Item 1A. Risk Factors
Item 1A. Risk Factors
Our business is subject to a number of risks that could have a material adverse effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material adverse effect on our business, results of operations, financial condition and/or liquidity.
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The combined company’s ("Kestrel Group") business, financial condition and results of operations are subject to various risks and uncertainties as noted below, which may affect the value of its securities. In addition to the risks discussed below, there may be additional risks not presently known to us or that we currently deem less significant that also may adversely affect its business, financial condition and results of operations, perhaps materially. Some statements in the risk factors constitute forward-looking statements. You should also read and consider the risk factors associated with the businesses of Maiden because these risk factors may affect the operations and financial results of Kestrel Group.
These risk factors may be found under Part I, Item 1A. Risk Factors in Maiden’s Annual Report on Form 10-K for the year ended December 31, 2024, which is on file with the SEC. Additional risks and uncertainties not presently known to Maiden, Kestrel or Kestrel Group or that are not currently believed to be important also may adversely affect Kestrel Group.
Risks Relating to Kestrel Group
Kestrel Group may not be able to recover amounts due from its reinsurers, which would adversely affect its financial condition.
Kestrel Group will be a specialty program group offering fronting arrangements to domestic and foreign insurers that want to access specific U.S. property and casualty insurance business, which are collectively referred to as “capacity providers,” and will generally reinsure on a quota share basis up to 100% of the risk under these policies with these carriers in exchange for ceding fees. Kestrel Group will write business initially through the AmTrust Insurance Companies, all subsidiaries of AmTrust through which Kestrel has been writing its business, and the combined company will have an option to acquire the AmTrust Insurance Companies from AmTrust.
Kestrel Group will reinsure a substantial portion of the underwriting and operating risks in connection with its fronting arrangements to its capacity providers. Kestrel Group will generally select either well capitalized, highly rated authorized capacity providers or will require the capacity providers to post collateral and/or obtain guarantees to secure the reinsured risks. However, if any of the capacity providers becomes insolvent or otherwise refuse to reimburse losses paid to these policyholders in a timely manner, the corresponding impact to the combined company’s ability to continue writing business through the AmTrust Insurance Companies could materially adversely affect Kestrel Group’s financial condition and results of operations.
While Kestrel Group generally will not hold net reserves for losses or loss adjustment expenses (“LAE”) that might arise as a result of claims made under the policies (unless it participates on a quota share basis to a limited extent in certain programs), it may hold collateral from capacity providers who may not be well capitalized, highly rated, or authorized to protect against any such capacity provider’s failure to pay claims. However, collateral may not be sufficient to cover the combined company’s liability for these claims, and Kestrel Group may not be able to cause the capacity providers to deliver additional collateral.
Although the AmTrust Insurance Companies will ultimately take the risk of insolvency or other failure to pay by a capacity provider, any adverse impact to the business, financial condition, results of operations and prospects of the AmTrust Insurance Companies may have an adverse impact on Kestrel Group’s financial condition and results of operations as Kestrel Group is reliant on the AmTrust Insurance Companies to write its business. For example, any risks or difficulties that result in a negative impact on the financial strength ratings, licenses or reputation of any of the AmTrust Insurance Companies may limit or restrict Kestrel Group’s ability to continue to write business on behalf of its capacity providers, which in turn may have a material and adverse impact on Kestrel Group’s ability to generate fee revenues.
If market conditions cause Kestrel Group’s reinsurance to be more costly or difficult to obtain, it may be required to bear increased risks or reduce the level of its underwriting commitments.
Kestrel Group will provide access to the U.S. property and casualty insurance markets in exchange for ceding fees through its fronting business by providing access to the AmTrust Insurance Companies with expansive licensing and an “A-” (Excellent) rating by A.M. Best through its relationship with AmTrust. As part of its business strategy, Kestrel Group will reinsure a substantial portion of underwriting risk, credit risk and business risk related to its fronting business. Kestrel Group may be unable to maintain its current reinsurance arrangements or to obtain other reinsurance in adequate amounts and at favorable rates, particularly if reinsurers become unwilling or unable to support its specialized fronting model in the future. A decline in the availability of reinsurance, increases in the cost of reinsurance or a decreased level of activity by general agents could limit the amount of fronting business the combined company could write through the AmTrust Insurance Companies and materially and adversely affect its business, financial condition, results of operations and prospects.
Regulators may challenge Kestrel Group’s use of fronting arrangements in states in which its capacity providers are not licensed.
Kestrel Group will enter into fronting arrangements with general agents and domestic and foreign insurers that want to access specific U.S. property and casualty insurance business in states in which such capacity providers are not licensed or are not authorized to write particular lines of insurance. The capacity providers or the general agents administer the business, settle all claims and reinsure a substantial portion of the risks. Kestrel Group will receive ceding fees but generally will not share in the profits or losses of the business it writes for the capacity providers unless Maiden Reinsurance participates on a quota share basis to a limited extent in certain programs. Some state insurance regulators may object to such fronting arrangements. In certain states, insurance regulators have the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states without such prohibition could still deem the assuming insurer as transacting insurance business without a license and the issuing carrier as aiding and abetting the unauthorized sale of insurance.
If regulators in any of the states where Kestrel Group conducts its fronting business were to prohibit or limit the arrangement, Kestrel Group would be prevented or limited from conducting the business for which a capacity provider is not authorized in those states, unless and until such capacity provider is able to obtain the necessary licenses. This could have a material and adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
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While it is expected that the fronting business will be ceded to a number of unaffiliated reinsurers, Maiden Reinsurance may be ceded a small percentage of the reinsurance, subject to prior approval from the Vermont Department of Financial Regulation ("Vermont DFR") of Kestrel Group’s ability to reinsure the business that it expects to underwrite. If the Vermont DFR fails to provide this approval, or places certain limitations on such approval, Kestrel Group may not be able to operate its fronting business efficiently, which could reduce Kestrel Group’s effectiveness in the marketplace.
