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MAIDEN HOLDINGS, LTD. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K and Item 1, "Business - General Overview". Except as explicitly described as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to the Company's continuing operations except for net income (loss) and net income available to Maiden common shareholders. Amounts in tables may not reconcile due to rounding differences. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk and uncertainties. Please see the "Special Note About Forward-Looking Statements" in this Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the "Risk Factors" set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Overview
Maiden Holdings is aBermuda -based holding company. We create shareholder value by actively managing and allocating our assets and capital, including through ownership and management of businesses and assets mostly in the insurance and related financial services industries where we can leverage our deep knowledge of those markets. Through GLS, we also provide a full range of legacy services to small insurance companies, particularly those in run-off or with blocks of reserves that are no longer core to those companies' operations, working with clients to develop and implement finality solutions including acquiring entire companies that enable our clients to meet their capital and risk management objectives. We expect our legacy solutions business to contribute to our active asset and capital management strategies. We are not currently underwriting reinsurance business on new prospective risks but are actively underwriting risks on a retroactive basis through GLS. We also have various historic reinsurance programs underwritten byMaiden Reinsurance which are in run-off, including the liabilities associated with AmTrust which we terminated in 2019 as discussed in "Note 10 - Related Party Transactions" of the Notes to Consolidated Financial Statements included in Part II Item 8. "Financial Statements and Supplementary Data". In addition, we have a LPT/ADC Agreement with Cavello and a commutation agreement that further reduces our exposure to and limits the potential volatility related to our AmTrust liabilities in run-off, as discussed in "Note 8 - Reinsurance" of the Notes to Consolidated Financial Statements included in Part II Item 8. "Financial Statements and Supplementary Data". Short-term income protection business is written on a primary basis by our wholly owned subsidiaries Maiden LF and Maiden GF in the Scandinavian and Northern European markets. Insurance support services are provided to Maiden LF and Maiden GF through our wholly owned subsidiary, Maiden Global, which is also a licensed intermediary in theU.K. . Maiden Global had previously operated internationally by providing branded auto and credit life insurance products through insurer partners, particularly those inEurope and other global markets. These products also produced reinsurance programs which were underwritten by our wholly owned subsidiaryMaiden Reinsurance . Our business currently consists of two reportable segments: Diversified Reinsurance and AmTrust Reinsurance. Our Diversified Reinsurance segment consists of a portfolio of predominantly property and casualty reinsurance business focusing on regional and specialty property and casualty insurance companies located primarily inEurope . This segment also includes transactions entered into by GLS which was formed inNovember 2020 . Our AmTrust Reinsurance segment includes all business ceded toMaiden Reinsurance by AmTrust, primarily the AmTrust Quota Share and the European Hospital Liability Quota Share, both of which are in run-off effective as ofJanuary 1, 2019 . Please refer to Item 1. "Business - Our Reportable Segments" section for further discussion on our reportable segments.
Business Strategy
We continued to implement our revised operating strategy during 2022, which leverages the significant assets and capital we retain. In addition to restoring operating profitability, our strategic focus centers on creating the greatest risk-adjusted shareholder returns in order to increase book value for our common shareholders, both near and long-term. This strategy has three principal areas of focus: •Asset management - investing in assets and asset classes in a prudent but expansive manner in order to maximize investment returns and is principally enabled by limiting the amount of insurance risk we assume in relation to the assets we hold and maintaining required regulatory capital at very strong levels to manage our aggregate risk profile;
•Legacy underwriting - judiciously building a portfolio of legacy run-off
acquisitions and retroactive reinsurance transactions which we believe will
produce attractive underwriting returns; and
•Capital management - effectively managing the capital we hold on our balance
sheet and when appropriate, repurchasing securities or returning capital to
enhance common shareholder returns.
The returns expected to be produced by each pillar of our strategy are evaluated
in relation to our cost of debt capital, which carries a weighted average
effective interest rate of 7.6%. To the extent our experience or belief
indicates we cannot exceed the cost of debt capital, we expect to refrain from
activities in those areas.
As an example, our present assessment of the reinsurance marketplace along with
our current operating profile continues to be that the risk-adjusted returns
that may be produced via active reinsurance underwriting of new prospective
risks are likely to
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be lower over the long-term than our cost of capital. However, as interest rates
have increased and moved towards historically observed levels, risk-adjusted
returns for active reinsurance underwriting of new prospective risks may become
more attractive and while we have no immediate plans to resume such
underwriting, we continue to evaluate if such a strategy would produce suitable
value for shareholders.
The measures implemented in recent years have allowed us to more flexibly
allocate capital to those activities most likely to produce the greatest returns
for shareholders, and we are actively engaged in evaluating and deploying funds
in all pillars of the strategies as discussed herein. We also believe that these
areas of strategic focus will enhance our profitability through increased
returns, which we believe also increase the likelihood of fully utilizing the
significant NOL carryforwards described above which would create additional
common shareholder value.
As part of our expanded asset management activities, we have evaluated and
continue to consider investing in various initiatives in the insurance industry
across a variety of segments which we believe will produce appropriate
risk-adjusted returns while maintaining the option to consider underwriting
activities in the future. We believe these expanded activities will produce a
broad range of positive impacts on our financial condition, including current
income, longer-term gains and in certain instances, fee income.
In recent years, we have invested approximately $272.5 million into alternative
investments which include equity securities, other investments and equity method
investments in a wide variety of asset classes and we believe these activities
will exceed that benchmark cost of capital with adjustments as necessary if
those returns do not emerge.
In November 2020 , we formed GLS which specializes in providing a full range of
legacy services to small insurance entities, particularly those in run-off or
with blocks of reserves that are no longer core to those companies' operations,
working with clients to develop and implement finality solutions including
acquiring entire companies that enable our clients to meet their capital and
risk management objectives. We acquire legacy liabilities and (re)insurance
reserves from companies and provide retroactive reinsurance coverage for
portfolios of (re)insurance business, primarily via loss portfolio transfer
contracts ("LPT"). Additionally, we provide reinsurance contracts to other
(re)insurers to mitigate some of their risk of future adverse development (an
adverse development cover, or "ADC") on insurance risks relating to prior
accident years.
We believe the formation of GLS is highly complementary to our overall
longer-term strategy and will produce risk-adjusted returns in excess of our
debt cost of capital. In addition, while we anticipate profitable growth from
the GLS portfolio as it develops, we expect our required capital to continue to
decline as insurance risk incurred by GLS will be more than offset by the
run-off of insurance liabilities from our prior reinsurance strategies. GLS,
along with other recent insurance industry investments, enables us to leverage
our knowledge base while not re-entering active underwriting of new prospective
risks and maintaining an efficient operating profile. We believe GLS not only
enhances our profitability through both fee income and effective claims
management services, but it will also increase our asset base through the
addition of blocks of reserves or companies that can be successfully wound down.
Effective October 1, 2021 , GLS completed its first loss portfolio transfer
transaction which includes an ADC cover. GLS and its subsidiaries have completed
additional transactions in 2022 and as of December 31, 2022 , GLS and its
subsidiaries have insurance related liabilities totaling $45.1 million which
included total reserves of $28.2 million , derivative liability on retroactive
reinsurance of $14.6 million , and deferred gains on retroactive reinsurance of
$2.3 million .
GLS continues to write additional retroactive reinsurance transactions
consistent with its business plan and in 2022 acquired its first insurance
company to run-off. In addition to producing long-term returns that exceed the
target cost of capital, we expect the business produced through GLS should
further enhance our ability to pursue the asset and capital management pillars
of our business strategy. The nature of GLS business plan is that it may take a
sustained period of growth in insurance liabilities to produce the targeted
returns. In addition, early stage initiatives such as GLS may take a period of
time to reach profitability. Finally, the nature of legacy transactions which
GLS seeks to execute may be inconsistent as to their timing and not predictable
as regards how many transactions may be completed in any fiscal period.
Our capital management strategy is significantly informed by the required
capital needed to operate our business in a prudent manner and our ongoing
analysis of our loss development trends. Trends in recent years have increased
our confidence in our recorded ultimate losses for our insurance liabilities in
run-off, however a prudent assessment dictates that the run-off portfolio still
requires additional maturity to fully emerge, as evidenced by the adverse loss
development we experienced in 2022. While there is no assurance that these
recent positive long-term loss development trends will persist, as our
confidence has increased, it has enabled us to pursue continued capital
management initiatives, primarily the repurchase of our preference shares and
the subsequent Exchange, which we believe provided the greatest risk-adjusted
returns to our common shareholders.
Completion of the Exchange represents a significant milestone in our capital
management plan and we continue to evaluate other capital management options
that may be available to us. However, there can be no assurance that we will
pursue such initiatives, or that they will provide appropriate risk-adjusted
returns. Our ability to execute our asset and capital management initiatives is
dependent on maintaining adequate levels of unrestricted liquidity and cash
flows. Further, there can be no assurance that our insurance liabilities will
run-off at levels that will permit further capital management activities, which
we continually review as part of our strategy.
Please refer to the "Liquidity and Capital Resources" section for further
information on our asset and capital management activities.
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2022 Developments
During 2022, we continued to advance each pillar of our business strategy and our book value increased by 7.7% to$2.80 per common share atDecember 31, 2022 . We made significant progress in the capital management pillar of our business strategy, repurchasing additional preference shares and ultimately executing an exchange of all of our outstanding preference shares for our common shares as discussed in the "Exchange of Preference Shares" section below. These capital management measures produced gains of$115.5 million and were the single biggest driver of our increase in book value. We also grew our alternative investment portfolio by 21% and produced a positive return of 2.0% on that portfolio in a very challenging year in the global financial markets. Despite the volatility experienced in financial markets during 2022, we believe our alternative investment portfolio remains well positioned to achieve its targeted longer-term returns. As interest rates continue to rise, we are increasingly focusing our investing activities on opportunities that will produce current income. While we continued to develop the business platform of GLS during 2022, a disappointing operating loss was reported as new reinsurance contracts did not perform to expectations. The run-off of our historic reinsurance programs significantly underperformed during 2022, and we experienced adverse prior year reserve development of$32.6 million which offset much of the positive progress made in our capital and asset management strategies. Finally, volatile financial markets and sharply rising interest rates resulted in downward pressure on both our book value and earnings as investment results, including both realized and unrealized, were adversely affected. Exchange of Preference Shares On the Exchange Date, the Company exchanged all of its outstanding Preference Shares for its common shares,$0.01 par value per share. The Company offered three common shares as consideration for each share of the Series A, C and D Preferred Stock tendered. A total of 1,500,050 shares of Series A Preference Shares, 1,744,028 shares of Series C Preference Shares, and 1,542,806 shares of Series D Preference Shares were accepted, resulting in the issuance of 14,360,652 common shares to non-affiliates at a fair value of$28.4 million . The Exchange was accounted for as an extinguishment resulting in the derecognition of the$119.7 million carrying amount of Series A, C and D Preference Shares tendered, elimination of$4.0 million of original issuance costs, recognition of the$25.9 million excess of the fair value of the common shares issued over par value, net of$2.4 million issuance costs, as additional paid in capital, and recognition of the$87.2 million excess of the carrying amount of the Preference Shares redeemed over the fair value of the common shares issued as an increase to retained earnings.
Prior to the Exchange,
outstanding Preference Shares. After the Exchange,
of our total outstanding common shares and subject to limitations in our
bye-laws, has a 9.5% voting interest in our common shares.
Please refer to "Notes to Consolidated Financial Statements - Note
6 - Shareholders' Equity" under Item 8 "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K for further information on the
Exchange.
We believeMaiden NA's investments, including its ownership ofMaiden Reinsurance and its active asset management strategy, will create opportunities to utilize NOL carryforwards of$280.7 million atDecember 31, 2022 . The NOL carryforwards combined with additional net deferred tax assets ("DTA") primarily related to our insurance liabilities result inU.S. DTA (before valuation allowance) of$116.2 million or$1.14 per common share atDecember 31, 2022 . NetU.S. DTA of$116.2 million is not presently recognized on the Company's consolidated balance sheet as a full valuation allowance is carried against it. At this time, while positive evidence in support of reducing the valuation allowance is growing, the Company believes it is necessary to maintain a full valuation allowance against the netU.S. DTA as more evidence is needed regarding the utilization of these losses, primarily the adverse loss development experienced in 2022. As circumstances further develop, we will continuously evaluate the amount of the valuation allowance held against the netU.S. DTA. For further details please see "Note 13 - Income Taxes" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Taken together, we believe these measures should generate additional income forMaiden NA in a tax-efficient manner, while sharing in the improvement in profitability anticipated inMaiden Reinsurance as a result of the measures enacted as described above. 38
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2022 and 2021 Financial Highlights
For the Year Ended December 31, 2022 2021 Change Summary Consolidated Statement of Income Data: ($ in
thousands except per share data)
Net (loss) income$ (60,041) $ 26,645 $ (86,686) Gain from repurchase & exchange of preference shares 115,473 90,998 24,475 Net income attributable to Maiden common shareholders 55,432 117,643 (62,211)
Basic and diluted earnings per common share:
Net income attributable to Maiden common shareholders(2) 0.63 1.35 (0.72) Gain from repurchase/exchange of preference shares per common share 1.33 1.06 0.27 Gross premiums written 5,479 10,938 (5,459) Net premiums earned 37,732 52,993 (15,261) Underwriting (loss) income(3) (54,934) 11,572 (66,506) Net investment results(13) 24,725 52,409 (27,684) Non-GAAP measures: Non-GAAP operating earnings(1) 52,070 60,481 (8,411) Non-GAAP diluted operating earnings per common share(1) 0.60 0.70 (0.10) Non-GAAP operating return on average common shareholders' equity(1) 17.2 % 25.0 % (7.8) At December 31, 2022 2021 Change Consolidated Financial Condition ($ in thousands except per share data) Total investments and cash and cash equivalents(4)$ 633,684 $ 888,699 $ (255,015) Total assets 1,846,866 2,322,610 (475,744) Reserve for loss and LAE 1,131,408 1,489,373 (357,965) Senior notes - principal amount 262,500 262,500 - Common shareholders' equity 284,579 225,047 59,532 Shareholders' equity 284,579 384,257 (99,678) Total capital resources(5) 547,079 646,757 (99,678) Ratio of debt to total capital resources(10) 48.0 % 40.6 % 7.4 Book Value calculations: Book value per common share(6)$ 2.80 $ 2.60 $ 0.20 Accumulated dividends per common share(12) 4.27 4.27 - Book value per common share plus accumulated dividends$ 7.07 $ 6.87 $ 0.20 Change in book value per common share plus accumulated dividends 2.9 % Diluted book value per common share(7)$ 2.79 $ 2.59 $ 0.20 Non-GAAP measures: Adjusted book value per common share(8) 3.25 3.18 0.07 Adjusted Maiden shareholders' equity(9) 329,987 434,200 (104,213) Adjusted total capital resources(9) 592,487 696,700 (104,213) Ratio of debt to adjusted total capital resources(11) 44.3 % 37.7 % 6.6 (1)Non-GAAP operating earnings, non-GAAP diluted operating earnings per common share and non-GAAP operating return on average common shareholders' equity are non-GAAP financial measures. See "Key Financial Measures" for additional information.
(2)Please refer to "Notes to Consolidated Financial Statements - Note 12.
Earnings per Common Share" included under Item 8 "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for the calculation of
basic and diluted earnings per common share.
(3)Underwriting (loss) income is a non-GAAP measure and is calculated as net premiums earned plus other insurance (expense) revenue, less net loss and LAE, commission and other acquisition expenses and general and administrative expenses directly related to underwriting activities. See "Key Financial Measures" for additional information. 39
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(4)Total investments and cash and cash equivalents includes both restricted and
unrestricted.
(5)Total capital resources is the sum of the Company's principal amount of debt and Maiden shareholders' equity. See "Key Financial Measures" for additional information. (6)Book value per common share is calculated using common shareholders' equity (shareholders' equity excluding the aggregate liquidation value of our Preference Shares, if any) divided by the number of common shares outstanding. See "Key Financial Measures" for additional information.
(7)Diluted book value per common share is calculated by dividing common
shareholders' equity, adjusted for assumed proceeds from the exercise of
dilutive options, divided by the number of outstanding common shares plus
dilutive options and restricted shares (assuming exercise of all dilutive share
based awards).
(8)Adjusted book value per common share is a non-GAAP measure that is calculated using common shareholders' equity, adjusted by adding the following items to shareholders' equity: 1) the unamortized deferred gain on retroactive reinsurance arising from the LPT/ADC Agreement; and 2) an adjustment which reflects the equity method accounting related to the fair value of certain hedged liabilities within an equity method investment in a limited partnership investment held by the Company wherein the ultimate realizable value of the asset supporting the hedged liabilities cannot currently be recognized at fair value, divided by the number of common shares outstanding. See "Key Financial Measures" for additional information. (9)Adjusted shareholders' equity and adjusted total capital resources are calculated by adding the following items to shareholders' equity: 1) the unamortized deferred gain on retroactive reinsurance arising from the LPT/ADC Agreement; and 2) an adjustment which reflects the equity accounting related to the fair value of certain hedged liabilities within an equity method investment held by the Company wherein the ultimate realizable value of the asset supporting the hedged liabilities cannot currently be recognized at fair value. The deferred gain arises from the LPT/ADC Agreement with Cavello relating to losses from the AmTrust Quota Share. UnderU.S. GAAP, the deferred gain shall be amortized over the estimated remaining settlement period. See "Key Financial Measures" for additional information.
