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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Maiden Holdings' First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Bill Horning, Senior Vice President, Investor Relations. Sir, you may begin.
Thank you. Good morning, and thank you for joining us today for Maiden's first quarter 2018 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 Ltd.
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 SEC, 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 the 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 results in the first quarter of 2018 relative to the corresponding period in 2017.
With that, I'll now turn the call over to Art.
Thank you, Bill. Good morning and thanks for joining us for today's call. Following several challenging quarters last year, our results in the first quarter of 2018 have improved significantly. We reported net income in the first quarter of $13.7 million, or $0.16 per diluted common share.
On an operating basis, we earned $16.8 million in the quarter or $0.20 per diluted common share, and importantly, we did not see significant adverse loss development in our Diversified segment and only a modest level of adverse development in our AmTrust Reinsurance segment. I will provide more color on business development in each segment, and then Karen, our Chief Financial Officer, will provide more detail on the quarterly results in her financial review.
Across the Diversified segment in the first quarter of 2018, gross premiums written were $279 million, down from $332 million, beginning with our US underwriting operations as we expected with the continued competitive environment. We found it more difficult to renew some accounts, some due to competitive pressure and others we choose not to renew. And particularly in the first quarter on a comparative basis to the prior year’s first quarter, we felt the impact of several large accounts non-renewed in 2017 and early in 2018 and in one case we had a fairly significant return of premium reserves.
We do expect revenue to grow in subsequent quarters versus the prior year quarter period, reflecting new client additions as well as increases from existing client relationships, but we are not presently expecting significant year-on-year growth in the US. While it has been a difficult environment for a variety of reasons, clients and prospective clients continue to see the value in our collateralized reinsurance solutions, and our differentiated value proposition.
In Maiden Capital Solutions, our European regional business, we continue to add accounts and are enjoying increasing awareness and opportunities for our unique product offerings. Our first quarter Capital Solutions business development was strong with several new client relationships added during the quarter. Additionally, in our international insurance services, Affinity Reinsurance Business, we are seeing a variety of business development successes both in our branded consumer auto activity, as well as our payment protection insurance products. Both areas have experienced new program and new client growth.
Within the protection insurance component, we are expanding our offerings to other Affinity relationships in areas primarily in consumer finance. Of particular appeal to these new customers is our ability to customize products to meet their customers’ needs, and also the team’s fast time-to-market approach. And finally we are enjoying growth due primarily through increased shares we received in our German Affinity auto reinsurance program, which was renewed on January 1.
Within our AmTrust segment, we observed a modest decline in gross written premium reflecting their underwriting decisions made primarily in their programming segment, some softening of primary market conditions and AmTrust’s own initiatives to improve underwriting performance. As we have stated in the past, we anticipate a continued moderation at AmTrust and a potential further reduction in revenue over time. We believe they are responding effectively to competitive market conditions by maintaining disciplined underwriting.
As we mentioned on our fourth quarter conference call, we are evaluating all options to enhance value to our shareholders. In April, we did announce our board of directors had engaged Bank of America Merrill Lynch to help drive this effort forward and we are actively engaged in the process. We will, of course, communicate any important developments in this process when they occur.
I'd now like to turn the call over to Karen Schmitt, who will provide more details on the quarter. Karen?
Thank you, Art, and good morning. As Bill said at the outset of today's call, unless otherwise stated, all references to common share data are on a diluted common share basis, and comparative comments will refer to Maiden's results in the first quarter of 2018 relative to the corresponding periods in 2017.
Last night, Maiden reported a first quarter 2018 net income attributable to common shareholders of $13.7 million or $0.16 per diluted common share compared to net income attributable to common shareholders of $20.5 million or $0.23 per share. The non-GAAP operating earnings was $16.8 million or $0.20 per diluted common share compared with a non-GAAP operating earnings of $22.6 million or $0.26 per share.
The annualized non-GAAP operating return on average common equity was 9.3% for the quarter. Gross premiums written in the first quarter decreased 7.7% to $853 million compared to $923 million. In the Diversified Reinsurance segment, gross premiums written totaled $279 million, a decrease of 16% impacted by the return of some unearned premium during the quarter on one large US account that was not renewed at [1.1].
Also affecting the comparison to the prior year was the termination of several accounts that occurred after the first quarter of 2017. Diversified growth outside of the US was very strong for the quarter in both our international insurance services and European Capital Solutions businesses.
