Maiden Holdings, Ltd. — 2016 Form 10-K Summary
Business context and reporting period
Maiden is a Bermuda-based reinsurer serving regional and specialty insurers, primarily in the U.S. and Europe. This 10-K covers the fiscal year ended December 31, 2016; quarterly figures are unaudited. Its two reportable segments are Diversified Reinsurance and AmTrust Reinsurance. AmTrust accounted for 70.9% of 2016 gross premiums written.
Financial performance and condition
- Premiums and revenue: Gross premiums written rose 6.3% to $2.831 billion; net premiums written increased 5.6% to $2.655 billion; net premiums earned rose 5.7% to $2.568 billion. Total revenue was $2.732 billion.
- Profit: Net income was $48.1 million, down 61.3%. Net income attributable to common shareholders fell 84.8% to $15.2 million; diluted EPS was $0.19 versus $1.31. Non-GAAP operating earnings attributable to common shareholders were $17.3 million versus $107.2 million.
- Underwriting and margins: Underwriting recorded a $53.2 million loss, versus $44.5 million income in 2015. The combined ratio deteriorated to 103.2% from 99.3% (above 100% indicates an underwriting loss). Loss and LAE ratio rose to 70.6%; expense ratio was 32.6%.
- Investment income: Net investment income increased 11.3% to $145.9 million as average invested assets grew 13.0%; average book yield eased to 2.9% from 3.0%.
- Cash flow: Operating cash flow was $470.1 million, down 25.9% from $634.3 million. Investing activities used $439.2 million and financing activities used $76.8 million. Cash and cash equivalents ended at $45.7 million, excluding restricted cash.
- Assets, reserves and capital: Total assets were $6.252 billion; loss and LAE reserves were $2.896 billion, up 15.4%; total shareholders’ equity was $1.361 billion. Total capital resources were $1.723 billion, and debt-to-capital was 21.0%.
- Debt and liquidity: Senior notes had $362.5 million principal outstanding ($351.4 million net carrying value). Investments totaled $4.737 billion. Cash, cash equivalents and investments totaled $4.886 billion, but $4.399 billion was pledged or restricted as collateral.
- Shareholder measures: Book value per common share was $12.12, up 3.0%; book value plus accumulated dividends rose 6.3% to $15.44. Common dividends declared were $0.57 per share.
Material changes versus 2015
- Adverse reserve development was $165.3 million for the year, including a $120.4 million fourth-quarter charge. Commercial auto was the principal driver, with additional development in program general liability and run-off business.
- Segment underwriting diverged: Diversified Reinsurance posted a $68.8 million underwriting loss and a 109.4% combined ratio; AmTrust Reinsurance earned $30.1 million with a 98.4% combined ratio. AmTrust premiums continued to grow, while Diversified earned premiums declined 2.8%.
- Series B mandatory convertible preference shares converted into 12.1 million common shares in September 2016. The company issued $110 million of 6.625% senior notes and redeemed $107.5 million of 8.25% notes, reporting a $2.3 million accelerated issuance-cost charge.
- A.M. Best upgraded the operating subsidiaries’ financial strength rating to A, stable, from A-, positive. S&P rated them BBB+, stable.
Outlook, commentary, risks and unusual items
- Management’s long-term goal is operating return on average common equity of 15%; 2016 was 1.9%, versus 12.0% in 2015. Management said underwriting initiatives were expected to support progress toward the target over the next 12–24 months.
- The filing targets 10% business growth in 2017. Management also reported competitive renewal pricing and pressure across the market, and said it would decline business that does not meet underwriting standards.
- Key risks include reserve uncertainty—management estimated a reasonably possible reserve increase of approximately $180.9 million—continued commercial auto loss emergence, pricing competition, catastrophe exposure, investment and interest-rate risk, and currency movements. Maiden reported no currency hedges at year-end.
- Concentration and related-party exposure are significant: AmTrust generated 70.9% of gross written premiums; $3.0 billion of collateral was provided to AmTrust-related entities, and Maiden had a $168.0 million related-party loan. These arrangements, alongside governance conflicts, warrant attention.
- Most assets are committed to collateral trusts or other requirements, and subsidiary dividends are subject to regulatory limits. Maiden Bermuda paid $445 million to the parent in 2016; Maiden US could pay no dividend without regulatory approval at year-end.
- The filing discloses an ongoing former-executive whistleblower claim, which the company contests; hearings were expected to conclude in late 2017 or early 2018. The company also recorded a $1.8 million impairment of goodwill tied to Insurance Regulatory Capital.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether commercial auto reserve strengthening is adequate and whether subsequent claims development supports management’s estimates.
- How much of the $4.399 billion in collateralized assets is readily available for other liquidity needs, and whether collateral requirements may increase.
- AmTrust’s future premium growth, underwriting results, financial strength and continuation of the reinsurance agreements; assess the related-party loan and collateral protections.
- Whether underwriting profitability recovers, particularly in Diversified Reinsurance, and how actual 2017 growth and renewal pricing compare with management’s stated targets and commentary.
- The sensitivity of investment values, capital and income to interest-rate, credit-spread and foreign-exchange changes, and the implications of the portfolio’s concentration in fixed-income securities.
- Dividend capacity at the holding company, including preference-share obligations and statutory or regulatory restrictions on subsidiary distributions.