(10)Ratio of debt to total capital resources is calculated using the total
principal amount of debt divided by the sum of total capital resources.
(11)Ratio of debt to adjusted total capital resources is calculated using the
total principal amount of debt divided by the sum of adjusted total capital
resources.
(12)Accumulated dividends per common share includes the cumulative sum of
dividends declared and paid in the past on the Company's issued common shares
since inception.
(13)Net investment results include the sum of net investment income, net
realized and unrealized gains (losses), and interest in income (loss) of equity
method investments.
Key Financial Measures Revenues We historically derived the majority of our revenues from premiums on reinsurance contracts, net of any reinsurance or retrocessional coverage purchased and to a minor extent from premiums from insurance policies. Reinsurance premiums are a function of the amount and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. As a result of significant strategic transactions, our gross and net premiums written continue to be materially lower and our net investment income will increasingly become a significantly larger portion of our total revenues compared to prior periods. The Company's revenues also include fee income earned from both our GLS business and IIS business as well as income generated from our investment portfolio. The Company's investment portfolio is comprised of AFS fixed maturity investments and other investments including equities, private equity and credit funds, privately held investments, hedge funds, equity method investments and other non-fixed income investments. In accordance withU.S. GAAP, our fixed maturity investments are carried at fair market value and any unrealized gains and losses are included in AOCI as a separate component of shareholders' equity. If unrealized losses are considered to be other-than-temporarily impaired due to a credit-related event, such impairment losses are recognized within earnings as a realized loss under total other-than-temporary impairment losses. Equity and other investments include limited partnerships, hedge funds and start-up insurance entities which are carried at fair market value with any unrealized gains or losses included in earnings under net realized gains (losses) on investment. Our investments made by special purpose vehicles focused on lending activities are carried at cost. Any indication of impairment is recognized immediately within net income.
Expenses
Our expenses currently consist largely of net loss and LAE, commission and other acquisition expenses, general and administrative expenses, interest and amortization expenses, foreign exchange and other gains or losses, the latter of which includes on a non-recurring basis any gains or losses from the disposal of subsidiaries. Net loss and LAE has three main components: (1) losses paid, which are actual cash payments to insureds, net of recoveries from reinsurers; (2) change in outstanding loss or case reserves, which represent cedants' best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and (3) change in IBNR reserves, which we establish to respond to changes in the values of claims that have been reported to us but are not yet settled, as well as claims that have occurred but have not yet been reported to us. The portion recoverable from reinsurers is deducted from the gross estimated loss. Commission and other acquisition expenses include commissions, brokerage fees and insurance taxes. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business and can, in certain instances, vary based on loss sensitive features of reinsurance contracts. Commission and other acquisition expenses are reported after: (1) deducting commissions received on ceded reinsurance; (2) deducting the part of commission and other acquisition expenses relating to unearned premiums; and (3) including the amortization of previously deferred commission and other acquisition expenses.
General and administrative expenses include personnel expenses (including
share-based compensation expense), audit fees, rent expenses, legal and
professional fees, information technology costs and other general operating
expenses. General and
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administrative expenses are allocated to the reportable segments on an actual
basis except salaries and benefits where management's judgment is applied;
however general corporate expenses are not allocated to the segments.
Non-GAAP Financial Measures
In addition to our key financial measures presented in accordance with GAAP in the Consolidated Balance Sheets and Consolidated Statements of Income and Comprehensive Income, management uses certain non-GAAP financial measures to evaluate the Company's financial performance and the overall growth in value generated for the Company's common shareholders. Management believes that these measures, which may be defined and calculated differently by other companies, explain the Company's results to investors in a manner that allows for a more complete understanding of the underlying trends in the Company's business. The non-GAAP financial measures should not be viewed as a substitute for those determined in accordance withU.S. GAAP. The calculation of some of these key financial measures including the reconciliation of non-GAAP financial measures to the nearest GAAP measure and relevant discussions are found within Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations". These non-GAAP financial measures are: Non-GAAP operating earnings and non-GAAP diluted operating earnings per common share: Management believes that the use of non-GAAP operating earnings and non-GAAP diluted operating earnings per common share enables investors and other users of the Company's financial information to analyze its performance in a manner similar to how management analyzes performance. Management also believes that these measures generally follow industry practice therefore allowing the users of financial information to compare the Company's performance with its industry peer group, and that the equity analysts and certain rating agencies which follow the Company, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. Non-GAAP operating earnings should not be viewed as a substitute forU.S. GAAP net income. Non-GAAP operating earnings is an internal performance measure used by management as these measures focus on the underlying fundamentals of the Company's operations by excluding, on a recurring basis: (1) net realized and unrealized investment gains (losses); (2) foreign exchange and other gains (losses); (3) the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under the LPT/ADC Agreement and related changes in amortization of the deferred gain liability; and (4) interest in income (loss) of equity method investments. We excluded net realized and unrealized gains (losses) on investment, interest in income (loss) of equity method investments and foreign exchange and other gains (losses) as we believe these are influenced by market opportunities and other factors. We do not believe that ceded risks under the LPT/ADC Agreement are representative of our ongoing and future business which are different to retroactive reinsurance risks written by GLS that are representative of our ongoing and future business. We believe all of these amounts are substantially independent of our business and any potential future underwriting process, therefore, including them would distort the analysis of underlying trends in our operations. Underwriting income (loss) is a non-GAAP measure and is calculated as net premiums earned plus other insurance revenue (expense), net less net loss and LAE, commission and other acquisition expenses and general and administrative expenses directly related to underwriting activities. For purposes of these non-GAAP operating measures, the fee-generating business which is included in our Diversified Reinsurance segment, is considered part of the underwriting operations of the Company. The fair value changes in underwriting-related derivative instruments is also included within other insurance (expense) revenue as the Company considers these contracts to be part of its underwriting operations. Management believes that this measure is important in evaluating the underwriting performance of the Company and its segments. This measure is also a useful tool to measure the profitability of the Company separately from the investment results and is also a widely used performance indicator in the insurance industry. A reconciliation of the Company's underwriting results can be found in the Company's Consolidated Financial Statements in the "Notes to Consolidated Financial Statements Note 3. Segment Information" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The Company no longer presents certain non-GAAP measures such as combined ratio and its related components in this Annual Report on Form 10-K for the year endedDecember 31, 2022 , as it believes that as the run-off of our reinsurance portfolios progresses, such ratios are increasingly not meaningful and of less value to readers as they evaluate the financial results of the Company, particularly compared to historical data. While an important metric of success, underwriting income (loss) does not reflect all components of profitability, as it does not recognize the impact of investment income earned on premiums between the time premiums are received and the time loss payments are ultimately paid to clients. Because we do not manage our cash and investments by segment, investment income and interest expense are not allocated to the reportable segments. Certain general and administrative expenses are generally allocated to segments based on actual costs incurred. Non-GAAP Operating Return on Average Adjusted Common Equity ("Non-GAAP Operating ROACE"): Management uses non-GAAP operating return on average adjusted common shareholders' equity as a measure of profitability that focuses on the return to common shareholders. It is calculated using non-GAAP operating earnings available to common shareholders (as defined above) divided by average adjusted common shareholders' equity. Book Value per Common Share and Diluted Book Value per Common Share: Book value per common share and diluted book value per common share are non-GAAP measures. Management uses growth in both of these metrics as a prime measure of the value we are generating for our common shareholders, because management believes that growth in each metric ultimately results in growth in the Company's common share price. These metrics are impacted by the Company's net income and external factors, such as interest rates, which can drive changes in unrealized gains or losses on our fixed income investment portfolio, as well as common or preference share repurchases. Ratio of Debt to Total Capital Resources: Management uses this non-GAAP measure to monitor the financial leverage of the Company. This measure is calculated using the total principal amount of debt divided by the sum of total capital resources. 41 -------------------------------------------------------------------------------- Non-GAAP underwriting loss, Non-GAAP earnings, and Non-GAAP net loss and LAE: Management has further adjusted underwriting income, as defined above, as well as reported loss and LAE by excluding the portion of favorable or unfavorable prior year reserve development for which we ceded the risk under retroactive reinsurance agreements such as the LPT/ADC Agreement. The losses are estimated to be fully recoverable from Cavello and management believes adjusting for this development shows the ultimate economic benefit of the LPT/ADC Agreement on our underwriting results. We believe reflecting the economic benefit of this retroactive reinsurance agreement is helpful to understand future trends in our operations. Adjusted Total Shareholders' Equity, Adjusted Total Capital Resources, Ratio of Debt to Adjusted Total Capital Resources and Adjusted Book Value per Common Share: Management has adjusted GAAP shareholders' equity by adding the following items to shareholders' equity: 1) unamortized deferred gain on ceded retroactive reinsurance under the LPT/ADC Agreement; and 2) an adjustment which reflects the equity accounting related to the fair value of certain hedged liabilities within an equity method investment previously held by the Company wherein the ultimate realizable value of the asset supporting the hedged liabilities cannot currently be recognized at fair value ("LP Investment Adjustment"). The unamortized deferred gain on ceded retroactive reinsurance under the LPT/ADC Agreement includes the aggregate impact of: 1) cumulative increases to losses incurred prior toDecember 31, 2018 for which we have ceded the risk under the LPT/ADC Agreement with Cavello; and 2) changes in estimated ultimate losses for certain workers' compensation reserves previously commuted to AmTrust which are subject to specific terms and conditions pursuant to the LPT/ADC Agreement. As a result, by virtue of this adjustment, management has also adjusted Total Capital Resources and computed the Ratio of Debt to Adjusted Capital Resources and Adjusted Book Value per Common Share. The deferred gain liability on retroactive reinsurance under the LPT/ADC Agreement represents loss reserves estimated to be fully recoverable from Cavello and management believes adjusting for this shows the ultimate economic benefit of the LPT/ADC Agreement. We believe reflecting the economic benefit of this non-recurring retroactive reinsurance agreement is helpful to understand future trends in our operations, which will improve our shareholders' equity over the settlement or contract periods, respectively.
Alternative investments is the total of the Company's holdings of equity
securities, other investments and equity method investments as reported on the
Company's Consolidated Balance Sheets.
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Critical Accounting Policies and Estimates
It is important to understand our accounting policies in order to understand our financial position and results of operations. The Company's Consolidated Financial Statements have been prepared in accordance withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following presents a discussion of those accounting policies and estimates that management believes are the most critical to its operations and require the most difficult, subjective and complex judgment. If actual events differ significantly from the underlying assumptions and estimates used by management, there could be material adjustments to prior estimates that could potentially adversely affect the Company's results of operations, financial condition and liquidity. These critical accounting policies and estimates should be read in conjunction with "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report Form 10-K for a full understanding of the Company's accounting policies.
Reserve for Loss and LAE
General: The amount of time that elapses before a claim is reported to the
cedant and then subsequently reported to the reinsurer is commonly referred to
in the industry as the reporting tail. Lines of business for which claims are
reported quickly are commonly referred to as short-tailed lines; and lines of
business for which a longer period of time elapses before claims are reported to
the reinsurer are commonly referred to as long-tailed lines. In general, for
reinsurance, the time lags are longer than for primary business due to the delay
that occurs between the cedant becoming aware of a loss and reporting the
information to its reinsurer(s). The delay varies by reinsurance market (country
of cedant), type of treaty, whether losses are paid by the cedant and the size
of the loss. The delay could vary from a few weeks to a year or sometimes
longer.
Because a significant amount of time can elapse, particularly on longer-tail
lines of business written on an excess of loss basis, between the assumption of
risk, the occurrence of a loss event, the reporting of the event to an insurance
company (the primary company or the cedant), the subsequent reporting to the
reinsurance company ("the reinsurer") and the ultimate payment of the claim on
the loss event by the reinsurer, the Company's liability for unpaid loss and LAE
("loss reserves") is based largely upon estimates. The Company categorizes loss
reserves into two types of reserves: reported outstanding loss reserves ("case
reserves") and IBNR reserves. Case reserves represent, for each individual
claim, an estimate of unpaid losses, either by the Company's cedants or the
Company's claims handling professionals, and recorded by the Company. IBNR
reserves represent a provision for claims that have been incurred but not yet
reported to the Company, as well as future loss development on losses already
reported, in excess of the case reserves. The Company updates its estimates for
each of the aforementioned categories primarily on a quarterly basis using
information received from its cedants.
For excess of loss treaties, cedants generally are required to report losses
that either (i) exceed 50% of their retention; or (ii) have a reasonable
probability of exceeding the retention; or (iii) meet defined reporting
criteria. All excess of loss reinsurance claims that are reserved are reviewed
on a periodic basis. In addition, reserves for loss and LAE are reviewed every
quarter for each cedant. For proportional treaties, cedants are required to give
a periodic statement of account, generally monthly or quarterly. These periodic
statements typically include information regarding premiums written, premiums
earned, unearned premiums, ceding commissions, brokerage amounts, applicable
taxes, paid losses and reported outstanding losses. They can be submitted up to
ninety days after the close of the reporting period. Some proportional treaties
have specific language requiring earlier notice of serious claims.
For all lines, the Company's objective is to reasonably estimate ultimate loss
and LAE. Total loss reserves are then calculated by subtracting losses paid.
Similarly, IBNR reserves are calculated by subtracting case reserves from total
loss reserves. IBNR is the estimated liability for: (1) changes in the values of
claims that have been reported to us but are not yet settled; (2) claims that
have occurred but have not yet been reported; and (3) claims that are closed but
subsequently reopened. Each claim is settled individually based upon its merits,
and particularly for longer-tailed lines of business, it is not unusual for a
claim to take several years after being initially reported to be settled and
paid, especially if legal action is involved. These claims may also require
changes in anticipated future payments due to changes in medical conditions or
changes in expected inflationary pressures. As a result, the reserve for loss
and LAE includes significant estimates for IBNR reserves.
The reserve for IBNR is generally estimated by management based on various
factors, including actuarial analysis and actual loss experience to date. Our
actuaries employ standard actuarial methodologies to determine estimated
ultimate loss reserves. In selecting management's best estimate of loss and LAE
reserves, we consider the range of results produced by many actuarial methods
and the appropriateness of those estimates. These actuarial methodologies are
described in "Notes to Consolidated Financial Statements - Note 9. Reserve for
Loss and Loss Adjustment Expenses" included under Item 8 "Financial Statement
and Supplementary Data".
The composition of the reserve for loss and LAE at December 31, 2022 and 2021
was as follows:
December 31, 2022 2021
($ in thousands)
Reserve for reported loss and LAE$ 702,691 $ 851,950 Reserve for losses incurred but not reported 428,717 637,423 Reserve for loss and LAE$ 1,131,408 $
1,489,373
43 -------------------------------------------------------------------------------- The loss reserves in the table above exclude the impact of the LPT/ADC Agreement. While management believes that our case reserves and IBNR are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The analysis of the appropriateness of the reserve for IBNR is reviewed quarterly, with adjustments made as appropriate. To the extent that actual reported losses exceed expected losses, the carried estimate of the ultimate losses may be increased (i.e. unfavorable reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses may be reduced (i.e. favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverable in the periods in which they are determined. Reinsurance recoverable on unpaid losses covered by the ADC portion of the LPT/ADC Agreement are recorded as part of the deferred gain on retroactive reinsurance shown on the Consolidated Balance Sheets which represents the cumulative adverse loss development under the AmTrust Quota Share covered by the LPT/ADC Agreement atDecember 31, 2022 . Amortization of the deferred gain will not occur until paid losses have exceeded the minimum retention under the LPT/ADC Agreement, which is estimated to be in 2025. Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we reasonably expect the ultimate resolution and administration of claims will cost. These estimates are based on actuarial projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and as claims are reported and resolved. In addition, the relatively long periods between when a loss occurs and when it may be reported to our claims department for our casualty reinsurance lines of business also increase the uncertainties of reserve estimates in such lines. With the guidance of the methods described in "Notes to Consolidated Financial Statements - Note 9. Reserve for Loss and Loss Adjustment Expenses" included under Item 8 "Financial Statement and Supplementary Data" of this Annual Report on Form 10-K, actuarial judgment is applied in the determination of ultimate losses. In general, the Company's segments have varying levels of seasoning with which the Company has direct experience and as a result, differing methods are utilized to estimate loss and LAE reserves within each segment. In our Diversified Reinsurance segment, we hold books of business that have been in runoff for several years, as well as books of business that have been underwritten only during the last few years. In general, we utilize the Expected Loss Ratio ("ELR") approach at the onset of reserving an account, the Bornhuetter-Ferguson ("BF") method for business with less but maturing loss experience, and then, as the experience matures, theLoss Development ("LD") method is utilized. The runoff book of business primarily uses the LD method due to its maturity and the amount of experience which has emerged over the years. For proportional business, the Company relies heavily on the actual contract experience, whereas for excess of loss business, there will be more usage of industry and/or Company specific benchmark assumptions in the reserving process. The Company underwrote the AmTrust Reinsurance segment fromJuly 1, 2007 untilMaiden Reinsurance and AII agreed to terminate the remaining business subject to the AmTrust Quota Share and European Hospital Liability Quota Share, both on a run-off basis, effectiveJanuary 1, 2019 . A large portion of the exposure in the underlying book of business has significant seasoning, and allows for a significant amount of credibility in using parameters derived from historical experience to calculate reserve estimates. Some segments of the book are a result of recent acquisitions or newer markets for AmTrust. These segments require a greater level of assumptions and professional judgment in deriving reserve levels, which inherently implies a wider range of reasonable estimates. In addition, changes to case reserving and claims settlement practices by AmTrust have required the use of methods which adjust historical paid and incurred losses to reflect the current basis. As a result, we have tended to rely on a weighted approach which primarily employs the LD method for aspects of the segment with ample historical data, while also considering the ELR or BF method for exposure resulting from recent acquisitions, or a relative business with a more limited level of experience. The LD method can also be based on AmTrust specific historical information, historical information adjusted to current levels, or information derived from industry sources, with actuarial judgment being used as to the credibility weighting employed. The Frequency-Severity ("FS") method is also considered for segments of the AmTrust book for which claim count information is available. Additional data detailing items such as the class of business, state of occurrence, claim counts, and the frequency and severity of claims is available in many instances, further enhancing the loss reserve analysis. Significant Assumptions Employed in the Estimation of Reserve for Loss and Loss Adjustment Expenses: The most significant assumptions used atDecember 31, 2022 to estimate the reserve for loss and LAE within our reporting segments are as follows:
•the information developed from internal and independent external sources can be
used to develop meaningful estimates of the likely future performance of
business bound by the Company;
•the loss and exposure information provided by ceding companies, insureds and brokers in support of their reinsurance submissions have been used by the Company's pricing actuaries to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy;
•historic loss development and trend experience may be used to predict future
loss development and trends;
•no significant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur; and
•the Company is able to identify and properly adjust for changes to case
reserving and claims settlement rates in the underlying data.
