Kestrel Group Ltd (KG) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Maiden Holdings, Ltd. fourth-quarter and full-year 2009 earnings conference call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Ellen Taylor with Maiden Holdings Investor Relations. Please go ahead.

Thank you. Hello, everyone. Thanks for joining us today. This morning Maiden's CEO, Art Raschbaum, is going to kick things off for us, and then, of course, he's going to be followed by John Marshaleck, the CFO, and after their comments, then we will be happy to take Q&A. We're also very pleased to have Barry Zyskind, our Chairman, joining us today.

Now before I begin, of course, I've got a few familiar reminders for you. This call will contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company, and there can be no assurance that actual developments will be those anticipated by the Company. Actual results may differ materially from those projected as a result of significant risks and uncertainties, including non-receipt of the expected payments; changes in interest rates; effect of the performance of financial markets on investment income and fair value of investments; developments of claims and the effect on lost reserve; accuracy and projecting loss reserves; the effective competition and pricing environment; changes in demand for the Company's products; the effective general economic conditions; adverse state and federal regulation; legislation, regulations and regulatory investigations into industry's practices; developments relating to existing agreements; heightened competition; changes in pricing environment; and changes in asset valuation. And, of course, the Company undertakes no obligation to publicly update any forward-looking statements.

Also, some of the discussion about the Company's performance today will include reference to certain financial measures that are considered non-GAAP. We've provided information that reconciles these measures to GAAP in our earnings release.

With that, I will hand it over to Art.

Good morning and thank you all for joining us. Today I'm very pleased to report the results of another successful quarter and our first full year as a combined company.

As you may know, it's been just over a year since we acquired the GMAC RE portfolio and their underwriting platform. Throughout 2009 the Maiden team executed all of the tasks that were critically necessary to integrate the two platforms and just as importantly at the same time continued to deliver significant value to our regional and specialty clients.

In the fourth quarter, the continued emphasis on disciplined underwriting and our efforts to maintain and grow our client base translated into solid operating results. We maintained our commitment to our highly differentiated, low volatility, non-cat business model, largely focused on the needs of regional and specialty insurers.

We began 2009 focused on several key objectives I've mentioned quite a few times in past calls. We focused on a 96% combined ratio, return on equity of 15% or better at run rate, a 10% combined annual growth rate in net written premium, an 85% or higher client retention rate, and, of course, maintaining our highly efficient expense structure. I'm pleased to report that we've achieved our combined ratio, our revenue growth, our client retention and our efficiency targets. And with respect to the ROE target, we continue to make progress in expanding the invested asset base, increasing earned and written revenue which in the aggregate will help to strengthen ROE over time. For 2009 achieving ROE targets became much more challenging as a result of the proven investment management over the year and the market recovery which helped drive significant book value growth. We remain confident today in our ability to achieve that level of return, but admittedly with the current investment environment, it will be a longer-term target than initially anticipated.

For the quarter Maiden generated net income of $16.7 million, our strongest quarterly net income for the year as we continue to ramp up our investment portfolio. That translates to earnings per share of $0.24 and operating earnings per share of $0.25. For the full year, we produced net income of $61.1 million and operating earnings of nearly $65 million or earnings per share of $0.87 and operating earnings per share of $0.93.

Income from operations for the quarter increased nearly 30% year-over-year to just under $29 million or for the full year $101 million of operating earnings -- or, excuse me, of income from operations.

Underwriting for the quarter generated a combined ratio of 95.5%, which is slightly better than our target of 96% with the full year coming in just under that at 95.9%.

It is important to note that across the reinsurance sector many participants have been reporting particularly strong underwriting results that really reflect to a large extent the relatively benign catastrophe season. As we've mentioned many times in the past, our underwriting activity is not focused on catastrophe business, and, as a result, our results reflect more stable, expected performance levels. We believe that our regional and specialty-focused working layer-oriented business model enables us to generate comparatively stable performance regardless of the cat environment, and we are very pleased with our results.

