Bermuda-based Premia Reinsurance has entered into a loss development cover agreement with AmTrust Financial Services.
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, and covers AmTrust’s exposures through April 1, 2017.
“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, chairman and CEO, 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.”
The agreement provides 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. The consideration for this agreement is a payment of approximately $675 million, 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 collateralised 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.
AmTrust will retain sole authority to handle and resolve claims, continuing its commitment to customer care, and Premia has various access, association and consultation rights.
“This agreement supports our goal of reducing exposure to volatility and creating more certainty and confidence in our future financial performance,” said Adam Karkowsky, executive vice president and CFO, AmTrust. “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.”
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