Business context and reporting period
Maiden Holdings, Ltd. is a Bermuda-based reinsurer serving regional and specialty insurers in the U.S. and Europe. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; financial amounts below are U.S. dollars. Its segments are Diversified Reinsurance, AmTrust Quota Share Reinsurance, and NGHC Quota Share, which is in run-off.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net premiums earned | $531.9m | $513.3m | $1,051.1m | $1,001.7m |
| Total revenues | $563.4m | $536.7m | $1,115.7m | $1,055.7m |
| Net income | $31.9m | $23.3m | $34.0m | $51.4m |
| Net income attributable to common shareholders | $25.8m | $20.2m | $21.7m | $45.2m |
| Basic EPS | $0.35 | $0.28 | $0.30 | $0.62 |
| Underwriting income | $15.1m | $17.3m | $30.3m | $32.3m |
| Combined ratio | 98.0% | 97.6% | 97.8% | 97.6% |
| Net investment income | $28.1m | $20.7m | $55.9m | $42.7m |
- Management’s non-GAAP operating earnings attributable to common shareholders were $28.2m for Q2 and $53.7m for the first half, versus $20.4m and $41.5m, respectively. First-half GAAP earnings included a $28.2m non-cash charge for accelerated amortization and write-off of costs on redeemed junior subordinated debt.
- For the six months, operating cash flow was $235.5m versus $150.0m; investing cash outflow was $125.4m and financing cash outflow was $180.4m. Cash and cash equivalents were $70.0m at June 30, down from $139.8m at year-end; restricted cash was $221.5m.
- At June 30, total assets were $5.02bn, investments $3.24bn, loss reserves $2.10bn, and shareholders’ equity $1.22bn. Reinsurance balances receivable were $672.5m, including $371.7m from related parties.
- Total debt was $360m, all senior notes, compared with $486.4m at year-end. Debt-to-total-capital resources declined to 22.7% from 30.2%. Total capital resources were $1.58bn. Book value per common share was $12.46, up from $11.14 at year-end.
- Fixed-maturity investments had a 3.5% average yield and 4.8-year duration. Net unrealized investment gains reached $126.0m, up from $34.3m at year-end; the increase primarily reflected lower interest rates. Management reported no other-than-temporary impairment charges.
Material changes versus the prior comparable period
- Q2 net income rose 36.8%; first-half net income fell 33.9%, principally because of the one-time $28.2m debt-redemption accounting charge. Excluding that item, management reported first-half net income growth of 21.0%.
- First-half net premiums written increased 5.4%. AmTrust quota-share written premiums grew 24.5% and Diversified Reinsurance grew 14.4%; NGHC written premiums declined as the agreement terminated in 2013 and ran off.
- Investment income increased 31.0% in the first half, supported by an 18.5% rise in average invested assets and a higher average book yield (3.1% versus 2.8%). Underwriting income declined 6.1%, while the combined ratio edged up 0.2 percentage points.
- On January 15, Maiden redeemed $152.5m face value of junior subordinated debt, using senior-note proceeds and cash. The refinancing lowered the reported weighted-average effective debt rate; first-half interest and amortization expense declined to $15.2m from $19.1m.
- Common dividends declared were $0.11 per share for Q2 versus $0.09 a year earlier. The Series B preference shares issued in 2013 increased preference dividends and reduce earnings available to common shareholders.
Outlook, commentary, risks and contingencies
- Management reported continued competitive reinsurance conditions and residual pricing pressure, while stating it would maintain disciplined underwriting and decline business not meeting its standards. No specific earnings or revenue guidance was provided.
- Management cited AmTrust organic expansion and improved rates, particularly in U.S. workers’ compensation, as growth drivers. It said cash-flow benefits from AmTrust growth typically lag by at least one quarter and anticipated further cash-flow benefits in 2014.
- Diversified Reinsurance’s Q2 combined ratio rose to 99.9%, reflecting elevated property losses and $2.8m of loss activity and reinstatement premiums tied to the divested E&S business. NGHC’s combined ratio was 104.9%, with unfavorable prior-year development in run-off.
- Interest-rate, credit, counterparty and foreign-currency exposures remain material. A hypothetical 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $152.9m and shareholders’ equity by 12.5%. The company had no currency hedges in force; a 10% strengthening of the U.S. dollar against non-U.S. currencies was estimated to reduce net assets by $17.0m.
- Collateralized cash and investments totaled $2.51bn, including substantial assets supporting related-party AmTrust reinsurance arrangements. The company also reported a $167.975m loan to AmTrust’s reinsurance affiliate. These relationships create counterparty and concentration risks.
- A former executive’s whistleblower-related employment claim was remanded for further proceedings; a hearing was scheduled for September 2014. The company disputes the claim and is defending it. Management reported no material change in other commitments or contingencies and no material change in previously disclosed risk factors.
- After quarter-end, the board declared the next quarterly dividends and authorized repurchases of up to $75m of common shares. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- Assess earnings quality by separating the $28.2m debt-related non-cash charge from GAAP results and reviewing management’s non-GAAP operating earnings reconciliation.
- Monitor underwriting performance by segment, especially elevated Diversified property losses, AmTrust commission costs and growth, and adverse development in the NGHC run-off book.
- Review related-party exposure, including AmTrust-related receivables, collateral trusts and the $167.975m affiliate loan, and evaluate collectability and collateral protections.
- Track investment portfolio sensitivity to rates, mortgage-backed-security prepayments, unrealized gains, credit quality and foreign-currency exposures.
- Confirm the outcome of the scheduled employment-claim hearing and the implementation and funding of the announced share repurchase authorization.