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AmTrust Financial Services, Inc. (NASDAQ:AFSI)

Q4 2012 Results Earnings Call

February 14, 2013 9:00 AM ET

Executives

Hilly Gross - Vice President, Investor Relations

Barry Zyskind - President and CEO

Ron Pipoly - Chief Financial Officer

Michael Saxon - Chief Operating Officer

Beth Malone - Senior Vice President, IR and Corporate Development

Analysts

Matt Carletti - JMP Securities

Adam Klauber - William Blair

Mark Hughes - SunTrust

Amit Kumar - Macquarie

Operator

Good day, ladies and gentlemen. And welcome to the AmTrust Financial Fourth Quarter and Full Year 2012 Earnings Conference Call. As a reminder, this call is being recorded.

I would like to introduce your host for today’s conference, Hilly Gross, Vice President of Investor Relations for AmTrust. You may begin.

Hilly Gross

Thank you. Good morning. And again thank you everyone for taking the time out to join us with this our fourth quarter earnings and end of year 2012 conference call at AmTrust. With me this morning are Mr. Barry Zyskind, President and CEO of AmTrust; and Mr. Ron Pipoly, Chief Financial Officer of AmTrust. And always it is a pleasure to acknowledge the presence of Mr. Michael Saxon, Chief Operating Officer of AmTrust, as well as Ms. Beth Malone, Senior Vice President of Investor Relations and Corporate Development.

Before I call on Mr. Zyskind and Mr. Pipoly to give you their review and analysis of these fourth quarter and full year 2012 results, I would with your indulgence read into the record the obligatory paragraph on forward-looking statements.

Since members of our management team may include in today’s presentation statements other than historical facts. These statements include the plans and objectives of management for future operations including those relating to future growth of the company’s business activities and availabilities of funds, and are based on current expectation and involve assumptions that are difficult or impossible to predict accurately, many of which are beyond the control. There can be no assurance that actual developments will be consistent with these assumptions.

Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties including the factors set forth in our filings with the Securities and Exchange Commission.

The projections and statements in this presentation speak only as the date of this presentation and we undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise except as may be required by law.

Finally, in the prepared remarks and responses to questions during today’s presentation, our management will refer to financial measures that are not derived from generally accepted accounting principles, or is as known GAAP.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information is provided in the press release for the fourth quarter 2012 which is available on the Investor Relations section of our website at www.amtrustgroup.com, repeat, www.amtrustgroup.com.

Having dispensed with the legal niceties, it is now my pleasure to introduce to you Mr. Barry Zyskind, President and CEO of AmTrust Financial. Barry?

Barry Zyskind

Thank you, Hilly. Good morning. I’m very pleased to announce a very strong quarter AmTrust having the fourth quarter of 2012. We are seeing tremendous growth in the workers’ compensation market and we are taking full advantage of those opportunities.

We’ve been growing in all of our states. We’ve been seeing an increase of submissions, an increase of biding a business, we’re targeting the classes that we want and we are getting to the rates that we want.

Some of our competitors have had issues for not being as disciplined as we believe we were the last couple of years and that’s allowing us to have tremendous opportunities in the workers’ comp market. This momentum has continued into the New Year. Our January has been very, very strong as well. We are growing in all states, especially in California.

Our workers’ compensation increased in the month of January rose 69%. This is the first time that our company is entering the hard market as an established market player, when the last market came around hard market we were just beginning to establish ourselves as the company.

But now we are very well positioned to grow in many of the lines that we play in, niche lines, very discipline, very conservative and we are continuing to grow our business very, very strongly.

Our Specialty Risk and Extended Warranty, we are starting to see a lot of opportunities that we didn’t see in the past. The acquisition of Warrantech which is now few years is really starting to bear fruits. We have tremendous momentum. We have a lot of opportunities to grow that business.

As you know, we’ve always been an underwriter in Europe and in recent we announced the acquisition of Car Care Plan. Car Care Plan is expected to close at the end of this month and we believe that will allow us to continue growing in Europe as well in South America and in the Asia market because of the opportunities that Car Care Plan currently has in Brazil and in China.

We continue to believe that Specialty Risk and Extended Warranty is a very strong diversification platform for our small workers’ comp, as it’s a very short-term nature. It’s a very niche business. We are also seeing tremendous opportunities in our Program Business.

As you know, we’ve been -- we announced over the last few months several acquisitions. The acquisition of First Nonprofit we hope to close the second part of the acquisition of the insurance company through a successful demutualization which should take place sometime in the second quarter of 2013. We’ve announced acquisition of Sequoia, which is a California regional writer.