In the AmTrust Reinsurance segment, gross premiums written were $574 million, a decrease of 3%. Net premiums written were $849 million, down from $901 million. Net premiums earned were $685 million, down modestly from $710 million, mainly due to the decline in net premiums written in both segments.
Net loss and loss adjustment expenses in the first quarter were $473 million compared to $481 million. In the Diversified Reinsurance segment, we had prior year loss development of $1.2 million compared to $6.2 million recorded in the same period last year.
In the AmTrust Reinsurance segment, we experienced $8.5 million of adverse prior year loss development compared to $10.3 million in the prior year. Higher initial loss ratios were booked in both segments. In the Diversified segment, the higher ratios added approximately 0.6 points to the segment combined ratio, and in the AmTrust segment the initial loss ratios added 1.8 points to the AmTrust loss ratio.
Commission and other acquisition expenses decreased 6% to $209 million, reducing the ratio to 30.3% compared to 31.1%. Mix was the main driver of the lower commission ratios.
General and administrative expenses for the first quarter totaled $20 million versus last year's G&A of $17.4 million. The increase was due in part to increased audit, legal and system costs incurred in the first quarter of this year. As a result, the G&A ratio increased to 2.9% from 2.4%. This 0.5 point increase in the G&A expense ratio represents more than half of the increase in the combined ratio from 100.9% last year to 101.8% this quarter.
The Diversified reinsurance segment combined ratio was 99.6% versus 99.9%. The combined ratio for the quarter reflected higher initial combined ratio, which we believe to be prudent. Within the segment, we also experienced 0.9 percentage point increase in the year-on-year G&A expense ratio, which we do not believe to be [indiscernible].
The AmTrust segment combined ratio for the quarter was 100.9% versus 99.8%. The increase was due to higher initial loss ratios booked, offset by less adverse development in the quarter as compared to the prior year.
Investment results were consistent in the first quarter with net investment income of 42.9 million compared to 42.2 million. Investable assets decreased slightly to 5.4 billion with an average yield on the fixed income portfolio of 3.18%. The duration of Maiden’s total investable assets was 4.7 years compared to the duration of liabilities of 3.7 years. With the rising rate environment, the mark-to-market adjustment on our available for sale portfolio was $68 million, which was recorded through AOCI, which reduced our book value by $0.82 per share this quarter. However, importantly the change in market value was not driven by a weakening of credit quality or impaired assets. Maiden would only realize these valuation losses if it chose to sell assets at market.
Maiden does not have a significant liquidity risk in its portfolio and has relatively predictable cash flows. Our book value per common share, excluding AOCI, was $9.10 at the end of the first quarter versus $9.09 at year-end. We ended the first quarter with total assets of $6.76 billion compared to $6.64 billion at year-end. Cash and cash equivalents were $161 million compared to $192 million at December 31.
Its shareholders’ equity was $1.16 billion compared to $1.23 billion at year-end. And finally as we announced in our press release on Tuesday, our board authorized a quarterly cash dividend of $0.15 per common share payable on July 12th, as well as dividends on our preference shares payable on June 15.
I will now turn the call over to Art for some additional comments.
Thank you, Karen. As we look further into 2018, we believe we are taking the steps necessary to return Maiden to more stable results and more consistent profitability. With our strategic review process well underway, we continue to focus on actions that will enhance value to our shareholders.
Before I end our formal comments, I also like to acknowledge the exceptional efforts of the entire Maiden team in remaining focused on delivering significant differentiated value to our customers. While there have been a number of issues that have made their jobs significantly more challenging, I'm deeply proud and appreciative of their professionalism and their commitment to deliver value every day. I would also like to thank our customers for their loyalty and support. We are committed to strengthening our value proposition for all of our clients and our shareholders to deliver exceptional reinsurance solutions.
This concludes our prepared remarks. Operator, could you please open the lines for Q&A?
[Operator Instructions] And our first question comes from the Randy Binner with B. Riley FBR. Your line is now open.
Hi, good morning. Thank you.
Good morning, Randy.
Hi, Randy.
Good morning. Hi. I will start with just a question on just reserve activity. So, it looks like diversified REITdid not have any development this quarter, and there has been quite a bit for the last several. So, could you dig into that a little bit and just describe kind of where that process is with reserves in Diversified Re?
