AmTrust's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: AmTrust Financial (AFSI)

AmTrust Financial Services, Inc. (NASDAQ:AFSI)

Q3 2013 Results Earnings Call

November 5, 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, Investor Relations and Corporate Developments

Analysts

Randy Binner - FBR Securities

Matt Carletti - JMP Securities

Mark Hughes - SunTrust

Ken Billingsley - Compass Point

Bob Farnam - KBW

Randy Binner - FBR Securities

Operator

Good day, ladies and gentlemen. And welcome to the AmTrust Financial Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference 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. And thank you everyone for taking the time to join us this morning for this AmTrust Financial’s third quarter earnings conference call 2013. With me this morning are Mr. Barry Zyskind, President and CEO of AmTrust; and Mr. Ron Pipoly, Chief Financial Officer of AmTrust. As always it’s a pleasure to acknowledge the presence of Mr. Michael Saxon, Chief Operating Officer of AmTrust; and Ms. Beth Malone, Senior Vice President of Investor Relations and Corporate Developments.

Before I call on Mr. Zyskind and Mr. Pipoly to give you their review and analysis of the third quarter 2013 results, I would with your indulgence read into the record the mandatory paragraph on forward-looking statements.

Since members of our management team may include in today’s presentation statements other than historical facts such statements may include the plans and objectives of management for future operations, including those relating to future growth of the company’s business activities, availabilities of funds, and since these statements are based on current expectations and involve assumptions that are difficult or impossible to predict accurately, many in fact which are beyond our control. So 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 of the date of this presentation and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, of course, except as maybe required by law.

Finally, in the prepared remarks and responses to questions in today’s presentation, our management will refer to financial measures that are not derived from Generally Accepted Accounting Principles or as it is 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 our third quarter 2013 earnings, which of course is available on the Investor Relations section of our website at www.amtrustgroup.com, I repeat, www.amtrustgroup.com.

Thus 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 am very pleased to report that we had an excellent third quarter and nine months results. Our favorable market position in all of our segments has resulted in strong quarter and strong quarter of top and bottom line performance.

Each of our segments continue to perform very well of some -- our small commercial business, Specialty Risk and Extended Warranty and Specialty program, as well as our fee business. They are all benefiting from the combination of our strong fundamentals and favorable market conditions.

Market conditions continued to provide an excellent rate environment for our business especially in our workers compensation. We continue to see an improving rate environment nationwide, as well as double-digit rate increases in California.

Our fee business continues to grow from both the combination of organic growth and acquisitions. Our investment income benefited from continued growth of assets, our investment assets now stand at $3.8 billion that's from both cash flow generated from the operations over the last several years, as well as acquisitions.

We’ve closed many transactions over the last 18 months to 24 months, they are all performing very well and we look forward to continuing to close our transactions, particularly Insco Dico and Sagicor, which we expect to close sometime in the fourth quarter or in the beginning of next year in 2014. We believe both of those transactions will add more lines of business to AmTrust in a very control disciplined manner and will be accretive to earnings.

We continue to look for acquisitions and we believe we are very well-positioned. Some of our competitors that historically have competed with us for acquisitions are not able to do acquisition now which gives us an opportunity to buy things in those types of lines that we like at the right costs.

I just wanted to end that we believe we are very well-positioned to continue growing strongly both in revenue and of course, in profit. We believe that AmTrust over the next couple of years will continue growing very strongly and have a very high return on equity and everything we've done till now we -- as we look forward we believe we are very well-positioned to continue even doing better in the future.

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

Ron Pipoly

Thank you, Barry, and good morning. The third quarter represents the second consecutive quarter that we surpassed $1 billion of gross written premium. Gross written premium for the quarter totaled $1.1 billion, which represents an increased of 46%.

For the nine months, our gross written premium totaled $3.1 billion, an increase of 55% over 2012. Our gross and gross written premium was generated across all three of our operating segments. Over the trailing 12-month period, we have gross written premium of $3.8 billion.

For the quarter, we generated net income of $58 million or $0.74 per diluted share. We had operating earnings of $65 million or $0.83 per diluted share, diluted share count increased to $78.8 million shares for the quarter, compared to $70 million shares for the second quarter of 2013.

The increase in the shares would result in the 10% stock dividend, as well as an additional $2.4 million shares attributable to our convertible notes. EPS calculation for both net income and operating earnings will reduce by preferred dividends of $2 million or $0.03 per share.

