Kestrel Group Ltd (KG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Maiden Holdings Ltd. first-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Miss Ellen Taylor with Investor Relations. Miss Taylor, you may begin.

Thanks, Francesca. Hello everyone, we really appreciate you joining us this morning. I know it's a busy time. Our CEO, Art Raschbaum, is with us this morning and he is going to be followed by John Marshaleck, our CFO. And of course after their comments we'll be happy to take Q&A. We're also joined today by Barry Zyskind, our Chairman. And before I begin I've got a few reminders for you.

Of course 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. There can be no assurance that actual developments will be those anticipated by the Company.

Our actual results may differ materially from that as projected as a result of significant risks and uncertainties including non-receipt of the expected payments; changes in interest rates; effective performance of financial markets on investment income and the fair value of investments; developments of claims and the affect on loss reserves; accuracy in projecting loss reserves; the effect -- compensation and pricing environment; changes in demand for the Company's products; the effect of general economic conditions; adverse state and federal legislation; regulations in the regulatory investigations into industry practices; developments relating to existing agreements; heightened competition; changes in pricing environment and changes in asset valuations.

And of course the Company takes no obligation to publicly update any forward-looking statements that we make. 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. And with that I'll hand things over to Art.

Thank you, Ellen, I appreciate it. And thanks everyone for joining us today. Good morning. I'm pleased to report today that in the first quarter of 2010 Maiden Holdings continued to deliver solid underwriting performance, additional growth in book value and continued improvement in our run rate investment earnings.

Importantly, the results of the first quarter reaffirm our view that our business objectives are achievable -- and I'll reiterate those, our critical objectives remain -- a 96% combined ratio or better; a 10% combined annual growth rate or better in net written premium; a client retention rate of greater than 85%; and importantly maintenance of our highly efficient expense structure.

In the first quarter across the reinsurance sector underwriting results have suffered materially from the combined impacts of the winter storms in the US, the Chilean earthquake and of course most recently the Deepwater Horizon offshore drilling rig explosion. It's important to note that Maiden does not anticipate losses from these events.

In contrast Maiden's results reflect our continued focus on supporting the needs of regional and specialty insurers while deemphasizing catastrophe exposures and other volatile lines of business. Our underwriting performance in the quarter produced a combined ratio of 97%, just above our target combined ratio of 96%, and reflects the impact of several non-catastrophic property losses.

We've indicated in the past that we do see some variability in quarterly results, but as it stands today we do feel confident that our targeted full year combined ratio of 96% remains achievable. By segment the AmTrust portfolio combined ratio was 96% versus 95.3% in the first quarter of 2009 and that largely reflects a change in business mix. While the diversified reinsurance portfolio combined ratio was 96.4% versus 94.3%, again reflecting the previously discussed property loss activity.

Importantly, both the 2009 and 2010 results by segment are net of holding company expenses. When you add those in that brings the aggregate combined to the 97.1%. While our year-on-year net written premium was down slightly from $336.5 million to $327 million on a full-year basis we do remain confident in our ability to continue to grow the underwriting portfolio despite what are arguably challenging market conditions.

Although revenue for the quarter reflects the impact of several large accounts that were not renewed at year end, which we referenced on our call at the end of the year, it does not yet fully reflect the impact of the ACAC transaction. The impact of that transaction will grow in subsequent quarters as will the associated underwriting benefits.

The quarter also reflects revenue growth from AmTrust which is driven largely by growth in their international business. Importantly, through the ends of the year our client retention count at Maiden Re, our US subsidiary, stood at 87%, which is again a very important metric for us.

Today we continue to see strong demand from our core regional client base and are actively reviewing a number of potentially significant transactions today. While we're not discounting the impact of a competitive environment, we continue to believe that Maiden can leverage its significant competitive advantages to grow the portfolio in a disciplined manner.

Ultimately, however, we will not undermine our underwriting discipline for the sake of revenue. Something we've repeated many times in the past. Earned premium for the quarter was up significantly versus 2009 from $210 million to $264 million. Also it reflects an increase from fourth-quarter 2009 earned premium of $248 million. We anticipate growth in earned premium in subsequent quarters, particularly as the ACAC portfolio comes online.

