Best’s Rating Report - AmtrustFinancial · Best’s Rating Report balance sheet strength is...

Printed October 8, 2017 www.ambest.com of 6

Best’s Rating Report

AMTRUST GROUP Best’s FSR FSC AmTrust International Ins Ltd A XV Technology Insurance Co., Inc A XV Rochdale Insurance Company A XV ARI Insurance Company A XV AmTrust Europe Limited A XV AmTrust Insurance Co of Kansas A XV AmTrust Intl Underwriters DAC A XV Associated Industries Ins Co A XV CorePointe Insurance Company A XV Heritage Indemnity Company A XV Milford Casualty Ins Co A XV NV Nationale Borg-Maatschappij A XV Nationale Borg Reinsurance NV A XV Republic Underwriters Ins Co A XV

Best’s FSR FSC Security National Ins Co A XV Wesco Insurance Company A XV AmTrust Captive Solutions Ltd A XV AmTrust Insurance Luxembourg A XV Developers Surety & Indem Co A XV First Nonprofi t Insurance Co A XV Indemnity Co of California A XV Republic Fire and Casualty Ins A XV Republic Lloyds A XV Republic-Vanguard Ins Co A XV Sequoia Indemnity Company A XV Sequoia Insurance Company A XV Southern County Mutual Ins Co A XV Southern Insurance Company A XV Southern Underwriters Ins Co A XV

Associated With:AmTrust Financial Services, Inc

AMTRUST GROUP59 Maiden Lane, 43rd Floor

New York, NY 10038Web: www.amtrustfi nancial.com

Tel: 212-220-7120 AMB#: 018533 Associated Ultimate Parent#: 051002

RATING RATIONALEUnder Review Rating Rationale: The ratings have been placed under review with negative implications following the announcement by AmTrust Financial Services, Inc. (AFSI), of its entry into a defi nitive agreement to sell certain of its U.S.-based managing general agen-cies and warranty third-party administrators (collectively referred to as “fee businesses”) and the separate announcement of a reserve strengthening of $327 million during the third quarter of 2017.



balance sheet strength is expected following the closure of the fee business sale; however, until the transaction is closed, these benefi ts will not be realized. The ratings will remain under review until the fee business sale closes and A.M. Best has assessed the impact of the actual closing terms on risk-adjusted capital; and year-end 2017 fi nan-cials have been fi led and A.M. Best has assessed the full-year reserve information to determine appropriate capital charges associated with the enterprise reserves.

Rating Rationale: The ratings are based on the consolidated results of AmTrust International Insurance, Ltd. (Bermuda) (AII), and its affi li-ate companies, which operate through intercompany quota share re-insurance arrangements and make up the AmTrust Group (AmTrust). The ratings refl ect the consolidated group’s supportive balance sheet strength, strong underwriting and operating performance within its niche market segments as well as implicit and explicit support from its parent, AmTrust Financial Services, Inc. (AFSI), if needed to sup-port AmTrust’s expanding operations. AmTrust has been successful in executing its business plan, which is focused on growth through the acquisition of companies and renewal rights offerings, as well as expanding established books of business at appropriate rates, terms and conditions. This enables AmTrust to further leverage its scalable underwriting platform to drive expense savings. Partially offsetting these positive rating factors is AmTrust’s con-tinued signifi cant growth in both premium volume and associated li-abilities over the current fi ve-year period, primarily achieved through policy renewal rights transactions and acquisitions, as well as organic growth through rate increases and new policies. The acquisitions have the inherent risk associated with expansion into new markets and integrating new business. While the group has historically executed acquisitions of companies and renewal rights transactions favorably, and the group appears to be applying discipline in its underwriting and controls, considerable risk associated with the recent growth remains. AmTrust’s more recent acquisitions will benefi t from the expense controls associated with the implementation of AmTrust’s underwrit-ing platform, but will also need to utilize that platform to improve underwriting selection and loss ratios. Concerns with growth in the group’s workers’ compensation business are somewhat mitigated by the focus on target lower hazard niche classes and smaller accounts.

