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AmTrust Financial Services will make about $950 million by selling a majority equity interest in some of its U.S.-based fee businesses including managing general agencies and warranty third-party administrators to private equity firm Madison Dearborn Partners (MDP).

Barry Zyzkind, AmTrust’s chairman and chief executive officer, said that the sale helps to unlock the value of its fee business, but also connects to recent initiatives to beef up its balance sheet, simplify and generate capital slated to fuel organic growth.

“This transaction creates value for all parties,” Zyskind added in prepared remarks.

The deal calls for AmTrust to transfer a 51 percent equity interest in “certain of its U.S.-based fee businesses” to MDP. AmTrust said the business is worth $1.15 billion. It generated after-tax net income for AmTrust of about $53 million in the year prior to June 30, 2017.

Beyond the $950 million in cash, AmTrust will keep a 49 percent equity interest in the business, and use the monetary infusion to pursue growth and also reorganize its debt and finances. AmTrust may also use some of its cash infusion to pursue alternative reinsurance agreements

AmTrust will still own 49 percent of the operation that provides warranty and services contracts for the automotive, consumer products and specialty equipment industries, among others, and administers niche workers’ compensation and contractor liability coverage in the United States for AmTrust and other carriers. Stuart Hollander, currently president, Specialty Risk North America for AmTrust, will become CEO of the new company. A new name will be announced sometime in the future.

Deal Specifics

As part of the agreement, AmTrust plans to continue providing insurance coverage connected to warranty and service contracts and underwrite policies offered through MGAs. AmTrust’s underwriting platform will still support the U.S. fee business that MDP is going to partially own. The transferred fee business will produce between $750 million and $800 million in gross written premium for AmTrust in 2018, according to the deal announcement.

The transaction has been approved by AmTrust’s board of directors. It is expected to close in the first half of 2018.

AmTrust’s European fee operations, workers’ compensation assigned risk administration business, other fee business connected to residual lines of business, and fee revenue generated from related parties or internal structuring are not part of the sale.

In a separate announcement yesterday, AmTrust said that a third-quarter boost to prior-year reserves of $327 million before taxes will exhaust the Premia reinsurance cover.

The last time AmTrust announced an initiative to strengthen its balance sheet was earlier this fall. AmTrust announced then that it by selling to National General Holdings Corp. a personal lines policy management system it developed for the insurer.

Earlier in September, AmTrust signed a new quota share reinsurance contract for its Republic Companies business.

In July, it inked a reinsurance agreement with Premia Reinsurance Ltd. addressing loss reserve development up to $400 million over the company’s stated reserves of $6.59 billion as of March 31, 2017. The arrangement is designed to help AmTrust insulate itself from future reserve volatility.

Following the announcement of AmTrust’s reserve strengthening and its plan to sell some of its businesses, A.M. Best placed under review with negative implications the company’s credit and financial strength ratings.

Topics USA Reinsurance