Annualized return on equity for the quarter was 18.8% and annualized return on equity from operating earnings was 21%. For the nine months, we’ve generated net income of $221 million or $2.84 per diluted share. Included in net income was approximately $39.1 million of net gains associated with our acquisition of Car Care, Sequoia and First Nonprofit Insurance Company. These net gains accounted for earnings per diluted share of $0.50.

Additionally, we recognized the net gain of $5.6 million related to the successful 1.4 A offering completed by National General Holdings Corp. and our subsequent conversion of the preferred shares into common equity. The gain increased earnings per diluted share by $0.07.

For the nine months, we had operating earnings of $183 million or $2.35 per diluted share. Diluted share count increased to $77.6 million as a result of the 10% stock dividend as well as an additional 1.5 million shares attributable to our convertible notes.

In terms of premiums by segment, our small commercial business premium increased by $180 million to 74%. The increase in premium was driven by combination of $102 million increase in our small workers’ compensation product. California, Florida and New York were the states with the largest growth during the quarter.

Overall workers’ compensation policy accounts increased by 33% during the quarter. Additionally, the acquisition of Sequoia and First Nonprofit contributed $34 million and $16 million of gross written premium respectively. Specialty risk and extended warranty added top line premium growth of $92.5 million or 36%. Domestic growth was $22 million while International growth was $70 million. Included in international premium growth was $30 million of premium generated by our acquisition of Car Care in February of 2013.

Our specialty program premium increased $88 million or 44%. This quarter has attributed to the expansion of existing programs, as well as adding a few new programs during the quarter.

Growth within this segment was primarily driven by non-workers compensation programs. We recorded $7.3 million in premium in our personal lines reinsurance segment, which represents our quarter share agreement with National General. This was a decrease of $23 million from the third quarter of 2012. As previously announced, our 10% quarter share in insurance agreement was terminated effective August 1, 2013.

For the nine months, our gross written premium increased by $1.1 billion or 55% from $2 billion to $3.1 billion. Small commercial business increased by $500 million, specialty program increased by $245 million, specialty risk and extended warranty increased by $360 million. Across all of the segments, premium growth driven by acquisition totaled $142 million.

We have written $1.4 billion of workers compensation gross written premium over the prior four quarters. Our net written premium for the quarter rose to $729 million compared to $484 million for the third quarter of 2012. Premiums ceded included approximately $241.1 million to Maiden.

For the nine months, our net written premium was $1.9 billion and we ceded $829 million to Maiden. Net earned premium totaled $614 million for the quarter which is 58% increase over the third quarter of 2012.

Small commercial business accounted for 33% of our net earned premium. Specialty program was 23%, specialty risk and extended warranty was 40%. For the quarter, we ceded approximately $232 million of earned premium to Maiden.

For the nine months, net earned premium was $1.6 billion and we ceded $711 million to Maiden. Our combined ratio came in at 89.6% for the quarter compared to 92% for the same quarter last year. The loss ratio was 66.9% this quarter compared to 66% for the same period last year.

Since we began writing workers’ compensation in 2001, we have gross earned premium of $4.1 billion. Our workers compensation experiences significant and is credible than any other data source.

To see how our low hazard book of workers’ compensation business contrast with industry, we only need to look at the 2012 NCCI statistical bulletin. When comparing our NCCI States to the industry, our rate of death claims is less than half of the industry.

Our rate of temporary partial disability is 40% of the industry. Permanent partial disability is 36% of the industry. Excuse me -- additionally, given the lower hazards of book of business we focused on, our claim closure rates are higher. In fact, our claim closures rates have accelerated over the most recent accident years.

95% of our workers compensation indemnity claims from 2008 are closed, 91% in 2009 and 87% in 2010. From 2001 to 2012, we had 34,000 indemnity claims and 90% of that total are closed, which is consistent with the lower hazard book of business we have written and focused on for the past 14 years.

Our expense ratio was 22.7% for the quarter compared with 24.2% in the third quarter of 2012 without the effect of the Maiden ceding commission, our expense ratio this quarter would have been 24.6%. Our service and fee income totaled $90 million in the quarter, an increased of $45.4 million or 102% from the prior year.

The increase over last year was driven by the acquisition of Car Care, which contributed fee revenue of $9.9 million during the quarter and AmTrust consumer services which contributed $17 million. Additionally, fee revenue generated by NCCI assigned risk business was $8.8 million, an increase of $3.3 million; AMT warranty was $21.7 million, an increase of $4 million; IT service and licensing fee associated with National General was $7.4 million, an increase of $3.4 million and Case New Holland was $7.6 million, an increase of $3.2 million.

