A Hidden Gem? Maiden Holdings

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Weak performance warrants discount in target price

Stock: AGNC Investment Corp (NASDAQ:AGNC) 

Maiden Holdings, a $662.6 million Bermuda-based holding company, primarily focused on serving the needs of regional and specialty insurers, currently trades 40% off its book value and just 0.2 times its sales compared to 1.3 times its industry average.

The holding company also has an attractive 7.7% dividend yield.

Meanwhile, the company has a couple of unattractive figures as well. In the recent twelve months, Maiden had generated losses of $45 million while having provided a total of $75 million in dividend payouts thus explaining that it has no trailing price-earnings multiple and dividend was actually not supported by company profits in the period.

Having no capital expenditures and mostly reliant on ‘Reserve for loss and loss adjustment expenses**’ for the bulk of its cash flow, dividend payouts actually represented just about 14% of its free cash flow in the recent 12 months.

**Maiden on its Reserve for Loss and Loss Adjustment Expenses (10-K)

“We are required by applicable insurance laws and regulations in Bermuda, the U.S., Sweden and by U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) to establish loss reserves to cover our estimated liability for the payment of all loss and loss and loss adjustment expense (LAE) incurred with respect to premiums earned on the policies and treaties that we write. These reserves are balance sheet liabilities representing estimates of loss and LAE which we are ultimately required to pay for insured or reinsured claims that have occurred as of or before the balance sheet date. The loss and LAE reserves on our balance sheet represent management’s best estimate of the outstanding liabilities associated with our premium earned. In developing this estimate, management considers the results of internal and external actuarial analyses, trends in those analyses as well as industry trends. Our opining independent actuary certifies that the reserves established by management make a reasonable provision for our unpaid loss and LAE obligations.”

For further details, turn to page 14 of Maiden’s recent annual filing.

Quarterly performance

In the first half that ended in June, Maiden registered 13.3% year over year growth in its revenue to $1.51 billion and a contrasting $1.9 million loss compared to $58 million a year earlier.

In the period, the company recorded 19% higher in expenses and minus its preferred dividends led to losses for the common shareholders.

Maiden Holdings

(10-K) Maiden was founded in 2007. The company specializes in reinsurance solutions that optimize financing and risk management by providing coverage within the more predictable and actuarially credible lower layers of coverage and/or reinsuring risks that are believed to be lower hazard, more predictable and generally not susceptible to catastrophe claims.

Maiden’s tailored solutions include a variety of value-added services focused on helping its clients grow and prosper.

In addition, Maiden’s principal operating subsidiaries are rated “BBB+” (Good) with a stable outlook by S&P Global Ratings (“S&P”), which is the eighth highest of twenty-two rating levels.

On September 1, 2016, A.M. Best Company (“A.M. Best”) upgraded Maiden’s principal operating subsidiaries’ financial strength rating to “A” (Excellent) with a stable outlook, which rating is the third highest of sixteen rating levels, from “A-” (Excellent) with a positive outlook.

The company provides reinsurance in the U.S. and Europe through its wholly owned subsidiaries, Maiden Reinsurance Ltd. (“Maiden Bermuda”) and Maiden Reinsurance North America, Inc. (“Maiden US”).

Internationally, Maiden provides insurance sales and distribution services through Maiden Global Holdings, Ltd. (“Maiden Global”) and its subsidiaries. Maiden Global primarily focuses on providing branded auto and credit life insurance products through insurer partners to retail clients in the European Union (“EU”) and other global markets. These products also produce reinsurance programs which are underwritten by Maiden Bermuda.

In 2016, Maiden generated 86.3% of its gross premiums written in North America and the rest in other countries.

Maiden has two reportable segments: Diversified Reinsurance and AmTrust Reinsurance.

Diversified Reinsurance

Diversified Reinsurance segment consists of a portfolio of predominantly property and casualty reinsurance business focusing on regional and specialty property and casualty insurance companies located, primarily in the U.S. and Europe.

