Maiden Holdings, Ltd. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where shown.
Business context
Maiden is restructuring and running off substantial reinsurance business following its sale of U.S. treaty operations and the termination of its AmTrust quota-share agreements effective January 1, 2019. Continuing operations comprise Diversified Reinsurance, focused primarily on European business, and AmTrust Reinsurance, which is in run-off. The changes sharply reduced premiums and shifted the business toward managing existing claims and investments.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net premiums earned | $134.0m | $504.4m | $317.1m | $1,021.2m |
| Net investment income | $31.1m | $34.3m | $63.1m | $67.1m |
| Net income (loss) from continuing operations | $3.3m | $(5.5)m | $(30.0)m | $6.8m |
| Net income (loss), including discontinued operations | $(15.4)m | $2.7m | $(52.0)m | $25.0m |
| Net loss attributable to common shareholders | $(15.4)m | $(5.9)m | $(52.0)m | $7.8m |
| Combined ratio | 136.6% | 108.1% | 132.6% | 105.5% |
| Operating cash flow | Not presented quarterly | $(503.7)m | $56.1m |
Q2 underwriting loss was $39.1m, compared with $32.0m a year earlier; first-half underwriting loss was $81.9m versus $36.7m. The combined ratio above 100% indicates underwriting losses. Net adverse prior-year reserve development was $26.0m in Q2 and $33.3m in the first half, primarily in AmTrust Commercial Auto Liability. Investment realized gains were $24.1m in Q2 and $13.0m for the first half; net investment income declined as average book yield fell to 3.1% from 3.3%.
At June 30, total assets were $4.60bn, total liabilities $4.01bn, and shareholders’ equity $590.6m, including $465.0m of preference shares. Common shareholders’ equity was $125.6m; book value per common share was $1.51, up from $1.08 at year-end, mainly reflecting unrealized investment gains. The loss reserve was $3.05bn. Senior notes had $262.5m principal outstanding ($254.8m net carrying value); debt was 30.8% of total capital resources.
Cash and cash equivalents were $82.5m and restricted cash was $381.7m. Total cash, including restricted cash, was $464.2m; restricted cash and investments totaled $2.87bn. Management reported that collateral and operating cash needs are supported by the investment portfolio, but noted negative operating cash flow is expected to continue through the remainder of 2019. Investing activities provided $630.9m in the first half, largely as investment sales and maturities exceeded purchases.
Material changes versus prior periods
- Net premiums earned fell 73.4% in Q2 and 68.9% in the first half, mainly because AmTrust agreements were terminated and unearned premiums were returned. First-half net premiums written were negative $561.9m, reflecting the return of premium, versus positive $1.14bn in 2018.
- AmTrust Reinsurance’s combined ratio rose to 135.5% for Q2 and 130.3% for the first half, from 106.7% and 103.7%, respectively. The filing attributes deterioration to the changed mix of remaining business, higher loss ratios, adverse reserve development, and a five-percentage-point increase in ceding commission on remaining in-force business.
- Cash flow from operations swung to a $503.7m use, largely due to the AmTrust termination and associated premium and collateral movements. Investing cash flow offset this outflow in the first half.
- Preference and common dividends were not declared or paid in the first half of 2019. Maiden said it had voluntarily agreed not to make capital distributions without the Bermuda Monetary Authority’s consent.
- All held-to-maturity securities were transferred to available-for-sale in Q1 2019 after Maiden determined it could no longer demonstrate intent and ability to hold them to maturity. Unrealized gains contributed to the increase in equity.
Outlook, transactions, and risks
On July 31, 2019, after quarter-end, Maiden and Enstar entered into a loss portfolio and adverse development cover agreement. Enstar’s affiliate is to assume qualifying AmTrust reserves above a $2.179bn retention, up to $600m, for a $445m premium; the agreement provides $155m of adverse development cover over the specified carried reserves. Maiden also agreed with AmTrust to commute specified California and New York workers’ compensation business for a $312.8m payment. The filing states these arrangements, together with other remediation measures, meant Maiden and Maiden Bermuda had sufficient capital to meet their enhanced capital requirements as of July 31, 2019, with solvency levels expected to improve through year-end. The agreements require substantial cash funding and collateral arrangements; the LPT/ADC accounting may defer gains, and further adverse development could cause losses before related gains are recognized.
Management expects lower premiums and investment income to be a larger share of revenue, and expects negative operating cash flow to persist during 2019. It believes available cash, investments, investment income, and runoff collections are adequate for obligations and the next twelve months. New reinsurance business requires BMA approval. The filing provides no quantitative earnings guidance.
- Reserves: Adverse development, particularly in AmTrust Commercial Auto, and the uncertainty of ultimate claims remain significant risks.
- Liquidity and collateral: Most fixed-income investments and cash are restricted or pledged; assess the availability and timing of funds for claims, transaction payments, and operations.
- Counterparty exposure: Maiden has substantial funds-withheld balances and a related-party loan involving AmTrust/AII; the filing identifies risk that these parties may fail to repay or perform.
- Capital and ratings: ECR remediation was completed after quarter-end. A.M. Best withdrew Maiden’s financial strength rating with a final B++ rating and negative outlook.
- Market and legal risks: The portfolio is exposed to interest rates, credit quality, foreign exchange, and investment prepayments; no currency hedges were in force. The filing also describes a securities class action filed in February 2019 and a longstanding former-employee whistleblower proceeding.
Investor facts to verify
- Confirm the terms, funding, collateral, and risk-transfer accounting of the Enstar LPT/ADC and AmTrust commutation, including any subsequent reserve or earnings effects.
- Track AmTrust adverse reserve development, especially Commercial Auto, and compare actual claims emergence with recorded reserves and the agreement’s coverage limits.
- Assess unrestricted liquidity and cash-flow needs against restricted collateral, upcoming claim payments, and transaction funding obligations.
- Verify sustained compliance with Bermuda capital requirements and whether the BMA permits distributions or new business.
- Monitor the reduction in premium base, underwriting performance, expense reductions, investment yields, and progress toward the stated runoff and capital objectives.