For the nine months, we generated $238.6 million of fee revenue, an increase of $120.5 million or 102%. The increase in the fee revenue for the nine months was driven by the acquisition of Car Care, AmTrust consumer services and First Nonprofit Company, which accounted for $22.5 million, $28.3 million and $16.6 million respectively.

Additionally, fee revenue generated by NCCI assigned risk business was $27.3 million, an increase of $12.1 million. AMT warranty was $67.8 million, an increase of $14 million. IT service and licensing fees associated with National Journal was $18.7 million, an increase of $8.2 million and Case, New Holland was $21.9 million, an increase of $17.5 million.

On a quarterly basis, our total revenues grew by 59%, including year total revenues grew by 54%. We generated approximately $23 million investment income for the quarter and had $723,000 of net realized gains. For the nine months, we've generated investment income of $64 million and had net realized gains of $13.3 million.

Additionally, our investment in National General has generated equity income of $1.9 million for the third quarter and $3 million on a year-to-date basis. This income is included in our operating earnings. Just to be clear, our equity income for the quarter for National General was $1.9 million.

Shareholders equity is $1.4 billion, which includes a $115 million related to our preferred shares. That equates to a book value of $17.08 per share. The increase in book value per share since December 31, 2012 was 10.3%. During the quarter, we declared a 10% stock dividend. Additional, we also declared a quarterly cash dividend of $0.14 per common share.

Total assets as of September 30th were approximately $10 billion. Total invested assets was $3.8 million, fixed maturities comprised 80% of the portfolio, cash and short-term investments 16%, equity securities 1% and other investments 3%, included in our other investments is our equity investment in National General.

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

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 our listening audience. In order so you can facilitate the access to us, I am going to momentarily turn this back to our moderator for specific instructions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Randy Binner of FBR Securities. Your line is now open.

Randy Binner - FBR Securities

Good morning. Thank you. Ron. I just -- could you review please I didn’t catch all the details? You said the Nat Gen gain was how much in there and then what other items were in the gains for the third quarter results?

Ron Pipoly

The National General gain, there is two components to our relationship with National Journal. On an equity income basis, we earned $1.9 million in the third quarter and $3 million on a year-to-date basis. And on a year-to-date basis based on our conversion of our preferred shares and to common equity, we had a $5.6 million gain but that's on a year-to-date basis. It was more effective in the third quarter.

Randy Binner - FBR Securities

Okay. So that was -- there was no impact for the latter item in the third quarter.

Ron Pipoly

There was no impact related to the conversion of the preferred.

Randy Binner - FBR Securities

Okay. And so your, the kind of unmarked -- the mark-to-market gain there though relative to those securities has not been taken on to the AmTrust balance sheet.

Ron Pipoly

It is not. We’ve used the equity method of accounting for our investment in National Journal, so there's no mark-to-market gains reflected in our OCI. It's not in our balance sheet, that’s correct.

Randy Binner - FBR Securities

Thank you for that clarification. And then in the other gain category, were there other, what were the other gains that were in the $0.07 call out?

Ron Pipoly

Well, the $0.07 was the gain on a year-to-date basis of the $5.6 million conversion that occurred in the second quarter and on a year-to-date basis based on our acquisitions of Car Care, Sequoia and First Nonprofit insurance company, which had approximately net gains of $39.1 million, which equates to $0.50, but again, that is on a year-to-date basis and neither one of those events occurred in the third quarter impact any EPS calculations in the third quarter.

Randy Binner - FBR Securities

Okay. Thank you for that clarification. A couple more if I could. One is the retention of business by AmTrust was higher than we expected on your net written premiums were higher, which equate to higher earn. And so, could you give us more color on that? Should we kind of assume a higher retention in the business going forward, was there anything unusual in the quarter there?

Ron Pipoly

Randy, this is Ron. If you look at the third quarter of 2012 as kind of a basis, we retained about -- in the third quarter of 2012 about 65.7% of our premium and in the third quarter of this year 2013, we retained about 67.9%. So very consistent on a quarter-over-quarter basis and what happens this quarter is that that there are certain programs that we write our third quarter events that are not part of our Maiden reinsurance structure just based -- structurally they don’t fit with the quota share. So that’s why you will see, the third quarter have a higher retention rate. You will see in the fourth quarter, it will kind of convert back to the mean if you will, the third quarter being the outlier.