The five assumptions above significantly influence the Company's determination
of initial expected loss ratios and expected loss reporting and payment patterns
that are the key inputs which impact potential variability in the estimate of
the
44
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reserve for loss and LAE and are applicable to each of the Company's business
segments. These factors are combined with the actuarial judgment exercised by
our reserving actuaries. While there can be no assurance that any of the above
assumptions will prove to be correct, we believe that this process represents a
realistic and appropriate basis for estimating the reserve for loss and LAE.
Loss emergence factors and expected loss ratios used in the reserving process
are based on a blend of our own direct experience, cedant experience and
industry benchmarks, when appropriate. The benchmarks selected were those that
we believe are most similar to our underwriting business.
Factors Creating Uncertainty in the Estimation of the Reserve for Loss and Loss
Adjustment Expenses: While management does not include an explicit or implicit
provision for uncertainty in its reserve for loss and LAE, certain of the
Company's business lines are by their nature subject to additional
uncertainties, which are discussed in detail below. In addition, the Company's
reserves are subject to additional factors which add to the uncertainty of
estimating reserve for loss and LAE. Time lags in the reporting of losses can
also introduce further ambiguity to the process of estimating reserve for loss
and LAE.
The inherent uncertainty of estimating the Company's reserve for loss and LAE
increases principally due to:
•the lag in time between the time claims are initially reported to the ceding
company and the time they are ultimately reported through one or more
reinsurance broker intermediaries to the Company;
•the differing case reserving practices among ceding companies;
•changes to characteristics of a claim over time, such as future medical needs
or assessment of liability;
•the diversity of loss development patterns among different types of reinsurance
treaties or contracts;
•the Company's need to rely on its ceding companies for loss information, which also exposes the Company to changes in the reserving philosophy of the ceding company and the adequacy of its underlying case reserves; and
•changes in internal company operations such as alterations in claims handling
procedures.
To verify the accuracy and completeness of the information provided to us by our ceding company counterparties, the Company's actuaries, accountants and claims personnel perform claims reviews, and at times also accounting and financial audits, of the Company's ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company's case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company's reported loss and LAE do not comport with the terms of the contract held with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company's policy is to vigorously defend its position in litigation or arbitration. AtDecember 31, 2022 , the Company was not involved in any material claims litigation or arbitration proceedings. Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company's business activities can also impair the accuracy of its loss and LAE reserve estimates. AtDecember 31, 2022 , there were no significant backlogs related to the processing of policy or contract information in any of our reporting segments. The Company assumes in its loss and LAE reserving process that, on average, the time period between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as property, to many years for some casualty lines of business. To the extent that actual reported losses are reported more quickly or more slowly than expected, the Company may adjust its estimate of ultimate loss accordingly. Potential Volatility in the Reserve for Loss and LAE: In addition to the factors creating uncertainty in the Company's estimate of loss and LAE, the Company's estimated reserve for loss and LAE can change over time because of unexpected changes in the external environment. Potential changing external factors include:
•changes in the inflation rate for goods and services related to the covered
damages;
•changes in the general economic environment that could cause unanticipated
changes in claim frequency or severity;
•changes in the litigation environment regarding the representation of
plaintiffs and potential plaintiffs;
•changes in the judicial and/or arbitration environment regarding the
interpretation of policy and contract provisions relating to the determination
of coverage and/or the amount of damages awarded for certain types of claims;
•changes in the social environment regarding the general attitude of juries in
the determination of liability and damages;
•changes in the legislative environment regarding the definition of damages;
•new types of injuries caused by new types of injurious activities or exposures;
and
•assessment of changes in ceding company case reserving and reporting patterns.
The change in loss reserve estimates from the prior year is referred to as PriorYear Development ("PPD"). We experienced adverse PPD of$32.6 million for the year endedDecember 31, 2022 compared to favorable PPD of$27.6 million for the year endedDecember 31, 2021 , primarily within the AmTrust Reinsurance segment. 45
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Please refer to "Notes to Consolidated Financial Statements - Note 9 - Reserve
for Loss and Loss Adjustment Expenses" included under Item 8. "Financial
Statements and Supplementary Data" of this Form 10-K for further details.
The Company creates a statistical distribution around the estimate of reserve for loss and LAE based on an assumption of the volatility inherent in the estimate. The Company, in the analysis of reserves for loss and LAE, in addition to selecting a best point estimate, makes a selection of a range of reasonable reserves. This range is based on a combination of objective and subjective data, including the underlying characteristics of the exposure, the volatility in historical emergence, the credibility of the information available to estimate the reserve for loss and LAE, and professional actuarial judgement. The size of the range is related to the level of confidence associated with the point estimate, as well as the amount of uncertainty inherent in the characteristics of the exposure being evaluated. Based on this range of reasonable reserves, our required reserves after reinsurance recoverable could increase by approximately$153.0 million , or 14.3%, of our consolidated net loss and LAE reserves, excluding the impact of the LPT/ADC Agreement. If the LPT/ADC Agreement were to be considered, our required reserves could increase by approximately$73.0 million , or 12.6% of our consolidated net loss and LAE reserves.
For the range of reasonable reserves, we have assumed what we believe is an
appropriate confidence level. However, the range is not intended to be a
measurement of all possible future outcomes, and there can be no assurance that
our claim obligation will not vary outside of this range.
Premiums and Commissions and Other Acquisition Expenses
For pro-rata contracts and excess-of-loss contracts where no deposit or minimum
premium is specified in the contract, premium written is recognized based on
estimates of ultimate premiums provided by the ceding companies. Initial
estimates of premium written are recognized in the period in which the
underlying risks are incepted. Subsequent adjustments, based on reports of
actual premium by the ceding companies, or revisions in estimates, are recorded
in the period in which they are determined. Reinsurance premiums assumed are
generally earned on a pro rata basis over the terms of the underlying policies
or reinsurance contracts.
Contracts and policies written on a "losses occurring" basis cover claims that
may occur during the term of the contract or policy, which is typically twelve
months. Accordingly, the premium is earned evenly over the contract term.
Contracts which are written on a "risks attaching" basis cover claims from all
underlying insurance policies written during the terms of such contracts.
Premiums earned on such contracts extend beyond the original term of the
reinsurance contract, typically resulting in recognition of premiums earned over
a twenty-four-month period.
Reinsurance premiums on specialty risk and extended warranty are earned based on
the estimated program coverage period. These estimates are based on the expected
distribution of coverage periods by contract at inception, because a single
contract may contain multiple coverage period options and these estimates are
revised based on the actual coverage period selected by the original insured.
Unearned premiums represent the portion of premiums written which is applicable
to the unexpired term of the contract or policy in force. These premiums can be
subject to estimates based upon information received from ceding companies and
any subsequent differences arising on such estimates are recorded in the period
in which they are determined.
The Company provides proportional and non-proportional reinsurance coverage to
cedants (insurance companies). Cedants' actual premiums are unknown at the time
they enter into reinsurance agreement so treaties are based upon estimates of
those premiums at the time the treaties are written and are typically adjusted
as premiums are known. Reporting delays are inherent in the reinsurance industry
and vary in length by type of treaty. As delays can vary from a few weeks to a
year or sometimes longer, the Company produces accounting estimates to report
premiums and commission and other acquisition expenses until it receives the
cedants' actual results. Under proportional treaties, the Company shares
proportionally in both the premiums and losses of the cedant and pays the cedant
a commission to cover the cedants' acquisition expenses. Under this type of
treaty, the Company's ultimate premiums written and earned and acquisition
expenses are not known at the inception of the treaty and must be estimated
until the cedant reports its actual results to the Company. Under
non-proportional treaties, the Company is typically exposed to loss events in
excess of a predetermined dollar amount or loss ratio and receives a deposit or
minimum premium, which is subject to adjustment depending on the premium volume
written by the cedant.
Reported premiums written and earned and commission and other acquisition
expenses on proportional treaties are generally based upon reports received from
cedants and brokers, supplemented by the Company's own estimates of premiums
written and commission and other acquisition expenses for which ceding company
reports have not been received. Premium and acquisition expense estimates are
determined at the individual treaty level based upon contract provisions. The
determination of estimates requires a review of the Company's experience with
cedants, a thorough understanding of the individual characteristics of each line
of business and the ability to project the impact of current economic indicators
on the volume of business written and ceded by the Company's cedants. Estimates
for premiums and commission and other acquisition expenses are updated
continuously as new information is received from the cedants. Differences
between such estimates and actual amounts are recorded in the period in which
estimates are changed or the actual amounts are determined.
Assessing whether or not a reinsurance contract meets the condition for risk
transfer requires judgment. The determination of risk transfer is critical to
reporting premiums written and is based, in part, on the use of actuarial and
pricing models and assumptions. If we determine that a reinsurance contract does
not transfer sufficient risk, we account for the contract as a deposit liability
rather than a premium written.
46
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Acquisition expenses represent the costs of writing business that vary with, and
are primarily related to, the production of the business. Acquisition expenses
that are related to successful contracts are deferred and recognized as expense
over the same period in which the related premiums are earned. Only certain
expenses incurred in the successful acquisition of new and renewal insurance
contracts are capitalized. Those expenses include incremental direct costs of
contract acquisition that result directly from and are essential to the contract
transaction and would not have been incurred had the contract transaction not
occurred. All other acquisition-related expenses, such as costs incurred for
soliciting business, administration, and unsuccessful acquisition or renewal
efforts are charged to expense as incurred. Administrative expenses, including
rent, depreciation, occupancy, equipment, and all other general overhead
expenses are considered indirect and are expensed as incurred.
The Company considers anticipated investment income in determining the
recoverability of these deferred costs and believes they are fully recoverable.
A premium deficiency is recognized if the sum of anticipated losses and LAE,
unamortized acquisition expenses and anticipated investment income exceed
unearned premium.
Retroactive Reinsurance
Retroactive reinsurance policies provide indemnification for losses and LAE with respect to past loss events. For our GLS run-off business in our Diversified Reinsurance segment, we use the balance sheet accounting approach for assumed loss portfolio transfers, whereby at the inception of the contract there are no premiums or losses recorded in earnings. At the inception of a run-off retroactive reinsurance contract, if the estimated undiscounted ultimate losses payable are in excess of the premiums received, a deferred charge asset is recorded for the excess; whereas, if the premiums received are in excess of the estimated undiscounted ultimate losses payable, a deferred gain liability is recorded for the excess, such that we do not record any gain or loss at the inception of these retroactive reinsurance contracts. The premium consideration that we charge the ceding companies under retroactive reinsurance contracts may be lower than the undiscounted estimated ultimate losses payable due to the time value of money. After receiving the premium consideration in full from our cedents at the inception of the contract, we invest the premium received over an extended period of time, thereby generating investment income. We expect to generate profits from these retroactive reinsurance contracts when taking into account the premium received and expected investment income, less contractual obligations and expenses. Deferred charge assets will be recorded in other assets (if and when applicable), and deferred gain liabilities are recorded in other liabilities, and amortized over the estimated claim payment period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE. The amortization of deferred charge assets and deferred gain liabilities is adjusted at each reporting period to reflect new estimates of the amount and timing of remaining loss and LAE payments. Changes in the estimated amount and timing of payments of unpaid losses may have an effect on the unamortized deferred charge assets and deferred gain liabilities and the amount of periodic amortization.
Fair Value of Financial Instruments
Please refer to "Notes to Consolidated Financial Statements - Note 5. Fair Value of Financial Instruments" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion on the fair value methodology and valuation techniques used by the Company to determine the fair value of the financial instruments held atDecember 31, 2022 and 2021.
Other-Than-Temporary Impairment ("OTTI") of Investments
Please refer to "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion on the impairment evaluation performed by the Company on its investment portfolio. For the years endedDecember 31, 2022 andDecember 31, 2021 , the Company did not recognize any OTTI impairment losses in its results of operation. Please see "Notes to Consolidated Financial Statements: Note 4. Investments" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further details. 47
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Results of Operations
The following table sets forth our selected Consolidated Statement of Income
data for each of the years indicated:
For the Year Ended December 31, 2022 2021
($ in thousands)
Gross premiums written $ 5,479 $ 10,938
Net premiums written $ 5,082 $ 10,403
Net premiums earned $ 37,732 $ 52,993
Other insurance (expense) revenue, net (4,530) 1,067
Net loss and LAE (57,991) (7,307)
Commission and other acquisition expenses (18,511) (24,840)
General and administrative expenses(1) (11,634) (10,341)
Underwriting (loss) income(2) (54,934) 11,572
Other general and administrative expenses(1) (19,313) (25,679)
Net investment income 30,070 32,013
Net realized and unrealized (losses) gains on investment (5,140) 12,648
Foreign exchange and other gains 8,255 7,685
Interest and amortization expenses (19,331) (19,327)
Income tax benefit (expense) 557 (15)
Interest in (loss) income in equity method investments (205) 7,748
Net (loss) income (60,041) 26,645
Gain from repurchase and exchange of preference shares 115,473 90,998
Net income available to Maiden common shareholders $ 55,432 $ 117,643
(1)Underwriting related general and administrative expenses is a non-GAAP
measure. Please refer to "General and Administrative Expenses" below for
additional information related to these corporate expenses and the
reconciliation to those presented in our Consolidated Statements of Income.
(2)Underwriting income (loss) is a non-GAAP measure and is calculated as net premiums earned plus other insurance revenue (expense), less net loss and LAE, commission and other acquisition expenses and general and administrative expenses directly related to underwriting activities. (3)The Company no longer presents certain non-GAAP measures such as combined ratio and its related components in its results of operation, as it believes that as the run-off of its reinsurance portfolios progresses, such ratios are increasingly not meaningful and of less value to readers as they evaluate our financial results. Net Income Net income available to Maiden common shareholders for the year endedDecember 31, 2022 was$55.4 million compared to net income available to Maiden common shareholders of$117.6 million in 2021. The net income for the year endedDecember 31, 2022 included combined gains from the Exchange and repurchase of our Preference Shares of$115.5 million for the year endedDecember 31, 2022 compared to the gain of$91.0 million for Preference Share repurchases during 2021. Excluding the combined gain on the Exchange and repurchase of our Preference Shares, our net loss for the year endedDecember 31, 2022 was$60.0 million compared to net income of$26.6 million in 2021. The net decrease in results for the year endedDecember 31, 2022 compared to 2021 was primarily due to: •underwriting loss of$54.9 million in the year endedDecember 31, 2022 compared to underwriting income of$11.6 million in the same period in 2021 largely due to:
•adverse prior year loss development of
detailed as follows:
•Our AmTrust Reinsurance segment had adverse prior year loss development of$28.1 million for 2022, compared to favorable prior year loss development of$24.0 million in 2021.
•Our Diversified Reinsurance segment had adverse prior year loss reserve
development of
development in GLS, compared to favorable development of
•on a current accident year basis, an underwriting loss of$22.3 million for the year endedDecember 31, 2022 compared to an underwriting loss of$16.0 million in 2021, primarily due to results in AmTrust Reinsurance segment and Diversified Reinsurance segment as discussed further below in the segment analysis; 48 -------------------------------------------------------------------------------- •negative earned premium adjustments of$15.8 million in the AmTrust Reinsurance segment related to premium adjustments for surcharges on Workers' Compensation policies and inuring AmTrust reinsurance for certain programs in Specialty Risk and Extended Warranty cessions (collectively the "AmTrust Cession Adjustments" which are discussed in greater detail in the AmTrust Reinsurance segment). Net of commission and loss adjustments, this contributed an underwriting loss of$5.1 million to our reported results for the year endedDecember 31, 2022 ; and
•an exit cost of
Reinsurance segment.
