Kestrel Group Ltd (KG) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Maiden Holdings, Ltd. first quarter 2013 Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to your host, Noah Fields, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for Maiden's first quarter 2013 Earnings Conference Call. Presenting on the call today, we have Art Raschbaum, Maiden's Chief Executive Officer and John Marshaleck, our Chief Financial Officer. Also in attendance is Pat Haveron Executive Vice President. Before we begin, I would like to note that the information presented here today contains projections or other Forward-looking statements regarding future events or the future financial performance of the Company.

These statements are based on current expectations and future events are subject to a number of risks and uncertainties that could cause actual results to differ materially from these expectations. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission specifically the Company's Annual Report on Form 10-K and our quarterly reports on Form 10-Q. Some of our discussions about the Company's performance today will include reference to both non-GAAP financial measures and information that reconciles these measures to GAAP as well as certain operating metrics that may be found in our filings with the SEC and in our news release located on Maiden's Investor Relations website. I will now turn the call over to Art.

Thank you, Noah, and thank you for joining us. I am very pleased to report that Maiden's results in the first quarter of 2013 demonstrated the continued strength of our differentiated lower volatility business model with year-over-year improvement in revenue underwriting results, investment earnings, operating expense relativities, investible assets and net income.

We reported annualized operating return on common equity of 9.8% in the first quarter of 2013 not dissimilar to the 9.9% return in the first quarter last year.

Book value per share has increased $12.10 and Maiden's combined ratio of 97.5% as traded favorably with 4/10 of a percentage point improvement compared to the same period in 2012. Premium growth was strong in the first quarter with net premiums increasing nearly 17% compared to the first quarter 2012.

The premium from our AmTrust Quota Share segment was the driver of this increase as our largest client experienced impressive first quarter growth. Importantly, much of AmTrust growth came in lines of business experiencing rate strengthening such as Workers' Comp. We believe that AmTrust is very well positioned to continue to benefit from the improved pricing environment for the balance of 2013, and we also believe that their recent acquisition are complementary to their current underwriting portfolio and should position them for continued profitable growth for the balance of the year.

During the first quarter, premium from our strategic quota share with ACAC which is the former GMAC personal auto insurance company was relatively flat compared to the first quarter of last year at $76.6 million while they focus on strengthen underwriting performance. The relatively flat revenue reflects ongoing underwriting actions that are focused on lowering the combined ratio and improving their operating margins. We believe that revenue for the balance of the year in this segment will be relatively flat.

In the Diversified Reinsurance segment which includes our US underwriting platform Maiden Re as well as both our International and Bermuda develop business excluding the AmTrust and ACA quota shares. Net premiums written were $267.6 million that is down 7.2% in the first quarter compared to the same quarter last year.

Historically, January 1st has represented approximately 40% of our annual Diversified segment premiums. In looking it the components of our Diversified segment revenue while our US and IIS businesses were relatively flat year-on-year, they in fact reflect progress in replacing business that was terminated last year as a result of underwriting actions and client retention decisions.

The majority of the year-over-year revenue shortfall is largely attributed to Bermuda underwritten business that was terminated in 2012. In our Diversified segment deal flow is encouraging, and we are optimistic that we can continue to grow our active client count as we did at January 1st of this year. Of course, underwriting discipline is key. So we will continue to identify business that meet our exceeds our return hurdles.

Maiden's international insurance services business development units or IIS continued to selectively target expansion of its auto OEM branded customer insurance programs. While there are definitely headwinds that have been created by weak European auto sales, the team is actively developing new programs and focused on expanding clients. Across the Diversified platform, we remain confident that we can achieve growth in this segment in 2013.

On a consolidated basis, underwriting margins have improved and reflect the favorable impact of 2012 underwriting actions as well as the improving primary insurer pricing environment starting with the diversified reinsurance segment the combined ratio has improved to 97.5% from 98.9% in the first quarter of 2012. Within this segment, we have seen some improvement in our US treaty portfolio following a number of 2012 underwriting actions which included the non-renewal of certain accounts.

Our IIS platform results reflect improved loss ratios in the German and UK auto businesses. As you may recall, our German auto business which is the largest component of this portfolio experienced unprofitable performance in the late 2011 and 2012 period. Our underwriting and business development teams work with our client to develop performance improvement initiatives, and we are really beginning to see the benefit of that effort.