Randy Binner - FBR Securities

Okay. And then, I'll draw back in the queue, one more, just any net reserve development one way or the other of note in the quarter?

Ron Pipoly

We didn’t have any net adverse development in the quarter.

Randy Binner - FBR Securities

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of [Dujon Mozaami] of Guggenheim. Your line is now open.

Unidentified Analyst

Good morning, everyone. I have a question for Barry with a follow-up for Ron. First, Barry, could you comment on the competitive environment in particular the problems that some of your competitors are experiencing and how would that been impacting your growth rate going forward?

And the follow-up for Ron, your capital structure has trust preferred, senior note, convertibles, preferred stock. Is that an optimal capital structure that you guys are looking for?

Barry Zyskind

Okay. I will take the first question. I think if you look at the last couple of quarters, we have been talking about how we have been seeing the environment change and how lot of competitors have been pulling out of comp, probably for the last year to 18 months, and that’s really, if you look back at the 2000 and -- we would like to say the 2009 to 2011 years, there maybe a little bit at the end of eight, a lot of companies took the rates down. If you look at us, we were very consistent in our rates and in our comp, and actually, we grew on comp, it was only because we did acquisitions that we bought a book from Swiss Re. We did first car loan. We were able to take book to business and pair them down. But we didn’t grow organically.

So that really allowed us to when the market started changing we were in a very strong position and we have always done very well on the comp. So we have been taking advantage of this already for 18 months.

And it’s not just, loan competitors that people are talking about, that are having issues that may be in the press, there is really a lot of other even larger companies that were extremely competitive in those top tiers that are pulling back, which really is dumping a lot of business into the marketplace for the last, I would say, again, a 12 months to 18 months. So I think we see a lot of opportunity.

In addition, [Dujon], remember we were not in California in those years between 2008, ‘09, ‘10, ‘11 when you go back and look at the statistics on an industry way -- on an industry it’s really been very, very poorly performing. However we got in at the end of ’11, the second half of ’11 when the market started turning and especially into ’12 when we really started writing business and ’13.

So I think that when you look at where we are positioned I think we are probably very uniquely positioned. We have been very disciplined in the workers comp. We see tremendous opportunity. I don’t want to comment about any specific companies that have issues. I think in every -- whether the companies admit or not, I think we have to realize that those companies have a lot of employee that were caught. They made some mistakes and I don’t think if it’s anyone advantage to name certain companies and specifically target them. But I think in general the marketplace has a lot of opportunities for us and we are looking to write good business every single day aggressively.

Ron Pipoly

And then, [Dujon], this is, Ron, on the follow-up question. From a total capital structure, right now we say that the total capitalization is approximately $2 billion and I do think that our capital structure right now is optimal in order to achieve our objectives and as we go forward we will continue to make sure that we maximize the capital structure in terms of use of hybrid securities whether it would preferred, whether it would be additional debt. Again, we will be cognizant of any investment effect on our (inaudible) that we manage our total capitalization appropriately.

Barry Zyskind

And I think, [Dujon], we look at it, we are big shareholders and everyday we wake up, we want to build book value growth. We want to grow earnings per share and the way to do is to do it in what we believe is the most optimal structures. So, equity -- common equity is the last thing you want to issue, but you want to continue growing the business and raising capital in the way that’s the most efficient to the shareholders.

Unidentified Analyst

Okay. One last question, $240 million of service and fee incomes growing in a dramatic way, what’s your plan for this action, Barry, going forward?

Barry Zyskind

Okay. Right now our goal is to continue growing it. I think it’s a great thing to have a strong insurance franchise and a very strong fee business. It gives you a lot of flexibility. Again, going to your question of capital structure, we have a lot of cash flow coming out of there. We could service debt without having to take money out of the insurance companies. We could issue dividends. We could do a lot of things. We could fund acquisitions.

So I think right now the way we look at it we think it’s a great business. It’s closely intertwined and related to what we do overall. Everyday, we wake up we want to continue growing our insurance business and we want to grow our fee business.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Carletti of JMP Securities. Your line is now open.

Matt Carletti - JMP Securities

All right. Thanks. Good morning. Just a few questions, a couple of number questions for Ron. First on, some of the movement from loss ratios by segment, both small commercial and specialty risks showed some improvement? Is that kind of bringing the year down for workers comp in the small business and what are you seeing in risk and warranty?

