Maiden Holdings, Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context
Maiden is a Bermuda-based reinsurer with two reportable segments: Diversified Reinsurance and AmTrust Reinsurance. AmTrust-related business represented 75.1% of gross premiums written in Q2 and 70.7% in the first half of 2018, creating substantial counterparty and business concentration.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net premiums earned | $667.3m | $711.1m | $1,352.8m | $1,420.6m |
| Total revenue | $713.3m | $754.8m | $1,445.7m | $1,511.1m |
| Net income (loss) | $2.7m | ($16.3m) | $25.0m | $10.2m |
| Net income (loss) attributable to common shareholders | ($5.9m) | ($22.4m) | $7.8m | ($1.9m) |
| Basic EPS attributable to common shareholders | ($0.07) | ($0.26) | $0.09 | ($0.02) |
| Combined ratio | 106.0% | 105.8% | 103.9% | 103.4% |
| Net investment income | $44.3m | $40.5m | $87.2m | $82.7m |
| Operating cash flow | Not separately stated for Q2 | $56.1m | $223.5m |
Underwriting remained unprofitable: underwriting losses were $32.9m in Q2 and $36.7m in the first half. The Q2 common-shareholder loss reflects $8.5m of preference dividends despite positive consolidated net income. Management’s non-GAAP operating loss attributable to common shareholders was $10.7m for Q2; first-half non-GAAP operating earnings were $6.2m.
Financial position and liquidity
- At June 30, total assets were $6.718bn, total liabilities $5.612bn, and total equity $1.106bn, down from $1.233bn at year-end 2017.
- Cash and cash equivalents were $72.1m unrestricted and $154.7m restricted. Cash-flow statements include both, totaling $226.8m at period-end.
- Investments totaled $5.012bn at carrying value. Fixed maturities had $131.6m of gross unrealized losses, versus $40.4m at December 31, 2017; management attributed the losses principally to rising interest rates and foreign-exchange movements and reported no other-than-temporary impairment.
- Senior-note principal was unchanged at $262.5m, with a $254.6m carrying value. Debt to total capital resources rose to 19.2% from 17.6%, primarily as equity declined. Management said liquidity sources were adequate for the next 12 months.
- Operating cash flow fell to $56.1m from $223.5m in the first half of 2017, which the company attributed mainly to higher loss payments, lower premiums written, and a $17.5m returned-premium portfolio on a terminated U.S. account. Investing activities provided $22.2m; financing activities used $42.2m. Total cash, including restricted cash, increased $35.3m.
- Restricted cash and investments used as collateral were $4.8bn. These assets support reinsurance obligations and are not freely available for general use.
Changes versus prior periods
- First-half gross premiums written declined 7.5% to $1.507bn; net premiums written declined 5.7% to $1.495bn. Net premiums earned fell 4.8%. AmTrust premium reductions, especially in Small Commercial Business, and underwriting actions contributed to the decline.
- Q2 consolidated net income improved from a loss in the prior-year quarter, while common shareholders still recorded a loss. The comparison benefited from higher investment income, favorable foreign-exchange results, lower interest expense and less adverse prior-year loss development.
- First-half common-shareholder results moved to income from a loss, but non-GAAP operating earnings fell to $6.2m from $10.2m. Underwriting losses worsened, partly offset by increased investment income and lower interest expense.
- Combined ratios remained above 100%: 106.0% in Q2 and 103.9% in the first half. First-half adverse prior-year development was $45.6m, lower than $72.9m in the comparable period, but initial loss ratios on current-year business increased.
- Shareholders’ equity fell by $126.4m, principally due to a $110.3m decline in accumulated other comprehensive income as investment marks worsened, plus declared dividends. Book value per common share declined to $7.71 from $9.25.
Outlook, risks and notable items
- Management said underwriting initiatives and reserving actions were expected to improve operating returns in 2018 and advance longer-term return objectives over the next 12–24 months. The board’s review of strategic alternatives to increase shareholder value was ongoing. No quantified earnings or premium guidance was provided.
- Management’s long-term target for non-GAAP operating return on average common equity is 15%; reported first-half 2018 return was 1.8%.
- AmTrust quota-share arrangements were scheduled for renewal in 2019. On August 8, 2018, the boards agreed to extend the notice date for the renewal provision from September 30, 2018 to January 31, 2019. The main quota-share agreement otherwise runs through June 30, 2019, subject to its terms.
- Subsequent to quarter-end, the board authorized a common dividend of $0.05 per share, down from $0.15 per share paid for Q2. Preference-share dividends were also authorized.
- Key risks include adverse reserve development, current-year loss trends, interest-rate and credit-spread exposure, foreign-exchange movements, and reliance on AmTrust. No currency hedges were in force. A 100-basis-point increase in rates was estimated to reduce AFS portfolio fair value by $196.4m and shareholders’ equity by 17.8%, before considering other effects.
- The principal operating subsidiaries retained A.M. Best financial strength ratings of A- with a negative outlook. A former executive’s whistleblower-related employment claim remained pending; the company said it considered the claim without merit and would defend it. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Most important facts for investors to verify
- Progress and terms of the strategic-alternatives review, and the status of the AmTrust quota-share renewal.
- Whether adverse development and current-year loss ratios stabilize, particularly in AmTrust workers’ compensation, general liability and commercial auto.
- AmTrust’s financial condition and ability to meet reinsurance, collateral and related-party loan obligations; assess the scale of related-party exposures and restricted assets.
- Investment portfolio sensitivity to interest rates and credit spreads, and the effects of unrealized losses on capital and book value.
- Cash generation and the sustainability of liquidity and dividends, including the reduction in the common dividend to $0.05 per share.
- Reserve adequacy, including the $45.6m first-half adverse prior-year development and the assumptions underlying loss reserves.