Both these companies are exactly the type of companies we like to acquire. They have low hazard types of business, very niche, have been around for long time, have good underwriters, have a good focus, have a good following in the market and they are exactly the type of deals that fit right into the AmTrust model.

Both of them have historically good loss ratios and if you look at their financials, most of these is rounded is expense ratio which we believe with the AmTrust infrastructure we’ll be able to lower this expense ratios dramatically and turn both those businesses into high return business, while expanding our product base and having key niche businesses to continue expanding in.

Our pipeline for acquisitions is very strong. The pipeline is the strongest we’ve seen since our founding. We continue to be very excited about what’s taking place in the market. We believe that we will see a lot of growth at AmTrust in ‘13 and ‘14 from the combination of both organic growth, as well as disciplined acquisitions that fit in the lines of business we like doing.

Our balance sheet, we continue to be very conservative and discipline in our investing, and we will continue that way, not taking too much risk on the asset side, as well as making sure the duration is a short enough duration that when and if interest rates start rising we are in a very well-positioned environment.

With closing, I would just like to say, we think we have a very, very strong business model. We continue to grow, at the same time, we are growing in lines of business that we have experienced in. We are taking advantage of the opportunities that are presenting themselves to us both in terms of organic growth and in acquisitions.

We also are continuing to leverage down our expense ratio and that’s something that we think will continue to allow us to have a high return on equity and you can also see from our financials that we’ve significantly grown our fee business, which is a big portion of AmTrust, something that’s continuing to grow.

We are looking to do acquisitions and we are looking to grow it organically and we think that’s a very nice hedge to the underwriting business and again, that allows us to have a very strong return on equity. So we look forward to 2013 with a lot of confidence and excitement.

And with that, I’d like to return -- turn it over to Ron Pipoly.

Ron Pipoly

Thank you, Barry. Good morning. Unless otherwise noted, my comments this morning will revolve around a discussion of our results this quarter compared with the fourth quarter of last year.

We produced gross written premium of 774 million in the fourth quarter, which represents a 31.9% increase over the fourth quarter of 2011. For full year 2012, gross written premiums totaled 2.5 billion, an increase of 600 million or 27.8% over full year 2011.

This topline results reflect growth in all of our operating segments for both the fourth quarter, as well as the entire year. The growth in gross written premium is a reflection of our diversified business model, which allows us to take advantage of market conditions as they present themselves.

For the quarter, we generated net income of $55.3 million or $0.79 per diluted share and operating earnings of $53.2 million or $0.77 per diluted share. For the quarter, we realized a gain of approximately $4.9 million or $0.07 per diluted share related to our investment in life settlement contracts. During the quarter, we experienced one mortality event.

Earnings per share amounts were affected by the 10% dividend that was declared in August of 2012. And for the full year we generated net income of $178 million or $2.57 per diluted share and operating earnings of $190.9 million or $2.77 per diluted share.

For the year we realized a gain of approximately $6.5 million or $0.10 per diluted share related to our investment in life settlement contracts. During the year we experienced three mortality events.

Annualized return on equity from operating income was 19.3% during the quarter and 18.8% for the year. In terms of premium by segment, our small commercial business results continued to reflect the improving pricing environment, as well as increasing policy counts on year-over-year and quarter-over-quarter basis.

Gross written premium for the quarter increased by $95 million or 63.5% to $244 million. The increase was driven primarily by our expansion in California, as well as strong growth in both Florida and New York.

Specialty Risk and Extended Warranty produced gross written premium of $352 million, up $45 million or nearly 14.6% from the fourth quarter of last year. Growth within this segment are continuous be driven both domestically and internationally. For the quarter, 85% of our gross written premium in this segment was derived from international operations. This percentage is consistent with prior years.

Specialty Program had gross written premium of $150 million, which grew by $44 million or 42% when compared to 2011. We recorded $29 million in gross written premium in our Personal Lines Reinsurance segment, which is an increase over 12.12% for fourth quarter of 2011.

For the year, our gross written premium increased by $600 million or 27.8% from $2.15 billion to $2.75 billion. Small commercial business increased by $323.9 million or 53.1%. Specialty Program increased by $198 million or 51.6%. And Specialty Risk and Extended Warranty increased by $62 million or 55.9%.

Our net written premium for the quarter rose $413 million, compared to $345 million for the fourth quarter of 2011. Premiums ceded included approximately $270 million to Maiden.