Ron Pipoly

I think from a small commercial business perspective, I think that’s your observation is accurate in terms of -- as we go through and conduct our monthly losses that means, as I mentioned, we issue very strong trends within our workers comp book of business and its performance for the current accident year. So that’s certainly attributed to the overall lower loss ratio on a three-month basis.

On the Specialty Risk and Extended Warranty perspective, again loss ratio really just a reflection of where we are from the business mix perspective, in terms of the contribution of U.S. Extended Warranty business overall to that book of business and our growing European presence and focus not only on Extended warranty there but expansion to what is kind of equivalent of U.S. casualty lines. So I think that loss ratio is really just reflective of the business mix.

And from a program perspective, loss ratio is pretty consistent. We are very optimistic about this segment on a go-forward basis. We’re seeing a very strong pricing environment overall.

We believe that the program that we have added have been structured from an operational perspective, the way we like to structure the program. We’re maximizing our over sighting control of those program, not only from the underwriting perspective, but from the point of adjudication standpoint. So we’re certainly very optimistic from a loss ratio perspective. And I will continue to believe that monthly loss reserve meetings allows us to set very conservative loss ratios and we really monitored the business very closely.

Barry Zyskind

And just to add to Ron, on the program side of the business we are -- this is already probably a second year in a row, we’re receiving very consistent rate increases across the causality line, that we are getting year-over-year rates. And we think we are very well positioned to continue growing our business and that’s the one line of business that we’ve always said if you look back at our history when the market was soft, we really didn’t grow it. We started growing it probably 24 months ago.

We started to see the environment changing and we will continue growing it and a lot of the growth is coming as well from rate increases. So that’s something where we think the next couple of years will be very strong in terms of return as well.

Matt Carletti - JMP Securities

Okay. And then on the tax rate, Ron, as we go higher in the quarter about kind of close to statutory, is that just bringing the year up mix businesswise, how should I think about a go forward?

Ron Pipoly

Matt, we commented as the quarters past related to other numbers, sometimes quarterly number have volatility because we are dealing with the obviously three months period. What happened in this quarter related to our effective tax rate is we completed the reorganization of our portion of our European operations in order to gain, I think, more efficient capital structure. As a result of that, the quarter was impacted from a tax perspective.

But if you look at our nine months effective tax rate which is right around 28%, that is probably, if I was to guide you, I would say that I think our effective tax rate on a yearly basis will be somewhere around 27%, 28%. We may have some quarterly volatility you did this time because of our completion of some lease structure in Europe but I would expect it to drop in the first quarter and for the year to be somewhere around 27%, 28%.

Matt Carletti - JMP Securities

Okay. Great. And then last question if I can for Barry, related to Sagicor kind of twofold one. If you could just, kind of refresh us on, what was so attractive about Sagicor and obviously getting that foot into Lloyds? And then secondly in terms of more modeling at least from a get go, how much of that book do you think you are going to keep off the bat before kind of thinking about other opportunities which we kind of build into our assumptions for ‘14?

Barry Zyskind

I think as I said in last call. I think we have always realized that as we continue growing globally especially on the specialty risk and extended warranty and we do business with larger industrial and larger corporations around the world. We thought and we believe that Lloyd’s presence will really allow us to service a lot of these customers globally.

And historically, they were happy if they just -- you did business within them in the U.S. and Europe and then they would find other ways to do business. But as these companies are more and more and looking for one solutions, we think it’s necessary and Lloyd's really allows us to do that, the Lloyd's platform of having global platform and having opportunities to do business throughout Asia and Pacific in all those areas, I think it’s going to be very strong for us.

In terms of the business, we are currently analyzing the business. There is a lot of good business there. There is a lot good people there. Obviously, we have good presence in Europe and England as well. So it’s really still under review but I would say that our intent is to keep most of the business and make a go with it and make sure that it’s obviously consistent with the AmTrust underwriting philosophy of making profit and everything we write.

Matt Carletti - JMP Securities

Great. Thanks for the answer and congrats in the quarter.

Barry Zyskind

Thank you.

Operator

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

Mark Hughes - SunTrust

Thank you very much. Didn’t you describe the pricing environment in California yet, if you did I didn’t hear it?

