Fraud or Short Attack? (AFSI)



AmTrust Financial Services (AFSI) is under heavy pressure this past week – having dropped over 30% on an article posted on Seeking Alpha accusing the company inflating earnings.  Of course, as my luck would have it, all this happened after I decided to write some puts on the stock (which now means those options are heavily under water)

At a Glance:
Symbol: US-AFSI
Price: $31.03
Market Cap: $2.32B
Yield: 1.80%
Me Wife Mom
Options  ✓

Mid-morning on December 12, GeoInvesting, who seem like a small boutique research group, issued an article which ended up on Seeking Alpha – a platform for publication of investment research.  With the stock already down a few percentage points that day, the article immediately triggered a ~20% drop to $31 over the next several hours.  The stock continues to struggle, moving below $30 mid this week before rebounding a little today.

Source: Google Finance

Source: Google Finance

Key summary of findings from the report:

  • AFSI appears to be excluding losses of wholly-owned subsidiaries in its SEC filings – hiding over $275M in its subsidiaries
  • AFSI is mismarking some of its policies and using aggressive assumptions relative to pears despite some evidence that policies may be worthless

There were some attempts to refute the statements made in this article by Bronte Capital as well as official statements from AFSI itself.  Now, I’m no financial analyst – but even if I were, you’d probably need to be a forensic accountant to figure out heads from tails from all these statements.  I’m not going to try and decipher what each viewpoint is – you can read each article and determine who you think is right (if even possible).  This investment was in a small insurance company focusing on niche markets and constantly looking for opportunities to acquire companies/policies for cheap of which the company has been able to do and grow earnings (hopefully legitimately).

One thing to note is the writers of the original article proclaim themselves as short sellers of the stock – one of the many that make up the 29% short interest in the stock.  That’s quite a high number especially for an insurance company.  As the article from Bronte Capital indicates, it believes GeoInvesting issued out a “hit piece” – shorting the stock and then spreading negative news (or potential rumours).  AFSI   itself lends itself to a little bit of this manipulation – it’s a small-medium sized company with small float and is now widely traded (~850K shares traded each day on average over the past 3 months).  Moreover, in some message boards, posters were talking about the high put volumes so I went back and grabbed the option volumes (from and it paints a very suspicious picture:

AFSI Dec 2013 Put Volume (September - December 2013)

AFSI Dec 2013 Put Volume (September – December 2013)

Buyers of puts give them the right to sell 100 shares of the stock for a specific price.  They are aiming for the price to go down and profit as the share price falls.  Since the beginning of September, the put volume trade has been quite low – averaging a daily trade volume of about 800 with some peaks up to 4500 or so.  The last point on the chart is December 11th, one day before GeoInvesting’s “hit piece” with put volume increasing more than 2.5x from their previous high and over 10x the average volume for the past 3 months.  Suspicious?  You bet.    

So, who’s right?  Has AFSI been hiding losses or is this an aggressive move by shorts?  Only time will tell but the shorts have definitely had their way over the past week. I’ve had similar experiences at one point or another where the rumours ended up to be true (EBIX) and untrue (ISRG, STON, AMT).  If there’s some points that would lead me to believe these accusations are incorrect, it’s that insiders own 60% of the company and have not sold any holdings (why would they hold if they were doing some shady business?).  Moreover, with the drop in price, insiders have actually bought more shares:

Now, that’s some pretty heavy investment for you and me, but probably not even a drop in the sand for the Karfunkel’s but still says enough about their belief in the company.

For me, we already have quite enough shares (especially with the puts likely to require me to buy shares in the mid-30s).  One idea that I’ve followed up with in discussions with fellow investors on a message board I follow is the AFSI Preferred Shares (AFSI-A).  With all this FUD (fear, uncertainty, doubt), the preferred shares also dropped from $21 to as low as $17.50.  The preferred share (which was just issued this year) is suppose to give $1.69/year (which now yields 9.09% at today’s price of $18.60). This may work out to be a better play – even if AFSI is found of hiding losses, it still may remain solvent and continue to pay the preferred share dividend.  This also brings up the only beef I have about the preferred shares – they are non-cumulative.  I would value preferred shares that are cumulative – meaning that if the company misses a dividend payment, they are obligated to pay that missed dividend back.  Non-cumulative means the opposite – they are not obligated – and you can bet that if AFSI were to stop dividend payments, that would surely tank the share price.

In any event, thought it was worth the risk – overall (preferred shares, common shares, and options), it’s representing 3.5% of our portfolio – it would hurt if the company went belly up but would totally be able to recover from.  With the preferred shares at a 10% discount from where they were two weeks ago, plus an early call value of $25 (30% above today’s price), and a 9% dividend, it seemed like a good play on what I still believe is a good company.


4 thoughts on “Fraud or Short Attack? (AFSI)

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