For the year, our net written premium totaled $1.64 billion and we ceded $847 million to Maiden. We produced net earn premium of $383 million for the quarter, up 28% from the fourth quarter of last year.

Specialty Risk and Extended Warranty accounted for 39% of the net earned premium, small commercial business accounted for 28%, Specialty Program 26% and Personal Lines Reinsurance was 7%.

For the quarter, we exceed, we ceded approximately $215 million of earned premium to Maiden. For the 12 months, net earned premium is $1.42 billion, which is an increase of 36.8% from 2011. We ceded $730 million to Maiden.

As Barry mentioned, our service fee, our revenue continues to be very strong and for the quarter it totaled $54.1 million, increased of approximately $23.9 million from the prior year quarter.

The increase on a quarterly basis was driven by the 2012 acquisition of Case New Holland insurance agencies which accounted for $5.4 million and increase in AMT warrant fee income of $5.6, as well as an increase of assigned risk fee income of $2.4 million.

Service and fee revenue totaled $172.2 million for 2012, compared to $108.6 million in 2011. The largest drivers of the increase for full year 2012 were the acquisition of Case New Holland insurance agencies, which totaled $9.8 million, BTIS which was acquired in December of 2011 totaled $16 million of fee income, assigned risk fee revenue increased by $8.5 million and $10.7 million related to the licensing fee revenue associated with implementation of ACAC’s operating platform.

We generated $19.5 million investment income for the quarter and recognized $3.4 million after tax net realized gain. For the year, we generated a total of $77.5 million of investment income and had after tax net realized gains of $5.8 million. The yield on the investment portfolio at December 31st was 3.9% and the duration on the portfolio remains relatively slow at 4.7 years.

Our total revenues grew by 34% for the fourth quarter -- from the fourth quarter of 2011 and for the year, our total revenues grew by 34.7%.

Our combined ratio came in at 90.1% for the quarter, compared to 89% last year. The loss ratio totaled 66.6%, compared to 64.9% for the same period last year and for 2012 the combined ratio was 89.5%, compared to 89% for 2011. The loss ratio for fully year 2012 was 65%, compared to 65.4% for 2011.

Our expense ratio for the quarter was 23.5%, compared with 21.4% in the fourth quarter of 2011. For the full year, our expense ratio was 24.4%, compared to 23.6% for 2011. The company paid $0.10 dividend during the fourth quarter and $0.39 for the year.

Annual -- total shareholders equity was $1.14 billion, an increase of $253 million from year end 2011, book value was $17.03 a share, up $3.56 per share from a year ago. Total assets as of December 31st were approximately $7.4 billion and included total invested assets of $2.7 billion.

Fixed maturities comprised 76% of the portfolio, cash and short-term investments 18%, equity securities 1% and other investments 5%, and the within the other investment category is our investment in ACAC. Our cash flow for the year for operations was approximately $500 million for full year and $120 million for the fourth quarter.

And with that, I will turn it back to Hilly. Thank you.

Hilly Gross

Thank you, Ron, and thank you, Barry. Both Mr. Zyskind and Mr. Pipoly have indicated their willingness to entertain questions from those of you in our conference call audience. To facilitate your access to us to ask those questions, I’m going to momentarily turn it back to our moderator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Matt Carletti of JMP Securities. Your line is open.

Matt Carletti - JMP Securities

Thanks. Just had a couple questions on some of the loss ratios, specifically, one, were there any material adverse or favorable movements in the quarter in any of the segments and then secondly, the Specialty Risk and Extended Warranty took a little step up in the quarter. For the year, it moved on little more than a point. There is some mix of business there or was there something else going on?

Ron Pipoly

Hey, Matt. It’s Ron. To answer the first part of your question related to any either favorable or adverse development during the quarter of the year, no, we did not have anything substance.

In terms of the second part of your question related to the movement in the loss ratio on the Specialty Risk and Extended Warranty segment, really the change in the quarter from a loss ratio perspective wasn’t necessarily business mix driven. It was more assessing where we saw it exiting the year 2012 from an Italian med mal perspective would come in and we move that loss ratio up slightly during the fourth quarter related to the current exiting year. So that was reflected more in -- obviously the quarterly loss ratios and as you can see for the year, we are obviously down year-over-year from a segment or loss ratio.

Matt Carletti - JMP Securities

Okay. I mean, along those lines, could you maybe give us an update just on what you are seeing in Italian med mal that caused you a little bit of caution and then just more broadly, has the competitive environment changed at all?

