AmTrust faces "hundreds of millions of dollars" reserve charge, say analysts

Speciality property/casualty insurance group AmTrust Financial Services (AFSI) should take a reserve charge “in the hundreds of millions of dollars” and commit to “much-improved disclosure” in order to restore investor confidence, according to analysts at Keefe, Bruyette & Woods.

In addition, the analyst team recommends an enlarged board of directors, a reconstituted audit committee, and an enhanced investor-facing senior management team.

AmTrust had delayed its 2016 consolidated financial statements (10-K) and warned that its 2014 and 2015 financial reports had to be restated. The restatement and delay were related to the timing of recognition of revenue in the company's service and fee business.

Furthermore, shareholder rights law firm Robbins Arroyo filed a class action complaint against AmTrust on behalf of all purchasers of AmTrust securities between March 2, 2015 and March 16, 2017, for alleged violations of the Securities Exchange Act of 1934 by AmTrust's officers and directors.

According to the complaint, in a series of filings with the US Securities and Exchange Commission, AmTrust officials falsely attested to the accuracy of the financial statements, the disclosure of any material changes to the company's internal controls over financial reporting, and the disclosure of all fraud.

The KBW analysts criticised AFSI’s reserve practices in the note saying that they were “very uncomfortable” with AFSI’s stated reserves. They expect AFSI to provide either “a much more robust justification for its reserves or (as we think is increasingly likely) it bites the bullet and takes a sizeable (likely nine-digit) reserve charge, absorbing any accompanying rating agency downgrades and/or capital raises.”

The analysts explained that they find AFSI’s reserves hard to defend for three (related) reasons. For one, AmTrust’s reported 2016 underwriting results seem inconsistent with management’s year-end rhetoric.

Secondly, they said that a review of AmTrust’s loss triangles point to a meaningful (albeit hard-to-quantify) deficiency.

In addition, historically, most companies that released immature accident-years’ reserves while strengthening older years’ reserves subsequently re-strengthened the recent years’ reserves, according to the analysts.

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