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AFSI: Market Reaction To Auditor Change Sets Up A Buying Opportunity Similar To Q3-14

|Includes: AmTrust Financial Services, Inc. (AFSI)

Recent 8k announcing dismissal of BDO / hiring of KPMG LLP is NOT a surprise to followers of AFSI since early 2014. Market reaction sets up a buying opportunity similar to Q3 2014.

Change of auditors has been planned since Sep 2014 disclosure of intent to do so.

Pending and recently completed acquisitions total ~ $461 mil and should fuel growth in '16 and beyond.

Deals will be financed with $125 mil raised 3/15/16, $315 mil common capital raised Nov '15, $150 mil raised Jan-15 and substantial earnings generated in 2015.

Below is taken from our 9/16/14 archived notes entry for AFSI

9/16/14...AFSI - agrees to NY insurance regulators requirements as condition to participation in ACP / Tower transaction (AFSI has acquired renewal rights to TWGP's commercial lines biz). Nothing onerous here, but mkt may need some clarification. However, this could be taken as a positive in the sense that the strictest state regulator in the US was not explicitly critical, and implicitly sees AFSI's business model as generally OK. Quite likely, the actuarial plan submitted by AFSI, was in the works even without regulator input. They've grown and will grow further - that requires actuarial scale. AFSI appears to be comfortably in compliance with NPW/surplus ratio requirement. See recent presentation.

9/16/14 Agreement Components:

1) Strengthen internal actuarial resources/staffing by year-end '15.

2) Comply with NPW/surplus ratio requirement (3/1). Appears to be in compliance now.

3) Modify its current intercompany reinsurance structure by reducing the quota share cession to AII to 60% effective 1/1/15 and 50% effective 1/1/16.

4) Intercompany receivables included on line 4 of AII's 2013 statutory balance sheet to be paid down on or before 12/31/15, with at least 50% to be paid by12/31/14.

5) In light of AmTrust's growth and increased geographic footprint, AmTrust will engage an external auditing firm with corresponding global resources and skills beginning with the audit for the annual period ending12/31/15 (current auditor is BDO USA). Maiden and NGHC also use BDO; ACP Re probably does too. Regulators probably want AFSI to have an auditor other than BDO for greater objectivity given common board members and significant founding stockholders among the companies.

Disclosure: I am/we are long AFSI.