AmTrust Financial takes another big reserve charge in the third quarter

AmTrust Financial Services has posted a prior year adverse reserve development of $326.9 million on a pre-tax basis for the third quarter ended September 30, 2017.

All prior year development was ceded to the company's adverse loss development cover agreement (ADC) with Premia Holdings, which it entered into in the second quarter of 2017, resulting in a deferred reinsurance gain now totalling $337 million on AmTrust's balance sheet.

The ADC provided 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, and covers AmTrust's exposures through April 1, 2017.

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.

The third quarter 2017 prior year development charge largely relates to development in the company's specialty programme segment (which contains lines such as commercial auto and general liability that have performed below expectations and that have already been placed into runoff), as well as development in the small commercial business segment and the specialty risk and extended warranty segment, with development in certain product lines in the international business.

"With this reserving action and the transactions we have announced earlier this year and today, we have transformed the company's balance sheet and established the strongest capital profile in AmTrust's history," said Barry Zyskind, chairman and chief executive, AmTrust.

"With our large capital base and disciplined underwriting approach, we are well positioned to continue to be a leading provider of small commercial business insurance and warranty coverage globally. Our two core operating segments of Small Commercial Business and Specialty Risk and Extended Warranty, representing approximately 80% of our gross written premium, continue to perform strongly."

Adam Karkowsky, chief financial officer, added: "We continue to execute on our plan of strengthening our balance sheet and responding to our rigorous and diligent actuarial process. With this reserve charge, we have utilized the full benefit of the ADC and believe that we have increased certainty around reserves associated with accident years 2016 and prior.

In Q3 2017, IBNR represented 56 percent of our total net reserves, compared to 55 percent in Q2 2017 and 52 percent in Q3 2016. We believe we have established a reserve base that mitigates uncertainty on previous accident years and we are exercising more caution on the 2017 accident year to insulate the Company from future reserve volatility."

Karkowsky continued, "We expect to maintain underwriting profitability through disciplined pricing and conservative reserving that acknowledges recent loss trends that led to the prior year development, including the previously communicated discontinuation of a number of programs in our Specialty Program segment, which contributed to a significant portion over the overall reserve development.

“Even after recognizing the prior year development, primarily in accident years 2013 through 2016, our overall underwriting business was profitable. Accident year loss ratios in our core Small Commercial Business segment continue to outperform industry averages. We remain focused on driving operational excellence, maintaining disciplined underwriting, and achieving our financial goals, including a targeted 12-15% operating return on equity."

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