Why Is AmTrust Financial (AFSI) Down 17.7% Since the Last Earnings Report?

More than a month has gone by since the last earnings report for AmTrust Financial Services, Inc. AFSI. Shares have lost about 17.7% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

AmTrust Financial Loss Narrower Than Expected in Q3

AmTrust Financial Services, Inc. reported third-quarter 2017 operating net loss of 4 cents per share, significantly narrower than the Zacks Consensus Estimate of a loss of 98 cents. Also, operating net loss compared unfavorably with operating earnings of 61 cents in the year-ago quarter.

Higher net catastrophe loss of $54 million largely contributed to this downside.

Nonetheless, the quarterly results reflect improvement in premiums across the company’s largest operating segments, namely Small Commercial Business, and Specialty Risk and Extended Warranty.

Behind Third-Quarter Headlines

AmTrust Financial’s total operating revenues of nearly $1.4 billion increased 3.2% from the year-ago quarter. Higher net investment income (up 2%) as well as service and fee income (up 34.8%) drove this upside. However, the top line missed the Zacks Consensus Estimate by 5.2%.

Net investment income improved nearly 2% from the prior-year quarter to $61.1 million. Total expenses increased 42% year over year to $1.8 billion. Higher loss and loss adjusted expenses (LAE), acquisition costs and underwriting expenses as well as other expenses resulted in the increase.

Combined ratio deteriorated 4120 basis points (bps) from the year-ago quarter to 134.4%. Expense ratio also deteriorated 290 bps to 28.3%.

Segment Update

Small Commercial Business: Net earned premiums grew 2.3% year over year to $529.1 million. Combined ratio deteriorated 3980 bps to 132.5%.

Specialty Risk and Extended Warranty: Net earned premiums climbed nearly 13% year over year to $482.8 million. Combined ratio deteriorated 3210 bps to 121.1%.

Specialty Program: Net premiums earned declined 28.2% year over year to $180.9 million. Combined ratio deteriorated 7400 bps to 175.5%.

Financial Update

At the end of the third quarter, Am Trust Financial had cash, cash equivalents and investments of $9.6 billion, up 4.3% from $9.2 billion at year-end 2016. Total assets grew 14.2% to $25.8 billion from $22.6 billion at year-end 2016. Shareholder equity rose 6.6% to $3.7 billion from the level at 2016-end.

The long-term debt-to-capitalization ratio of Am Trust Financial was 27.1%, reflecting an improvement of 60 bps from Dec 31, 2016.

Additionally, book value per share declined nearly 4% to $13.26 as of Sep 30, 2017 from $13.81 as of Dec 31, 2016. Operating return on equity deteriorated to (1.1) % from 17.7% in the year-ago quarter.

Dividend Update

The board of directors approved a cash dividend of 17 cents per share.

Business Update

On Nov 7, 2017, AmTrust Financial entered into a strategic transaction with Madison Dearborn Partners to transfer 51% equity stake of its U.S.-based fee businesses to the latter. The business is valued at $1.15 billion and the company expects to get gross cash proceeds of about $950 million upon the completion of the transaction.

The company projects that this particular amount will add about $6.00 per share in net tangible book value and nearly $3.50 per share in net book value. The company expects the transaction to close by the first half of 2018. Notably, this transaction is anticipated to create the strongest capital base in AmTrust Financial’s history and strengthen its position as a premier multinational property and casualty insurer.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the past month as none of them issued any earnings estimate revisions.

AmTrust Financial Services, Inc. Price and Consensus

 

AmTrust Financial Services, Inc. Price and Consensus | AmTrust Financial Services, Inc. Quote

VGM Scores

At this time, AmTrust Financial's stock has a poor Growth Score of F, however its Momentum is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stocks has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than momentum investors.

Outlook

The stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.

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