AmTrust Financial Services Gains As Economy Recovers

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AmTrust Financial Services epitomizes the American dream for two Hungarian immigrant brothers, Michael and George Karfunkel.

The billionaire moguls, ages 71 and 65, startedAmTrust ( AFSI ) in 1998 by buying the computer-warranty business from Wang Laboratories, which had undergone bankruptcy. They fueled their Manhattan-headquartered company's rapid growth with acquisitions -- 30 in all.

Through its subsidiaries, the multinational insurance holding company sells extended warranties on consumer electronics, furniture and cars, plus specialty property and casualty insurance including workers' compensation, commercial auto and general liability.

Source Of Controversy

Though AmTrust stock has since more than recovered, it crashed 32% in early December after stock research site said that AmTrust hid losses in offshore entities and inflated life-settlement contract ( LSC ) valuations.

"From 2009 to 2012, we believe that AFSI has not disclosed a total of $276.9 million in losses ceded to Luxembourg subsidiaries," GeoInvesting wrote in a December 12 report titled "AmTrust Financial Services: A House of Cards?" They added: "AmTrust appears to be boosting earnings and tangible book value by marking up its portfolio of life settlement contracts."

AmTrust CEO Barry Zyskind, Michael Karfunkel's son-in-law, lashed back at what he called factual inaccuracies in the report. "There is no hiding of losses," he said on a Dec. 16 conference call.

Zyskind accused GeoInvesting of manipulating AmTrust's stock price to profit from short-selling -- borrowing shares of a stock at a high price and returning them at a low price to profit when the stock drops.

But AmTrust stock has risen. With the Karfunkel family owning nearly 60% of shares, it has rallied 35% year-to-date and 53% in the past year vs. 1% and 12% for the S&P 500 index over the same periods.

In early January, AmTrust announced a $150 million share-buyback authorization -- about 6% of the float at the time. In April, the firm increased its quarterly cash dividend 43% from 14 to 20 cents a share. And on May 1, AmTrust announced first-quarter results that spurred an 11% stock rally over two days.

Boost From The Economy

In a recent conference call with analysts, Zyskind said that strong U.S. economic growth has boosted demand for all of AmTrust's products. Companies hired more workers, thereby increasing demand for workers' comp, while increased consumer spending lifted demand for warranties on cars and other big-ticket items. At the same time, the company is introducing new products and adding more sales agents.

AmTrust earns investment income from a $5 billion portfolio using a strategy that Zyskind says will be profitable over different market cycles. "In the first quarter, we created over $100 million of capital, and we believe that this is a trend that will continue for the remainder of 2014 and beyond," Zyskind said in AmTrust's first-quarter conference call. "We are excited and believe that what we've created is a model that will produce great results in both hard and soft markets."

AmTrust enjoyed strong growth in the first quarter from winning new business and buying out other companies in the past year: Insco Dico, Sagicor Europe, Sequoia Insurance, Mutual Insurers Holding (First Nonprofit Insurance's parent company) and AMTCS Holdings. In January, AmTrust cut a deal withTower Group International ( TWGP ) to reinsure 60% of its commercial policies. It has a number of other deals in the works both in the U.S. and abroad.

"They take advantage of the opportunities that present themselves in the market, and they're not scared to act when other people are hesitant," said Ken Billingsley, an analyst at Compass Point. He added that AmTrust's low expense ratio (a measure of efficiency), driven by technology, gives the company a competitive advantage over its peers. And the percentage of money that it spends relative to what it collects runs in the mid 20s vs. the mid 30s for most insurers.

Small Business Strategy

AmTrust's workers' comp operation insures low-hazard businesses such as restaurants, retail shops and doctors' offices. It refuses accident-prone businesses such as construction, transportation and agricultural firms. With an average insurance premium of $10,000, it targets an underserved niche of small businesses, with an average of nine employees, that big insurers don't pursue.

"We carved out a niche focusing on small workers' comp," said Ron Pipoly, AmTrust's chief financial officer. "The volume of premiums we've written has expanded dramatically, either through a series of successful renewal rights, transactions or acquisitions we've done over the years."

Pipoly joined the company in 2001, when it had 35 employees and $25 million worth of insurance policies. He has seen the company grow to 3,500 employees in 70 offices worldwide, $4.1 billion in insurance policies as of 2013 and 8,000 independent retail insurance agents.

Pipoly says that AmTrust has its sights on expanding its warranty business to Southeast Asia and Latin America -- places with a rapidly growing middle class hungry for consumer electronics.

AmTrust has beaten Wall Street's earnings forecasts for 12 quarters straight. First-quarter earnings blew past the consensus of analysts in a Thomson Reuters poll by 37%. First-quarter revenue climbed 89% from a year earlier to $954 million, while diluted earnings per share surged 18% to $1.27.

"AmTrust's superior expense management has allowed it to materially outgrow and outearn peers," William Blair analyst Adam Klauber and colleagues wrote in a report May 1. "As the premiums continue to ramp up, this will become ever more evident."

Analysts polled by Thomson Reuters forecast 2014 revenue growth of 51% and earnings growth of 28%. Annual revenue grew by double digits (29% to 60%) year-over-year each of the past 10 years, except during the recession in 2008. Revenue has grown at a compounded annual rate of 36% over five years, compared with an industry average of 10.4%, according to Morningstar.

AmTrust sports a superior return on equity (ROE), averaging 19% over the past five years vs. 10% for its competitors, according to JMP Securities. ROE is net income divided by shareholders' equity. The higher the figure, the more return a firm is making for the investors.

Investing Risks

The insurance industry currently enjoys a cash hoard amid a lack of catastrophic losses lately, coupled with rising rates following an onslaught of disasters in 2011 -- Hurricane Irene, Japan's earthquake and tsunami, and major flooding in Australia and Thailand, said Robert Paun, an analyst with Sidoti & Co.

Mild losses over the past two years will slow increases in insurance premiums over the next few years, he believes. Workers' comp premiums in California, which account for 18% to 19% of the market, experienced double-digit rate rises over the past three years as larger insurers scaled back. But California's workers' comp market is very volatile, Paun said, suggesting that premium prices could just as quickly swing the other way.

With firms that make as many acquisitions as AmTrust does, problems may arise in integrating a new company, Paun added.

AmTrust is 26th in size, by market cap, of 80 firms in IBD's Insurance-Property/Casualty/Title industry group. The largest areACE ( ACE ),Travelers ( TRV ) andAllstate (ALL).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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