In addition, the Vermont DFR may place certain restrictions on Kestrel Group’s fronting business, such as requiring Maiden Reinsurance to no longer be licensed as a captive or affiliated reinsurer. Such limitations could further impact the combined company’s ability to operate its fronting business, which could have a material and adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
Notwithstanding these state law restrictions on ceding insurers, the Nonadmitted and Reinsurance Reform Act (“NRRA”) contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) provides that all laws of a ceding insurer’s nondomestic state (except those with respect to taxes and assessments on insurers or insurance income) are preempted to the extent that they otherwise apply the laws of the state to reinsurance agreements of nondomestic ceding insurers. The NRRA places the power to regulate reinsurer financial solvency primarily with the reinsurer’s domiciliary state and requires credit for reinsurance to be recognized for a nondomestic ceding company if it is allowed by the ceding company’s domiciliary state. A state insurance regulator might not view the NRRA as preempting a state regulator’s determination that an unauthorized reinsurer must obtain a license or that any statute prohibits the combined company from doing a fronting business. However, such a determination or a conflict between state law and the NRRA could cause regulatory uncertainty about its fronting business, which could have a material and adverse effect on its business, financial condition, results of operations and prospects.
State insurance regulation could materially adversely affect Kestrel Group’s business.
Some states have adopted changes to their insurance laws and regulations that permit insurers to obtain credit for reinsurance from reinsurers who are able to post reduced collateral if they satisfy certain requirements, including specific rating criteria. Kestrel Group will require many of its capacity providers to post collateral to secure their reinsurance obligations. If regulatory changes are adopted in the states in which the AmTrust Insurance Companies are domiciled that permit non-admitted reinsurers to post reduced or no collateral in order for the insurer to obtain credit for that reinsurance, it may become more difficult for Kestrel Group to obtain collateral from its capacity providers who meet the applicable rating agency requirements, which could materially and adversely affect the amount of business that the combined company can write through the AmTrust Insurance Companies.
In addition, state insurance regulators maintain broad discretion to deny, delay, suspend, non-renew or revoke licenses for various reasons, including violation of regulations. In some instances, where there is uncertainty as to applicability, Kestrel Group may follow practices based on interpretations of regulations or practices that the combined company believes generally to be followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If Kestrel Group does not have the requisite licenses and approvals or does not comply with applicable regulatory requirements, state insurance regulators could preclude or temporarily suspend the combined company from carrying on some or all regulated activities or could otherwise penalize the combined company. In particular, Kestrel Insurance Agency, LLC (“Kestrel Insurance Agency”), which is licensed as a reinsurance broker and general lines agent by the Texas Department of Insurance, has entered into a management agreement with AmTrust that governs Kestrel Group’s fronting arrangement with each of the AmTrust Insurance Companies. If either of these licenses is suspended, non-renewed or revoked, Kestrel Group may be unable to maintain its fronting arrangement with AmTrust and, further, may be unable to exercise the option to acquire the AmTrust Insurance Companies from AmTrust. This could adversely affect Kestrel Group’s ability to operate its business. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could interfere with Kestrel Group’s operations and require it to bear additional costs of compliance, which could adversely affect Kestrel Group’s ability to operate its business.
Insurers are also regulated by state insurance departments for solvency issues and are subject to reserve requirements. Kestrel Group cannot guarantee that all of the AmTrust Insurance Companies comply with regulations instituted by state insurance departments. Kestrel Group may need to expend resources to address questions or concerns regarding its relationships with the AmTrust Insurance Companies, diverting management resources away from operating its business.
Compliance by Kestrel Group’s insurance subsidiaries with the legal and regulatory requirements to which they are subject is expensive. Any failure to comply could have a material adverse effect on Kestrel Group’s business.
Kestrel Group’s insurance subsidiaries are required to comply with a wide variety of laws and regulations applicable to insurance or reinsurance companies, both in the jurisdictions in which they are organized and where they sell their insurance and reinsurance products. The insurance and regulatory environment has become subject to increased scrutiny in many jurisdictions, including the U.S., various states within the U.S. and the EU. In the past, there have been Congressional and other initiatives in the U.S. regarding increased supervision and regulation of the insurance industry. It is not possible to predict the future impact of changes in laws and regulations on Kestrel Group’s operations.
Compliance with applicable laws and regulations is time-consuming and personnel-intensive, and changes in these laws and regulations may materially increase costs of compliance. In the future, states may make existing insurance laws and regulation more restrictive or enact new restrictive laws. In such event, the combined company may seek to cut down its business in, or withdraw entirely from, these states. Additionally, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. Currently, the U.S. federal government does not directly regulate the property and casualty insurance business. However, Dodd-Frank Act established a Federal Insurance Office (“FIO”) within the Department of the Treasury. The FIO initially is charged with monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data and developing methods to modernize and improve the insurance regulatory system in the United
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States. The FIO continues to support the current state-based regulatory regime but will consider federal regulation should the states fail to take steps to greater uniformity. The combined company cannot fully predict the impacts of any new legislation on its business, financial condition and results of operations.
In addition, Kestrel Group’s subsidiaries may not always be able to obtain or maintain necessary licenses, permits, authorizations or accreditations. They also may not be able to fully comply with, or to obtain appropriate exemptions from, the laws and regulations applicable to them. Any failure to comply with applicable law or to obtain appropriate exemptions could result in restrictions on either the ability of the company in question, as well as potentially its affiliates, to do business in one or more of the jurisdictions in which they operate or on brokers on which the combined company may rely. In addition, any such failure to comply with applicable laws or to obtain appropriate exemptions could result in the imposition of fines or other sanctions. Any of these sanctions could have a material adverse effect on the combined company’s business.