The sale of the fee businesses is expected to signifi cantly improve the equity position and balance sheet strength of AFSI. In addition to gross cash proceeds of $950 million, the transaction will remove approxi-mately $482 million of goodwill and intangible assets from the AFSI balance sheet. The improvement in fi nancial leverage on both a total and tangible capital basis is projected to be signifi cant once the transac-tion closes. Risk-adjusted capitalization, calculated using Best’s Capi-tal Adequacy Ratio (BCAR), is also expected to increase materially. The overall improvement in the holding company’s position upon clo-sure of the sale will be a net positive to AFSI’s credit ratings and those of its subsidiaries. In addition to the sale of the fee businesses, AFSI has taken a num-ber of other actions in 2017 to strengthen capital, including a common equity raise; sale of assets that carried high capital charges, including equity in National General Holdings Corporation; and the sale of un-derwriting and claims systems to National General. Separately from these fi nancial improvements, the company has also recently expanded its executive staff in the fi nance, accounting, audit and actuarial dis-ciplines to bring additional expertise to these critical business areas. The company has been working to resolve the material weaknesses in fi nancial controls identifi ed in the year-end 2016 audit and has regained current fi ler status with the SEC, enabling it to more readily access capital markets should such action be necessary. At the same time, however, AFSI has announced a signifi cant strengthening of reserves by $326.9 million in its insurance operations, driven primarily by increases in reserves for its program business and for the 2013 through 2016 accident years. The reserve increase is not expected to impact statutory equity, as the reserve increases will be ceded to the Adverse Development Cover (ADC) purchased by AFSI in June 2017. However, the actions raise questions about the potential fu-ture movement of reserves for these accident years (which would not be covered by the ADC, as that cover is being exhausted by these actions) and about price adequacy and underwriting practices for the current and more recent accident years. A review of the full-year 2017 results, including the associated reserve analysis, is necessary to provide A.M. Best with suffi cient information to resolve these questions. The negative implications assigned to the “under review” status refl ect the expectation that reported fi nancial results for 2017 will deteriorate from both prior years’ results and from expectations, and the associ-ated deterioration in risk-adjusted capital. Signifi cant improvement in



KEY FINANCIAL INDICATORS ($000) Net Pre-tax Total Policy- Premiums Operating Admitted holders’ Comb.Year Written Income Assets Surplus Ratio2012 1,246,197 10,848 4,174,418 1,312,581 103.52013 1,175,922 126,237 5,085,280 1,457,706 95.72014 1,670,940 182,473 6,056,021 1,714,749 92.62015 2,352,115 237,117 7,485,571 1,839,813 89.92016 2,434,068 181,506 8,162,039 2,075,632 96.2(*) Data refl ected within all tables of this report has been compiled through the A.M. Best Consolidation of statutory fi lings.

AmTrust Group’s consolidated fi nancial data excludes AmTrust International Insurance Ltd, AmTrust Europe limited and AmTrust International Underwriters, Ltd as they are domiciled in Bermuda, UK and Ireland, respectively, and are not required to fi le an NAIC statement. The data presented within these tables includes the consolidated historical results of AmTrust North American Group operations.

BUSINESS PROFILE AmTrust Financial Services Inc. (AFSI) is a multinational specialty property and casualty insurance holding company with operations in the United States, Europe and Bermuda, focused on generating con-sistent underwriting profi ts. The group provides insurance coverage for small businesses and products with high volumes of insureds and loss profi les more predictable. The group targets lines of insurance that they believe are generally underserved by larger insurance carri-ers. AmTrust has grown by acquiring companies, producer networks, underwriting teams and renewal rights with established books of spe-cialty insurance business. The group’s business is currently focused on three business segments: Small Commercial Business; Specialty Risk and Extended Warranty; and Specialty Program. The Small Commercial Business segment includes workers’ com-pensation products for small businesses classifi ed as low to medium hazard operations. Other products offered to small business customers include commercial package and other property and casualty lines, in-cluding property, general liability and commercial auto. The segment accounted for approximately 45.4% of AFSI’s net premiums written (NPW) on a US GAAP basis in 2015. Customers in the Small Com-mercial segment had an average annual premium of $8,500 in 2015. The segment writes business in all 50 states, with California the larg-est state on a direct basis. The business is produced through a network of over 8,000 retail and wholesale agents. The Specialty Risk and Extended Warranty segment accounted for approximately 31.3% of AFSI’s US GAAP NPW in 2015. Cover-

The negative outlooks refl ect A.M. Best’s concerns with respect to the material weakness in internal controls disclosed by AFSI on February 27, 2017. AFSI’s adjusted debt-to-total capital (excluding accumulated other comprehensive income -- AOCI) of 25.6% and its adjusted debt-to-tangible capital (excluding AOCI) of 33.2% as of September 30, 2016, were within A.M. Best’s expectations. The group’s goodwill and intan-gible assets of $1.085 billion as of that date account for approximately 23.0% of GAAP equity. In addition, the company’s access to corporate credit facility and non-operating company dividend capacity provides additional liquidity to meet corporate obligations. AFSI maintains a strong interest coverage ratio that is well within A.M. Best’s guidelines.