General and administrative expense levels -- I mentioned before the importance of this metric to us -- those continue to improve for the quarter reflecting a 3.26% of earned premium efficiency level. That's significantly better than the first quarter of 2009 which stood at 3.6% and also better than the full year 2009 operating expense efficiency level of 3.5%. Assuming that lost costs are equivalent operating efficiency can make a significant difference in our profitability and performance.

For the quarter Maiden generated net income of $13.4 million, that's slightly above the first-quarter 2009 level. But it's important to note that 2010 results include a larger foreign exchange loss than the previous year, the full impact of the trust preferred interest expense and also a deferred tax provision.

Importantly, net investment income totaled $17.6 million in 2010 versus $14.3 million in 2009, that's also an increase over Q4 2009 net investment income of $16.8 million and again reflects a continued strengthening of the earnings run rate on investments. We anticipate a continued strengthening of that in subsequent quarters as additional assets are generated through underwriting activity and of course invested.

Operating earnings for the quarter totaled $15.8 million versus $16.8 million in 2009 and that difference really reflects the comparative difference in underwriting performance. While John will spend a bit more time on the balance sheet, it's important to note that we continue to see strong growth in book value reflecting a high-quality, low-risk investment portfolio and continued contributions from earnings.

Our book value grew from $9.62 per share at year end 2009 to $10.10 per share, that's -- and it actually increased 30% from $7.79 in the first quarter of 2009, that's a $2.21 per share addition and that's net of dividends.

Our annualized return on equity in the first quarter is 8.1% while operating ROE is 9.3% and that compares to 10.1% and 13% in the first quarter of 2009. We believe that both ROE and operating ROE should grow in subsequent quarters reflecting the continued strengthening of earnings and target levels of underwriting performance as well.

On balance we're pleased with the first-quarter performance for Maiden and we remain confident that we can achieve our underwriting revenue and income objectives for the full year. I'd like to turn things over now to John to provide a bit more detail on the quarter. John?

Thanks, Art, and good morning and thank you for being with us today. I'd like to share a few points before I begin my review of the results. This will be the first quarter that we have more meaningful comparisons to prior periods since the GMAC acquisition took place in the fourth quarter of 2008. However, because of the acquisition there are a few comparisons that may need some additional clarification.

Our results for the quarter represent good underlying momentum, which is somewhat masked by a few items which I'll talk about in more detail shortly. All in all we believe that, particularly in context of the fairly tough environment, for the industry overall we produced very solid results which again demonstrate our disciplined approach to underwriting, our efforts to continue to expand and diversify our business model while maintaining low volatility in a conservative investment portfolio.

We produced GAAP net income of $13.6 million for the quarter, or $0.19 per share, which was up 3.6% over the first quarter of last year. This reflects both strength in earned premium and higher investment income which was somewhat muted by higher commission and loss expenses largely reflecting a shift in our business mix. We incurred higher foreign exchange losses of about $1.2 million this quarter which lowered the reported net -- net reported number compared with about $200,000 last year.

On an operating basis we generated $16.2 million in earnings this quarter or $0.23 per share which was down modestly from $16.8 million or $0.25 per share last year. We recorded tax expense for the quarter of $300,000. However, as we've discussed in the past, this is a deferred tax expense and we believe it is reasonable to exclude this from operating earnings.

Our earned premium continues to grow and for the first quarter of 2010 was $264 million, up from $210 million in the first quarter of 2009. As Art mentioned, our topline results this quarter of $311 million in net written premium decreased $25.3 million from the first quarter of last year. This largely reflected the effect of the 1/1 renewal activity we mentioned on our last call which involved a combination of clients retaining or electing to retain certain premium they had previously ceded, as well as our continued efforts to maintain our pricing and underwriting standards.

The diversified reinsurance segment produced approximately $168 million in net written premium and $151 million in earned compared with $251 million of net and $118 million of earned in the first quarter of last year. The combined ratio for this segment stood at 96.4% for the quarter compared with 94.3% in the first quarter of 2009.

