Maiden Holdings, Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are U.S. dollars unless otherwise noted. Maiden is a Bermuda-based reinsurer with Diversified Reinsurance and AmTrust Reinsurance segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Gross premiums written | $864.1 million | $834.3 million |
| Net premiums written | $792.8 million | $797.0 million |
| Net premiums earned | $616.0 million | $577.3 million |
| Net investment income | $36.3 million | $28.3 million |
| Net income | $36.8 million | $38.5 million |
| Net income attributable to common shareholders | $27.2 million | $32.4 million |
| Basic / diluted EPS | $0.37 / $0.35 | $0.44 / $0.41 |
| Combined ratio | 98.9% | 98.2% |
| Operating earnings attributable to common shareholders (non-GAAP) | $28.3 million | $26.6 million |
| Diluted operating EPS (non-GAAP) | $0.37 | $0.35 |
Underwriting income was $12.9 million, down from $16.5 million. Investment income and realized investment gains totaled $38.6 million, versus $29.1 million a year earlier. Comprehensive income was $130.1 million, including $93.3 million of after-tax other comprehensive income, primarily reflecting higher unrealized investment values.
Balance sheet, liquidity and capital
- Total assets were $6.12 billion and total equity was $1.46 billion at March 31, 2016. Maiden shareholders’ equity was $1.46 billion; common shareholders’ equity was $979.0 million.
- Investments were $4.33 billion; cash and cash equivalents were $85.2 million, with a further $145.5 million restricted. Total investments and cash, including restricted balances, were $4.56 billion.
- Senior notes had $360 million principal outstanding and a $350.0 million net carrying value. Debt was 19.8% of total capital resources, down from 21.1% at year-end. Interest and amortization expense was $7.3 million.
- Operating cash flow was $9.0 million, compared with $170.4 million in Q1 2015. Investing activities provided $3.1 million; financing activities used $20.1 million. Cash and cash equivalents fell $4.4 million to $85.2 million.
- Management attributed lower operating cash flow in part to the $107 million AmTrust commutation settlement and growth-related timing of reinsurance balances. It expects cash-flow benefits from AmTrust segment growth later in 2016.
- Cash and investments pledged as collateral totaled approximately $3.8 billion. Common book value per share was $13.23, up 12.4% from December 31, 2015; book value plus accumulated dividends was $16.12.
Changes versus the prior comparable period
- Net premiums earned rose 6.7%, mainly from 15.4% growth in AmTrust earned premiums; Diversified earned premiums declined 10.6% amid business-mix changes.
- Net premiums written declined 0.5%, reflecting increased premiums ceded to a global reinsurer and foreign-exchange effects.
- Net income declined 4.4%, while common-shareholder net income declined 16.0%, partly because preference-share dividends increased, including Series C dividends. Operating earnings increased 6.4%.
- The consolidated combined ratio worsened 0.7 percentage points. Diversified’s ratio rose to 102.9% from 101.1%, producing a $5.1 million underwriting loss; AmTrust’s ratio rose to 95.3% from 94.6%, while underwriting income was approximately $20.9 million.
- Loss and LAE expense rose 6.9%, and commission and acquisition expenses rose 9.4%. Management cited adverse loss development in Diversified and the run-off E&S business, increased commercial-auto loss activity, business mix, and higher initial booking ratios in parts of AmTrust.
- Net investment income increased 28.5%, supported by 16.1% growth in average investable assets and a 3.1% average book yield, versus 2.8%.
Outlook, risks and notable items
- No specific earnings or premium guidance was provided. Management described reinsurance markets as highly competitive, with residual pricing pressure, and said it would decline business that does not meet underwriting standards. Its stated long-term target for operating return on average common equity is 15%; Q1 was 12.3%.
- Interest-rate sensitivity is material: a hypothetical 100-basis-point increase was estimated to reduce AFS fixed-maturity fair value by $163.8 million and shareholders’ equity by 11.2%. Foreign-currency exposure is also relevant; the filing estimates a 10% strengthening of the U.S. dollar against currencies held would reduce net assets by $9.7 million, all else equal. No currency hedges were in force.
- At quarter-end, 96.7% of fixed-maturity investments were investment grade. Securities in unrealized-loss positions had $67.3 million of losses; management considered these temporary and recorded no other-than-temporary impairment.
- Related-party exposure is significant: AmTrust business made up 63.9% of net premiums written, and related-party balances and collateral are substantial. The AmTrust quota-share agreement was extended through June 30, 2019; the European Hospital Liability agreement runs through March 31, 2017.
- Founder Michael Karfunkel died on April 27, 2016, after quarter-end; his shares are held by his estate. The filing reported no material change in previously disclosed risk factors or contingencies. A former executive’s whistleblower claim remained in proceedings, which the Company was defending; management expected the hearing to conclude in 2016.
- The board declared a $0.14 common dividend for July 2016. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loss development, especially commercial auto and Diversified business, affects reserves and combined ratios in subsequent quarters.
- Whether AmTrust growth converts into cash as anticipated, and the collectability and concentration of related-party receivables and balances.
- The amount and terms of collateral supporting reinsurance obligations, including the impact on available liquidity.
- How unrealized investment gains, interest-rate movements, credit quality and foreign-exchange changes affect equity and investment income.
- Any developments in the whistleblower litigation, governance following Mr. Karfunkel’s death, and related-party arrangements.