OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has placed under review with negative implications the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” and the Long-Term Issue Credit Ratings of AmTrust Financial Services, Inc. (AFSI) (headquartered in New York, NY) [NASDAQ:AFSI]. Concurrently, A.M. Best has placed under review with negative implications the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICRs of “a” of the members of the AmTrust Group. A.M. Best also has placed under review with negative implications the FSR of A- (Excellent) and the Long-Term ICR of “a-”of AmTrust Title Insurance Company (New York, NY).
The Credit Ratings (ratings) have been placed under review with negative implications following the announcement by AFSI of its entry into a definitive agreement to sell certain of its U.S.-based managing general agencies and warranty third-party administrators (collectively referred to as “fee businesses”) and the separate announcement of a reserve strengthening during third-quarter 2017.
AFSI will be increasing prior years’ loss reserves by $326.9 million, driven primarily by increases in reserves for its program business and for the 2013 through 2016 accident years. A.M. Best does not expect the reserve increase to impact statutory equity, as the reserve increases will be ceded to the Adverse Development Cover (ADC) purchased by AFSI in June 2017. However, the actions raise questions about the potential future movement of reserves for these accident years (which would not be covered by the ADC, as that cover is being exhausted by these actions) and about price adequacy and underwriting practices for the current and more recent accident years. A review of the full-year 2017 results, including the associated reserve analysis, is necessary to provide A.M. Best with sufficient information to resolve these questions.
The concurrently announced sale of the fee businesses is expected to significantly improve the equity position and balance sheet strength of AFSI upon completion of the transaction. In addition to gross cash proceeds of $950 million, approximately $482 million of goodwill and intangible assets associated with the businesses being sold will be removed from AFSI’s balance sheet, as those businesses are deconsolidated. The improvement in financial leverage on a total and tangible capital basis is projected to be significant once the transaction closes. Risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), also is expected to strengthen materially. The overall improvement in the holding company’s position upon closure of the sale will be a net positive to AFSI’s ratings and those of its subsidiaries.
In addition to the sale of the fee businesses, AFSI has taken a number of other actions in 2017 to strengthen capital, including a common equity raise, sale of assets that carried high capital charges, including equity in National General Holdings Corp. (National General), and the sale of underwriting and claims systems to National General. Separately from these financial improvements, the company also has recently expanded its executive staff in the finance, accounting, audit and actuarial disciplines to bring additional expertise to these critical business areas. The company has been working to resolve the material weaknesses in financial controls identified in the year-end 2016 audit and has regained current filer status with the Securities and Exchange Commission, enabling it to more readily access capital markets should such action be necessary.
The negative implications assigned to the under review status reflect A.M. Best’s expectation that reported financial results for 2017 will deteriorate from prior years’ results and from expectations, and result in an associated deterioration in risk-adjusted capital at the AmTrust holding company. The under review status also reflects the uncertainty regarding future changes in loss reserves and current year pricing and underwriting actions. Significant improvement in balance sheet strength is expected following the closure of the fee business sale; however, until the transaction is closed, these benefits will not be realized. The ratings will remain under review until:
- the fee business sale closes, and A.M. Best has assessed the impact of the actual closing terms on risk-adjusted capital; and
- year-end 2017 financials have been filed, and A.M Best has assessed the full-year reserve information to determine appropriate capital charges associated with the enterprise reserves.
This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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