Noah Fields - SVP, IR Art Raschbaum - CEO Karen Schmitt - CFO.

Ken Billingsley - Compass Point Randy Binner - FBR & Company.

Welcome to the Maiden Holdings Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Noah Fields. Please go ahead, sir..

Good morning and thank you for joining us today for Maiden's second quarter 2016 earnings conference call. Presenting on the call today we have Art Raschbaum, Maiden's Chief Executive Officer; along with Karen Schmitt, our Chief Financial Officer. Also in attendance today is Pat Haveron, President of Maiden Reinsurance Limited.

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 and 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 those 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.

Please also note that unless otherwise stated, all references to common share data in today's discussion are on a diluted share basis and comparative comments will refer to Maiden's result in the second quarter of 2016 relative to the corresponding period in 2015. I will now turn the call over to Art..

Good morning and thank you for joining us. Against the backdrop of increasingly intensifying competition, growing loss-cost volatility and declining interest rates, Maiden produced double-digit returns, along with profitable underwriting results, reflecting the wisdom of our unique business model.

With our continued strong focus on risk management, a lower risk underwriting profile than the typical reinsurer and a conservative investment portfolio focused on high-quality investment-grade debt, we've been able to deliver stronger and more stable operating returns than more traditional volatility-oriented reinsurers.

Importantly, we do this by delivering high-quality reinsurance capital solutions to small to midsize companies and to our long-standing strategic quota-share reinsurance relationship with AmTrust.

For the quarter, Maiden generated net income per share of $0.39 and operating earnings per share $0.37, along with an annualized return on common equity of 12.3% and an operating return on common equity of 11.3%. This is the 12th consecutive quarter of double-digit operating returns for Maiden.

We ended the quarter with book value per common share of $14.18 per share, a strong increase of 7% from the prior quarter and just over 20% from year-end 2015, resulting from the increase in market value securities, as well as quarterly earnings.

Premium written increased on both a gross and a net basis by 2% and 3%, respectively, from the prior year. In the AmTrust segment, growth was moderated in the second quarter versus the same period in 2015 which reflected the impact of various acquisitions, including Tower.

We also saw the impact of previously commuted lines, along with a disciplined reaction to growing competition in the quarter.

While we expect to see continued growth in this segment for the balance of the year absent any significant unidentified acquisition activity, we do anticipate a more moderate growth rate than in 2015, as prior-year acquisition premium flows normalized.

It's important to note that much of AmTrust reported growth in the quarter has emanated from recent acquisitions in business lines that we've chosen not to participate in. Despite a softening market, AmTrust continues to emphasize geographies and lines of business where they can maintain responsible risk-based pricing.

In the Diversified segment, we saw 9% gross premium growth and 11% growth on a net basis. As we have commented in the past organic growth from existing clients has typically been a relatively active element of growth.

And to a lesser extent, we're also benefiting from new client activity in the U.S., where our accident and health business was up year on year 25%, along with the more significant continued impact of growth from our European capital solutions business.

In the U.S., we continue to operate in a competitive environment and we remain highly selective and disciplined.

We're focused on leveraging our competitive advantages, including our low operating expense ratio, our unique collateral trust, our customer-centric operating platform and a focus on delivering differentiated value to our clients as a true specialist reinsurer.

As we discussed last quarter, we've launched our innovative equipment breakdown product initiative and we're currently entertaining a number of quoting opportunities from our existing clients.

Internationally, despite a competitive market, we continue to see strong interest in our post-Solvency II capital solutions business, with continued submission activity. Going forward, we believe that the upcoming January 1, 2017 renewal season is shaping up to be an active one for our team.

Beyond the growth from our capital solutions reinsurance business, it's important to note that our results do not yet reflect the anticipated impact of our payment protection insurance initiative with Allianz in Europe, as we continue to work with prospects to deliver effective solutions.

