AM Best downgrades Maiden Re following sale of US unit to Enstar
The financial strength ratings of Maiden Re and its US operating subsidiary Maiden Reinsurance North America have been downgraded to B++ from A- by AM Best in response to strategic changes at the company.
Maiden Re is an operating subsidiary of Maiden Holdings. The ratings remain under review with negative implications.
The rating agency said the ratings reflect Maiden Re’s balance sheet strength, which it categorizes as strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM) regime. The balance sheet strength assessment reflects the historical levels of risk-adjusted capitalization and the group’s conservative investment portfolio.
In the third quarter of 2018 Maiden Holding’s 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 Maiden Holdings.
Earlier in the third quarter, Maiden Holdings and Enstar also entered into an agreement whereby Enstar will acquire Maiden Reinsurance North America, in addition to assuming the liabilities associated with Maiden Holding’s reserves for its US diversified business segment in Maiden Re via novation and retrocession agreements.
Finally, during the third quarter Maiden Holdings entered into and immediately closed a renewal rights transaction with Transatlantic Reinsurance Company for the existing portfolio of its US treaty reinsurance portfolio.
In conjunction with those agreements, Maiden Holdings 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.
AM Best explained that, 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,” the rating agency said.
It also said that operating performance has been assessed as marginal, as it expects Maiden Holdings 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 rating agency said.
AM Best also noted that the limited business profile reflects recent and expected changes in Maiden Holdings’ operations. While its 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 organization’s business profile, it said.
It noted that Maiden Reinsurance North America had a niche in providing proportional reinsurance programs to local and regional insurance companies in the US, 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.”
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