Maiden Holdings, Ltd. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited; amounts below are U.S. dollars unless noted. Maiden is a Bermuda-based reinsurer operating through Diversified Reinsurance, AmTrust Quota Share Reinsurance, and ACAC Quota Share segments.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Gross premiums written | $451.1m | $289.8m | $1,384.3m | $952.0m |
| Net premiums earned | $420.3m | $309.6m | $1,134.6m | $857.3m |
| Total revenues | $440.7m | $328.7m | $1,201.4m | $913.7m |
| Net income attributable to Maiden shareholders | $16.0m | $18.5m | $11.0m | $50.7m |
| Diluted EPS | $0.22 | $0.26 | $0.15 | $0.72 |
| Underwriting income | $14.1m | $12.9m | $32.0m | $36.5m |
| Combined ratio | 97.4% | 97.0% | 98.0% | 96.8% |
Operating earnings, a non-GAAP measure, were $21.4m ($0.30 basic, $0.29 diluted per share) in Q3 and $52.4m ($0.73 basic, $0.72 diluted) year to date. Net investment income was $18.7m in Q3 and $57.7m year to date. The nine-month figures include $15.1m of debt repurchase expense and $20.3m of accelerated non-cash amortization related to refinancing.
Cash, capital, and liquidity
- Operating cash flow was $105.1m for the first nine months, versus $114.2m in 2010; cash and cash equivalents ended at $146.3m, up from $96.2m at year-end 2010.
- At September 30, total assets were $3.26bn, total liabilities $2.49bn, and Maiden shareholders’ equity $767.2m; book value per common share was $10.63.
- Total debt was $233.8m: $107.5m of 8.25% senior notes due 2041 and $126.3m carrying value of junior subordinated debt. Debt to total capitalization was 23.4%, compared with 22.3% at year-end 2010.
- The company issued the senior notes and used the proceeds, together with cash, to repurchase $107.5m of 14% junior subordinated debt. Management said the refinancing should save approximately $6.2m annually, while noting the transaction produced the non-recurring charges above.
- Restricted cash and investments totaled $1.45bn. Subsidiary dividend and capital distributions are subject to regulatory restrictions; management said it did not expect these restrictions or collateral commitments to materially impair ordinary operations or common dividends.
Material changes and management commentary
- Premium growth reflected the 2010 IIS acquisition, organic growth in U.S. business, the European Hospital Liability quota share added in April 2011, and a full nine months of ACAC operations versus seven months in 2010. Nine-month net premiums written rose 46.5% to $1.315bn.
- Q3 net income fell despite higher premiums and underwriting income, primarily because investment results shifted from $1.6m of gains to $2.9m of losses. Nine-month net income fell largely because of refinancing charges; operating earnings were $52.4m versus $55.4m.
- Second-quarter U.S. thunderstorm and tornado activity caused a reported $9.5m adverse net underwriting impact, net of the normal catastrophe provision. Management described losses from broader 2010–2011 catastrophe events as immaterial to Maiden, while noting U.S. storm activity adversely affected results.
- Management cited competitive pricing, historically low fixed-income yields, and uncertainty over the durability of any market price improvement. It said it would maintain underwriting discipline and believed conditions could support better pricing in the near term. Management’s long-term target is 15% operating ROE; annualized operating ROE was 11.1% for Q3 and 9.2% year to date.
- Investment portfolio fair value was $1.90bn; 99.1% of fixed maturities were investment grade and the average rating was AA. Unrealized losses were attributed primarily to wider credit spreads and market illiquidity; no other-than-temporary impairment was recorded. The portfolio had a 2.78-year weighted average duration, and a 100-basis-point rate rise was estimated to reduce shareholders’ equity by 8.6%.
Risks, contingencies, and unusual items
- Significant related-party business and balances involve AmTrust and entities associated with founding shareholders. The filing reports $181.5m of related-party reinsurance receivables, a $168.0m related-party loan, and related-party collateral arrangements. The AmTrust quota share is a major source of premiums; review contract terms, collateral protections, and counterparty exposure.
- The company disclosed foreign-currency exposure, particularly to the euro and pound, with no hedging instruments in place at September 30. A 10% or 20% exchange-rate change was estimated to change net assets by $11.1m or $22.2m, respectively.
- Remaining junior subordinated debt carried a 14% coupon. Repayment before January 20, 2014 could trigger an estimated $21.4m penalty, in addition to a reduction in earnings from recognizing remaining unamortized discount.
- A former executive’s whistleblower complaint was dismissed by an administrative law judge; the former executive petitioned for review, and Maiden filed opposition. The company said it considers the claim without merit and is defending it.
- On November 2, 2011, the board declared a $0.08-per-share quarterly dividend payable January 17, 2012.
Important facts for investors to verify
- Underlying reserve adequacy and future loss development, especially for AmTrust and ACAC business and the 2011 storm claims.
- Whether premium growth translates into sustainable underwriting profitability as combined ratios and business mix evolve.
- AmTrust and other related-party counterparty strength, collectability of balances, and sufficiency and accessibility of pledged collateral.
- Refinancing savings versus ongoing debt costs, potential early-repayment penalties, and subsidiary capacity to upstream cash and fund dividends.
- Investment portfolio sensitivity to interest rates, credit spreads, and foreign-exchange movements, including the sizable mortgage-backed and corporate bond exposures.