Fourth-quarter net written premium was $234 million, which is an increase from the prior two quarters. We also experienced growth in the AmTrust portfolio, which includes both organic growth and the benefit of the Cybercom transaction, as well as organic growth in our US-based platform that has been driven by existing client activity, growth in existing relationships, as well as the addition of a number of new clients throughout the year. For 2008 net written premiums were $341 million in the fourth quarter, but remember that they reflected the transfer of the GMAC RE premium reserves. For the full year, net premium written totaled $1 billion in 2009 compared with $727 million for 2008. Earned premium of $249 million in the fourth quarter compares favorably to the prior year period of $164 million and reflected continued quarter to quarter growth. On a full-year basis, earned premium totaled $920 million, essentially on target.

Looking a bit closer at our underwriting performance for the quarter, our combined ratio for the AmTrust segment was 94.5%. While this is a bit higher than the historical level, it remains well within our target. Net premiums written for this segment actually decreased $48 million year on year. But it is important to keep in mind that in 2008 Maiden assumed an in force portfolio relating to AmTrust/UBI transaction. Excluding the effect of that transaction, that segment's revenues were up 4.5%. The general reinsurance segment, which includes the underwriting activities that Maiden Re used in the USA and the Maiden insurance platform in Bermuda, produced a favorable combined ratio of 94.9%. Revenue in that segment increased dramatically from 2008 to 2009, significantly reflecting the ramping up of the GMAC RE portfolio for a full year. Importantly, we continue to see underlying growth in the Maiden Re segment, and we have maintained a vast majority of our preacquisition business relationships.

We continue to generate strong operating cash flow, and our invested assets grew 26% in 2009 to $1.8 billion, while we have maintained our strong investment positions and thoughtfully positioned the entire portfolio really in anticipation of rising interest rates. John will provide you a bit more detail on this shortly, but given our continued growth and the resulting cash flow, we continue to have a significant amount of cash on hand. Of course, growth in the underlying business will further increase investable assets in 2010 and beyond, and we will continue to carefully deploy available cash as quickly as we can into invested assets. Net investment income for the quarter was just under $17 million and provides a solid foundation as we look ahead.

As I mentioned, we generated an operating return on equity of 10.4% for the quarter, 10.9% for the year, which was below our medium to long-term target, but again, that reflects not only our deliberate and conservative investment philosophy as we carefully deploy the cash proceeds from the GMAC RE transaction, but it also reflects the significant increase in our hurdle rate that has been driven by the absolute growth in our equity base that was driven by favorable investment portfolio valuations and contributions for earnings.

If you look at our return on beginning equity in 2009, it was actually 12%. On balance we are very pleased with the efforts of the entire Maiden team in the fourth quarter and throughout all of 2009. But before I turn the discussion over to John for a little more detail on the financial picture, I would like to provide a bit more perspective on our outlook for 2010.

Since we just completed the imported January 1 renewal season, I would like to provide some perspective on the market and specifically on our renewal activity. While many in the industry had hoped for a market turn in 2009, the strong underwriting earnings and the growth in book value across the sector certainly dampened that optimism. We believe that the market remains competitive today but for the most part relatively saying. Of course, as many of you know, our portfolio is a bit less vulnerable to the full effect of the market cycle since much of the portfolio is comprised of a significant number of long-term relationships. We are really oriented toward providing more customized solutions that provide long-term capital support versus a more commodity-oriented focus on business segments that are much more transactional. Nevertheless, we did see two factors that influenced our year-end.

Beyond the normal ebb and flow of business, the first was that several clients chose to retain risk rather than purchase reinsurance. It's possible that some of this activity was motivated by revenue pressures, or in the face of improving balance sheets, the clients felt perhaps more comfortable holding more risk.

The other factor was that new business activity was a bit more challenging to develop. While we did succeed in creating a number of new client relationships at year-end, our hit ratio on opportunity was a bit lower than usual. Partially offsetting these factors was an increase in deal flow.