The interest quarter share segment combined ratio was 95.9% in the first quarter of 2013 which compares to 95.5% in the first quarter of last year. Despite the slight increase in the combined ratio, we are well within target levels of performance and importantly, the favored pricing environment should have beneficial impact on this segment in the future. The combined ratio for the ACAC quota share was 98.8% compared to 96.4% in the first quarter of 2012, and it reflects a higher than target combined ratio.

While we have seen quarter-to-quarter variability in results for this segment, this quarter reflects an increase in claim costs from prior years. We have completed a comprehensive audit of the ACAC business in the first quarter, and based on both underwriting and claim actions that are currently underway, we are confident that the combined ratio for this segment should moderate over the course the year. While our overall results are favorable to the prior year first quarter, we continue to target a 96% combined ratio across the Maiden underwriting platform, and we are focused on further reducing that combined ratio.

The key will be to maintain a disciplined approach to underwriting. We believe that the primary pricing environment in the US and in select global markets will be a continued catalyst to improving performance. Before I turn the call over to John, I wanted to provide some additional color regarding the recently announced 100% quota share and ultimately divestiture of Maiden's specialty's property access and surplus lines business.

While this transaction does not have a significant impact on Maiden as aggregate revenue which represents about 1% of Maiden's 2012 net premium written or the P&L, it is important from a risk management perspective since it reduces our exposure to catastrophic volatility. As background, this business came to Maiden as part of the GMAC reacquisition.

As part of Maiden, NS property book required a significantly more costly reinsurance program and significant changes in the underwriting guidelines to stay within our lower volatility parameters which adversely impacted the economics of this business. Exiting the E& S property insurance business will substantially reduce our retained exposure to catastrophic risk over the next 12 months, reduce our risk based capital requirements, and improve Maiden's overall risk profile.

You may recall that while Maiden Sandy loss was within our CAT risk tolerance, the NS portfolio made up the majority of the fourth quarter 2012 loss from this event. It is Maiden's objective to limit catastrophic exposure to large and frequent events to an amount substantially less than annual earnings, and with this transaction completed we will be very comfortably below this threshold.

While we retain -- maintain the net run off exposure for the business written prior to May 1st, we expect the overall CAT exposure related to this business to decline rapidly as the owner premium and related exposure earn out over the next 12-month. And of course despite our strategic decision to exit the segment, we sincerely appreciate the efforts of the NS team, and we wish them well in their new endeavour. I would like to now turn the call over to John Marshaleck, our CFO to review the first quarter financial results in more detail. John.

Thank you, and good morning. For the first quarter of 2013 net operating earnings were $21.1 million or $0.29 per diluted common share compared with $19.4 million or $0.27 perdiluted common share in the comparative quarter in 2012.

Net premiums written increased 16.6% or $98..2 million to $689.1 million in the first quarter of 2013 compared to the same quarter in 2012with the growth coming from the AmTrust segment.

Net premiums earned of $488.4 million increased 11 .4% from $49.9 million compared to the first quarter of 2012 reflecting growth of the neat premiums written during 2012.

That investment income of $22 million increased 19.2% compared to the first quarter of 2012. Total investments increased 19.6% to $2.6 billion versus March 31st, 2012.

The average yield on the fixed income portfolio excluding cash is 3.32% with and average duration of 3.57 years as compared to and average yield of 3.86% in the first quarter of 2012 and average duration of 3.22 years as of the end of the first quarter of 2012.

The new money rate for invested cash during the first quarter of 2013 was 2.53%, and obviously the current investment environment will challenge our ability to maintain investment income at recent levels.

As Art mentioned, the combined ratio for the first quarter of 2013 totalled 97.5% compared with 97.9% the first quarter of 2012.

The components of the combined ratio are as follows. Loss of expense ratio for the quarter was 67.8%, as compared to 65% in the first quarter of 2012, an increase of 2.8 percentage points.

This increase was offset by 3 percentage point decrease in the commission and acquisition expense ratio in the first quarter of 2013 and as compared to the first quarter of 2012. The General and Administrative expense ratio improved to 2.9% compared to 3.1% in the first quarter of 2012.

The changes in the ratios largely reflect the business mix from 2012 to 2013. Total assets increased 6.7% to $4.4 billion compared to $4.1 billion at the end of 2012.

Shareholders' equity was $1.03 billion an increase of 1.1% compared to December 31st, 2012.

Book value for common share was $12.10 at the end of the first quarter of 2013 or 1.2% higher than at December 31st, 2012. We remain comfortable with our current capital levels and monitor our capital position frequently. If we were to determine additional capital is required, we would enhance our capital in the most shareholder humbling way available. I will now turn the call back over to Art for some additional.

