Strong
stocks with
insider buying were hard to come by for this week’s
insider buying feature. But never fear, we have found an
insurance stock that
Motley Fool calls ridiculously cheap. Apparently Donald T. DeCarlo agrees as the
AmTrust Financial Services Inc (NY) (AFSI) director bought $71,960 worth of AFSI on June 23rd. The $72k investment represents roughly 50% of
Mr. DeCarlo’s compensation from AmTrust. We would say that’s a strong statement.
AmTrust Financial Services, Inc is a multinational specialty property and casualty insurance holding company with operations in the United States, Europe and Bermuda. They principally provide workers’ compensation, commercial packages and customized property and casualty coverages for businesses, and extended warranty coverages for consumer and commercial goods.
In a show of its financial strength, AFSI recently raised its dividend by 20% to 6 cents from 5 cents. At the 6 cent per quarter rate, AFSI’s dividend yield is a money market like rate of 2.1%. While a 2% dividend might not make investors’ socks roll up and down, AmTrust’s valuations should.
The insurance broker currently trades at a forward P/E you can count on one hand: 5; while its projected 5 year earnings growth rate stands at 12%. That’s an absurd P/E-to-growth rate discount. In fact, AFSI’s trailing P/E of 8.13 is heavily discounted relative to the industry norm of 18.77. Split the difference between AFSI’s P/E and the industry average P/E and AmTrust’s stock would trade at $28.65. Considering the stock closed yesterday at $11.40, most investors would be satisfied if AmTrust were to just meet the analysts’ consensus price target of $17. We know we would be happy with a 50%-to-150% return in 12 months.
AmTrust should continue to reward investors with higher profits and possibly higher dividends as it sports a sparkling return on equity of 21.3% and an overall combined ratio of 77.3%. Now you ask, “What the hell is the combined ratio?” Good question, here’s how Investopedia defines it:
The combined ratio is A measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.
Many insurance companies believe that this is the best way to measure the success of a company because it does not include investment income and therefore only includes profit that is earned through efficient management.
Now that you know what combined ratio means, aren’t you happy to know AFSI’s is under 100%? Makes you feel a little better, doesn’t it? We expect AFSI will continue to make investors feel better as we believe the stock will outperform the market over the next 6-to-12 months.
Suggested Closing Price Stop: $10.21
