MHLD - Maiden Holdings Ltd: Poor Performance And Inflated Price

2023-10-12 02:57:50 ET

Summary

• Maiden Holdings has experienced a steady decline in share price due to slipping margins and a significant decline in net income.
• The company operates in the reinsurance industry, offering property and casualty coverage to insurers across Europe, the US, and international markets.
• The poor performance and struggling balance sheet of MHLD indicate a risky market environment and a potential further decline in share price.

Introduction

The share price for Maiden Holdings, Ltd. ( MHLD ) has been in a steady decline for the last 12 months as the company continues to grapple with staying afloat when the margins are slipping. On a YoY basis, the company has dropped significantly in terms of its net income and last quarter showed a net loss of $2.9 million, down from a positive $25.8 million just a year prior. This sort of shift has turned the market sentiment around the company quite sour I think and a quick recovery seems unlikely. I don't see any value here and will be rating the company a sell for now as a result.

Company Structure

MHLD specializes in offering reinsurance solutions for property and casualty coverage to regional and specialty insurers across Europe, the United States, and international markets. The company operates through two primary segments: Diversified Reinsurance and AmTrust Reinsurance. Under these segments, MHLD engages in underwriting various reinsurance treaties, employing both quota share and excess of loss approaches. Additionally, the company collaborates with insurer partners to provide auto and credit life insurance products to retail clients.

As has been mentioned already the last quarter's poor performance for MHLD as the bottom line saw a significant decline on a YoY basis reaching into the negatives. For the moment the market environment seems quite risky to enter and I am further discouraged from the company given the last quarter's results as well. Until there are markable improvements in the profit margins of MHLD I find the risk/reward profile here skewed to the downside.

As for the asset side of the business and balance sheet, I think it has been further visible that the company has been struggling. The difference on a YoY basis is staggering and underscored why the risks here are too large to make for a buy case, or even a hold for that matter. The YTD annualized returns on the funds withheld receivables are $134 million lower than in 2022 during the same period. More on this, the AFS and cash are $46 million lower this period than last year. Trends like this have soured the sentiment around the company and if this poor performance continues I can see the share price falling further. There aren't any strong fundamentals carrying the company up right now so the potential fall of the share price is really 50% or so. Justifying this would be that the p/s of MHLD declines to around 1, down from the TTM of 2.39 it has right now. A fall like this would be justified if the business lacks growth prospects. The next few quarters from the company will have to display improvements in these areas as otherwise I don't see the price recovering and investors will be left with a poor ROI.

Earnings Transcript

In the last report that the company posted for investors the CEO of MHLD Patrick J. Haveron had some comments to share on the performance and the outlook right now.

As noted in our last report, the market environment has led to a more measured pace of deployment of new alternative investment opportunities, and we are adjusting our investment focus accordingly, focusing on income-producing, lower-risk assets at more attractive yields. We believe our second quarter results demonstrate our asset management strategy remains on track to achieve its targeted long-term returns".

This comment quite clearly states that the company still views the market conditions as quite positive and that it's a bump in the road right now. However, I remain skeptical as the business is still posting negative net incomes, and even if there are improvements in some parts of the business, it's not enough to lift the entire prospects of the business to a more positive level where they can generate strong returns. Lacking these capabilities should lead to a declining share price quite frankly and is a significant reason for the sell rating I will have on them now.

Risk Associated

One potential risk to consider is related to the company's preferred shares and the management's majority ownership of them. In theory, management has the authority to modify the terms of these preferred shares. If they decide to explore alternative methods for unlocking capital allocation strategies, they could opt to alter the terms of the preferred shares. Despite their majority ownership of the preferred shares since June 2021, management has continued to repurchase them, increasing their overall ownership from 61% to 74%. While this indicates that changing the terms may not currently be their strategy, it remains a risk that should be acknowledged and monitored.

Considering that the company operates in the insurance sector, there is a notable risk associated with the increasing frequency and severity of climate-related disasters and accidents, such as floods and droughts. These events have the potential to result in higher insurance claims, which could impact profitability and hinder earnings expansion for MHLD This represents a significant risk that investors should take into account. Given the recent subpar performance in the last quarter, any further increase in these climate-related risks could exert additional downward pressure on the company's shares in the short term.

Investor Takeaway

MHLD has had some pretty bad quarters recently as the bottom line has reached a negative level right now. This is not a recovery story and without fundamentals like profitability and no strong prospects of quickly recovering it as well, I think that investors are left with a pretty poor investment thesis here that only really concludes with one thing, a sell.

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