Business context and reporting period
Maiden Holdings, Ltd. is a Bermuda-based reinsurer focused on regional and specialty insurers, with an emphasis on lower-hazard, non-catastrophe business. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Its three segments are Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share. Amounts below are U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Gross premiums written | $478.5 | $451.1 | $1,537.0 | $1,384.3 |
| Net premiums earned | $449.0 | $420.3 | $1,324.6 | $1,134.6 |
| Net income attributable to common shareholders | $21.9 | $16.0 | $56.8 | $11.0 |
| Basic EPS | $0.30 | $0.22 | $0.79 | $0.15 |
| Underwriting income | $11.5 | $14.1 | $35.0 | $32.0 |
| Combined ratio | 98.2% | 97.4% | 98.0% | 98.0% |
| Net investment income | $21.6 | $18.7 | $60.1 | $57.7 |
For the nine months, operating earnings, a non-GAAP measure, were $58.6 million ($0.81 basic per share), versus $52.4 million ($0.73) in 2011. Q3 operating earnings were $19.5 million ($0.27 per share), down from $21.4 million ($0.30). The filing attributes the nine-month GAAP earnings comparison in part to $35.4 million of debt-repurchase and accelerated-amortization charges in 2011; these did not recur in 2012. Q3 earnings benefited from higher investment income and investment gains, partly offset by weaker underwriting results.
At September 30, 2012, total assets were $3.949 billion, investments $2.613 billion, and cash and cash equivalents $66.9 million. Common shareholders’ equity was $877.8 million, or $12.14 per common share; total equity, including $150 million of Series A preference shares, was $1.028 billion. Loss and loss adjustment reserves were $1.547 billion and unearned premiums $976.7 million. Senior notes were $207.5 million and junior subordinated debt $126.3 million; total debt of $333.8 million represented 24.5% of total capital resources.
Operating cash flow for the first nine months was $268.1 million, compared with $105.1 million in 2011. Investing activities used $615.4 million, primarily reflecting purchases of fixed maturities; financing activities provided $224.6 million, including net proceeds of $96.6 million from 2012 senior notes and $145.0 million from preference shares, partly offset by common dividends. Cash and cash equivalents fell $121.2 million to $66.9 million. Restricted cash and investments totaled $2.083 billion, principally supporting reinsurance collateral. Average book investment yield was 3.0% for the nine-month period, down from 3.3%.
Material changes versus prior periods
- Nine-month net premiums written rose 10.9% to $1.459 billion; growth was led by AmTrust and ACAC quota-share business. Net premiums earned increased 16.7%.
- The nine-month combined ratio remained 98.0%, but Q3 worsened to 98.2% from 97.4%. The loss ratio increased to 68.5% for Q3 and 67.3% for the nine months; management cited lower amortization of deferred acquisition-related gains, as well as higher losses in parts of Diversified Reinsurance.
- Net investment income increased, reflecting growth in invested assets despite lower yields. Net unrealized investment gains increased to $137.2 million from $63.6 million at year-end 2011, contributing to higher equity.
- In March 2012, the company issued $100 million of 8.00% senior notes. In August, it issued $150 million of 8.25% non-cumulative Series A preference shares, receiving $145.0 million net. No common shares were repurchased through September 30, 2012.
- Adoption of updated acquisition-cost accounting increased commission and acquisition expenses by $0.5 million in Q3 and $2.5 million year to date, reducing 2012 common earnings by those amounts.
Outlook, management commentary and risks
Management gave no specific numerical earnings or premium guidance. It described a competitive reinsurance market, historically low interest rates and pressure on investment yields, while noting that catastrophe losses and industry conditions could support improved pricing. Management said it would maintain underwriting discipline and believed it was positioned to benefit if pricing improved. It also expected general and administrative costs to continue rising as the business expanded.
Hurricane Sandy struck in October 2012, after quarter-end. Although Maiden generally avoids catastrophe property exposures, its clients reinsure property risks with the company, so potential losses were uncertain and expected to affect fourth-quarter 2012 results. The filing provides no clear estimate of the company’s Sandy exposure.
Liquidity depends in part on distributions from regulated subsidiaries, which may be restricted by statutory capital and regulatory requirements. The company reported no subsidiary dividends to the parent in 2012. Significant assets are pledged or restricted as collateral. Related-party exposures include a $168.0 million loan to AmTrust’s reinsurer and substantial collateral arrangements; the filing also describes material reinsurance business and service relationships with AmTrust and ACAC. Other risks include reserve estimation, counterparty credit, interest-rate and foreign-currency exposure. Management reported no off-balance-sheet arrangements and stated that disclosure controls were effective.
Important facts for investors to verify
- How Sandy losses develop and whether the fourth-quarter impact differs materially from the filing’s uncertain assessment.
- Whether the higher loss ratio and Q3 combined ratio persist, particularly in Diversified Reinsurance, and how reserve development affects results.
- How investment income responds to persistently low yields, mortgage-backed security prepayments and the portfolio’s longer duration.
- The collectability and collateral protection of related-party balances, particularly the $168.0 million AmTrust loan, and the extent of reliance on related-party business.
- Available parent-company liquidity after accounting for restricted collateral, subsidiary dividend limits, debt service, common dividends and preference-share terms.
- Reconcile GAAP net income with management’s non-GAAP operating earnings, and monitor any future use of preference-share proceeds for buybacks or debt repurchases.