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AmTrust Financial Services, Inc. (NASDAQ:AFSI)

Q3 2008 Earnings Call Transcript

November 7, 2008, 10:00 am ET

Executives

Hilly Gross – VP, IR

Barry Zyskind – President and CEO

Ron Pipoly – CFO

Analysts

Bijan Moazami – FBR Capital Markets

Kenneth Billingsley – Signal Hill Group

Dan Schlemmer – Fox-Pitt Kelton

Adam Klauber – Fox-Pitt Kelton

Operator

Good morning, everyone, and welcome to the AmTrust Financial Services third quarter 2008 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Hilly Gross, Vice President of Investor Relations. Please go ahead, sir.

Hilly Gross

Thank you and good morning. And welcome, everyone, to the Third Quarter Investors Conference Call for AmTrust Financial Services. With me this morning is Barry Zyskind, President and CEO of AmTrust Financial Services and. Ron Pipoly, its Chief Financial Officer.

Before I introduce both gentlemen to you, I would like to read into the record the mandatory paragraph on forward-looking statements since this morning’s call contain forward-looking statement, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that actual developments will be those anticipated by the Company. Actual results may differ materially from those projected as a result of significant risks and uncertainties, including non-receipt of the expected payments, changes in interest rates, effect of the performance of financial markets on investment income, and fair value of investments, development of claims, the effect on loss reserves, accuracy in projecting loss reserves, the impact of competition and pricing environments, changes in the demand for the Company's products, the effect of general economic conditions, adverse state and federal legislation, regulations and regulatory investigations into industry practices, developments relating to existing agreements, heightened competition, changes in pricing environments, and changes in asset valuations. The Company undertakes no obligation to publicly update any forward-looking statement.

Having dispensed with the legal niceties, it is my pleasure this morning to introduce to you the President and Chief Executive Officer of AmTrust Financial, Mr. Barry Zyskind.

Barry Zyskind

Thank you, Hilly, and good morning. I am pleased to report that AmTrust had a profitable third quarter with strong operating earnings and premium growth. Gross written premium for the third quarter in 2008 was approximately $281 million, an increase of 45% over third quarter 2007. And operating earnings for the quarter was $39 million, an increase of 52% over 2007.

Before I go more deeply into the Company’s quarterly results, I would like to discuss the investment impairments. As outlined in our press release, the Company had $29.8 million in after-tax losses. This was primarily related to fixed income investments in Lehman Brothers and Washington Mutual. These investments were made in early 2007 when these companies had a very strong ratings and a market capitalization of over $40 billion. We are holding two highly-rated financial institutions that suffered as circumstances overtook them.

Although we have these impairments we believe the rest of our investments are strong and, as previous mentioned, the Company has no subprime mortgages and no preferred stock in Fannie or Freddie.

Shareholders’ equity as of September 30th was $388.6 million, slightly down from $390 million at 12/31. These numbers include our dividends of $7.8 million. Having said that, our balance sheet is solid, our cash flows and liquidity are strong, and we view the unrealized losses in fixed income as temporary. We have the ability to hold the fixed incomes to maturity and therefore will see an increase in our book value as positions mature and the markets come back.

While we are not happy with these impairments, they are manageable ones due to the strength of our core operations. For the third quarter, we continue to see premium growth and operating earnings. For the first nine months of the year we have seen written premium grow in all of our segments.

Our small commercial business segment has grown through the acquisition of UBI and the offering of packaged policies along with expansion of our customer base. We continue to find new opportunities to grow this segment. We have recently entered into a strategic relationship with CardinalComp. CardinalComp currently writes over $150 million of workers' compensation, and we have become their exclusive writer of workers' compensation in New York State and others through United States as well. We believe this will add significant premium to AmTrust over the next 12 months. Additionally, we are seeing increasing opportunities related to the dislocations in the marketplace as some carriers are struggling for capital.

