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AmTrust (AFSI) to Sell Policy Management System for $200M

Zacks

AmTrust Financial Services, Inc. AFSI recently announced that it will sell personal lines policy management system — referred to as policy management system — to National General Holdings Corp. NGHC for $200 million. The sale will help AmTrust not only unlock value but also boost potential, which the company has built through technological expertise over a considerable period of time.

Terms of the Transaction

Per the sale agreement, AmTrust will receive $200 million of total consideration in three equal instalments. The first payment will be made after the proper execution of the sale agreement, while the second one will be disbursed when the sale agreement reaches its six-month anniversary mark. Finally, the third instalment will be paid either on the 18-month anniversary of the sale agreement or when the full separation and transfer of the system to National General’s operating environment is complete.

Notably, National General is set to purchase the right, title and interests in the policy management system.

Rationale Behind the Divestiture

On completion of the sale, which in turn will be instantly accretive to AmTrust’s book value, the property and casualty (P&C) will be able to enhance its service portfolio, resulting in company’s improvement of overall performance. To that end, proceeds from this transaction will add further strength to AmTrust’s balance sheet with potential to increase and consolidate the company’s capital position. This apart, the deal will reflect the insurer’s commitment toward making its organization and financial disclosure more comprehensible.

Interestingly, the development, support and licensing fees from National General, pertaining to the policy management system, generated about $26 million in pre-tax income ($17 million after tax) for AmTrust in 2016. Hence, we expect this sale to boost the company’s operational performance in the near term as well.

AmTrust has been offering National General and its units informational technology development services, with respect to development and licensing of the policy management system for the past few years. Hence, the transaction will allow National General to improve its technological experience and fortify its position in the market.

On the back of this sale agreement, the company is anticipated to make its market position robust as well as improve operational and financial performances to emerge as an attractive stock from an investment perspective.

Zacks Rank and Share Price Movement

Currently, AmTrust carries a Zacks Rank #5 (Strong Sell). Also, shares of the company have tumbled 52.5% year to date, massively underperforming the industry’s gain of 8.1%. However, we expect top-line growth, improving premiums and strategic initiatives to turn the stock around in the near term.



Stocks to Consider

Some better-ranked stocks from the insurance industry are CNO Financial Group, Inc. CNO and FBL Financial Group, Inc. FFG, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CNO Financial develops, markets and administers health insurance, annuity, individual life insurance and other insurance products for senior and middle-income markets in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 6.69%.

FBL Financial sells individual life insurance and annuity products. The company delivered positive surprises in three of the last four quarters with an average beat of 6.23%.

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