Kestrel Group may change its underwriting guidelines or strategy without shareholder approval.
Kestrel Group’s management team has the authority to change its underwriting guidelines or strategy without notice to shareholders and without shareholder approval. As a result, Kestrel Group may make fundamental changes to its operations without shareholder approval, which could result in Kestrel Group pursuing a strategy or implementing underwriting guidelines that may be materially different from the current strategy and underwriting guidelines.
Kestrel Group has a limited operating history and may not be able to manage its growth effectively .
Kestrel Group intends to grow its business in the future, which could require additional capital, systems development and skilled personnel. However, the limited operating history of Kestrel Group may make it difficult to evaluate its current capital structure and future capital requirements, which may have an adverse impact on potential strategic initiatives. Kestrel Group will encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increasing and unforeseen expenses as it continues to grow its business. The inability of Kestrel Group to manage these risks successfully may have a direct impact on its ability to exercise the option to acquire the AmTrust Insurance Companies from AmTrust, as it must be able to meet its capital needs, expand its systems and internal controls effectively, allocate its human resources optimally, identify, hire, train and develop qualified employees and effectively incorporate the components of any business it may acquire in its effort to achieve growth. The failure to manage Kestrel Group’s growth effectively could have a material adverse effect on its business, financial condition and results of operations.
Inability to maintain the strategic relationship with AmTrust could adversely affect Kestrel Group’s business.
Upon the completion of the Combination Agreement, AmTrust holds approximately 7.8% of the issued and outstanding Kestrel Group common shares and has the right to nominate three directors to the Kestrel Group board. See “Note 10 - Related Party Transactions” for more details. Kestrel Group will write its business on a fronting basis initially through the AmTrust Insurance Companies. Kestrel Group will cede up to 100% of underwriting risk in exchange for a ceding fee based on gross premiums written. In addition, AmTrust will provide additional services in relation to the AmTrust Insurance Companies pursuant to a management agreement with Kestrel Insurance Agency, including compliance, data reporting, data flow and information technology systems. As a result, Kestrel Group will rely on its strategic partnership with AmTrust, and any inability to maintain such relationship with AmTrust or to exercise the option to acquire the AmTrust Insurance Companies from AmTrust would materially adversely affect its business. These contractual arrangements may terminate or be terminated under certain circumstances, and there can be no assurance that this strategic relationship will continue in the future, including on the same or similar terms, and if not, that Kestrel Group would be able to find a suitable replacement or another strategic partnership on favorable terms, if at all. If Kestrel Group was not able to find other insurance carriers with similar financial strength ratings with which it could partner, its ability to write new and renewal business would be significantly impacted.
Kestrel Group’s business, and therefore its results of operations and financial condition, may be adversely affected by conditions that result in reduced insurer capacity.
Kestrel Group’s results of operations depend on the continued capacity of the AmTrust Insurance Companies to adequately and appropriately underwrite risk and provide coverage. Capacity could be reduced by the AmTrust Insurance Companies failing or withdrawing from writing certain coverages that Kestrel Group will offer and it will have limited control over these matters. In addition, to the extent that reinsurance becomes significantly more expensive, Kestrel Group may experience restrictions and limitations on its ability to continue to write the amount or types of business it anticipated, which could have a negative impact on its ability to generate fee revenue.
A decline in the financial strength rating or financial size category of Kestrel Group’s fronting companies may adversely affect Kestrel Group’s financial condition and results of operations.
Each of Kestrel Group’s fronting companies has an “A-” (Excellent) financial strength rating and a XV financial size category from A.M. Best. A downgrade or withdrawal of the financial strength rating or reduction in the financial size category of any of Kestrel Group’s fronting companies could cause current and future general agents and insureds to choose other competitors and could severely limit or prevent Kestrel Group’s writing of new and renewal insurance contracts.
A.M. Best’s analysis includes comparisons to peers and industry standards as well as assessments of operating plans, philosophy and management. A.M. Best periodically reviews each insurance carrier’s financial strength rating and may adjust upward or downward at its discretion based primarily on analyzing the balance sheet strength, operating performance and business profile of each insurance carrier.
In addition, in view of the earnings and capital pressures experienced by many financial institutions, including insurance companies, it is possible that rating organizations will heighten the level of scrutiny that they apply to such institutions, increase the frequency and scope of their credit reviews, request additional information from the companies that they rate or increase the capital and other requirements employed in the rating organizations’ models for maintenance of certain ratings levels.
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As Kestrel Group will leverage its strategic relationship with such fronting companies for lines of business that require an “A-” financial strength rating from A.M. Best, any downgrade or withdrawal of any insurance carrier’s rating could have a material adverse effect on Kestrel Group’s business. A.M. Best assigns ratings that are intended to provide an independent opinion of an insurance company’s ability to meet its obligations to policyholders and is neither an evaluation directed to investors nor a recommendation to buy, sell or hold stock or any other securities an insurance group may issue.
There can be no assurances that Kestrel Group’s fronting companies will be able to maintain this rating. Any downgrade in ratings would likely materially adversely affect Kestrel Group’s business through the loss of certain existing and potential policyholders and the loss of relationships with clients that might move to other companies with higher ratings. If such fronting companies lose their “A-” rating, Kestrel Group may need to secure a new fronting arrangement or risk losing the business of its capacity providers to higher rated issuing carriers.
Kestrel Group derives a significant portion of its fee revenues from a limited number of general agents, the loss of which could result in its inability to continue to write a significant portion of the current business, additional expense and a material decrease in fee revenues.