Thank you, John. In terms of the primary insurer rate environment , we continue to see some variation between rates depending upon geography and risk, but the broad trend remains favorable. In the US, we continue to see ongoing signs of improving rates from many of our customers.

Across the reinsurance sector, disciplined underwriting is prevalent though not without competition particularly given the challenging investment environment. We expect that discipline will remain. We do believe that the favorable primary insurer pricing environment will also benefit reinsurance experience since reinsurance rates are typically indexed to primary insurance premiums. Internationally, we are seeing auto insurance pricing vary between 8% increases in Germany, the biggest market for IS business, but relatively flat in the UK. But on balance, the trend is positive across the entire portfolio.

With a good first quarter behind us, we look forward to continued progress for the balance of the year as we maintain our focus and highly differentiated strategy of serving the non-catastrophe reinsurance needs of our regional and specialty insured clients. Importantly, in addition to a favorable business outlook, we remain committed to improving our cost of capital when the 4G% coupon trust preferred securities call period expires in January of 2014.

As our business develops for the balance of the year, we will have more clarity around how best to maximize our options, but we believe that Maiden remains well positioned to deliver increased value to our shareholders and our customers. This concludes our prepared remarks. Operator, could you please open the lines for Q&A?

Absolutely. (Operator Instructions). Our first question is from the line of Matt Carletti of JMP Securities. Your line is now open.

I just had a - - actually a question on the Brit transaction. Art, I think you mentioned it is about 1% of premiums. So not a big number. Is there any material seasonality to that? Is it heavy Q1, or is it pretty spread across the year?

No. Interestingly, it was reasonably spread across the year and, again, pretty modest effect. That clearly given the strength of overall revenue, I do not think it will have an adverse effect at all on us.

Okay. And then thinking kind of tying into your the TRUPS we know that there was a little more CAT exposure there, and why you ultimately decided to part with the business. Do you have and estimate of how much capital that would free up in your business by divesting that book?

Yes. It is a rough estimate, and it depends on the capital model that you use. But our general view is that once the runoff is completed, it probably frees up $30 million to $40 million of capital.

Okay. Great. Thanks very much for the answers, and congrats on a nice start to the year.

Thank you, Matt. Appreciate it.

Thank you. Our next question in queue is from Randy Binner of FBR. Your line is now open.

Morning, Randy.

Good morning. Thanks. Follow-up on capital there with Matt's question. So that $30 million or $40 million that gets freed up, that would be kind of freed up and kind of deployable over the course of the year. What would be the status of that $30 million to $40 million, say in January 2014?

The majority of it will be available.

Okay. And so - -

That exposure kind of runs off pretty quickly pretty steeply.

Right. No, that makes sense. So you kind -- you combine that with good operating cash flow in the quarter. And so, I appreciate all the comments you made around the TRUPS. But it seems like your generating capital that frees up capital. Maybe AMBest want lower operating leverage from its companies. I am not sure if you have a view on that, but is there any way at this point to kind of get a better sense of what the direction might be with the TRUPS?

Well, I think we have said a few times, now that obviously, we start out with a view that we like to take the TRUPS out in the most efficient way possible. The best circumstance would be to takeout of existing capital. On the other hand, we will see how the business develops this year. Revenue growth is coming in lines of business where we feel we will generate good margins. And so, we do think that potentially with strong profitable revenue growth, we may or may not be able to take the TRUPS out with existing capital, but we will be strengthening the earnings run-rate. If the reason for that is that we are writing more profitable business. So it is a little early to tell kind of what we will actually do, and that is why I generally alluded to point that we will sort of have to see how the year develops to determine the most effective way. I think John said earlier, when we look at any capital decision, we look at kind of the most shareholder friendly return generating option available.

Alright. Understood. Thank you. And then on -- just one quick one on Diversified Re. In fact if I missed this in the commentary, but the last quarter was Jan 1 renewals were kind of more in focus, and I think that you said that you had maybe like 17 or something like that new relationships. So a lot new relationships that were smaller than what was kind of not getting kind of quota share by folks out there. So two questions. One. Did you have any more kind of renewals come through since we last talked on the conference call, and are you getting a sense of a harder primary market that there is less inclination overall for folks to quota share out business?

I would say the balance sheets are certainly stronger for a loft companies. And so that will affect quota share demand, but we entertain both quota share and access business. In our January 1 business, we referenced was excess of lost business. We definitely still see a lot of good opportunities in the pipeline. As far as the question of whether we saw a lot of incremental renewal activity. After 1/ 1, while we always have some accounts that flow throughout the course of the year, the period after 1/ 1, is not necessarily a big renewal period for us. So not really much happening in that period.