These opportunities have a fairly long lead time and we now expect a more gradual growth rate from this important initiative. In terms of underwriting profitability, we saw some improvement in the combined ratio during the quarter of 98.6%, versus 99.2% in 2015.

AmTrust continues to run at or better than expectations, largely reflecting business mix changes within segments of their portfolio reinsured by Maiden.

While the Diversified Reinsurance segment was impacted again by commercial auto adverse development, reflecting unanticipated reporting latency from several accounts, these isolated accounts are experiencing continued development from older underwriting years, primarily, again, 2011 to 2013.

We continue to actively monitor and audit exposed accounts and as we've communicated in the past, we will continue to react as necessary. At this point, we have a significantly smaller commercial auto portfolio, with both stronger pricing and more careful risk selection, with the most recent underwriting years performing within expectation.

And importantly, Maiden's other casualty lines are performing well. Our run rate underwriting performance, absent adverse development, is at expectation and solidly profitable. Finally, while we're not a writer of catastrophe reinsurance, we're impacted by weather losses from time to time.

However, I am pleased to say that despite a very active cat environment in the quarter, our weather-related losses were within our anticipated quarterly catastrophe load for such events.

While Karen will go to much greater detail in a moment from an investment income perspective, during the second quarter, we did make the strategic decision to accumulate cash rather than invest during a period of historically low yields.

As a result, our $35 million of investment income was not as high during the quarter as it could have been had we deployed some of the more than $0.5 billion in cash we're holding at the end of the quarter. We will continue to monitor the fixed income market and we'll deploy the cash as opportunities are available.

We've successfully employed this active management of cash in the past and we believe it's in our shareholders' best interest that we prudently manage our assets. Overall, Maiden's pipeline for growth continues to develop nicely.

And importantly, as Karen will explain, we expect continued strength in our investment income run rate as we deploy our large cash balance. Of course, we will be mindful of optimizing yield without substantially altering our risk profile.

I'd like to now turn the call over to our Chief Financial Officer, Karen Schmitt, to review the second quarter results in greater detail.

Karen?.

Thank you, Art and good morning. As Noah said earlier, unless otherwise stated, all references to common share data are on a diluted share basis and comparative comments will refer to Maiden's results the second quarter of 2016 relative to the corresponding period in 2015.

In the second quarter of 2016, net income attributable to common shareholders was $31 million or $0.39 per diluted common share, compared with $21 million or $0.27 per diluted common share. Net operating earnings of $28 million or $0.37 per diluted common share were unchanged from the second quarter last year.

Annualized return on common equity was 12.3% in the second quarter, compared to 8.8%, while annualized operating return on common equity was 11.3% in the quarter, compared to 12.2%.

Importantly, Maiden's second quarter returns were muted by the strategic decision to maintain an elevated cash position, rather than lock in historically low interest rates. I will provide more details on this shortly. Gross premium written increased 2% in the quarter to $688 million from $674 million.

In the AmTrust Reinsurance segment, gross premiums written were $524 million, compared to $523 million. The AmTrust Reinsurance segment saw limited premium growth this quarter, with increases in the master quota share offset by decreases in the Italian hospital liability contract for the quarter.

This segment was also impacted by the commutation announced in the fourth quarter of 2015 and slower growth following the completion of AmTrust's integration of the Tower Group. Gross premiums written in the Diversified segment were $165 million, an increase of 9% which Art covered earlier.

Net premiums written were $650 million in the quarter, an increase of 3%. Net premiums earned of $638 million increased 5%. In the AmTrust Reinsurance segment, net premiums earned were up 5% to $447 million. Net premiums earned in the Diversified Reinsurance segment increased 3% to $191 million.

Net loss and loss adjusted expenses of $427 million were up 3%. The 66.8% loss ratio was lower than the 67.8% reported in the second quarter of 2015. Commission and other acquisition expenses increased 6% to $186 million in the second quarter.

The commission ratio increased to 31.8% for the second quarter, compared with 31.4%, reflecting changes in business mix. General and administrative expenses for the second quarter totaled $17 million, a 6% increase compared with $16 million. The G&A expense ratio was 2.7% in the second quarter which is the same as last year.

