Beleaguered reinsurer Maiden Holdings is facing a potential activist challenge after investment firm 683 Capital Management disclosed a near-10 percent stake in the company.
Disclosures by the investment firm outline various avenues it is considering pursuing, including engaging with the board and management, proposing strategic alternatives and advocating to other shareholders.
It is also considering proposing changes to Maiden’s capitalisation, ownership structure, board structure or operations, according to a 13-D filing with the Securities and Exchange Commission on 22 March.
Though such filings are typically boilerplate and broad-based in their delineation of potential options, the disclosure of activist strategies suggests all options remain firmly on the table.
It is worth noting that despite an apparent track record of similar filings, little is known about 683 Capital Management, which appears to have assets under management numbering in the hundreds of millions according to available information.
The disclosures come at a fascinating juncture for Maiden.
Just over a decade after it was founded as close to a captive reinsurer for AmTrust Financial, Maiden finds itself all but in run-off, with few operations, assets or liabilities not in some way intertwined with its sister company.
Arguably, this only serves to amplify the complicated conflicts of interest and corporate governance challenges that have been at the heart of the company since its formation.
Potential activist faces challenges
In the 13-D filing, 683 Capital Management disclosed it has purchased 7.9 million shares of common stock, amounting to a 9.49 percent stake in Maiden. Due to the company’s bye-laws, this is essentially the largest position an external investor could acquire.
In the risk factors listed in Maiden’s most recent 10-K filing, the firm outlines numerous other bye-laws that could make life more challenging for an activist investor than at a more typical company.
These include provisions that “may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so”, as well as anti-takeover provisions.
Another challenge facing anyone looking to radically alter Maiden’s strategy is the reinsurer’s unconventional policy of fronting AmTrust with funds to provide collateral for its reinsurance.
At year end 2018, $4.0bn or 92 percent of the reinsurer’s cash and investments were restricted in various trusts and loans. This reduces the ability of Maiden to take a more adversarial approach on claims handling with AmTrust or to withhold payments, even if an external investor was to acquire full control of management, the board and operations.
A further challenge could come if Maiden’s shares are delisted from the Nasdaq stock exchange, which would remove the requirement for it to maintain a majority of independent directors.
Also included in the 13-D filing was the fact that 683 Capital Management holds numerous positions across Maiden’s preferred equity securities, in total around one million shares across the various classes.
The 13-D notes these security holders have the right to appoint two additional directors to the reinsurer’s board in the event that dividends are not paid for the equivalent of six or more dividend periods. Maiden has not declared or paid dividends for two of its last scheduled payment dates.
Even in an industry facing a significant uptick in activist interest, Maiden’s unique business structure and peculiar corporate governance challenges have long made it more vulnerable to heightened shareholder scrutiny than most peers.
Indeed, there was much speculation last year after run-off firm Catalina acquired a significant stake in Maiden, given the legacy firm’s history of successful activism in its pursuit of American Safety Insurance in 2013.
Even a cursory read of Maiden’s balance sheet demonstrates the unusual nature of the company, with the majority of its assets and liabilities in some way connected to a related party, a term used to describe a counterparty or company with close familial connections with principal executives or owners.
Meanwhile, the description of related-party transactions runs for three pages in its 10-K.
Perhaps nothing demonstrates this long-standing risk better than the fact that the reinsurer’s founding COO Bentzion Turin is still suing the company for allegedly firing him in retaliation for whistle-blowing on alleged inappropriate handling of conflict of interest issues going back more than a decade.
With Maiden now in run-off, these risks have arguably only become more challenging for the reinsurer to manage. The firm is now simply a box of assets and liabilities that essentially equates a zero-sum game with AmTrust. Simply put, nearly every dollar of value creation for Maiden is likely to come at the expense of its sister company.
This is perhaps most acutely clear in the application of the loss corridor, a provision contained in one of the reinsurance treaties between the two firms that if applied would inure to Maiden’s benefit at the expense of AmTrust.
To date, the firm has been coy in providing details about its likelihood of triggering – something which is challenging for external observers to assess as it is based on inception-to-date loss ratios for business not separately broken out.
However, it is notable that the Karfunkel-Zyskinds, the founding family behind both firms, remain heavily incentivised to put AmTrust’s interest over Maiden’s, with the family owning just 21 percent of the much smaller reinsurer versus 53 percent of the larger AmTrust.
This is summarised succinctly in a risk disclosure in Maiden’s 10-K.
“The interests of our significant shareholders may not be fully aligned with our interests, and this may lead to a strategy that is not in our best interest,” the firm told its own shareholders.
One other potential area of conflict for Maiden remains the fate of its senior notes. The firm has $263mn of senior notes outstanding, at least $153mn of which it previously said it would be required to redeem following various asset sales, only to change its position at a later date.