Maiden Holdings, Ltd. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a quarterly filing; amounts are in U.S. dollars unless noted. The company is a Bermuda-based reinsurer serving regional and specialty insurers, with three segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance, and ACAC Quota Share.
Financial performance and position
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Gross premiums written | $2,001.0 million | $1,812.6 million | Up 10.4% |
| Net premiums written | $1,901.3 million | $1,723.5 million | Up 10.3% |
| Net premiums earned | $1,803.8 million | $1,552.4 million | Up 16.2% |
| Net income attributable to common shareholders | $46.5 million | $28.5 million | Up; 2011 included $35.4 million of debt-related charges |
| Basic / diluted EPS | $0.64 / $0.64 | $0.40 / $0.39 | Improved year over year |
| Operating earnings (non-GAAP) | $48.5 million | $69.6 million | Down; reflects weaker underwriting and Sandy losses |
| Underwriting income / combined ratio | $18.7 million / 99.5% | $42.8 million / 98.1% | Lower underwriting income; ratio worsened but remained below 100% |
| Net investment income / average book yield | $81.2 million / 2.9% | $74.9 million / 3.2% | Income rose 8.4% on asset growth; yield declined |
| Operating cash flow | $319.1 million | $181.3 million | Higher operating cash generation |
| Total assets / total liabilities | $4,138.2 million / $3,122.6 million | $3,395.1 million / $2,626.1 million | Both increased with business growth |
| Common shareholders’ equity / book value per common share | $865.2 million / $11.96 | $768.6 million / $10.64 | Book value per share increased |
| Total debt / debt-to-capital ratio | $333.8 million / 24.7% | $233.8 million / 23.3% | Debt rose following the 2012 notes issuance |
At year-end, investments were $2.62 billion, while cash and cash equivalents were $81.5 million and restricted cash was $132.3 million. Approximately $2.17 billion of cash and investments was pledged or otherwise restricted as collateral. Cash and cash equivalents fell by $106.5 million during 2012, primarily as the company deployed funds into investments. Total capital resources, as defined by the company, were $1.349 billion.
Material changes and segment results
- Premium growth came principally from AmTrust, whose net premiums written increased 25.6% to $840.3 million, and ACAC, up 15.4% to $295.7 million. Diversified Reinsurance net premiums written declined 4.1% to $765.3 million after non-renewals and fewer large proportional contracts.
- Diversified Reinsurance recorded a $19.9 million underwriting loss and a 102.5% combined ratio, versus $22.0 million income and 97.1% in 2011. AmTrust produced $30.7 million of underwriting income and a 95.8% combined ratio; ACAC produced $7.9 million and a 97.2% ratio.
- Superstorm Sandy generated $31.1 million of net losses in 2012, mostly in Maiden Specialty, and increased the consolidated loss and combined ratios by 1.7 percentage points. The fourth quarter recorded a $6.7 million consolidated net loss and a $10.3 million loss attributable to common shareholders.
- Net loss and loss adjustment expenses rose to $1.262 billion. The company recorded $23.3 million of adverse prior-year reserve development, compared with $14.2 million adverse development in 2011. Favorable amortization gains from acquired loss portfolios were $9.1 million, down from $28.9 million in 2011.
- The August 2012 issuance of $150 million of 8.25% Series A preference shares generated $145.0 million net proceeds. The company also issued $100 million of 8.00% senior notes in March 2012, receiving $96.6 million net proceeds.
Outlook, risks, and unusual items
- No specific earnings or premium guidance is provided. Management’s long-term goal is operating returns on capital above 15%; 2012 operating return on common equity was 5.9%, versus 9.2% in 2011. Management said it expected to make progress toward its target over the coming 12 to 24 months.
- Management described reinsurance pricing improvement as possible but uncertain after Sandy; January 1 renewals showed only limited improvement. The company said it would continue to reject business that does not meet its underwriting standards and intended to substantially reduce Maiden Specialty’s net exposure to natural-hazard events during 2013.
- Concentration is material: AmTrust and ACAC together represented 56.8% of gross premiums written. The relationships involve related parties and potential conflicts of interest. AmTrust also accounted for a substantial share of business and collateral arrangements.
- Reserve estimates are inherently uncertain. Management estimated that a four-percentage-point change in the AmTrust segment’s aggregate loss ratio could change required reserves, net of reinsurance, by approximately $101.1 million; the comparable sensitivities were approximately $28.0 million for Diversified and $6.5 million for ACAC.
- Investment risks include low yields, interest-rate sensitivity, and mortgage-backed security prepayments. A hypothetical 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $104.4 million and shareholders’ equity by 10.3%. No other-than-temporary investment impairments were recorded in 2012.
- Liquidity is affected by collateral requirements and regulatory limits on subsidiary dividends. Maiden Bermuda’s estimated dividend capacity was approximately $217.7 million, subject to its final solvency calculations; Maiden US had no dividend capacity without prior regulatory approval.
- On March 7, 2013, after year-end, Maiden and AmTrust extended their principal quota-share agreement to July 1, 2016 and revised ceding commissions and certain Specialty Program loss-sharing terms. The filing also discloses a former executive’s whistleblower claim, which the company contests; the claim remained under administrative review.
- The 2011 comparative result included $15.1 million of junior-debt repurchase expense and $20.3 million of accelerated amortization. These non-recurring charges make reported net income comparisons less indicative of underlying operating trends.
Important facts for investors to verify
- Whether subsequent reserve development, particularly in the AmTrust segment and long-tail casualty business, validates the company’s year-end estimates.
- The ultimate recoverability and timing of $79.7 million of Sandy-related reinsurance recoverables, within total unpaid-loss recoverables of $110.9 million.
- How the March 2013 AmTrust contract amendment affects commissions, loss volatility, and the economics of this major customer relationship.
- The availability of holding-company cash and subsidiary dividends, considering $2.17 billion of collateral-restricted assets and regulatory dividend limits.
- The investment portfolio’s sensitivity to rates, prepayments, credit spreads, and the continued low-yield environment; also verify the company’s 2012 mix of lower-rated securities and unrealized gains.
- The ability to improve operating returns toward the 15% long-term target while maintaining underwriting discipline and managing customer concentration.
The consolidated financial statements received an unqualified audit opinion from BDO USA, LLP. Management and the auditor reported effective internal control over financial reporting as of December 31, 2012.