The combined ratio for the second quarter totaled 98.6%, compared with 99.2%. The AmTrust Reinsurance segment reported a combined ratio of 94.9%, compared to 95.2%. The Diversified Reinsurance segment combined ratio was 103.4% in the quarter, down from 103.6%.

Adverse reserve development in commercial auto continued to impact the Diversified Reinsurance segment, resulting in underwriting loss for the quarter in that segment. Net investment income for the second quarter was $35 million, a modest increase over the second quarter last year.

The second quarter of 2015 included $6 million of additional income from two culled securities. The net investment income excluding culled securities was up 21% year on year. Investable assets increased to $4.9 billion, compared to $4.3 billion at June 30, 2015.

The average yield on the fixed Income portfolio, excluding cash, is 3.29%, with an average duration of 4.55 years. The new money yield on the limited number of fixed Income securities purchased in the second quarter was 2.84%, with an average duration of 3.82 years.

Including cash, the average duration is 4.06 years versus an average duration of liabilities of 4.17 years. Operating cash flow during the quarter returned to a more normal level of $156 million, as the first quarter cash flow was adversely impacted by the settlement of the AmTrust commutation during that quarter.

This strong operating cash flow and increase in cash from matured investments and more limited second quarter purchases of investments caused our cash and cash equivalent position to grow to $506 million as of June 30, compared to $231 million at March 31.

This elevated cash position at the end of the second quarter reflects our prudent decision to avoid locking in U.S. fixed-income rates near all-time lows. Total assets increased 10% to $6.3 billion at June 31, compared to $5.7 billion at year-end. Shareholders' equity was $1.5 billion, up 14% compared to December 31.

Unrealized gains rose $44 million in the second quarter to a net unrealized gain position of $94 million. Book value per common share was $14.18 at June 30 or 21% higher than year-end. Before I finish my portion of the presentation this morning, I would like to provide a brief update regarding Maiden's strong capital position.

In May, we announced the final redemption of our $107.5 million 8.25% coupon senior notes that had been issued in 2011. In June, we issued $110 million of 6.625% coupon senior notes which allowed us to lower our cost of capital.

Should the interest rate remain favorable, we may have additional opportunities to further reduce our cost of capital over the next 12 to 24 months. One final point of clarification. On September 15, Maiden's mandatory convertible preferred shares will convert to equity.

We expect the quarterly impact on diluted earnings per share to be very modest, no more than $0.02 per share, depending upon the conversion price. We also expect a reduction in return on equity of about 0.8, regardless of the conversion price and a small impact on book value.

While not significant impacts, we wanted investors to beware of these changes that will occur in the third quarter. I will now turn the call over to Art for some additional comments..

Thank you, Karen. In looking at the market conditions and the operating environment generally, competition throughout the industry has increased as capital growth has outpaced revenue growth.

Given the overabundance of capital in the market and the limited severity of the cat that we're experiencing in the quarter, we don't see any meaningful reduction in industry capital levels. Internationally, we do not anticipate any adverse impact from Brexit.

We're looking at potential opportunities to see if we can help clients or prospective clients with their capital requirements, should their balance sheets be adversely impacted by Brexit-related impacts.

In closing, I'm optimistic for the continued performance of the business and I believe that we have some excellent opportunities available to us to continue to expand our Diversified segment as we make our way through 2016 and into 2017.

While adverse development has been a headwind over us several quarters, we believe that our actions to not only deal with adverse development, but also to ensure that our risk selection and pricing today reflect the changing operating environment or appropriate.

We remain focused on maintaining consistent underwriting profitability and carefully growing our underwriting portfolio. And we're confident that our earnings run rate and our operating return will benefit in future quarters as we fully deploy our investable cash, as well as strengthen underwriting performance in our Diversified segment.

This concludes our prepared remarks.

Operator, could you please open the lines for Q&A?.

