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A.M. Best Removes from Under Review with Negative Implications and Downgrades Credit Ratings of AmTrust Financial Services, Inc. and Most Subsidiaries; Assigns Stable Outlook
[July 03, 2018]

A.M. Best Removes from Under Review with Negative Implications and Downgrades Credit Ratings of AmTrust Financial Services, Inc. and Most Subsidiaries; Assigns Stable Outlook


A.M. Best has removed from under review with negative implications and downgraded the Financial Strength Rating to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to "a-" from "a" for the members of the AmTrust Group (AmTrust). In addition, A.M. Best has removed from under review with negative implications and downgraded the Long-Term ICR of AmTrust Financial Services, Inc. (AFSI) [NASDAQ: AFSI] to "bbb-" from "bbb" and downgraded all of AFSI's Long-Term Issue Credit Ratings (Long-Term IRs) and Indicative Long-Term IRs by one notch. Also, A.M. Best has removed from under review with negative implications and affirmed the FSR of A- (Excellent) and Long-Term ICR of "a-" of AmTrust Title Insurance Company (New York, NY). The outlook assigned to all of these Credit Ratings (ratings) is stable. See below for a listing of all companies and ratings.

The 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.)

Risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), improved through the first quarter of 2018, primarily related to a reduction in investment risk following the sale of certain private and related party investments that carried substantial risk charges. The balance sheet assessment also reflects AmTrust's relatively modest exposure to natural catastrophe and terrorism events, which is reflected in favorable performance on stress tests of its risk-adjusted capitalization. The group maintains a panel of quality reinsurers, and has substantial security from its largest reinsurer in the form of a trust account.

In addition, A.M. Best views AFSI as having a neutral impact on the balance sheet assessment, based on improvements in its risk-adjusted capitalization following the sale of a majority interest in certain U.S.-based fee businesses. This transaction replaced goodwill and intangibles with cash on AFSI's balance sheet, improving quality of capital and risk-adjusted capitalization, as available capital under the BCAR model excludes goodwill and intangibles. The recently approved plan under which AFSI will be privatized has a neutral impact on the rating. The company has stated publicly that it will maintain its public filer status with the U.S. Securities and Exchange Commission, enabling access to public financing should such a step be appropriate in the future. At the same time, the ability of management to assess its long-term business plans removed from the shorter-term focus of public equity markets should allow for improved development and implementation of those plans.

Offsetting these favorable rating factors is adverse development of prior years' loss reserves that occurred in 2016 and 2017. The impact of the 2017 action on surplus was muted by the adverse development cover (ADC (News - Alert)) purchased and exhausted by AmTrust during the year. However, any future adverse development of reserves as of March 31, 2017 that is 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. Although there has been no material adverse development reported since the third quarter of 2017, A.M. Best continues to incorporate a reserve deficiency in its view of AmTrust's risk-adjusted capitalization. This assumed deficiency will be adjusted over time based on future development patterns.

AmTrust's adequate operating performance assessment reflects the decline in calendar and accident year performance in 2016 and 2017, which was impacted by the adverse development of prior years' loss reserves in the calendar years and by higher selected loss ratios for those accident years. 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.

The neutral assessment of AmTrust's business profile reflects its position within the U.S. workers' compensation market and the diversification of its business within the U.S. and internationally. Offsetting these positive factors are market conditions in its largest line of business, workers' compensation, and the execution risk associated with transforming the operation from its previous growth-oriented strategy to a more focused property/casualty enterprise while re-establishing underwriting and operating performance in line with historical levels.



ERM is assessed currently as marginal for the AFSI enterprise. At present, portions of the ERM framework, while emerging and developed, have yet to be fully embedded within the organization, which is the state A.M. Best would expect from an enterprise of AFSI's size and complexity. 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 material weaknesses identified in the 2016 audit highlighted the challenges of making acquisitions at the scope and pace of the organization prior to 2017.

While A.M. Best acknowledges the actions company management has taken to resolve these issues, the material weaknesses have yet to be fully remedied. Management has made progress toward accomplishing plans as expected, including making accurate and timely filings, but continued to face challenges through the first half of 2018. Given the volume of change that has characterized the enterprise over time - including merger and acquisition activity with the associated integration; capital raising to fund that activity; negotiating the sale of the fee-business; and the upcoming change in ownership - the opportunity for management to focus on its core business provides significant opportunity for more firmly embedding its risk management framework and developing strong and consistent capabilities to meet the on-going risks of the business.


