Maiden Holdings, Ltd. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results; financial statement amounts below are in U.S. dollars. Maiden is a Bermuda-based reinsurer serving regional and specialty insurers. Its segments are Diversified Reinsurance, AmTrust Quota Share Reinsurance and NGHC Quota Share.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net premiums earned | $508.1m | $449.0m | $1,509.8m | $1,324.6m |
| Total revenues | $535.1m | $475.6m | $1,590.8m | $1,395.1m |
| Net income attributable to Maiden common shareholders | $21.9m | $21.9m | $67.1m | $56.8m |
| Diluted earnings per common share | $0.30 | $0.30 | $0.91 | $0.78 |
| Underwriting income | $15.2m | $11.5m | $47.4m | $35.0m |
| Combined ratio | 97.6% | 98.2% | 97.6% | 98.0% |
| Net investment income | $23.3m | $21.6m | $66.0m | $60.1m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $359.3m | $268.1m |
For Q3, operating earnings, a non-GAAP measure, were $22.7m, up 16.5%; nine-month operating earnings were $64.2m, up 9.6%. Management attributed earnings improvement mainly to higher underwriting and investment income, partly offset by higher interest expense and Series A preference dividends. Operating return on average common equity was 11.1% for Q3 and 10.2% for the nine months; management’s stated long-term target is 15%.
Financial position and liquidity
- At September 30, total assets were $4.45bn, investments $2.68bn, cash and cash equivalents $131.3m, and restricted cash $269.9m. Restricted cash and investments totaled $2.30bn and primarily support reinsurance collateral requirements.
- Total liabilities were $3.48bn. Debt comprised $207.5m of senior notes and $126.4m of junior subordinated debt. Total capital resources were $1.31bn; debt was 25.5% of capital resources, versus 24.7% at year-end 2012.
- Total shareholders’ equity was $974.0m; Maiden common shareholders’ equity was $823.5m. Book value per common share fell 5.2% to $11.34 from $11.96, principally due to a $92.5m decline in accumulated other comprehensive income as interest rates rose.
- Nine-month cash flows: $359.3m provided by operations, $289.7m used in investing and $20.7m used in financing. Cash increased $49.8m to $131.3m.
- Subsidiary dividends are subject to regulatory and statutory capital restrictions. Management said it did not anticipate these restrictions or pledged collateral to materially impede normal operations or common dividends.
Material changes versus comparable periods
- Nine-month net premiums written rose 13.1% to $1.65bn, led by AmTrust quota-share growth (+47.2%); Diversified Reinsurance declined 6.1% and NGHC declined 25.5%. AmTrust’s share of written premiums increased to 54.3% from 41.7%.
- Nine-month net premiums earned rose 14.0%; underwriting income increased 35.5%. The combined ratio improved to 97.6% from 98.0%. Q3 common net income was essentially unchanged, as higher underwriting and investment contribution was offset in part by preference dividends and expenses.
- Net investment income grew despite average book yield declining to 2.8% from 3.0%, as average invested assets increased. Higher mortgage-backed security prepayments increased premium amortization expense by $2.6m for the nine months versus 2012.
- Unrealized investment gains fell substantially: net unrealized gains on available-for-sale fixed maturities were $54.2m at September 30, versus $143.5m at December 31, 2012. No other-than-temporary impairment was recorded.
- Loss reserves increased to $1.93bn from $1.74bn and unearned premiums to $1.09bn from $936.5m, reflecting business growth. The filing identifies $65.8m, or 67.6%, of reinsurance recoverable on unpaid losses as related to Superstorm Sandy; the estimated ultimate Sandy loss remained $31.1m.
Outlook, management commentary and risks
- Management described a competitive reinsurance market with limited pricing improvement and additional non-traditional capital, and said it would maintain disciplined underwriting. It cited the possibility of more favorable primary-market pricing but said the scale, duration and effect of any improvement remained uncertain. No formal earnings or revenue guidance was provided.
- The NGHC quota-share agreement was terminated effective August 1, 2013, on a run-off basis. Maiden remains liable for covered losses and continues to earn premiums on policies in force at termination until expiry.
- Maiden entered a transaction to divest its excess-and-surplus property business, with Brit assuming renewal rights; existing business is running off. The business had written $19.6m of net premiums in 2012.
- In October 2013, Maiden completed a $165m Series B mandatory convertible preference share offering, receiving $160.1m net proceeds, including the exercised over-allotment. Management said proceeds would support reinsurance growth and general corporate purposes. Pro forma debt-to-capital resources was reported at 22.8% after the issuance.
- In November, the board increased the common dividend to $0.11 per share, payable January 15, 2014. Series B shares carry a 7.25% cumulative dividend and are mandatorily convertible in September 2016, subject to conversion terms and adjustments.
- Interest-rate exposure is material: a hypothetical 100-basis-point increase was estimated to reduce fixed-maturity fair value by $123.1m and shareholders’ equity by 12.6%. The portfolio’s weighted average duration increased to 4.5 years from 3.5 years. Foreign-currency exposures are unhedged; a 10% or 20% strengthening of the U.S. dollar against relevant currencies was estimated to reduce net assets by $13.4m or $26.8m, respectively.
- Other risks include reserve-estimation uncertainty, counterparty and related-party credit exposure, low investment yields, collateral and dividend restrictions, and potential rating-related collateral requirements. S&P revised its outlook to negative in May 2013 while affirming ratings.
Important facts for investors to verify
- Development and adequacy of loss reserves, including the remaining Superstorm Sandy recoverables and ultimate-loss estimate.
- AmTrust concentration and related-party exposures, including the $168.0m loan to AII and the collateral held in trust; assess counterparty protections and the effect of the amended quota-share terms.
- Run-off of the terminated NGHC quota share and the financial contribution lost as the portfolio expires.
- Investment-portfolio sensitivity to rates, mortgage-backed prepayments, credit spreads and the meaningful reduction in unrealized gains; confirm whether any impairment indicators change.
- Effects of the Series B issuance, conversion and dividend terms, the increased common dividend, and the company’s ability to fund parent-level payments given subsidiary distribution restrictions.
- Whether premium growth and underwriting performance remain sustainable amid competition, and how continued growth affects reserve, liquidity and capital needs.