Kestrel Group, Ltd. (KG) Q2 2008 Earnings Report, Transcript and Summary

Good afternoon everyone, welcome to the Maiden Holdings, Ltd second quarter 2008 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Ben Turin, Chief Operating Officer at Maiden Holdings. Please go ahead sir.

Thank you and good afternoon. Before I introduce you to our President and Chief Executive Officer, Mr. Max Caviet; our Chief Financial Officer, Mr. Michael Tait; and our Chairman, Mr. Barry Zyskind I would like to read a paragraph on forward-looking statements. This call contains 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. 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, effective performance of financial markets on investment income and fair values of investments, developments of claims and the effect on loss reserves, accuracy in projecting loss reserves, the impact of competition and pricing environments, changes in the demand for the Company's products, the effect of general economic conditions, adverse state and federal legislation, regulations and regulatory investigations into industry practices, developments relating to existing agreements, heightened competition, changes in pricing environments, and changes in asset valuations. The Company undertakes no obligation to publicly update any forward-looking statements. I now introduce you to Maiden’s President and Chief Executive Officer, Mr. Max Caviet.

Thank you and good afternoon. I am pleased to report that Maiden had a very strong quarter with excellent top line and bottom line results. Net written premium for the second quarter was $171.3 million. Our net income was $13.8 million for the quarter and earnings per share were $0.23. The company’s combined ratio was 92.3% the components were a loss ratio of 56.4% and an expense ratio of 35.9%. We continued to see excellent results from our strategic partnership with AmTrust Financial Services and benefit from their growing book of business. Our quota share agreement with AmTrust for the second quarter 2008 provided $168.1 million of premium and a combined ratio of 89.8% for the quarter. As discussed in our previous call, we are pleased to continue our relationship in the quota share arrangement with AmTrust for its UBI activity. During the second quarter, we had an exciting opportunity to enter into an unearned premium transfer agreement for $82.2 million which was available as a result of the transaction between AmTrust and Unitrin. We carefully evaluated this book of business and feel that with its excellent loss history it will be a highly beneficial opportunity impacting Maiden during 2008 and the first part of 2009. We look forward to similar opportunities in the future as this is a valuable service we are able to offer as a reinsurance company. We are seeing a very strong pipeline of third-party business. While there was not significant premium written during the second quarter, we are confident in our activities. We carefully adhere to disciplined underwriting standards and are leveraging our team’s close relationships with brokers and insurance companies as we develop new opportunities. For the first six months of 2008, we have written $22 million in third-party business and are confident we will close a number of contracts in the coming quarters and achieve our goals for 2008. Our investment income for the second quarter totaled $7.8 million and annualized return on equity for the second quarter grew to 10.4%. We look forward to continued growth and achieving a run rate in the mid teens by the end of the year. We are confident in both the growth of our balance sheet experienced during the quarter and our conservative investment portfolio. We have maintained our focus on high-quality investments with 98% of our portfolio in cash or bonds. 91% of our bond portfolio is A rated or better while 55% of our bond portfolio is AAA government agencies. Our conservative investment activities continued to serve Maiden well and provide a solid platform for growth during the challenging market environment. In summary, our focus remains on non-volatile books of business. We are successfully expanding our activity and look forward to continued growth from the many quality opportunities in the marketplace. Now, I would like to turn the discussion over to our Chief Financial Officer, Michael Tait to report on our second quarter financial highlights.

