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A one-notch downgrade was good for AmTrust simply by virtue of not being worse

Is there such a thing as a good downgrade?

Last Tuesday when most of the US had already turned its attention to the 4 July celebrations, AM Best slipped out an announcement to say that it was downgrading AmTrust from A to A-.

The accompanying statement does not make pretty reading. It describes the enterprise risk management at AmTrust as “marginal” and says that it continues to incorporate reserve deficiency in its view of the business.

But there is a sense in which it is good simply by virtue of not being worse.

AmTrust has had its A financial strength rating under review with negative implications for some time and, given the scale of the challenges it has faced, a double-notch downgrade to B++ was surely a genuine possibility.

Such a move would have seriously impaired the business, necessitating the use of an expensive fronting carrier in various areas, sapping the top line, and in all likelihood toppling the take-private deal.

The Karfunkel-Zyskinds’ private equity partner Stone Point had a clause which would have allowed them to pull out of the deal on any ratings downgrade, but the two parties immediately made clear that the deal would go ahead at A-.

The same may well not have been true at B++. The take-private has overcome Carl Icahn’s challenge and with AM Best dropping it just a single notch, the way seems to be clear to closing the deal.

A/under negative implications contained the potential seeds of AmTrust’s destruction, so you don’t have to squint hard to see why the company will be more comfortable at A-/stable.

An A- rating is certainly far from as good as an A rating in many cases – and AmTrust will almost certainly lose some accounts – but the firm’s book will be less ratings-sensitive than many others.

Much of the workers’ comp it writes is for small employers in states that have guarantee funds and its warranty business should not be at risk.

The ratings situation may also explain another development that we have started to see in London over the last week.

AmTrust is investing money in bringing staff into its Lloyd’s business, with MS Amlin’s Greg Roberts and Axis’ Michael Shen both high-profile hires.

With the A rating that Lloyd’s paper brings, AmTrust’s managing agency is now the obvious place for it to write big-ticket or reinsurance risk within the group.

Our understanding is that Roberts and Shen are likely to be the first of a number of hires to upskill the Lloyd’s business.

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