Our specialty risk and extended warranty segment continues to grow through the establishment of new programs, both in the United States and Europe. While some of our customer sales may have decreased due to the economic environment, we have grown our number of customers as they look at sell warranties and increase attachment rates as revenue generating product. This provides inroads for our businesses and allows them to offset impacts of their declining sales.

Our middle market program continues to do well and we are very (inaudible) pricing stability being restored in the marketplace. We are ready with our systems and infrastructure and personnel to take advantage of market changes to further grow this line. We believe that this segment will grow significantly in a hardening market.

During the third quarter, we recognized $10 million in after-tax debt redundancy. These redundancies are a testament to the Company’s continued focus on profitable underwriting, which together with diligent cost control, enables our excellent operations activity.

We are seeing some of our competitors pulling back from some areas due to capital constraints and we are taking advantage of these opportunities while at the same time maintaining our discipline in underwriting (inaudible).

AmTrust is very well capitalized, has a diversity of products, a multiplatform platform, and technology infrastructure and systems to take advantage of market opportunities. In the past several years AmTrust has completed several acquisitions and we have hired teams of business specialists. We believe that the current dislocation in certain areas of the insurance market will provide AmTrust with our multi-product platform, an even further opportunities for growing our stable book of business. It is precisely because of our strong operating activities and well capitalized position that we are able to take advantage of opportunities that are already presenting themselves.

In summary, we are very proud of our third quarter performance. In an economic climate that has seen unprecedented turmoil in financial markets and a challenging volatility in our own industry, we have emerged profitable, strong, and financially able to take advantage of opportunities we are currently seeing in the marketplace.

And with this, I’d like to turn it over to Ron Pipoly, our Chief Financial Officer, to give third quarter financial highlights. Thank you.

Ron Pipoly

Thank you, Barry, good morning. For the quarter, the Company generated operating earnings of $39.2 million, or $0.65 per share compared to $25.7 million, or $0.43 per share for the same period last year. On a year-to-date basis, operating earnings were $92.5 million, or $1.54 per share, compared to $61.5 million, or $1.03 per share.

We are pleased to announce that gross written premium for the nine months increased by $224 million, or 37.8%, from $593 million for 2007 to $817 million for 2008. The small commercial business segment grew by $69.4 million, or 29.5%, which was driven by $67.3 million of premium from the UBI acquisition. The specialty middle-market segment remained relatively flat compared to 2007 with a slight increase in gross written premium of $2.7 million, or 1.6%. The specialty risk and extended warranty segment grew by $151.9 million, or 78.5%. This was driven by the Company’s continued success in integrating the IGI acquisition as well as strong growth, both domestically and internationally.

For the third quarter, our gross written premium increased $88 million, or 45.5% from $193.3 million for the third quarter of 2007 to $281.2 million for third quarter of 2008. The small commercial business segment grew by $36.2 million, or 53.7%, which was driven by $35.8 million of premium from the UBI acquisition. The specialty middle-market segment, again, remained relatively flat compared to 2007 with a slight decrease in gross written premium of $2.4 million, or 4.8%. The specialty risk and extended warranty segment grew by $54.1 million, or 74.1%.

In terms of net written premium, we ceded $102.7 million of premium to Maiden during the third quarter of 2008, and, as a result, our net written premium for the quarter was $139.4 million. This compares to a negative $30.7 million for 2007 However, the 2007 number included a $190.8 million of ceded premium to Maiden, which included the one-time UEP transfer at the inception of the agreement.

On a year-to-date basis, we have ceded $290.9 million of premiums to Maiden, and, as a result, our net written premium for the first nine months of 2008 was $388.9 million. This compares to $293.4 million for the comparable period last year.

In terms of earned premium for the third quarter and as a result of ceding earned premium of $84.1 million to Maiden during the quarter, net earned premium was $92.3 million for the third quarter of 2008 compared to $81.8 million for the third quarter of 2007.