For the AmTrust segment we recorded approximately $122 million in written premium and $111 million in earned premium and $85 million and $92 million for the same period last year. The AmTrust segment combined ratio is 96% compared with 95.3% last year.

In the first quarter of 2010 the ACAC personal lines contract incepted with no incoming portfolio. We recorded $22 million of written premium for the quarter. This contract incepted on March 1 and since the contract was written on a new and renewal basis this resulted in approximately $2 million of earned premium for the quarter.

Much of this portfolio renews on a six-month basis, so as the premium is written and earned we will begin to see increasing benefit to the bottom line. Overall we feel we are well positioned in this environment with our premium revenue for the quarter and we believe we're comfortably -- we will comfortably achieve our 10% revenue growth target for the year.

Our net investment income for the quarter was $17.6 million which is up 23% from the first quarter of 2009. This reflects the continuing growth in our investment portfolio even considering a challenging investment rate environment. The portfolio totaled about $1.7 billion at the end of the quarter which was up approximately $65 million from last year -- from year end.

We continue to take a conservative approach to investing and some of the investments that were made were towards the end of the quarter which made it somewhat limited in investment income growth for the quarter. We're still targeting a total cash position of around $100 million. So at the end of the quarter we had approximately $80 million of cash we intend to put to work.

Approximately 86% of the portfolio is A- rated or better and the market value yield on our portfolio was approximately 4%, which was up modestly from the 3.9% at year end. Approximately 24% of the portfolio represented variable-rate securities and the total average duration of the portfolio is 2.7 years.

Just a few comments about our expenses. Our combined ratio target is 96%; our actual combined ratio for the quarter was 97.1%. Art talked about some of the reasons for this difference between the target and actual. I'd like to make a few more comments.

Our net loss and loss expense ratio for the quarter was 64.5% as compared to 69.6% for the first quarter of 2009. Our commission and acquisition expense ratio was 29.3% and this compares to 22% in 2009. This is one area where the comparison between quarters can be somewhat misleading.

With the acquisition of the GMAC RE business we assumed an unearned premium portfolio, that of acquisition expenses. As this premium earned in 2009 and a substantial portion of that premium earned in the first quarter of 2009 there were no acquisition expenses associated with it. This would produce in effect a higher loss ratio but a lower expense ratio for this business.

As new business is written and earned the loss and expense ratios will reach normal levels which you are seeing in the first quarter of 2010. Our shareholders equity grew by $33.4 million to $710 million at March 31, book value per share increased 5% to $10.10. All in all given the yield environment and competitive landscape we continue to feel we are well positioned in the current environment. Art, any more comments?

Thank you, John. Of course no discussion about operating results would be complete without some commentary on the market at large. As I mentioned before, we do not believe that a market turn is underway. Despite what have been clearly significant losses across the industry, we do not see any immediate signs that prices are firming. While continued significant catastrophe activity for the balance of the year could change the picture we're certainly not banking on that in our own expectations.

On the other hand, we still believe that there is opportunity for growth in our core target customer segment. Earlier I mentioned that we're still seeing strong deal flow. Many of these transactions are focused on clients and prospects that have very specialized capital needs that are triggered by a broad range of issues. For Maiden it's really our ability to select the best opportunities, develop responsive solutions that generate mutually beneficial results that will really determine our success.

Equally important to our strategy is the ability to identify long-term strategic opportunities to provide capital solutions in support of M&A and business development. ACAC is one such example of that type of transaction, as is our relationship with AmTrust. We'll continue in our efforts to develop similar opportunities.

And then finally, as we reported last quarter, we're continuing our efforts to implement a strategy to broaden our European underwriting activities and expect to make solid progress during the course of the year. We'll of course keep you advised of any developments. But we remain focused on delivering value to our clients and to our shareholders. Thank you very much and now open it up to questions, please.

Francesca?

(Operator Instructions). Bijan Moazami, FBR Capital Markets.

Good morning. I realize that you guys had some property non-catastrophe losses during the quarter. Could you explain a little bit more what kind of losses that were just big losses or were they in a specific geography? Any kind of trend going on there?