•total income from investment activities was
ended
of:
•net investment income decreased to
fixed income assets of 31.7% was partially offset by higher yields on these
assets as interest rates rose during 2022;
•realized and unrealized losses on investment of
ended
million
•interest in loss of equity method investments of
ended
investments of
The decrease in our results as discussed above was partially offset by the
following:
•corporate general and administrative expenses decreased to
the year ended
•foreign exchange and other gains increased to$8.3 million for the year endedDecember 31, 2022 compared to foreign exchange and other gains of$7.7 million in 2021. Net Premiums Written
The table below compares net premiums written by our reportable segments,
reconciled to the total consolidated net premiums written for the years ended
For the Year Ended December 31, 2022 2021 Change in
($ in thousands) Total Total $ %
Diversified Reinsurance $ 23,620 $ 16,098 $ 7,522 46.7 %
AmTrust Reinsurance (18,538) (5,695) (12,843) 225.5 %
Total $ 5,082 $ 10,403 $ (5,321) (51.1) %
Net premiums written for the year ended
compared to net premiums written of
following:
•Net premiums written in the Diversified Reinsurance segment increased by$7.5 million or 46.7% for the year endedDecember 31, 2022 compared to 2021 primarily due to the prior year return of unearned premiums written in a German Auto quota share reinsurance contract in our IIS business which went into run-off onJanuary 1, 2021 as well as direct premiums written by Maiden LF and Maiden GF which increased by$3.0 million or 14.0% during the year endedDecember 31, 2022 compared to 2021; and
•Negative premiums written in the AmTrust Reinsurance segment for the year
ended
Cession Adjustments.
Please refer to the analysis below of our Diversified Reinsurance and AmTrust
Reinsurance segments for further details.
Net Premiums Earned Net premiums earned decreased by$15.3 million or 28.8% for the year endedDecember 31, 2022 compared to 2021. The table below compares net premiums earned by our reportable segments, reconciled to the total consolidated net premiums earned, for the years endedDecember 31, 2022 and 2021: For the Year Ended December 31, 2022 2021 Change in ($ in thousands) Total Total $ % Diversified Reinsurance$ 27,983 $ 27,681 $ 302 1.1 % AmTrust Reinsurance 9,749 25,312 (15,563) (61.5) % Total$ 37,732 $ 52,993 $ (15,261) (28.8) %
Net premiums earned in the AmTrust Reinsurance segment for the year ended
due to
analysis of our AmTrust Reinsurance segment for further discussion.
49 -------------------------------------------------------------------------------- Net premiums earned in the Diversified Reinsurance segment for the year endedDecember 31, 2022 increased by$0.3 million or 1.1% compared to 2021. Please refer to the analysis of our Diversified Reinsurance segment for further discussion.
Other Insurance Revenue (Expense), Net
All other insurance revenue (expense), net is produced by our Diversified Reinsurance segment. Please refer to the analysis of our Diversified Reinsurance segment for further discussion regarding the sources of other insurance revenue (expense), net. Net Investment Income Net investment income decreased by$1.9 million or 6.1% for the year endedDecember 31, 2022 compared to 2021. This was primarily due to a decline in average aggregate fixed income assets of 31.7% driven by continued run-off of reinsurance liabilities previously written on prospective risks, resulting in significant negative operating cash flows as we run-off our existing reinsurance liabilities. Net investment income for the year endedDecember 31, 2022 was favorably impacted by a reversal of investment expense relating to certain alternative investments, which was a non-recurring item. Net investment income experienced an increase in annualized average book yields to 2.2% for the year endedDecember 31, 2022 compared to 1.9% in 2021. Despite the sharp decline in average invested fixed income assets noted above, net investment income decreased at a much lower rate due to the following factors: •shorter duration on our fixed income portfolio combined with 29.6% of fixed income investments as ofDecember 31, 2022 are floating rate investments which enabled us to take advantage of a higher interest rate environment by reinvesting at higher yields more quickly;
•a higher crediting interest rate on our funds withheld balance with AmTrust,
which had an average ending balance of
•a higher weighted average interest rate on our loan to related party of
million
The following table details our average aggregate fixed income assets (at cost)
and investment book yield for the years ended
For the Year Ended December 31, 2022 2021
($ in thousands)
Average aggregate fixed income assets, at cost (1) $ 1,226,134 $ 1,794,173
Annualized investment book yield 2.2 % 1.9 %
(1)Fixed income assets include AFS securities, cash and restricted cash, funds
held receivable, and loan to related party. These amounts are an average of the
amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
Net Realized and
Net realized and unrealized investment losses of$5.1 million for the year endedDecember 31, 2022 , and net realized and unrealized investment gains of$12.6 million for 2021 primarily reflect sales of fixed maturity bonds for the settlement of claim payments to AmTrust, the sale of which resulted in net realized losses of$3.0 million in 2022 compared to net realized gains of$9.1 million in 2021. The table below shows the breakdown of net realized investment gains (losses) and net unrealized investment gains (losses) by investment category for the years endedDecember 31, 2022 and 2021: For the Year Ended December 31, 2022 2021
($ in thousands)
Net realized investment (losses) gains - Fixed maturity
securities
$
(2,983)
Net realized investment gains - Equity securities 111 441 Net unrealized investment gains - Equity securities 2,225 335
Net realized and unrealized investment gains - Equity
securities
2,336 776 Net realized investment gains - Other investments 79 275 Net unrealized investment (losses) gains - Other investments (4,572) 2,500
Net realized and unrealized investment (losses) gains - Other
investments
(4,493) 2,775
Total net realized and unrealized investment (losses) gains
50
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The following table summarizes our net realized and unrealized investment gains
(losses) for the years ended
For the Year Ended December 31, 2022 2021 Net realized (losses) gains: ($ in thousands) Fixed income assets(1) (2,983) 9,097 Other investments, including equity securities 190 716 Total net realized (losses) gains
(2,793) 9,813
Net unrealized (losses) gains: Other investments, including equity securities (2,347) 2,835 Total net unrealized (losses) gains
(2,347) 2,835
Total net realized and unrealized investment (losses) gains
Interest in Income (Loss) of Equity Method Investments
The interest in loss of equity method investments was$0.2 million for the year endedDecember 31, 2022 compared to an interest in income of equity method investments of$7.7 million for the year endedDecember 31, 2021 . The results from equity method investments decreased by$8.0 million primarily due to a$5.1 million loss in our hedge fund equity method investments during the year endedDecember 31, 2022 . The Company's equity method investments include hedge fund investments of$5.4 million , real estate investments of$40.9 million and other investments of$33.8 million as ofDecember 31, 2022 . The following table details our interest in the (loss) income of equity method investments for the years endedDecember 31, 2022 and 2021, respectively: For the Year EndedDecember 31 ,
2022 2021
($ in thousands)
Hedge fund investments $ (5,053) $ 3,494
Real estate investments 29 -
Other equity method investments
4,819 4,254
Interest in (loss) income of equity method investments
Net Loss and Loss Adjustment Expenses
Net loss and LAE increased by$50.7 million during the year endedDecember 31, 2022 compared to 2021 largely due to significant net adverse prior year loss development in the AmTrust Reinsurance Segment compared to considerable favorable development experienced in this segment for 2021. The cessation of active reinsurance underwriting on prospective risks included the termination of the AmTrust Quota Share and European Hospital Liability Quota Share effectiveJanuary 1, 2019 . Net loss and LAE for 2022 was impacted by net adverse prior year reserve development of$32.6 million compared to net favorable prior year reserve development of$27.6 million during 2021. The prior year development is discussed in greater detail in the individual segment discussion and analysis and is primarily associated with the run-off of terminated reinsurance contracts in the AmTrust Reinsurance and Diversified Reinsurance segments.
Commission and Other Acquisition Expenses
Commission and other acquisition expenses decreased by$6.3 million or 25.5% for the year endedDecember 31, 2022 compared to 2021 primarily due to negative earned premiums in the AmTrust Reinsurance segment which reduced commission costs related to the AmTrust Cession Adjustments by$5.4 million . Please see further discussion in the individual segment analysis below.
General and Administrative Expenses
General and administrative expenses include both segment and corporate expenses segregated for analytical purposes as a component of underwriting income. Total general and administrative expenses decreased by$5.1 million or 14.1% for the year endedDecember 31, 2022 , compared to 2021 primarily due to lower corporate-related administrative expenses. Corporate general and administrative expenses for the year endedDecember 31, 2022 decreased by$6.4 million or 24.8% compared to 2021 due to lower payroll costs, equity-based incentive staff compensation and lower regulatory and professional fees incurred. 51
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General and administrative expenses for the years ended
2021 are comprised of:
For the Year Ended December 31, 2022 2021
($ in thousands)
General and administrative expenses - segments $ 11,634 $ 10,341
General and administrative expenses - corporate 19,313 25,679
Total general and administrative expenses $ 30,947 $
36,020
Interest and Amortization Expenses
The interest and amortization expenses related to outstanding senior notes issued byMaiden Holdings in 2016 andMaiden NA in 2013 were$19.3 million for the years endedDecember 31, 2022 and 2021, respectively. Please refer to "Notes to Consolidated Financial Statements - Note 7 - Long-Term Debt" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for further details on the Senior Notes. The weighted average effective interest rate for the Senior Notes was 7.6% for the years endedDecember 31, 2022 and 2021, respectively.
Foreign Exchange and Other Gains
Net foreign exchange and other gains amounted to$8.3 million during the year endedDecember 31, 2022 compared to net foreign exchange and other gains of$7.7 million in 2021. AtDecember 31, 2022 , net foreign exchange gains were primarily driven by exposures to euro, British pound and other non-USD denominated net loss reserves and insurance related liabilities in excess of foreign currency assets. Our non-USD denominated liabilities atDecember 31, 2022 included net loss reserves of$333.9 million . There was no new business written in non-USD currencies during the year endedDecember 31, 2022 . Our foreign currency asset exposures atDecember 31, 2022 included$205.1 million of fixed maturity securities managed by our investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy as well as$20.9 million of equity method real estate investments denominated in Canadian dollars. Net foreign exchange gains of$8.9 million and$7.5 million for the years endedDecember 31, 2022 and 2021, respectively, were attributable to the strengthening of theU.S. dollar on the re-measurement of net loss reserves and insurance related liabilities denominated in British pound and euro.
Income Tax Benefit (Expense)
The Company recognized an income tax benefit of$0.6 million for the year endedDecember 31, 2022 compared to an income tax expense of$15.0 thousand recognized for 2021. The income tax expense for 2021 was largely generated on the operating losses of our international subsidiaries. The effective rate of income tax was 0.9% for the year endedDecember 31, 2022 compared to an income tax rate of 0.1% for the year endedDecember 31, 2021 . The effective tax rate on the Company's net income differs from the statutory rate of zero percent underBermuda law due to tax on foreign operations, primarily theU.S. andSweden .
Underwriting Results by Reportable Segment
Diversified Reinsurance Segment
The underwriting results for our Diversified Reinsurance segment for the years
ended
For the Year Ended December 31, 2022
2021
($ in
thousands)
Gross premiums written$ 24,017 $ 16,633 Net premiums written$ 23,620 $ 16,098 Net premiums earned$ 27,983 $ 27,681 Other insurance (expense) revenue (4,530) 1,067 Net loss and LAE (12,483) (4,286) Commission and other acquisition expenses (14,164) (15,093) General and administrative expenses (8,857) (7,827) Underwriting (loss) income$ (12,051) $ 1,542 Underwriting results in the Diversified Reinsurance segment decreased for the year endedDecember 31, 2022 compared to 2021. This was primarily due to results from GLS operations, which reported an underwriting loss of$8.9 million for the year endedDecember 31, 2022 compared to$0.1 million in 2021, primarily driven by a$4.8 million decrease in the fair value of underwriting-related derivatives due to the acceleration of covered payments which triggered coverage in excess of the contracts risk margin during the year endedDecember 31, 2022 . 52 -------------------------------------------------------------------------------- Underwriting (loss) income by business unit is detailed in the table below for the Diversified Reinsurance segment for the years endedDecember 31, 2022 and 2021: For the Year Ended December 31, 2022 2021 ($ in thousands) International$ (1,103) $ 261 GLS (8,923) (137) Other run-off lines (2,025) 1,418 Underwriting (loss) income$ (12,051) $ 1,542 Premiums - Gross premiums written increased by$7.4 million , or 44.4% for the year endedDecember 31, 2022 compared to 2021 primarily due to the prior year return of unearned premiums written in a German Auto quota share reinsurance contract in our IIS business which went into run-off onJanuary 1, 2021 . Direct premiums written by Maiden LF and Maiden GF increased by$2.7 million or 12.3% during the year endedDecember 31, 2022 compared to 2021.
Net premiums written for the year ended
million
premiums in our German Auto quota share reinsurance contract which went into
run-off on
Net premiums earned increased by
Other Insurance (Expense) Revenue, Net - Other insurance (expense) revenue, net for the year endedDecember 31, 2022 includes fee income earned from our GLS business, fair value changes in derivatives related to certain coverages on retroactive reinsurance contracts written by GLS, and fee income derived from our IIS business not directly associated with premium revenue assumed by the Company as specified in the table below. Total other insurance (expense) revenue, net decreased by$5.6 million for the year endedDecember 31, 2022 compared to 2021 largely due to fair value changes on non-hedged underwriting-related derivatives in GLS. The decrease in the fair value of underwriting-related derivatives of$4.8 million was due to the acceleration of covered payments which triggered coverage in excess of the contracts risk margin. The decline of International fee income was primarily due to an auto customer program that went into run-off onJuly 31, 2021 .
The table below shows other insurance (expense) revenue, net by source for the
years ended
For the Year Ended December 31, 2022 2021 Change in $
($ in thousands)
Change in fair value of non-hedged underwriting-related
derivatives $ (4,825) $ - $ (4,825)
Other service fee income 194 302 (108)
International fee income 101 765 (664)
Total other insurance (expense) revenue, net $ (4,530)
Net Loss and LAE - Net loss and LAE increased by$8.2 million or 191.3% for the year endedDecember 31, 2022 compared to 2021. Net Loss and LAE was impacted by adverse prior year loss reserve development of$4.6 million during 2022, compared to the impact of favorable development of$3.6 million experienced during 2021. The adverse prior year development in 2022 was primarily due to GLS contracts and other reinsurance run-off lines partly offset by favorable reserve development in German Auto Programs. The favorable prior year loss development in 2021 was due to German Auto Programs, the run-off ofEuropean Capital Solutions and facultative reinsurance run-off lines.
The table below details prior year loss development by line of business for the
years ended
For the Year EndedDecember 31, 2022
2021
Prior Year Loss Development adverse (favorable) ($ in thousands) IIS business$ (1,683) $ (2,044) GLS 1,825 - Other run-off lines 4,410 (1,517) Total Diversified Reinsurance Prior Year Development$ 4,552 $ (3,561) 53
-------------------------------------------------------------------------------- Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by$0.9 million or 6.2% for the year endedDecember 31, 2022 compared to 2021. The lower commission expense for the year endedDecember 31, 2022 was largely related to an auto customer program that went into run-off onJuly 31, 2021 .
General and Administrative Expenses - General and administrative expenses
increased by
to 2021.
AmTrust Reinsurance Segment The AmTrust Reinsurance segment reported an underwriting loss of$42.9 million for the year endedDecember 31, 2022 compared to underwriting income of$10.0 million for the year endedDecember 31, 2021 . The decrease in underwriting results for the year endedDecember 31, 2022 was largely driven by adverse prior year loss development of$28.1 million during the year endedDecember 31, 2022 , which is detailed herein, compared to net favorable prior year loss development of$24.0 million in 2021. A significant portion of the loss development for the year endedDecember 31, 2022 was the result of the receipt of newly emergent adverse loss data for both known and unknown claims across a series of liability lines detailed in "Net Loss and Loss Adjustment Expenses" further below, primarily on older underwriting years reported by AmTrust. Accordingly, we have adjusted our carried IBNR and continue to be responsive and proactive to the loss data we are receiving. The AmTrust Cession Adjustments contributed an underwriting loss of$5.1 million to our reported results during the year endedDecember 31, 2022 ; excluding these adjustments, the AmTrust Reinsurance segment had an underwriting loss of$37.8 million on the run-off of unearned premium for terminated AmTrust reinsurance contracts.
The underwriting results for the AmTrust Reinsurance segment for the years ended
For the Year Ended December 31, 2022 2021
($ in thousands)
Gross premiums written $ (18,538) $ (5,695)
Net premiums written $ (18,538) $ (5,695)
Net premiums earned $ 9,749 $ 25,312
Net loss and LAE (45,508) (3,021)
Commission and other acquisition expenses (4,347) (9,747)
General and administrative expenses
(2,777) (2,514) Underwriting (loss) income$ (42,883) $ 10,030
Premiums - The table below shows net premiums written by category for the years
ended
For the Year Ended December 31, 2022 2021 Change in $
($ in thousands)
Net Premiums Written
Small Commercial Business $ (15,143) $ (6,445) $ (8,698)
Specialty Program 747 (876) 1,623
Specialty Risk and Extended Warranty (4,142) 1,626 (5,768)
Total AmTrust Reinsurance $ (18,538) $ (5,695) $ (12,843)
The negative gross and net premiums written for the year ended December 31, 2022
reflect the AmTrust Cession Adjustments which consist of higher than expected
adjustments related to the following items:
•$11.0 million of premium reductions on Workers Compensation policy surcharges
in Small Commercial Business subsequent to the termination of the AmTrust Quota
Share; and
•$4.8 million of premium reductions to AmTrust's inuring reinsurance for certain
programs in Specialty Risk and Extended Warranty which reduced the amount of
premium ceded to Maiden.
There were also negative gross and net premiums written for the year ended
December 31, 2022 and 2021 due to premium adjustments on Small Commercial
Business policies in the AmTrust Quota Share. Furthermore, the termination of
the AmTrust Quota Share and the European Hospital Liability Quota Share as of
January 1, 2019 resulted in no new business written under these contracts since
2018.
