Maiden Holdings, Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. Maiden is largely in run-off and is not actively underwriting reinsurance.
Business context and material developments
- The company continues to run off its AmTrust reinsurance agreements, terminated effective January 1, 2019, alongside its remaining diversified reinsurance business. Q1 2020 premiums earned therefore reflect legacy exposures, not a return to active underwriting.
- On March 16, 2020, principal operating subsidiary Maiden Reinsurance completed its re-domestication from Bermuda to Vermont. Maiden NA now owns 100% of that subsidiary. The company said the change better aligns capital with liabilities and may strengthen capital efficiency; Vermont regulators may need to approve future business or capital initiatives.
- Management said it would continue reassessing its operating strategy during 2020, focusing on risk-adjusted shareholder returns through asset and capital management, active underwriting, or a combination. It viewed near-term active reinsurance opportunities as comparatively limited. No specific earnings or revenue guidance was provided.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $59.1 million | $204.8 million |
| Net income (loss) | $20.9 million | $(36.6) million |
| Net income (loss) per common share | $0.25 | $(0.44) |
| Net premiums earned | $31.2 million | $183.1 million |
| Underwriting loss | $3.7 million | $42.7 million |
| Combined ratio | 131.6% | 129.9% |
| Net investment income | $18.0 million | $32.0 million |
| Net cash used in operating activities | $218.5 million | $331.9 million |
- Net income improved by $57.5 million year over year. Management cited lower underwriting losses, $11.0 million of realized investment gains versus $11.1 million of realized losses, and $8.2 million of foreign-exchange and other gains. Non-GAAP operating earnings were $3.1 million, compared with a $27.6 million loss in Q1 2019; this measure excludes specified investment, foreign-exchange, and other items.
- Premiums earned fell 83.0%, primarily as AmTrust business ran off. Q1 2019 net premiums written were negative $561.5 million, largely because of the return of unearned premiums under the AmTrust partial termination; Q1 2020 net premiums written were $10.4 million. Diversified Reinsurance earned premiums fell 50.5% to $12.5 million, while AmTrust Reinsurance earned premiums fell 88.2% to $18.7 million.
- The combined ratio worsened to 131.6%, above 100%, indicating an underwriting loss before investment income. The total underwriting loss narrowed substantially, but segment combined ratios remained above 100%: 105.4% for Diversified Reinsurance and 116.1% for AmTrust Reinsurance.
- Investment income declined 43.9%, reflecting a 34.4% decrease in average investable assets and a lower average book yield (2.7% versus 3.1%). The company recorded $1.5 million of other-than-temporary impairment losses on two securities.
- Comprehensive loss was $23.3 million, despite net income, as other comprehensive loss was $44.1 million, mainly from unrealized investment losses.
Financial position, liquidity and capital
- At March 31, 2020, total assets were $3.322 billion, total liabilities $2.837 billion, and shareholders’ equity $485.0 million. Common shareholders’ equity was $20.0 million; reported book value per common share was $0.24, down from $0.51 at December 31, 2019.
- Fixed maturities had a fair value of $1.509 billion versus amortized cost of $1.531 billion. Gross unrealized losses were $52.8 million, compared with $17.6 million at year-end 2019. Management attributed market pressure largely to wider credit spreads and pandemic-related volatility; it said it believed the portfolio’s amortized cost would ultimately be recovered.
- Cash and cash equivalents were $60.1 million, with a further $117.9 million restricted. Unrestricted cash and fixed maturity investments totaled $389.1 million. Broader investable assets, including restricted balances, the related-party loan and funds withheld receivable, were $2.6 billion.
- Operating cash outflow of $218.5 million was partly offset by $288.5 million of investing cash inflow, primarily investment sales, maturities and calls used to fund claims. Management expected negative operating cash flow to continue during run-off, partly offset by investing cash flows, and stated that available liquidity was adequate for the next 12 months.
- Loss and loss-adjustment reserves were $2.249 billion, down from $2.440 billion at year-end; reinsurance recoverables on unpaid losses were $620.9 million. Senior note principal remained $262.5 million, with net carrying value of $255.0 million. Debt was 35.1% of total capital resources, up from 34.1%.
- Restricted cash and investments used as collateral totaled $1.297 billion. Following the Vermont re-domestication, collateral requirements under the AmTrust arrangements increased, including a 110% funding requirement for the AmTrust quota share, subject to stated terms.
Risks, contingencies and unusual items
- COVID-19 and markets: Management said the pandemic had adversely affected results, financial condition, liquidity and capital resources. No COVID-19 claims had been received as of the filing, and management assessed exposure as limited and immaterial, but warned that loss and reinsurance-recovery estimates could change materially. Further market declines could require additional capital or collateral, reduce subsidiary dividend capacity, and pressure liquidity.
- Run-off, claims and recoverables: The company remains exposed to reserve-estimation uncertainty and to counterparty performance on reinsurance recoverables, including substantial AmTrust-related balances. It remains liable to policyholders if reinsurers fail to pay. The LPT/ADC agreement with Cavello provides up to $155 million of adverse-development cover above carried AmTrust reserves, subject to its terms; the $112.95 million deferred gain is not expected to be amortized until paid losses exceed the retention, estimated in 2024.
- Litigation: A securities class action alleges, among other matters, inadequate AmTrust-related loss reserves and resulting securities-law violations. Plaintiffs filed an amended complaint on May 1, 2020; the company said it considers the claims meritless and intends to defend itself. The long-running former executive whistleblower matter also remains disclosed.
- NASDAQ listing: After receiving notice that it had not regained compliance, the company appealed the proposed delisting. The appeal stayed delisting pending the hearing, scheduled for July 23, 2020.
- Other: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reports no material change in previously disclosed commitments and contingencies.
Most important facts for investors to verify
- Whether the company can meet claims and collateral needs while operating cash flows remain negative and significant assets are restricted.
- How COVID-19 affects investment values, regulatory capital, collateral requirements, subsidiary dividend capacity and potential insurance claims.
- Actual development and collectability of loss reserves and reinsurance recoverables, including the AmTrust and Cavello arrangements and the deferred gain’s recognition timetable.
- Whether the securities litigation or NASDAQ appeal produces material developments after the filing date.
- Whether management’s strategic review leads to active underwriting or other capital-allocation actions, and how those actions affect shareholder value.