- A differentiated business model in the reinsurance sub-specialty industry sector positions the company for stable, predictable growth and income.
- A recent redemption of high-cost financing and a record-setting quarter in revenues may be an indicator to open a position now.
- Management team philosophy maintains a low-risk/high-reward ratio for shareholders.
Maiden Holdings, Ltd. (NASDAQ:MHLD) is a Bermuda-based holding company, primarily focused on serving the needs of regional and specialty insurers in the United States and Europe by providing reinsurance solutions designed to support their capital needs. Maiden operates through three business segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share.
Recent news is particularly encouraging for the current valuation versus the reinsurance industry peer group.
According to a June 24, 2014 article in Street Insider, FBR Capital analyst Randy Binner raised his price target on Outperform-rated Maiden Holdings to $16.00 (from $14.00) Binner commented:
We recently hosted meetings with MHLD management and institutional investors and came away with positive business updates. Overall, we believe that the market continues to underappreciate the high-frequency/low-severity nature of MHLD s business, relative to potentially more volatile Bermuda reinsurers, who are also seeing a more competitive pricing environment than MHLD. MHLD has underperformed commercial lines peers by 3% and reinsurers by 8% over the last year, putting shares at ~1.0x book value, under 7x 2015E EPS (where we have a high confidence level), and a 3.7% dividend yield, the highest in our P/C or life coverage.We maintain our Outperform rating and increase our price target from $14 to $16, which is 1.15x 2015E BV of $13.80 and 9.1x 2015E EPS, multiples we think are easily achievable given our 14%-plus ROE outlook.
The company press release of earnings released via Globe Newswire on May 7, 2014, makes a point of reporting the recent improvements in net operating earnings per share. But, also the recent move by management to reduce the financing costs by redemption of the 14% TRUPs.
HAMILTON, Bermuda, May 7, 2014 (GLOBE NEWSWIRE) -- Maiden Holdings, Ltd. ("Maiden" or "the Company") today reported record first quarter 2014 net operating earnings(1) of $25.6 million, or $0.34 per diluted common share compared with $21.1 million, or $0.29 per diluted common share in the first quarter of 2013. In the first quarter of 2014, net income was $2.1 million compared to net income of $28.1 million in the first quarter of 2013, impacted by a non-recurring non-cash charge of $28.2 million, representing the accelerated amortization of both the original issue discount and issuance costs associated with the TRUPs.
Ratio Study versus the Reinsurance Sub-Industry and the S&P 500 Index:
- Price/Earnings TTM 9.28
- Price/Sales FY 1.19
- Dividend Yield 1.10%
My particular interest in study of MHLD is its place in a Dividend Growth portfolio; the current 3.66% dividend yield versus the sub-industry average of 1.10% produces another positive in the evaluation.
MHLD - Maiden Holdings Ltd
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Maiden's Value Proposition (*Summary from Investor Presentation May/June 2014 - Company website)
• Focus on low-volatility lines of business and more predictable "working layer"reinsurance- Not focused on the property catastrophe reinsurance market
• Long-term relationships with targeted regional and specialty P&C insurers - 31-year operating history
• Successful and stable multi-year strategic reinsurance relationship with AmTrust Financial Services, Inc. ("AmTrust") since 2007
• Diversified portfolio of low-volatility underwriting business
• Predictable and stable operating results
• Highly efficient and scalable operating platform
• Growing balance sheet scale and capital efficiency supported by the low-volatility model
• Reduced cost of capital following TRUPs redemption enhances operating returns
• Conservative investment portfolio
Maiden is well positioned with unique competitive advantages and a highly differentiated business strategy
Additional briefings from the 2013 Annual Report to Shareholders highlights:
DECEMBER 2013 We completed 2013 with record annual net income attributable to Maiden common shareholders of $87.9 million and net premiums written of $2.1 billion.
JANUARY 2014 Maiden redeemed all remaining outstanding 14% TRUPs with a face value of $152.5 million, significantly lowering our cost of capital and completing the redemption of the high interest rate debt issued in 2009 to support the acquisition of GMAC RE. As a result of this redemption, Maiden anticipates a strengthening of annualized earnings of $9.5 million.
An important initiative in 2013 was the sale of the Excess and Surplus Property portfolio to Brit Global Specialty. This action significantly reduced the company exposure to potential catastrophic losses, consistent with the fundamental strategy of focusing on more stable and predictable business. With this sale, company exposure to 1-in-250 year events dropped 59% to a mere 3.4% of common shareholders' equity or $28 million.
Maiden Holdings has been a dividend payer for years with a yield above the industry average. And, management is pursuing a differentiated business relationship model to lower risk and improve reward for shareholders. Plus, the recent news and valuations present a buying opportunity for investors.
Note: Securities prices and yields quoted are current as of July 20, 2014.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in MHLD over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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