That suggests to us that incumbents are a bit more inclined to try to hold account positions in the current marketplace, and despite some of those headwinds, today we are entertaining a number of opportunities at a time that is actually normally slow at this portion in the season. We're remaining true to our pricing discipline, and on balance we are very optimistic that with our competitive advantages, including our highly efficient operating platform, our unique collateral trust and our client-focused service platform, we should be able to comfortably meet our 10% combined annual growth rate target in 2010.

Importantly, we have a tremendous head start with the recent closing of the ACAC acquisition of the GMAC Insurance Personal Lines operation on June 1. Maiden will begin providing a 25% quota share reinsurance program, which is expected to generate revenue in excess of $200 million over the next 12 months with underwriting range consistent with our target combined ratios.

Importantly, this multiyear transaction should provide Maiden with a stable source of profitable reinsurance from what we believe is a very disciplined, high quality, personal automobile underwriter. We also believe this transaction serves as an exceptional complement to the current underwriting portfolio by adding additional diversification and increasing the scale of the business, which will, of course, further enhance our expense efficiency and also help to grow the asset base.

We're also focused on continuing to develop the Maiden Re platform in the US, and we are working to implement a longer-term strategy for our European platform. All of these things give us greater confidence that we will be able to generate both portfolio and asset growth and increase the overall earnings power of Maiden in a disciplined manner.

The current yield environment is challenging, but we anticipate that we will continue to increase our investment income run rate in relation to our growth in the asset portfolio type which is tied to the underwriting portfolio growth. We are confident that we can deliver on the underwriting expense relativity retention level and revenue growth targets, and we also believe that we can make some progress in 2010 toward our goal of achieving a 15% return.

I'd like to now turn it over to John to provide a bit more color on the quarter and the full year.

Thanks, Art. Good morning and thank you for being with us today.

As Art mentioned, we produced a very solid quarter given the impermanent. We believe our results demonstrate our discipline in both underwriting and investment management. Just a few comments before I start with the details.

As you know, we acquired the GMAC RE business in the fourth quarter of 2008. That included an unearned premium portfolio and a loss portfolio. As a result, certain year-over-year comparisons are somewhat distorted. I will point out the effect of these transactions when I talk about the various components of our income statement and balance sheet. Also, in some cases I will reference some of the third-quarter 2009 results because I think it will provide a more useful comparison.

Our GAAP net income for the quarter was $16.7 million, which is up from $15 million for the third quarter of 2009. It is driven by the premium growth and higher investment income. This compares to $20 million in the fourth quarter of 2008, which included an additional $4 million of realized investment gains. Our GAAP net income for the year was $61.1 million. This compares to $18.8 million in 2008.

Earnings per share on this basis were $0.24 in the fourth quarter. That is up 23% from $0.21 in the third quarter of 2009. Earnings per share for the fourth quarter of 2008 were $0.34, which included $4.8 million of realized investment gains. Our investment gains for the fourth quarter of 2009 were $732,000. Our operating earnings per share were $0.25 for the quarter.

Our operating earnings for the quarter were $17.6 million as compared to $19 million in 2008, and the operating earnings for the year were $64.9 million from $60.6 million for 2008.

As Art mentioned, net premium written for the quarter was over $234 million, and we generated over $1 billion for the full year, reflecting solid gains in both segments and reflecting the benefit of our broader platform.

These results compared to $340 million for the fourth quarter of 2008 and $727 million for the full-year 2008.

The 2008 amounts included a benefit of the GMAC RE unearned premium portfolio of about $170 million and also $82 million of unearned premium from the UBI transaction. These two amounts will distort some of the trends when we compare the year-over-year comparisons. We are very pleased with the organic premium growth for the year as it establishes a significant base for future growth. We should begin to see additional premiums from the 25% quota share contract with ACAC. We're familiar with this book of business as we talked about before, and we expect it to perform nicely.

For the quarter we produced a net loss ratio of 58.8%. This compares to 70.4% in the fourth quarter last year. This change largely reflects the change in the underlying portfolio mix.

Overall, we continue to produce strong underwriting results with a combined ratio of 95.5% and 95.9% for the full year. This is on target with a growing premium base.

