New investor challenge to AmTrust’s plan to go-private
Central Europe based investment group Arca Capital said that it will meet with state insurance regulators to oppose the AmTrust privatisation transaction and that it will continue to campaign aggressively against the "absurdly low" buyout price.
AmTrust Financial Services stockholders have, at a special meeting held on June 21, 2018, approved the proposed amended merger transaction which will take the insurer specialized in the coverage for small businesses private.
AmTrust reported a net loss of $348.9 million for 2017 after a net profit of $430.4 million in 2016. CEO Barry Zyskind had previously argued that as a private enterprise AmTrust will be able to focus on long-term decisions, without the emphasis on short-term results. AmTrust wants to address financial controls as well as pricing and reserve adequacy issues.
The deal will see Evergreen Parent, an entity formed by private equity funds managed by Stone Point Capital, together with Barry Zyskind, chairman and CEO of AmTrust, George Karfunkel and Leah Karfunkel, acquiring the approximately 45 percent of the company's issued and outstanding common shares that the Karfunkel-Zyskind Family and certain of its affiliates and related parties do not presently own or control.
Arca Capital has been contending that the fair value of AmTrust is approximately double the $14.75 per share amended offer price and had already sent a written demand for appraisal to management.
Arca, which owns approximately 2.4 percent of outstanding shares of AmTrust, is now warning state regulators that the pending privatization transaction puts all policyholders at risk due to insufficient oversight and is continuing its campaign to stop AmTrust from going private.
California Insurance Commissioner Dave Jones has previously investigated and taken action against AmTrust's management on multiple occasions for having insufficient reserves to cover active policies, Arca noted in a corporate statement. Additionally, Arca noted that Commissioner Jones has expressed concerns about AmTrust management's actions surrounding its previous merger with Tower Insurance whereby management funnelled profitable policies into AmTrust and funnelled policies with active claims to a company called Castle Point, which appeared to be built expressly for the purposes of going bankrupt to avoid making payouts. These actions led to severe consequences for customers of Tower Insurance, who were denied payouts under the pretences that their insurance company was insolvent, and for taxpayers, who ended up footing some of the bill, Arca added.
The New York State Department of Financial Services has also investigated AmTrust's actions in the Tower merger due to policyholders having their claims denied, Arca said. A recent investigative report by WNBC New York from June 29, 2018, profiled Eita Pruss, a woman who was run over by a vehicle covered by an active Tower Insurance policy. Pruss was denied an agreed upon payout by AmTrust management after the debilitating accident during AmTrust's merger with Tower Insurance because the policy for the vehicle had been funnelled to the defunct Castle Point company, Arca said. This denial of a payout came despite AmTrust management's previous assurances that AmTrust would cover Tower's outstanding liabilities, the investment firm said.
As a result of these controversial dealings by management, taxpayers in New York and New Jersey have had to pay close to $20 Million to cover parts of these claims (regulations require the state to cover up to $1 Million per policy), Arca stated. The investment firm sees these activities as part of a pattern of troubling conduct displayed by the controlling Zyskind/Karfunkel family and likens the activities to their attempt to take AmTrust private at an underpriced valuation.
"AmTrust is fundamentally a strong business that does not need to resort to unfairly denying payouts to victims of accidents to make nominal increases in profit,” said Pavol Krupa, chairman of Arca Capital. “Unfortunately, the Zyskind/Karfunkel family will stop at nothing to line their pockets at the expense of their investors and their policyholders. If AmTrust is allowed to go private, they will have even less accountability and oversight over their operations thus allowing the Zyskind/Karfunkel family to decrease their reserves for payouts and deny fair payouts to policyholders on a very large scale. Arca Capital envisions AmTrust as a strong public enterprise that can generate returns for shareholders and provide policyholders with policies they can count on in the case of unfortunate events. Make no mistake, privatization is bad for investors, bad for brokers, bad for taxpayers and bad for policyholders. Thus, we are meeting with regulators to urge them to act for the benefits of all of their constituents and reject this transaction," Krupa explained.
Arca Capital is actively pursuing a campaign to stop the transaction or, if it goes forward, to demand fair value for investors. Arca Capital is exploring all legal avenues to obtain fair value for its AmTrust shares should the transaction go forward.
Arca Capital is also investigating whether Zyskind/Karfunkel affiliates were included as part of the "minority shareholders" in the June 21st vote, which required that a majority of the minority shareholders approve the transaction. If Zyskind/Karfunkel affiliates are found to have voted as minority shareholders, the entire integrity of the June 21st vote could be called into question, Arca said.
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