Maiden Holdings, Ltd. — Q1 2018 Form 10-Q
Business context and period. Bermuda-based reinsurer reporting the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are with December 31, 2017. The business has Diversified Reinsurance and AmTrust Reinsurance segments. AmTrust represented 67.3% of Q1 gross premiums written.
Financial performance and position
- Premiums and revenue: Gross premiums written were $852.6 million, down 7.7%; net premiums written were $849.3 million, down 5.7%; and net premiums earned were $685.4 million, down 3.4%. Total revenue was $732.4 million, down 3.2%.
- Profit: Net income was $22.3 million versus $26.5 million. Net income attributable to common shareholders was $13.7 million ($0.17 basic EPS; $0.16 diluted), compared with $20.5 million ($0.24 basic; $0.23 diluted). Non-GAAP operating earnings attributable to common shareholders were $16.8 million, down from $22.6 million.
- Underwriting and margins: Underwriting loss was $3.8 million, versus $1.1 million of income. The combined ratio rose to 101.8% from 100.9% (above 100% indicates an underwriting loss). The loss ratio was 68.6%, versus 67.4%; the expense ratio improved to 33.2% from 33.5%.
- Investment results: Net investment income increased 1.7% to $42.9 million, while average book yield declined to 3.1% from 3.3%. Net realized investment gains were $0.4 million versus $0.9 million.
- Cash flow and liquidity: Operating cash flow was negative $32.1 million, versus positive $45.5 million; investing cash flow was positive $22.0 million and financing cash flow negative $21.2 million. Cash and restricted cash totaled $161.0 million at quarter-end, including $73.3 million of unrestricted cash. Management said available liquidity was adequate for the next 12 months. Much of the investment portfolio is pledged: restricted cash and investments were $4.8 billion.
- Balance sheet and capital: Total assets were $6.76 billion; total liabilities $5.60 billion; and total equity $1.16 billion. Loss and LAE reserves were $3.62 billion. Senior notes totaled $262.5 million principal ($254.5 million net carrying value); debt was 18.5% of total capital resources, up from 17.6%. Common book value per share fell to $8.34 from $9.25.
- Investment valuation: Available-for-sale fixed maturities had $4.0 billion fair value. Rising rates contributed to a $76.3 million after-tax quarterly comprehensive loss and a $68.3 million decline in net unrealized investment gains. The company reported no other-than-temporary impairment.
Material changes and management commentary
- Diversified Reinsurance net premiums written declined 16.0%, largely from non-renewals and re-underwriting; one terminated account generated $17.5 million of returned premium. AmTrust net premiums written edged up 0.2%, but earned premiums declined 3.2%.
- Management attributed weaker underwriting to higher initial loss assumptions for current-year business and lower earned premiums. Adverse prior-year loss development was $10.1 million, down from $16.8 million; most Q1 2018 development came from AmTrust General Liability and accident years 2015–2016.
- Management said underwriting actions and 2017 reserving measures were expected to support improved operating returns in 2018 and progress toward long-term targets over 12–24 months. Its long-term target is 15% non-GAAP operating return on average common equity; Q1 was 9.3%. The board was reviewing strategic alternatives to increase shareholder value. The filing provides no specific earnings or premium guidance.
- A.M. Best downgraded the operating subsidiaries’ financial strength rating from A to A- on March 2, 2018, with a negative outlook. S&P had withdrawn its rating.
- Q1 common dividends were $0.15 per share; the board authorized another $0.15 quarterly common dividend after quarter-end. Preference-share dividends increased following the 2017 Series D issuance.
Risks, contingencies and unusual items
- Interest-rate sensitivity is material: the filing estimates that a 100-basis-point increase would reduce AFS fixed-maturity fair value by $208.0 million and shareholders’ equity by 18.0%, before considering other effects.
- Foreign-currency exposure includes the euro and pound; no hedges were in place at quarter-end. The company recorded $2.4 million of Q1 foreign-exchange losses.
- Related-party and counterparty exposure merits attention: AmTrust supplied 67.3% of gross premiums, and Maiden provided approximately $3.23 billion of collateral for the AmTrust quota-share arrangement, in addition to a $168.0 million related-party loan.
- A former executive’s whistleblower claim remains pending; the company expected hearings to conclude in 2018 and said it would vigorously defend the claim. Management stated routine legal proceedings were not expected to materially affect results.
- The company cited reinsurance and receivable credit risk, reserve-estimation uncertainty, inflation and market competition. It reported no material off-balance-sheet arrangements and no material changes to the risk factors in its 2017 Form 10-K.
Important facts for investors to verify
- Whether current-year loss trends and adverse reserve development improve, particularly in AmTrust General Liability and Diversified Reinsurance run-off contracts.
- How the AmTrust relationship, collateral requirements and related-party balances evolve, and whether the A.M. Best negative outlook or downgrade affects business or capital needs.
- Whether premium reductions in Diversified Reinsurance are offset by profitable new business, and whether the combined ratio returns below 100%.
- How interest rates affect AFS portfolio values, book value and capital; distinguish unrealized AOCI movements from realized losses and cash liquidity.
- Progress on the strategic-alternatives review, the 15% long-term operating-return target, dividend sustainability and the pending whistleblower matter.