A significant portion of Kestrel Group’s total fees are derived from a limited number of general agents and Kestrel Group is heavily reliant upon these general agents to generate revenues. The decision of any such general agent to seek to terminate its arrangements with Kestrel Group or to otherwise decrease the volume of business Kestrel Group writes through them, could result in additional expense and a material decrease in the amount of fee revenues Kestrel Group is able to generate. In addition, if Kestrel Group is unable to collect fees under these arrangements due to insolvency, dispute or other unwillingness or inability of any of its general agents to meet their obligations to Kestrel Group, its business, financial condition, results of operations or prospects could be materially and adversely affected.
Kestrel Group will depend on a limited number of capacity providers and general agents for a large portion of its gross written premium, and the loss of business provided by any one of them could materially adversely affect Kestrel Group.
Kestrel Group will offer fronting arrangements to both general agents and capacity providers. Capacity providers may be either independent or under common control with a particular general agent. An independent capacity provider may reinsure a single book or multiple books with various general agents. A single general agent may control a single book with one capacity provider or multiple books with various capacity providers.
Other insurance companies compete with Kestrel Group for this business. These capacity providers and general agents may choose to enter into fronting arrangements with such competitors, and the general agents or capacity providers may terminate fronting arrangements with Kestrel Group if they no longer need access to its fronting capacity. Relationships with clients, including general agents and capacity providers, are generally governed by agreements that may be terminated on relatively short notice.
Given Kestrel Group’s reliance on a small group of capacity providers and general agents, a significant decrease in business from, or the entire loss of, any of them would cause Kestrel Group to lose premium and ceding fees and require Kestrel Group to seek additional capacity providers or general agents or to replace the lost premium and ceding fees. If Kestrel Group is unable to do so, its business, financial condition, results of operations and prospects would be materially and adversely affected.
In addition, the ability of Kestrel Group to compete and remain profitable will depend, in part, on it maintaining business relationships with clients (including general agents and capacity providers), the business development and marketing efforts of its sales professionals, the servicing efforts of its relationship managers and on its ability to offer insurance solutions and maintain financial strength ratings through the AmTrust Insurance Companies that meet the requirements and preferences of clients. Any failure to be effective in any of these areas may have a material and adverse effect on the combined company’s business, financial condition, results of operations and prospects.
Failure of capacity providers or general agents to properly market, underwrite or administer policies could materially adversely affect Kestrel Group.
The marketing, underwriting, claims administration and other administration of policies will be the responsibility of Kestrel Group’s capacity providers or general agents. Any failure by them to properly handle these functions could result in liability to the AmTrust Insurance Companies, which may have an adverse impact on the financial condition of Kestrel Group. Even though these capacity providers or general agents may be required to compensate the AmTrust Insurance Companies for any such liability, there are risks that any such failure could create regulatory or reputational issues for the AmTrust Insurance Companies, which could limit or restrict Kestrel Group’s ability to continue to write business on behalf of its capacity providers. Any such limitations or restrictions could materially and adversely affect the business, financial condition, results of operations and prospects of Kestrel Group.
Kestrel Group may not be successful in building more direct relationships with general agents and capacity providers.
Kestrel Group’s fronting capacity may be constrained by the size of its capital base, and it may rely on its relationship-driven channels to generate new fronting business. In addition, Kestrel Group may rely on brokers to identify general agents in need of fronting. Although Kestrel Group will build direct relationships with general agents and capacity providers and hire additional fully-dedicated sales staff, Kestrel Group may not be successful in its efforts to expand its fronting business.
Kestrel Group may face increased competition.
Kestrel Group competes primarily on the basis of price, customer service, geographic coverage, financial strength ratings, licenses, reputation, business model and experience. Its competitors include State National, MS Transverse, Obsidian, Palomar and Trisura. Unlike Kestrel Group, some of its competitors may offer policy administration or other services or be willing to take on significant underwriting risk. There is already active competition for business and any increase in competition could materially and adversely affect the business, financial condition, results of operations and prospects of Kestrel Group.
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Some of Kestrel Group’s fronting arrangements may contain limits on the reinsurer’s obligations.
While Kestrel Group will reinsure a substantial portion of the risks inherent in its fronting programs, Kestrel Group will, in certain cases, enter into programs that contain limits on its reinsurers’ obligations, including exclusion of certain coverages, loss ratio caps, per occurrence or aggregate reinsurance limits or exclusion of the credit risk of general agents. To the extent losses under these programs exceed the prescribed limits, Kestrel Group and/or the AmTrust Insurance Companies will be liable to pay the losses in excess of such limits, which could materially and adversely affect the business, financial condition, results of operations and prospects of Kestrel Group.
Catastrophic losses may exceed expectations.
Kestrel Group’s insurance business is subject to claims arising from catastrophes, such as hurricanes, tornadoes, windstorms, floods, earthquakes, hailstorms, severe winter weather and fires, or other events, such as explosions, terrorist attacks, riots and hazardous material releases. The incidence and severity of these events are inherently unpredictable, and Kestrel Group’s losses from catastrophes could be substantial. Although Kestrel Group reinsures a substantial portion of the underwriting risk through its capacity providers, a catastrophe loss could impair the ability of one or more of such capacity providers to pay all of the reinsured claims, in which case the AmTrust Insurance Companies would be responsible for paying any claims not paid by Kestrel Group’s capacity providers. The consequence may include substantial volatility in the financial condition or results of operations of the AmTrust Insurance Companies for any fiscal quarter or year, which could have a material and adverse effect on its business, financial condition, results of operations and prospects or its ability to write new business. Any limitations or restrictions on the ability of the AmTrust Insurance Companies to continue to write new business may have a material impact on Kestrel Group’s ability to write new business for its capacity providers, in particular, if it is unable to find a suitable replacement for the loss of any insurance capacity from the AmTrust Insurance Companies. The inability of Kestrel Group to continue to write new business could materially and adversely affect its business, financial condition, results of operations and prospects.
