Maiden Holdings, Ltd. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report; selected Q4 figures are identified separately below. Amounts are in U.S. dollars.
Business context
Maiden is a Bermuda-based reinsurer focused on regional and specialty insurers, generally emphasizing lower-volatility business and quota-share arrangements. Its two reportable segments are Diversified Reinsurance and AmTrust Reinsurance. AmTrust is the largest client and a related party; the AmTrust segment represented 70.8% of 2015 gross premiums written.
Financial and operating results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Gross premiums written | $2,662.8 million | $2,507.4 million | +6.2% |
| Net premiums written | $2,514.1 million | $2,458.1 million | +2.3% |
| Net premiums earned | $2,429.1 million | $2,251.7 million | +7.9% |
| Total revenue | $2,573.1 million | $2,381.2 million | +8.1% |
| Net income | $124.3 million | $101.5 million | +22.4% |
| Net income attributable to common shareholders | $100.1 million | $77.1 million | +30.0% |
| Diluted EPS | $1.31 | $1.04 | +26.0% |
| Operating earnings attributable to common shareholders (non-GAAP) | $107.2 million | $117.7 million | -8.9% |
| Net investment income | $131.1 million | $117.2 million | +11.8% |
| Underwriting income | $42.3 million | $65.4 million | -35.3% |
| Combined ratio | 99.3% | 98.0% | 1.3 points higher |
The combined ratio remained below 100%, indicating overall underwriting profitability, but the result weakened. The Diversified Reinsurance segment recorded an underwriting loss of $24.8 million and a 103.3% combined ratio; AmTrust Reinsurance earned $79.3 million with a 95.3% combined ratio. Diversified segment net premiums written fell 13.6%, while AmTrust segment net premiums written rose 10.5%.
- Cash flow: Operating cash flow was $634.3 million, versus $651.6 million in 2014. Investing activities used $750.7 million, principally reflecting investment purchases; financing activities provided $99.8 million, including the Series C preference-share issuance. Cash and cash equivalents decreased by $18.5 million to $89.6 million; restricted cash was $242.9 million.
- Investments and liquidity: Total investments were $4.13 billion; investments and cash, including restricted amounts, totaled approximately $4.46 billion. Restricted cash and investments were $3.67 billion, primarily supporting reinsurance collateral. The filing does not provide a conventional current ratio or a single unrestricted-liquidity measure.
- Capital and debt: Total assets were $5.71 billion and total liabilities $4.36 billion. Maiden shareholders’ equity was $1.35 billion, including $480 million of preference shares. Senior notes totaled $360 million; debt was 21.1% of total capital resources, down from 22.5%. Book value per common share declined 7.2% to $11.77.
- Reserves: Gross loss and LAE reserves were $2.51 billion, including $1.10 billion of IBNR. Prior-year net reserve development was adverse by $74.9 million, primarily from U.S. commercial auto, compared with $18.8 million adverse in 2014.
- Q4 2015, unaudited: Net income was $30.7 million; net income attributable to common shareholders was $24.7 million; diluted EPS was $0.32.
Material changes versus 2014
- Common-shareholder net income increased, but the comparison benefited from a $28.2 million non-cash accelerated debt-discount amortization and issuance-cost charge recorded in 2014. Excluding that charge, 2015 common-shareholder net income was down $5.2 million, or 4.9%, year over year.
- Operating earnings fell 8.9%, mainly because underwriting income declined; higher investment income partly offset the decrease. Operating return on average common equity was 12.0%, down from 13.6% and below management’s long-term 15% target.
- Diversified Reinsurance performance deteriorated, reflecting increased U.S. commercial auto losses and adverse reserve development, loss of a large customer, expiration of a fronting arrangement, and foreign-exchange effects. AmTrust reinsurance continued to grow and maintained a 95.3% combined ratio.
- Net investment income rose with average invested assets, while average book yield edged down to 3.0% from 3.1%. The company recorded $1.1 million of investment impairment losses, versus $2.4 million in 2014.
- Unrealized investment losses reduced other comprehensive income; AOCI moved from positive $95.3 million to negative $23.8 million. The decline reflected market movements and foreign exchange, and contributed to lower book value per common share.
Outlook, commentary, risks and unusual items
- Management targets 10% business growth in 2016 and a long-term operating return on common equity above 15%. It said underwriting initiatives were expected to support progress toward the return target over the next 12–24 months. These are goals, not guaranteed guidance.
- Management described competitive pricing pressure, including in higher-frequency, lower-severity business, and said it would continue to decline business that did not meet underwriting standards.
- AmTrust concentration is material: it generated 70.8% of gross premiums written. The filing also describes related-party relationships, shared founding shareholders and potential conflicts of interest.
- Effective January 1, 2015, Maiden began ceding certain business under a retrocessional quota-share agreement with a highly rated global insurer. A separate agreement with AmTrust commuted certain liabilities and unearned premiums at December 31, 2015; the stated commuted reserve value was $107 million, and the affected business is excluded prospectively.
- Maiden issued $165 million of 7.125% Series C preference shares in November 2015, receiving $159.6 million net proceeds. Series C dividends are non-cumulative. The existing Series B mandatory convertible preference shares carry a 7.25% dividend and were scheduled for mandatory conversion in September 2016, subject to their terms.
- Management’s reserve sensitivity analysis estimated that reserves could increase by approximately $251.6 million, or 10% of year-end loss and LAE reserves, if ultimate loss ratios varied from expectations in aggregate. Reserve estimates depend on cedant data, actuarial assumptions and long reporting tails.
- Other key exposures include workers’ compensation (42.9% of 2015 net premiums written), catastrophe and terrorism losses, investment-rate and credit risk, foreign exchange (no hedges were in force at year-end), collateral restrictions, and dependence on broker and reinsurer counterparties. Approximately 49.2% of reinsurance recoverables on unpaid losses related to Superstorm Sandy claims.
- A former executive’s whistleblower-related employment claim remained in an administrative proceeding; the company said it believed the claim was without merit and expected the hearing to conclude in 2016. The company reported no other material legal proceedings.
- The auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective as of December 31, 2015.
Important facts for investors to verify
- Whether commercial auto loss experience and the $74.9 million of adverse prior-year reserve development continue to pressure Diversified Reinsurance results.
- How much of earnings and premium growth depends on AmTrust, and the current terms, performance and collateral arrangements of the related-party agreements.
- Whether 2016 growth and the stated 12–24-month underwriting improvement objective are achieved without weakening pricing or underwriting discipline.
- The sensitivity of reserve adequacy to cedant reporting, actuarial assumptions and the disclosed potential $251.6 million increase.
- The availability of unrestricted cash and subsidiary distributions, given $3.67 billion of restricted collateral assets and regulatory limits on dividends.
- The effects of interest rates, credit spreads and foreign exchange on investment income, AOCI, book value and capital; also review Series B conversion dilution and preference-dividend obligations.