Maiden Holdings, Ltd. quarterly report, Q2 FY2013

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Maiden Holdings, Ltd. — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013; unaudited. Amounts below are in U.S. dollars unless stated otherwise.

Business context

Maiden is a Bermuda-based reinsurer serving specialty and regional insurers. Its three reporting segments were Diversified Reinsurance, AmTrust Quota Share Reinsurance and NGHC Quota Share. AmTrust-related business generated 58% of Q2 net premiums written. The filing reports continued growth in AmTrust business, while Diversified Reinsurance writings declined.

Financial results and key metrics

  • Q2 revenue and earnings: Total revenues were $536.7 million, versus $456.5 million a year earlier. Net income was $23.3 million, versus $14.6 million; net income attributable to common shareholders was $20.2 million, or $0.28 basic and $0.27 diluted per share, versus $14.5 million, or $0.20 per share.
  • First-half results: Total revenues were $1.056 billion, versus $919.6 million. Net income attributable to common shareholders was $45.2 million, or $0.62 basic and $0.61 diluted per share, versus $34.9 million, or $0.48 per share.
  • Premiums and underwriting: Q2 net premiums written increased 20.9% to $497.9 million and net premiums earned rose 17.4% to $513.3 million. Underwriting income increased to $17.3 million from $11.4 million. The combined ratio improved to 97.6% from 97.9%; below 100% indicates underwriting profitability. First-half combined ratio was also 97.6%, versus 97.9%.
  • Segment performance, Q2: AmTrust underwriting income was $11.8 million (95.5% combined ratio); Diversified was $4.7 million (97.4%); NGHC was $0.8 million (98.9%). NGHC’s combined ratio worsened from 96.3%, reflecting weaker physical-damage results and adverse prior-year development.
  • Investments: Q2 net investment income was $20.7 million, up 3.3%; first-half income was $42.7 million, up 10.9%. Average book yield fell to 2.7% from 3.0% in Q2 and to 2.8% from 3.0% for the first half. The increase in investment income reflected larger average invested assets despite lower yields.
  • Cash flow: First-half operating cash flow was $150.1 million, versus $166.4 million. Investing activities used $128.0 million, versus $380.6 million; financing activities used $11.8 million, versus providing $85.2 million. Cash and cash equivalents ended at $89.4 million, up $7.8 million since year-end.
  • Balance sheet and liquidity: At June 30, total assets were $4.406 billion, total liabilities $3.449 billion and total equity $956.8 million. Investments were $2.719 billion. Restricted cash and investments totaled $2.157 billion, largely supporting reinsurance collateral requirements. Reinsurance receivables were $685.1 million.
  • Debt and capital: Senior notes were $207.5 million and junior subordinated debt was $126.3 million, or $333.8 million total debt. Debt was unchanged from year-end; debt to total capital resources rose to 25.9% from 24.7%. Common book value per share declined to $11.12 from $11.96.
  • Dividends: Common dividends declared were $0.09 per share for Q2, versus $0.08 a year earlier. The 8.25% Series A preference shares had $3.1 million of Q2 dividends and $6.2 million for the first half.

Material changes versus comparable periods

  • Growth was driven principally by AmTrust: Q2 net premiums written rose 48.5% in that segment, while Diversified declined 6.3%. First-half AmTrust net premiums written rose 50.7%; Diversified declined 6.9%.
  • Common-shareholder net income increased, but operating earnings—a company-defined non-GAAP measure—rose only 3.7% in Q2 to $20.4 million and 6.2% for the first half to $41.5 million. Preference-share dividends, issued in August 2012, reduced earnings available to common shareholders.
  • Rising interest rates in Q2 reduced the fair value of available-for-sale securities. First-half other comprehensive loss was $93.1 million, primarily from investment valuation declines; accumulated other comprehensive income fell to $48.0 million from $141.1 million at year-end. This contributed to lower equity and book value per common share.
  • Total assets increased 6.5% from year-end, while loss reserves rose 6.0% to $1.844 billion and unearned premiums rose to $1.130 billion, reflecting business growth.

Outlook, commentary, risks and unusual items

  • Outlook: The filing gives no specific earnings or premium guidance. Management stated it would maintain disciplined underwriting and decline business that does not meet its standards. Management’s long-term target for annualized operating return on average common equity is 15%; reported first-half operating return was 10.0%.
  • Market conditions: Management cited intense reinsurance competition, limited pricing improvement in 2013 renewals and uncertainty about the duration of any favorable pricing environment. Low yields were expected to constrain investment-income growth, although reinvestment at higher rates could help over time.
  • Interest-rate and investment risk: The portfolio’s duration rose to 4.4 years from 3.5 years at year-end. A hypothetical 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $99.7 million and shareholders’ equity by 10.4%. No other-than-temporary investment impairment was recorded; management attributed unrealized losses mainly to spread widening and market illiquidity.
  • Catastrophe and reserve exposure: Estimated ultimate Superstorm Sandy losses remained $31.1 million at June 30; $18.5 million of related loss payments occurred in the first half. Reinsurance recoverables were $101.1 million, of which $67.7 million related to Sandy. Actual claims and reserve outcomes may differ from estimates.
  • Related-party and contract risk: AmTrust is a major related-party counterparty. Maiden had a $168.0 million loan to an AmTrust affiliate and substantial collateral arrangements. The AmTrust quota-share agreement was amended and extended through July 1, 2016. On August 1, 2013, after quarter-end, NGHC terminated its quota-share agreement on a run-off basis; Maiden remains liable for covered losses on policies in force at termination as they expire.
  • Other changes and exposures: Maiden began transferring its excess and surplus property business to Brit effective May 1, 2013; existing business is running off. The company reported no off-balance-sheet arrangements. It had no foreign-currency hedges in place and warned that currency movements, inflation, rating changes, counterparty failure and limits on subsidiary dividends could adversely affect results or liquidity. S&P revised its outlook on the operating subsidiaries, senior notes and preference shares to negative in May 2013, while affirming the ratings.

Important facts for investors to verify

  • How the NGHC termination affects future premium volume, earnings and runoff claims, and whether the company can replace that business profitably.
  • Whether AmTrust growth and related-party collateral, receivables and loan exposures remain adequately protected and collectible.
  • Subsequent investment portfolio performance, interest-rate sensitivity, realized losses and the effect of lower yields or mortgage prepayments on income and book value.
  • Development of Sandy recoverables and loss reserves, including any adverse reserve development.
  • Dividend capacity at the holding company given restricted assets, subsidiary regulatory limits and the continuing preference-share dividend burden.
  • Progress toward management’s 15% long-term operating return target; this is a target, not filed earnings guidance.