Maiden Holdings, Ltd. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Amounts are U.S. dollars; financial amounts below are in millions unless noted. Maiden is a Bermuda-based reinsurer serving regional and specialty insurers, with Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share segments.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Gross premiums written | $613.2 | $470.8 |
| Net premiums written | $590.8 | $449.5 |
| Net premiums earned | $438.5 | $346.5 |
| Total revenue | $463.1 | $370.4 |
| Net income attributable to Maiden shareholders | $20.4; $0.28 per diluted share | $19.3; $0.27 per diluted share |
| Operating earnings (non-GAAP) | $19.4; $0.27 per diluted share | $19.8; $0.27 per diluted share |
| Underwriting income / combined ratio | $12.1 / 97.9% | $13.7 / 97.0% |
| Net investment income | $18.4 | $19.1 |
| Operating cash flow | $71.2 | $13.7 |
Premiums written and earned rose 31.4% and 26.5%, respectively. Net income increased modestly as lower interest expense and higher investment gains offset weaker underwriting income. The loss ratio rose to 65.0% from 63.0%; the acquisition-cost ratio improved to 29.8% from 30.5%, and the G&A ratio fell to 3.1% from 3.5%. Operating ROE was 9.9% annualized, versus 10.6%; management’s stated long-term average target is 15%.
At March 31, total assets were $3.668 billion, versus $3.354 billion at year-end; shareholders’ equity was $810.4 million, versus $768.6 million. Book value per share increased to $11.22 from $10.64. Net unrealized investment gains rose to $93.1 million from $63.8 million, contributing to equity growth.
Cash and cash equivalents were $183.8 million, with restricted cash of $90.0 million. Investments totaled $2.202 billion; total cash and investments were approximately $2.5 billion. Operating cash flow was offset by $168.8 million of investing outflow, largely reflecting purchases of fixed maturities exceeding sales and maturities. Financing provided $91.2 million, principally from the new note issue; cash declined $4.2 million during the quarter.
Total debt was $333.8 million: $207.5 million of senior notes and $126.3 million of junior subordinated debt. Debt to total capital resources was 29.2%, versus 23.3% at December 31. The March issue was $100 million of 8.00% senior notes due 2042; net proceeds were approximately $96.6 million for working capital and general corporate purposes. The existing $107.5 million senior notes carry an 8.25% coupon. Junior subordinated debt has a 14% coupon.
Material changes and management commentary
- AmTrust quota-share net premiums written increased 78.4%, including premiums from the European Hospital Liability agreement that began in April 2011. ACAC quota-share written premiums grew 19.6%; Diversified Reinsurance grew 11.4%.
- AmTrust’s segment combined ratio improved to 95.5% from 97.4%, while Diversified Reinsurance worsened to 98.9% from 94.9%. ACAC improved to 96.4% from 97.3%.
- Management attributed higher losses to lower amortization of deferred gains from prior acquisitions, increased reported losses at Maiden Bermuda, elevated non-catastrophe excess property losses at Maiden US, and a higher loss ratio in AmTrust business.
- Adoption of the revised insurance acquisition-cost guidance increased Q1 acquisition expenses by $1.2 million and reduced net income by the same amount, or $0.02 per share. No other material impact from adopted accounting guidance was reported.
- Management described reinsurance pricing conditions as potentially more supportive of improvement after recent catastrophe losses, but said the extent and duration of any improved pricing are uncertain. It cited continued competition and historically low investment yields, and said it would maintain underwriting discipline.
Risks, contingencies and unusual items
- About $1.818 billion of cash and investments were restricted or held as collateral for reinsurance obligations. Subsidiary dividends are subject to regulatory and solvency restrictions; the parent relies on permitted distributions from subsidiaries for its own cash needs.
- Related-party exposure is significant: the filing reports a $168.0 million loan to AmTrust’s AII and substantial collateral arrangements supporting AmTrust business. The company also has material reinsurance arrangements with AmTrust and ACAC.
- Interest-rate risk is material because the fixed-maturity portfolio was $2.2 billion, with weighted-average duration of 3.2 years. A hypothetical 100-basis-point rate increase would reduce estimated portfolio fair value by $83.4 million and shareholders’ equity by 10.3%, before other effects.
- Investment yields were approximately 2.9%, down from 3.5% a year earlier despite higher average invested assets. Management warned that persistently low yields may pressure results.
- Foreign-exchange movements, reserve estimates and claim inflation may affect results. A 10% or 20% strengthening of the U.S. dollar against the foreign currencies held was estimated to reduce net assets by $14.1 million or $28.2 million, respectively; no hedging instruments were in place.
- There were no other-than-temporary investment impairments. Unrealized losses were $18.2 million, including $10.1 million on securities in a loss position for at least 12 months; management attributed remaining losses primarily to wider credit spreads and did not expect forced sales before recovery.
- Early repayment of the remaining trust preferred securities before January 20, 2014 could trigger an estimated $21.4 million interest penalty; repayment would also accelerate recognition of unamortized discount. The company reported no off-balance-sheet arrangements.
- The Board declared a $0.08-per-share quarterly dividend for payment in April and authorized another $0.08 dividend for July 2012.
Important facts for investors to verify
- Whether reserve development and loss trends—particularly in Maiden Bermuda, excess property and AmTrust business—support the reported underwriting performance.
- The credit quality, collectability and collateral terms of related-party balances and the company’s reliance on AmTrust and ACAC business.
- How restricted assets and subsidiary dividend limits affect parent-company liquidity, debt service and dividend capacity.
- The portfolio’s exposure to interest rates, credit spreads, mortgage-backed securities and foreign currencies, and the sensitivity of book value to market changes.
- The continuing impact of acquisition-cost accounting, financing costs and any future trust preferred debt refinancing on earnings and capital.