Kestrel Group relies on third-party service providers that provide the infrastructure for its technological systems, and any failure to maintain these relationships could harm the combined company’s business.
Information technology systems form a key part of Kestrel Group’s business and accordingly it is dependent on its relationships with third parties that provide the infrastructure for its technological systems. For example, as previously noted, AmTrust is providing services in relation to the AmTrust Insurance Companies pursuant to a management agreement with Kestrel Insurance Agency, which includes compliance, data reporting, data flow and information technology systems. If these third parties experience difficulty providing the services Kestrel Group requires or meeting its standards for those services, or experience disruptions or financial distress or cease operations temporarily or permanently, it could make it difficult for the combined company to operate some aspects of its business. In addition, such events could cause Kestrel Group to experience increased costs and delay its ability to provide services until it has found alternative sources of the services provided by these third parties. If Kestrel Group is unsuccessful in identifying high-quality partners, if it fails to negotiate cost-effective relationships with them or if it ineffectively manage these relationships, it could materially and adversely affect Kestrel Group’s business, operating results, financial condition and prospects.
If any of Kestrel Group’s third-party service providers experience difficulties or terminate their services and Kestrel Group’s is unable to replace them with other service providers, its operations could be interrupted. It may be difficult for Kestrel Group to replace some of its third-party vendors, particularly vendors providing its core operational and technological infrastructure, in a timely manner if they were unwilling or unable to provide Kestrel Group with these services in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material adverse effect on Kestrel Group’s business, financial condition or results of operations. Even if Kestrel Group is able to replace them, it may be at higher cost, which could have a material adverse effect on Kestrel Group’s business, financial condition or results of operations. In addition, if a third-party provider fails to provide the services Kestrel Group requires, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyber-attack or other security breach, Kestrel Group’s business could suffer economic and reputational harm that could have a material adverse effect on its business, financial condition or results of operations.
Maiden’s reinsurers may not pay losses in a timely fashion, or at all, which could have a material adverse effect on Kestrel Group’s results of operations or financial condition.
At June 30, 2025, Maiden had $517.9 million due to it from one reinsurer, Cavello Bay Reinsurance Limited (“Cavello”), consisting of losses recoverable from Cavello under a retrocession agreement of $36.2 million and reinsurance recoverable on unpaid losses under a retroactive reinsurance agreement of $481.7 million. Cavello provided collateral in the form of a letter of credit in the amount of $445.0 million to AmTrust under the Loss Portfolio Transfer and Adverse Development Cover Agreement (“LPT/ADC Agreement”) with Enstar Group Limited (“Enstar”) on July 31, 2019, pursuant to which Cavello assumed the loss reserves as of December 31, 2018 associated with a quota share reinsurance agreement between certain insurance subsidiaries of Maiden and AmTrust that went in run-off effective January 1, 2019, subject to additional collateral funding requirements. As of June 30, 2025, the amount of collateral required was $432.2 million. See " Note 8. Reinsurance " for additional information regarding these reinsurance and collateral arrangements with Cavello.
Maiden’s reinsurers may not pay losses in a timely fashion, or at all. Either of these events would increase Kestrel Group’s costs and could have a material adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
The failure of any of the loss limitation methods Kestrel Group has employed or could employ in the future could have a material adverse effect on its results of operations or financial condition.
Kestrel Group seeks to limit loss exposure through loss limitation provisions in policies it writes, such as limitations on the amount of losses that can be claimed under a policy, limitations or exclusions from coverage and provisions relating to choice
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of forum, which are intended to ensure that Kestrel Group’s policies are legally interpreted as intended. These contractual provisions may not be enforceable in the manner expected and disputes relating to coverage may not be resolved in Kestrel Group’s favor. If the loss limitation provisions in the policies are not enforceable or disputes arise concerning the application of such provisions, the losses that Kestrel Group incurs could be materially higher than expected and Kestrel Group’s financial condition and results of operations could be adversely affected.
Maiden’s investments in alternative investments and its investments in joint ventures and/or entities accounted for using the equity method may be illiquid and volatile in terms of value and returns, which could negatively affect Kestrel Group’s investment income and liquidity.
In addition to fixed maturity securities, Maiden has invested in alternative investments such as hedge funds, fixed income funds, equity funds, privately held investments, private equity and private credit funds and co-investments, real estate funds and co-investments and other alternative investments. At June 30, 2025, approximately 46% of its total cash and investments were categorized as equity securities, equity method investments and other investments on its condensed consolidated balance sheets.
These alternative investments and other similar investments may be illiquid due to restrictions on sales, transfers and redemption terms, may have different, more significant risk characteristics than investments in fixed maturity securities and may also have more volatile values and returns, all of which could negatively affect Kestrel Group’s investment income and overall portfolio liquidity.
Maiden has also invested in joint ventures and in other entities that it does not control. In these investments, many of which are accounted for using the equity method, Maiden may lack management and operational control over the entities in which it is invested, which may limit its ability to take actions that could protect or increase the value of its investment. In addition, these investments may be illiquid due to contractual provisions, and Maiden’s lack of operational control may prevent it from obtaining liquidity through distributions from these investments in a timely manner or on favorable terms. As a result, Maiden’s ability to promptly sell one or more investments in response to changing economic, financial and investment conditions may be limited and, if Maiden is required to liquidate all or a portion of these alternative investments and other similar investments quickly, it may realize significantly less than the value at which it had previously recorded those investments, which could have a material and adverse effect on Kestrel Group’s financial condition and results of operations.
