Maiden Holdings, Ltd. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
Maiden is largely in run-off following the sale of its U.S. treaty reinsurance business and termination of its AmTrust quota-share agreements effective January 1, 2019. It is not actively underwriting reinsurance, but continues to run off existing liabilities and operates a limited international insurance and fee-generating business. Its reportable segments are Diversified Reinsurance and AmTrust Reinsurance. Maiden Reinsurance re-domiciled from Bermuda to Vermont on March 16, 2020.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenues | $40.4 | $121.2 | $144.3 | $516.0 |
| Net premiums earned | $24.3 | $94.9 | $76.8 | $412.0 |
| Net investment income | $12.7 | $13.2 | $45.0 | $76.4 |
| Net income (loss) | $2.2 | $(58.3) | $32.2 | $(110.4) |
| GAAP combined ratio | 109.4% | 191.2% | 124.6% | 146.0% |
| Operating cash flow | — | $(447.7) | $(949.3) |
Q3 underwriting income was $3.4 million versus an $80.3 million loss a year earlier; nine-month underwriting loss narrowed to $0.3 million from $162.1 million. Improvement reflected much lower losses and favorable prior-year reserve development, against a substantially smaller run-off premium base. The nine-month GAAP result also benefited from the absence of the prior-year discontinued-operations loss. Q3 net income included $4.1 million of realized investment gains and $6.5 million of foreign-exchange and other losses. Nine-month realized gains were $24.0 million; net investment income fell 41.1% year over year as average investable assets declined 34.2%.
The reported loss ratio was 36.9% for Q3 and 52.9% for the first nine months. Prior-year reserve development was favorable by $7.2 million and $7.8 million, respectively, versus adverse development of $63.2 million and $96.5 million in the comparable 2019 periods. Management’s non-GAAP measures tell a more cautious underwriting story: non-GAAP combined ratios were 141.3% for Q3 and 136.5% year to date, excluding the benefit of reserve development ceded under the LPT/ADC agreement.
Financial position and liquidity
- Total assets were $3.055 billion at September 30, down from $3.568 billion at December 31, 2019. Shareholders’ equity was $538.1 million, including $465.0 million of preference shares; common shareholders’ equity was $73.1 million.
- Cash and cash equivalents were $91.7 million and restricted cash was $98.2 million. Unrestricted cash and fixed-maturity investments totaled $319.7 million, versus $435.0 million at year-end. Total investable assets were $2.4 billion.
- Operating cash outflow of $447.7 million was primarily related to claim payments and the run-off of reinsurance liabilities. Investing activities provided $528.7 million, and cash, restricted cash and equivalents ended at $189.9 million. Management said liquidity was adequate for the next 12 months, while expecting negative operating cash flow to continue.
- Loss and loss-adjustment reserves declined to $1.975 billion from $2.440 billion. Reinsurance recoverables on unpaid losses were $597.7 million; the deferred gain on retroactive reinsurance was $80.0 million.
- Senior-note principal remained $262.5 million, with a 6.625% tranche due 2046 and a 7.75% tranche due 2043. Debt to total capital resources was 32.8%, compared with 34.1% at year-end.
Changes, outlook and material risks
- Premiums and investment income fell as the business continued to contract. Negative AmTrust premiums written reflect run-off adjustments and returns after contract termination, not new underwriting growth. Diversified Reinsurance premiums also declined, particularly in German auto programs and European Capital Solutions.
- Management is evaluating capital and asset-management opportunities and has not provided quantified earnings or underwriting guidance. It said current assessment favors capital and asset management over active reinsurance underwriting, while retaining the option to reconsider underwriting. Any capital actions depend on the run-off and loss-development outlook.
- After quarter-end, Maiden Reinsurance announced an offer to buy up to $100 million of Series A, C and D preference shares for cash. The company had not declared or paid preference-share dividends since Q4 2018; the offer’s completion and final amount were not assured.
- The LPT/ADC agreement with Enstar affiliate Cavello covers specified AmTrust reserves above a $2.179 billion retention, with up to $600 million of cover and $155 million of adverse-development cover. The deferred gain is not expected to amortize until paid losses exceed the minimum retention, estimated by the company to occur in 2024. The company remains exposed to collection, counterparty and collateral risks.
- COVID-19 effects were uncertain. Maiden described investment-market volatility, lower yields, possible additional capital or collateral needs, and potential liquidity pressure. It considered existing COVID-19 insurance exposure limited and immaterial at the time, but said loss and recoverable estimates could change materially.
- Other risks include foreign-currency exposure (no hedges were in force), reserve-estimation uncertainty, and a securities class action alleging inadequate AmTrust-related reserves. The company disputes the claims and intends to defend itself. A long-running former-employee whistleblower matter also remains pending; the filing does not quantify potential exposure.
Important facts for investors to verify
- Whether favorable reserve development persists, and how ultimate losses compare with carried reserves—especially for AmTrust workers’ compensation, commercial auto and general liability.
- The collectability and collateral terms of the Cavello LPT/ADC recoverables, the timing of deferred-gain recognition, and remaining exposure to AmTrust-related obligations.
- Run-off cash requirements, available unrestricted liquidity, regulatory capital and collateral requirements, and the effect of restricted assets on funds available to the holding company.
- Investment portfolio credit quality, concentrated exposures, lower yields and realized or impairment losses; fixed maturities included $43.954 million rated BB or lower at September 30.
- Outcome and financial effects of the preference-share purchase offer, unpaid preference dividends, and the pending litigation. The filing provides no assurance of future preference dividends or further repurchases.