Maiden Holdings, Ltd. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
Maiden is a Bermuda-based reinsurer with two reportable segments: Diversified Reinsurance and AmTrust Reinsurance. The latter assumes substantial business from AmTrust, a related party. Management described reinsurance markets as highly competitive and said it continues to apply underwriting discipline.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gross premiums written | $706.9m | $628.5m | $2,259.3m | $2,136.9m |
| Net premiums earned | $698.3m | $658.5m | $1,951.9m | $1,845.3m |
| Net income | $40.8m | $28.5m | $117.5m | $93.6m |
| Net income attributable to common shareholders | $31.8m | $22.5m | $90.0m | $75.4m |
| Diluted EPS attributable to common shareholders | $0.40 | $0.30 | $1.15 | $0.99 |
| Combined ratio | 98.5% | 99.6% | 98.7% | 99.1% |
| Net investment income | $35.7m | $32.8m | $107.3m | $96.3m |
Q3 underwriting income was $17.4m, versus $10.0m a year earlier; nine-month underwriting income was $46.7m, versus $38.3m. Q3 operating earnings attributable to common shareholders, a non-GAAP measure, were $30.2m ($0.39 diluted per share); nine-month operating earnings were $87.0m ($1.11 diluted per share).
Segment performance: AmTrust Reinsurance produced underwriting income of $21.2m in Q3 and $65.1m for nine months, with combined ratios of 95.9% and 95.4%, respectively. Diversified Reinsurance recorded underwriting losses of $3.8m and $15.5m, with combined ratios of 102.2% and 102.8%. Management attributed pressure in Diversified to adverse development, particularly in U.S. commercial auto.
Cash flow and liquidity: Nine-month operating cash flow was $326.2m, down from $526.0m; investing cash outflow was $291.4m and financing cash outflow was $59.7m. Unrestricted cash and equivalents were $67.5m at quarter-end; restricted cash was $366.6m. Investments totaled $4.521bn at carrying value. Management said cash levels were above its target range amid market volatility and it was assessing opportunities to invest available cash. Cash flows are affected by claims, premium collections, and collateral requirements.
Debt and capital: Senior notes had $362.5m principal outstanding ($351.3m net carrying value). Debt-to-total-capital-resources was 18.9%, compared with 21.1% at year-end 2015. Total capital resources were $1.918bn. Shareholders’ equity was $1.556bn; book value per common share was $14.40, up 22.3% from $11.77 at year-end, partly reflecting unrealized investment gains and the Series B conversion. The company issued $110m of 6.625% notes and redeemed $107.5m of 8.25% notes in June; it recognized $2.3m of accelerated issuance-cost amortization.
Material changes and unusual items
- Premium growth was concentrated in AmTrust Reinsurance: Q3 net premiums written rose 17.5% year over year, while Diversified rose 9.4%. Management cautioned that initial cessions from AmTrust acquisitions affected the quarter’s growth and may not represent prospective quarterly growth.
- Net income increased year over year. Management cited higher underwriting income and investment income for Q3; for the nine-month period, higher investment income was the primary driver, with underwriting improvement also contributing.
- The $165m Series B mandatory convertible preference shares converted into 12,069,090 common shares on September 15, 2016. The conversion reduced preference shares and increased common equity and the common share count.
- Investment fair values rose, and nine-month other comprehensive income was $147.7m, largely reflecting unrealized gains on fixed maturities as interest rates declined. The company reported no other-than-temporary impairment losses in 2016; unrealized losses were attributed mainly to wider credit spreads, and management said it did not expect to sell the affected securities or be forced to sell before recovery.
- AmTrust’s main quota-share agreement was renewed through June 30, 2019. The European Hospital Liability quota share was amended effective July 1, 2016, reducing Maiden’s assumed share to 32.5% for policies written or renewed through June 2017 and 20% from July 2017.
- The company reported no material changes to previously disclosed commitments, contingencies, or risk factors. A former executive’s whistleblower claim remains in litigation; management said it believes the claim is without merit and expects the hearing to conclude in 2017.
Outlook, risks, and management commentary
No specific earnings or revenue guidance is provided in the supplied filing text. Management cited continued pricing pressure and competition, while stating it would decline business that does not meet its underwriting standards. Its stated long-term target for operating return on average common equity is 15%; reported nine-month 2016 operating return was 11.8%.
Key exposures include adverse loss development and reserve estimation, especially commercial auto; related-party and AmTrust concentration; interest-rate and credit-spread movements affecting investment values and equity; foreign-currency exposure (no hedges were in force at September 30); and collateral and regulatory restrictions on subsidiary funds. About 89.1% of fixed maturities and cash, including restricted balances, were used as collateral. A 100-basis-point increase in rates was estimated to reduce shareholders’ equity by 10.6%, while a 200-basis-point increase was estimated to reduce it by 20.5%.
Investor verification priorities
- Review reserve development, particularly commercial auto in Diversified Reinsurance, and how it affects future loss ratios and combined ratios.
- Assess reliance on AmTrust-related business, receivables, collateral arrangements, and the terms and performance of related-party agreements.
- Reconcile earnings and operating cash generation, including the reported impact of the $107m AmTrust commutation and growth in reinsurance receivables.
- Evaluate investment valuation and interest-rate sensitivity, including unrealized losses, duration matching, credit quality, and the large restricted/collateralized asset base.
- Consider the capital and per-share effects of the Series B conversion, preference dividends, and the 2016 debt refinancing.
- Track the whistleblower litigation and verify subsequent dividend declarations: the filing reports a $0.15 common dividend and Series A and C dividends authorized November 1, 2016.