Best’s News & Research Service - November 14, 2018 05:13 PM (EST)
A.M. Best Downgrades Credit Ratings of Maiden Holdings, Ltd. and Insurance Subsidiaries
- November 14, 2018 05:13 PM (EST)
Oldwick //BestWire// - A.M. Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb” from “bbb-” of Maiden Holdings, Ltd. [NASDAQ: MHLD] (Pembroke, Bermuda) and its downstream intermediate holding company, Maiden Holdings North America, Ltd. (MHNA) (Delaware). All Long-Term Issue Credit Ratings (Long-Term IR) of MHLD and MHNA also have been downgraded (see below for detailed list). At the same time, A.M. Best has downgraded the Financial Strength Rating to B++ (Good) from A- (Excellent) and the Long-Term ICR to “bbb” from “a-” of Maiden Reinsurance, Ltd. (Maiden Re) (Pembroke, Bermuda), Maiden Holdings’ primary operating subsidiary, and Maiden Reinsurance North America, Inc. (MRNA) (Jefferson City, MO), the U.S. operating affiliate of Maiden Re. The ratings remain under review with negative implications. See below for a list of issues and ratings.
The Credit Ratings (ratings) reflect Maiden Re’s balance sheet strength, which A.M. Best categorizes as strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).
The balance sheet strength assessment reflects the historical levels of risk-adjusted capitalization and the group’s conservative investment portfolio. As noted in MHLD’s third quarter 2018 10-Q filing, at Sept. 30, 2018, risk-adjusted capital levels declined substantially from their year-end 2017 levels as action was taken with respect to its reserves in advance of signing a loss portfolio transfer (LPT) agreement with Enstar Group Limited (Enstar) for the loss reserves related to its quota share reinsurance with AmTrust Financial Services, Inc. (AmTrust), a related party to MHLD. Earlier in the third quarter, MHLD and Enstar also entered into an agreement whereby Enstar will acquire MRNA, in addition to assuming the liabilities associated with MHLD’s reserves for its U.S. Diversified business segment in Maiden Re via novation and retrocession agreements. Finally, during the third quarter MHLD entered into and immediately closed a renewal rights transaction with Transatlantic Reinsurance Company for the existing portfolio of its U.S. treaty reinsurance portfolio.
As of Sept. 30, 2018, regulatory approval for the U.S. Diversified transactions with Enstar was pending, leaving the associated reserves on MHLD’s books. In conjunction with those agreements, MHLD wrote off goodwill and intangible assets related to that business of approximately $74 million. At the same time, the reserves related to the AmTrust business were increased by approximately $200 million. In combination with other losses, equity declined by over $300 million in the quarter. As a result, the group’s risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) has declined. However, the announced transactions are projected to improve risk-adjusted capital calculated by BCAR. Should the transactions not have the expected impact on risk-adjusted capital, further negative rating action may be taken.
Operating performance has been assessed as marginal, as A.M. Best expects MHLD to post a third consecutive underwriting loss and a substantial net loss for the full year 2018, based on year-to-date results. While the adverse loss reserve development that has driven a significant portion of the losses will be removed from the group’s books by the transactions, future performance will be dependent on its ability to complete and successfully implement its strategic review.
The limited business profile reflects recent and expected changes in MHLD’s operations. While MHLD’s business was historically concentrated in its AmTrust segment, which accounted for approximately 70% of its 2017 business, its Diversified segment was an important factor in the previous neutral assessment of the organization’s business profile. MRNA had a niche in providing proportional reinsurance programs to local and regional insurance companies in the United States, which gave it a unique role within the global reinsurance industry. A.M. Best expects the AmTrust quota share reinsurance agreement to produce materially less premium going forward. With the sale of the Diversified business and the reduction in the AmTrust assumption, the group’s profile within the global reinsurance market will be reduced. The group will continue to generate business through its International Insurance Services (IIS) platform, but that niche product, in combination with the continuing AmTrust relationship, is supportive of a limited business profile assessment.
The appropriate assessment of ERM reflects the expectations at the “bbb” rating level, and that the assessments of other building blocks reflect areas where the effectiveness of the ERM program has been challenged.
The ratings will remain under review pending completion of the announced transactions and management’s strategic review, and while A.M. Best assesses their impact. The failure of the transactions to have the expected effect on risk-adjusted capital could result in negative rating action, as could further material reductions in the group’s equity in the interim.
The following Long-Term IRs have been downgraded, the under-review with negative implications status maintained:
Maiden Holdings, Ltd.—
—to “bb” from “bbb-” on $110 million 6.625% senior unsecured notes, due 2046
—to “b+” from “bb” on $165 million 7.125% preferred non-cumulative stock
—to “b+” from “bb” on $150 million 8.25% preferred stock
—to “b+” from “bb” on $150 million 6.7% preferred stock
Maiden Holdings North America, Ltd.—
—to “bb” from “bbb-” on $152.5 million 7.75% senior unsecured notes, due 2043
The following indicative Long-Term IRs under the shelf registration have been downgraded, the under review with negative implications status maintained:
Maiden Holdings, Ltd.—
—to “bb” from “bbb-” on senior unsecured debt
—to “bb-” from “bb+” on subordinated debt
—to “b+” from “bb” on preferred stock
Maiden Holdings North America, Ltd.—
—to “bb” from “bbb-”on senior unsecured debt
—to “bb-” from “bb+” on senior subordinated debt
—to “b+” from “bb” on junior subordinated debt
This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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