Thank you, Max. Good afternoon everyone. I would like to walk you through the key components of our results. As mentioned by Max, our net premium written for the second quarter was $171.3 million continuing the strong growth from the first quarter. Our net written premium for the first half of the year totaled $273.6 million. As you know we extended our quota share agreement with AmTrust effective June 1, 2008 to encompass its acquisition of Unitrin Business Insurance or UBI. This transaction had two components. Firstly, we took 100% of the unearned premium portfolio as of June 1, 2008 amounting to $82.2 million and secondly we have a 40% quota share of new UBI policies issued by (inaudible). The overall combined ratio for the second quarter was 92.3% and the combined ratio for the first six months of 92.4%. Our income for the quarter was $13.8 million and for the first six months it was $26.3 million. Earnings per share were $0.23 for the quarter and $0.44 for the first six months. We operate two segments, AmTrust quota share and other reinsurance. As a result of the UBI transaction $158.1 million or 98% of our net premium written for the second quarter was from the AmTrust quota share. For the first half of the year, $251 million or 92% was from the AmTrust quota share. The combined ratio for the AmTrust quota share segment was 89.8% for the second quarter, an improvement over the first quarter reflecting the improvement in the development of the AmTrust royalty [ph] offset partially by the increased commission payable on the UBI section. For the other reinsurance segment, the combined ratio was 107.3% for the first six months. Whilst this segment is being established, the fixed cost will outweigh the pure underwriting profit. We are confident this ratio will decline in future quarters as the premium is earned from the contracts already written and the new business. Net investment income for the second quarter was $7.8 million and our average invested assets including the loan to related party was $660.4 million. We have a high quality investment portfolio, over 98% of our portfolio was in cash and cash equivalents or bonds, 55% of our bond portfolio is AAA rated government agencies, 91% is A rated or better. We strongly believe that maintaining a high quality investment portfolio will better Maiden’s long-term activity. Our operating cash flow was strong, $78.3 million for the first six months of the year including the proceeds of $69.4 million from AmTrust under the quota share agreement. That agreement requires us to collateralize certain liabilities which we satisfied by loaning funds to AmTrust. This loan is classified as loan to related party on our balance sheet although increased by $54.3 million in the second quarter. The company’s book value at June 30, 2008 was $9.01 per share and we paid a $0.05 dividend this quarter. Thank you. I would like now to turn over to our Chairman, Barry Zyskind for a few words.

Thank you Mike. We are very pleased with the first six months of 2008 as Maiden continues to progress in both revenues and earnings while keeping a very solid balance sheet. I would also like to inform our shareholders that we at Maiden are working very hard with management to grow our third-party business. We are doing this by continuing to build on our infrastructure and by looking for acquisitions in both book of business and teams of people that we believe will allow Maiden to pass forward its business plans. I am happy to report to you that we are seeing a very healthy deal flow and are confident that Maiden is well on its way to becoming a first class specialty reinsurance with predictable earnings without any casualty exposure. Thank you.

Thank you. Our speakers today have indicated they are pleased to entertain questions or audience by PAS. To facilitate that, I now turn it back to the operator.

Thank you. The question-and-answer session will be conducted electronically (Operator instructions) We’ll go first to Nick Prendergast with Signal Hill. Nick Prendergast – Signal Hill: Hi good afternoon and congratulations on a good quarter. I just had one quick question for you; it seems to be the hot question of the quarter here, I was just curious, has your investment portfolio experienced any fall-out related to the ongoing financial crisis, the mortgage industry, etc.

No, there hasn’t been any effect of that. Over the quarter, the market value of our portfolio went down about $3 million or so on the bond side, so I have to answer no to that question. Nick Prendergast – Signal Hill: Okay, great. Thank you very much.

(Operator instructions) we’ll go next to Dan Schlummer [ph] with SCK [ph]. Dan Schlummer – SCK: Good afternoon. I wanted to see if you could maybe give us a little more description on what you are seeing in terms of deal flow? Do you have sort of some generalizations that you could share with us in terms of are these US Lloyd, other maybe types of deals that are out there that are coming your way that people are – whether they are getting on the books or not at least what is in the market, the people want you take a look at?

This is Max Caviet speaking. As I mentioned earlier, we are seeing a very strong pipeline of enquiries and we feel the current market site is very exciting because not only are the brokers the main agent understanding more and more the type of specialized business that we are looking for such as small insurance companies, auto liability, small ticket workers’ home, residential warranties, specialty risk and the like, with the current market dynamics, we are finding that brokers and agents and customers are looking for alternative ways to generate revenues because they are not getting it from the property and casualty business that they had. So, they are coming to us to ask us from solutions, customized solutions to help them generate other revenue. So, we are very excited about the opportunities in the marketplace. Dan Schlummer – SCK: Are they mostly coming from the US or is it –

No, it’s getting a mixture throughout Europe and US I am pleased to say. Dan Schlummer – SCK: And then is it mostly people are looking for excessive loss or is it mostly quota share or mixed?

No, mostly quota share but again mostly our idea is to help them deal with the current marketplace because we are very niche player, we are not doing what most of the other people are doing in the market. Dan Schlummer – SCK: Right, okay. Sort of a detailed question, just on the earn-out for the Unitrin unearned premium, $80 million just as far as looking forward and how we model it, $80 million dollars divide that by 12 and that is sort of the monthly run rate it should be earning out at, does that make sense or is that not really how it is going to earn out?

