Maiden Holdings, Ltd. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars unless noted.
Business context
Bermuda-based reinsurer serving regional and specialty insurers, primarily in the U.S. and Europe. It focuses on lower-volatility property, casualty, auto and credit-life risks, with most business written through quota-share arrangements. Operations are reported in Diversified Reinsurance, AmTrust Quota Share Reinsurance and NGHC Quota Share, which entered run-off effective August 1, 2013.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Gross premiums written | $2,204.2 million | $2,001.0 million |
| Net premiums written | $2,096.3 million | $1,901.3 million |
| Net premiums earned | $2,000.9 million | $1,803.8 million |
| Total revenues | $2,110.1 million | $1,899.8 million |
| Net income attributable to Maiden common shareholders | $87.9 million | $46.5 million |
| Basic / diluted earnings per common share | $1.21 / $1.18 | $0.64 / $0.64 |
| Net investment income | $91.4 million | $81.2 million |
| Underwriting income | $63.9 million | $18.7 million |
| Combined ratio | 97.5% | 99.5% |
| Operating cash flow | $366.2 million | $319.1 million |
A combined ratio below 100% indicates underwriting profitability. Net income attributable to Maiden shareholders before preference dividends was $102.7 million in 2013. The company declared $0.38 per common share in dividends for the year.
Financial position and liquidity
- Total assets were $4.71 billion, including $3.17 billion of investments and $139.8 million of cash and cash equivalents. Restricted cash was $77.4 million.
- Loss and loss-adjustment reserves were $1.96 billion, up from $1.74 billion; unearned premiums were $1.03 billion, up from $936.5 million.
- Total liabilities were $3.59 billion and total Maiden shareholders’ equity was $1.12 billion. Common shareholders’ equity was $808.8 million.
- Total debt was $486.4 million at year-end: $360.0 million of senior notes and $126.4 million carrying value of junior subordinated debt. Debt was 30.2% of total capital resources.
- Operating cash flow was $366.2 million; investing activities used $584.0 million and financing activities provided $274.5 million. Cash and cash equivalents increased $58.3 million.
- About $2.23 billion of cash and investments was restricted or held as collateral for reinsurance obligations. Management reported that regulatory capital and liquidity requirements were met.
Material changes versus 2012
- Net premiums written rose 10.3%, principally reflecting 39.2% growth in AmTrust quota-share premiums. AmTrust generated 55.8% of net premiums written, compared with 44.2% in 2012.
- NGHC net premiums written fell 44.3% following termination of new participation; existing policies continue in run-off. Diversified Reinsurance premiums written were nearly flat.
- Net income attributable to common shareholders rose 89.0%. The 2012 comparison included $31.1 million of Superstorm Sandy losses; management said 2013 common-shareholder net income was up 13.3% excluding those losses.
- The combined ratio improved to 97.5% from 99.5%, and underwriting income increased to $63.9 million. Prior-year reserve development was favorable by $1.4 million in 2013, versus $23.3 million adverse in 2012.
- Investments increased 20.8%, but rising interest rates reduced unrealized gains and accumulated other comprehensive income. Common book value per share declined 6.9% to $11.14.
- Capital resources increased 19.4% to $1.61 billion, following issuance of $165 million of Series B preference shares and $152.5 million of 7.75% senior notes in 2013.
Outlook, commentary and notable items
- Management’s long-term target is operating return on average common equity of 15%; 2013 operating return was 10.5%. Management said it expected progress toward the target over the following 12–24 months, citing improved combined ratios and a lower cost of capital after refinancing.
- On January 15, 2014, the company redeemed the remaining $152.5 million face amount of 14% junior subordinated debt, funded primarily with 2013 senior-note proceeds and cash. It expected a $26.1 million non-cash accelerated-amortization charge in first-quarter 2014.
- The AmTrust quota-share agreement was extended to July 1, 2016, with a 31% ceding commission for most covered business and a loss corridor for specified Specialty Program business. AmTrust is the largest client and a substantial related-party exposure.
- The company sold renewal rights for Maiden Specialty’s surplus-lines property business to Brit effective May 1, 2013; remaining policies were in run-off. Modeled one-in-250-year hurricane exposure declined to $24.5 million from $53.3 million, and earthquake exposure to $25.4 million from $36.1 million.
- Management described reinsurance markets as competitive, with residual pricing pressure, and said it would decline business that did not meet underwriting standards. Investment yields remained low; the portfolio’s average book yield was 2.8% versus 2.9% in 2012.
- Major risks include reserve estimation uncertainty, concentration in AmTrust and workers’ compensation, catastrophe exposure, investment-rate and credit risk, foreign-exchange exposure, regulatory changes, and potential rating downgrades. S&P’s operating-subsidiary rating was BBB+ with a negative outlook; A.M. Best’s was A- with a stable outlook.
- A former executive’s whistleblower claim was remanded for further proceedings, with a hearing scheduled for May 2014. The company stated that it considered the claim without merit and was defending it. Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether AmTrust’s growth, agreement terms and related-party arrangements remain economically favorable, and how much earnings and premium volume depend on this client.
- Loss-reserve adequacy, especially for long-tail casualty and workers’ compensation business; disclosed sensitivity estimates include approximately $36.2 million for a one-point Diversified segment loss-ratio variance and approximately $110 million for a roughly 3.5-point AmTrust segment variance.
- The cash-flow, earnings and capital effects of the January 2014 debt redemption, including the $26.1 million non-cash charge and subsequent interest savings.
- Whether investment portfolio values and income withstand interest-rate changes; the filing estimates a 100-basis-point rate increase would reduce fixed-maturity fair value by $142.1 million.
- Liquidity available to the holding company given collateral restrictions, regulated-subsidiary dividend limits, and the $168.0 million loan to related party AII.
- Progress toward the 15% operating-return target, while considering that operating earnings and related measures are non-GAAP and exclude specified items.