Net earned premium by segment without regard to the earned premium ceded to Maiden, was as follow for the third quarter – small commercial business was $68.3 million in 2008 compared to $68.9 million in 2007; specialty middle-market was $64.1 million in 2008 compared to $44.7 million in 2007; specialty risk and extended warranty was $44 million in 2008 compared to $30.4 million.

On a year-to-date basis, we’ve ceded $216.8 million of earned premium to Maiden and, as a result, we had net earned premium of $305.7 million compared to $330.9 million in 2007. Without the cession of earned premium to Maiden, earned premium of the first nine months would have been $552.5 million compared to $393.8 million for 2007. We earned $33.5 million of ceding commission revenue from Maiden during the quarter and $88.9 million for the first nine months of 2008.

The overall combined ratio for the third quarter was 58% compared to 74.6% for the third quarter of 2007. In terms of the components of our combined ratio, the loss ratio for the third quarter was 40.2% compared to 63.9% in the third quarter of 2007. And as Barry mentioned, during the quarter, the Company reduced its loss reserves related to prior accident years by $15 million on a pre-tax basis.

The expense ratio for the third quarter was 17.8% compared to 10.7% for the third quarter of 2007. Our expense ration on the third quarter of 2008 without effect of the Maiden ceding commission was 24.9%.

The combined for the third quarter for the small commercial business segment was 61%, which was made up of a loss ratio of 42%, and an expense ratio of 19%. The combined ratio for the third quarter of the specialty middle-market segment was 79.9%, which was made up of a loss ratio of 58.1% and an expense ratio of 21.7%. The combined ratio for the third quarter for the specialty risk and extended warranty was 38.5%, which was made up of a loss ratio of 24.85 and an expense ratio of 13.7%.

On a year-to-date combined ratio for the small commercial business was 72.4%, which was comprised of a loss ratio of 52% and an expense ratio of 20.4%. Year-to-date combined ratio for the specialty middle-market segment was 85.5%, which was comprised of a loss ratio of 60.8% and an expense ratio of 24.7%. The year-to-date combined ratio of the specialty risk and extended warranty segment was 64.8%, which was comprised of a loss ratio of 52.65 and an expense ratio of 12.3%.

On a year-to-date basis, net operating income for the year was $92.6 million, or $1.54 per share. Net income was $61.5 million, or $1.03 per share.

For the third quarter, our investment income was $15.4 million and after-tax realized losses were $29.8 million. For the year, our investment income was $43.1 million, and after-tax realized losses were $34.6 million.

Annualized return on equity on operating earnings for the nine months was 31.7%. On a year-to-date basis the Company has generated over $80 million in positive cash flow from operations. Total shareholders’ equity was $388.6 million, which represents a book value of $6.48 per share. We also paid a quarterly dividend of $0.05 per common share during the third quarter.

Total assets as of September 30th, 2008, were approximately $3.2 billion. Total invested assets were approximately $1.4 million [ph]. Fixed maturities comprised 65.7% of the portfolio. Cash and short-term investments comprised 30.1%; equity securities 3%; and other investments 1.2%.

And with that I will turn it back over to Hilly.

Hilly Gross

Thank you, Ron Pipoly, thank you Barry Zyskind. Both Barry and Ron have indicated their willingness to entertain questions from those of you in our listening audience. And so to facilitate your access to us so that you can formulate and ask your questions, I am going to turn it back momentarily to our central control who will outline to you the procedure for reaching us with your questions.

Question-and-Answer Session

Operator

Thank you, sir. Today question-and-answer session will be conducted electronically. (Operator instructions) And our first question comes from Bijan Moazami with FBR capital Markets.

Bijan Moazami – FBR Capital Markets

Good morning, everyone. Pretty impressive results. My first question is for you, Barry, if you can expand a little bit more about your growth initiative, should we expect the same – similar kind of growth rate that you’ve had historically in the warranty business or should we expect that more of your growth rate is generated from the P&C side and your relationship with Cardinal?