Typically, there is not a public market for these alternative investments and other similar investments in which Maiden has invested. As a result, certain of these securities are valued quarterly at fair value based on assessments from Kestrel Group’s third-party valuation firms. The determination of fair value and, consequently, the amount of unrealized gains and losses in Kestrel Group’s portfolio are, to a certain degree, subjective and dependent on the valuation process of these third-party valuation firms. Certain factors that may be considered in determining the fair value of certain of Maiden’s alternative investments and other similar investments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates by Kestrel Group’s third-party valuation firms. Maiden holds a high level of illiquid investments and has a high proportion of assets that are fair valued relative to other assets which requires Kestrel Group’s third-party valuation firms to rely on a high degree of unobservable valuation inputs. In addition, the review of fair valuations of certain of these alternative investments and other similar investments requires a high degree of auditor judgment and extensive effort to audit management’s determination of fair value of such alternative investments and other similar investments, including the need to involve fair value specialists possessing relevant valuation experience to evaluate the appropriateness of the valuation techniques and the significant unobservable inputs used in the valuation of such investments which may differ from the valuation techniques and inputs utilized by Kestrel Group and its third-party valuation firms and/or may change over time. The effect of all these factors on Kestrel Group’s portfolio may reduce Kestrel Group’s net asset value by increasing unrealized depreciation in Kestrel Group’s portfolio. Depending on market conditions, Kestrel Group could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
In addition, alternative or “other” investments may not meet regulatory admissibility requirements or may result in increased regulatory capital charges to Maiden’s insurance subsidiaries that hold these investments, which could limit those subsidiaries’ ability to make capital distributions to Kestrel Group, which in turn could adversely affect Kestrel Group’s business, financial condition, results of operations and prospects.
Performance of Kestrel Group’s investment portfolio will be subject to a variety of investment risks.
Kestrel Group’s operating results will be affected, in part, by the performance of its investment portfolio. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond Kestrel Group’s control. Although Kestrel Group will take measures to manage investment risks, it may not be able to fully or effectively mitigate interest rate sensitivity. Despite any mitigation efforts, a significant change in interest rates could have a material and adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
In addition, the performance of Kestrel Group’s investment portfolio will generally be subject to other risks, including the following:
• deterioration in the financial condition, operating performance or business prospects of one or more issuers of its fixed-income securities;
• heavy concentration of the investment portfolio in the securities of a few issuers, sectors or industries;
• inability to convert investment securities into cash on favorable terms and on a timely basis; and
• general movements in the securities markets.
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A substantial decline in its investment portfolio could have a material and adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
We identified a material weakness in our internal controls
Our management identified a material weakness related to our internal control over financial reporting for the financial statements of the Kestrel Group LLC and its subsidiaries. This material weakness existed prior to the consummation of the acquisition. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. See Part I Item 4 Controls and Procedures included within this filing for details on material control weakness including remediation measures designed and implemented by the Company.
We bel ieve the remediation measures will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. However, the new and enhanced controls have not operated for a sufficient amount of time to conclude that the material weakness has been remediated.
Because we identified a material weakness and have not remediated it in the current fiscal year, our disclosure controls and procedures and internal control over financial reporting may not be sufficient to ensure that material information is timely and accurately disclosed, which may adversely affect investor confidence and our ability to file timely reports with the SEC. Despite management’s ongoing efforts, the material weakness in our disclosure controls could result in material misstatements in our financial statements, which could harm our reputation, result in regulatory scrutiny, or lead to corrective action. Further, integration of the legacy Kestrel and Maiden businesses can also expose us to risks that material weaknesses may not be promptly resolved, potentially delaying completion of our consolidated internal control assessment and impairing our financial reporting.
Technology breaches or failures, including, but not limited to, those resulting from cyber-attacks on Kestrel Group or its business partners and service providers, could disrupt or otherwise negatively impact Kestrel Group’s business.
Kestrel Group’s information technology systems are vulnerable to data breaches, interruptions or failures due to events that may be beyond its control, including, but not limited to, natural disasters, theft, terrorist attacks, computer viruses, hackers and general technology failures. Kestrel Group’s information technology systems will include the Internet and third-party hosted services. Kestrel Group will use information systems to process financial information and results of operations for internal reporting purposes and for regulatory financial reporting, legal and tax requirements. Kestrel Group may also use information systems for electronic communications with customers and its various locations.
A shutdown or inability to access one or more of its facilities, a power outage, a security breach, or a failure of one or more of its information technology, telecommunications or other systems could significantly impair Kestrel Group’s ability to perform such functions on a timely basis. These incidents could be caused by malicious or disruptive software, computer hackers, rogue employees, cyber-attacks, failures of telecommunications systems or other catastrophic events. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of Kestrel Group’s ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Furthermore, a significant portion of the communications between Kestrel Group’s employees and its business, banking and investment partners will depend on information technology and electronic information exchange. In addition, Kestrel Group may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to it, and may become subject to legal action and increased regulatory oversight. Kestrel Group could also be required to spend significant financial and other resources to remedy any damage caused to repair or replace information systems.
Kestrel Group’s information systems may be the target of attacks. Although Kestrel Group has not experienced known material or threatened cases involving unauthorized access to its information technology systems and data or unauthorized appropriation of such data to date, it has no assurance that such technology breaches will not occur in the future.