[Operator Instructions]. And our first question comes from Ken Billingsley of Compass Point. Your line is now open..

I wanted to ask first on the investment yield. I know you gave some color on why it was low.

But should we be looking to re-set our expectations for yield, at least in the near term, a little bit lower? Or what type of timing are you expecting to deploy the cash?.

Well, Ken, we're obviously looking for opportunities wherever we can find them. We've put about $200 million to work since the close of the quarter. The yields were slightly lower than our book yields, so we're continuing to look for opportunities. But as you know, the wait for rate increases seems to be taking a lot longer than we had all expected.

We'll keep looking for opportunities. But I think a more moderate -- slightly more moderate might be prudent as the new cash is invested..

And does this have anything to do with the timing on obviously the swapping of the debt? Did that have an impact in the quarter or was that a separate issue?.

No, that actually had no impact. It was basically the same timing -- the cash came in and went out pretty much at the same time. So no impact..

Okay. Another question on other insurance revenue. That was lighter during the quarter. Typically, I believe, it's generated at either of your Diversified REIT segment. It's the lowest amount since the third quarter of 2014.

Can you talk about maybe what caused the decline and maybe what our expectation should be for that line item?.

I think for the most part, Ken, it was reduced auto volume in Europe, particularly in Germany, that affected our revenue on the German auto program. But whether that recovers or not -- a lot of the sales activity there is very dependent on how the auto market behaves and then specifically, how our customers' car sales behave.

But that's really the issue -- no other underlying story there. But we will see how the full year plays out..

And generally, what are those revenues coming for?.

They are actually commissions through our German agency in Germany that supports the sale of insurance products through the dealer channels..

And then the last question I have and I'll turn it over, is on reserves.

What was the net reserve adjustment for the quarter?.

Net reserve adjustment was $13 million..

It was $13 million? And what was the commercial auto development by itself?.

Commercial auto development was $13 million as well. I mean, there were some other ups and downs, but everything netted to $13 million which was the same amount as the commercial auto..

Coincidentally..

Coincidentally. And the majority of it was commercial auto. We've seen -- just along that line, we've seen a number of other companies continuing to take charges there.

And with some of these reinsurers that have their own unique models, that are trying to go after non-cat business, can you just talk about competition? Is it getting more fear from some of these guys that are struggling? Where do you see some of these players that have gotten in the last few years in your markets and where are you overlapping with them?.

I kind of prefer not to discuss specific companies or anything of the sort. I would say that the market remains as competitive as it has been. We have not seen any new entrants in the quarter.

In fact, to some extent -- we've talked about some of the big multinationals sometimes being a bit more competitive, but we've seen a bit more sanity in the last quarter. There are definitely new entrants that we see from time to time in the space, but I wouldn't say that, that has the primary force of creating competition in the market.

With regards specifically to with commercial auto, actually our commercial auto volume is way down. And that reflects, to some extent, we see what happens adverse and then we affect our forward pricing with changes in expected loss cost and we find that we're not writing as much business.

The other thing that has changed is some of our risk selection criteria. So we're very comfortable with that and thankfully, we've had the offset of organic growth from some of our clients, particularly some of the quota share accounts and the additional expansion of our European capital solutions business. So that kind of helps balance that nicely.

There's no rush to exit the line, but to the extent that we do write it, it's going to be under much more stringent pricing and risk selection criteria..

And our next question comes from Randy Binner of FBR Capital Markets. Your line is open..

I think Ken got the $13 million of PYD was in -- obviously that's all in Diversified REIT.

And just to clarify, the only PYD you had was from commercial auto, right? Correct?.

There were some other -- we had property in 2015 was up a little bit, but that just can be some timing of some late-reported claims. That was on non-cat. But that was offset by some favorables on some other lines. On a net basis, we had $13 million. And really not by design, but our commercial auto was also $13 million..

Okay. And then did you--.

It was the biggest component of--.

I'm sorry, say again?.

