Maiden Holdings, Ltd. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial amounts below are in U.S. dollars; figures are rounded to millions unless noted. The filing presents the U.S. treaty reinsurance business as discontinued operations following the decision to divest it.
Business context and strategic transactions
- Maiden’s continuing business comprised Diversified Reinsurance, focused primarily on Europe, and AmTrust Reinsurance. AmTrust accounted for 93.5% of Q3 gross premiums written and 93.2% for the first nine months.
- Maiden sold U.S. treaty reinsurance renewal rights to TransRe on August 29 for $7.5 million, subject to possible additional amounts. It agreed to sell Maiden US to Enstar for $321.5 million, subject to closing adjustments and regulatory approvals. Related novation and retrocession transactions carry aggregate ceding commissions of $14 million; Maiden also agreed to provide up to $25 million of adverse-development cover under specified conditions.
- On November 9, after quarter-end, Maiden signed a further agreement for an Enstar subsidiary to assume $2.675 billion of net loss reserves associated with AmTrust quota-share contracts as of June 30, subject to adjustment for paid claims, approvals and other closing conditions. The AmTrust contracts remained in force at the filing date.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net premiums earned | $520.1m | $457.3m | $1,541.3m | $1,512.4m |
| Total revenue | $555.7m | $496.6m | $1,649.7m | $1,620.2m |
| Loss from continuing operations | $(229.1)m | $(45.1)m | $(230.9)m | $(27.8)m |
| Net loss, including discontinued operations | $(300.2)m | $(55.1)m | $(275.2)m | $(44.9)m |
| Loss per common share | $(3.72) | $(0.74) | $(3.62) | $(0.76) |
| Combined ratio, continuing operations | 150.7% | 115.6% | 120.7% | 106.3% |
- Underwriting losses were $251.2 million in Q3 and $287.9 million for the nine months. Net loss and loss-adjustment expenses were $600.3 million and $1,323.5 million, respectively.
- Adverse prior-year loss development was $212.5 million in Q3 and $250.5 million year to date. AmTrust accounted for $210.4 million and $247.3 million, respectively; workers’ compensation was a principal source, with additional development in other lines.
- Excluding prior-year development, the reported combined ratios would have been 107.6% for Q3 and 102.4% for the nine-month AmTrust segment; management also cited higher initial loss ratios and elevated current-year activity in Specialty Risk and Extended Warranty.
- Net investment income rose 11.2% to $34.4 million in Q3 and 10.9% to $101.5 million year to date. Net realized investment results shifted to losses of $0.2 million and $0.3 million, respectively, from gains in the prior-year periods.
- Discontinued operations produced losses of $71.1 million in Q3 and $44.3 million for the nine months. Q3 included a $66.7 million disposal loss, reflecting a $74.2 million write-off of goodwill and intangibles partly offset by renewal-rights proceeds.
Financial position, cash flow and liquidity
- At September 30, total assets were $6.54 billion and total liabilities $5.76 billion. Investments were $3.84 billion; cash and cash equivalents were $94.6 million, with an additional $170.0 million restricted. Continuing-operations cash and restricted cash totaled $264.6 million.
- Loss and loss-adjustment reserves were $2.85 billion, up $465.0 million from year-end 2017. Unearned premiums were $1.30 billion.
- Senior-note principal remained $262.5 million ($254.6 million net carrying value). Maiden shareholders’ equity was $772.6 million, including $465.0 million of preference shares; common shareholders’ equity was $307.6 million. Book value per common share fell to $3.71 from $9.25 at year-end, while debt to total capital resources increased to 25.4% from 17.6%.
- Operating cash flow was $162.6 million for the nine months, down from $374.8 million. Continuing-operations operating cash flow was $217.2 million versus $328.5 million. Total cash and restricted cash increased $124.8 million, including discontinued operations.
- Unrealized losses on fixed maturities totaled $115.3 million at quarter-end; Maiden shareholders’ accumulated other comprehensive loss was $116.4 million. Management attributed investment-market declines primarily to rising interest rates and wider credit spreads.
- Management stated that liquidity sources were adequate for the next 12 months, but also disclosed that, pending the transactions, the group did not meet Bermuda’s Group Minimum Solvency Margin and Enhanced Capital Requirement at September 30. Maiden notified the BMA; it was not paying dividends from Maiden Bermuda without BMA consent.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management’s stated long-term target is a 15% non-GAAP operating return on average common equity; reported returns were deeply negative in 2018.
- Maiden expected the Maiden US sale transactions to close in Q4 2018, subject to regulatory approvals and customary conditions. It said the 2013 Senior Notes’ redemption conditions might exist and that it expected to redeem the $152.5 million notes if its final analysis confirmed this.
- AmTrust quota-share agreements were subject to renewal negotiations; their stated expirations were March 31 and June 30, 2019. The parties extended the non-renewal notice deadline to January 31, 2019. The business remained highly concentrated in AmTrust and related-party balances and collateral arrangements.
- Principal risks include reserve estimation and further adverse development, completion or termination of the Enstar transactions, regulatory capital and dividend restrictions, AmTrust relationship and renewal outcomes, investment-value sensitivity, and foreign-exchange exposure. Maiden reported A.M. Best ratings of A- with a negative outlook and no currency hedges in place. A long-running former-executive whistleblower claim remained pending; the company said it believed the claim lacked merit and would defend it.
Important facts for investors to verify
- Whether the Maiden US sale and the separate $2.675 billion reserve-transfer agreement closed, received all required approvals, and produced the expected cash, capital and reserve effects.
- Whether Maiden restored compliance with Bermuda solvency requirements and obtained BMA consent for any subsidiary dividends.
- Subsequent development of the AmTrust-related reserves, including workers’ compensation, and the adequacy of remaining adverse-development protection.
- Whether AmTrust agreements were renewed or terminated after the January 2019 notice deadline, and the resulting premium concentration and earnings profile.
- Changes in common equity, book value, liquidity, debt redemption and investment marks; also verify the terms and status of the disclosed preferred and common dividends.