No, we don't see any trend. I mean really they were sort of a couple of unrelated losses and more your traditional fire and the more standard peril, not catastrophe driven. We see that from time to time, particularly on excess business where we expect some level of volatility over the course of the year, we just don't know when it's going to develop. And in this case the first quarter we saw a little bit more frequency there than we had in the previous year. John, is there anything you'd care to add there?

Nothing more to add, just that it is kind of a normal activity. We don't get an even flow of losses throughout the year and you wouldn't expect that. So on excessive loss business it's a normal event.

Okay. Would it have a material impact on the results if it happens in the first quarter versus in the fourth quarter? So that means that if you have accrual of IBNR or anything like that, would it help if it's happening a little bit later in the quarter -- in the year than at the beginning of the year?

Well, we do expect some type of activity throughout the year on this. And when we record our results we record certain amounts of IBNR for this type of activity. But for property losses especially, they are on an excessive loss basis, they do tend to just on a quarterly basis distort the results.

If the loss occurs in the first quarter we certainly record that loss, which we have very little earned premium necessarily to match against that loss. So it is somewhat distorts the number in the quarter that you're booking it. But again, overall for the entire year you should see the effect of that being more normal.

Okay. Is there any kind of seasonality pattern in the premium volume that you guys generate?

As we mentioned before, I guess this was last year on the call, Bijan; there is some seasonality on the recording of the excessive loss business. And that's one -- our policy there is to record an estimate of the premium written when the contract incepts.

So, yes, in the first quarter we have quite a few contracts that do incept at 1/1, so we do get some more written premium recorded, not earned -- again, it's earned over the life of the contract. So from that standpoint there is some seasonality. And it really does match the renewal period of the contracts.

The other thing that can affect -- it's not really seasonality, Bijan, but we can generate a large transaction anytime over the course of a year and that can create sort of a blip in writings. But we plan the year on the basis that we want to develop business across the 12 months when that business development is a function of our effectiveness and when the market opportunities are presented to us. So it becomes challenging to get it exactly right.

I understand. Thank you.

Thank you.

Bob Farnam, KBW.

Thanks. Good morning. In terms of the deal flow that you said has been pretty good, can you give us an idea of what types of businesses -- I mean what lines of business you've been looking at? And maybe -- I assume it's regional (inaudible) carriers that you're dealing with, but is that true?

Yes, they're essentially regional, some within their sort of specialty regional by line of business. We're seeing a number of auto opportunities, both commercial and personal, not dominated by any particular geography. And we're also seeing some working layer workers comp activity opportunities as well.

Again, how many of those we land is a function of how effective we are at coming up with responsive solutions. But we're reasonably confident on a number of those transactions right now.

Okay. And your 10% projected growth for the year, does they contemplate any of these new deals or is that excluding these potentials?

It's sort of our view of the long-term of ability to develop it over the course of the year. Clearly ACAC is going to have an enormous affect on our ability to grow the business. Then we kind of made the comment at the end of the year that the nice thing about ACAC is it does give us a pretty certain amount of good profitable revenue growth during the course of the year.

What we can develop in our US regional portfolio is we typically assume some level of growth in that portfolio. And we target the 10% combining a growth rate. But as I said before, that's the one area where the market competitiveness can have an influence on our ability to expand the business. But as it stands right now, we believe we can continue to grow this year in that segment.

Okay, good. And the contracts that were non renewed, just remind us what types of business those were relating to.

I think workers comp and accident and health.

Okay. And last question I have is you didn't mention any reserve development and I'm assuming there wasn't much if any?

No, remember how we sort of have to account for the portfolio prior to the transfer. We sort of take any favorable and we amortize it over the expected payout of the obligation. So we really can't use a favorable development to offset anything going on in the current period. We've not seen any significant changes there -- John?

No, that's correct there's (inaudible).

Okay. Very good, thanks.

Thank you.

Adam Klauber, Macquarie.

