A.M. Best Downgrades AmTrust As Insurer Prepares to Go Private

July 5, 2018

A.M. Best has downgraded its financial strength and credit ratings for insurer members of the AmTrust Group, not long after AmTrust Financial Services Inc. (AFSI) shareholders approved a $2.95 billion deal that will make it a private entity.

The insurer’s financial strength rating has been downgraded to A- (Excellent) from A. Its long-term issuer credit dipped to “a-” from “a”. The insurer’s ratings had been under review with negative implications.

A.M. Best said its rating actions reflect AmTrust’s balance sheet strength, which A.M. Best categorizes as “very strong,” as well as its “adequate operating performance, neutral business profile and marginal enterprise risk management (ERM).”

The ratings agency said AmTrust’s risk-adjusted capitalization improved through the first quarter of 2018, primarily related to the sale of certain investments that carried substantial risk charges. The balance sheet assessment also reflects AmTrust’s relatively modest exposure to natural catastrophe and terrorism events. The group maintains a panel of quality reinsurers and has substantial security from its largest reinsurer in the form of a trust account, according to A.M Best.

A.M. Best views AFSI as having a neutral impact on the balance sheet assessment following the sale of a majority interest in certain U.S.-based fee businesses. Also, the recently approved plan under which AFSI will be privatized has a neutral impact on the rating, said A.M. Best.

Related to that privatization move, A.M. Best noted that the company has said that it will maintain its public filer status with the Securities and Exchange Commission, enabling access to public financing if needed in the future. At the same time, A.M. Best said the ability of management to assess long-term plans removed from the shorter-term focus of public equity markets “should allow for improved development and implementation of those plans.”

A.M. Best also has cited concerns that offset the favorable rating factors. One is adverse development of prior years’ loss reserves that occurred in 2016 and 2017. A.M. Best noted that the purchase of adverse development cover muted the impact of the 2017 action on surplus. However, any future adverse development not subject to other reinsurance agreements will be borne by the group. Through year-end 2017, adverse reserve development was particularly noticeable in the 2010 through 2014 accident years, A.M. Best said.

A.M. Best said its assessment that AmTrust’s operating performance has been adequate reflects the decline in calendar and accident year performance in 2016 and 2017. The deterioration in underwriting results and increased variability of performance in recent years contributed to the downgrade of the ratings. The assessment of operating performance also reflects the trends and variability in performance of the most recent years relative to prior years, and conditions in the group’s core markets, A.M. Best said.

A.M. Best’s neutral assessment of AmTrust’s business profile reflects AmTrust’s “position within the U.S. workers’ compensation market and the diversification of its business within the U.S. and internationally.” A.M. Best also cited “execution risk” associated with transforming the operation to a “more focused property/casualty enterprise while re-establishing underwriting and operating performance in line with historical levels.”

A.M. Best assessed ERM for AFSI as marginal, citing that portions of the ERM framework have not yet been fully embedded within the organization. “The issues the enterprise has experienced over the near-term indicate that risk management resources and capabilities with respect to reserving and operational risk have yet to demonstrate long-term effectiveness,” the ratings agency said, adding that material weaknesses it identified in a 2016 audit “highlighted the challenges of making acquisitions at the scope and pace of the organization prior to 2017.”

A.M. Best said the insurer now has an opportunity for “more firmly embedding its risk management framework and developing strong and consistent capabilities to meet the on-going risks of the business.”

Last month, AmTrust stockholders approved a $2.95 billion plan to go private. The acquisition is spearheaded by entity formed by private equity funds managed by Stone Point Capital, along with AmTrust Chairman and CEO Barry Zyskind, and founders George Karfunkel and Leah Karfunkel. According to the deal, they will buy the 45 percent of the company’s shares that both the Karfunkels and Zyskinds don’t presently own or control.

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