It was the biggest component of adverse. And the other elements were essentially offset..

And then did you have a cat number you can identify in the second quarter for D-REIT? I'm just trying to get to what the action year loss pick looks like?.

That cat number? Yes, we were actually within our cat load by 700,000, so that was a slight favorable..

Okay, so call that zero. So if I think about the -- so the underlying loss ratio is maybe like 68 on the second quarter. So it bounces around. I guess it's a little bit higher.

But is that the right way to think about where you try and set the action year?.

You know, we look at loss ratio because we do have a lot more pro rata coming in. So the loss and the expense components are going to move a little bit. But if you look at combined ratio, it added about 2 points to the overall Maiden combined ratio for the quarter, the prior-year development..

So the goal here basically is to get your combined couple percentage points below 100? Is that still roughly the goal? I think you talked about 97.

So something 2% to 3% better than 100?.

Yes, we certainly want an underwriting profit and would like it to be higher than lower. But I think we said earlier that, to the extent that we will have some opportunity to build some higher -- to put in some higher booking rates, we think that's prudent for the near term..

So absent the adverse development, we'd likely be booking something in kind of the 98 range or higher, just to ensure that the current, let's say, competitive and volatile environment is appropriately dealt with..

Sure. And then commercial auto, so it's still 2011 to 2013. You know, you haven't seen any PYD for 2014 and 2015. I would say globally, we're seeing some weak development in commercial auto for those action years.

So can you help us with that? Do you think it's reasonable to think that this continues to roll on? Or is there something about your book that you think it should be mostly contained to those earlier action years, 2011 to 2013?.

Well, we try to identify these trends quickly, so we try to reflect them as quickly as we can in pricing. I would say, while the development is primarily in 2011 through 2013, we did see a little bit in 2014. I think 2015 was a little more stable.

But the one thing we have done and will continue to do is accelerate our audit activity, to make sure that we can at least proactively identify claims that are going to -- and these are, again, excess, not pro rata. What was disappointing for us in the quarter is that we're still seeing latency from another account, from several accounts.

And despite the fact that we've done a fairly comprehensive on-site review of known claims and even looked a little bit below the attachment point, we're still seeing some elements that are popping. So that does cause us concern.

But at least as it stands today, applying the same rigor from a claim and kind of underwriting evaluation perspective, we're not seeing the same dramatic movement in 2014 and 2015..

I think we also, in 2015 in particular, we made contract changes and pricing changes. We did not at 1-1, but really starting with 4-1, as we started to identify some of these problems.

So some of our contract changes -- I feel much better about 2015, because we definitely have stronger pricing and underwriting in the vast majority of that year and then certainly for 2016 as well..

Okay. And then I just have one more, on the AmTrust side.

Did you mention that the Italian men mall book is getting smaller, your share of that book is getting smaller? Can you quantify how much smaller that is?.

For the quarter, it was down pretty substantially. We believe there may be some timing issues, so it's possible that some of that will reverse. There is sometimes a lag in the way that things get reported to us. But yes, for the quarter, it was down very substantially..

I think they had to, to the extent possible, shifting the book to high deductible business which may have an effect on premium. But we don't see anything substantial in terms of a pullback there. Our share of the program remains identical to what it has been, so nothing has changed there.

And we think, in particular over the last several years, you know, they've had strong pricing, strong risk selection. So we feel good about what they're doing..

And that litigation situation around that block or that book, that does not -- does that affect you in any way as a quarter-share reinsurer?.

It does not. I believe they've reported that they've resolved it, but we did not participate--.

Well, yes, I mean, I guess it is a two-part question. I mean, they write what they write, I suppose, in the market, despite the headlines.

But then the settlement, that operates independently of how you quota-share the risk, basically?.

That's correct..

Thank you. And this concludes our question-and-answer session for today. I would like to turn the conference back over to management for any further remarks..

Thank you, everyone, for joining us today. It's a busy day for earnings calls, so thanks for participating. Take care..

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