Barry Zyskind

Yeah. This is Barry, Matt. I still think we feel very good about the medical map in Italy. As I mentioned on previous calls, we have a book around, probably around €200 million and it’s being staying flat. We have a pretty big percentage of the market right now. Competition is sporadic. You will have some people come in at times and people leave, but overall pricing has stayed really at the levels that we feel very, very comfortable.

And I think our answering the question of putting increasing loss ratios more just to be conservative. There is a long tail nature to the line and we want to be in a position where we are conservative about it and hopefully have positive things coming in the future. But even where we have in place now, it’s a very profitable line for us and it’s a very high return business.

And again, as I mentioned in some of the other calls, in overdoing different than other people as they are, we are doing the claims ourselves. We have our own people on the ground. At this point in the game, we have all the claims under our control. We know what’s going on. We are reserving it ourselves and I think some of the issues in that line, historically besides the pricing obviously.

In terms of conditions, it was really people outsourcing the claims and that’s something we believe and very strongly that you have to manage our claims, need long-term lines and you put up the reserve that you feel very good about and make sure you are in a very, very strong position from a reserving standpoint.

Matt Carletti - JMP Securities

Great. Well, thank you for the answers and congrats on a very successful quarter and year.

Barry Zyskind

Thank you.

Operator

Thank you. Our next question is from Adam Klauber of William Blair. Your line is open.

Adam Klauber - William Blair

Hi, everyone. Couple of questions. Obviously, nice growth in the workers’ comp of the business, at what rate, are you getting on the existing book of business?

Ron Pipoly

And what we will offer for a year and a quarter is pretty reflective. At an, overall workers’ comp book of business, we are getting around 46% but in our largest states, we have experienced our largest average rate increases. California for the year is still hanging slightly above 18% where the fourth quarter was a little bit higher than that. New York is still around an 8.3%, increase in Florida was an 8.1% increase.

So really from a workers’ comp perspective, you will remember that we’ve talked about on previous calls has continued. I mean, we are seeing very strong growth in policy account and seeing the rates increase.

Barry Zyskind

And just add to what, Ron, is saying, I think when you take California for example, we are going to be going into now ‘13 with rate-on-rate increases. So, ‘12 was 18%, 19% but ‘11, we already taking rates up 8% or 9% and now you go into ‘13 and we believe that we still have to take rates in the category of 12%, 13%, maybe 14%, 15%. So now you are starting to really get to a point where you are getting rates on top of rates and we are getting the classes of business that we want. We are targeting them. So there is just a lot of opportunities in the market.

And the other thing that we are seeing that demonstrates the hardening of the markets, especially in workers’ comp is you are seeing an increase on renewal rates across all lines in all states and that’s really telling you, that’s a very good indication of that. There’s not other carriers out there, brokers, I want to make sure that their existing carry is going to stay with them.

So we are just seeing. New Hampshire is improving. You see it by increased submissions. You see it by increased buy submission. You see it by increased renewal rates. You are seeing it by getting rates on top of rates. You see some of the more business that you wanted in the past that you had to chase. On lower hazard, you are seeing more of it coming on its own as well. We also assigned risk carrier and we are seeing very, very strong growth in the states that we managed the assigned risk, so we have a participation.

And that’s really an indication of a hard market. When the market gets soft, those assigned risk businesses start to deplete and when the market gets hard those harder deplete risks cannot find a home and they end up going to assigned risk. So, and I think you are reading this from the market. There is no question about it that workers’ comp is something that’s going into right direction and we are seeing it as well from a loss ratio standpoint, fourth quarter was very strong and we are going to see it, hopefully, very nicely into ‘13 and ‘14.

Adam Klauber - William Blair

Thanks. And that was actually one of my questions. I mean, we’ve heard a lot of indications from markets doing better. But the assigned risk is always an interesting data point. What would you see, what would you say your growth in 2012 was in the states that you administer in the assigned risk pool in 2012 versus 2011?

Ron Pipoly

In the same states, our growth rate was about 50% in the same states and then obviously we experienced growth overall because we had three additional states in 2012.

Adam Klauber - William Blair

Right. It was still pretty significant.

Ron Pipoly

From a January perspective, I can certainly say that the January 2013 assigned risk premium was higher than the January 2012 assigned risk premium and obviously you have to remove because we know our service security in our two additional states. But if you look at states comparisons, it’s up again in 2013 or at least the first month.

Adam Klauber - William Blair

Okay. Also, Barry, you mentioned that the loss outlook is maybe looking better. At what point in the workers’ comp book, can we see accident years on the book begin to get better. Is that possible in 2013?