Barry Zyskind

Yes. I think in my notes I mentioned that we are still seeing double digit rate increase. So if you think about it, we got in at ‘11. At ‘11, we started seeing probably 7% to 8%. In 2012, we definitely were in double digit territory. In 2013, we are double digit territory and we continue, I just spoke to the underwriter yesterday. We continued to see very strong pricing environment in California.

Again, remember we also took the book that we acquired and we dramatically changed the book to a low hazard type of book of business. So now not only if you look at our book of business, it’s much more heavily way towards the low hazard that we have done historically throughout the United States, but as well we are getting very, very nice rate increase in both our new business and our renewal business.

So we think we are very well positioned in California. We think that we are in very profitable territory for California and we feel good about where we are positioned right now.

Mark Hughes - SunTrust

Thanks for the detail. How about the Italian med mal, could you give us an update on that one?

Barry Zyskind

I think an Italian med mal, it’s the same story, it’s been in the last couple of quarters. We got in there and then in 2009, it really started growing 2010 and 2011. We are very consistent on the pricing, terms and conditions. Most of our book now is really renewal business. We don’t write that much new business just because of where we are positioned in the market.

We are doing a very good job in handling the claims and managing the claims ourselves, but really if you look at it today our book, I’d say is just guessing probably 80% to 85% of our business is renewal business. And as you know renewal business is always the better business. You have the loss runs yourself. You know the frequency severities. I think we are very well positioned and again we believe that book of business is going to return and is returning very nice combined ratio on return on equity for us.

Mark Hughes - SunTrust

Finally, in the warranty business, the GM contract that you won, have you seen sustained momentum in terms of new business opportunities? How should we see that premium playing out of the next few quarters?

Barry Zyskind

I think I don’t want to comment on any individual account, but I will tell you is we continue growing with all our accounts. We continue getting new accounts. I think we are very well positioned in the specialty risk and extended warranty. It’s a business that we have been doing really since our inception over 15 years ago and even before.

We bought the company. It was the company that focused on ensuring technology. I think a lot of our accounts are giving us new opportunities, going global with them and going to new territories. I would say it’s always been a great business and its something that we put a lot of energy. I think we are one of the only known companies that specialty risk and extended warranty has really focused for us and that we are centric company.

And that something we think, we feel good about and we continue to seek new opportunities and pushing our sales people and pushing our underwriters to service the accounts and look for new opportunities. And we’re doing it global and we hope to continue growing both organically and to acquisitions.

Mark Hughes - SunTrust

Thank you.

Operator

Thank you. Our next question comes from the line of Ken Billingsley of Compass Point. Your line is now open.

Ken Billingsley - Compass Point

Hi. Good morning and thanks for taking my questions. I wanted to just follow-up on briefly on the workers’ comp. At the beginning I read your comments, you were talking about excellent rate environment you said, especially on workers’ comp. Outside of workers’ comp, are you still seeing more mid-single digit rate increases or is it cost driven clips or the CIB surveys that are out there?

Barry Zyskind

I think it depends, if you’re looking at, like the program division, I think you are seeing clearly double digit rate increases on programs and really some of the shake out at the marketplace in the last I would say again, 12 months to 18 months has really not too many new companies coming and willing to do programs. We’ve been doing it for long time. So, I think the program business you’re seeing very healthy rate environments.

On the regular commercial business that’s outside of workers’ comp that we do in our small commercial business, I think you would probably I would say single digit increase. And most of lines accept some of the commercial autos going up more, depend on your pockets. Some of the bank business depends where you are. But in general I would say, probably 6% to 7% and then in some of your non-admitted business you may -- depends on the pocket from the class of business you may be seeing a little bit more.

Ken Billingsley - Compass Point

So the reinsures having low cap year in excess capital, will there be a capacity issue where they will maybe make it easier for the primary companies to be more competitive and grow market share, are you seeing that yet?

Barry Zyskind

I’m not seeing that. But I think at the end of the day, companies have to really look at their own balance sheet and their own expense structure and have to, what their required return on equity is. And it’s always been like that, always be like that. We have very consistent and disciplined returns that we want and we’ve been doing it for long time. And so regardless to what’s swung in the marketplace, we have to find the business that we think is good and stay focused on it.

Ken Billingsley - Compass Point

Okay. And last question on workers’ comp, you talked about how before you shifted your book on workers’ comp to a lower hazard book of business.

Barry Zyskind

That was in California.

Ken Billingsley - Compass Point

Just in California.

Barry Zyskind

We’ve always been in that nation, when we took over the Majesty book in California that was in more hazard book that we changed to lower hazard.

