AM Best downgrades Maiden Holdings ratings
AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb” from “bbb-” of Maiden Holdings and its downstream intermediate holding company, Maiden Holdings North America.
All long-term issue credit ratings of MHLD and MHNA also have been downgraded. At the same time, AM 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, Maiden Holdings’ primary operating subsidiary, and Maiden Reinsurance North America, the US operating affiliate of Maiden Re. The ratings remain under review with negative implications.
The credit ratings reflect Maiden Re’s balance sheet strength, which AM Best categorises 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 capitalisation 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 for the loss reserves related to its quota share reinsurance with AmTrust Financial Services, 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 US 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 US treaty reinsurance portfolio.
As of Sept. 30, 2018, regulatory approval for the US. 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 capitalisation 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 AM 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 percent of its 2017 business, its Diversified segment was an important factor in the previous neutral assessment of the organisation’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. AM 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 AM 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.