The ratings of AFSI reflect its adequate level of risk-adjusted capitalization, as measured by BCAR, and financial leverage and coverage metrics that are within guidelines for the current rating level. Going forward, earnings power at the holding company will be impacted by the decision to sell a portion of its fee business, but this will be offset at least partially by investment income on the proceeds that were achieved from the sale. As noted previously, the sale of that business removed a material level of goodwill and intangibles from the balance sheet, strengthening both overall balance sheet quality and risk-adjusted capitalization.

The ratings of AmTrust Title Insurance Company reflect its balance sheet strength, which is assessed as very strong, its marginal operating performance, limited business profile and marginal ERM. Risk-adjusted capitalization is at the strongest level as measured by BCAR, but the relatively modest size of the balance sheet and potential for volatility in light of the growth experienced by the company produce a final balance sheet strength assessment of very strong. Operating performance improved in 2017 and is close to the performance of its title market peers. However, lack of scale negatively impacted results since operations commenced due to elevated expenses relative to peers, even as losses remained better than average. The company has a limited business profile, with a market share well below 1% nationally. The business is concentrated substantially in New York, but even within that state, the company has not achieved significant market share. In addition, the title insurance market has faced heightened regulatory scrutiny in New York. The issues associated with ERM described previously for the AFSI enterprise drove the assessment of ERM as marginal.

The FSR has been downgraded to A- (Excellent) from A (Excellent) and the Long-Term ICRs downgraded to "a-" from "a" with both ratings removed from under review with negative implications and a stable outlook assigned for the following members of the AmTrust Group:

  • AmTrust Captive Solutions Limited
  • AmTrust Europe Limited
  • AmTrust Insurance Company of Kansas
  • AmTrust Insurance Luxembourg S.A.
  • AmTrust International Insurance Ltd
  • AmTrust International Underwriters Designated Activity Company
  • ARI Insurance Company
  • Associated Industries Insurance Company, Inc.
  • CorePointe Insurance Company
  • Developers Surety and Indemnity Company
  • First Nonprofit Insurance Company
  • Heritage Indemnity Company
  • Indemnity Company of California
  • Milford Casualty Insurance Company
  • Nationale Borg Reinsurance N.V.
  • Republic Fire and Casualty Insurance Company
  • Republic Lloyds
  • Republic Underwriters Insurance Company
  • Republic-Vanguard Insurance Company
  • Rochdale Insurance Company
  • Security National Insurance Company
  • Sequoia Indemnity Company
  • Sequoia Insurance Company
  • Southern County Mutual Insurance Company
  • Southern Insurance Company
  • Southern Underwriters Insurance Company
  • Technology Insurance Company, Inc.
  • Wesco Insurance Company

The following Long-Term IRs have been removed from under review with negative implications and downgraded with a stable outlook assigned:

-- to "bbb-" from "bbb" on $69 million 5.5% senior unsecured notes, due 2021

-- to "bbb-" from "bbb" on $250 million 6.125% senior unsecured notes, due 2023

-- to "bbb-" from "bbb" on $158 million 2.75% senior unsecured notes, due 2044

-- to "bbb-" from "bbb" on $76 million 2.75% senior unsecured notes, due 2044

The following Long-Term IRs have been removed from under review with negative implications and downgraded with a stable outlook assigned:

-- to "bb+" from "bbb-" on $150 million 7.25% subordinated notes, due 2055

-- to "bb+" from "bbb-" on $125 million 7.5% subordinated notes, due 2055

The following Long-Term IRs have been removed from under review with negative implications and downgraded with a stable outlook assigned:

-- to "bb" from "bb+" on $120 million 6.75% preferred stock

-- to "bb" from "bb+" on $250 million 6.95% non-cumulative preferred stock

-- to "bb" from "bb+" on $100 million 7.25% preferred stock

-- to "bb" from "bb+" on $182.5 million 7.5% preferred stock

-- to "bb" from "bb+" on $80 million 7.625% preferred stock

-- to "bb" from "bb+" on $125 million 7.75% preferred stock

The following indicative IRs have been removed from under review with negative implications and downgraded with a stable outlook assigned:

-- to "bbb-" from "bbb" on senior unsecured debt

-- to "bb+" from "bbb-" on subordinated debt

-- to "bb" from "bb+" on preferred stock

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.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2018 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.


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