Maiden Holdings, Ltd. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise. The company is a Bermuda-based reinsurer operating through Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share segments. Interim statements are unaudited.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Gross premiums written | $445.2 | $462.4 | $1,058.4 | $933.2 |
| Net premiums written | $412.0 | $437.0 | $1,002.8 | $886.5 |
| Net premiums earned | $437.1 | $367.8 | $875.6 | $714.3 |
| Total revenues | $456.5 | $390.4 | $919.6 | $760.7 |
| Net income (loss) attributable to Maiden shareholders | $14.5 | $(24.4) | $34.9 | $(5.0) |
| Basic and diluted EPS | $0.20 | $(0.34) | $0.48 | $(0.07) |
| Net investment income | $20.1 | $19.8 | $38.5 | $39.0 |
| Underwriting income | $11.4 | $4.2 | $23.5 | $17.9 |
| Combined ratio | 97.9% | 99.8% | 97.9% | 98.4% |
Q2 net premiums earned increased 18.9%, although net premiums written fell 5.7%. For the first half, earned premiums rose 22.6% and written premiums rose 13.1%. Management reported non-GAAP operating earnings of $19.7 million for Q2 and $39.1 million for the first half, versus $11.2 million and $31.0 million, respectively, in 2011.
In Q2, the loss ratio was 68.4%, acquisition cost ratio 26.1%, and general and administrative expense ratio 3.4%. First-half ratios were 66.7%, 28.0%, and 3.2%, respectively. Segment combined ratios for Q2 were 98.6% for Diversified Reinsurance, 96.5% for AmTrust Quota Share and 96.3% for ACAC Quota Share.
Cash flow and liquidity: First-half operating cash flow was $166.4 million, compared with $43.7 million in 2011. Investing activities used $380.6 million, chiefly reflecting purchases of investments; financing activities provided $85.2 million, including proceeds from the 2012 Senior Notes. Cash and cash equivalents declined to $58.9 million from $188.1 million at year-end 2011. Restricted cash was $84.4 million; restricted cash and investments totaled $1.949 billion and support reinsurance collateral obligations. Total cash and investments were approximately $2.5 billion.
Balance sheet and capital: Total assets were $3.753 billion, total liabilities $2.928 billion, and Maiden shareholders’ equity $824.3 million at June 30, 2012. Book value per share was $11.41, up from $10.64 at December 31, 2011. Loss and loss adjustment expense reserves were $1.523 billion; unearned premiums were $974.3 million. Debt totaled $333.8 million: $207.5 million senior notes and $126.3 million junior subordinated debt. Debt was 28.8% of total capital resources, up from 23.3% at year-end.
Changes versus the prior comparable period
- Reported results turned profitable: 2011 Q2 and first-half losses included $15.1 million of junior subordinated debt repurchase expense and $20.3 million of accelerated debt discount and issuance-cost amortization. These were nonrecurring 2011 charges, not 2012 operating improvements.
- Underwriting improved overall: the combined ratio fell to 97.9% from 99.8% in Q2 and to 97.9% from 98.4% for the first half. The 2011 comparison included $9.5 million of U.S. thunderstorm and tornado losses in Q2, net of normalized catastrophe provisions.
- First-half investment income was slightly lower despite growth in invested assets. Average book yield declined to 3.0% from 3.5%, reflecting historically low rates and increased mortgage-backed security prepayments and premium amortization.
- Net investment results included realized and unrealized losses of $2.9 million in Q2 and $1.6 million in the first half of 2012, versus gains in the comparable 2011 periods. The Treasury short position was closed June 28, 2012.
- Shareholders’ equity increased 7.2% from year-end, reflecting earnings and $30.1 million of higher net unrealized investment gains, partly offset by $11.6 million of declared dividends.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management cites continuing competition and says it will maintain underwriting discipline, declining business that does not meet its pricing and terms standards. It sees potential for improved near-term pricing but says the scope and duration are uncertain.
- Management expects general and administrative expense growth to continue as the company expands. It also warns that persistently low interest rates may constrain investment income and pressure industry underwriting results.
- Investment portfolio risks include interest rates, credit quality and foreign exchange. A hypothetical 100-basis-point rise in rates was estimated to reduce fixed-maturity fair value by $91.0 million and shareholders’ equity by 11.0%; a 100-basis-point fall was estimated to increase them by $94.7 million and 11.5%, respectively. A 10% strengthening of the U.S. dollar against the company’s non-U.S. currencies was estimated to reduce net assets by $17.0 million. No currency hedges were in place.
- The company reported $20.3 million of unrealized investment losses, including $13.2 million on securities in loss positions for at least 12 months, but recorded no other-than-temporary impairment. Management attributed remaining fixed-maturity losses primarily to widened credit spreads and market illiquidity.
- Substantial related-party exposure includes the AmTrust reinsurance relationship, a $168.0 million loan to an AmTrust affiliate supporting collateral arrangements, and related-party reinsurance balances. The filing identifies counterparty risks, including potential failure to repay the loan or return/apply collateral appropriately.
- Subsidiary dividends are subject to regulatory and solvency restrictions, while substantial assets are pledged as collateral. Management does not currently expect these constraints to materially impair normal operations or common-dividend payments, but notes that inability of subsidiaries to distribute funds could affect holding-company obligations.
- On August 7, 2012, the company amended the European Hospital Liability quota share, effective January 1, 2012, increasing the per-claim limit from €5 million to €10 million and adding France; other terms remained unchanged. The filing also reports a subsequent $0.08 quarterly dividend, but its stated payment and record dates appear inconsistent.
- Adoption of revised insurance acquisition-cost accounting increased acquisition expense and reduced Maiden-attributable net income by $0.8 million in Q2 and $2.0 million for the first half; first-half EPS impact was a $0.03 decrease.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s non-GAAP operating earnings, including the treatment of investment and foreign-exchange results and prior-year debt charges.
- Assess reserve development, loss trends and segment performance, particularly the higher 2012 loss ratios in Diversified and AmTrust business and the effect of lower amortization of deferred acquisition gains.
- Review investment yield, duration, credit exposures and sensitivity to rate changes; confirm whether unrealized losses remain recoverable and whether any impairment indicators have changed.
- Monitor collateral restrictions, related-party balances and the collectability and terms of the $168.0 million AmTrust-affiliate loan, as well as regulatory limits on subsidiary distributions.
- Confirm the subsequent dividend’s correct record and payment dates: the filing states payment on October 1, 2012, to shareholders of record October 15, 2012.