Maiden Holdings, Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Maiden is a Bermuda-based holding company focused on managing assets and capital, providing legacy insurance services, and running off legacy reinsurance liabilities. It is not actively underwriting reinsurance. Its two reportable segments are Diversified Reinsurance and AmTrust Reinsurance; the AmTrust agreements are in run-off. Maiden’s Swedish and UK subsidiaries continue to write limited primary insurance.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $22.0 | $44.7 | $52.0 | $103.9 |
| Net income | $8.1 | $9.2 | $17.4 | $30.1 |
| Gain from preference-share repurchases | $18.7 | — | $81.2 | — |
| Net income available to common shareholders | $26.8 | $9.2 | $98.6 | $30.1 |
| Basic and diluted EPS | $0.31 | $0.11 | $1.14 | $0.35 |
| Net premiums earned | $13.3 | $21.3 | $25.1 | $52.5 |
| Net investment income | $7.3 | $14.3 | $17.1 | $32.3 |
| GAAP combined ratio | 75.6% | 131.8% | 126.6% | 131.7% |
Net income available to common shareholders included the preference-share repurchase gain; excluding that gain, net income was $8.1 million for Q2 and $17.4 million for the first half. Management’s non-GAAP operating earnings were $13.9 million for Q2 and $61.2 million for the first half, versus $1.2 million and $4.4 million, respectively, a measure with adjustments that investors should assess alongside GAAP results. Non-GAAP underwriting losses were $2.4 million for Q2 and $10.7 million for the first half.
Underwriting results benefited from favorable prior-year reserve development of $12.8 million in Q2 and $18.4 million in the first half. This included $10.8 million and $20.7 million, respectively, of development covered by the Cavello LPT/ADC agreement. The GAAP combined ratios therefore should not be read as evidence of comparable current-year underwriting profitability.
Financial position, liquidity and cash flow
- At June 30, total assets were $2.61 billion and shareholders’ equity was $404.2 million, down from $2.95 billion and $527.8 million at year-end 2020. Common shareholders’ equity was $222.8 million; book value per common share was $2.58.
- Loss and loss-adjustment reserves were $1.67 billion, down $218.7 million from December 31, 2020. Reinsurance recoverables on unpaid losses were $565.5 million.
- Senior-note principal was unchanged at $262.5 million, with a net carrying value of $255.2 million. Debt to total capital resources rose to 39.4% from 33.2%, largely as equity declined.
- Investments and cash, including restricted balances, totaled $1.17 billion. Unrestricted cash and fixed-maturity investments were $189.3 million, versus $269.2 million at year-end. Restricted cash and investments used as collateral were about $823 million.
- First-half operating cash flow was negative $185.8 million, primarily reflecting claim payments on run-off reinsurance liabilities. Investing activities provided $251.0 million, substantially from investment sales, maturities and calls. Financing activities used $127.2 million, mainly for preference-share repurchases. Cash and restricted cash decreased $62.1 million to $73.8 million.
- Unfunded investment commitments were $112.0 million in total across other and equity-method investments. The filing also reports $8.5 million of real-estate joint-venture guarantees; management considered potential losses remote and accrued no liability.
Material changes and management commentary
- First-half net premiums earned fell 52.3% year over year, primarily as AmTrust agreements remained in run-off and the German Auto quota-share contract entered run-off on January 1, 2021. Net premiums written declined 96.1% to $0.6 million.
- Net investment income fell 47.0% in the first half, reflecting average invested assets down 22.0% and average book yield down to 1.7% from 2.5%. Management cited lower interest rates and shorter fixed-income duration.
- The company repurchased 8.52 million preference shares for $124.7 million in the first half, recognizing an $81.2 million accounting gain. The remaining authorized amount at June 30 was $25.3 million. No common or preference dividends were paid in the first half; the board had not declared dividends since Q4 2018.
- Management’s strategy emphasizes asset and capital management and legacy services, including Genesis Legacy Solutions, rather than active reinsurance underwriting. Management said current liquidity was adequate for expected needs over the next 12 months, while noting that run-off is expected to continue producing negative operating cash flows.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management said the run-off portfolio needs further maturity and that continued preference-share repurchases depend on reserve development, unrestricted liquidity and cash flows. It expects the asset base to continue declining as claims are paid, with investment and other positive investing cash flows expected to offset negative operating cash flows.
Key risks include uncertainty in reserve estimates and future claim severity; the ability of reinsurers, including Cavello, to meet obligations; collateral and regulatory-capital requirements; market, interest-rate, credit, liquidity and foreign-exchange risks; and potentially restricted redemptions or volatility in alternative investments. COVID-19 claims were described as limited and immaterial to date, but management cautioned that impacts and estimates could change. Fixed-income investments had $5.1 million of unrealized losses at June 30; the filing estimates an immediate 100-basis-point rate increase would reduce their fair value by $27.8 million.
A securities class action related to alleged inadequate AmTrust reserves remained pending. On August 6, 2021, the court denied defendants’ motion to dismiss in part, directed plaintiffs to file a shorter amended complaint, and allowed limited discovery. Maiden said it considers the claims without merit and intends to defend itself. A separate former-employee whistleblower claim also remains in dispute. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and the unusually low GAAP combined ratio reflects favorable prior-year reserve development, particularly amounts covered by the LPT/ADC agreement, rather than current-period underwriting performance?
- Whether future reserve emergence, Cavello recoveries and collateral arrangements support management’s estimates and liquidity expectations.
- Whether investment income and returns from expanded alternative investments can offset declining assets, lower fixed-income yields and ongoing run-off cash outflows.
- The effects of preference-share repurchases on capital, liquidity, common-share value and any future dividend capacity.
- Developments in the securities class action and other contingencies, as well as the timing and cash demands of unfunded investment commitments.