Dan, it is Mike Tait. No, I think that’s the reasonable way to do it. I think it is starting June 1, so all the premium will be earned by May 31 of 2009. You know, we had the first month before so it was about $10 million to $12 million of earned, so I think dividing it by 12, I think is probably a reasonable estimate. Dan Schlummer – SCK: Just last question, can you give us maybe a little bit of just generally how you are setting the loss ratio on the excess portion in particular, it seems like the quota share is probably barely straightforward and you probably have pretty good data from the underlying – on the excess contract, I think there is a couple you detailed in S1, can you sort us give us a little bit of detail on how the loss ratio is shared [ph] or how you get to the right number for that, some of them will be relatively long tailed obviously.

Dan I think as part of our underwriting process, we have both the underwriters and consulting actuaries looking at the data. Between them, they make recommendations, they underwrite in 50, the target loss ratio is set and that is what we use and we’ll review it as we go along. So, in excess of what is treating as you know, generally we hope the ratio to be very low but we would not reserve on that basis. We are using consultants and actuaries and we are confident that we are doing a great bit of underwriting to keep that in shape. Dan Schlummer – SCK: Very helpful, thank you.

We’ll take our next question from Jeff Feinberg with JLF. Jeff Feinberg – JLF: Thank you very much. Congratulations on solid progress guys.

Thank you. Jeff Feinberg – JLF: Couple of question here, First of all, what was book value at the end of March and how did that compare to – I think it was $9.02 here at the end of June.

The book value was $8.91 at the end of March. Jeff Feinberg – JLF: Okay, great, so it went up by about $0.10 or $0.12 there?

Yes and plus we paid a dividend in the quarter as well. So –

So, that will be another $0.05 added. Jeff Feinberg – JLF: Wonderful. So, to follow up on that, book value growth as well as the earlier question about the sort of bonds, obviously with your stated book share at $9, and if I understood your comments of $15 ROE by the fourth quarter which gets you to $30, $40, obviously people are not paying attention to that and are overly concerned about something in bond portfolio, can you just provide a little more flavor around any given percentages, 91% percent, can you provide some flavor that would give some added detail/comfort with regard to bond portfolio since the market seems to be voting differently.

Jeff this is Barry, first of all obviously we are not going to comment on what the market does but I think from where the bond portfolio is, going back to the previous question, the question was how the bond portfolio perform in the quarter and Mike said that the bonds were up only $3 million from the March 31 date and all the bonds are mark to market on the portfolio. So, obviously you could see when it was a very tough market, in the market the bond portfolio has held up very, very nicely in the market and the bond portfolio is very solid, as we mentioned, 55% is AAA, which is mortgage backed which are all agencies. We have no other mortgages except agency backed mortgages and the corporates are very high quality of 91% is above A. So, the portfolio is in very, very good shape. Jeff Feinberg – JLF: Wonderful. And that $3 million represented what type of percentage decline? What is the base?

The portfolio is less than half percent because you have a portfolio lower [ph] than $700 million between cash and bond. Jeff Feinberg – JLF: I am so sorry, $700 million, so (inaudible) $700 very small?

Right. Jeff Feinberg – JLF: Okay, terrific. Finally just to make sure did I understand that comment correctly that you would expect to get to a mid teens ROE by the fourth quarter?

Yes, on a run rate. Jeff Feinberg – JLF: Okay, so just doing the math, that would sort of imply that whatever $1.40 [ph] does that incorporate some of the new diversification opportunity that you alluded to or is that just based on the existing book?

It is based on the existing book and the growth trend for the company for the remainder of the year. Jeff Feinberg – JLF: Okay, wonderful, very exciting, thank you very much.

Thank you. Jeff Feinberg – JLF: I guess I would just add one last comment if I may that is from one shareholder, given this opportunity in the marketplace, I can imagine other alternative investments that are as attractive as your own stock, is that something that you are able to do in terms of buyback?

No, we looked at it and because of the large shareholders of myself and the majority of the shareholders of AmTrust and the company; it would be very difficult for the company to do a share buyback because of certain percentages that we have to remain below. Jeff Feinberg – JLF: Okay, understood. Thank you very much. Great job.

Thank you.

Thank you for joining us this afternoon. I will now turn it back to the operator.

Thank you. That does conclude today’s call. We do appreciate your participation. You may disconnect at this time.