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Why Amtrust Financial Services, Inc. Shares Jumped

By Sean Williams – Feb 13, 2014 at 12:51PM

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Amtrust Financial shares soar after crushing Wall Street's expectations in the fourth quarter once again. Can this stock head even higher or is this rally your opportunity to hit the exits?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Amtrust Financial Services (AFSI), an underwriter and provider of property and casualty insurance in the U.S. and abroad, jumped as much as 16% after the company reported better-than-expected fourth-quarter earnings results before the opening bell this morning.

So what: According to its press release, Amtrust reported adjusted EPS of $0.82 for the quarter, a 14% improvement over the $0.72 in adjusted EPS reported last year, as its combined ratio improved 60 basis points to 89.9% from 90.5%. As a quick refresher: The combined ratio is a measure of an insurer's margins on underwritten policies. Anything below 100% is profitable, and the lower the figure, the higher the margin. Total quarterly revenue rose 77% to $816.4 million from $461.5 million last year. Comparatively speaking, the Street had only expected a $0.78 EPS profit from Amtrust in the fourth quarter on $639 million in revenue, so this was a sizable beat.

Now what: Amtrust has now crushed Wall Street's EPS estimates in each of the past 12 quarters, saw its book value rise by 15% in 2013 to $17.85 per share, and despite today's pop, is still valued at less than 10 times this year's estimated earnings. The deal with P&C insurers is that one-time catastrophe losses will arise from time to time, but these businesses are really set up to be cash cows that can use these catastrophes as justification to boost premiums to a comfortable and profitable level. Amtrust is clearly well capitalized and the quality of its underwriting is improving based on its lowered combined ratio. I'd say that alone could be enough of a reason for the stock to head even higher.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Amtrust Financial Services. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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