Barry Zyskind

Yeah. Adam, from an interest perspective, we continue to do the same things from reserve analysis. I mean, we are encouraged with what we see with movements in prior year’s reserves. I can tell you that 2013 is the year, but we are certainly encouraged by what we see relative to 2011, 2010 exiting years and how those things are developing? So we’ll just have to continue to have monthly meetings and look at the trends. And if we get comfortable, we may be able to make whatever necessary adjustments are but we will continue to monitor that.

Ron Pipoly

I think also in 2012, we already had a lot of rate increase from latter part of ‘11 coming in and the rates of ‘12 increasing. And also one of the things for hardening market for us, the opportunity is some of the package writers stop writing the lower hazard risk, there is stuff throwing it in. Some players get out of the market. So you have two things going on.

One, you have an increase in pricing but also for us, we are getting a bigger percentage of the lower hazard risk that we like. The combination of those two things allows us to have a lower loss ratio. And clearly from a workers’ comp standpoint, 2012 is tracking better than ‘10 and ‘11 and is closer to 2009. So we are seeing. We are already seeing the improvement in the loss ratio.

Adam Klauber - William Blair

Okay. That’s good to hear. In the specialty risk segment, fourth quarter, you actually had better growth on a gross premium basis than we’ve seen all year. Is that some new business coming in or is that just greater sales on existing accounts?

Ron Pipoly

I think it’s a combination of both really. I mean, it has some growth on existing programs within Europe, new accounts, new policy accounts. And then in the U.S., I mean, obviously I think we saw existing accounts selling more extended warranties in the fourth quarter. I mean, it was strong quarter for premium product for that segment overall. And obviously I think the increase in AMT Warranty, fee income is effective. We are writing more extended warranty and big service contracts here in the U.S.

Barry Zyskind

Yeah. I think, again, in that business segment you got two things going on. We are doing a very good job at keeping our renewals and we are doing a very good job at aggressively growing new accounts and you have existing accounts. For example, in the auto business, this year it was the star. The auto business grew -- you see by new car sales growing, so that added a lot of momentum.

So maybe in some of the consumer electronics where business may have been was flat or decreasing in some segments in the auto business we saw a lot of growth. So that’s a well balanced book but it’s really a combination like, Ron, said of new accounts, renewals, sticking the renewals, sticking with the renewals and current accounts growing and we are seeing very nice growth in the auto industry as well.

Adam Klauber - William Blair

Okay. So, there weren’t any big lumps because sometimes if client comes in and it can be a little lumpy. There wasn’t any big lumps.

Ron Pipoly

There was a, Michael, one time where we had to go over portfolio like we’ve done in the past or had those opportunities.

Adam Klauber - William Blair

Okay. Great. And on the fee-based revenue or fee based years, we are seeing nice growth and with some of the acquisition that should continue into next year. How should we think about the profit margins on the fee-based income -- fee-based revenue?

Ron Pipoly

When we look at fee business, we look at it, certainly like a pre-tax like an EBITDA. Obviously because that’s how we look at the fee business because you are buying things, you have goodwill. You are creating some intangible assets. So, we look at an EBITDA margin and really we believe it’s somewhere between 25% and 30% is the gross margin from an EBITDA standpoint. And that’s something that we continue to grow. We feel very good about it. We think it’s a good diversification.

Remember, we are not going into the fee businesses because that’s unrelated. For example, the First Nonprofit acquisition, we bought the fee business that services a certain fee product for the non-profits and it’s a first cousin to selling the insurance that we are going to be selling when we close on the acquisition of the insurance company with - hopefully with the right approvals.

So the same thing over here, we have fee business now where we are clipping more than $1 billion a month on the ACAC. So that’s something. It’s an IT platform. We have the BTIS, that’s a wholesaler. We did that acquisition and we are growing that business. It’s a fee business but again, we are a significant underwriter there. And that’s really and of course on the warranty business you have the -- Warrantech, which were the underwriter. We have a Case New Holland, which were the underwriter and we have the fee business. Car Care Plan is going to have a free component to it.

So, I think we believe that long-term, we want the growth in the fee business to be very similar to the growth in the premium business. So we think that a real balanced portfolio for us should be constant growth of fee business, constant growth of the premium where we have the opportunities and really that allows us to have -- first of all, significant cash flows -- free cash flows that will allow us to service debt and take dividends and use for acquisitions as well as enhancing the return on equity.

