Maiden Holdings, Ltd. — Q2 2017 Form 10-Q
Business context and reporting period. Bermuda-based reinsurer reporting unaudited results for the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Its two reportable segments are Diversified Reinsurance and AmTrust Reinsurance. The AmTrust segment accounted for 79.9% of Q2 net premiums written; the filing also reports substantial related-party and customer concentration.
Financial performance and position
- Premiums and revenue: Q2 net premiums earned were $711.1 million, up 11.5%; total revenue was $754.8 million, up 11.9%. First-half net premiums earned were $1.421 billion, up 13.3%; total revenue was $1.511 billion, up 13.3%. First-half net premiums written rose 9.8% to $1.585 billion.
- Profit: Q2 net loss attributable to Maiden was $16.3 million versus income of $39.9 million a year earlier; the loss attributable to common shareholders was $22.4 million, or $0.26 per share, versus earnings of $30.9 million, or $0.42 per share. First-half net income attributable to Maiden was $10.2 million, but preference dividends resulted in a $1.9 million common-shareholder loss, or $0.02 per share, compared with common earnings of $58.1 million, or $0.79 per share, in 2016. Non-GAAP operating earnings attributable to common shareholders were a $12.5 million Q2 loss and $10.2 million for the first half, down from $28.4 million and $56.8 million, respectively.
- Underwriting and margins: Underwriting loss was $35.1 million in Q2 and $34.0 million in the first half, versus underwriting income of $16.3 million and $29.3 million in 2016. The combined ratio deteriorated to 105.8% for Q2 and 103.4% for the first half, from 98.6% and 98.7%. A ratio above 100% indicates underwriting losses. Q2 segment combined ratios were 112.9% for Diversified Reinsurance and 101.5% for AmTrust Reinsurance.
- Investment results: Net investment income increased 14.7% to $40.5 million in Q2 and 15.4% to $82.7 million in the first half. Management cited higher average invested assets and yields; average book yield was 3.1% in Q2 and 3.2% for the first half. First-half realized investment gains were $2.5 million.
- Cash flow and liquidity: First-half operating cash flow was $223.5 million versus $165.0 million in 2016; investing cash outflow was $31.7 million and financing cash inflow was $7.6 million. Cash and cash equivalents were $246.8 million at June 30, with a further $190.5 million in restricted cash. Management said cash was temporarily elevated, in part because $128.5 million of investment purchases had not yet settled and was settled after quarter-end. Restricted cash and investments totaled $4.6 billion and serve as collateral, limiting their general availability.
- Debt and capital: Senior note principal declined $100 million to $262.5 million after redemption of the 2012 notes. Debt was 14.9% of total capital resources, down from 21.0% at year-end. Total capital resources were $1.763 billion. The company issued $150 million of 6.70% Series D preference shares, receiving about $145.0 million net proceeds; the proceeds partly funded the redemption. Maiden common shareholders’ equity was $1.035 billion, and book value per common share was $11.95 versus $12.12 at year-end.
- Reserves and balance sheet: Loss and loss adjustment expense reserves rose 7.4% to $3.110 billion, while total assets increased to $6.791 billion from $6.252 billion at year-end. Reported adverse prior-year loss development was $56.0 million in Q2 and $72.9 million for the first half.
Material changes and management commentary
- Management attributed weaker underwriting primarily to higher initial current-year loss ratios and adverse prior-year reserve development in both operating segments. Diversified Reinsurance development included facultative commercial auto and several specific contracts; more than half of Q2 development came from three accounts. First-half results also included a non-recurring actuarial assumption change for a large German personal auto account. AmTrust development was concentrated in non-program casualty, with additional adjustments for European hospital liability.
- AmTrust-related business continued to grow. AmTrust represented 80.0% of Q2 gross premiums written and 71.0% for the first half. Related-party balances and collateral arrangements are substantial; the filing describes a $167.975 million loan to AmTrust and approximately $3.106 billion of collateral under the AmTrust quota-share arrangement.
- Foreign exchange shifted from gains in 2016 to losses of $6.7 million in Q2 and $8.6 million for the first half of 2017, which management linked to euro and British pound movements. The company reported no currency hedges in force.
- Management said underwriting initiatives are intended to support progress toward its long-term 15% operating return on average common equity target over the next 12 to 24 months. It also cited disciplined underwriting amid industry pricing pressure and said it would decline business that does not meet its standards. This is an objective, not a quantified earnings forecast; the filing provides no specific full-year guidance.
- The investment portfolio is predominantly fixed income; 97.4% of fixed maturities were investment grade. Management identified interest-rate, credit, prepayment, and foreign-exchange risks. A hypothetical 100-basis-point increase in rates was estimated to reduce AFS fair value by $164.1 million and shareholders’ equity by 10.9%, before any other effects.
Contingencies and unusual items
- The company recorded $2.8 million of accelerated amortization of senior-note issuance costs following the 2012 note redemption.
- An employment-retaliation claim by a former executive remained in an administrative hearing process; the company said hearings were expected to conclude in late 2017 or early 2018 and that it would vigorously defend the claim. Management did not expect routine legal proceedings to have a material adverse effect.
- The company reported no material changes to risk factors from its 2016 Form 10-K and no material changes in internal control over financial reporting. Its operating subsidiaries had A.M. Best ratings of A with a stable outlook and S&P ratings of BBB+ with a negative outlook.
- After quarter-end, the board authorized a $0.15 common dividend and dividends on Series A, C, and D preference shares. The Q2 common dividend declared was $0.15 per share.
Important facts for investors to verify
- Whether adverse reserve development persists, particularly in commercial auto, non-program casualty, and European hospital liability, and how actual claims emergence compares with management’s estimates.
- Whether underwriting performance improves from combined ratios above 100%, including the results of the cited underwriting initiatives and the path toward the 15% operating ROACE target.
- The financial and collateral implications of the company’s high AmTrust concentration, related-party receivables and loan, and dependence on AmTrust-related reinsurance arrangements.
- How much reported cash is freely available after settling investment purchases and accounting for restricted assets, regulatory requirements, and collateral needs.
- The effects of currency movements, interest rates, and investment prepayments on earnings, equity, and investment income; the filing states that no currency hedges were in place.
- The outcome and potential exposure from the former executive’s claim, and the sustainability of common and preference dividends given underwriting results and subsidiary distribution restrictions.