AmTrust Financial Services Inc. Management Provides a Response to Recent Stock Activity (Transcript)

Dec.17.13 | About: AmTrust Financial (AFSI)

Call Start: 08:00

Call End: 08:13

Amtrust Financial Services, Inc. (NASDAQ:AFSI)

Guidance Call

December 16, 2013 08:00 AM ET


Elizabeth Malone - SVP, IR

Barry Zyskind - CEO and President

Ron Pipoly - CFO



Good day, ladies and gentlemen and welcome to the AmTrust Financial Services Response to Recent Stock Activity Call. At this time, all participants are in a listen-only mode. I'd now like to turn the call over to your host, Elizabeth Malone, Senior Vice President, Investor Relations. Please go ahead.

Elizabeth Malone

Thank you, Patrick. Thank you for joining us this evening on this AmTrust Financial Services Inc. conference call to discuss the Company’s recent stock activity. On the call today is our CEO and President, Barry Zyskind, who will speak first followed by our Chief Financial Officer, Ronald Pipoly. I will now read the forward-looking statements.

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 expectations and involve assumptions that are difficult or impossible to predict accurate, many of which are beyond our control. There could be no assurance that actual developments will be consistent with our 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, except as maybe required by law.

Now it is my pleasure to introduce Mr. Barry Zyskind, President and CEO of AmTrust Financial. Barry?

Barry Zyskind

Good afternoon and thank you for joining us. In light of the recent trading activity in the Company’s stock, we felt that it would be prudent to provide our shareholders, employees, customers and the broader market with an update on our business as well as our outlook for the future. As part of this business update, we’ll also address the factual inaccuracies included in this meeting statements made in recent days about our financial reporting by short sellers. First I will address in general these factual misstatements and then I will turn the call over to Ron Pipoly, our Chief Financial Officer, for additional details.

This report authored by investors that have a short position in our stock was inaccurately critical of two of our businesses, our Luxembourg reinsurance business and our investment in life settlements. Let me begin by putting things in perspective. All of the Luxembourg reinsurance companies results a consolidated on our financial in accordance with U.S. GAAP. For the period beginning in 2009 through the first nine months of 2013, AmTrust has earned pretax profits of approximately $1.1 billion. Less than $25 million of that profit resulted from our direct operations in Luxembourg, or just under 2.5%. The notion, that we are hiding losses in an off balance sheet insurance company is completely not true. There is not off balance sheet item, there is no hiding of losses. Our loss ratio that is reported in our segment information is our actual loss ratio. It is in no way affected by any intercompany reinsurance transactions.

In addition, let me describe our Luxembourg reinsurance business and explain why we invest in these reinsurance companies. Many large multinationals have captive reinsurance companies to reinsure their own insurance business. These are typically large companies that choose to self insure some or all of their insurance risk, either because the insurance terms available in the open market are unattractive or because these companies believe they will capture additional profit by self insuring. This structure is similar to those setup by many U.S. corporations in states like Delaware or Vermont. Many European companies choose Luxembourg because it has a very sophisticated financial marketplace with a work force and regulatory body that has a very strong and deep knowledge of both banking and insurance. The companies reinsure their own risk and establish equalization reserves, which are designed to protect the company against unforeseen volatility. For example, if a company is in the business of manufacturing products and may reinsure its product liability exposure.

In addition to its standard carried reserves for known liabilities, it would establish an additional liability called an equalization reserve to protect against insurance volatility. At some point the company accumulates more reserves that it needs to protect against this volatility, either because better pricing is available in the market or the losses have run favorably for several years. The company will then seek to sell its reinsurance company at a discount to its fair value to a third party rather than reduce its liabilities. This allows many companies including AmTrust to purchase these reinsurance companies at a discount to fair value. We are effectively buying a reinsurance company at a discount to its ultimate book value, allowing us to generate earnings and capital over time.

I want to further point out that the regulatory process in Luxembourg is very thorough. We are active participants in Luxembourg insurance community. We own an operated fully regulated A-rated primary carry and a fee based captive management business. Before we acquire reinsurance company, we have to submit a business plan specifically detailed how we plan on ceding premium and losses to these companies. Also, I would like again to address our investment and life settlements. The continued mischaracterization of our carrying value has been addressed many times before.

As you know AmTrust is a niche entrepreneurial company that has a very solid foundation. A big part of our success has been acquiring assets or entering markets when there has been dislocation and where we believe that the upside benefit is many times a downside risk. This philosophy is what drove our founders to enter the stock transfer business in early 1970s when others were exiting the business, ultimately creating one of the most successful and profitable stock transfer businesses in history. It is why our founders have acquired commercial real estate during significant downturns, such as in the early 1990s and is a process have created substantial value as a result of being entrepreneurial and opportunistic. We have applied the same philosophy to the insurance business since our founding in 1998. It is why we aggressively entered into the small low-hazard workers compensation market over 13 years ago, after there was a dislocation in the market allowing us to earn significant profits over the years and to develop into one of the leaders in its very profitable niche.

Yes, we are entrepreneurial. We realized in 2010 after the financial crisis that life settlement assets were very undervalued to where we knew we could acquire that with tremendous potential returns with minimal downside risk. We believe we acquired these assets at an attractive price at the right time that our potential returns will be significant and that our shareholders will benefit for years to come. Keep in mind that our total net carrying value is approximately 132 million and represents less than 1.5% of our total assets as of September 30, 2013. Ron will describe again in detail how conservative we believe we are in our approach to carrying these assets.