Adam Klauber - William Blair

Okay. Well. Great. Thanks very much.

Operator

Thank you. Our next question is from Mark Hughes of SunTrust. Your line is open.

Mark Hughes - SunTrust

Good morning.

Ron Pipoly

Good morning.

Mark Hughes - SunTrust

Could you give us the quick sketch of where you will be post these deals in terms of underwriting leverage and debt, and then what’s your comfort is with adding either new premium or new debt?

Ron Pipoly

From a leverage perspective, Mark, this is Ron. Like I said, we finished the year at net written premium about $1.64 billion and total shareholders equity of about $1.14 billion. But then -- so we are certainly very comfortable with where we are at when we look at from a total capitalization perspective and how that’s translates into whether it’s an reserve analysis and the B car ratio. So we are certainly very comfortable with where we are at because we think from a leverage perspective when you look at it from a B car perspective, we are right around 1.1., 1.5, 1.21 on a net written premium basis to total capitalization.

And obviously, we are able to increase book value this year by approximately $250 million and with ROEs that are in the high teens, we certainly generated significant amount of capital. And while we’ve certainly been very inquisitive and announced several transactions, we certainly feel that we have the powder to absorb the premiums associated with those transactions.

But, again, how we are structured from a capital standpoint and acquisition is something that we always talk about. But we are very comfortable with what our position is right now.

Mark Hughes - SunTrust

Right.

Barry Zyskind

And from a debt standpoint, we think we have capacity both on our lines and also if we were to have significant more acquisitions, significant more growth. As Ron said, we have a lot -- we’re creating a lot of capital on the returns on equity that we have. But we also have, as we’re building the capital base, we have opportunities to increase our debt structure. Right now, our debt equity is at a level that we believe we have significant more capacity on a debt level as well.

Mark Hughes - SunTrust

How about -- we really got specialty risk business, you talked about some of the drivers on the loss ratio. When we think about the kind of loss picks as we start here at 2013, is it going to be more like the fourth quarter number or the full year loss?

Ron Pipoly

Actually, I think it’s kind of combination of the two. I mean, for the quarter we were at 66.8, for the year, we are at 63 at the end of day. I would say looking at it on a go-forward basis, it’s kind of split the difference of around 65.

Mark Hughes - SunTrust

Okay.

Barry Zyskind

I think it’s important to know that specialty risk and extended warranty tends to always have a higher loss ratio because a lot of the programs, you don’t have fees and commissions associated with it. So we tend to look at it more on a combined ratio rather than looking at it, just from a pure loss ratio. I mean, we watched the loss ratio very carefully but that’s one line of business that we think has to be really looked at from a combined ratio.

Mark Hughes - SunTrust

If you look at that, you share a 69% number in the workers’ comp for January, also gave us some good pricing measures. How much of that 69% would be organic either new exposures or pricing?

Ron Pipoly

Mark, based on the preliminary policy accounts business, we have and then looking at the rates for January of the growth that Barry mentioned. About 60% of it is being driven by policy account increase and then 40% through rate. And then you’re also seeing within that, some slight expansion of the payroll as well. So that’s obviously encouraging.

Barry Zyskind

As well as increased renewed retentions. So historically, we were at 81 or 82 renewal. Now, we are keeping 87, 88, suddenly you are writing and you are writing more new business, you’re going to see a lot of growth coming.

Mark Hughes - SunTrust

Okay. Great. Thank you.

Operator

Thank you. Our next question is from the line of Randy Binner of FBR. Your line is open.

Unidentified Analyst

Thanks. Good morning. This is [Dan Altron] for Randy. I think the last time we spoke, we talked about, maybe about $100 million of capital capacity available for acquisitions and that was, I think, taken into account, the Car Care acquisition but -- now with first non-profit and Sequoia looking to close pretty soon. How do you think about that going forward and how much excess capital you think you’re generating annually?

Ron Pipoly

Hi Dan, it’s Ron. We talked about the $100 million. I guess, at the end of the day, that was kind of a rough estimate but at the end of the day, when you look at what we’re going to -- the purchase price of Sequoia in the first non-profit insurance part of that overall de-neutralization.

We still certainly feel that we have additional capacity for acquisitions without doing anything additionally. But as Barry said, it’s a very strong pipeline and we look to do transactions that make sense that we can get the right price that are going to be immediately accretive.

So it is and I feel that number is being completely exhausted and we certainly have the ability to go out and continue to do acquisitions as long as they make sense and meet our kind of hurdle rates in terms of how it’s going to be accretive to the organization overall.

