Business Context and Reporting Period
Maiden Holdings, Ltd. (MHLD), a Bermuda-based reinsurance holding company, filed this Form 8-K on August 8, 2017, to report financial results for the fiscal quarter and six months ended June 30, 2017. The Company operates primarily through two segments: AmTrust Reinsurance and Diversified Reinsurance.
Key Financial Metrics
Quarter Ended June 30, 2017
- Net Loss: $22.4 million ($0.26 per diluted common share), compared to net income of $30.9 million ($0.39 per share) in Q2 2016.
- Non-GAAP Operating Loss: $12.5 million ($0.14 per diluted common share), compared to operating earnings of $28.4 million ($0.37 per share) in Q2 2016.
- Premiums: Gross premiums written increased 2.5% to $705.2 million; Net premiums written increased 5.2% to $684.1 million.
- Combined Ratio: 105.8% (up from 98.6% in Q2 2016).
- Investment Income: Net investment income increased 14.7% to $40.5 million.
- Balance Sheet: Total assets were $6.8 billion; Shareholders' equity was $1.5 billion. Book value per common share was $11.95.
Six Months Ended June 30, 2017
- Net Loss: $1.9 million ($0.02 per diluted common share), compared to net income of $58.1 million ($0.75 per share) in H1 2016.
- Non-GAAP Operating Earnings: $10.2 million ($0.12 per diluted common share), compared to $56.8 million ($0.73 per share) in H1 2016.
- Premiums: Gross premiums written increased 4.9% to $1.63 billion; Net premiums written increased 9.8% to $1.58 billion.
- Combined Ratio: 103.4% (up from 98.7% in H1 2016).
- Investment Income: Net investment income increased 15.4% to $82.7 million.
Material Changes vs. Prior Period
The primary driver of the decline in profitability was net adverse development of $56.0 million in the second quarter. This was comprised of:
- AmTrust Reinsurance: $29.4 million in adverse development, primarily driven by elevated severity in U.S. small commercial lines business.
- Diversified Reinsurance: $25.4 million in adverse development, stemming from casualty facultative business, select treaty accounts, and approximately $6 million in non-catastrophe property losses.
Despite the underwriting loss, the Company saw growth in premiums written and earned, as well as a significant increase in net investment income due to higher investable assets. The loss ratio increased to 74.1% in Q2 2017 from 66.8% in Q2 2016.
Guidance, Outlook, and Capital Actions
Management Commentary
CEO Art Raschbaum stated that the adverse development observed in Q2 is not analogous to the long-term trend of commercial auto liability issues seen in 2011-2014. Management noted that year-to-date treaty commercial auto has been benign. The Company has increased reserves in response to elevated severity in specific jurisdictions and confirmed claims operational changes in AmTrust's U.S. small commercial lines.
Capital Actions
- Debt Redemption: In June 2017, Maiden redeemed its $100 million 8.0% senior notes due 2042.
- Equity Issuance: Issued $150 million of 6.7% non-cumulative preference shares (Series D).
- Dividends: The Board declared a quarterly dividend of $0.15 per common share (payable Oct 16, 2017). Preference share dividends were also declared for Series A ($0.515625), Series C ($0.445313), and Series D ($0.418750), payable Sept 15, 2017.
Risks
Forward-looking statements highlight risks including changes in interest rates, investment market performance, accuracy of loss reserve projections, and the impact of competition and pricing environments.
Investor Verification Checklist
- Verify the sustainability of the $56.0 million adverse development and whether it represents a one-time event or a recurring trend in the AmTrust and Diversified segments.
- Confirm the impact of the $100 million debt redemption and $150 million preference share issuance on the Company's leverage and cost of capital.
- Monitor the "benign" performance of year-to-date treaty commercial auto to validate management's assertion that historical auto liability issues have been addressed.
- Review the reconciliation of GAAP net loss to Non-GAAP operating earnings to understand the magnitude of adjustments (e.g., foreign exchange, amortization).
- Assess the adequacy of the $3.11 billion reserve for loss and loss adjustment expenses given the recent adverse development.