54
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Net premiums earned decreased by $15.6 million for the year ended December 31,
2022 compared to 2021 due to AmTrust Cession Adjustments and due to the
termination of the AmTrust Quota Share and European Hospital Liability Quota
Share as of January 1, 2019 . Excluding AmTrust Cession Adjustments of $15.8
million , net premiums earned were $25.5 million for the year ended December 31,
2022 compared to $25.3 million in 2021. Negative premiums earned in the years
ended December 31, 2022 and 2021 in Small Commercial Business were due to
premium adjustments on such policies in the AmTrust Quota Share.
The table below details net premiums earned by category for the years ended
For the Year Ended December 31, 2022 2021 ($ in thousands) Total % of Total Total % of Total Net Premiums Earned Small Commercial Business$ (15,131) (155.2) %$ (6,095) (24.1) % Specialty Program 748 7.7 % (853) (3.4) %
Specialty Risk and Extended Warranty 24,132 247.5 %
32,260 127.5 %
Total AmTrust Reinsurance$ 9,749 100.0 %
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by
million
adverse prior year loss development of
Net adverse prior year loss development of$28.1 million during the year endedDecember 31, 2022 was due to unfavorable movements in Commercial Auto Liability, General Liability, Other Specialty Risk & Extended Warranty and European Hospital Liability partly offset by continued favorable development in Workers Compensation. European Hospital Liability was due in part to higher than expected loss emergence in Italian Hospital Liability policies as well as the agreed exit cost of$3.7 million (€3.4 million) for the commutation of French Hospital Liability policies as described in "Note 10.Related Party Transactions".
Net favorable prior year loss development in 2021 was due to Workers
Compensation and Commercial Auto Liability partly offset by adverse development
in General Liability and European Hospital Liability.
The table below details prior year loss development by lines of business for the
years ended
For the Year Ended December 31, 2022 2021
Prior
impact of the LPT/ADC Agreement
($ in thousands) Workers Compensation$ (38,131) $ (22,242) Commercial Auto Liability 19,088 (29,918) General Liability 18,452 20,868 European Hospital Liability 13,247 7,885 Other Lines (1,685) (637) Other Specialty Risk & Extended Warranty 17,113 - Total AmTrust Reinsurance Prior Year Development$ 28,084 $ (24,044) As ofDecember 31, 2022 , the reinsurance recoverable on unpaid losses under the LPT/ADC Agreement was$490.4 million . The LPT/ADC Agreement providesMaiden Reinsurance with$155.0 million in adverse development cover over its carried AmTrust Quota Share loss reserves atDecember 31, 2018 . All lines of business in the table above are covered by the LPT/ADC Agreement, except for European Hospital Liability which is not part of the AmTrust Quota Share. European Hospital Liability business is not covered under the LPT/ADC Agreement and therefore, adverse development in this line of business may result in significant losses. Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by$5.4 million for the year endedDecember 31, 2022 compared to 2021 primarily due to AmTrust Cession Adjustments which resulted in negative earned premiums and a reduction to related brokerage fees.
Excluding AmTrust Cession Adjustments of
acquisition expenses were
compared to
General and Administrative Expenses - General and administrative expenses
increased by
to 2021 primarily due to higher letter of credit fees associated with the
LPT/ADC Agreement.
55
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Liquidity and Capital Resources
Liquidity
Maiden Holdings is a holding company and transacts no business of its own. We therefore rely on cash flows in the form of dividends, advances, loans and other permitted distributions from our subsidiary companies to pay expenses and make dividend payments on our common shares. The jurisdictions in which our operating subsidiaries are licensed to write business impose regulations requiring companies to maintain or meet statutory solvency and liquidity requirements and also place restrictions on the declaration and payment of dividends and other distributions. As ofDecember 31, 2022 , the Company had investable assets of$1.2 billion compared to$1.7 billion as ofDecember 31, 2021 . Investable assets are the combined total of our investments, cash and cash equivalents (including restricted cash), loan to a related party and funds withheld receivable. The decrease in our investable assets is primarily the result of the cessation of active reinsurance underwriting of new prospective risks since 2019 which subsequently resulted in negative operating cash flows to settle claim payments from the run-off of liabilities from our reinsurance portfolio in 2022. As discussed in "Item 1. Business",Maiden Reinsurance re-domesticated fromBermuda toVermont onMarch 16, 2020 . We continue to be actively engaged with the Vermont DFR regardingMaiden Reinsurance's longer term business plan, including its investment policy, changes to which require prior regulatory approval as stipulated byVermont law or the Vermont DFR for any active underwriting, capital management or other strategic initiatives.Maiden Reinsurance has received all necessary approvals required to date by theVermont DFR, including its activities via GLS and its investment policy, which includes: 1) the expansion of approved asset classes for investment reflecting not onlyMaiden Reinsurance's solvency position but the material reduction in required capital necessary to operate its business as discussed further in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity & Capital Resources - Cash and Investments; and 2) the purchase of affiliated securities as demonstrated in the recent preference share tender offers and the recently completed Exchange. The Investment Policy, as approved and as amended, maintains our established investment management and governance practices. During the second quarter of 2022, the Vermont DFR approved an annual dividend program to be paid byMaiden Reinsurance toMaiden NA , with notification to the Vermont DFR as dividends are paid. Subsequent to that approval,Maiden Reinsurance has paid$18.8 million in dividends toMaiden NA during the year endedDecember 31, 2022 .Maiden Reinsurance is regulated by the Vermont DFR and is the principal operating subsidiary ofMaiden Holdings . AtDecember 31, 2022 ,Maiden Reinsurance had statutory capital and surplus of$898.1 million , exceeding the amounts required to be maintained of$107.0 million atDecember 31, 2022 . Under its license as an affiliated reinsurer under the captive licensing laws in theState of Vermont ,Maiden Reinsurance requires the approval of the Vermont DFR for the payment of any dividends. During the year endedDecember 31, 2022 ,Maiden Reinsurance paid dividends of$18.8 million toMaiden NA . During the years endedDecember 31, 2022 and 2021,Maiden NA did not pay any dividends toMaiden Holdings during both periods.Maiden Holdings has two Swedish domiciled operating subsidiaries, Maiden LF and Maiden GF, which are both regulated by the Swedish FSA. AtDecember 31, 2022 , Maiden LF and Maiden GF each had a statutory capital and surplus of$7.8 million and$8.5 million , respectively, exceeding the amounts required to be maintained of$4.3 million and$5.6 million , respectively, atDecember 31, 2022 . Maiden LF and Maiden GF are subject to statutory and regulatory restrictions under the Swedish FSA that limit the maximum amount of annual dividends or distributions paid by Maiden LF and Maiden GF toMaiden Holdings . AtDecember 31, 2022 , Maiden LF and Maiden GF are not allowed to pay dividends or distributions without the permission of the Swedish FSA. During the years endedDecember 31, 2022 and 2021, Maiden LF and Maiden GF did not pay any dividends toMaiden Holdings .Maiden Holdings' wholly ownedU.K. subsidiary, Maiden Global, operates as a reinsurance services and holding company. Maiden Global is subject to regulation by theU.K. Financial Conduct Authority (the "FCA"). AtDecember 31, 2022 , Maiden Global is allowed to pay dividends or distributions not exceeding$3.8 million . Maiden Global paid dividends of$1.1 million toMaiden Holdings during the year endedDecember 31, 2022 , however there were no dividends paid in 2021. We may experience continued volatility in our results of operations which could negatively impact our financial condition and create a reduction in the amount of available distribution or dividend capacity from our regulated reinsurance subsidiaries, which would also reduce liquidity. Further, we and our insurance subsidiaries may need additional capital to maintain compliance with regulatory capital requirements and/or be required to post additional collateral under existing reinsurance arrangements, which could reduce our liquidity.
Operating, investing and financing cash flows
Our sources of funds historically have consisted of premium receipts net of
commissions and brokerage, investment income, net proceeds from capital raising
activities, and proceeds from sales, maturities, pay downs and redemption of
investments. Cash is currently used primarily to pay loss and LAE, ceded
reinsurance premium, general and administrative expenses, and interest expense,
with the remainder of cash in excess of our operating requirements made
available to our investment managers for investment in accordance with our
investment policy, as well as for capital management such as repurchasing our
shares.
Our business has undergone significant changes since 2018. As previously noted,
we have engaged in a series of transactions that have materially reduced our
balance sheet risk and transformed our operations. As a result of these
transactions, we are not engaged in any active underwriting of new prospective
reinsurance business thus our net premiums written will continue to be
materially lower and investment income will become a significantly larger
portion of our total revenues. We are writing new retroactive risks through GLS,
however this will be smaller in relation to the run-off of our prior reinsurance
business. Despite
56
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the initial inflow of new business from GLS, the run-off of our prior
reinsurance business has continued to cause significant negative operating cash
flows as we run off the AmTrust Reinsurance segment reserves as shown in the
cash flows table below.
While the development of the GLS platform over time should further enhance our
ability to pursue the asset and capital management pillars of our business
strategy, we expect the trend of negative overall cash flows to continue to
reduce our asset base going forward into 2023 and beyond.
We expect to use funds from cash and investment portfolios, collected premiums on reinsurance contracts in force or being run-off, investment income and proceeds from investment sales and redemptions to meet our expected claims payments and operational expenses. Claim payments will be principally from the run-off of existing reserves for losses and LAE. A significant portion of those liabilities are collateralized and claim payments will be funded by using this collateral which should provide sufficient funding to fulfill those obligations. The Company's management believes its current sources of liquidity are adequate to meet its cash requirements for the next twelve months as we generally expect negative operating cash flows to be sufficiently offset by positive investing cash flows. While we continue to expect our cash flows to be sufficient to meet our cash requirements and to operate our business, our ability to execute our asset and capital management initiatives are dependent on maintaining adequate levels of unrestricted liquidity and cash flows. Our expanded asset management strategy can be impacted by both investment specific and broader financial market conditions and may not produce the expected liquidity and cash flows these investments are designed to achieve, or the timing thereof may also be impacted by those factors. We experienced such conditions during 2022. AtDecember 31, 2022 and 2021, unrestricted cash and cash equivalents and unrestricted fixed maturity investments were$64.3 million and$81.1 million , respectively. The decrease of$16.8 million in unrestricted cash and fixed maturity investments during 2022 was primarily the result of the following key items:
•
•$47.2 million utilized for net purchases of alternative investments including
equity method investments, and
•$19.1 million utilized for interest payments on the Senior Notes, partly offset
by:
•excess collateral releases of
million
Please see the related discussion on cash flows from investing and financing
activities below. The table below summarizes our operating, investing and
financing cash flows for the years ended
For the Year Ended December 31, 2022 2021
($ in thousands)
Operating activities $ (195,928) $ (394,430)
Investing activities 188,790 464,064
Financing activities (10,983) (138,903)
Effect of exchange rate changes on foreign currency cash (1,342) (470)
Total decrease in cash, cash equivalents and restricted cash
Cash Flows from Operating Activities
Cash flows used in operating activities for the year endedDecember 31, 2022 were$195.9 million compared to cash flows used in operating activities of$394.4 million for the year endedDecember 31, 2021 , a decrease of$198.5 million . The operating cash flows used in operations for the years endedDecember 31, 2022 and 2021 were primarily the result of claims payments for the runoff of existing reserves for terminated AmTrust Quota Share and the European Hospital Liability Quota Share contracts as well as return of premiums due to AmTrust Cession Adjustments.
Cash Flows from Investing Activities
Cash flows provided by investing activities consist of proceeds from sales and maturities of investments net of payments for investments acquired. Net cash provided by investing activities was$188.8 million for the year endedDecember 31, 2022 compared to$464.1 million for 2021 due to proceeds from sales of fixed maturity investments which were made primarily to settle claim payments and repurchase the Company's preference shares during the years endedDecember 31, 2022 and 2021. For the year endedDecember 31, 2022 , the proceeds from the sales, maturities and calls exceeded the purchases of fixed maturity securities by$233.4 million compared to net proceeds of$575.4 million during 2021. The net proceeds were partly offset by$47.2 million utilized for net purchases of alternative investments, including equity method investments, during the year endedDecember 31, 2022 .
Cash Flows from Financing Activities
Cash flows used in financing activities were$11.0 million for the year endedDecember 31, 2022 compared to$138.9 million during 2021 primarily due to the repurchase of the Company's Preference Shares. The Company paid$10.0 million for the repurchase of 1,581,509 preference shares pursuant to the 2021 Preference Share Repurchase Program during the year endedDecember 31, 2022 compared to$136.3 million paid during 2021 for 9,404,012 preference shares. The Company also paid$1.0 57
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million for common share repurchases from employees which represent tax
withholding in respect of tax obligations on vesting of both
non-performance-based and discretionary performance-based restricted shares
during 2022.
No dividends on common or preference shares were paid during 2022 and 2021. Our Board of Directors has not declared any common or preference share dividends since the third quarter of 2018. After the Exchange, there are no longer any preference shares outstanding as ofDecember 31, 2022 .
Restrictions, Collateral and Specific Requirements
Maiden Reinsurance is generally required to post collateral security with respect to any reinsurance liabilities it assumes from ceding insurers domiciled in theU.S. to obtain credit on theirU.S. statutory financial statements with respect to reinsurance recoverables due to them. Consequently, cash and cash equivalents and investments are pledged in favor of ceding companies to comply with relevant insurance regulations or contractual requirements. AtDecember 31, 2022 , the Company had letters of credit outstanding of$40.3 million for collateral purposes which are secured by cash and fixed maturities with a fair value of$47.1 million . AtDecember 31, 2022 and 2021, restricted cash and cash equivalents and fixed maturity investments used as collateral were$296.8 million and$582.1 million , respectively. This collateral represents 82.2% and 87.8% of the fair value of our total fixed maturity investments and cash, restricted cash and cash equivalents atDecember 31, 2022 and 2021, respectively. The following table provides additional information on restricted cash and fixed maturities used as collateral atDecember 31, 2022 and 2021: December 31, 2022 2021 Restricted Cash & Fixed Restricted Cash & Fixed ($ in thousands) Equivalents Maturities Total Equivalents Maturities Total
Diversified Reinsurance $ 13,122 $ 48,101 $ 61,223 $ 34,298 $ 48,845 $ 83,143 AmTrust Reinsurance 2,516 233,091 235,607 5,121 493,883 499,004 Total $ 15,638 $ 281,192 $ 296,830 $ 39,419 $ 542,728 $ 582,147
As a % of Consolidated Balance
Sheet captions 100.0% 89.4% 89.9% 100.0% 90.9% 91.5%Maiden Reinsurance loaned funds of$168.0 million to AmTrust atDecember 31, 2022 and 2021, respectively, to partially satisfy its collateral requirements with AII. Advances under the loan are secured by promissory notes and the loan is carried at cost. OnJanuary 30, 2019 , in connection with the termination of the AmTrust Quota Share, the Company and AmTrust amended the Loan Agreement betweenMaiden Reinsurance , AmTrust and AII, originally entered into onNovember 16, 2007 , to extend the maturity date toJanuary 1, 2025 and the parties acknowledged that due to the termination of the AmTrust Quota Share, no further loans or advances may be made pursuant to the Loan Agreement. OnJanuary 11, 2019 , a portion of the existing trust accounts used for collateral on the AmTrust Quota Share were converted to a funds withheld arrangement. The Company transferred$575.0 million to AmTrust as a funds withheld receivable which bears an annual interest rate of 2.1%, subject to annual adjustment. The annual interest rate was 1.8% for the duration of 2021. AtDecember 31, 2022 , the funds withheld balance was$416.8 million compared to$575.0 million atDecember 31, 2021 . OnJanuary 24, 2019 ,Maiden Reinsurance transferred cash of €45.1 million ($51.2 million ) to AIU DAC as a funds withheld receivable to serve as collateral for the European Hospital Liability Quota Share. AIU DAC paidMaiden Reinsurance a fixed annual interest rate of 0.5% on the average daily funds withheld balance. EffectiveJuly 1, 2022 ,Maiden Reinsurance and AIU DAC entered into an agreement ("Commutation Agreement") which provided for AIU DAC to assume all reserves ceded by AIU DAC toMaiden Reinsurance with respect to AIU DAC's French Medical Malpractice exposures for underwriting years 2012 through 2018 reinsured byMaiden Reinsurance under the European Hospital Liability Quota Share. In accordance with the Commutation Agreement,Maiden Reinsurance paid$31,291 (€29,401) to AIU DAC, which is the sum of net ceded reserves of$27,625 (€25,956) and an agreed exit cost of$3,666 (€3,444). As a result of the Commutation Agreement,Maiden Reinsurance reduced its exposure to AmTrust's Hospital Liability business, however, it continues to have exposure to Italian medical malpractice liabilities under the European Hospital Liability Quota Share. For AIU DAC, the Company utilized funds withheld to satisfy its collateral requirements which was used to settle the Commutation Agreement onSeptember 12, 2022 . Therefore, atDecember 31, 2022 , the funds withheld under this agreement was eliminated compared to$26.5 million held atDecember 31, 2021 . Collateral arrangements with ceding insurers may subject our assets to security interests or require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from these assets, while held in trust, accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities or the investment regulations of the state or territory of domicile of the ceding insurer, which may be more restrictive than the investment regulations applicable to the Company underU.S. law in theState of Vermont . The restrictions may result in lower investment yields on these assets, which may adversely affect our profitability. We do not anticipate that restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies or from assets committed in trust accounts or those assets used to collateralize letter of credit facilities will have a material impact on our ability to carry out our normal business activities. 58
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Cash and Investments
Historically, the investment of our funds had generally been designed to ensure safety of principal while generating current income. Accordingly, the majority of our funds had been invested in liquid, investment-grade fixed income securities which are all designated as AFS atDecember 31, 2022 . As our insurance liabilities continue to run-off and the required capital to operate our business for regulatory purposes decreases, we have modifiedMaiden Reinsurance's investment policy (which has been approved by the Vermont DFR as noted) and have expanded the range of asset classes we invest in to enhance the income and total returns our investment portfolio produces. We categorize these investments as alternative investments which include "Other Investments", "Equity Securities ", and "Equity Method Investments" on our consolidated balance sheets as discussed in "Note 2 - Significant Accounting Policies" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
As of
AtDecember 31, 2022
2021
($ in
thousands)
Fixed maturities, available-for-sale, at fair value
Equity investments, at fair value
43,621 24,003 Equity method investments 80,159 83,742 Other investments 148,753 117,722 Total investments 587,060 822,612 Cash and cash equivalents 30,986 26,668 Restricted cash and cash equivalents 15,638
39,419
Total Investments and Cash (including cash equivalents)
In addition to the discussion on Cash and Cash Equivalents and Fixed Maturities that follows herein, please see "Notes to Consolidated Financial Statements - Note 4 - Investments" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further discussion on our AFS fixed income securities. Under this revised investment policy, we have continued to increase the amount of alternative investments during 2022 and 2021, and we expect to continue to increase the amounts invested therein. Under our investment policy, alternative investments could include, but are not limited to, privately held investments, private equities, private credit lending funds, fixed-income funds, hedge funds, equity funds, real estate (including joint ventures and limited partnerships) and other non-fixed-income investments.
