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.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.