Good morning, thanks. Filling in for Dan. Could we talk a bit about the performance on the legacy GMAC book? How has the loss ratio trended on that legacy book? And also you mentioned some non-renewing, what's your retention like compared to historical norms on that book?

Sure, let me sort of take the first one to historical GMAC RE portfolio and kind of going back to the description that I gave Bob about favorable development. We showed at the end of the year, actually in the 10-K that we had experienced favorable development on the pre -- sort of the loss portfolio of business. And that has not changed measurably since we reported that at the end of the year. So the bottom line is it's developing favorably. We can't recognize that all in one fell swoop, it gets blended and amortized over time.

With respect to retention levels, we're really kind of in our targeted band of retention. We aim for 85% or better, we ran at the end of the year at about 87%, so we're pretty comfortable with the position. There hasn't been a lot of renewal activity since the end of the year and that's typical in the first quarter. But we've been able to retain really a dominant majority of our client relationships.

And the couple of accounts that we alluded that we did not write at year end, in those instances typically we offered terms and the client ultimately chose to retain the risk. We didn't lose them in those cases to competition.

Okay. And when you look just across your book, are there any types of lines that are seeing market increases in severity or frequency over the last say six months?

Nothing that stands out as a broad line. We have a fairly diverse portfolio in terms of geography and line of business. We think that that helps us stabilize the effective performance. Across lines of business I can't really point to any substantial loss cost trend. John, is there anything you can --?

No, and I think that's something we certainly look forward. We're very concerned with the economy where it is. And if that would show up we're certainly -- we're trying to look for that and we don't see it actually. But it's not -- doesn't mean we don't continue to watch to make sure that that doesn't occur. But we haven't so far.

We do in our quarterly business review and performance review meetings, we talk about specific trends. Our claim professionals come in to the discussion as well and we try to note where we're seeing any systemic issues. They more relate to a specific client and a specific issue that they may be facing in their specific market. But haven't seen it across the line at this point.

Okay. And then as far as the ACAC transaction, is there any lumpiness to that premium on a seasonal basis?

I don't think it will be too lumpy actually. It should follow a fairly kind of normal cycle of -- like any traditional auto portfolio, most of them are six-month policies. So we'll see a bit different earning rate than we do in a lot of the business we write, which is typically 12-month. But I think it will be a fairly stable addition in terms of revenue and earned premium. John, do you have any --?

Yes, I would agree. It's a fairly large portfolio overall. So some of the seasonality you expect to see in smaller portfolios you generally don't see in a portfolio of that size. So, no, we don't expect that.

Okay. And finally, what's your target on premium to surplus and when do you think you'll roughly -- when you think you'll hit that target?

Overall I don't think we have a set target for it. We're comfortable with the leverage and ratios we have today. I think we have the ability to grow the premium and support that and is supported in the capital. So we're going to grow that. We don't have a specific target. (multiple speakers) fully utilize our capital.

Sorry, maybe I'll put it (multiple speakers).

We're also (multiple speakers) I'm sorry, Adam?

Let me put the question a different way. What level would you be uncomfortable with? I guess what's your target -- what's the ceiling you wouldn't want to go past?

Well, first of all, there's no specific numeric target because it's also a function of the risk in the portfolio, right? So there are certain lines of business that you can lever at a greater level because there's less expected volatility from them. And so it's hard to throw a specific number. We will manage the portfolio to ensure that we maintain strong ratings and at the same time optimize the balance sheet.

As John said, we do believe we have a comfortable ability to grow. We are creating capital every quarter. In this last quarter we not only created capital through earnings but also through unrealized -- and that's really occurred throughout the year. So we feel pretty comfortable -- certainly comfortable about our ability to absorb the target growth rate of the business.

Okay.

We expect to contribute further to the capital raise. So we don't see any wave of -- a massive wave of additional premium that's going to throw us out of whack. And obviously we wouldn't do something like that that would undermine our balance sheet integrity.

Okay, thanks a lot.

You're welcome. Thank you.

I'm showing no further questions at this time.

Okay, so thanks again, everyone, for your time this morning. Certainly if you have any follow-ups please don't hesitate to call us. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. And everyone have a wonderful day.