AmTrust Signs $400M Reinsurance Agreement with Premia

July 7, 2017

Hoping to reassure stakeholders that the company is “well insulated from any potential reserve volatility in the future,” specialty insurer AmTrust Financial Services Inc. has entered into an agreement for a loss development cover with Bermuda reinsurer Premia Reinsurance Ltd. The cover is for loss reserve development up to $400 million over the company’s stated reserves of $6.59 billion as of March 31, 2017.

Premia will provide up to $1.025 billion in coverage for adverse development of reserves, attaching when losses exceed $5.96 billion of net loss reserves. This provides approximately $400 million of coverage above AFSI’s carried reserve position of $6.59 billion as of March 31, 2017.

AFSI will pay a premium of approximately $50 million and administrative fees of $1 million annually. AmTrust will also accrue an expense liability of approximately $11 million, the present value of a $1 million annual administration monitoring fee for 30 years.

“By entering into a reinsurance agreement, we are providing confidence to all of our stakeholders that we are well insulated from any potential reserve volatility in the future,” said Barry Zyskind, chairman and chief executive officer, AmTrust.

The agreement, which will be accounted for in AmTrust’s second quarter 2017 financial statements as a retroactive reinsurance agreement, will result in a one-time, non-operating pre-tax charge to net income of approximately $61 million.

AmTrust said it will retain sole authority to handle and resolve claims.

“This agreement supports our goal of reducing exposure to volatility and creating more certainty and confidence in our future financial performance,” said Adam Karkowsky, AmTrust’s executive vice president and chief financial officer.

New York-headquartered AFSI offers specialty property/casualty insurance products including workers’ compensation, commercial automobile, general liability and extended service and warranty coverage through its primary insurance subsidiaries.

Ratings agency A.M. Best commented on the reinsurance agreement. AFSI’s long-term credit ratings and financial strength rating (A-Excellent) remain unchanged but the ratings firm noted that the transferring of reserves under the agreement could lead to future ratings changes, positive or negative.

A.M. Best noted that AFSI will recognize an after-tax charge to net income of approximately $39 million in the second quarter of 2017 as a result of this transaction. A.M. Best said it anticipates that this will be more than offset by the gain AFSI will recognize from the sale of its holdings of National General Holdings Corp. during the second quarter, which is expected to bring in $212 million.

While the reinsurance agreement will increase the future stability of AFSI’s balance sheet, which A.M. Best views as credit positive. The ratings form added that the agreement “does not significantly strengthen” AFSI’s risk-adjusted capital position as calculated by Best’s Capital Adequacy Ratio (BCAR), given the assumed deficiency incorporated in the BCAR.

“The future development of AFSI’s reserves, including reserves that may be transferred under this agreement, may drive future positive or negative rating action,” A.M. Best analysts said.

AmTrust twice delayed the release of its 2016 annual report due to an ongoing KPMG audit of financial results from 2014-2016. In mid-March, AmTrust also disclosed that prior work by BDO USA involving its opinion on its consolidated financial statements for 2014 and 2015 and its opinions on the effectiveness on internal financial reporting controls were also at issue. On April 4, AmTrust finally released its 2016 annual report and updated financials going back to 2014. The audit had some impact on 2014 and 2015 net income. According to AmTrust, the restatements led to a 7.2 percent decline of net income attributable to common stockholders in 2014 and an 11.2 percent drop in 2015.

In May, the family of CEO Barry Zyskind and Director George Karfunkel agreed to inject $300 million for new shares in a private placement.

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