We, the founding shareholders of AmTrust, own and control approximately 58% of the outstanding stock. We have never sold any shares and on the contrary have been buyers of the stock. As you may have noticed on Thursday our two largest shareholders acquired approximately 400,000 shares in total. We have been building this business for over 15 years. We started with approximately 10 million in premiums and have grown it into the company we are today, a multinational A-rated business with gross revenues on a run rate as of the third quarter in 2013 of over $4 billion and growing. Our profits have grown substantially as well.

We are very proud of what we have built at AmTrust with the great management team that we have. Our future has never been brighter and our outlook is very positive. We are seeing more exciting business opportunities than ever and we are taking full advantage of these opportunities. Contrary to many of our competitors who are retrenching into market due to reserve issues, we are very fortunate that our balance sheet is very strong and our reserve position is solid allowing us to take advantage and grow profitably.

I will now turn it over to our Chief Financial Officer, Ron Pipoly for further detail.

Ron Pipoly

Thank you, Barry. As it relates to our Luxembourg reinsurance platform, we purchased these reinsurance companies to allow ourselves to obtain the benefit of their capital and utilization of their existing and future loss reserves through a series of reinsurance agreements with one or more of our insurance subsidiaries. Our business plan and reinsurance agreements are reviewed and assessed to insure the business plan complies with Luxembourg requirement and that the underlying business that is proposed to be reinsured into the company has sufficient volatility to at a minimum maintain the existing equalization reserves. These reinsurance agreements are primary aggregate treaties designed to cover perceived insurance volatility and are not proportional quota shares.

Premiums and associated losses are seated to our Luxembourg companies and are reflected in their annual audited financial statements. Our consolidated net earned premium, net incurred loss, as well as the balance sheet loss reserves, are properly stated in the AFSI consolidated financial statements. Our incurred losses and balance sheet loss reserves are not affected by the intercompany reinsurance transactions with our Luxembourg reinsurance companies. Regardless of local accounting requirements all of our foreign companies are reported in our consolidation under U.S. GAAP. Contrary to those that would claim otherwise, the loss ratio at our Bermuda insurance company is consistent with that of its affiliated insurance operations in the U.S. and Europe.

Now turning to life settlements. Our effective discount rate of our life settlement portfolio for the third quarter 2013 was 14.2%. The future process cash flows of our life settlement portfolio are expected to be $779 million. Those cash flows are reduced by additional reserves that we apply. Among those reserves is a reserve for life expectancy blending. Life expectancies are updated every year by two of the most widely recognized life expectancy providers and are weighted to the more conservative of the two expectancies. Additionally we provide a mortality adjustment reserve by reducing the standard mortality tables based on the assumption that higher net worth individuals will live longer based on access to better healthcare. We also provide additional reserves for future expenses, operational risk and reserve for highly impaired lives. We believe that establishing specific reserves and then applying in overall discount rate provides the most accurate valuation for our portfolio.

For the third quarter of 2013 the total of these reserves was $281 million, that gives us future cash flows net of reserves of 498 million. That 498 million is then discounted by 7.5% resulting in our September 30, 2013 carrying value of $227 million. That is with an effective discount rate of 14.2%. On both the quarterly and an annual basis our valuations are reviewed by nationally recognized life actuarial firm. Please be reminded that our investment and life settlement is a 15% - 50% joint venture. If you would have simply used discount rate of 7.5% applied to expected future cash flows of $779 million, the carrying value of our portfolio would have been $375 million as opposed to $227 million, which we actually carried at September 30. To-date, we have had seven mortality events with a benefit total of $40.5 million. Those seven policies were purchased for $1.7 million, we have paid $1.9 million in premium and we carried the policies at a fair value of $8.5 million. These seven policies resulted in an economic gain of $32 million and a cash gain of $36.9 million.

Additionally there have been comments made regarding the portion of our policies and our life settlement portfolio where Phoenix is the carrier. To be clear Phoenix policies represent only 15% of the fair value of our portfolio at September 30, 2013. Therefore, our net carrying value exposure to Phoenix policies is approximately $20 million. Thank you.

Barry Zyskind

I would like to conclude by reminding everyone that while we come to work every day and our focus is on continuing to create shareholder value, the short sellers use inaccuracies and deception to manipulate our stock price in an effort to capitalize in the short term by destroying well deserved shareholder value and having the process unfairly hurt our loyal shareholders. We felt it necessary to correct the record and to illustrate how we see our business. I can assure you that this company has never been in a better and stronger position and that we look forward to 2014 with supreme confidence and that we will grow our top line and bottom line and that our shareholders will be very pleased with our results. Please contact Beth Malone, Senior Vice President of Investor Relations with any questions.

I will now turn it over to Beth to conclude and I thank you for your time.

Elizabeth Malone

Thank you, Barry and thank you listeners for participating in this call today. A transcript of this conference call will be available on the AmTrust website. This now concludes the AmTrust Financial Services’ conference call. Thank you and good evening.


Ladies and gentlemen, thank you for participating in today’s program. You may all disconnect.

Question-and-Answer Session

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