Unidentified Analyst

Okay. And then a follow-up on the fee income and this obviously was a really strong quarter for about $54 million. I know there can be some seasonality in the business but on a go-forward basis, do you think $54 million is the right kind of quarterly run rate then you saw on top of their $30 million annually for Car Care, maybe another $15 million for first non-profit and then what other type of organic growth comes out of there?

Ron Pipoly

I do think that in fact given the -- as you mentioned, the $54 million is a good run rate. And then we need to factor in the issue, mention the acquisitions of Car Care and then the December acquisition of first non-profit companies.

Unidentified Analyst

Okay. So I mean, we can be looking at a pretty healthy -- as they increase towards next year, maybe like in the 230-ish range give or take?

Ron Pipoly

Yeah.

Unidentified Analyst

Perfect. And then just one quick follow-up on California workers’ comp, can you give us what your accident year loss ratio for ‘12 was, particularly for California?

Ron Pipoly

Yeah. Actually in 2012, I mean, we haven’t really deviated too much. I think we talked about this, maybe, in the second quarter call. For accident year 2012, we’re still coming up with a loss pick of around 70, 71.

Unidentified Analyst

Okay. Great. Thanks so much.

Operator

Thank you. Our next question is from the line of Amit Kumar of Macquarie. Your line is open.

Amit Kumar - Macquarie

Good morning. A few follow-ups on the prior questions. First of all just going back to the discussion on your pipeline for acquisitions. You said it’s very strong. When you look at your level of premiums and then as you, sort of, look forward and then you, sort of, look at your platform, in your mind, what would be, sort of, the optimal premium number for your company?

Ron Pipoly

From -- an optimal premium number for our company, at the end of the day, I mean, there isn’t going to be any potential acquisitions that we’re going to look at that we would just disregard based on premium volume. I mean, if you look at our history, we’ve done a larger transactions but then we’ve also been able to do some transactions that proved very accretive, accretive with regards to the small premium bond volumes and such as BancInsure’s comes to mind.

So really, our appetite in what we’re going to look at, from a premium volumes is not going to be dictated on premium volumes, we dictated on our ability to get attractive price and we have it nearly accretive.

Amit Kumar - Macquarie

I just was kind of ask as you can keep on scaling it to a certain level and you get to that level and sort of, the returns can reflect, that’s all I’m going to ask. I do think that your model is infinitely scalable?

Ron Pipoly

I certainly -- I mean, I don’t know if it’s really scalable but at the end of the day, I think loss ratio for example is just about reflection for 2012 that the model is very scalable because don’t forget 2012 was the year in which he adopted new provisions and how deferred acquisition cost is calculated and certain cost that were deferred in the past and no longer eligible for the deferrals. So that would have actually caused a slight increase in the overall expense ratio.

But when you look at the expense ratio for the quarter, you see improvement on a year -- quarter-over-quarter basis. So I think that’s reflective of the scalability of the operations. So I continue to think that at the end of the day, the additional acquisitions that we add are certainly going to continue to help us have a very low expense ratio relative to our peers.

Barry Zyskind

And I think just to add, this is Barry, we’re looking, our sweet spot are really acquisitions. And our book-to-business is anywhere between $50 million to $200 million whether there are companies, whether there are renewal right book of business. We believe we could really improve on the expense ratio.

Of course, every company always believe they could improve on the loss ratio but we go into these acquisitions. Our thing is we look at it, we know one thing that we could change the next day expense ratio and that allows us really to take companies that maybe have 3%, 4%, 5% return on equity and turn them in our infrastructure into 16%, 17%, 18% return on equity and maybe even higher.

So we can say the opportunities are endless but we do believe that we’re going into a cycle now and you see this in the life cycle when the soft cycle ends and you start going into a hardening cycle and a much more disciplined cycle. Typically, what happens is these smaller companies that were able to live with a high expense ratio because the loss ratio was lower at their extended soften market.

Now, their loss ratios have gone from somewhere in the mid-to-high 50s to high 60s, maybe below 70s for some of them. The expense ratio has stayed constant, sometime even increasing because of the decreased premium and they have no way to go. And that’s where we come in and we’re able to do these acquisitions and really leverage our infrastructure by being able to take over $100 million book of business or $80 million or $200 million book of business and immediately put a lower expense ratio on top of that healthy book.

Amit Kumar - Macquarie

So just a follow-up to that. I mean, your competitors are watching and looking. Why do you think it’s so difficult for them to replicate. And I know you’ve talked a lot about the platform in the past but we’ve seen these very strong results. Why do you think it’s still difficult for them to replicate the success that you have?

