Maiden prepares plans for unrated future

Maiden Holdings is working on plans to drop its AM Best rating, heavily curtail its third-party reinsurance business and refocus its business towards the management of its $5bn of float, The Insurance Insider can reveal.

The reinsurer is in the spotlight after its CEO and CFO left the business, it cut its dividend and strengthened reserves – with the share price collapsing as much as 45 percent in trading yesterday.

Sources told this publication that Maiden, which was founded by the Karfunkel family, will look to continue with a small part of its current $800mn-premium “diversified business” on a collateralised basis.

But with that book being slashed in size, the company is likely to downsize its employee base – which was 219 at year-end – to fewer than 50.

AM Best downgraded Maiden’s financial strength rating to A- with a negative outlook in March and it seems likely that a combination of capital pressure, a weak underwriting result and management turnover would have imperilled the lower rating.

Maiden will have to pass through a series of commutations with many of its existing clients, given that many will be unwilling to stick with unrated reinsurance capacity.

As previously reported, Maiden had been working with Bank of America Merrill Lynch on a strategic process in which it looked to dispose of the diversified business.

The Bermuda-domiciled reinsurer has been in talks with legacy company Catalina – which has built a 5 percent stake in Maiden – about selling the back-year book for the non-AmTrust business.

And, although a deal could still be consummated, it is understood that the two sides have not been able to reach agreement on a price for the roughly $1bn-reserve book – potentially pointing to an in-house run-off.

As highlighted ahead of the results by this publication, Maiden is under some capital pressure after the Bermuda Monetary Authority increased its capital requirements owing to changes in the way it considers cat risk, prompting a cut to its dividend from $0.15 to $0.05.

Sources said that Maiden is still above its solvency capital requirements – or it would not have paid a dividend – and the capital position would cease to be an issue quickly if there is a huge reduction in the size of the diversified book.

 

Quota share deadline extended

Yesterday, Maiden and AmTrust said they had extended the deadline for deciding the fate of the roughly 40 percent quota share agreement between the two linked companies.

Last year, $1.95bn of premiums were ceded under the quota share, representing 71 percent of Maiden’s assumed premiums.

The two firms now have until 31 September to decide whether or in what form to keep the quota share going.

Sources said that the extension would give AmTrust time to complete its take-private with private equity house Stone Point.

A final decision on the continuation of the arrangement will not be taken until nearer the deadline, but sources suggested there was a good chance that Maiden would continue to assume business from AmTrust.

However, it is understood that with AmTrust’s capital position far stronger following a succession of actions, the size of the cession is likely to fall.

Maiden already posts collateral with the AmTrust quota share, so the business is not reliant on Maiden’s rating.

If the Bermuda-domiciled reinsurer no longer has to support an AM Best rating, it will be able to follow unrated legacy market players like Enstar and Catalina in running a more aggressive asset management strategy to drive improved returns.

However, it is worth noting that there are restrictions to what you can do with the assets in a collateralised account owing to the way that collateralisation works.

The pivot away from being a business focused on underwriting towards a business focused on asset management, run-off and managing a small number of relationships was already potentially flagged by the decision to promote general counsel Lawrence Metz to CEO.

Art Raschbaum, Maiden CEO since 2008, will step down on 1 September; the company has cited “personal reasons” for the change. CFO Karen Schmitt, who has been in post since 2014, is also leaving. However, she will stay in place until 1 March next year.

Patrick Haveron, currently president of Maiden Reinsurance Ltd, will take on her position and also serve as chief operating officer.

As markets digested the results, executive departures and the lack of progress on monetising the “diversified reinsurance” business through M&A transactions, the share price of the business crashed.

After closing on Wednesday at $7.50, the shares fell steeply and continued to slide through the day, reach a low of $4.15 – down 45 percent. The shares posted a modest recovery just before the bell to close yesterday at $4.40, down 41.3 percent. This valued the business at 0.57x book.

In its earnings release, Maiden said that it was continuing to “evaluate a broad range of options” as part of the strategic review that it was running.

However, it drew a line under the idea of selling the diversified business by saying that it would “be maintaining a substantial presence in the US reinsurance market”.

It added that it expects to complete its strategic review during the second half of 2018, with the majority of the initiative completed during the third quarter.

In addition, it said that it would look to improve results in the diversified segment via “enhanced underwriting standards and expense reduction”.

Maiden reported an operating loss of $10.7mn in the second quarter on a combined ratio of 106.0 percent, with $36mn of adverse development on prior years.

Maiden declined to comment.