Business context and reporting period
Maiden Holdings, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2011. The Bermuda-based group provides property and casualty reinsurance, primarily to regional and specialty insurers, and international auto and credit-life-related insurance services. Its three segments are Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share.
Financial performance and condition
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Gross premiums written | $1,812.6 million | $1,298.1 million |
| Net premiums written | $1,723.5 million | $1,227.8 million |
| Net premiums earned | $1,552.4 million | $1,169.8 million |
| Total revenue | $1,640.4 million | $1,248.0 million |
| Net income attributable to Maiden shareholders | $28.5 million | $69.9 million |
| Basic / diluted EPS | $0.40 / $0.39 | $0.99 / $0.98 |
| Combined ratio | 98.1% | 96.9% |
| Operating cash flow | $181.3 million | $151.6 million |
Underwriting income was $42.8 million; net investment income was $74.9 million. The loss and loss expense ratio rose to 66.6% from 64.6%; the expense ratio improved to 31.5% from 32.3%. The combined ratio remained below 100%, indicating underwriting profitability. Management-reported non-GAAP operating earnings were $69.6 million ($0.96 diluted per share), versus $72.7 million ($1.02) in 2010; operating return on equity was 9.2%, below management’s long-term 15% target.
At year-end, total assets were $3.35 billion, shareholders’ equity $768.6 million and book value per share $10.64. Cash and cash equivalents were $188.1 million; investments were $2.02 billion. Restricted cash and investments totaled $1.59 billion, limiting their general availability. Debt was $233.8 million—$107.5 million of senior notes and $126.3 million of junior subordinated debt—with debt equal to 23.3% of total capital. Loss reserves were $1.40 billion, including $577.6 million for incurred-but-not-reported losses. Quarterly dividends declared totaled $0.30 per share, compared with $0.265 in 2010.
Material changes versus the prior comparable period
- Net premiums written rose 40.4%, supported by growth in all segments, the first full year of IIS operations and the European Hospital Liability quota share added in April 2011.
- Net income fell 59.2%. Results included $15.1 million of debt-repurchase expense and $20.3 million of accelerated non-cash debt discount and issuance-cost amortization from the refinancing. Management said the refinancing was expected to save about $6.2 million annually.
- U.S. thunderstorm and tornado activity reduced underwriting results by $9.5 million, net of the company’s normalized catastrophe provision. Prior-year reserve development was adverse by $14.2 million, versus favorable development of $32.9 million in 2010.
- Operating cash flow increased to $181.3 million. Year-end cash and cash equivalents rose to $188.1 million from $96.2 million.
- In Q4 2011, revenue was $439.0 million and net income attributable to shareholders was $17.5 million, versus $334.3 million and $19.1 million, respectively, in Q4 2010. Q4 basic EPS was $0.25 versus $0.27.
Outlook, commentary, risks and unusual items
Management saw catastrophe losses and weak pricing and investment conditions as potentially supportive of improved reinsurance pricing in the near term, but stressed that the scale and duration were uncertain. It said it would continue to decline business that did not meet underwriting standards. No numerical earnings or premium guidance was provided.
Key risks include uncertainty in loss-reserve estimates and cedant reporting, catastrophe exposure, low interest rates, investment-market volatility, foreign-currency exposure, regulatory change and dependence on brokers and major counterparties. AmTrust and ACAC together represented 51.0% of gross premiums written. Maiden Bermuda had $168.0 million loaned to AmTrust’s reinsurer AII and substantial assets committed as collateral; the filing notes counterparty and liquidity risks. No currency hedges were in force at year-end. The company’s 1-in-250-year hurricane or earthquake exposure was estimated at $52.4 million.
The company’s principal operating subsidiaries retained A.M. Best “A-” and S&P “BBB+” financial strength ratings, both with stable outlooks. A whistleblower-related employment claim remained under review after an administrative law judge dismissed it; the claimant petitioned for further review. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Review the assumptions, development history and sensitivity of the $1.40 billion loss reserves, including the adverse 2011 prior-year development.
- Assess how much reported growth and underwriting profitability depend on AmTrust, ACAC, the new European medical-liability business and IIS-related operations.
- Examine the availability and recoverability of collateral, restricted assets, the $168.0 million AII loan and the $24.3 million IIS funds-withheld balance.
- Reconcile GAAP net income with non-GAAP operating earnings and verify the refinancing costs, remaining debt terms and potential early-repayment penalties.
- Monitor investment income and portfolio sensitivity: fixed-income duration was 2.78 years, and the filing estimates a 100-basis-point rate increase would reduce fixed-maturity fair value by $69.4 million.
- Confirm subsidiary dividend capacity and the conditions supporting future shareholder dividends; the board’s stated quarterly dividend remains discretionary and subject to legal and regulatory limits.