Maiden Holdings, Ltd. — Q2 2016 Form 10-Q
Business context and period. Bermuda-based reinsurer serving regional and specialty insurers, with Diversified Reinsurance and AmTrust Reinsurance segments. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Gross premiums written | $688.3m | $674.2m | $1,552.4m | $1,508.4m |
| Net premiums earned | $637.6m | $609.4m | $1,253.6m | $1,186.7m |
| Net income | $39.9m | $26.5m | $76.7m | $65.0m |
| Net income attributable to common shareholders | $30.9m | $20.5m | $58.1m | $52.9m |
| Basic / diluted EPS | $0.42 / $0.39 | $0.28 / $0.27 | $0.79 / $0.75 | $0.72 / $0.69 |
| Combined ratio | 98.6% | 99.2% | 98.7% | 98.7% |
| Net investment income | $35.3m | $35.2m | $71.6m | $63.4m |
- Underwriting: Underwriting income was $16.3m in Q2 and $29.3m in the first half, versus $11.8m and $28.3m, respectively, in 2015. AmTrust’s combined ratio was 94.9% in Q2 and 95.1% year to date. Diversified Reinsurance remained loss-making in underwriting, with ratios of 103.4% and 103.2%.
- Cash flow: First-half operating cash flow was $165.0m, down from $378.4m; investing used $89.4m and financing used $40.4m. Cash and cash equivalents ended at $127.5m unrestricted and $378.3m restricted.
- Balance sheet and capital: Total assets were $6.271bn and total equity $1.531bn at June 30. Senior notes had $362.5m principal ($351.2m net carrying value). Total capital resources were $1.892bn; debt to capital resources was 19.2%, down from 21.1% at year-end 2015. Book value per common share was $14.18, up 20.5% from $11.77.
- Investments: Fixed-maturity investments were about $4.25bn at fair value, with 96.3% investment grade. Net unrealized investment gains improved substantially, contributing to a $142.7m first-half increase in other comprehensive income. The filing reports $49.2m of unrealized losses on securities in loss positions; management considered these temporary and reported no other-than-temporary impairment.
- Dividends: Common dividends declared were $0.14 per share for Q2, versus $0.13 a year earlier. The board subsequently authorized another $0.14 quarterly common dividend and dividends on Series A, B and C preference shares.
Material changes versus comparable periods
- Q2 net income rose 50.5%; first-half net income rose 17.9%. Management attributed the Q2 increase chiefly to higher underwriting income and foreign-exchange gains, partly offset by a one-time $2.3m accelerated amortization charge on redeemed debt. First-half growth was driven principally by higher investment income, with additional contributions from foreign exchange and realized gains.
- Net premiums earned increased 4.6% in Q2 and 5.6% in the first half. First-half AmTrust earned premiums rose 10.0%, while Diversified earned premiums declined 3.8%.
- First-half net operating earnings, a non-GAAP measure, were $56.8m versus $55.0m; Q2 was $28.4m, essentially unchanged year over year. Operating ROACE was 11.3% in Q2 and 11.9% for the first half, below management’s stated long-term 15% target.
- Operating cash flow fell sharply year over year, which the company linked mainly to settlement of a $107m AmTrust commutation in Q1 2016 and different premium/reserve cash-flow movements.
- In June, Maiden issued $110m of 6.625% senior notes and redeemed $107.5m of 8.25% notes, lowering the coupon cost. The redemption triggered the $2.3m accelerated issuance-cost expense.
Outlook, commentary and risks
- No quantitative earnings or premium guidance is provided. Management described a competitive reinsurance market with pricing pressure, said it would maintain underwriting discipline, and noted it may hold elevated cash while market and interest-rate conditions remain volatile.
- Adverse reserve development in commercial auto continued to pressure Diversified Reinsurance underwriting. The company also cited adverse development in its Diversified segment and legacy run-off business when discussing reserve growth.
- AmTrust-related business represented about 75% of Q2 net premiums written and generated substantial related-party balances and collateral requirements. At June 30, restricted cash and investments totaled about $4.09bn; the company said collateral assets were 86.1% of total fixed maturities and cash, including restricted cash.
- Interest-rate sensitivity is material: a hypothetical 100-basis-point increase was estimated to reduce AFS fixed-maturity fair value by $151.3m and shareholders’ equity by 9.9%; a 100-basis-point decrease was estimated to increase equity by 10.0%. These scenarios are not forecasts.
- Foreign-exchange exposure is unhedged at period-end. A hypothetical 10% or 20% strengthening of the U.S. dollar against relevant foreign currencies was estimated to reduce net assets by $9.2m or $18.5m, respectively.
- The filing identifies the U.K. Brexit vote as a source of uncertain potential disruption to European and global business and markets. Other disclosed risks include credit, claims inflation, investment valuation, broker/reinsurer counterparty exposure, and regulatory limits on subsidiary distributions.
- Routine legal matters were not expected to materially affect results. A former executive’s whistleblower-related employment claim remained under defense; the company said it considered the claim without merit and expected the administrative hearing to conclude in 2016. Management reported no material change in commitments and contingencies.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Q2 earnings improvement is sustainable after separating realized investment and foreign-exchange gains, and the $2.3m debt-related charge; compare GAAP earnings with the company’s non-GAAP operating earnings.
- Reserve adequacy and subsequent development, particularly commercial auto in Diversified Reinsurance and legacy run-off exposures.
- AmTrust concentration, related-party terms, recoverability of the $168.0m related-party loan, and adequacy and availability of collateral supporting reinsurance obligations.
- Liquidity and cash-flow trends, including restricted versus unrestricted assets and the ability of subsidiaries to distribute funds to the holding company.
- Investment portfolio interest-rate, credit, mortgage prepayment and foreign-currency exposures; assess the effect of unrealized gains on reported book-value growth.
- Progress and outcome of the pending employment claim, and the effect of Brexit or other market changes on European operations and investments.