AmTrust Q2 profit plummets as reinsurance cost bite, combined ratio deteriorates

New York-based insurance holding company AmTrust Financial Services saw its profits plummet in the second quarter of 2017 as the cost of a retroactive reinsurance agreement weighs on results and the combined ratio deteriorates.

Net income attributable to common stockholders were $5.8 million in the second quarter of 2017, down from $127.2 million in the same period a year ago.

Operating earnings fell to $72.9 million from $135.3 million over the period.

During the second quarter, the company entered into an adverse loss development cover agreement ("ADC"). The ADC was accounted for as retroactive reinsurance, and resulted in a loss of $58.9 million pre-tax.

The loss represents the amount paid in excess of the $625 million of ceded losses for $400 million of reinsurance coverage above the carried loss reserves of approximately $6.59 billion. During the second quarter, the company had prior year adverse loss reserve development of $73.1 million on a pre-tax basis, which exceeded the cost related to the consideration for the ADC, resulting in a pre-tax deferred gain of $14.1 million. The company believes the ADC improves its earnings outlook and financial stability by significantly mitigating reserve risk going forward.

"We took transformative steps in the second quarter, executing on a number of strategic initiatives to increase certainty and confidence in AmTrust's long-term financial strength, and appointing a new CFO," said Barry Zyskind, chairman and CEO of AmTrust.

"In particular, we enhanced our balance sheet and capital base through a $300 million equity investment by members of the Karfunkel family to further support our insurance business and organic growth opportunities. Our sale of approximately 86 percent of our equity position in National General simplifies our balance sheet and reduces concentration in our investment portfolio composition. The reinsurance agreement we entered provides up to $400 million of coverage for adverse net loss reserve development, in excess of our stated net loss reserves as of March 31, 2017, to insulate AmTrust from future reserve volatility. We undertook these actions with a long-term view for the Company and our shareholders, to demonstrate strength and stability to all of our partners, brokers, agents, and insureds, and to enhance our earnings consistency."

Gross written premium was up 6.1 percent year on year at $2.2 billion in the second quarter.  The combined ratio deteriorated to 101.2 percent compared to 91.3 percent over the period.

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