Maiden Holdings, Ltd. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The company is a Bermuda-based reinsurer operating through Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $390.4 | $303.2 | $760.7 | $585.0 |
| Net premiums earned | $367.8 | $283.8 | $714.3 | $547.7 |
| Net income (loss) attributable to Maiden | $(24.4) | $18.6 | $(5.0) | $32.2 |
| Basic EPS | $(0.34) | $0.27 | $(0.07) | $0.46 |
| Operating earnings (non-GAAP) | $11.2 | $21.2 | $31.0 | $37.4 |
| Net investment income | $19.8 | $18.9 | $39.0 | $36.5 |
| Underwriting income | $4.2 | $13.7 | $17.9 | $23.6 |
| Combined ratio | 99.8% | 96.3% | 98.4% | 96.7% |
- Premium growth was substantial: gross premiums written rose 38.1% in Q2 and 40.9% year to date; net premiums earned increased 29.6% and 30.4%, respectively. Growth reflected the ACAC and IIS businesses and new European Hospital Liability coverage.
- Q2 GAAP loss included $15.1 million of debt repurchase expense and $20.3 million of accelerated amortization charges tied to refinancing. Management’s non-GAAP operating earnings exclude these and other specified items; they declined from the prior-year periods.
- U.S. thunderstorm and tornado losses reduced underwriting results by $9.5 million net of the company’s normalized catastrophe provision. The consolidated loss ratio was 67.7% in Q2 and 65.4% year to date, versus 61.8% and 63.1% in 2010.
- Six-month operating cash flow was $43.7 million, compared with $72.4 million. Cash and cash equivalents were $198.4 million at June 30; management said this balance was temporarily elevated by the June debt offering before the July debt repurchase. Investing activities provided $39.0 million; financing activities provided $18.5 million.
- Total assets were $3.29 billion, total liabilities $2.53 billion and total equity $759.6 million at June 30. Maiden shareholders’ equity was $759.3 million; reported book value per common share was $10.52.
- Investments totaled $1.90 billion, predominantly fixed maturities. The portfolio’s weighted average duration was 3.61 years; management reported an average yield of about 3.5% for the first half, versus 3.6% in the prior-year period. It reported no other-than-temporary impairment charges.
Material changes and debt
- In June, Maiden issued $107.5 million of 8.25% senior notes due 2041, guaranteed by the parent. On July 15, 2011, it used the proceeds and existing cash to repurchase $107.5 million principal amount of 14% junior subordinated debt, incurring the disclosed $15.1 million repurchase charge. Management estimated annual interest savings of approximately $6.2 million.
- At June 30, reported debt to total capitalization was 29.8%, temporarily affected by the timing of the notes issuance and subsequent debt repurchase. Management stated the adjusted ratio was 23.5% after reflecting the repurchase.
- Restricted cash and investments held as collateral totaled $1.42 billion. These assets support reinsurance obligations and are not freely available for general use. The company also reported a $168.0 million related-party loan to AmTrust International Insurance, Ltd. as collateral under its reinsurance arrangement.
- Six-month dividends declared were $0.14 per share. The board later authorized a quarterly dividend of $0.08 per share, payable in October 2011.
Outlook, commentary and risks
- No specific full-year earnings or revenue guidance is provided. Management’s stated long-term target is a 15% average operating return on equity; reported annualized operating ROE was 8.3% for the first half of 2011, versus 10.8% in 2010.
- Management described competitive reinsurance markets, low investment yields and elevated catastrophe activity. It said it continues to apply underwriting discipline and believes more loss activity could improve competition and pricing, but the timing and extent are uncertain.
- AmTrust and ACAC are related-party counterparties, and the filing describes material quota-share, collateral, brokerage and investment-management arrangements with affiliated entities. Certain insiders and affiliates also participated in the senior note offering.
- Key exposures include loss-reserve estimation, cedant and counterparty credit risk, interest-rate sensitivity, foreign currency movements, and restricted assets. The company reported no currency hedges at June 30; a 10% or 20% U.S. dollar exchange-rate move against its non-U.S. currency exposures was estimated to change net assets by $16.1 million or $32.2 million, respectively.
- A former executive’s whistleblower-related claim remained under review after an administrative law judge dismissed it; the former executive petitioned for review in July 2011. The filing also updates the Bermuda tax assurance date to March 31, 2035.
Important facts for investors to verify
- Whether underwriting results and loss ratios improve, particularly in AmTrust and ACAC business and after catastrophe losses.
- Whether the expected refinancing savings materialize and how remaining junior subordinated debt, including any early-repayment costs, affects earnings and capital.
- How much of the reported cash and investment base is available after collateral, trust and regulatory restrictions.
- Development of reinsurance receivables, loss reserves and the $145.3 million IIS funds-withheld balance, including completion of pending contract novations.
- Related-party transaction terms, collateral sufficiency and counterparty performance, as well as the outcome of the pending executive claim.