Ken Billingsley - Compass Point

So it’s just shifting of the Majestic book.

Barry Zyskind

Right.

Ken Billingsley - Compass Point

Okay. Obviously, there has been some company struggling over the last few quarters here. But as competition comes back in, is that, did you see a move back into some higher risk classes to maintain rate going forward or you think you always remain focused on the lower hazard classes?

Barry Zyskind

I mean, as we think if you look at us for the last 15 years, we’ve really been on the lower hazard, that’s been our specialty, that’s what we do well. We consistently outperformed the market by staying focus. So as we stand here today, we’ve plan on continued being with the lower hazard and what we know has to do very well on the lower and the smaller stuff. And I don't think we have any intent in changing that regardless where the market is.

Last time, the market gets up until we held onto our renewals, very aggressively meaning not in pricing but service and we didn’t write too much. We didn’t write a lot of new business, we bought some books of business and repair them down but that allowed us to get some growth and I think that’s our game plan as well.

We’ll continue as long as we can, riding the business that we want to provide pricing. If the market gets too soft, we will look to continue renewing our business as much as we can, riding the business at the right rate. And if we have to do acquisitions that allow us to continue writing business at our rate and our underwriting guidelines throughout the different cycles.

Ken Billingsley - Compass Point

When you were shifting that business, you said you were getting double-digit rate increases, was that based on what they had been charged with the other underwriter or how would you calculate that?

Barry Zyskind

In the California, we look basically -- we are looking at two things. We’re looking at where our new business is. New business rates that we're getting compared to the quarters before and the year before and then we’re looking at the renewal business as well. So it’s what the rate environment we’re getting and what we’re getting on the renewal business that we're renewing and we’re getting our new business compared to what we were getting. We’re looking at a rate per payroll and what we're getting last year and what we’re getting now.

Ken Billingsley - Compass Point

Last question I had was, on the fee income side, it looks like maybe the expense structures continuing to improve there. Were there any dramatic changes there or is there more cost savings that you are working through those to the fee income lines since you acquired and obviously existing operations as well?

Ron Pipoly

Hi, Ken. This is Ron. I think on the fee revenue margin, you did see an expansion in that margin in the third quarter. I think that’s just really a reflection of scale or leverage that we’re able to add is we filled in addition fee revenue opportunities. We’re able to put them on a common operating platform, which adds efficiencies to their operations and we have the ability to continue to scale that up and have improving margins in the fee revenue.

Ken Billingsley - Compass Point

Great. Congratulations on the quarter.

Ron Pipoly

Thank you.

Operator

Thank you. Our next question come from Bob Farnam of KBW. Your line is now open.

Bob Farnam - KBW

Hi there. Thanks. Good morning.

Barry Zyskind

Good morning.

Bob Farnam - KBW

You talked about the optimal capital structure rate now. I'm just curious about M&A, so how much capacity do you feel you have right now for continued M&A?

Ron Pipoly

Hi, Bob. This is Ron. I mean, I think as we sit right now from a -- if you want to refer to as an excess capital position or M&A opportunities, I think we’re somewhere between $200 million and $300 million of additional capacity to tinkle out look at transactions. And again, I think our capital structure now is optimal and an opportunity to present itself. We certainly have an opportunity to continue to go out and do some things from hybrid security or debt to add to our total capitalization and we are adding a lot of capital everyday by the returns we are making on the business as well.

Bob Farnam - KBW

Right, right. Okay. And I assume that if you had your (inaudible) you probably would buy a lot of smaller acquisitions than one big $200 million to $300 million acquisition, is that accurate?

Barry Zyskind

I think, Bob, we always look at where the opportunity is where we can grow and where we could do very well and have a high return on business wherever the deal happens to be. We’ve historically done very well on smaller renewal rate, but if there is an opportunity in a bigger thing that makes a lot of sense that we really believe that’s going a have a high return for us then we will look at it.

Bob Farnam - KBW

Okay. Great. Thanks

Operator

And our last question comes from the line of Randy Binner of FBR. Your line is now open.

Randy Binner - FBR Securities

Hey. Thanks. I got just a few follow-ups. One, just picking up where Ken left off there. Did you -- Ron, you said the margins were better on fee-for-service, but can you quantify that and if I missed that I apologize? Were you kind of closer I think you talked about 25% to 30% EBITDA margins before? I mean, where are were on that for the quarter like specifically?

