Business Context and Reporting Period
Maiden Holdings, Ltd. is a Bermuda-based reinsurer serving regional and specialty insurers, with operations in Bermuda and the U.S. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Its segments are Diversified Reinsurance, AmTrust Quota Share Reinsurance, and NGHC Quota Share, which is in run-off.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Gross premiums written | $722.4 million | $714.7 million; up 1.1% |
| Net premiums written | $709.9 million | $689.1 million; up 3.0% |
| Net premiums earned | $519.2 million | $488.4 million; up 6.3% |
| Total revenues | $552.3 million | $518.9 million |
| Net income | $2.1 million | $28.1 million |
| Net income (loss) attributable to common shareholders | $(4.1) million; $(0.06) per share | $25.0 million; $0.35 per share |
| Operating earnings attributable to common shareholders (non-GAAP) | $25.6 million; $0.35 per share | $21.1 million; $0.29 per share |
| Underwriting income | $15.2 million | $15.0 million |
| Combined ratio | 97.7% | 97.5% |
| Net investment income | $27.8 million | $22.0 million; up 26.7% |
| Operating cash flow | $143.7 million | $16.2 million |
At March 31, 2014, total assets were $4.87 billion and total shareholders’ equity was $1.15 billion. Investments were $3.17 billion; cash and cash equivalents were $72.0 million, with an additional $151.2 million of restricted cash. Loss and loss adjustment reserves were $2.04 billion, and unearned premiums were $1.22 billion.
Debt was $360.0 million, all senior notes, versus $486.4 million at year-end 2013. Debt-to-capital resources declined to 23.8% from 30.2%. Total capital resources were $1.51 billion. The common dividend declared was $0.11 per share, compared with $0.09 in Q1 2013; preference dividends were also paid.
Material Changes Versus the Prior Period
- GAAP net income fell to $2.1 million, principally because redeeming junior subordinated debt generated a non-recurring, non-cash $28.2 million accelerated amortization and issuance-cost charge. The company reported $25.6 million of non-GAAP operating earnings attributable to common shareholders, up 21.4% year over year.
- On January 15, 2014, the company repurchased the outstanding junior subordinated debt for $152.5 million, using proceeds from its 2013 senior notes and cash on hand. Management said the transaction lowered its cost of capital; weighted-average effective debt interest rate was 8.47%, versus 11.47% in Q1 2013.
- AmTrust quota-share net premiums written rose 21.5% and earned premiums rose 38.4%, supporting segment underwriting income of $14.3 million and a 95.3% combined ratio. Diversified Reinsurance premiums written rose 9.0%, but its combined ratio worsened to 99.4%, with elevated property losses among several U.S. clients.
- NGHC quota-share premiums fell sharply as the agreement terminated effective August 1, 2013 and entered run-off. The segment recorded a 102.7% combined ratio, including unfavorable development.
- Net unrealized investment gains increased, lifting accumulated other comprehensive income by $37.8 million. Management attributed higher investment income to 17.5% growth in average invested assets, a higher average book yield (3.1% versus 2.9%), and slower mortgage-backed-security prepayments.
- Operating cash flow improved, but financing cash outflow of $166.4 million—primarily the debt redemption and dividends—contributed to a $67.8 million decrease in cash and cash equivalents.
Outlook, Commentary, Risks and Unusual Items
No specific earnings or premium guidance is provided. Management described reinsurance markets as highly competitive, with residual pricing pressure, and said it would maintain disciplined underwriting and decline business that does not meet its standards. Management’s long-term target for average operating return on common equity is 15%; reported annualized operating return on average common equity was 12.6% for the quarter.
Key exposures include interest-rate risk on the $3.17 billion fixed-income portfolio, credit risk, foreign-currency risk, and claims-reserve uncertainty. The portfolio’s weighted-average duration was 4.8 years; a hypothetical 100-basis-point rate increase was estimated to reduce shareholders’ equity by 13.2%. The company had no foreign-exchange hedges in place; a 10% strengthening of the U.S. dollar against relevant foreign currencies was estimated to reduce net assets by $15.3 million, all else equal.
Collateral and related-party concentration merit attention: $2.36 billion of cash and investments was restricted or pledged, and the company had a $168.0 million loan to AmTrust’s reinsurance affiliate. AmTrust-related balances and arrangements are material; the filing describes the related-party relationships and terms. A former executive’s whistleblower claim remains pending, with a hearing scheduled to begin in May 2014; the company says it considers the claim without merit and is defending it. Management reported no material changes to previously disclosed risk factors or commitments and contingencies, and stated disclosure controls were effective.
Important Facts for Investors to Verify
- Reconcile the $28.2 million debt-redemption charge and the company’s non-GAAP operating-earnings adjustments with GAAP results; assess the continuing interest-cost benefit against remaining senior-note obligations.
- Monitor AmTrust business growth, related-party receivables and collateral, and the concentration of premium and underwriting results in that segment.
- Track reserve development, especially the NGHC run-off and the $47.0 million of reinsurance recoverables associated with Superstorm Sandy.
- Assess liquidity available for parent-company dividends given restricted assets, subsidiary distribution limits, and the quarter’s debt repayment and cash decline.
- Review investment-portfolio sensitivity to interest rates, mortgage-backed-security prepayments, credit quality, and unhedged foreign-currency exposures.