For further details on our alternative investments, in addition to the
discussion of the investments herein, please see "Notes to Consolidated
Financial Statements Note 4(b). Other Investments,
Method Investments" included under Part II Item 8 "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K.
Our investment performance is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, foreign exchange risk, liquidity risk and credit and default risk. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. An increase in interest rates could result in significant losses, realized or unrealized, in the value of our investment portfolio. A portion of our portfolio consists of alternative investments that subject us to restrictions on redemption, which may limit our ability to withdraw funds for some period of time after the initial investment. The values of, and returns on, such investments may also be more volatile. We believe our other investments, equity securities and equity method investments portfolio provides diversification against our fixed-income investments and an opportunity for improved risk-adjusted return, however, the returns of these investments may be more volatile and we may experience significant unrealized gains or losses in a particular quarter or year. While we believe the returns produced by these investments will exceed our cost of capital, in particular our cost of debt capital, it is too soon to determine if the actual returns will achieve this objective and it may be an extended period of time before that determination can be made. We may utilize and pay fees to various companies to provide investment advisory and/or management services related to these investments. These fees, which would be predominantly based upon the amount of assets under management, would be included in net investment income. In addition, costs associated with evaluating, analyzing and monitoring these investments may require additional expenditures than traditional marketable securities. During 2022, our investment expenses associated with our alternative investments decreased compared to 2021. The substantial majority of our current and future investments are held byMaiden Reinsurance , whose investment policy has been approved by theVermont DFR. We utilized a portion ofMaiden Reinsurance's unrestricted assets to purchase affiliated securities and, during the year endedDecember 31, 2022 , we utilized$10.0 million in conjunction with the 2021 Preference Share Repurchase Program.Maiden Reinsurance received all necessary approvals for its investment policy. Prior to the Exchange, we cumulatively invested$176.4 million in the preference shares ofMaiden Holdings which have since been extinguished and exchanged for 41,439,348 common shares of the Company pursuant to the Exchange. 59 -------------------------------------------------------------------------------- As a result of the Exchange, there are no preference shares outstanding. The market value of our common shares held byMaiden Reinsurance was$87.4 million atDecember 31, 2022 . Cash & Cash Equivalents AtDecember 31, 2022 , we consider the levels of cash and cash equivalents we are holding to be within our targeted ranges. During periods when interest rates experience greater volatility, we have periodically maintained more cash and equivalents to better assess current market conditions and opportunities within our defined risk appetite, and may do so in future periods.
Fixed Maturity Investments
The average yield and average duration of our fixed maturities, by asset class,
and our cash and cash equivalents (both restricted and unrestricted) are as
follows:
Original or Gross Gross
Amortized Unrealized Unrealized Fair Average
December 31, 2022 Cost Gains Losses Value yield(1) Average duration(2)
AFS Fixed maturities ($ in thousands) U.S. treasury bonds$ 55,647 $ 1$ (116) $ 55,532 4.0 % 0.7 U.S. agency bonds - mortgage-backed 38,767 - (4,402) 34,365 2.7 % 4.7 Collateralized mortgage-backed securities 7,199 - (432) 6,767 5.3 % 2.7 Non-U.S. government bonds 12,643 - (825) 11,818 0.3 % 2.8 Collateralized loan obligations 119,120 - (5,028) 114,092 3.1 % 0.3 Corporate bonds 97,063 - (5,110) 91,953 1.5 % 2.1 Total fixed maturities 330,439 1 (15,913) 314,527 2.7 % 1.5 Cash and cash equivalents 46,624 - - 46,624 1.2 % 0.0 Total$ 377,063 $ 1$ (15,913) $ 361,151 2.5 % 1.3 Original or Gross Gross Amortized Unrealized Unrealized Fair Average December 31, 2021 Cost Gains Losses Value yield(1) Average duration(2) AFS fixed maturities ($ in thousands) U.S. treasury bonds$ 59,989 $ -$ (110) $ 59,879 0.2 % 0.9 U.S. agency bonds - mortgage-backed 96,554 2,429 (193) 98,790 2.7 % 2.1 Collateralized mortgage-backed securities 14,972 565 - 15,537 3.2 % 3.1 Non-U.S. government bonds 3,163 113 - 3,276 0.3 % 7.3 Collateralized loan obligations 183,974 140 (5,093) 179,021 1.3 % 0.3 Corporate bonds 236,692 10,094 (6,144) 240,642 2.5 % 2.7 Total AFS fixed maturities 595,344 13,341 (11,540) 597,145 1.9 % 1.7 Cash and cash equivalents 66,087 - - 66,087 - % 0.0 Total$ 661,431 $ 13,341 $ (11,540) $ 663,232 1.7 % 1.5 (1) Average yield is calculated by dividing annualized investment income for each sub-component of fixed maturity securities and cash and cash equivalents (including amortization of premium or discount) by amortized cost.
(2) Average duration in years.
During the year endedDecember 31, 2022 , the yield on the 10-yearU.S. Treasury bond increased by 236 basis points to 3.88%. The 10-yearU.S. Treasury rate is the key risk-free determinant in the fair value of many of the fixed income securities in our portfolio. TheU.S. Treasury yield curve experienced a material upward shift during the year endedDecember 31, 2022 , reflecting concerns of theU.S. Federal Reserve about ongoing inflation emanating from the combination of: 1) the continuing strength of theU.S. economy combined with inflationary pressures, particularly in labor markets; 2) geopolitical instability inEastern Europe which threatened additional inflation and global economic stability; 3) the levels of fiscal stimulus administered by theU.S. federal government in recent years to support the economy, particularly during the COVID-19 pandemic; and 4) the anticipated monetary policy responses required to collectively temper these factors. Central banks globally have responded in similar fashion and continue to indicate additional interest rate increases are likely in 2023. As a result of these and other factors, the movement in the market values of our fixed maturity portfolio during the year endedDecember 31, 2022 generated net unrealized losses of$17.7 million which reduced our book value per common share by$0.17 during that period. Current outlooks for global monetary policy indicate that substantial quantitative tightening by central banks in theU.S. and globally appears likely to continue. Our investment portfolios, in particular our fixed maturity portfolio, may be adversely impacted by unfavorable market conditions caused by these measures, which could cause continued volatility in our results of operations and negatively impact our financial condition. 60 -------------------------------------------------------------------------------- Interest rate risk is the price sensitivity of a security to changes in interest rates. Credit spread risk is the price sensitivity of a security to changes in credit spreads. As noted, the fair value of our fixed maturity investments will fluctuate with changes in interest rates and credit spreads. We attempt to maintain adequate liquidity in our fixed maturity investments portfolio with a strategy designed to emphasize the preservation of our invested assets and provide sufficient liquidity for the prompt payment of claims and contract liabilities. Because we collateralize a significant portion of our insurance liabilities, unanticipated or large increases in interest rates could require us to utilize significant amounts of unrestricted cash and fixed maturity securities to provide additional collateral, which could impact our asset and capital management strategy described herein. We also monitor the duration and structure of our investment portfolio as discussed below. As ofDecember 31, 2022 , the aggregate hypothetical change in fair value from an immediate 100 basis points increase in interest rates, assuming credit spreads remain constant, in our fixed maturity investments portfolio would decrease the fair value of that portfolio by$9.1 million . Actual shifts in interest rates may not change by the same magnitude across the maturity spectrum or on an individual security and, as a result, the impact on the fair value of our fixed maturity securities may be materially different from the resulting change in value described above. To limit our exposure to unexpected interest rate increases which would reduce the value of our fixed income securities and reduce our shareholders' equity, we attempt to maintain the duration of our fixed maturity investment portfolio combined with our cash and cash equivalents, both restricted and unrestricted, within a reasonable range of the duration of our loss reserves. AtDecember 31, 2022 and 2021, these respective durations in years were as follows:December 31 ,
2022 2021
Fixed maturities and cash and cash equivalents
1.3 1.5
Reserve for loss and LAE - gross of LPT/ADC Agreement reserves 5.3 4.4
Reserve for loss and LAE - net of LPT/ADC Agreement reserves
1.1 1.4
During the year endedDecember 31, 2022 , the weighted average duration of our fixed maturity investment portfolio decreased by 0.2 years to 1.3 years while the duration for reserve for loss and LAE increased by 0.9 years to 5.3 years. The differential in duration between these assets and liabilities may fluctuate over time and, in the case of our fixed maturities, historically has been affected by factors such as market conditions, changes in asset mix and prepayment speeds in the case of both ourU.S. agency mortgage-backed bonds ("Agency MBS") and commercial mortgage-backed securities. AtDecember 31, 2022 , the duration of our fixed maturity investment portfolio decreased compared toDecember 31, 2021 due to continued sales of fixed maturity investments primarily made to settle claim payments with AmTrust. AtDecember 31, 2022 , the duration of our loss reserves net of the LPT/ADC Agreement was slightly lower than the duration of our fixed maturity investment portfolio atDecember 31, 2022 driven by the commutation of certain European Hospital Liability policies which were long-tailed in nature and were not subject to the LPT/ADC Agreement. To limit our exposure to unexpected interest rate increases that could reduce the value of our fixed maturity securities and our shareholders' equity, the Company holds floating rate securities whose fair values are less sensitive to changes in interest rates. AtDecember 31, 2022 andDecember 31, 2021 , 29.6% and 23.6%, respectively, of our fixed income investments are comprised of floating rate securities. The floating rate investment holdings atDecember 31, 2022 andDecember 31, 2021 were as follows: December 31, 2022 2021 ($ in thousands) Fair Value % of Total Fair Value % of Total Floating rate securities Collateralized loan obligations$ 114,092 11.8 %$ 174,873 11.9 % Collateralized mortgage-backed securities 4,773 0.5 % 3,007 0.2 % Corporate bonds - - % 1,145 0.1 % Total floating rate AFS fixed maturities at fair value 118,865 12.3 % 179,025 12.2 % Loan to related party 167,975 17.3 % 167,975 11.4 % Total floating rate securities$ 286,840 29.6 %$ 347,000 23.6 % Total fixed income investments at fair value (1)$ 970,538 $ 1,467,619
(1) Total fixed income investments at fair value include AFS fixed maturities,
cash and restricted cash, funds withheld receivable, and loan to related party.
61
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At
mortgage-backed. Additional details on the Agency MBS holdings at
2022
December 31, 2022 2021
($ in thousands) Fair Value % of Total Fair Value % of Total
FNMA - fixed rate $ 18,750 54.6 % $ 47,419 48.0 %
FHLMC - fixed rate 13,034 37.9 % 47,758 48.3 %
GNMA - variable rate 2,581 7.5 % 3,613 3.7 %
Total
TotalU.S. agency MBS comprise 10.9% of our fixed maturity investment portfolio atDecember 31, 2022 . Given their relative size to our total investments, if faster prepayment patterns were to occur over an extended period of time, this could potentially limit the growth in our investment income in certain circumstances or reduce the total amount of investment income we earn.
At
maturity investments consisted of investment grade securities. We define a
security as being below investment grade if it has an S&P credit rating of BB+
or equivalent, or less. Please see "Part II, Item 8 - Notes to Consolidated
Financial Statements Note 4. Investments" for additional information on the
credit rating of our fixed income portfolio.
The security holdings by sector and financial strength rating of our corporate
bond holdings at
Ratings(1)
BBB+, BBB, % of Corporate
December 31, 2022 AAA A+, A, A- BBB- BB+ or lower Fair Value bonds
Corporate bonds ($ in thousands)
Basic Materials - % - % 5.3 % - % $ 4,912 5.3 %
Communications - % 5.7 % 5.2 % - % 10,004 10.9 %
Consumer - % 6.3 % 39.1 % - % 41,767 45.4 %
Energy - % 0.9 % 7.7 % - % 7,860 8.6 %
Financial Institutions 1.6 % 20.3 % 0.4 % 5.2 % 25,272 27.5 %
Industrials - % 2.3 % - % - % 2,138 2.3 %
Total Corporate bonds 1.6 % 35.5 % 57.7 % 5.2 % $ 91,953 100.0 %
Ratings(1)
BBB+, BBB, % of Corporate
December 31, 2021 AAA A+, A, A- BBB- BB+ or lower Fair Value bonds
Corporate bonds ($ in thousands)
Basic Materials - % 2.4 % 1.7 % - % $ 9,995 4.1 %
Communications - % 2.4 % 3.2 % - % 13,480 5.6 %
Consumer - % 2.4 % 31.3 % 2.8 % 87,753 36.5 %
Energy - % 9.4 % 4.8 % - % 34,068 14.2 %
Financial Institutions 0.6 % 18.8 % 12.9 % 2.6 % 84,025 34.9 %
Industrials - % 1.0 % - % - % 2,393 1.0 %
Technology - % 3.7 % - % - % 8,928 3.7 %
Total Corporate bonds 0.6 % 40.1 % 53.9 % 5.4 % $ 240,642 100.0 %
(1) Ratings as assigned by S&P, or equivalent
62
-------------------------------------------------------------------------------- The table below includes the Company's ten largest corporate holdings at fair value and as a percentage of all fixed income securities held as atDecember 31, 2022 , of which 100.0% are Euro denominated, with 54.7% invested in the Consumer Sector and 19.3% invested in the Financial Institutions sector: % of Total Fixed December 31, 2022 Fair Value Income Holdings Rating(1) ($ in thousands) Anheuser-Busch INBEV NV, 2.875%, Due 9/25/2024 $ 10,638 3.4 % BBB+ Chubb Ina Holdings Inc., 1.55%, Due 3/15/2028 6,139 1.9 % A Kraft Heinz Foods Co., 1.5%, Due 5/24/2024 6,118 1.9 % BBB- Glencore Finance (Europe) LTD, 1.875%, Due 9/13/2023 5,299 1.7 % BBB+ Santander Consumer Finance SA, 1.125%, Due 10/9/2023 5,281 1.7 % AVolkswagen International Finance NV , 1.125%, Due 10/2/2023 5,277 1.7 % A- America Movil SAB DE CV, 1.5%, Due 3/10/2024 5,221 1.7 % A- Utah Acquisition Sub Inc., 2.25%, Due 11/22/2024 5,165 1.6 % BBB-Molson Coors Beverage Co ., 1.25%, Due 7/15/2024 5,164 1.6 % BBB- PPG Industries Inc., 0.875%, Due 11/3/2025 4,912 1.6 % BBB+ Total $ 59,214 18.8 %
(1) Ratings as assigned by S&P, or equivalent
At
dollar denominated securities:
December 31, 2022 2021 ($ in thousands) Fair Value % of Total Fair Value % of Total Non-U.S. dollar denominated collateralized loan obligations$ 102,812 50.1 %$ 113,399 42.9 % Non-U.S. dollar denominated corporate bonds 90,491 44.1 % 147,740 55.9 % Non-U.S. government bonds 11,818 5.8 % 3,275 1.2 % Total non-U.S. dollar denominated securities$ 205,121 100.0 %$ 264,414 100.0 % AtDecember 31, 2022 and 2021, respectively, 100.0% of our non-U.S. dollar denominated securities above were invested in euro. The net decrease in non-U.S. dollar denominated fixed maturities is largely due to the relative depreciation of euro denominated corporate bonds during the year endedDecember 31, 2022 . AtDecember 31, 2022 and 2021, all of the Company's non-U.S. government issuers have a rating of AA- or higher by S&P.
For our non-
summarizes the composition of the fair value of our fixed maturity investments
by ratings at
Ratings(1) at December 31, 2022 2021 ($ in thousands) Fair Value % of Total Fair Value % of Total A+, A, A-$ 32,633 36.0 %$ 56,669 38.4 % BBB+, BBB, BBB- 53,094 58.7 % 78,021 52.8 % BB+ or lower 4,764 5.3 % 13,050 8.8 % Total non-U.S. dollar denominated corporate bonds$ 90,491 100.0 %$ 147,740 100.0 %
(1) Ratings as assigned by S&P, or equivalent
The Company does not employ any credit default protection against any of the fixed maturity investments held in non-U.S. dollar denominated currencies atDecember 31, 2022 and 2021, respectively.