Barry Zyskind

It really depends on where we are. It really depends on the market environment and where we could take the advantages of the opportunities. As things calm, as the market shifts, the fact that we have a diverse platform allows us to move around and grow in different areas. So if you look at the last year, obviously, the growth was not coming from comp. We kept our pricing discipline very strong. But we had a lot of opportunities to warranty. Now we are seeing opportunities in comp, so we are going to go there. We are going to take opportunities there. We are still pushing to grow our warranty, but I would tell you that for – based on the CardinalComp relationship and some of the other things similarly trends we are seeing in the small comp – in the comp arena, we think that we’ll see significant growth coming in the comp now probably outpace the warranty for the next 12 to 18 months.

Bijan Moazami – FBR Capital Markets

Wonderful. Could you talk a little bit about your bond portfolio and what kind of securities you have in your corporate investment? Should we expect anything like the charges that you had with Lehman and Washington Mutual, going forward?

Barry Zyskind

I don’t believe so. I think the portfolio as it stands today is very solid. As we mentioned, half the portfolio is in the AAA MBS’, which are government-backed and then in the corporate portfolio the names that we are left with are names that we feel very, very comfortable with and we don’t see this situation again which happened with Lehman and WaMu. And we’ve taken steps – and if – from now and going forward we are not going to take a chance, meaning if you look at what happened the weekend before Lehman Brothers went out, the bonds were trading in the 70s, I don’t think the market thought that it would go out of business. But going forward, if we see those types of situations, we will sell them before it gets to the situation where we’d have to take an impairment.

Bijan Moazami – FBR Capital Markets

Thank you.

Operator

And our next question comes from Ken Billingsley with Signal Hill.

Kenneth Billingsley – Signal Hill Group

Hi, good morning. First, very impressive quarter. Just – I had a few questions, some from the balance sheet in general and then some on your comment that you made. First off, you said some competitors are pulling back in some lines and that’s running – could you talk about what you are seeing because you made a comment about opportunities in workers' comp, we’ve heard a lot of competitors talk about they expect rate increases and some price strengthening in ’09. No one is actually really personally been experiencing that outside of a few companies. What are you guys seeing and experiencing?

Barry Zyskind

I think when you look at – we play in the small comp arena and some of the small – some of the regional areas. Our competitors are typically they’re not going to be your national players. They are going to be typically small regional players. And for some reason, some the players who we know are pulling back, and we have suspicious reasons that we suspect that maybe they have capital constraints or they have reinsurance issues. We don’t exactly why, but we are clearly – or just they mis-priced their risk for a couple years. They were – some of these guys were aggressive. We are just seeing – and now the claims are coming in. So we are seeing, in the areas where we play especially on the workers' comp, we are seeing some opportunities. Again, remember, one of the big players in small comp even though they define small comp much larger than we, was AIG. And you are seeing a lot of producers that are nervous about AIG that are starting to shift business back into the marketplace. So, that has an effect on the entire market and people looking to place business in other markets. So I think the combination of what’s going on in the financial markets and some of our direct competitors having some financial problems, we are seeing opportunities, then we are seeing pullbacks in certain areas and we are taking advantage of it.

Kenneth Billingsley – Signal Hill Group

The Cardinal relationship you mentioned on the call of the $150 million, is that something that will be coming all to you or is that a percentage of that?

Barry Zyskind

Well, just so you understand, CardinalComp was an affiliate of First Cardinal. It’s a subsidiary of First Cardinal. First Cardinal was one of the largest and most profitable writers of workers' comp trust business in New York. And with the changes in law and the shutting down of a lot of the trusts, they control a lot of business. We are, I believe, their only market right now. We’ve entered into an exclusive relationship with the. I can't tell you we are going to see the whole $150 million. They are a very good underwriter, they have very good books of business for a long time. A lot of the businesses is exactly the type of business we like, which is small and low assets class. They also have other states of business that are not in the trust regular business that we are going to be writing now. So, we can't tell you exactly what the number is but there is a very big pool. We quote in a lot of the business. We are actively writing and underwriters are down there. We just view it is it’s almost a renewal rights opportunity where it’s just a great amount of business, and we are going to take and price it effectively and profitably. With the infrastructure and systems and economies of scale we have it just further strengthens our small comp division.