In the first half, gross premium written in the diversified business fell 1.6% year over year to $472.9 million (29% of unadjusted total premiums) and lost $26.3 million compared to losses of $11.7 million losses a year earlier.

As could be expected, Maiden’s diversified recorded far worse combined ratio** of 106.4% compared to 103.2% a year earlier.

**(10-Q): Calculated by adding together net loss and LAE ratio and the expense ratio.

AmTrust Reinsurance

AmTrust Reinsurance segment includes all business ceded by AmTrust to Maiden Bermuda, primarily the AmTrust Quota Share and the European Hospital Liability Quota Share.

Gross written premium for AmTrust grew 7.8% to $1.16 billion (71% of unadjusted total premiums) and lost $6.3 million in the first half compared to an underwriting income of $43.9 million (4.1% margin).

The combined ratio for the AmTrust business was 100.6% in the period compared to 95.1% a year earlier.

Sales and profits                    

In the past three years, Maiden registered a three-year revenue growth average of 9%, and a contrasting 21.9% profit average decline, and profit margin average of 2.56% (Morningstar).

Cash, debt and book value (equity)

As of June, Maiden had $246.8 million in cash and cash equivalents and $254.4 million in notes with debt-equity ratio of 0.17 times compared to 0.23 times a year earlier.

Senior notes decreased by $97 million year over year while book value declined by $30 million to $1.5 billion.

The cash flow summary

In the past three years, Maiden generated an accumulative $1.76 billion in cash flow from operations, reduced its debt by $154 million, raised $6 million in common share issuances and $160 million in preferred share issuances, and provided $197 million in dividends and share repurchases ($1 mil) at an average payout ratio of 11%.

Conclusion

Looking at Maiden’s recent performance would not please any prospecting investors. Certainly, the company has carried a strong balance sheet that makes Maiden as creditworthy as it stated in its filings.

Nonetheless, Maiden’s business (especially its ‘Diversified Reinsurance’) has failed to generate any underwriting profits at all in the recent couple of years including the recent six months.

Analysts have an average overweight recommendation with a target price of $10.25 a share vs. $7.75 at the time of writing. Asking 50% discount from Maiden’s book value indicated a per share figure of $8.66.

In summary, Maiden is a speculative buy with target price of $9.

Quotes

Art Raschbaum, Chief Executive Officer of Maiden (second quarter)

“The emergence of adverse loss development in both of our key operating segments has impacted our second quarter 2017 results. We do not believe that the development observed in the quarter is analogous to the trend observed across our portfolio over recent quarters which specifically emanated from elevated commercial auto liability frequency and severity from the 2011-2014 underwriting years, a phenomenon which has plagued many in the industry. While the AmTrust Reinsurance segment adverse development is relatively modest in the context of the overall historical portfolio assumed, as we have committed to in the past, it is our practice to respond to confirmed adverse development promptly. In response to observed elevated claims activity which we noted in our first quarter earnings call, Maiden’s audit activity has confirmed claims operational changes in AmTrust’s U.S. small commercial lines business which are believed to have contributed to a portion of the increased emergence in related casualty lines. We have however increased our reserves in these lines in the quarter in response to elevated severity in specific jurisdictions.

“In the Diversified Reinsurance segment, adverse development was observed in the segment’s casualty facultative business and from a small number of treaty accounts. Despite the adverse development in the quarter, year-to-date treaty commercial auto which has been the source of significant development over many recent quarters, has been benign, giving us increasing comfort that we have addressed this issue. In the quarter, Maiden also experienced elevated non-cat property loss activity in its Diversified Reinsurance segment. As we have observed in prior quarters, the most recent underwriting years continue to perform within expectations. Despite the underwriting results, we did benefit from strong investment income, up 14.7% from the prior year period driven by increased investable assets. Absent adverse development, this will improve both return on equity and operating results in future quarters.”

Disclosure: I do not have shares in any of the companies mentioned.