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Rating agency A.M. Best Co. Inc. put AmTrust Financial Services Inc.’s A financial strength rating under review with negative implications on Monday following the insurer’s announcement that it had exhausted its recently purchased adverse development coverage for its loss reserves.
However, New York-based AmTrust also announced the sale of a majority share in its fee-based businesses, which should improve its capital position, Oldwick, New Jersey-based Best said.
AmTrust on Monday reported prior-year adverse loss reserve development of $326.9 million for the third quarter of 2017. All the loss reserve development was ceded to Premia Holdings Ltd., a Bermuda-based runoff reinsurer associated with Arch Capital Group Ltd., from which AmTrust bought $400 million in adverse development coverage in July.
“Year-to-date through September 30, 2017, the Company has recorded $400 million of adverse loss reserve development ceded to the ADC, including $73.1 million of charges recorded in the second quarter of 2017,” an AmTrust statement said.
The third-quarter charge is related to the insurer’s specialty program segment, which includes programs writing commercial auto and general liability that have been placed in runoff, small commercial, specialty risk, extended warranty and certain international lines of business, the statement said.
Reviewing the AmTrust loss reserve announcement, Best said in a statement that the actions raise questions about the potential for future development of the past-year loss reserves “and about price adequacy and underwriting practices for the current and more recent accident years.”
In addition, AmTrust announced on Monday that it has agreed to sell a 51% stake in various fee-based businesses — including warranty and service contracts and managing general agency business — to Chicago-based private equity firm Madison Dearborn Partners L.L.C.
“Through a combination of MDP’s equity investment of approximately $210 million and debt borrowings by the new business, AmTrust will receive gross cash proceeds of approximately $950 million at closing,” an AmTrust statement said.
The deal valued the business at $1.15 billion, the statement said.
Best said the sale of the fee businesses “is expected to significantly improve the equity position and balance sheet strength of (AmTrust).”
AmTrust Financial Services Inc., a New York-based insurance holding company, is reportedly the subject of a federal investigation into its accounting practices aided by an auditor who worked for accounting firm BDO USA L.L.P., which was auditing the company in 2014.