Kenneth Billingsley – Signal Hill Group

Okay. So you don’t have to take everything they send to you. You are able to pick and choose?

Barry Zyskind

Yes, of course we are underwriting it. We are underwriting it and if there is something that doesn’t fit or is not priced, we are not going to take it or we are not going to quote it.

Kenneth Billingsley – Signal Hill Group

Great. Where there any – can you talk about any changes, unrealized losses that were taken in the quarter that change in AOCI that we likely will see in the 10-Q?

Barry Zyskind

I am sorry, just ask the question again?

Kenneth Billingsley – Signal Hill Group

Just trying to get an idea of – it was booked – you had pretty strong earnings in the quarter but book value still went down from the prior – just the second quarter. Just what kind of changes may have occurred in the balance sheet to drive that?

Barry Zyskind

Yes, you are going to see that the corporate bonds obviously, the corporate bonds that we own, even though they are strong financially and they are going to mature at 100%, the mark-to-market in a lot of these bonds are just knocked around and I think September 30th, if you look at March 30th, it was a very bad quarter-end. June, a lot of it came back. So you saw book value growth. And in September I mean prices and bonds were just ridiculous. The lot of them I don’t think make sense, but it is what it is, and we’ve taken a very conservative approach where we have decided to mark-to-market every one of our bonds and that really – it’s a mark-to-market issue. We don’t believe it’s a credit issue, we don’t believe it’s – ultimately going to have effect on our book value, ultimately it will come back. It’s just a timing thing. We have to mark-to-market. So most of it is coming from just no liquidity in the bond market and the prices of bonds is going down.

Kenneth Billingsley – Signal Hill Group

And is that do you guys have a number now or do you need to wait for the Q for that?

Ron Pipoly

A number as it relates to the bond portfolio?

Kenneth Billingsley – Signal Hill Group

Yes. Really – any additional unrealized loss that flow in through AOCI.

Barry Zyskind

Oh yes, that is the difference. They are not growth – the difference in book value is not growing. It’s going to be related to that, which you will see in detail in the Q.

Kenneth Billingsley – Signal Hill Group

Okay. And then the last question I have is looking at the just loss and loss expense reserve line item for the third quarter, it was up about $184 million from the second quarter. Could you just talk about the – just – I may have missed something, but why it grew so quickly quarter-over-quarter given that there is only about $94 million of earned premium reported?

Barry Zyskind

One of the biggest factors in terms of the growth in loss and loss reserve, I think you see the corresponding increase on the balance sheet side would be as part of the UBI transaction with the four player carriers, along with that transaction we had picked up reinsurance recoverables associated with them of about $160 million. So again and that business is all reinsured with Trinity Universal, their former parent company, but again from a balance sheet presentation standpoint, we have to show the loss reserves grow. So we actually picked up $160 million of loss reserves, which is fully reinsured with Trinity Universal.

Kenneth Billingsley – Signal Hill Group

Okay. So, on the reinsurance recoverable line we’ll see that actually pick up?

Ron Pipoly

Yes you will, you will see it—

Kenneth Billingsley – Signal Hill Group

Okay.

Ron Pipoly

Increase.

Kenneth Billingsley – Signal Hill Group

Great. Thank you. Those are my questions. Congratulations on the quarter.

Barry Zyskind

Thank you.

Operator

And next we’ll hear from Dan Schlemmer with Fox-Pitt Kelton.

Dan Schlemmer – Fox-Pitt Kelton

Yes, hi good morning. Yes congratulations on a real nice quarter. Starting off, I have a – hate to get too granular on the details, but I just have one question, I want to make sure I understand just in terms of the actual numbers in the model. The ceding commission, the 37.116, how much of that is the earn out of the commission on the unearned premium related to the Unitrin, Maiden transaction that sort of passed through, both this quarter and forward looking. Is that a significant part of the $37 million ceding commission and will it be a significant amount going forward?

