What happened

Property-casualty insurance company AmTrust Financial Services (NASDAQ:AFSI) reported second-quarter earnings that came in short of analysts' estimates and fell by 48% year over year. The miss was largely fueled by higher catastrophe losses. As of 3:29 p.m. EDT, shares were down 9.9%.

So what

Despite the bottom-line miss, AmTrust's earnings report wasn't all negative. Gross written premiums of $2.2 billion represented a 6.1% increase from a year ago, and fee income grew by an impressive 35.5%. AmTrust's board also approved its next $0.17 dividend payment, which translates to an annual yield of 4.8%, among the highest in the insurance industry.

Man in suit looking at an arrow going through the floor.

Image source: Getty Images.

However, the higher catastrophe losses contributed to a significantly higher combined ratio of 101.2% versus 91.3% a year ago. A combined ratio over 100% indicates that the company operated at an underwriting loss for the period. Total expenses were up by nearly 32% year over year on higher underwriting expenses and acquisition costs, in addition to the higher losses. AmTrust also reported prior-year adverse loss reserve development of $73.1 million, which also could be worrying investors.

Now what

AmTrust also took steps to strengthen its balance sheet, and to mitigate its risks going forward. The company completed a $300 million common equity raise and sold its 86% interest in National General. In addition, the company entered into a new reinsurance agreement that provides up to $400 million of coverage for excess losses.

It remains to be seen what long-term effects these moves will have, but it's safe to say that the market will be watching AmTrust's combined ratio and adverse reserve development closely going forward.

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