We talked about our efforts to wrap up our full earnings rate, and during the quarter we continue to invest available cash, drawing our fixed income portfolio to $1.7 billion by the end of the year. That is up 50% from the fourth quarter of 2008. Our investment income reflects these efforts and for the quarter increased to almost $17 million, up 30% to $12.9 million in the fourth quarter of last year.

For the year our investment income totaled $63.2 million as compared to $37 million in 2008. The yield in our portfolio stood at approximately 4% at year-end, and this portfolio mix reflects our prudent investment portfolio of 87% of A- rated or better and nearly 67% rated AAA or government issue bonds. The average duration of the portfolio is 2.9 years, and approximately 28% of the portfolio was made up of floating rate securities.

We think this positions us appropriately given the current forward rate expectations.

I would like to note that the average duration of our reserve liabilities was approximately 4.7 years for the full year of 2009, and this is up modestly from 4.3 years for 2008.

We believe the underlying earnings power of the business can best be measured by the income from operations. This amount reflects our pretax income before the effect of amortization, foreign exchange, gains or losses, and interest expense. For the full-year 2009, we generated income from operations of $101 million, and for the fourth quarter, this amount totaled $29 million. Approximately $120 million annualized represents the earnings power of our combined platform. As we fully realize the income for our investment portfolio, we expect to see additional growth from these levels.

Our shareholders equity grew by $167 million over the year to $670 million at 12/31/09. This amount was $510 million at 12/31/2008. Our book value per share at 12/31/2009 was $9.62, and this is up from $8.70 at 12/31/2008. We are very pleased with the quarter, and it continues to reflect underwriting results within our targeted range. Growing premium income, growing investment income and a very strong balance sheet going into 2010.

I would like to thank the entire Maiden Holdings team for their continued disciplined, their client-focus, and their drive to enhance shareholder value. With our significant competitive advantages, portfolio of strong long-term client relationships, the opportunity for growth both organically through expansion of existing relationships and by continuing to develop new client relationships, the significant ACAC transaction, and continued underwriting discipline, we believe that the opportunity to increase shareholder value in 2010 is significant. Importantly, we will keep our focus on delivering stable and profitable underwriting results and differentiated reinsurance solutions to our clients.

Despite the general market conditions and consistent with our business model as evidenced by the recently announced ACAC Reinsurance transaction, we'll continue to focus our efforts on identifying unique opportunities to expand our business model in a disciplined manner. If we do this effectively, which I'm confident that we can, our value creation for shareholders will be significant over the long-term.

Thank you very much. I'd like to turn it over now to questions, please.

(Operator Instructions) Dan Schlemmer, Macquarie Securities.

Congratulations on a real nice quarter. A nice way to finish out the year. I had a couple of questions on the ACAC transaction if I could. First of all, I guess you are saying the transaction just closed. So there will be premium -- looking forward there will be premium added during Q1? It would be like basically 112 so the $200 million, or is it going to come on at a different rate, or how should we be looking at that going forward?

Thanks, Dan. I will turn it over to John to give you some of the details of that.

Dan, it won't be -- there's not an unearned premium portfolio coming in. So it is going to start building, and it will start in March of this year of this month. But it will come on slowly, and then as the premium builds and as they write the premium, of course, we will take our quota share percentage of that.

So throughout the year, you will see the premium building, as well as the earned, while they right a good number of six-month policies so the earnings will follow that trend. But you will not really see much impact in the first quarter. You will see more of that in the second.

But then in terms of written, like in the second quarter, you will be up at full run rate then, or is there any reason why that would be lagged after the end of Q1?

It shouldn't be, Dan. It should come in -- it should be at a full run rate after the first month or so of premium writings. (multiple speakers) -- steady run rate, yes.

And then the ACAC obviously brings a lot of premium onto your books, adds a lot of premium. Are there any other changes that are coming out as a result of that? One of the things that I thought was your cat modeling and your level of exposure on a cat, is that changing as a result of the ACAC premium coming on, or are there any other of those second-quarter order effects over and above just a nice bump in the premium?

