Maiden Holdings: governance gone bad
Our investment focus is primarily on global companies, but we do keep an eye on the local market. Recently, a concerning chart pattern in Bermuda-headquartered Maiden Holdings caught our attention. Maiden stock has fallen over 85 per cent in the past five months and yesterday closed at $1.29 per share. Such price action generally suggests a company in big trouble and, upon further investigation we began to realise that this is prime example of why investors often distrust the financial services industry.
Doing a bit of digging, we find that Maiden Holdings and its sister company, AmTrust, Inc were founded by the Karfunkel family, a couple of brothers who began their less than illustrious careers by being sanctioned by the SEC in 1971 for selling unregistered securities, among other things. After re-entering the business, they started AmTrust, Inc in 1998, a once fast-growing insurance company which won over the analyst community by posting impressive growth, largely by gobbling up smaller players in the industry. The current CEO of AmTrust is one Barry Zyskind who was also a director of Maiden.
The Karfunkels created Maiden Holdings in Bermuda as a sort of captive reinsurance vehicle and a way to lay off mounting claims risk. Underpriced insurance policies from AmTrust were reinsured by Maiden giving AmTrust a competitive advantage, until it blew up. With Mr Zyskind having a hand in both operations, it was a perfect set up.
The extent of these losses has become quite evident over the past several months with Maiden continuing a long string of deeply negative earnings reports. For example, in the latest quarter, the company reported an operating loss of about $235 million, or $2.83 per share, quite staggering considering the current market value of the company is only about $100 million and the company’s book value is just around $300 million according to Bloomberg data. Maiden stock has been steadily declining for some time and more recently the company eliminated dividends on both the common and preferred shares. The vast majority of the earnings debacle was due to adverse loss development in the AmTrust reinsurance segment.
With compensation of almost $5 million per year, Mr Zyskind has done quite well with Maiden and AmTrust. Company stakeholders, not so much.
Apparently, the company’s auditors and Bermuda Monetary Authority had been asleep at the switch for some time, oblivious to Maiden’s massive under-reserved claim liabilities. Otherwise, investors might have caught on to the scheme earlier. Both the CEO and CFO of the company resigned last year amid the accounting scandal and otherwise dysfunctional operation.
Putting the company up for sale resulted in just the few profitable parts of the company being liquidated but likely resulted in no bids for the company as a whole.
Adding to the drama, late last year Maiden released a 10Q report stating they intended to call one issue of their outstanding baby bonds at par, making a few lucky investors whole. The bonds traded up on the news. After all, the covenants in the debenture indicated the call was mandatory upon the occurrence of certain events, mainly when the company sold its Maiden North America subsidiary.
This subsidiary was the entity backing the debenture and the transaction was consummated late last year. However, a few weeks ago the company changed its mind and decided to keep the proceeds to themselves, ostensibly committing an act of fraudulent conveyance. The bonds tumbled over 20 per cent on the news.
Not to be left behind in the competition for poor governance, AmTrust, now a private company, recently decided they do not care much about their asset owners either. After previously announcing they would continue to maintain listings of their preferred stock and baby bonds on the New York Stock Exchange, last week the company reversed course and said they would now delist all of the issues.
The initial statement of intent to retain the NYSE listing was removed from their website. The delisting action makes them tradable only by appointment on the much less liquid OTC exchange. The bonds fell about 30 per cent immediately after the announcement.
When I was recently asked about ESG, the popular acronym for environmental, social and governance factors as they relate to future investment performance, I stated that I have always thought good governance, although the last of the three variables, deserved more attention by analysts. The sad saga of Maiden Holdings and AmTrust is a prime example of why it matters.
• Bryan Dooley, CFA is the senior portfolio manager and General Manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority
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