All we can look at is what is deal that low in the pipeline look like. And it is pretty strong right now . So, and some it is proportional and some of it is excess. We will see. As you know, the ultimate objective for us will only write if it meets our hurdle requirements. It is not that there have not been quota share opportunities in the market. It is just in some cases that we just do not see the returns we need for the business.

Understood. Thank you.

You are welcome. Thank you.

Thank you. And our next question in queue is from Ken Billingsley of BGB Securities, Inc. Your line is now open.

Good morning.

Hello Ken.

Hello. I want to just follow up on some of the questions on the diversified resegment. You had said that you expect to grow premiums -- grow in 2013. Do you mean that it is going to turn positive by the end of the year, or actually that it will be positive for the whole year?

Well, I think our wish, or our expectation is that opportunities that we are seeing today will turn into business. There is no certainty in that, of course, but we are cautiously optimistic that we can full year grow the business. I think we said in the first quarter that the Diversified segment we were sort of targeting expecting about a 5% growth rate, and I think we still feel reasonably comfortable about that.

So annually 5% growth.

That is correct. Yes and as I said earlier on the call- - I do not want to sort of not mention the fact that -- or not reinforce the fact that there has been sort of growth offsetting some of the reduction of business last year. So it is not that we are kind of necessarily losing ground. We are sort of making up some of the business that clearly was not operating as we like and we terminated. But that is always going to be part of the cycle, but the most important priority across the platform is not growth for the sake of growth but profitability.

And on that, the expense ratio was down quarter-over-quarter, and I would have traditionally expected that if premium is shrinking that essentially the expense ratio can end up rising from a fixed costs basis. Can you kind of discuss what is driving the lower expense ratio? Is it temporary? Or is this kind of based on the new mix of business it may remain a little bit lower than what we have seen in prior quarters?

Ken, this is John Marshaleck. The expense ratio overall dropped from the 3.1% to 2.9 % and part of that is just the premium for the quarter. So that is driving that and as premium base gross and it did in the quarter. So there is really no change -- no drastic change in our expense ratio or expected. It has been in the 3 range, and I think you did see some last quarter. In the fourth quarter we had a decrease, but that was due to a some adjustments there on some of the compensation and -- incentive compensation. I think there is really no major story there.

Well, specifically in the diversified resegment it was 27.6 versus 35.6, the prior year. It is a eight point movement.

Yes.

Going on there.

Right. That is really driven by the business mix, and that really is including the commission changes on the business mix that is flowing through. As we write more excess of loss business the commission structure -- the commission rates are lower and there are some adjustable commission features that some of our contracts - - we talked about that - - some of those were adjusted in that quarter. So from the diversified reinsurance segment analysis kind of we look at the combined ratio more than the changes. There is going to be changes from quarter to quarter in the expense ratio mix. Sometimes as you see in this quarters it was fairly significant.

So it is business mix in there for diversified resegment?

Yes. Very much so. Yes.

I think this is kind of and off shoot of the seed. The other income line that you guys reported - - the $5..2 million that you reported. At least in the past, I believe a lot of revenues were related to the Diversified resegment. Is this still true? And if this segment is shrinking right now , can you give us an idea of what to be looking from a modeling aspect?

Yes. The C revenue there is generally coming from our International operations, and they do -- there is a little bit of seasonality to that business, but there is really no change there. It is impacted by car sales in Germany actually. So that is impacting that, but I -- there is no real change. Overall in that business is certainly coming from the same place.

Then I would add in terms of the biggest source of the fee business which is a German distribution channel. In 2012, actually they benefited from higher rates, and we expect they will benefit from higher rates in 2013 as well, and despite the fact that car sales were moving down, their penetration levels increased. So they have done a pretty darn good job of kind of offsetting a challenging environment. So we are cautiously optimistic they can continue the trends through this year. So in looking at sort of fee component of it, I would not necessarily assume big reductions in that revenue this year and, hopefully, some increase.

Great. Last question is at least in my model, premiums written were much higher than expected, but the earned pattern was a little slower. Can you talk about is there a significant shift in the mix of the business that was added over the last quarter or two that might be changing the earn pattern as we look to model out for the rest of 2013?

Well, there is two factors, Ken, that are probably impacting that. The first the written premium growth all of it that came from the AmTrust segment. So obviously that has a different earning pattern than the Diversified segment. The Diversified segment a lot of that business the excess of lost business. We do book that in the beginning of the contract period. A lot of that was 1/1, renewals, and that then earns out through the year. So that does impact the earning pattern on that as well.

