Press Release - AUGUST 13, 2019
AM Best Affirms Credit Ratings of AmTrust Financial Services, Inc. and Most Subsidiaries
FOR IMMEDIATE RELEASE
OLDWICK - AUGUST 13, 2019
In addition, AM Best has affirmed the Long-Term ICR of “bbb-” of AmTrust Financial Services, Inc. (AFSI) (the group company headquartered in New York, NY) and all of AFSI’s Long-Term Issue Credit Ratings (Long-Term IRs) and indicative Long-Term IRs, each with a stable outlook. Concurrently, AM Best has withdrawn the ratings for AFSI, as AFSI no longer discloses its consolidated financial information publicly following its recent privatization. AM Best will continue to receive and review financial information for AFSI in conjunction with its ongoing ratings of the operating insurance companies, as required by AM Best’s rating methodology.
The ratings of AmTrust reflect its balance sheet strength, which AM 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), was assessed in the very strong category. The risk-adjusted capitalization in 2018 benefited from an increase in fixed maturity assets coupled with a decrease in equities, as well as a statutory surplus gain of 3.4%. 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.
Offsetting these favorable rating factors were capital losses resulting from the market correction at the end of 2018 and adverse development of prior years’ loss reserves in recent years, which was notably significant in 2017. Adverse development was more modest in 2018, with the commercial automobile liability and other liability lines driving most of the adverse development.
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 capitalization. This assumed deficiency will be adjusted over time based on future development patterns.
In addition, AM 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 the global surety business and the sale of a majority interest in certain U.S.-based fee businesses. Further improvement in the risk-adjusted capital level of AFSI is expected in 2019, as the organization completes a number of announced transactions.
AmTrust’s adequate operating performance reflects its recent underwriting results, which no longer outperform its peer group average. The deterioration in underwriting results to a level that is in line with composite averages, the increased variability of performance in recent years relative to prior years and conditions in the group’s core markets are reflected in this assessment.
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 United States and internationally. AmTrust remains among the largest providers of workers’ compensation insurance in the United States, and its business is well-diversified geographically. While the group has a concentration in workers’ compensation, approximately 51% of its business is in other commercial lines, affording some benefit from diversification. 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. The group has developed a risk management framework that should address corporate risk effectively. With changes made during 2017 and 2018 to bolster management and financial reporting capabilities, the framework is continuing to develop and becoming embedded throughout the organization. Given the organization’s size and scope, a fully embedded ERM framework is expected. The group’s risk management capabilities are generally in line with its exposures. However, there are two key areas — reserving risk and operational risk — where recent changes made to improve the group’s ability to manage risk have yet to show a consistent return to prior levels. Greater stability in loss reserves and a return to positive underwriting income will demonstrate better alignment of the risk profile and capabilities in these areas. 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 and surety businesses; and the change in ownership — the opportunity for management to focus on its core business should allow it to more firmly embed its risk management framework and develop strong and consistent capabilities to meet the on-going risks of the business.
The ratings of AmTrust Title 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 2018, and was 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 below 1% nationally. The business is concentrated substantially in New York, but even within that state, the company has not achieved significant market share. The issues associated with ERM described previously for the AFSI enterprise drove the assessment of ERM as marginal.
The FSR of A- (Excellent) and the Long-Term ICRs of “a-” have been affirmed with stable outlooks for the following members of the AmTrust Group:
The following Long-Term IRs were affirmed with a stable outlooks and withdrawn:
— “bbb-” on $69 million 5.5% senior unsecured notes, due 2021
— “bbb-” on $250 million 6.125% senior unsecured notes, due 2023
— “bbb-” on $76 million 2.75% senior unsecured notes, due 2044
— “bb+” on $150 million 7.25% subordinated notes, due 2055
— “bb+” on $125 million 7.5% subordinated notes, due 2055
— “bb” on $120 million 6.75% preferred stock
— “bb” on $250 million 6.95% non-cumulative preferred stock
— “bb” on $100 million 7.25% preferred stock
— “bb” on $182.5 million 7.5% preferred stock
— “bb” on $80 million 7.625% preferred stock
— “bb” on $125 million 7.75% preferred stock
The following indicative Long-Term IRs were affirmed with stable outlooks and withdrawn:
— “bbb-” on senior unsecured debt
— “bb+” on subordinated debt
— “bb” on preferred stock
This press release relates to Credit Ratings that have been published on AM 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 AM 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 AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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