AmTrust Financial Services, Inc. AFSI inked a deal with Madison Dearborn Partners (“MDP”) to transfer 51% equity stake of its U.S.-based fee businesses to the latter. The business is valued at $1.15 billion, plus up to an additional $50 million subject to conditions. The transaction is expected to close in the first half of 2018. It positions the fee business for accelerated growth.
Details of the Deal
AmTrust Financial will receive gross $950 million through a combination of MDP’s $210 million equity investment and debt borrowings by the new business.
AmTrust Financial will retain 49% stake in the fee businesses and continue to be an important provider of insurance coverage.
Also existing premium generated by the U.S. fee businesses will continue to support AmTrust Financial’s underwriting platform and thus generate about $750-$800 million in gross written premium for the company in 2018.
AmTrust Financial’s European fee operations, workers’ compensation assigned risk administration business and other fee businesses related to residual lines of business will not be impacted by this transaction.
The new company will operate under a new brand name, to be announced at a later date.
Rationale for the Transaction
AmTrust Financial expects the transaction to be accretive to its book value, increasing the same by $6.00 per share and increasing the net book value by $3.50.
The transaction is in tandem with AmTrust Financial’s focus to simplify operational structure, strengthen balance sheet and have a robust capital position to fund growth initiatives.
Cash proceeds from the transaction will help AmTrust Financial achieve operating return on equity of 12-15%. The proceeds will also help the company invest more and unlock benefits in core Small Commercial Business and Specialty Risk & Extended Warranty segments.
AmTrust Financial’s U.S. fee businesses produced adjusted EBITDA of $82 million and $53 million in net income for the 12 months ended Jun 30, 2017. However, the company expects to recover the same with net investment income by investing the proceeds along with organic growth and operating returns generated from the higher capital base.
Nonetheless, due to this transaction, AmTrust Financial’s service and fee revenues in 2018 will be impacted by $300-$350 million.
AmTrust Financial has been focusing on creating a long-term value and has thus raised about $300 million in capital in May 2017 to boost its capital base that supports growth initiatives. The company also divested personal lines policy management system for $200 million this September.
AmTrust Financial carries a Zacks Rank #4 (Sell). Shares of the company have plunged 56.6% year to date, underperforming the industry’s increase of 12.6%. However, we expect such strategic initiatives to help the shares turn around.
A.M. Best Jumps into Action
A.M. Best has placed the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” and the Long-Term Issue Credit Ratings of AmTrust Financial under review with negative implications post the announcement.
Stocks to Consider
Some better-ranked stocks from the insurance industry are NMI Holdings Inc. NMIH, First American Corp. FAF and CNA Financial Corp. CNA.
NMI Holdings provides private mortgage guaranty insurance services in the United States. The insurer sports a Zacks Rank #1 (Strong Buy). The company delivered an average four-quarter positive surprise of 11.72%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
First American Financial, a provider of financial services, carries a Zacks Rank #2 (Buy). The company delivered an average four-quarter positive surprise of 12.74%.
CNA Financial provides commercial property and casualty insurance products primarily in the United States. The insurer carries a Zacks Rank of 2. The company delivered an average four-quarter positive surprise of 39.87%.
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