RATING UNIT MEMBERSAmTrust Group (AMB# 018533): Best’s PoolAMB# Company FSR %050300 AmTrust International Ins Ltd A u 70.00011234 Technology Insurance Co., Inc A u 20.00003120 Rochdale Insurance Company A u 10.00000376 ARI Insurance Company A u 087400 AmTrust Europe Limited A u 004778 AmTrust Insurance Co of Kansas A u 057399 AmTrust Intl Underwriters DAC A u 011693 Associated Industries Ins Co A u 000237 CorePointe Insurance Company A u 002771 Heritage Indemnity Company A u 003548 Milford Casualty Ins Co A u 090159 NV Nationale Borg-Maatschappij A u 092564 Nationale Borg Reinsurance NV A u 002422 Republic Underwriters Ins Co A u 002522 Security National Ins Co A u 002468 Wesco Insurance Company A u 093455 AmTrust Captive Solutions Ltd A u 093205 AmTrust Insurance Luxembourg A u 011752 Developers Surety & Indem Co A u 010856 First Nonprofi t Insurance Co A u 004048 Indemnity Co of California A u 012097 Republic Fire and Casualty Ins A u 002011 Republic Lloyds A u 004070 Republic-Vanguard Ins Co A u 013076 Sequoia Indemnity Company A u 002281 Sequoia Insurance Company A u 003382 Southern County Mutual Ins Co A u 002012 Southern Insurance Company A u 012098 Southern Underwriters Ins Co A u



2016 BY-LINE BUSINESS ($000) Reinsurance —DPW— —Prem Assumed—Product Line ($000) (%) ($000) (%)Workers’ Comp . . . . . . . . . . . . . . . . . . 3,110,623 50.1 189,402 57.8Comm’l Auto Liab. . . . . . . . . . . . . . . . 563,113 9.1 25,386 7.7Oth Liab Occur . . . . . . . . . . . . . . . . . . 466,058 7.5 -67,157 -20.5Warranty . . . . . . . . . . . . . . . . . . . . . . . 694,959 11.2 8,629 2.6Com’l MultiPeril . . . . . . . . . . . . . . . . . 263,392 4.2 -1,064 -0.3Excess Workers’ Comp . . . . . . . . . . . . 60,444 1.0 156,492 47.7Oth Liab CM . . . . . . . . . . . . . . . . . . . . 127,018 2.0 … …Auto Physical . . . . . . . . . . . . . . . . . . . . 233,554 3.8 -1,468 -0.4Allied Lines . . . . . . . . . . . . . . . . . . . . . 127,487 2.1 14,659 4.5Priv Pass Auto Liab . . . . . . . . . . . . . . . 140,902 2.3 … …All Other . . . . . . . . . . . . . . . . . . . . . . . 416,086 6.7 2,925 0.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,203,636 100.0 327,804 100.0

Reinsurance Business —Prem Ceded— —NPW— RetentionProduct Line ($000) (%) ($000) (%) (%)Workers’ Comp . . . . . . . . . . . . . . 1,936,804 47.3 1,363,221 56.0 41.3Comm’l Auto Liab. . . . . . . . . . . . 331,122 8.1 257,377 10.6 43.7Oth Liab Occur . . . . . . . . . . . . . . 225,288 5.5 173,613 7.1 43.5Warranty . . . . . . . . . . . . . . . . . . . 548,319 13.4 155,268 6.4 22.1Com’l MultiPeril . . . . . . . . . . . . . 180,941 4.4 81,386 3.3 31.0Excess Workers’ Comp . . . . . . . . 139,790 3.4 77,146 3.2 35.6Oth Liab CM . . . . . . . . . . . . . . . . 72,765 1.8 54,253 2.2 42.7Auto Physical . . . . . . . . . . . . . . . . 179,453 4.4 52,633 2.2 22.7Allied Lines . . . . . . . . . . . . . . . . . 95,245 2.3 46,902 1.9 33.0Priv Pass Auto Liab . . . . . . . . . . . 120,463 2.9 20,440 0.8 14.5All Other . . . . . . . . . . . . . . . . . . . 267,182 6.5 151,829 6.2 36.2

