Maiden Holdings, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless noted.
Business context
Maiden is in a major strategic transition and run-off. It sold its U.S. treaty reinsurance business in 2018, terminated its AmTrust quota-share and European hospital liability agreements effective January 1, 2019, and is not actively underwriting reinsurance business. Continuing operations comprise Diversified Reinsurance, primarily European property and casualty business, and run-off AmTrust Reinsurance business.
Financial results and position
| Metric | Q3 2019 | Nine months 2019 | Comparison |
|---|---|---|---|
| Total revenue | $121.2 million | $515.9 million | Down from $555.7 million and $1,649.7 million, respectively, in 2018 |
| Net loss attributable to Maiden common shareholders | $58.3 million | $110.4 million | Losses narrowed from $308.8 million and $301.0 million, respectively |
| Loss per common share | $0.70 | $1.33 | Loss per share was $3.72 and $3.62, respectively, in 2018 |
| Net premiums earned | $94.9 million | $412.0 million | Down 81.8% and 73.3%, respectively |
| Net investment income | $13.2 million | $76.4 million | Down from $34.4 million and $101.5 million, respectively |
| GAAP combined ratio | 190.8% | 146.0% | Compared with 150.8% and 120.7% in 2018; above 100% indicates underwriting losses |
GAAP underwriting loss was $80.3 million in Q3 and $162.1 million for the nine months. The AmTrust Reinsurance combined ratio was particularly elevated at 205.5% for Q3 and 146.5% for the nine-month period. Diversified Reinsurance reported combined ratios of 107.7% and 102.5%, respectively.
Management’s non-GAAP measures materially differ from GAAP: Q3 non-GAAP operating earnings were $39.8 million and the non-GAAP combined ratio was 81.3%; nine-month non-GAAP operating loss was $9.1 million and the non-GAAP combined ratio was 120.8%. These measures include the $104.5 million deferred gain associated with the Enstar retroactive reinsurance agreement; they are not a substitute for GAAP results.
- Cash flow: Nine-month operating cash outflow was $949.3 million, versus $162.6 million of inflow in 2018; investing activities provided $686.4 million. Cash, including restricted cash, was $72.9 million at period-end.
- Liquidity and investments: Management reported $434.4 million of unrestricted cash and fixed-maturity investments and $3.0 billion of investable assets. Restricted cash and investments totaled $1.7 billion, largely supporting collateral obligations.
- Balance sheet: Total assets were $3.792 billion, down from $5.287 billion at year-end 2018. Loss and loss-adjustment reserves were $2.626 billion. Shareholders’ equity was $533.2 million; common shareholders’ equity was $68.2 million, or $0.82 book value per common share.
- Debt: Senior notes had $262.5 million principal outstanding and $254.9 million net carrying value. Debt was 33.0% of total capital resources. No debt principal change was reported.
- Dividends: No common or preference dividends were paid in the first nine months of 2019. The board had not declared dividends on either class since Q4 2018.
Material changes and notable transactions
- Termination and run-off of AmTrust agreements sharply reduced premiums. Nine-month net premiums written were negative $526.0 million, principally reflecting the return of unearned premiums under the partial termination; this figure should not be read as ordinary new-business production.
- Under the July 2019 Enstar LPT/ADC agreement, Cavello assumed covered AmTrust loss liabilities above a $2.179 billion retention, up to $600 million, for a $445 million premium. The agreement provides up to $155 million of adverse-development cover. At September 30, the related recoverable was $549.5 million and the deferred-gain liability was $104.5 million. The deferred gain is recognized into earnings over the settlement period; management estimated about five years before payments exceed the retention.
- Maiden paid AmTrust $312.8 million to commute certain California and New York workers’ compensation liabilities. The Enstar and AmTrust settlements were funded August 12, 2019; related interest payments totaled $13.6 million.
- Prior-year reserve development remained adverse: $63.2 million in Q3 and $96.5 million for the nine months before the LPT/ADC effect. AmTrust adverse development was primarily associated with Commercial Auto and General Liability, partly offset by favorable Workers’ Compensation development.
- Investment portfolio fair value benefited from lower interest rates: nine-month net unrealized investment gains contributed to an $87.6 million increase in accumulated other comprehensive income. The company also recorded realized investment gains of $25.7 million for the nine months.
Outlook, risks and contingencies
- Management expected negative operating cash flow to continue through the remainder of 2019, with claims and expenses funded through cash and investments, run-off premiums, investment income, and investment maturities and sales. Management stated liquidity was sufficient for expected requirements over the next 12 months.
- The company and Maiden Bermuda had failed to meet enhanced capital requirements at December 31, 2018. After remediation transactions completed July 31, 2019, management reported both entities above applicable Bermuda capital requirements and expected solvency levels to improve through year-end.
- Maiden Bermuda filed to leave Bermuda and seek licensing and re-domestication in Vermont, targeting January 1, 2020, subject to regulatory approvals. The parent holding company would remain Bermuda-based.
- Key exposures include reserve-estimation uncertainty, counterparty credit and concentration risk, foreign-exchange risk, and interest-rate risk. Nearly all reinsurance recoverables at September 30 were due from Cavello; the LPT/ADC recoverable was supported by a letter of credit, while other AmTrust-related balances and funds-withheld arrangements also create counterparty exposure. No foreign-currency hedges were in force.
- The filing describes a securities class action alleging misrepresentations and a long-running former-employee whistleblower claim; Maiden said it would defend the claims. Management noted that the effect of expected additional litigation related to the company’s financial condition was uncertain.
- In November 2019, after quarter-end, Maiden Bermuda agreed to commute the NGHC quota share for $2.248 million. No formal earnings guidance is provided in the filing.
Most important facts for investors to verify
- How the $104.5 million deferred gain, the $155 million adverse-development cover, and the $600 million LPT limit affect future GAAP earnings, recoveries, and liquidity.
- Whether reserve development—especially Commercial Auto and General Liability—continues, and how the remaining AmTrust run-off liabilities compare with recorded reserves.
- Whether collateral, funds withheld, and recoverables from AmTrust and Cavello are collectible and available when claims fall due.
- Whether cash outflows, restricted assets, and the reduced operating scale leave adequate liquidity and capital through the run-off and any Vermont re-domestication.
- Regulatory progress on re-domestication, the status of dividend restrictions, and developments in the disclosed litigation.