Barry Zyskind

Well, I think, two things, one is you had all the companies that have been successful in this business. We’re not the first ones that are successful. There is particularly four or five companies that I look up to that I think have had a very strong track record in this industry.

But I think, the other thing is some of the smaller players who were at one time the same size of us have done acquisitions over the years, some of them are hurting now. They got into trouble. I can think of a couple, in particular, that are having real serious trouble and they used to be the ones that when we would look at things, many times, they were around the corner, they were there, they looked at it.

So some of our competitors have left because they have not been disciplined we believe as we’ve been in the market. But I think one key point that I have to add is what we always get back to is technology. I have seen a lot of, lot of companies in our years in terms of when we’ve acquired them or we didn’t acquire them and they either outsourced their technology or they have legacy technology. And they don’t -- they really can’t take a 38% expense ratio and take it down to somewhere in the 20s.

Maybe they could take it from 38 to 34 or 33 but we -- because of what we’ve done, we’ve always been an IT company. We believe within AmTrust that some thing that really is very important, we view technology not as something that’s necessary. We think technology is a key and a core competency for this company and that’s allowed really to allow us to take over businesses and immediately and its one thing we’ve done from the get go.

Every acquisition goes on entire platform and even if it means, sometimes we lose business that’s the risk we’re willing to take. But we’ve done it time and time over again where we have a single platform, that’s our platform that we control and that gives us a lot of leverage on the expense ratio.

Amit Kumar - Macquarie

Got it. The only other question I have I think is a follow-up to maybe Adam’s question on the comp. Previously, you’ve given us the rate of closed claims for ‘08 to ‘10. Do you have some of those updated statistics with you right now?

Ron Pipoly

I’m sorry. I don’t know have those with me but I can tell you one thing just because as the claim closure is something that we’re looking at on a monthly basis, your question is like it was specific to accident years. Our claim close ratio for 2012 was very, very consistent with the prior year.

So I wouldn’t expect any appreciable change in closure rates based on the prior accident years. And I will keep this question in mind for the first quarter earnings call and have that information available.

Amit Kumar - Macquarie

Got it. And maybe, if I can just sneak one more, in the opening remarks and there were other questions regarding hard market, you’re getting rate over rate, when you talk about hard market, I got the feeling you were referring to more as a rate on rate discussion as opposed to an earned ROE. What would you quantify as a hard market earned ROE?

Ron Pipoly

Well, I think we’re a little unique in that thing. And I think your comment is correct. I would call it a hardening market, not hard where it’s an impossible market. Just hardening market where rates are going up and you’re starting to see rates on rate. You’re seeing disciplined underwriting. You’re seeing renewals, track higher, some of the things that we mentioned before but I think when we look at our business and I think because of the niche we plan, we’ve said this time and time again, we don’t have to take our business up by 20%, 30%, 40% to make money.

Look at we’ve been running the last couple of years in the market. The key for us is when the market gets hard, what gets us excited is there is a lot of the states like New York and similar states we’ve been doing business for years, what you tend to see is some of the large carriers, some of the package drivers that have been competitors now start chasing the figure, the hardening, the middle market and larger stuff and that leads a lot more of the smaller business for us to go after.

So we look at a hardening market for example in small commercials, especially small comp. We’re looking to gain more market share and ultimately that allows us to have a big book of business and through the soft market, we were able to survive very healthy by having renewal rates because that’s smaller business sticks.

So I think when we look at our return on equity business, our model is we want to be a high teen, low 20 return on equity business because everything we have, the discipline, the lower expense ratio, the niche business, the low hazard proponent to it, the fee business, the leverage, all that is what we look at as the business.

So this is not something where -- we can end up being at 25% or 27% return on equity and we’re not saying that. We believe that we’ll hopefully continue growing the lines of business, hopefully continuing leverage down our expense ratio, getting more of the business we like and continue to have a very healthy return on equity.

Amit Kumar - Macquarie

Got it. Thanks for all the answers.

Ron Pipoly

Thank you.

Operator

Thank you. And with that, I’m showing no further questions. I’d like to turn it back to Hilly Gross for any closing comments.

Hilly Gross

Thank you. With no further questions, that concludes our fourth quarter earnings conference call and the end of year 2012. On behalf of all of us at AmTrust, we thank you for taking the time out of your busy schedules to join us and we wish you all a pleasant day. Thank you.

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