AmTrust completes $400m retroactive reinsurance deal with Premia

AmTrust Financial Services has entered into an agreement for a loss development cover with Premia Reinsurance, a subsidiary of Premia Holdings, the Bermuda start-up whose majority shareholders are Arch Capital Group and private equity firm Kelso & Company.

The agreement provides up to $400 million of reinsurance for adverse net loss reserve development in excess of AmTrust's stated net loss reserves as of March 31, 2017, of approximately $6.59 billion. It covers AmTrust's exposures through April 1, 2017.

The agreement includes up to $1.025 billion of coverage for adverse net loss reserve development, attaching when losses exceed approximately $5.96 billion of net loss reserves and extending $400 million in coverage in excess of the carried loss reserves of approximately $6.59 billion up to approximately $6.99 billion.

AmTrust will pay some $675 million for the deal, of which $50 million represents a premium payment for the coverage above the carried loss reserves of approximately $6.59 billion. AmTrust will also accrue an expense liability of approximately $11 million, the present value of a $1 million annual administration monitoring fee for 30 years.

The agreement, which will be accounted for in AmTrust's second quarter 2017 financial statements as a retroactive reinsurance agreement, will result in a one-time, non-operating pre-tax charge to net income of approximately $61 million. On an after-tax basis, the charge will be approximately $39 million, or $0.22 per common share, based on weighted average common shares outstanding of approximately 181 million in the second quarter ended June 30, 2017.

The consideration paid to Premia will be placed into a collateral trust account as security for Premia's claim payment obligations to AmTrust. Ceded reserves will be collateralized by the premium payment and all investment income will inure to the benefit of the collateral trust account.

Premia will deposit an incremental $100 million of excess collateral at inception and will also deposit incremental collateral in accordance with a pre-agreed schedule.

“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," said Barry Zyskind, chief executive of AmTrust.

"We are committed to acting in the long-term interests of the Company and our shareholders, supporting opportunities for growth and success across our global operations and continuing to be a strong, stable partner for our brokers, agents, and policyholders."

Adam Karkowsky, chief financial officer of AmTrust, added: "This agreement supports our goal of reducing exposure to volatility and creating more certainty and confidence in our future financial performance.

"We are taking a thoughtful, conservative approach to the ongoing management of our balance sheet, consistent with that of property and casualty insurance providers of our size, scale and capacity."

AmTrust had caused concerns among stakeholders after it  delayed its 2016 consolidated financial statements and said that the company's 2014 and 2015 financial reports would be restated.

Shareholder rights law firm Robbins Arroyo filed a class action complaint against AmTrust. In the filing, the law firm accuses AmTrust officials of falsely attesting to the accuracy of the financial statements, to the disclosure of any material changes to the company's internal controls over financial reporting, and to the disclosure of all fraud.

AmTrust should take a reserve charge “in the hundreds of millions of dollars” and commit to “much-improved disclosure” in order to restore investor confidence, analysts at Keefe, Bruyette & Woods suggested.

Meanwhile, AmTrust has completed a $300 million capital raise through a private placement to support its insurance units.

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