Description

Summary

We recommend going long the senior notes (MHLA, MHNC) and preferred stock (MHPR-A, MHPR-C, MHPR-D) of Maiden Holdings, which we think are worth par given the significant de-risking of Maiden’s business and will provide a nice return as Maiden runs down. The preferreds in particular are pricing in significant further adverse development at current market prices.

Maiden’s current cap table is shown below:

Senior Notes

The 2043 and 2046 Senior Notes are trading 84 and 90 and have a pretty decent yield of ~9%.

Non-Cumulative Preferreds

The Preferred Series are trading at 43-44, at a significant discount to the liquidation preference of $25. In December, MHLD tendered for the Preferreds for $10.50 in cash, which resulted in the reduction of around $71m at face value, capturing a discount of $41 million.

All three Series of Preferreds are Non-Cumulative. There is no mandatory redemption provision for the Preferreds.

Per the terms of the Preferreds, following the non-payment of six dividends whether or not for consecutive periods, holders voting as a single class with holders of any and all other series of voting preference shares are entitled to vote for the election of two additional directors to the 9 member board of directors. Maiden stopped paying dividends on the preferred shares during Q3 2018.  

At the Special Meeting on December 15, Preferred holders elected two directors to the Board (Claude LeBlanc the CEO and President of AMBC and Paul Giordano the ex-CEO of Syncora Holdings), which could drive further redemptions of the preferred shares above current market prices.

Background and Recent Developments

Maiden Holdings (NASDAQ:MHLD) is a publicly held Bermuda-based insurance holding company in run off. Maiden was previously focused on serving the needs of regional and specialty insurers in the US and Europe. Maiden Reinsurance Ltd. (“MRL”), a wholly owned subsidiary of Maiden Holdings, is a Bermuda reinsurer that was re-domiciled to Vermont in 2020.

Maiden was originally set up by AmTrust’s majority shareholders - AmTrust’Michael Karfunkel, George Karfunkel and Barry Zyskind in 2007 as a captive reinsurer to support AmTrust Financial Services. Leah Karfunkel and Barry D. Zyskind own approximately 7.9% and 7.4% of Maiden, respectively.  Barry Zyskind serves as the Non-Executive chairman of Maiden’s BoD and as the CEO and Chairman of AmTrust.

Maiden reinsured a large portion of AmTrust’s portfolio, and the AmTrust Reinsurance segment made up the majority of Maiden’s revenues under a quota share arrangement whereby Maiden reinsured 40% of AmTrust’s premiums. As Maiden’s primary source of revenues were derived from the reinsurance of AmTrust insurance policies, Maiden suffered substantial losses when those policies paid out unexpectedly large claims.

Maiden’s business currently consists of two reportable segments: Diversified Reinsurance – a diversified book of reinsurance for P&C companies in the U.S. and Europe and AmTrust Reinsurance – a run-off book including all of the business ceded to Maiden Reinsurance from subsidiaries of AmTrust under the Amtrust. Maiden is not currently engaged in active reinsurance underwriting and is running off the remaining unearned exposures it has reinsured.

Following a period of high combined ratios and significant operating losses, the Board of Directors initiated a strategic review process in 2018 aimed at increasing value for shareholders. Since then, Maiden has engaged in a series of strategic measures that have dramatically reduced the regulatory capital needed to operate its business, strengthened the Company’s solvency ratios, domiciled Maiden Reinsurance from Bermuda to Vermont in the US (completed March 16, 2020) and ceased all active reinsurance underwriting.

Since 2018, Maiden has taken steps to improve its capital adequacy which have included:

1.     Sale of Maiden RE North America (“MRNA”) to Enstar on December 27, 2018 for $286.4m

2.     Effective January 1, 2019, Maiden Reinsurance and AmTrust agreed to terminate on a run-off basis (i) the remaining business subject to the AmTrust Quota share with AmTrust International Insurance (“AII”) and (ii) the European Hospital liability Quota share reinsurance with AmTrust Europe Ltd. (“AEL”) and AIU DAC

3.     Entered into a revised loss portfolio transfer and adverse development cover (“LPC/ADC MTA”) with Enstar in July 2019 under which an Enstar subsidiary (Cavello) will assume liabilities for loss reserves associated with the AmTrust Quota share in excess of a $2.18 billion retention for up to $600 million in exchange for a retrocession premium of $445 million which was fully paid in cash. The LPC/ADC agreement Maiden Bermuda with $155 million of adverse development cover over its carried AmTrust Quota reserves at December 31, 2018 arising during the run-off in reserves

4.     Agreed that Maiden Reinsurance Ltd. (“MRL”) would not write new business without prior approval of the BMA (Bermuda Regulator) and ceased preferred dividend payments in Q3 2018

5.     Completed the redomicilation to Vermont in March 2020 which could potentially release capital

Loss Portfolio Transfer (LPT/ADC) Agreement with Enstar (NASDAQ: ESGR)

The LPT/ADC Agreement with Enstar effectively addresses the bulk of Maiden’s remaining AmTrust book. Maiden entered into a revised loss portfolio transfer and adverse development cover (“LPC/ADC MTA”) with Enstar in July 2019. The adverse development cover is with respect to AmTrust Bermuda for losses incurred on or prior to December 31, 2018 in excess of a $2.178 billion retention up to a $600 million limit. In exchange, Enstar’s subsidiary (Cavello) received a $445 million retrocession premium and posted $445 million of collateral in the form of LCs to secure its obligations under the reinsurance agreement. The LPC/ADC agreement Maiden Bermuda with $155 million of adverse development cover over its carried AmTrust Bermuda Quota reserves at December 31, 2018 arising during the run-off in reserves. Paid Losses are not expected to exceed Maiden’s minimum retention until 2024. The LPC/ADC provided by Enstar effectively shortens the duration of the AmTrust book as it kicks in after the minimum retention is met.

At December 31, 2018, MHLD had a reserve for loss adjustment and loss adjustment expenses of $3.1 billion of which $2.95 billion was related to AmTrust. The LPC/ADC agreement covers losses between Maiden’s existing reserves of $2.118 billion up to $2.718 billion at Amtrust Bermuda the difference being the $600 million of LPC/ADC. As of September 30, 2020, the reinsurance recoverable on unpaid losses under the LPC/ADC agreement was $525m including $75m under the ADC. The LPC/ADC looks to be sufficient to capture losses on the AmTrust book. The remaining book of business which is small looks pretty stable.

Assuming Maiden operates at break-even, the bonds and preferreds would be worth par. 

Catalyst

New Board Directors

Further tender offers/repurchases

Run-off of the book