AmTrust Financial Services inked a reinsurance agreement with Premia Reinsurance Ltd. The cover addresses loss reserve development up to $400 million over the company’s stated reserves of $6.59 billion as of March 31, 2017.

The arrangement, designed to help AmTrust insulate itself from future reserve volatility, is with both Bermuda-based Premia and the private equity firm Kelso & Company,

Specifically, Premia agrees to provide up to $1.025 billion in coverage for adverse development of reserves when losses surpass $5.96 billion of net loss reserves. This gives AmTrust $400 million of coverage above its carried reserve position of 6.95 billion as of March 31.

AmTrust will pay $50 million in premium for the coverage, plus $1 million in administrative fees each year.

“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, AmTrust Chairman and CEO Barry Zyskind said in prepared remarks.

Chief Financial Officer Adam Karkowsky added that the arrangement addresses AmTrust’s push to create “more certainty and confidence in our future financial performance.” In prepared remarks, he referred to the approach as a “thoughtful, conservative approach to the ongoing management of our balance sheet, consistent with that of [property/casualty] insurance providers of our size, scale and capacity.”

AmTrust said it plans to count the deal in its Q2 2017 financial statements as a retroactive reinsurance agreement, and this will result in a one-time non-operating pre-tax charge to net income of about $61 million. After tax, the charge amounts to $39 million, or $0.22 per common share.

In its assessment of the transaction, A.M. Best noted that AmTrust expects the expense to be offset by gains it made when selling its ownership stake in National General Holdings Corp. in the 2017 second quarter. In June, AmTrust made another bid to simplify its balance sheet when it agreed to sell more than 10 million shares it owned in National General for $211.7 million.

At the same time, AmTrust keeps sole authority to handle and resolve claims, and Premia has various access, association and consultation rights.

Both moves follow the arrival of Karkowsky, who became AmTrust CFO in early June and previously led the company’s merger and acquisition initiatives and oversaw AmTrust’s corporate development and strategy.

AmTrust delayed its 2016 annual report by a few weeks in March, and eventually needed an audit and to restate financial statements for 2016, 2015 and 2014. The company blamed its former independent auditor for the issue. Since then, the company has said it has boosted its internal financial controls and created a chief accounting officer position.

Earlier this year, the family of Zyskind and director George Karfunkel (the late former chairman Michael Karfunkel’s brother) injected $300 million into the company for new shares in a private placement, a move meant to stabilize AmTrust after a drop in market capitalization.

Meanwhile, A.M. Best responded to the reinsurance agreement by leaving unchanged AmTrust’s financial strength rating of A (Excellent), and long-term issuer credit rating of “a” for all of its subsidiaries. The financial strength rating of A- and the long-term issuer credit rating of “a-” for AmTrust Title Insurance Company are also unchanged, and the outlook of AmTrust’s various unchanged credit ratings remains negative.

A.M. Best said the reinsurance agreement will help stabilize AmTrust’s balance sheet, but not significantly strengthen its risk-adjusted capital position as calculated by its Capital Adequacy Ratio.

Sources: AmTrust, A.M. Best

Topics Reinsurance AM Best