Ron Pipoly

Dan, this is Ron. In terms of the ceding commission, just to put a flavor on the $37 million of ceding commission revenue for the quarter, about $34 million of that related to a ceding commission from Maiden and I would need to get back with you in terms of really down to that granular level of how much of that $34 million related to the initial unearned premium transfer that we took as part of the UBI transaction.

Dan Schlemmer – Fox-Pitt Kelton

That is – that does still impact you this quarter and like the next two quarters. That will be – that will continue to flow through in the ceding commission line as you earn that out, right?

Ron Pipoly

Certainly, yes.

Dan Schlemmer – Fox-Pitt Kelton

Yes, okay. Question on then I guess just looking out at the market for acquisitions and other opportunities, I guess CardinalComp is not an acquisition but a similar structure, renewal right, as you phrase it. What do you see as the opportunities out there and in particular do you see – would you be comfortable taking up maybe some of the companies we’ve seen out there that have started to get into trouble on the balance sheet or what is your appetite for a company that has that kind of a problem.

Barry Zyskind

I’ll tell you, we’ve historically, Dan, always shied away from balance sheet. That being said, we do have now a diverse product spread where – we are in historically –when we did acquisitions in comp and we got economies of scale. Now with the Unitrin acquisition, we – and the systems and technology that we put forward and really built that infrastructure, we could expand what kind of acquisitions we can look for. We can look for small commercial lines. So we are not only in the comps. Same thing on the program side. That being said, of course, when there is opportunities, and we think there are going to be opportunities in the next couple of years because exactly what you are saying are balance sheet issues. We will look to do the transaction that makes the most sense, that’s most accretive, that has the least execution risk and the least risk of balance sheet. However, there may be some circumstances where if we can get very comfortable with the balance sheet, we will look at it. Case in point, we’ve – when we did the Florida transaction that was a company that had – it was a one-state company, a one product. We have been doing business with them for several years. We were able to get comfortable with the balance sheet. So it’s really depending on how comfortable we can get with the balance sheet. If we could get comfortable and there is a great opportunity, we’ll go for it. And if we can do a transaction without seeing the balance sheet, of course that’s our first – our first line is to do something without a balance sheet. But in some cases we will take a balance sheet if it makes sense.

Dan Schlemmer – Fox-Pitt Kelton

Okay, great, thanks. Sort of switching gears, the warranty business, which is –continues to see pretty phenomenal growth and you already had a question on it, but I am just curious if you track that in – in retailer parlance I guess you would be talking about same-store sales versus new stores. Similarly, as you add new vendors you are working with versus the recurrence, what are you seeing there and is the economy taking a toll on the “same-store sales” portion of that?

Barry Zyskind

Yes, it’s a good question. You are seeing same-store sales declining. You are seeing – however, some of that is offset – we mentioned this before, where – and we speak to some of our retailer clients. Some of them in these tough economic environment they tend to push the warranty much harder. When things are very fluid and it’s showing a lot of product and is showing a lot of big ticket items they don’t focus, Dan, much on the warranty. Some of the smart ones do obviously. And then when things slow down and they realize that they are going to see three TVs this week instead of 10, they try to sell a warranty on everyone, because they – that way just to get sales up of course at a good margin. So some of the same-store decline that you are seeing is being offset by more aggressive selling of warranties and actually the other thing is Dan, the consumer is much more conservative. So the consumer that isn’t buying in this environment wants to protect their assets. Insurance is something that they are concerned with. They want to make sure that this product they are spending on that it will be protected if something were to happen. So you have some other forces going against you and that – so it’s pretty stable even though the decline that we are seeing is not as much as you will see in the overall decline of the customers. And then putting on new real estate meaning new customers, new clients, which we are doing, we have more clients that historically may be did not sell warranties, they are now are willing to look at it. And we – that’s something of a growth opportunity. So when you add it all together, we still feel very good about the product line.

