AM Best has downgraded AmTrust just weeks after the listed insurer’s CEO, his in-laws and their backers secured shareholder approval to buy the carrier and take it private.
AM Best’s decision to slash AmTrust’s financial strength rating from “A” to “A-” risked putting the deal in jeopardy by giving the US insurer’s CEO Barry Zyskind, his wife’s family - the Karfunkels - and private equity house Stone Point the option to walk away from the acquisition.
In an Securities and Exchange Commission filing outlining the deal, AmTrust said the buyers could pull out if it “fails to have a financial strength rating of at least “A” from AM Best”.
But in a statement put out last night - at the same time as AM Best’s announcement that it had downgraded the firm - AmTrust boss Zyskind said: “On behalf of the Karfunkel-Zyskind family and our partner Stone Point Capital, we remain fully committed to our proposed transaction to take AmTrust private and are looking forward to continuing to serve our clients, agents, partners and policyholders.”
Explaining its decision, AM Best cited “material weaknesses” within AmTrust’s internal controls, which have caused the firm to delay the filing of its annual results for the last two years.
“While AM Best acknowledges the actions company management has taken to resolve these issues, the material weaknesses have yet to be fully remedied,” the rating agency said.
The delayed results announcements have contained details of underwhelming performance in part driven by significant reserve bolstering by AmTrust in 2016 and 2017.
“The deterioration in underwriting results and increased variability of performance in recent years contributed to the downgrade of the ratings,” said AM Best.
The rating agency pointed to a $400mn adverse development cover that AmTrust brought from legacy start up Premia that it subsequently burned through.
“The impact of the 2017 [reserve strengthening] action on surplus was muted by the adverse development cover (ADC) purchased and exhausted by AmTrust during the year,” AM best said.
However it noted that future reserve strengthening would erode AmTrust’s surplus.
“Through year-end 2017, adverse reserve development was particularly noticeable in the 2010 through 2014 accident years,” AM Best said.
“Although there has been no material adverse development reported since the third quarter of 2017, AM Best continues to incorporate a reserve deficiency in its view of AmTrust’s risk-adjusted capitalisation.”
Nevertheless, the rating agency did comment on AmTrust’s “very strong” balance street and “adequate” performance.