No, not significantly. Because, first of all, they are an auto only writer. They're not a homeowners underwriter. And secondly, we have (inaudible) catastrophe protections that are part of the transaction as well. So we don't see this having a significant impact on our modeled expected loan.

And, Dan, it is the type of business, too, that we continue to write over the years. It's not something that is different from our portfolio. We always had personal auto in our portfolio. So it fits right in with the model perfectly.

And then, John, you talked about in your prepared remarks about the duration of the liabilities, which has gone up a little bit. It seems like once ACAC business comes on, I'm guessing that number is going to start going back down. Is that right? And sort of the follow-up question then, regardless of your answer, how does that impact your ability to deploy capital? Is that a significant trying to do a match on liabilities versus assets? Is that a significant constraint on you deploying your capital?

The first question is it should come down when we have the ACAC transaction fully realized in the numbers. It really doesn't affect the investment portfolio at all. In fact, our investment duration is quite a bit less now than our liability. So we theoretically could increase that. Again, we would not do that in today's market, but we have room there to do that. So it doesn't have really any impact at all. We have been in that duration range for quite a while now over the years, so it's really not anything out of the ordinary.

I think it's a kind of safe place to be given where the market is today. We definitely have a bias to shorter rather than longer on the investment portfolio duration.

Great. Thanks.

Bob Farnam, KBW.

Just one I have a couple of questions just one question to follow on what Dan was talking about. You're talking about the ACAC book having a consistent combined ratio with your current book, can you give us an idea of maybe the loss ratio versus expense ratio component to that? Are we going to see any swings on those pieces?

No, the expense ratio should be generally in line with the -- look, generally in line with the whole portfolio. I think we're looking at seating commissions that are reflective of the whole overall portfolio.

It has provisional seating commission of 32.5%, which is very consistent with a quota share type of treaty. So that's a little bit higher certainly than an excessive loss contract, but that is in line with our other quota share business.

Okay. And going back with your corporate rate now, you did talk about the change in mix of business is driving the loss ratio lower quarter over quarter from last year. But the loss ratio was actually a lot lower versus the first nine months of this year as well. What exactly is driving -- what is changing in the mix that is driving that down? And expense ratio alternatively was higher than we expected. Can you get more into the detail there?

Yes, we do just getting from a higher level, we price our business on a combined ratio basis. So when you look at our numbers, I think it really is important to focus in on the combined. But what happens from underwriting year to underwriting year, the mix of quota share business changes. The quota share business we just talked about has a higher expense ratio to it, lower loss ratio. As those underwriting years earn into the accident years, you do get some quarterly significant changes in the mix. So you get kind of some noise in the quarters. But again, looking at the overall portfolio in each of the underwriting years, that is how we obviously measure and monitor our business. We don't see any significant change. 2008 did have a higher percentage of quota share business and a higher percentage of expenses as well as opposed to 2009. Some of that impact you are seeing in the calendar year as the premium earns.

So you're basically saying just focus on the combined ratio and not worry about the fluctuations in the components?

That is the key really. That's the way we price the business. That is the way we look at every piece of the business from a return basis on a combined ratio.

Another way to look at it, Bob, is many of these quota shares have variable experience adjustment features. So if the loss ratio improves, the expense ratio gets higher because we're paying more seating commission for more profitable results. That is some of the anomaly that is occurring in the fourth quarter.

Okay, all right good. And one number question, do you happen to have operating cash flow?

The operating cash flow was positive, about $70 million of investment, increased investment available. We look at it for the quarter. We look at our investment portfolio and how that is growing, and the cash, obviously as you can see, fluctuates up and down quite a bit from quarter to quarter. But we look at it on an investible asset base, and that grew for the quarter by about $70 million.

Great. Thank you.

Operator, are there any more questions?

There appears to be no other questions in the queue at this time.

Okay. Thanks, again, everyone, for joining us, and if you have any questions, don't hesitate to call.

Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. You may now all disconnect.