Other Investments, Equity Investments and Equity Method Investments
Our alternative investments are categorized as other investments, equity
securities and equity method investments as reported on our consolidated balance
sheets. These include private equity funds, private credit funds and hedge funds
investments, investments in limited partnerships, as well as investments in
direct lending entities and investments in technology-oriented insurance related
businesses known as insurtechs. Private equity investments consist of direct
investments in privately held entities, investments in private equity funds and
private equity co-investments with sponsoring entities. Private credit
investments consist of loans and other debt securities of privately held
entities or investment sponsors.
63
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Our alternative investments as ofDecember 31, 2022 and 2021 consisted of the following categories: December 31, 2022 2021 ($ in thousands) Carrying Value % of Total Carrying Value % of Total Publicly traded equity investments in common stocks $ 386 0.1 % $ 1,174 0.5 % Privately held common stocks 32,290 11.9 % 22,029 9.8 % Privately held preferred stocks 10,945 4.0 % 800 0.4 % Total equity securities 43,621 16.0 % 24,003 10.7 % Hedge fund investments 5,376 2.0 % 32,929 14.6 % Real estate investments 40,944 15.0 % 44,050 19.5 % Other equity method investments 33,839 12.4 % 6,763 3.0 % Total equity method investments 80,159 29.4 % 83,742 37.1 % Private equity funds 34,278 12.6 % 23,324 10.3 % Private credit funds 24,374 8.9 % 20,922 9.3 % Privately held equity investments 34,014 12.5 % 30,500 13.5 % Investment in direct lending funds (at cost) 56,087 20.6 % 42,976 19.1 % Total other investments 148,753 54.6 % 117,722 52.2 % Total alternative investments$ 272,533 100.0 %$ 225,467 100.0 % Our allocation to alternative investments increased to 43.0% of our total cash and investments as ofDecember 31, 2022 compared to 25.4% as ofDecember 31, 2021 ; and increased to 95.8% of our total shareholders' equity as ofDecember 31, 2022 compared to 58.7% as ofDecember 31, 2021 .
In addition to the categories described above, we also evaluate our alternative
investments by the following asset classes:
December 31, 2022 2021 ($ in thousands) Carrying Value % of Total Carrying Value % of Total Private Equity$ 60,227 22.1 %$ 66,290 29.4 % Private Credit 51,783 19.0 % 20,863 9.2 % Hedge Funds 5,376 2.0 % 32,929 14.6 % Alternatives 85,866 31.5 % 46,490 20.6 % Venture Capital 21,126 7.7 % 7,344 3.3 % Real Estate 48,155 17.7 % 51,551 22.9 % Total alternative investments$ 272,533 100.0 %$ 225,467 100.0 % During 2022, we funded$49.5 million of new investments largely focused on income producing assets reflecting the increase in interest rates experienced during the year. To the extent that interest rates and risk-adjusted credit quality remains appropriate, we expect to continue to focus on investments that will take advantage of that environment to produce current income.
For further details on these alternative investments, please see "Notes to
Consolidated Financial Statements: Note 4(b) Other Investments,
Securities
"Financial Statements and Supplementary Data" of this Annual Report on Form
10-K.
Certain of the Company's investments in limited partnerships are related to real
estate joint ventures with interests in multi-property projects with varying
strategies ranging from the development of properties to the ownership of
income-producing properties. In certain of these joint ventures, the Company has
provided certain indemnities, guarantees and commitments to certain parties such
that it may be required to make payments now or in the future. For further
details on these financial guarantees, please see "Notes to Consolidated
Financial Statements: Note 11 - Commitments, Contingencies and Guarantees"
included under Part II Item 8 "Financial Statements and Supplementary Data" of
this Annual Report on Form 10-K.
64
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Investment Results
The following table summarizes our investment results for the years ended
For the Year Ended December 31, 2022 2021 Net investment income ($ in thousands) Fixed income investments(1)$ 27,055 $ 33,261 Cash and restricted cash 428 (3) Other investments, including equities 2,987 1,103 Investment expenses (400) (2,348) Total net investment income 30,070 32,013 Net realized (losses) gains: Fixed income assets(1) (2,983) 9,097 Other investments, including equities 190 716 Total net realized (losses) gains (2,793) 9,813 Net unrealized (losses) gains: Other investments, including equities (2,347) 2,835 Total net unrealized (losses) gains (2,347) 2,835
Interest in (loss) income of equity method investments:
Interest in (loss) income of equity method investments
(205) 7,748 Total interest in (loss) income of equity method investments (205) 7,748 Total investment return included in earnings (A)
Other comprehensive loss:
Unrealized losses on AFS securities and equity method
investments excluding foreign exchange (B)
$ (24,247) $ (32,880) Total investment return = (A) + (B)
Annualized income from fixed income assets(2)$ 27,483 $ 33,258 Average aggregate fixed income assets, at cost(2) 1,226,134 1,794,173 Annualized investment book yield 2.2 % 1.9 % Average aggregate invested assets, at fair value(3)$ 1,468,077 $ 1,986,000 Investment return included in net earnings 1.7 % 2.6 % Total investment return - % 1.0 %
1.Fixed income investments include AFS securities as well as funds withheld
receivable, and loan to related party.
2.Fixed income assets include AFS portfolio, cash and restricted cash, funds
withheld receivable, and loan to related party.
3.Average aggregate invested assets include all investments (AFS and alternative investments), cash and restricted cash, loan to related party and funds withheld receivable and is computed as an average of the amounts disclosed in our quarterlyU.S. GAAP consolidated financial statements. 65
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The following table details total investment returns for our fixed income
investments for the year ended
For the Year Ended
Fixed Income Investments(1) December 31,
($ in thousands) 2022 2021
Gross investment income $ 27,483 $ 33,258
Net realized (losses) gains (2,983) 9,097
Change in AOCI (3) (28,661) (28,466)
Gross investment returns
Average invested assets, at fair value (4)
Gross Investment Returns (0.3) % 0.8 % Investment expenses$ 417 $ 845 Net investment returns$ (4,578) $ 13,044 Net Investment Returns (0.4) % 0.7 % Despite higher book yields on our fixed income investments, total returns on fixed income investments were negative for the year endedDecember 31, 2022 due to the impact of interest rates which increased during the year endedDecember 31, 2022 compared to 2021.
The following table details total investment returns for our alternative
investments for the year ended
For the Year Ended
Alternative Investments(2) December 31,
($ in thousands) 2022 2021
Gross investment income $ 2,782 $ 8,851
Net realized and unrealized (losses) gains (2,157) 3,551
Change in AOCI (3) 4,414 (4,414)
Gross investment returns
Average invested assets, at fair value (4)$ 249,000 $ 166,182 Gross Investment Returns 2.0 % 4.8 % Investment expenses$ (17) $ 1,503 Net investment returns$ 5,056 $ 6,485 Net Investment Returns 2.0 % 3.9 %
1.Fixed income investments includes AFS securities as well as cash, restricted
cash, funds withheld receivable, and loan to related party.
2.Alternative investments includes other investments, equity securities, and
equity method investments.
3.Change in AOCI excludes unrealized foreign exchange gains and losses.
4.Average invested assets is the average of the amounts disclosed in our
quarterly
66
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The following table details total investment returns for alternative investments
by asset class at
December 31, 2022 Private Equity Private Credit Hedge Funds Alternative Assets Venture Capital Real Estate Total
($ in thousands)
Gross investment income $ 1,269 $ 2,025 $ (5,053) $ 3,993 $ 125 $ 423 $ 2,782
Net realized and
unrealized (losses) gains (1,717) (2,487) - 29 2,307 (289) (2,157)
Change in AOCI - - - 4,414 - - 4,414
Total Investment Return $ (448) $ (462)
$ (5,053) $ 8,436 $ 2,432 $ 134$ 5,039 Average Investments$63,259 $36,323 $19,153 $ 66,178 $ 14,235 $ 49,853$ 249,000 Gross Investment Returns (0.7) % (1.3) % (26.4) % 12.7 % 17.1 % 0.3 % 2.0 % Total investment returns on alternative investments were positive for the year endedDecember 31, 2022 , however, net investment returns were lower compared to 2021. During the year endedDecember 31, 2022 , positive returns in our alternative and venture capital asset classes were partly offset by losses in our hedge fund asset class as well as by modest losses in both private equity and private credit asset classes, largely due to rising interest rates and the resulting volatility in financial markets. The hedge fund asset class reported a loss of$5.1 million which reduced gross investment returns by 2.4% during the period. Excluding our hedge fund assets, our gross investment return would have been 4.4% for the year endedDecember 31, 2022 .
The following table details total investment returns for alternative investments
by asset class at
December 31, 2021 Private Equity Private Credit Hedge Funds Alternative Assets Venture Capital Real Estate Total
($ in thousands)
Gross investment income $ 444 $ 659 $ 3,494 $ 4,254 $ - $ - $ 8,851
Net realized and
unrealized (losses) gains 2,185 668 - 275 423 - 3,551
Change in AOCI - - - (4,414) - - (4,414)
Total Investment Return $ 2,629 $ 1,327
$ 3,494 $ 115 $ 423 $ -$ 7,988 Average Investments $ 46,965 $ 10,432 $ 31,182 $ 46,756 $ 5,072 $ 25,776$ 166,182 Gross Investment Returns 5.6 % 12.7 % 11.2 % 0.2 % 8.3 % - % 4.8 % For the year endedDecember 31, 2021 , investment returns benefited from positive returns in the hedge fund and private credit asset classes largely resulting from strong financial markets performance.
Despite the volatility experienced in financial markets during 2022, we believe
our alternative investment portfolio remains well positioned to achieve its
targeted longer-term returns.
Other Balance Sheet Changes
The following table summarizes the Company's other material balance sheet
changes at
December 31, 2022 2021 Change Change ($ in thousands) $ % Reinsurance balances receivable, net$ 10,707 $ 19,507 $ (8,800) (45.1) % Deferred commission and other acquisition expenses 24,976 36,703 (11,727) (32.0) % Funds withheld receivable 441,412 636,412 (195,000) (30.6) % Reserve for loss and LAE 1,131,408 1,489,373 (357,965) (24.0) % Unearned premiums 67,081 100,131 (33,050) (33.0) % Deferred gain on retroactive reinsurance 47,708 48,960 (1,252) (2.6) % Accrued expenses and other liabilities 60,518 44,542 15,976 35.9 % 67 -------------------------------------------------------------------------------- The Company's deferred commission and other acquisition expenses decreased by 32.0% and unearned premiums decreased by 33.0% primarily due to the termination of the remaining business under both quota share contracts with AmTrust which have been in run-off sinceJanuary 1, 2019 . Reinsurance balances receivable decreased by 45.1% primarily due to the collection of premiums receivable due from the European Hospital Liability Quota Share during the second quarter of 2022. Funds withheld receivable decreased by 30.6% primarily due to lower funds withheld to be utilized as collateral for AmTrust Reinsurance segment with the commutation of French Hospital Liability polices under theEuropean Hospital Liability Quota Share during the third quarter of 2022 and settlement of reinsurance losses payable due under the AmTrust Quota Share. Accrued expenses and other liabilities increased by 35.9% primarily due to recognition of a derivative liability on retroactive reinsurance of$14.6 million for GLS policies as ofDecember 31, 2022 . The Company's reserve for loss and LAE decreased by 24.0% primarily due to the settlement of prior year loss claims for contracts under the AmTrust Quota Share. The deferred gain on retroactive reinsurance decreased by 2.6% for the year endedDecember 31, 2022 . Of the net adverse prior year loss development of$28.1 million reported in the AmTrust Reinsurance segment,$15.5 million of this development was subject to coverage under the LPT/ADC Agreement, and was substantially offset by$16.0 million of favorable loss development on certain Workers Compensation losses that were commuted to AmTrust in 2019 that inure to the benefit of Cavello as opposed to the Company under the terms of LPT/ADC Agreement.
Capital Resources
During the year endedDecember 31, 2022 , book value per common share increased by 7.7% to$2.80 and diluted book value per common share increased by 7.7% to$2.79 , compared toDecember 31, 2021 primarily due to net income available to Maiden common shareholders of$55.4 million partly offset by a net decrease in AOCI of$29.0 million for the year endedDecember 31, 2022 . Capital resources consist of funds deployed in support of our operations. The following table shows the movement in our capital resources atDecember 31, 2022 and 2021: December 31, 2022 2021 Change Change ($ in thousands) $ % Preference shares $ -$ 159,210 $ (159,210) (100.0) % Common shares at par value 1,492 923 569 61.6 % Additional paid-in capital 884,259 768,650 115,609 15.0 %
Accumulated other comprehensive loss (41,234) (12,215)
(29,019) 237.6 % Accumulated deficit (442,863) (498,295) 55,432 (11.1) % Treasury shares, at cost (117,075) (34,016) (83,059) 244.2 % Common shareholders' equity 284,579 225,047
59,532 26.5 %
Total Maiden shareholders' equity 284,579 384,257
(99,678) (25.9) %
Senior Notes - principal amount 262,500 262,500 - - % Total capital resources$ 547,079 $ 646,757 $ (99,678) (15.4) %
Total capital resources decreased by
•net decrease in Preference Shares of$159.2 million at par value due to the repurchase and Exchange of remaining shares during the year endedDecember 31, 2022 ; •net increase in additional paid-in capital of$115.6 million due to$5.3 million relating to elimination of Preference Share issuance costs on remaining shares which were repurchased and exchanged during the year; and additional paid-in capital of$107.6 million for the total common shares issued under the Exchange, and share-based compensation of$2.7 million ; •net decrease in AOCI of$29.0 million which arose due to: (1) net unrealized losses on investment of$13.0 million due to a decrease of$17.7 million for our fixed income investment portfolio relating to market price movements from rising interest rates in the year endedDecember 31, 2022 , partly offset by$4.4 million increase for equity method investments and$0.3 million increase in deferred taxes; and (2) a decrease in cumulative translation adjustments of$16.0 million during the year endedDecember 31, 2022 ; •accumulated deficit decreased by$55.4 million due to gains recognized on the repurchase and Exchange of Preference Shares of$115.5 million for the year endedDecember 31, 2022 which increased retained earnings partly offset by a net loss of$60.0 million for the year endedDecember 31, 2022 ; and
•treasury shares increased by
issued to
repurchased due to tax obligations on restricted shares vesting of
Please refer to "Notes to Consolidated Financial Statements - Note
6 - Shareholders' Equity" included under Item 8 "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for a discussion of the
equity instruments issued by the Company at
68
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Book value and diluted book value per common share atDecember 31, 2022 and 2021 were computed as follows: December 31, 2022 2021 ($ in
thousands except share and per
share data)
Ending Maiden common shareholders' equity $ 284,579 $ 225,047
Proceeds from assumed conversion of dilutive options 4 10
Numerator for diluted book value per common share calculation
Common shares outstanding 101,532,151 86,467,242
Shares issued from assumed conversion of dilutive options and
restricted share units
499,963 494,926
Denominator for diluted book value per common share
calculation
102,032,114 86,962,168 Book value per common share $ 2.80$ 2.60 Diluted book value per common share 2.79 2.59 Common Shares OnFebruary 21, 2017 , the Company's Board of Directors approved the repurchase of up to$100.0 million of the Company's common shares from time to time at market prices. During the year endedDecember 31, 2022 , the Company did not repurchase any common shares under its share repurchase authorization as it was precluded from repurchasing its common shares due to its failure to pay dividends on its preference shares that were previously outstanding. AtDecember 31, 2022 , the Company had a remaining authorization of$74.2 million for share repurchases. Preference Shares OnMarch 3, 2021 andMay 6, 2021 , the Company's Board of Directors approved the repurchase, including the repurchase byMaiden Reinsurance in accordance with its investment guidelines, of up to$100.0 million and$50.0 million , respectively, of the Company's preference shares from time to time at market prices in open market purchases or as were privately negotiated. The authorizations are collectively referred to as the "2021 Preference Share Repurchase Program". Please refer to "Notes to Consolidated Financial Statements - 'Note 6 - Shareholders' Equity" under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a summary of repurchases made of the Company's preference shares during the year endedDecember 31, 2022 . OnDecember 27, 2022 , the Exchange was completed with record holders of the Series A, C and D Preference Shares and three common shares was exchanged as consideration for each of the Series A, C and D Preference Shares tendered. A total of 1,500,050 shares of Series A Preference Shares, 1,744,028 shares of Series C Preference Shares, and 1,542,806 shares of Series D Preference Shares were extinguished upon the issuance of 14,360,652 common shares to non-affiliates at a fair value of$28.4 million . The number of the Company's Series A, C and D Preference Shares held byMaiden Reinsurance pursuant to the 2020 Tender Offer and the 2021 Preference Share Repurchase Program was 13,813,116 at the Exchange date. Therefore, 41,439,348 common shares were issued toMaiden Reinsurance in exchange for the preference shares held which are reflected as treasury shares on the Consolidated Balance Sheet and are not treated as outstanding shares for purposes of determining certain financial measures, both GAAP and non-GAAP, as of, and for the period ending,December 31, 2022 . As a result of the Exchange, the Preference Shares were delisted from and no longer trade on theNew York Stock Exchange as of the Exchange Date. No Preference Shares are issued or outstanding, and the Preference Shares were deregistered under the Securities Exchange Act of 1934, as amended. In addition, all rights of the former holders related to ownership of the Preference Shares have terminated. Please refer to "Notes to Consolidated Financial Statements - Note 6 - Shareholders' Equity" under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further information on the above transactions. Senior Notes There were no changes in the Company's Senior Notes atDecember 31, 2022 compared toDecember 31, 2021 and the Company did not enter into any short-term borrowing arrangements during the year endedDecember 31, 2022 . Please refer to "Notes to Consolidated Financial Statements - Note 7 - Long-Term Debt" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of the Senior Notes issued by the Company. The 2013 Senior Notes issued byMaiden NA are fully and unconditionally guaranteed byMaiden Holdings . The Senior Notes are unsecured and unsubordinated obligations of the Company.Maiden Holdings does not have any significant operations or assets other than our ownership of the shares of our subsidiaries. The dividends and other permitted distributions fromMaiden NA (and its subsidiaries) will be our sole source of funds to meet ongoing cash requirements, including debt service payments. Factors that may affect payments to holders of the 2013 Senior 69 -------------------------------------------------------------------------------- Notes include restrictions on the payments of dividends byMaiden Reinsurance toMaiden NA which provides the sole source of income for interest payments on the 2013 Senior Notes. During the second quarter of 2022, the Vermont DFR approved an annual dividend program to be paid byMaiden Reinsurance toMaiden NA , with notification to the Vermont DFR as dividends are paid. Subsequent to that approval,Maiden Reinsurance paid$18.8 million in dividends toMaiden NA during the year endedDecember 31, 2022 .