Sure. We had a very quiet quarter for Diversified this quarter. US was flat. Nothing booked in either direction. There is obviously movements in all kinds of directions for all of the individual pieces, but it netted out to zero. We had a small amount of adverse coming from our Bermuda run-off. Some of this was contracts that were in place when – at the very beginning of the Maiden existence, which we still have little bits of run-off from that, but really not a significant amount.
So that is really it, and then IIS was favorable for the quarter slightly.
Okay. And then with AmTrust, you kind of book – so that number was probably a little bit lower than I would have expected for adverse considering kind of their use of the adverse development cover, and last year – so, can you – is there – is that, I know there is always timing differences and methodology differences between Maiden and AmTrust, but is there any color you can give us around that 8.5, it seems they implied reserve charge from what AmTrust had already reported would have been higher?
Remember, we booked a lot in AmTrust last year. So, I guess my expectation would have been we book nothing, but we did book on 8.5 million. It was mostly in general liability, small amount of commercial auto, and really when you dig it apart a lot of those coming from program. Program continues to be a little bit of a challenge for us.
But, the adverse development cover from AmTrust, as we said before, it is really hard to compare what their results are going to be to our results. There is different business going in there. There is different things that are affecting that cover that we don't participate in. And then the business we do participate in our starting points may be different. So it is really hard to compare what they do with reserves certainly on a quarter-to-quarter basis versus what we do.
Okay. Yes, I will leave it there and jump back in the queue. Thank you.
Thank you.
Thank you. Our next question comes from Meyer Shields with KBW. Your line is now open.
Great. Thanks. Good morning.
Hi, Meyer.
Hi, Meyer.
Hi, [indiscernible]. Sorry. Art, in your comments, you didn't mention pricing, and I'm wondering what you are seeing in terms of any increases either on the primary side or in terms of the actual reinsurance pricing on the liability lines within the risk side?
Yes, I think – I mean, in terms of let us start with the reinsurance side of it, I think – and let us break it between excess and pro rata. A lot of our pro rata is in kind of the auto segment and we actually think that the pricing environment there, particularly in specific areas and jurisdictions is pretty positive. On the excess side, I think we are seeing more competition, sort of more rate pressure. That said, we shall have a pretty high retention on the business, but the primary market, at least the rating indicators that we see suggest that lines are just getting marginal levels of rate increase, and some lines are actually not seeing rate increases.
So, our expectation in our outlook is not focused on significant price strengthening and keep in mind when we price our business in the Diversified, we take a pretty objective look at the primary pricing environment, and then we build our pricing on that objective look. So, I would like to say that we were seeing an improvement in overall reinsurance pricing, but I would say that that is not true.
Again, our focus is oriented on the things where we believe that margins will be attainable. That would be things like our auto book. That would be things like our accident health book, which has been a pretty stable contributor. And the other area, where we have seen some benefit particularly with some of the growth in some of the lower combined ratio businesses in our international insurance solutions business, the Affinity business, we have a pretty good view on 2018 in that particular area.
Okay. That is great. Thank you. I am sorry.
And I guess I would add on the AmTrust side what we are seeing is probably a little bit of weakening on the workers comp, but strengthening in some of the other areas where there have been some profitability challenges. So it is kind of a mixed bag there.
Okay. You know that certainly makes sense. The second question, and I appreciate that you can't – there is no detail that you can disclose right now with regard to the strategic review, but can you talk about its impact on business development just the fact that there [indiscernible]?
No. That is a great question. I have said earlier how appreciative we are of the loyalty of our clients. You know, some of our clients actually have been with us for pre-Maiden period of time, and I think that our commitment is to enhance shareholder value. We believe that things that enhance shareholder value will also enhance value to our customers. And that is a sincere belief, and I think that from that perspective we are looking at things that can strengthen our value proposition to our shareholders and to them.
So, you know, in the interim we continue to provide collateral. Nothing changes there. They continue to have the benefit of what we think is the strongest security in the market. But we certainly get calls and we talk to customers and for the most part the majority have been very appreciative and understanding and recognize that there is not a lot we can divulge at this time. But the end objective is something that hopefully benefits them, as well as obviously most importantly our shareholders.
Okay, perfect. Thank you so much.
You're welcome. Thank you.
Thank you. [Operator Instructions] I'm not showing any further questions at this time. I'd like to turn the call back to Bill Horning, Senior Vice President of Investor Relations for any further remarks.
Thank you, operator. This concludes today's quarterly call. Thank you all for joining us and we look forward to speaking to you on future quarters this year.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.