Ron Pipoly

So, I guess the way to contrast that on a nine month basis, really the EBITDA margin on the fee revenue business has been about 25%, but for the quarter was closer to 28%. So, again you saw improvement on third quarter relative to a year-to-date basis.

Randy Binner - FBR Securities

Okay.

Barry Zyskind

As you still growing the businesses in the mix of business, you don’t have to hire more peoples, so we get some economies to scale a lot to push it up closer to 30%.

Randy Binner - FBR Securities

Yeah. I mean, I think it would help for all of us to see more specific disclosure there going forward, so we can kind of track that if that is an improvement story. Just another -- just jumping on the Luxembourg businesses has that kind of open this call. I saw that you got an A rating from A.M. Best for that business. Can you just give us kind of a brief update on what's going on there in the business and what that rating means for that business? I kind of think of it is as kind of a runoff business for people who have Luxembourg captives, but any update there and the significance of the A rating would be interesting?

Barry Zyskind

We are really muted to our Luxembourg structure. We have several companies in Luxembourg as you mentioned. We successful acquired the existing captives and have been able to use that as equalization reserves associated services. We would be able to successfully integrate those and runs those off. In addition to that, we have one captive facility in Luxemburg they were currently using to generate fairly insignificant amount of fee revenue. But it obviously has growth potential in the future and then we formed an insurance company, which is what the rating was assigned to. And again, the purpose of the insurance company again is to give us another platform to run our European business, give us slow diversification as we look forward to. So now we have not only a company domiciled in Ireland, two in U.K., now we have one in Luxembourg to service the needs of our clients and differentiate our products over in Europe.

Randy Binner - FBR Securities

Okay. So the runoff -- the runoff business there for, then I guess it’s my term for it, that is not rating sensitive as much, right?

Ron Pipoly

Yes, right. That’s correct that’s not rating sensitive. We know that a weighted company that receives the A rating.

Barry Zyskind

But Randy, when we do -- when we do we do -- sometimes when we do the runoff for our companies for industrials we buy the captive. They want to continue having a captive type solution that's when we will have a captive and the one actually use our insurance company in the front and then we'll reinsure but we’ll reinsure back into captives.

So they will sell you the old captive and then they want to continue having some kind of tool to be able to still sharing some of the risk. So therefore that's where the insurance company which shares the rating is very important.

Randy Binner - FBR Securities

Okay. Who are you in that, so you have an integrated the Luxembourg insurance company. What have been -- are there other companies that are focused there, I mean to compete with the big Europeans in that market?

Barry Zyskind

I think we compete with -- you compete with people who do captives, you compete with people who do runoff, you compete with everyone depends where you are in the structure. In every part of insurance you are competing with different companies. But I think what we do, we’ve been doing it for long time. The team that does is, has been doing it for several years. And I think we have good teams there and we have a good client there and we make good returns there.

Randy Binner - FBR Securities

Okay, thank you and just one more, I want to ask another California comp question and this one just kind of another obsolete question that hits a little bit differently but there is a report last night from the WCRB and it indicated that the state fund had a better combined ratio because they're growing more and so they have taken more business from the market. I guess how do you read that. Did that affect your business? Is that a reflection that better -- kind of a better pricing discipline in the markets, driving businesses of state fund, just be interested in observation of that state fund growth. This is in California workers’ comp?

Barry Zyskind

Yes, I think from what I'm seeing in California, speaking to the people on the ground, there’s no question about it. The last nine months, we are seeing the state fund come back to the market with even more competitive nature. Its something we have to deal it. We have to deal within the lot of different states as well.

But clearly they have a new pricing tool that they are using and in some class of business and some risks, they are very competitive. So they are out there, you have to deal with it. It’s like everything else. We have to stay disciplined, we have to go after the business we want and the pricing we want. But clearly we’ve seen them become more aggressive over the last nine months.

Randy Binner - FBR Securities

Okay. That’s helpful. Thank you.

Barry Zyskind

Thank you.

Operator

And I’m showing no further question at this time, I’d like to turn the call back over to Hilly Gross for any further remarks.

Hilly Gross

Thank you. There have been no further questions. That brings us to a conclusion to this our third quarter 2013 AmTrust earnings conference call. On behalf of all of us at AmTrust, we thank you for taking the time and trouble out of your busy schedules to join us and we wish you a very pleasant day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does concludes today’s program. You may all disconnect. Have a great day everyone.

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