Summarized financial information of
Maiden NA Maiden Holdings
($ in thousands)
Total assets $ 5,345 $ 8,460
Total liabilities 150,142 109,843
Amounts due from subsidiaries (not included in total assets above)
68 1,924
Amounts due to subsidiaries (not included in total liabilities
above)
13,646 2,505 Related party loan payable (not included in total liabilities above) - 270,904 Total revenue 361 3,788 Net loss (19,566) (20,649) The summarized financial information above has been presented on a combined basis for the issuerMaiden NA and the guarantorMaiden Holdings , excluding all other subsidiaries. Intercompany balances and transactions betweenMaiden NA andMaiden Holdings , whose information is presented above on a combined basis, have been eliminated. Any investment byMaiden NA orMaiden Holdings in subsidiaries that are not issuers or guarantors is not presented in the financial information above. Intercompany balances with subsidiaries that are not issuers or guarantors and any related party transactions were separately disclosed above and are not included in the total assets and total liabilities presented forMaiden NA andMaiden Holdings . The net loss forMaiden NA andMaiden Holdings was largely due to interest and amortization expenses on the Senior Notes as well as general and administrative expenses. The net loss inMaiden NA was also due to income tax expense incurred. The ratio of Debt to Total Capital Resources atDecember 31, 2022 and 2021 was computed as follows: December 31, 2022 2021 ($ in thousands) Senior notes - principal amount$ 262,500 $
262,500
Maiden shareholders' equity 284,579
384,257
Total capital resources $ 547,079 $
646,757
Ratio of debt to total capital resources 48.0 %
40.6 %
Off-Balance Sheet Arrangements
Certain of the Company's investments in limited partnerships are related to real estate joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the ownership of income-producing properties. In certain of these joint ventures, the Company has provided certain indemnities, guarantees and commitments to certain parties such that it may be required to make payments now or in the future as further described in the "Notes to Consolidated Financial Statements - Note 11 - Commitments, Contingencies and Guarantees " included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Any loss for which the Company could be liable would be contingent on the default of a loan by the real estate joint venture entity for which the Company provided a financial guarantee to a lender. While the Company has committed to aggregate limits as to the amount of guarantees it will provide as part of its limited partnerships, guarantees are only provided on an individual transaction basis and are subject to the terms and conditions of each transaction mutually agreed by the parties involved. The Company is not bound to such guarantees without its express authorization. As discussed above, atDecember 31, 2022 , guarantees of$42.1 million have been provided to lenders by the Company on behalf of real estate joint ventures, however, the likelihood of the Company incurring any losses pertaining to project level financing guarantees was determined to be remote. Therefore, no liability has been accrued under ASC 450-20. 70
--------------------------------------------------------------------------------
Non-GAAP Financial Measures
As defined and described in the Key Financial Measures section, management uses certain key financial measures, some of which are non-GAAP measures, to evaluate the Company's financial performance and the overall growth in value generated for the Company's common shareholders. Management believes that these financial measures, which may be defined differently by other companies, explain the Company's results to investors in a manner that allows for a more complete understanding of the underlying trends in the Company's business. The calculation, reconciliation to nearest GAAP measure and discussion of relevant non-GAAP measures used by management are discussed below. Non-GAAP operating earnings were$52.1 million for the year endedDecember 31, 2022 , compared to non-GAAP operating earnings of$60.5 million in 2021. The reduction in the Company's non-GAAP operating results was largely due to a non-GAAP underwriting loss of$55.4 million for the year endedDecember 31, 2022 , compared to a non-GAAP underwriting loss of$17.5 million in 2021. Underwriting performance was offset by gains of$115.5 million from the repurchase and exchange of preference shares at market values for the year endedDecember 31, 2022 compared to gains of$91.0 million for preference share repurchases during 2021.
Non-GAAP operating earnings and Non-GAAP diluted operating earnings per share
attributable to common shareholders
Non-GAAP operating earnings and Non-GAAP diluted operating earnings per share attributable to common shareholders can be reconciled to the nearestU.S. GAAP financial measure as follows: For the Year Ended December 31, 2022 2021 ($ in thousands except per share data) Net income available to Maiden common shareholders$ 55,432 $ 117,643 Add (subtract): Net realized and unrealized investment losses (gains) 5,140 (12,648) Foreign exchange and other gains (8,255) (7,685) Decrease in deferred gain on retroactive reinsurance (452) (29,081) Interest in loss (income) of equity method investments 205 (7,748) Non-GAAP operating earnings $
52,070
Diluted earnings per share attributable to common shareholders$ 0.63 $ 1.35 Add (subtract): Net realized and unrealized investment losses (gains) 0.06 (0.14) Foreign exchange and other gains (0.09) (0.09) Decrease in deferred gain on retroactive reinsurance (0.01) (0.33) Interest in loss (income) of equity method investments 0.01 (0.09)
Non-GAAP diluted operating earnings per common share
attributable to common shareholders
$ 0.60 $ 0.70 Non-GAAP Operating ROACE
Non-GAAP Operating ROACE for the years ended
follows:
For the Year Ended
2021
($ in
thousands)
Non-GAAP operating earnings$ 52,070
Opening adjusted common shareholders' equity 274,990
208,447
Ending adjusted common shareholders' equity 329,987
274,990
Average adjusted common shareholders' equity 302,489
241,719
Non-GAAP Operating ROACE 17.2 % 25.0 %
71
--------------------------------------------------------------------------------
Non-GAAP Underwriting Results
The following summarizes our non-GAAP underwriting results for the years ended
For the Year Ended December 31, 2022
2021
($ in
thousands)
Gross premiums written$ 5,479 $ 10,938 Net premiums written$ 5,082 $ 10,403 Net premiums earned$ 37,732 $ 52,993 Other insurance (expenses) revenue (4,530) 1,067 Non-GAAP net loss and LAE(1) (58,443)
(36,388)
Commission and other acquisition expenses (18,511) (24,840)
General and administrative expenses (11,634)
(10,341)
Non-GAAP underwriting loss(1) $ (55,386) $
(17,509)
(1) Non-GAAP underwriting loss and non-GAAP net loss and LAE for the years endedDecember 31, 2022 and 2021 are adjusted for prior year reserve development subject to the LPT/ADC Agreement. Please see the "Key Financial Measures" section for definitions of non-GAAP underwriting loss and non-GAAP net loss and LAE. The non-GAAP underwriting results include the impact of favorable prior year reserve development under the AmTrust Quota Share which is fully recoverable from Cavello under the LPT/ADC Agreement to show the ultimate economic benefit to the Company. As shown in the table above, adjusted for the decrease in the deferred gain under the LPT/ADC Agreement of$0.5 million during the year endedDecember 31, 2022 , the non-GAAP underwriting loss was$55.4 million . This compared to a non-GAAP underwriting loss of$17.5 million for 2021 when adjusted for the decrease in the deferred gain under the LPT/ADC Agreement of$29.1 million during the year endedDecember 31, 2021 . The non-GAAP underwriting loss above was driven by:
• underwriting results in the AmTrust Reinsurance segment not covered by the
LPT/ADC Agreement, specifically the run-off of the AmTrust Quota Share with
losses occurring after
• adverse loss development of
Quota Share, which is not covered by the LPT/ADC Agreement;
• favorable development on commuted Workers Compensation losses which are
contractually covered by the LPT/ADC Agreement that reduced the deferred gain
liability on retroactive reinsurance for the year ended
• underwriting loss of$12.1 million in the Diversified Reinsurance segment which included an underwriting loss of$8.9 million from GLS operations during the year endedDecember 31, 2022 .
Non-GAAP Net Loss and LAE
Adjusted for the decrease in the deferred gain under the LPT/ADC Agreement, the non-GAAP net loss and LAE for the year endedDecember 31, 2022 increased by$0.5 million (2021 -$29.1 million ) due to favorable loss experience for AmTrust reserves covered by the LPT/ADC Agreement which are ultimately recoverable from Cavello. This adjustment is reflected in the calculation of non-GAAP Loss and LAE in the table below: For the Year Ended December 31, 2022 2021 ($ in thousands) Net loss and LAE$ 57,991 $ 7,307 Less: change in deferred gain on retroactive reinsurance under the LPT/ADC Agreement (452) (29,081) Non-GAAP net loss and LAE$ 58,443 $ 36,388
Adjusted Shareholders' Equity, Adjusted Total Capital Resources, Adjusted Book
Value per Common Share and Ratio of Debt to Total Adjusted Capital Resources
The Adjusted Shareholders' Equity, Adjusted Total Capital Resources and Adjusted Book Value per Common Share atDecember 31, 2022 and 2021 reflect the addition of the unamortized deferred gain under the LPT/ADC Agreement to the GAAP shareholders' equity as depicted in the computations below. The deferred gain under the LPT/ADC Agreement was$45.4 million atDecember 31, 2022 compared to$45.9 million atDecember 31, 2021 , and relates to loss reserves subject to that agreement that are fully recoverable from Cavello. The decrease in the unamortized deferred gain under the LPT/ADC Agreement for the year endedDecember 31, 2022 is attributable to$0.5 million in loss and LAE recognized as favorable loss development in the Company's GAAP income statement for policies subject to the LPT/ADC Agreement. We believe the inclusion of this unamortized deferred gain under 72
--------------------------------------------------------------------------------
these metrics better reflects the ultimate economic benefit of the LPT/ADC
Agreement, which will improve the Company's shareholders' equity over the
settlement period under the terms of the agreement.
The Adjusted Shareholders' Equity, Adjusted Total Capital Resources and Adjusted Book Value per Common Share atDecember 31, 2021 also reflected the LP Investment Adjustment of$4.1 million , which pertained to the equity accounting related to the fair value of certain hedged liabilities in an equity method investment held by the Company wherein the ultimate realizable value of the asset supporting the hedged liabilities was not recognized at fair value until its sale in 2022. We believe that this adjustment recognized the future realizable value and reflected the ultimate economic benefit of this investment which was sold at a realized gain during the year endedDecember 31, 2022 and improved the Company's shareholders' equity over the hedged contract period of the investment.
Reconciliation of shareholders' equity to Adjusted shareholders' equity and
Adjusted Total Capital Resources
The following table computes adjusted shareholders' equity and adjusted total capital resources by recognizing the unamortized deferred gain under the LPT/ADC Agreement atDecember 31, 2022 and 2021 as well as the LP Investment Adjustment for the realizable value of an intangible asset in a limited partnership investment atDecember 31, 2021 : December 31, 2022 2021 Change Change ($ in thousands) $ % Preference shares $ -$ 159,210 $ (159,210) (100.0) % Common shareholders' equity 284,579 225,047 59,532 26.5 % Total shareholders' equity 284,579 384,257 (99,678) (25.9) % LP Investment Adjustment - 4,083 (4,083) (100.0) % Unamortized deferred gain on LPT/ADC Agreement 45,408 45,860 (452) (1.0) % Adjusted shareholders' equity 329,987 434,200 (104,213) (24.0) % Senior Notes - principal amount 262,500 262,500 - - % Adjusted total capital resources$ 592,487 $ 696,700 $ (104,213) (15.0) %
Reconciliation of Book Value per Common Share to Adjusted Book Value per Common
Share
The adjusted book value per common share as reconciled for the recognition of the unamortized deferred gain under the LPT/ADC Agreement as well as the LP Investment Adjustment for the realizable value of an intangible asset in a limited partnership investment atDecember 31, 2022 and 2021 was computed as follows: December 31, 2022 2021 Book value per common share$ 2.80 $ 2.60 Unamortized deferred gain on LPT/ADC Agreement 0.45 0.53 LP Investment Adjustment - 0.05 Adjusted book value per common share$ 3.25 $ 3.18
Ratio of Debt to Adjusted Total Capital Resources
Management uses this non-GAAP measure to monitor the financial leverage of the Company. This measure is calculated using the total principal amount of debt divided by the sum of adjusted total capital resources as computed in the table above. The ratio of Debt to Adjusted Total Capital Resources atDecember 31, 2022 and 2021 was computed as follows:December 31, 2022
2021
($ in
thousands)
Senior notes - principal amount$ 262,500
Adjusted shareholders' equity 329,987
434,200
Adjusted total capital resources$ 592,487
Ratio of debt to adjusted total capital resources 44.3 %
37.7 %
73
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Currency and Foreign Exchange
We conduct business in a variety of foreign (non-U.S. ) currencies, the principal exposures being the euro and the British pound. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. Our reporting currency is theU.S. dollar, and exchange rate fluctuations relative to theU.S. dollar may materially impact our results and financial position. Our principal exposure to foreign currency risk is our obligation to settle claims in foreign currencies. In addition, to minimize this risk, we maintain and expect to continue to maintain a portion of our investment portfolio in investments denominated in currencies other than theU.S. dollar. We may employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results of operations or equity may be adversely effected. AtDecember 31, 2022 , no such hedges or hedging strategies were in force or had been entered into. We measure monetary assets and liabilities denominated in foreign currencies at period end exchange rates, with the resulting foreign exchange gains and losses recognized in the Consolidated Statements of Income. Revenues and expenses in foreign currencies are converted at quarterly average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in AOCI.
Net foreign exchange gains were
2022
ended
AtDecember 31, 2022 , net foreign exchange gains were primarily driven by exposures to euro, British pound and other non-USD denominated net loss reserves and insurance related liabilities in excess of foreign currency assets. Our non-USD denominated liabilities atDecember 31, 2022 included reserves for net loss and LAE of$333.9 million . There was no new business written in non-USD currencies during the year endedDecember 31, 2022 . Our foreign currency asset exposures atDecember 31, 2022 include$205.1 million of fixed maturity securities managed by our investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy as well as$20.9 million of equity method real estate investments denominated in Canadian dollars. Effects of Inflation The anticipated effects of inflation are considered explicitly in the pricing of the insured exposures, which are used as the initial estimates of reserves for loss and LAE. In addition, inflation is also implicitly accounted for in subsequent estimates of loss and LAE reserves, as the expected rate of emergence is in part predicated upon the historical levels of inflation that impact ultimate claim costs. To the extent inflation causes these costs, particularly medical treatments and litigation costs, to vary from the assumptions made in the pricing or reserving estimates, the Company will be required to change the reserve for loss and LAE with a corresponding change in its earnings in the period in which the variance is identified. The actual effects of inflation on the results of operations of the Company cannot be accurately known until claims are ultimately settled. We continue to monitor inflationary impacts resulting from recent government stimulus, sharp increases in demand, labor force and supply chain disruptions, among other factors, on our loss cost trends. Our reserves predominantly consist of workers' compensation, general liability, and hospital liability. These long tailed lines of business have been subject to the longer term trend of social inflation, but we have not observed significant impacts for the recently elevated levels of inflation. We proactively analyze available data and we incorporate trends into our loss reserving assumptions to ensure we are considerate of current and future economic conditions. Governmental policy responses to inflation have significantly increased interest rates which, in the short term, have contributed to unrealized losses on our fixed income investments, particularly on our fixed maturity securities. There remains uncertainty around the rate and direction of inflation and we continue to monitor our liquidity, capital and potential earnings impact of these changes but remain focused on our asset allocation decisions as described in our "Business Strategy" section of Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview". Inflation may also result in increased wage pressures for our operating expenses, as we remain focused on being a competitive employer in our market. Labor shortages arising from the conditions of the COVID-19 pandemic have contributed to uncertainty in attracting and retaining talent that may put pressure on higher wage costs. Currently, salaries and incentive compensation costs comprise more than one-half of our total general and administrative expenses and thereby could have a material impact our net operating results.
Recent Accounting Pronouncements
Refer to "Notes to Consolidated Financial Statements - Note 2. Significant
Accounting Policies" included under Item 8 "Financial Statement and
Supplementary Data", of this Annual Report on Form 10-K for a discussion on
recently issued accounting pronouncements not yet adopted.
74
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HUB INTERNATIONAL NAMES TODD PETERSON CANADIAN NATIONAL PRIVATE CLIENT PRACTICE LEADER
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