Maiden Holdings, Ltd. quarterly report, Q2 FY2023

Maiden Holdings, Ltd. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise noted.

Business context

Maiden is managing a run-off reinsurance portfolio while pursuing legacy transactions through Genesis Legacy Solutions (GLS), asset management and capital management. It is not underwriting new prospective reinsurance risks. Its two reportable segments are Diversified Reinsurance and AmTrust Reinsurance, with the latter primarily comprising terminated, run-off AmTrust arrangements. Management is evaluating the strategic value of its Scandinavian insurance subsidiaries and expects that review to continue in the second half of 2023.

Financial performance and position

Q2 2023 net loss included $4.5m of adverse prior-year loss development and $2.6m of foreign exchange and other losses. Investment results were a partial offset: net investment income rose, and equity-method investments contributed $4.8m of income versus a $3.0m loss in Q2 2022. For the first half, adverse prior-year development was $8.2m, compared with $6.3m of favorable development in the prior-year period. Reported 2022 common-shareholder income included gains from preference-share repurchases of $24.7m in Q2 and $28.2m for the first half; excluding those gains, 2022 results were substantially weaker than the headline comparison suggests.

Net premiums earned were $11.0m in Q2 and $20.0m for the first half, up 5.7% and 73.3%, respectively, from 2022. Growth in Diversified Reinsurance reflected new Credit Life programs; comparisons in AmTrust were affected by significant negative premium adjustments in 2022. Segment underwriting losses in Q2 were $3.1m for Diversified Reinsurance and $6.1m for AmTrust Reinsurance; first-half losses were $5.1m and $12.4m, respectively. Management’s non-GAAP operating earnings were $4.5m for Q2, versus $16.6m in 2022, and a loss of $3.4m for the first half, versus earnings of $9.7m.

Net investment income improved with higher yields: annualized average book yield was 4.2% for Q2 and 4.0% for the first half, compared with 2.0% and 1.9% in 2022. Drivers included floating-rate holdings, higher interest on funds withheld and a higher rate on the $168.0m related-party loan.

At June 30, total assets were $1.665bn, shareholders’ equity $269.3m and book value per common share $2.65, down from $2.80 at year-end 2022. Adjusted book value per share, a non-GAAP measure that adds the unamortized LPT/ADC deferred gain, was $3.22. Loss and loss-adjustment reserves were $1.001bn, down from $1.131bn at year-end. Senior-note principal was $262.4m and net carrying value was $254.5m; debt was 49.3% of total capital resources (44.5% on management’s adjusted basis). Unrestricted cash, cash equivalents and fixed maturities totaled $82.2m. Cash and restricted cash together were $27.5m at period-end.

For the first half, operating cash flow was $(63.7)m, investing cash flow was $45.2m and financing cash flow was $(0.9)m; cash and restricted cash decreased $19.2m. Investable assets, as defined by the company, fell to $1.06bn from $1.24bn at year-end, reflecting run-off and claims payments. Restricted cash and investments held as collateral were $232.6m.

Material changes and notable items

• Adopted the expected-credit-loss standard on January 1, 2023, recording a $5.5m opening retained-earnings adjustment. At June 30, allowances included $4.5m on reinsurance recoverables, $1.0m on direct-lending investments, and smaller allowances on receivables and funds withheld.
• The deferred gain on retroactive reinsurance rose to $60.0m, including $57.7m under the Cavello LPT/ADC agreement. Related covered adverse development increases the deferred gain; management expects amortization under the LPT/ADC agreement to begin only after losses exceed the minimum retention, estimated in 2025.
• Maiden Reinsurance repurchased 299,630 common shares for approximately $0.6m under the existing authorization. The company also repurchased $95,000 of senior notes. The board authorized up to $100m of senior-note repurchases; $99.9m remained authorized at quarter-end.
• The company had $103.7m of unfunded alternative-investment commitments and $43.1m of guarantees to real-estate joint-venture lenders. Management assessed the likelihood of guarantee losses as remote and recorded no liability.

Outlook, risks and contingencies

Management expects negative overall cash flows and a shrinking asset base to continue through the remainder of 2023 and beyond as legacy claims run off. It believes available liquidity is adequate for the next 12 months, using cash and investments, premium collections, investment income and investment-sale proceeds. This is not earnings guidance. Management continues to assess legacy transactions, insurance distribution opportunities and whether selective prospective reinsurance could offer appropriate risk-adjusted returns; it has no immediate plan to resume prospective underwriting. The company’s stated strategic hurdle is returns above its 7.6% weighted-average effective debt cost.

Key risks include reserve uncertainty and further adverse development; the collectibility and timing of reinsurance recoverables, particularly those involving Cavello and AmTrust; reliance on subsidiary distributions subject to regulatory limits; collateral and liquidity demands; foreign-exchange exposure, with no hedges in force; interest-rate and credit-spread changes; and alternative-investment valuation, liquidity and redemption restrictions. A 100-basis-point immediate rate increase was estimated to reduce fixed-maturity fair value by $7.3m, assuming unchanged credit spreads. Management reported no material changes to the risk factors in its 2022 Form 10-K.

A securities class action alleging, among other things, inadequate AmTrust loss reserves remains pending; the company says it intends to defend itself and expects to file a dispositive motion. A separate former-employee whistleblower matter was summarily affirmed in the company’s favor by the Department of Labor Administrative Review Board on June 29, 2023. Management reported disclosure controls were effective and no material change in internal control during the quarter.

Important facts for investors to verify

• Whether adverse loss development continues, particularly in AmTrust General Liability and Commercial Auto Liability, and how actual reserve emergence compares with estimates.
• The collateralization, collectibility and timing of Cavello LPT/ADC and other reinsurance recoverables, including the $4.5m credit-loss allowance.
• Whether operating cash outflows, claims payments and collateral requirements remain manageable against unrestricted liquidity and regulatory dividend capacity.
• Performance, valuation and liquidity restrictions of alternative investments, which totaled $268.6m and represented 99.7% of reported shareholders’ equity.
• Whether investment returns can sustainably exceed the company’s 7.6% debt-cost benchmark, and the impact of currency and interest-rate movements.
• Developments in the AmTrust-related class action, the Maiden LF/GF strategic review, and the company’s capital-allocation and repurchase plans.