Additionally, some of Kestrel Group’s subsidiaries will collect, use, store, transmit, retrieve, retain and otherwise process confidential and personally identifiable information in their information systems in and across multiple jurisdictions, and they are subject to a variety of confidentiality obligations and privacy, data protection and information security laws, regulations, orders and industry standards in the jurisdictions in which they do business. The regulatory environment surrounding information security, data privacy and cybersecurity is evolving and increasingly demanding. A number of Kestrel Group’s subsidiaries are subject to numerous U.S. federal and state laws and non-U.S. regulations governing the protection of personally identifiable and confidential information of their customers and employees. On October 24, 2017, the NAIC adopted an Insurance Data Security Model Law, which requires licensed insurance entities to comply with detailed information security requirements. The NAIC model law has been adopted by certain states, including Vermont, which may raise compliance costs or increase the risk of noncompliance, and noncompliance could subject Kestrel Group’s insurance subsidiaries to regulatory enforcement actions and penalties, as well as reputational harm. Any such events could potentially have an adverse impact on Kestrel Group’s insurance subsidiaries’ business, results of operations, financial condition and cash flows.
Because the interpretation and application of many privacy and data protection laws along with contractually imposed industry standards are uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with Kestrel Group’s insurance subsidiaries’ existing data management practices or the features of their services and platform capabilities. Any failure or perceived failure by Kestrel Group’s insurance subsidiaries, or any third parties with which they do business, to comply with their posted privacy policies, changing consumer expectations, evolving laws, rules and regulations, industry standards, or contractual obligations to which they or such third parties are or may become subject, may result in actions or other claims against Kestrel Group’s insurance subsidiaries by governmental entities or private actors, the expenditure of substantial costs, time and other resources or the incurrence of significant fines, penalties or other liabilities. In addition, any such action, particularly to the extent Kestrel Group’s insurance subsidiaries were found to be guilty of violations
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or otherwise liable for damages, would damage their reputation and adversely affect their business, financial condition and results of operations.
Maiden Reinsurance’s legacy business is subject to risks related to litigation. Losses from legal and regulatory actions may have a material adverse effect on the Company’s reputation, which in turn may have a material adverse effect on Kestrel Group’s operating results, cash flows, financial condition and prospects.
Maiden Reinsurance may from time to time be subject to litigation or other legal or regulatory actions in the ordinary course of business relating to its current and past business operations, including, but not limited to, disputes over coverage or claims adjudication, including reinsurance contract disputes and arbitration, claims alleging that Maiden Reinsurance has acted in bad faith in the administration of claims by its policyholders, disputes with its agents, producers and termination of contracts and related claims and disputes with former employees.
Kestrel Group also may be subject to litigation from security holders due to the diminution in value of its securities as a result of its operating results and financial condition. For example, in 2019 certain security holders of Maiden filed a class action alleging that Maiden failed to take adequate loss reserves in connection with reinsurance provided to AmTrust and that certain of Maiden’s representations concerning its business, underwriting and financial statements were rendered false by the allegedly inadequate loss reserves, which caused Maiden’s share price to fall. This class action is currently under appeal. Defending against these actions may require Maiden to utilize significant resources in its defense as well as result in a significant amount of time by senior management. In addition, any reserves established for pending litigation may be insufficient, in particular, in the event of an adverse resolution of one or more such lawsuits or arbitrations, which could have a material adverse effect on Kestrel Group’s operating results, cash flows, financial condition and prospects.
If Kestrel Group is unable to establish and maintain accurate loss reserves, its business, financial condition, results of operations and prospects may be materially and adversely affected.
There is inherent uncertainty in the process of establishing insurance loss reserves. As a result of these uncertainties, the ultimate paid loss and LAE may deviate, perhaps substantially, from the point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in Kestrel Group’s financial statements. To the extent that loss and LAE exceed estimates, Kestrel Group will be required to immediately recognize any retained unfavorable development and increase loss reserves, with a corresponding reduction in its net income in the period in which the reserve levels are increased. Consequently, ultimate losses paid could materially exceed reported loss reserves and have a material and adverse effect on Kestrel Group’s business, financial condition, results of operations and prospects.
Kestrel Group’s business will depend on the efforts of its executive officers and other personnel. If Kestrel Group is unsuccessful in its efforts to attract, train and retain qualified personnel, its business, financial condition, results of operations and prospects may be materially adversely affected.
Kestrel Group’s success will depend on its executive officers’ industry expertise, knowledge of its markets and relationships with clients. The executive officers of Kestrel Group will be:
• Luke Ledbetter (Chief Executive Officer);
• Terry Ledbetter (Executive Chairman); and
• Patrick Haveron (President and Chief Financial Officer).
Kestrel Group has agreements with its executive officers that contain certain non-compete and non-solicit provisions. Nonetheless, should any of its executive officers cease working for Kestrel Group, it may not be able to find acceptable replacements with comparable skills and experience in the niche markets that Kestrel Group targets. In addition, its business is also dependent on other skilled employees. Kestrel Group cannot guarantee its ability to attract, train and retain, on a timely basis and on anticipated economic and other terms, experienced and capable senior management, underwriters and support staff. Kestrel Group will pay competitive salaries, bonuses and equity-based rewards in order to attract and retain such personnel, but there can be no assurance that Kestrel Group will be successful in such endeavors. Loss of key personnel or inability to recruit and retain qualified personnel in the future could have a material and adverse effect on Kestrel Group’s business, financial condition or results of operations.
Kestrel Group may require additional capital in the future which may not be available or available only on unfavorable terms.
Kestrel Group’s future capital requirements will depend on many factors, including its ability to successfully write new business and to establish premium rates and reserves at levels sufficient to cover losses. To the extent funds generated by its ongoing operations and capitalization are insufficient for operating requirements or to fund future strategic initiatives such as entering into new lines of business or exercising the option to acquire the AmTrust Insurance Companies from AmTrust, Kestrel Group may need to raise additional capital. Kestrel Group cannot assure that it will be able to raise equity or debt financing on favorable terms and in the needed amounts, or at all. If Kestrel Group cannot obtain adequate capital, its business, financial condition, results of operations and prospects could be materially adversely affected.
In addition, the terms of a capital raising transaction may include stringent financial and operating covenants which may restrict Kestrel Group from raising additional capital in the future.