Total . . . . . . . . . . . . . . . . . . . . . . . 4,097,372 100.0 2,434,068 100.0 37.3

ages offered in this segment include custom designed coverages of-fered in connection with the sale of consumer and commercial goods in the United States and Europe, as well as niche specialty risks, also in the United States and Europe. This segment includes the business of Lloyd’s property and casualty syndicates owned by AFSI. Among the products covered under the extended warranty programs are automo-biles, consumer electronics and appliances, commercial equipment and recreational vehicles and power sports equipment. Extended warranty products typically cover manufacturer or retailer obligations to repair or replace products to end purchasers of the warranty. The coverage terms have durations ranging from one month to 120 months, with the average contract term 57 months in the United States and 43 months in Europe. AmTrust generally has the ability to increase prices should loss experience exceed projections and, in Europe, the policies can be cancelled prior to the end of the term due to unusually high loss frequency or severity. The segment’s non-warranty business includes general liability, employer’s liability and professional and medical li-ability programs. Over half of the segment’s business on a gross basis is produced outside the United States. The Specialty Program business represented 17.4% of AFSI’s 2015 US GAAP NWP. The segment wrote 122 programs in 2015 through 41 independent wholesale and managing general agents. Programs writ-ten in the segment include a variety of commercial coverages for cus-tomers operating in narrowly-defi ned, homogenous groups that require specialized knowledge of the insured operations and business model to properly underwrite, price and manage the associated risk. The placing agents will generally have an at-risk position in the business they write with AmTrust. Workers’ compensation is the largest line of business covered in this segment, accounting for approximately 41% of the busi-ness in 2015. Consolidated results presented herein include the statutory fi nancial results of members of the group which are domiciled in the United States. AmTrust International Insurance Ltd. is a Bermuda-based rein-surer that assumes approximately 50% of the direct business underwrit-ten by the US statutory members of the group.



Consolidated Balance SheetAdmitted Assets ($000)

YE 2016 %Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,531,956 55.5Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . 530 0.0Common stock. . . . . . . . . . . . . . . . . . . . . . . . . 150,779 1.8Cash and short-term invest . . . . . . . . . . . . . . . 338,262 4.1Real estate, investment . . . . . . . . . . . . . . . . . . 158 0.0Other non-affi l inv asset . . . . . . . . . . . . . . . . . . 82,894 1.0Investments in affi liates . . . . . . . . . . . . . . . . . . 207,688 2.5Real estate, offi ces. . . . . . . . . . . . . . . . . . . . . . 5,523 0.1

Total invested assets . . . . . . . . . . . . . . . . . . $5,371,789 65.2Premium balances . . . . . . . . . . . . . . . . . . . . . . 1,663,779 20.4Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . 34,831 0.4All other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,145,640 14.0

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $8,162,039 100.0

Liabilities & Surplus ($000)

Loss & LAE reserves. . . . . . . . . . . . . . . . . . . . . $2,318,405 28.4Unearned premiums. . . . . . . . . . . . . . . . . . . . . 1,347,014 16.5Conditional reserve funds . . . . . . . . . . . . . . . . 17,640 0.2All other liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,403,349 29.4

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . $6,086,408 74.6Surplus notes . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500 0.1Capital & assigned surplus. . . . . . . . . . . . . . . . 1,138,902 14.0Unassigned surplus . . . . . . . . . . . . . . . . . . . . . 930,229 11.4

Total policyholders’ surplus . . . . . . . . . . . . . $2,075,632 25.4

Total liabilities & surplus . . . . . . . . . . . . . . . . $8,162,039 100.0

Why is this Best’s® Rating Report important to you?

The A.M. Best Company is the oldest, most experienced rating agen-cy in the world and has been reporting on the fi nancial condition of insurance companies since 1899.

A Best’s Financial Strength Rating (FSR) is an independent opin-ion of an insurer’s fi nancial strength and ability to meet its ongoing insurance policy and contract obligations. An FSR is not assigned to specifi c insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer’s claims-payment poli-cies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specifi c li-ability contractually borne by the policy or contract holder. An FSR is not a recommendation to purchase, hold or terminate any insurance

policy, contract or any other fi nancial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specifi c purpose or purchaser.

The company information appearing in this pamphlet is an extract from the complete AMB Credit Report. You may obtain the complete report by contacting Customer Service at +1(908)439-2200 or [email protected]. Please reference the company’s identi-fi cation number (AMB#) listed on this rating report.

For the latest Best’s Financial Strength Ratings along with their defi -nitions and A.M. Best’s Terms of Use, please visit www.ambest.com.


Copyright © 2017 A.M. Best Company, Inc. and/or its affi liates. All rights reserved.No part of this report may be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior written permission of the A.M. Best Company. While the data in this report was obtained from sources believed to be reliable, its accuracy is not guaranteed.


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