Maiden Holdings, Ltd. annual report, FY2019

Maiden Holdings, Ltd. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Amounts below are U.S. dollars.

Business context

Maiden has ceased active reinsurance underwriting and is principally managing runoff of legacy AmTrust reinsurance liabilities, alongside a smaller international insurance and reinsurance business focused on branded auto and credit life products. Its reportable segments are Diversified Reinsurance and AmTrust Reinsurance. Maiden Reinsurance completed its move from Bermuda to Vermont on March 16, 2020, after year-end; the parent remains Bermuda-domiciled.

Financial performance and position

Reported net premiums written were negative $531.9 million in 2019, versus positive $2,014.6 million in 2018, largely reflecting returned unearned premiums after AmTrust contract changes and terminations—not ordinary new-business activity. The reported combined ratio exceeded 100%, indicating underwriting losses. Management’s non-GAAP combined ratio was 123.5% in 2019, excluding the effect of the deferred gain on retroactive reinsurance; it was 127.7% in 2018.

At year-end, unrestricted cash and fixed-maturity investments were $435.0 million. Restricted cash and investments pledged as collateral totaled $1.508 billion. Total investments and cash, including restricted balances, were $1.975 billion. The debt-to-total-capital-resources ratio was 34.1%, compared with 32.1% in 2018; on management’s adjusted basis, including the deferred reinsurance gain, it was 29.7%.

Material changes versus 2018

• Net premiums earned fell 77.9%, principally because both AmTrust quota-share arrangements were terminated effective January 1, 2019 and the company returned unearned premium.
• Maiden paid AmTrust $312.8 million to commute specified workers’ compensation reserves and paid Enstar/Cavello a $445.0 million premium for loss portfolio and adverse development protection, covering up to $600.0 million above an approximately $2.2 billion retention.
• The Enstar agreement generated a $113.0 million deferred gain liability at year-end. The gain is recognized over the settlement period only after covered paid losses exceed the retention; management estimated amortization would not begin before 2024.
• Prior-year adverse reserve development was $112.5 million, down from $403.2 million in 2018. In 2019, adverse development was concentrated in commercial auto liability and general liability, partly offset by favorable workers’ compensation development.
• Operating cash flow swung to a $1.143 billion outflow, while investing activities provided $913.2 million, reflecting runoff, contract terminations, collateral arrangements and related settlements.
• Net investment income fell 28.2%, reflecting lower average investable assets and a lower average book yield (2.7%, versus 3.3%). Investment sales produced $27.9 million of realized gains, compared with $1.5 million of realized losses in 2018.

Outlook, risks and unusual items

• Management planned to reassess strategy during 2020, prioritizing risk-adjusted shareholder returns through asset and capital management, underwriting, or a combination. It said active reinsurance opportunities appeared relatively limited and gave no commitment or timetable to resume underwriting.
• Management expected available cash flows, capital and unrestricted cash and investments to meet obligations, including senior-note payments, but warned that weaker results or increased collateral demands could impair liquidity. The filing provides no specific earnings or revenue guidance.
• Management reported $435.0 million of unrestricted cash and fixed maturities, but 77.6% of total fixed maturities and cash, including restricted balances, was pledged as collateral. It also disclosed $2.2 billion of collateral provided to AmTrust-related entities and significant related-party balances.
• Reinsurance recoverables from Cavello were material: $620.7 million due at year-end across the retrocession and retroactive reinsurance arrangements. The company identified reinsurer collection and collateral sufficiency as risks.
• Loss reserves remain uncertain. Management’s estimated reasonable reserve range indicated potential increases of about $196.4 million, or 8.3%, excluding the LPT/ADC effect. The filing cautions that further adverse development could materially affect results and equity.
• Maiden had no A.M. Best financial-strength rating after withdrawing its rating in February 2019; the last rating was B++ with negative outlook. The lack of a major-agency rating may constrain new business and capital access.
• No common or preference dividends were declared in 2019. The board had not declared preference dividends since the fourth quarter of 2018; by March 15, 2020, preference holders had the right to elect two additional directors after six missed quarterly dividend periods.
• Other notable risks include the AmTrust relationship and related-party conflicts, the 2019 securities class action, a long-running former-employee whistleblower claim, potential NASDAQ listing compliance, currency exposure without hedges, and COVID-19-related economic uncertainty noted in the filing.

Important facts for investors to verify

1. Review reserve development by line and accident year, and the assumptions underlying the $2.440 billion loss and LAE reserve.
2. Verify the LPT/ADC retention, covered losses, collateral terms, collectability of Cavello recoverables, and timing of deferred-gain recognition.
3. Assess liquidity available to the holding company versus restricted assets, subsidiary distribution limits, and the scale and timing of runoff claims.
4. Confirm the terms and payment status of senior notes and preference shares, including missed dividends and resulting preference-holder voting rights.
5. Track Vermont regulatory capital requirements, the company’s post-redomestication strategy, rating status, litigation developments, and NASDAQ listing compliance.