Maiden Holdings, Ltd. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Maiden is transitioning to a substantially smaller run-off-focused reinsurance business following the 2018 sale of its U.S. treaty reinsurance operations and the January 2019 termination or partial termination of AmTrust quota-share agreements. Comparative 2018 operating results were reclassified for discontinued operations.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net premiums written | $(561.5) million | $622.7 million |
| Net premiums earned | $183.1 million | $516.8 million |
| Total revenues | $204.8 million | $553.8 million |
| Net loss from continuing operations | $(33.3) million | Net income $12.3 million |
| Net loss attributable to common shareholders | $(36.6) million; $(0.44) per share | Net income $13.7 million; $0.17 per share |
| Underwriting result; combined ratio | $(42.8) million; 129.6% | $(4.7) million; 102.9% |
| Net investment income; realized investment result | $32.0 million; $(11.1) million | $32.9 million; $0.4 million gain |
| Operating cash flow | $(331.9) million total; $(331.1) million continuing operations | $(32.1) million total; $14.5 million from continuing operations |
Premiums written were negative because of the return of unearned premium under the AmTrust partial termination; the company reported no new business under the terminated quota shares in Q1. The overall loss ratio was 83.0% versus 67.9%, and the expense ratio was 46.6% versus 35.0%. Q1 investing cash flow was $129.8 million, partly offsetting operating outflows; financing cash flow was zero. Cash and restricted cash for continuing operations ended at $131.9 million.
At March 31, total assets were $4.56 billion, total liabilities $3.98 billion, and Maiden shareholders’ equity $584.3 million, including $119.3 million of common shareholders’ equity. Senior notes were $262.5 million principal ($254.7 million net carrying value); debt was 31.0% of total capital resources. Investments and cash, including restricted balances, totaled $3.29 billion. Book value per common share was $1.44, up from $1.08 at year-end, principally reflecting unrealized investment gains recorded in other comprehensive income.
Material changes and management commentary
- Net premiums earned fell 64.6% year over year, largely due to the AmTrust contract actions. Q1 net premiums written included the substantial return of unearned premiums.
- AmTrust Reinsurance’s combined ratio rose to 126.5% from 100.9%, reflecting a changed mix of earned business, a five-percentage-point increase in ceding commission on remaining in-force business, and $8.1 million of adverse prior-year development. Total prior-year adverse development was $7.3 million, principally in AmTrust commercial auto liability.
- Diversified Reinsurance’s combined ratio was 102.5% versus 101.5%; written premiums fell 69%, partly from non-renewals and reduced German auto business. The sale of AVS reduced fee revenue; its sale also contributed $4.3 million to foreign-exchange and other gains.
- Management said operating costs have been reduced and are under further review. It expects lower premiums and operating cash flow to continue during 2019, with claims and expenses funded from cash, investments, premiums on in-force/run-off contracts, investment income, and investment maturities or sales. Management considers liquidity adequate for the next 12 months, but expects negative operating cash flows to be offset by investing cash flows.
- The investment portfolio generated substantial unrealized gains as interest rates declined; accumulated other comprehensive loss improved to near zero. The company reclassified all held-to-maturity securities to available-for-sale after concluding it could no longer demonstrate intent and ability to hold them to maturity. Realized investment losses were mainly associated with transfers connected to the AmTrust transactions.
Outlook, risks, and contingencies
- Maiden and its Bermuda reinsurance subsidiary did not meet Bermuda Group Enhanced Capital Requirement standards at March 31; the Group Minimum Solvency Margin was expected to be met. The condition was reported to the Bermuda Monetary Authority. Management expected the Enstar transaction, subject to approvals and closing conditions, to improve capital adequacy; the filing does not provide a definitive completion date or assurance of approval.
- The pending Enstar loss portfolio transfer/adverse development cover is structured to assume specified AmTrust reserves above a $2.441 billion retention, up to $675 million, and provide $175 million of adverse development cover. Cumulative ceded losses above $500 million may create a deferred gain, potentially producing significant interim losses before later recognition.
- The company voluntarily agreed not to make capital distributions, including common or preference dividends, without BMA consent. No preference or common dividends were declared or paid in Q1.
- Concentrated counterparty exposure remains important: $575 million was held by AmTrust under a funds-withheld arrangement at 3.5% interest, and the company also reported related-party loans, funds withheld, and collateral arrangements. Restricted cash and investments were approximately $3.0 billion, limiting their availability for general use.
- A.M. Best withdrew its financial strength rating in February 2019, with a final rating of B++ (Good) and a negative outlook. The filing notes foreign-exchange, interest-rate, credit, reserve-estimation, and liquidity risks; the company had no currency hedges in force at quarter-end.
- A securities class action filed in February 2019 alleges misrepresentations concerning risk management and underwriting. Maiden said it believed the claims were without merit and intended to defend itself; the effects of potential additional litigation were uncertain.
Key facts for investors to verify
- Whether the Enstar LPT/ADC agreement received regulatory approval, closed, and delivered the anticipated capital relief; verify final retention and settlement terms.
- Final AmTrust unearned-premium adjustments and collection of the estimated $46.5 million return due to Maiden Bermuda.
- Actual claims emergence, reserve development, and the timing and accounting effects of deferred gains under the Enstar retroactive reinsurance arrangement.
- Cash availability and capital compliance, distinguishing unrestricted cash and investments from collateralized or restricted assets; monitor BMA approval requirements for distributions and new business.
- Run-off underwriting performance, expense reductions, investment losses or gains, and developments in the securities litigation and rating status.