So probably the best way to look at that is to break it out into the two segments. There has been some shift in more excess of loss business in the Diversified segment. So maybe that is what your are seeing. That would earn out a little bit slowerwhen you look at the beginning quarter any way.

Great. I appreciate it. Thanks for taking my questions.

Thanks, Ken.

Thank you. Our next question in queue is from the line of Bob Farnam of KBW. Your line is now open. Please go ahead.

Morning.

So just a quick question on the ACAC book. You basically you mentioned the increase in claim costs in prior years, and you expect that combined ratio to moderate through the year. Can you just give an idea of how many points of development was in the first quarter?

I think it was about - -

About 3 points of development.

Okay. So the improvement going forward, you are expecting that combined ratio to get more in line with what it has been in the past?

Well, that is certainly our desire. I think that the business that is being underwritten today is underwritten within target. It should be within the swing. It isjust a question of whether we see any more sort of adverse - - a lot of this relates to some of the growth that they experienced in 2011, and they have definitely moved effectively I think to sort of focus on improving and strengthening underwriting. So revenue growth has been largely halted a bit, and what they are doing makes a lot of sense. A lot of changes in the claims infrastructure as well and process, and that will benefit. So our hope would be that the strengthening in the current underwriting year would begin to reflect improvement for the balance of the year, but we will just have to see how that develops.

Okay. And a question with the International business. You mentioned, obviously there are some headwinds with the auto market out there. You are developing some new programs. Is that getting into different countries maybe could you just expand more on what these new programs may entail, yes.

Yes. Some of them involve actually well, broadly one of our objectives is to expand at that other OEMs. So other manufacturers. As you know, this has had a very kind of GM-centric just given our ancestry. So we are in dialogue with other manufacturers to provide the same capabilities and services. On the fee side, we have in operation in the Nordics that was created last year that should generate some productive fee income as well, and we continue to see strong revenue coming out of Russia again on the fee side, not on the underwriting side.

So from and underwriting perspective, if you look at Germany where we see a positive pricing environment that should benefit us as well in terms of revenue growth. So did -- and we also had a bit of growth at the end of last year in our credit life segment. So all those conspire together and give us optimism for this year. The group is actively working to continue to expand the platform.

Okay. Thanks, guys.

You are welcome. Thank you.

Thank you. Our next question in queue is from Dan Farrell of Sterne Agee Your line is now open. Please go ahead.

Morning, Dan.

Hello. Good morning.

Morning.

Just want to ask a question. One of the comments you made about a rate at the primary level ultimately working its way into benefiting the reinsurance line. I was wondering if you could just talk about -- maybe the lag in that happening, do you guys wait a little bit longer to validate what you are seeing in the primary side before you start to take the benefit of rate in your own loss specs?

Yes. I mean generally that is true. Well, a couple of phenomenon.

One is that when we price our new business, you know, we look at -- even if it is a renewal. We sort of take a fresh look at what is happening with the client's pricing environment validate it. What is happening in the lost costs environment? What is happening with risk selection? What is happening in terms of their business and business development strategy? And all that gets aggregate to produce sort of a rate. If rate levels increase over the balance the year that were not contemplated, that should have a beneficial effect on our performance over the long-term as the business starts to earn out and losses start to sort of mature. We generally do not take credit for any of that sort of active price reduction activity.

We sort of let the accounts develop as they will, and we take and actuarial snapshot of those every quarter. So there is a lag in terms of our recognition of that, and that has been historically the case. I think it is -- we are pretty cautious about it. We certainly don't want to take credit for things unless we actually see them developing on the lost costs side, but again if you look at historical patterns in hardening markets there has been a lag in sort of the favorable performance being recognized sort of through the loss cause numbers.

Thanks. That is helpful. Just on the development in the ACAC book. Do you know offhand what years are primarily driving that?

Well, we have only been on it since 2010. So - -

Yes.

It is - - a lot of it is the growth in 2011.

Okay.

And 2012.

Okay. Great. All right. Thanks, guys.

Thank you.

Thank you. (Operator Instructions). Our next question in queue is were Amit Kumar of Macquarie Capital. Your line is now open.

My questions have been answered. Thanks.

Thank you. (Operator Instructions). And I am showing no further questions in queue. I would like to turn it back to management for any further comments.

Thanks to everyone for joining us today, and we look forward to speaking with you in the future. Have a great day.

Thank you. Again, thank you, ladies and gentlemen for joining today's conference. You may now disconnect. Have a great day.