Maiden Holdings, Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Maiden is a Bermuda-based reinsurer with Diversified Reinsurance and AmTrust Reinsurance segments. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period | Change / context |
|---|---|---|---|
| Gross premiums written | $834.3 | $722.4 | Up 15.5% |
| Net premiums written | $797.0 | $709.9 | Up 12.3% |
| Net premiums earned | $577.3 | $519.2 | Up 11.2% |
| Total revenues | $611.4 | $552.3 | Includes $28.3 of investment income and $0.9 of realized investment gains |
| Net income | $38.5 | $2.1 | Q1 2014 included a $28.2 non-cash debt-related charge |
| Net income attributable to common shareholders | $32.4 | $(4.1) | Basic EPS $0.44 versus $(0.06); diluted EPS $0.41 versus $(0.06) |
| Operating earnings attributable to common shareholders (non-GAAP) | $26.6 | $25.6 | Up 4.2%; diluted operating EPS was $0.35 versus $0.34 |
| Underwriting income | $16.4 | $16.4 | Broadly unchanged |
| Combined ratio | 98.2% | 97.7% | Higher ratio indicates modest underwriting deterioration |
| Operating return on average common equity | 11.4% | 12.6% | Below management’s long-term 15% target |
| Operating cash flow | $169.8 | $143.7 | Up 18.1% |
Segment results: AmTrust Reinsurance net premiums earned rose 26.1% to $384.6 million and underwriting income increased to $20.7 million; its combined ratio improved to 94.6% from 95.6%. Diversified Reinsurance underwriting shifted to a $2.3 million loss from $4.9 million income, with its combined ratio worsening to 101.2% from 97.6%. Management attributed pressure to higher commercial-auto losses and large losses in U.K. and German personal auto, alongside higher commissions.
Balance sheet and capital: At March 31, 2015, total assets were $5.507 billion, total equity $1.278 billion, and Maiden shareholders’ equity $1.277 billion. Senior notes were $360 million, unchanged from year-end; debt was 22.0% of total capital resources, versus 22.5%. Total capital resources were $1.637 billion. Book value per common share was $13.11, up 3.3% from $12.69 at year-end.
Liquidity and cash flows: Cash and cash equivalents were $168.1 million, with restricted cash of $473.1 million. Investments totaled $3.363 billion. Operating cash flow was $169.8 million; investing activities used $93.5 million and financing activities used $14.3 million. Cash increased $60.0 million during the quarter. Management noted that premium-growth cash flows typically lag by at least one quarter and anticipated further cash-flow benefits from AmTrust growth later in 2015. However, $3.301 billion of cash and investments was restricted or held as collateral, representing 86.3% of total investments and cash equivalents.
Material changes and management commentary
- Premium growth was concentrated in AmTrust Reinsurance, supported by acquisitions and organic expansion; a retrocessional quota share with a highly rated global insurer, effective January 1, 2015, partially reduced net written premium growth.
- Reported net income rose sharply year over year, but the comparison is affected by the prior-year $28.2 million non-cash accelerated amortization and issuance-cost write-off following redemption of junior subordinated debt. Excluding that charge, management said net income increased $8.3 million, primarily reflecting $7.8 million of foreign-exchange gains versus $0.1 million in Q1 2014. Operating earnings increased only 4.2%.
- Net loss and loss-adjustment expense ratio improved to 64.8% from 67.0%, while the commission and acquisition expense ratio rose to 30.6% from 27.9%. The resulting combined ratio increased to 98.2% from 97.7%.
- Net investment income grew only 1.5% to $28.3 million despite average investable assets increasing 14.7%; average book yield declined to 2.8% from 3.2%. Management cited higher cash balances amid fixed-income market volatility.
- Available-for-sale fixed maturities were $3.351 billion at fair value, down 3.1% from year-end. Net unrealized gains declined to about $71.2 million from $77.0 million. Management attributed investment losses chiefly to foreign-exchange movements and said it recorded no other-than-temporary impairments.
- Common dividends declared were $0.13 per share, versus $0.11 in Q1 2014. The board also authorized a $0.13 common dividend payable in July 2015. The $75 million share-repurchase authorization remained unused; reported quarterly share purchases were employee tax-withholding shares, not program repurchases.
Outlook, risks and contingencies
- No specific earnings or premium guidance was provided. Management described a highly competitive reinsurance market with residual pricing pressure, said it remains disciplined in underwriting, and stated it believes the company is positioned to benefit if pricing improves.
- Market risks include interest rates, credit quality, and foreign currencies. A hypothetical 100-basis-point rate increase was estimated to reduce shareholders’ equity by 11.5%. The company had no currency hedges in force; a 10% strengthening of the U.S. dollar against non-U.S. currencies was estimated to reduce net assets by $10.2 million, all else equal.
- Foreign-exchange gains boosted reported earnings, while currency movements also reduced the value of non-U.S.-dollar investments. Management reported an approximately $2.0 million unfavorable currency impact on underwriting operations.
- Related-party exposure is significant: AmTrust accounted for 63.1% of Q1 net premiums written. At quarter-end, reinsurance balances receivable included $312.3 million from related parties, and loss reserves included $1.219 billion related to related parties. Maiden also reported a $168.0 million loan to a related party and substantial assets in trust supporting related-party obligations.
- The company disclosed an ongoing former executive whistleblower claim; it believes the claim is without merit and is defending it. Management expected the administrative hearing to conclude in 2015. No material changes to other commitments and contingencies or risk factors were reported.
- Management stated disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether AmTrust-driven premium growth can continue while preserving underwriting profitability, particularly given its share of premiums and the segment’s related-party concentration.
- Whether the deterioration in Diversified Reinsurance underwriting and the higher overall commission ratio persist; monitor segment combined ratios and loss trends.
- How much of reported earnings depends on foreign-exchange movements versus recurring underwriting and investment performance; compare GAAP net income with the company’s non-GAAP operating earnings reconciliation.
- Liquidity available for dividends and claims after accounting for collateral restrictions, regulatory requirements, and the growth in reinsurance receivables and unearned premiums.
- Exposure to interest-rate, credit-spread, and currency changes, including the unhedged foreign-currency position and unrealized investment losses.
- Developments in the whistleblower proceeding, the related-party arrangements and collateral, and the company’s progress toward its 15% long-term operating ROACE target.