Majestic Capital Preparing for Bankruptcy Following Failed Merger Attempt

Majestic Capital, Ltd., the parent company of Majestic Insurance Co., is preparing a bankruptcy filing after a failed merger attempt.

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Bayside Capital Partners, LLC, a holding company, pulled out of a previously announced merger agreement, citing a “material deterioration” in Majestic’s capital surplus, a failure to secure regulatory approval from the California Department of Insurance and issues with a needed office space lease termination, according to a statement from Majestic Capital. Consequently, Majestic canceled a shareholders vote scheduled for March 28. As announced in September, the deal would have had Bayside acquiring Majestic for an aggregate purchase price of $7.8 million.

Majestic (NASDAQ: MAJC) and its subsidiaries “expect to seek protection under applicable United States and Bermuda bankruptcy and other similar laws for the protection of creditors,” Majestic said in a statement.

The company may announce more details within days, spokesman Mark Collinson said, adding, “That’s about as explicit as we can be at this point.”

Subsidiary Majestic Insurance signed a nonbinding letter of intent with AmTrust Financial Services Inc. (NASDAQ: AFSI) under which it would sell AmTrust its renewal rights and AmTrust would assume Majestic’s loss reserves and in-force insurance business though a loss portfolio transfer and 100% quota share reinsurance agreement. Terms of the letter are subject to negotiation and approval by California regulators. Pending closing of the transactions, Majestic will arrange for workers’ compensation policies to be underwritten by AmTrust companies and reinsured by Majestic.

A.M. Best Co. downgraded the financial strength rating to B (Fair) from B++ (Good) and issuer credit rating to “bb+” from “bbb” of Majestic Insurance Co. of San Francisco. A.M. Best also downgraded the FSR to B (Fair) from B+ (Good) and ICR to “bb+” from “bbb-” of Twin Bridges (Bermuda) Ltd. Concurrently, A.M. Best downgraded the ICRs to “b” from “bb” of both companies’ ultimate parent, Majestic Capital Ltd. and its intermediate holding companies, Embarcadero Insurance Holdings Inc. and Majestic USA Capital Inc. Additionally, A.M. Best has downgraded the debt ratings to “ccc+” from “b+” on the trust preferred securities of Majestic USA and Embarcadero. The status for all ratings has been revised to under review with negative implications from under review with developing implications (BestWire, March 25, 2011).

“These rating actions follow Majestic Capital’s announcement that Bayside Capital Partners LLC has terminated its previously announced merger agreement with Majestic Capital. The rating actions also recognize Majestic’s continued deterioration in its overall earnings and the material deterioration in the company’s surplus. In addition, these actions reflect A.M. Best’s heightened concerns with Majestic Capital’s ongoing operations following the recent announcement of a potential conservation on its main operating subsidiary, which would be taken in conjunction with its proposed transaction with AmTrust Financial Services, Inc.,” A.M. Best said.

In recent years, Majestic has shifted its book of business away from its historical niche of workers’ compensation insurance, according to BestLink, which provides online access to A.M. Best’s database of insurance information. With the acquisition in 2006 of Majestic by CRM Holdings, Ltd., and the sale of the renewal rights of the workers’ compensation act business in 2007, the company’s product offerings were expanded to include excess workers’ compensation for self-insured groups and a smaller risk profile, while simultaneously expanding Majestic’s geographic footprint to states including New York and New Jersey.

The AmTrust Group currently has a Best’s Financial Strength Rating of A (Excellent).

Shares of Majestic Capital were trading at $0.69 per share in mid-day trading on March 28, up 1.47% from the previous close. Shares of AmTrust were trading at $18.58, up 0.7% from the previous close.

(By Sean P. Carr, Washington Bureau Manager: sean.carr@ambest.com)