Dan Schlemmer – Fox-Pitt Kelton

Great, thanks. And last question, can you just give us an update on the Unitrin acquisition and specifically just the – it was $160 million being brought over and you thought you could capture a pretty substantial portion of that. Now that we are almost six months in, I guess, are you seeing pretty good conversion? Are you having any troubles of brining that over? And then sort of follow-on to that, is that – with your comps that you can offer that Unitrin mostly did not, are you finding opportunities to expand through the channels of the Unitrin agent relationships.

Barry Zyskind

Yes, the answer to your question is the acquisition is going well. We fully have put them on our systems and we did the transition and the transition has been done very well. And we are doing a very good job in transitioning the business. As expected I would say things are going very well. And we feel very good about the business.

And the second part of your question, we are already doing that and we are seeing the opportunities and we are starting to see momentum on that where like you said they were very shy about writing comp, they didn’t have the expertise, and they really only wrote comp when they had to. And now that it’s part of AmTrust and it’s a core business line for us, comp, we are going out and we’ve already began the process and we are already writing business. So we are adding comp to the mix and we are having a good distribution effect. So we are taking some of their products we decided to take out in some of our areas where we have a strong distribution. States like Georgia, like Pennsylvania, and vice versa. We are hitting them up, a lot of their agents (inaudible) not offer monocline comp or even when they offer the package (inaudible) offer, comp pushed on top of that. So, that’s going to be a nice pickup for us, and we feel good about that.

Dan Schlemmer – Fox-Pitt Kelton

Great. Thank you. Great quarter. Congrats again.

Barry Zyskind

Thank you.

Operator

And next we’ll hear from Adam Klauber with Fox-Pitt.

Adam Klauber – Fox-Pitt Kelton

Good morning.

Barry Zyskind

Good morning, Adam.

Ron Pipoly

Good morning.

Adam Klauber – Fox-Pitt Kelton

Are you or do you see potential to benefit from AIG? Obviously, they’ve got very big comp books. They also have decent size warranty book. They also have a fair amount of niches and there are teams of people who are beginning to walk away from AIG. So, are you seeing any potential there?

Barry Zyskind

Clearly, there is potential. There is potential in comp, there is potential in warranty. Obviously, no one is happy to see what has happened to AIG. It’s not a happy thing when a company who everyone viewed as a leader in the industry, having a financial difficulty. That being said, there are opportunities and as always AmTrust pursues the opportunities that we feel are accretive and make a lot of sense.

Adam Klauber – Fox-Pitt Kelton

Okay, okay. And also from a – capital usage, obviously, you have opportunities as we’ve been discussing. What’s the potential for a buyback?

Barry Zyskind

At this time, and this time in the market when you look at the potential for increasing capital and where the capital markets are I would say that we see the greater use of capital right now especially with the returns on equity that we are able to do and the opportunities we are seeing in the marketplace would be to keep the capital to support the business and buying – buyback stock at this point, which may be a short term – will increase earnings per share and book value, but the opposite is when you do see an opportunity, for example, like a CardinalComp, or your question about an AIG, you don’t want to be in a position where then you have to go back to the market and not only did you take back capital, but you can't raise capital. So I would say at this point in the marketplace we are going to hold on to our capital and we’re going to put it to use. If things change and the markets become more stable and more fluid and we feel we have much more access to capital, and of course things can change. But right now at this point we are going to hold to capital and put it to use.

Adam Klauber – Fox-Pitt Kelton

Okay. Thank you very much.

Barry Zyskind

Thank you.

Operator

That does conclude our question-and-answer session. Mr. Gross, I would like to turn the call back over to you for any additional or closing remarks.

Hilly Gross

Thank you very much. We just want to thank everybody for joining us this morning in our third quarter conference call. And on behalf of all of us in AmTrust we thank you for your continued interest. Have a wonderful day.

Operator

Thank you, sir. That does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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Source: AmTrust Financial Services, Inc. Q3 2008 Earnings Call Transcript

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