The general lines of authority or business Kestrel Group is licensed to conduct, as well as the rates charged by Kestrel Group under the policies it writes through the AmTrust Insurance Companies, will be subject to prior regulatory approval in most of the states in which Kestrel Group operates.
Kestrel Group is impacted by the regulation of the AmTrust Insurance Companies. Admitted insurance companies are subject to various state laws that govern organization, licensing, capitalization, policy forms, rate approvals and claims handling. Since the AmTrust Insurance Companies are admitted in most of the states in which Kestrel Group operates, Kestrel Group may have
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to obtain prior regulatory approval of general lines of authority or business it may be lacking in such states, as well as prior regulatory approval of program-specific insurance rates charged to its insureds and its clients’ insureds in such states, including any increases in the rates. The timing of such approval processes, as well as the willingness of insurance regulators to approve licensing changes or rate increases, can impact the profitability of new policies written by Kestrel Group, which in turn can cause fluctuations in Kestrel Group’s revenue and earnings. If Kestrel Group is unable to obtain approval for the requested licensing or rate changes, or if such approval is delayed, its financial condition, results of operations and liquidity may be adversely affected.
Even if the combination qualifies as a transaction described in Section 351 of the Code, a U.S. Holder of Maiden shares may still recognize gain as a result of the first merger if Maiden is or was classified as a passive foreign investment company (“PFIC”) for any taxable year during which a U.S. Holder held Maiden shares.
Pursuant to Section 1291(f) of the Code, to the extent provided in U.S. Treasury Regulations promulgated under the Code (the “Treasury Regulations”), even if the combination qualifies as a transaction described in Section 351 of the Code, if Maiden was a PFIC for any taxable year during a U.S. Holder’s holding period for the Maiden shares, certain adverse U.S. federal income tax consequences, including recognition of gain, could apply to such U.S. Holder as a result of the first merger, unless certain exceptions apply. Based on the nature of Maiden’s business, the projected composition of its income and the projected composition and estimated fair market values of its assets, Maiden does not believe it was a PFIC for its taxable year ended on December 31, 2024 and does not expect to be a PFIC for its taxable year ending on December 31, 2025, or the succeeding taxable year. However, because there is significant uncertainty in the application of the PFIC rules, no assurance can be given that Maiden was not previously a PFIC and will not be a PFIC for its taxable year ending December 31, 2025, or any subsequent taxable year.
Holders of Maiden shares should consult such holders’ tax advisors regarding the possible classification of Maiden as a PFIC and the resulting U.S. federal income tax considerations.
The ability of Kestrel Group’s subsidiaries to use net operating loss carryforwards and other tax attributes may be limited in connection with the combination or other transactions.
As of June 30, 2025, Maiden and certain of its subsidiaries had U.S. federal net operating losses of approximately $454,825. These net operating losses will carry forward to offset a portion of future taxable income, if any, until such unused losses expire, if at all.
Under Sections 382 and 383 of Code, these federal net operating loss carryforwards, certain losses incurred following the combination, and other tax attributes may become subject to an annual limitation in the event of certain changes in Kestrel Group’s ownership. An “ownership change” pursuant to Section 382 of the Code generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Kestrel Group’s, or its subsidiaries’, ability to utilize net operating loss carryforwards, certain losses incurred following the mergers, and other tax attributes to offset future taxable income or tax liabilities may be limited as a result of ownership changes, including potential changes in connection with the combination or other transactions. Similar rules may apply under state tax laws. Such limitations could result in increased future income tax liability to Kestrel Group or its subsidiaries, and Kestrel Group’s or its subsidiaries’ future cash flows could be adversely affected.
To preserve Kestrel Group’s and its subsidiaries’ ability to utilize their tax attributes without limitation, Kestrel Group has taken actions to attempt to prevent an “ownership change” from occurring, including adopting provisions that limit or discourage shareholders from acquiring 5% or more of Kestrel Group or, in the case of shareholders that already own 5% or more of Bermuda NewCo, from increasing their ownership. Kestrel Group may take further actions in the future. There can be no assurances that such actions will be available, or if such actions are available, whether Kestrel Group will decide to undertake any such actions. Moreover, there can be no assurances that any existing or future actions will be effective in preventing an “ownership change” pursuant to Section 382 of the Code.
Kestrel Group is a tax resident of, and subject to tax in, both the United States and Bermuda, which may result in an increase in Kestrel Group’s and its subsidiaries’ cash tax obligations and effective rate.
Under current U.S. federal tax law, a corporation organized under Bermuda law is generally classified as a foreign corporation pursuant to Section 7701(a)(4) of the Code. Section 7874 of the Code and the Treasury Regulations promulgated thereunder, however, contain rules that cause a foreign corporation, such as Kestrel Group, that acquires the stock of a domestic corporation, such as US NewCo, to be treated as a domestic corporation for U.S. federal tax purposes in certain situations. Kestrel Group expects to be treated as a domestic corporation for all US. Federal tax purposes upon consummation of the Second Merger pursuant to Section 7874(b) of the Code. However, Section 7874 of the Code is complex and Kestrel Group cannot be certain or provide any guarantees regarding its expected treatment.
On the basis that Kestrel Group is treated as a tax resident in the U.S., Kestrel Group is not expected to be treated as a Bermuda tax resident pursuant to Bermuda’s tax legislation. Regardless of whether Kestrel Group expects to be treated as a domestic corporation for U.S. federal income tax purposes pursuant to Section 7874(b) of the Code, it could be liable for both U.S. and Bermuda taxes. Kestrel Group does not expect any tax owed to Bermuda to be material, but Bermuda’s tax laws may change and Kestrel Group cannot provide any assurances that its Bermuda tax obligations will not become material in the future.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.