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Executives

Hilly Gross – VP, IR

Barry Zyskind – President and CEO

Ronald Pipoly – CFO

Michael Saxon – COO

Analysts

Randy Binner – FBR Securities

Bijan Moazami – Guggenheim Securities

Mark Hughes – SunTrust

Robert Farnam – KBW

Kenneth Billingsley – Compass Point

AmTrust Financial Services, Inc. (AFSI) Q4 2013 Earnings Conference Call February 13, 2014 9:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the AmTrust Financial Services Fourth 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. [Operator Instructions]. As a reminder, this conference call is being recorded.

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

Hilly Gross

Good morning. Thank you. And thank you everyone for taking the time to join us this morning for this AmTrust Financial’s fourth quarter earnings and year end conference call. With me this morning are Mr. Barry Zyskind, President and CEO of AmTrust; and Mr. Ronald 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 Development. Before I call on Mr. Zyskind and Mr. Pipoly to give you their review and analysis of fourth quarter and full year-end results, I would with your indulgence read into the record of the obligatory paragraphs on forward-looking statements.

Since members of our management team may include in today’s presentation statements other than historical facts. Such statements 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 etcetera. And since these statements are based on current expectations and involve assumptions that are difficult or impossible to predict accurately, many factors 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 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 as commonly 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 of our fourth quarter earnings which of course is available on the Investor Relations section of our website at www.AmTrustgroup.com I repeat, www.AmTrustgroup.com.

There, 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

Morning and thank you, Hill. Thank you for joining us on our fourth quarter earnings call and full year end results. We are extremely pleased with our full year and fourth quarter results. AmTrust has had a very strong year in all of our segment. We continue to see many opportunities in all of our business segments and are very encouraged by the pricing environment in which we operate. We are particularly encouraged by the direction of our small workers’ comp business which continues to grow at record level, with growth coming at our key state such as California, New York, Florida, New Jersey and others. We are also seeing strong renewal retention, and as many of you may know, renewals business traditionally performed at even better loss ratios than new business. So when you are in a rising rate environment and have strong new business as well as a sizeable renewal book, you see even a great improvement in the loss ratio. We are very encouraged by the loss trends we are seeing in the small workers’ comp business. I’m also very happy to report that the besides this small comp, we continue to expand our small commercial business with specialty niche line that come mostly through acquisitions.

For example, we are growing our bank insurance products by expanding geographically. This is an extension of the renewal rights transaction we did few years back with BancInsure. We also continue building out our small general liability to mostly small service contractors, which came to us through our acquisition of BTIS. We continue to build out our non-profit products, BNS and other specialty lines that came through key acquisitions like First Nonprofit, Sequoia and other acquisitions. We also recently completed acquisition of Insco Dico which further enhances our sturdy business and adds another niche product line. As we take full advantage of these opportunity, we continue to take and look at the small workers’ comp where we see the biggest opportunities. But while we are doing that, simultaneously, we are building out our specialty niche line, again we want to continue being a very niche player and not complete with the larger national players.

Turning to our specialty extended warranty, we continue to be very optimistic about the opportunities we’re seeing in the U.S., Europe and other parts of the world. We are staying focused in our small and middle market account as well as seeing some very large opportunities for multinationals to see more and more of the value in dealing with AmTrust, a fully integrated company, rather than dealing with several different companies they have done historically. Our recent acquisitions of Car Care Plan in England and Case New Holland Agency are performing very well, and as anticipated have been very accretive to-date. We expect it to continue being accretive to earnings going forward. I would like to give you an example of how we are combining fee revenue business and underwriting profits. A great example is the Warrantech, an acquisition we completed in 2011. At the time we acquired Warrantech, we were making very nice underwriting profits from the business being produced from Warrantech, but the company Warrantech itself had an EBITDA at a minimum level, breakeven. Since that time, by the change of management and going after new business consultants and some back office operations and expenses and putting a new technology, I’m pleased to report that Warrantech’s EBITDA this year is approximately $20 million and generated an addition to that $16.7 million in underwriting profits for AmTrust.

So this is another example how we buy something that has good underwriting profits, was not making money operationally. So now it has great underwriting profits as they did before, but even more, and in addition, we created a very substantial fee business that’s worth a lot of money. Another good example is our acquisition of BTIS, which we acquired at the end of 2011. When we acquired them, their EBITDA was little bit under $7 million having controlled approximately $60 million of premium dollars[ph]. Over the next couple of years, we transitioned most of the good business and grew it. In 2013, we got approximately 95.7 million of insurance premium of AmTrust, a very niche business with a very healthy underwriting profits and in addition to EBITDA, BTIS today is $12 million. Again, this is how we are creating additional value, not only by growing niche underwriting profits in very niche lines of business, but as well creating substantial value in fee businesses that we control.

We are very pleased with our most recent acquisitions of Sagicor and Insco Dico both of which closed in the last two months. Sagicor gives us a fully integrated Lloyd’s platform and in addition has a book of business of $250 million. The Sagicor business further enhances our worldwide insurance capabilities to better serve our customers. As I mentioned before, Insco Dico acquisition, we have now substantially expanded our [inaudible] capabilities, increasing our overall books to approximately $75 million. We are looking forward to grow this niche even further. We also continue to improving one of our core competencies which is our information technology systems. While many insurance companies are a multiple platforms specially ones that have done acquisitions and many times our legacy systems which are quite expensive, we at AmTrust believe in a single operating system. In addition, we’re constantly investing in technology and there is need that technology is a core principle and a core company seed and is one of the dominating reasons to our success.

When we do acquisitions, we consolidate their platforms to our operating systems, which not only decreases expenses to the company we acquired, but also gives us operating efficiencies which allow us to produce niche business at a significantly lower cost in the industry norms. We are very much looking forward to finalizing the Tower acquisition. If you look at the small commercial business, even after adjusting for their adverse reserve development, the loss ratio was approximately on average in the 60s. The small workers’ comp and small commercial business has historically performed very well. We believe by acquiring these lines of business, we will be increasing our focus on small commercial niche lines of business. In addition, once Tower is fully integrated niche to our IT platform, we believe we’re able to bring down their expense ratio in line with the AmTrust’s platforms. We estimate that the Tower business on a full year basis will add between 300 million to 500 million in small commercial business. In the interim, we will see significant earnings from the reinsurance agreement we currently have in place with Tower.

I would like to spend a few moments on the issue that peers have created some confusion. The issue relates to accounting of our Luxembourg reinsurance captives. For the record, AmTrust strictly adheres to generally accepted accounting principles and Luxembourg is not a dimension previously significant in terms of AmTrust’s performance. Some of what I’m going to say I said before and then I’ll give you an example of how we deal and how we make money on Luxembourg. Let me take a few minutes to describe our Luxembourg reinsurance business and explain why we invest in these reinsurance companies. As I mentioned previously, 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 risks, either because the insurance terms available in the market aren’t attractive or because these companies believe they will capture additional profits by self-insuring. The companies reinsure their own risk and are mandated by Luxembourg laws establish equalization reserves, which are redundant reserves designed to protect the company against unforeseen volatility.

For example, if the company is in the business of manufacturing products, it may reinsure its product liability exposure. In addition to its standard reserves for low liability and IBNR, we’ll establish an additional reserve called an equalization reserve, to protect against insurance volatility. At some point, the company accumulates more equalization reserves than it needs to protect against the volatility, either because a better pricing is available in the market, or the losses have run favorably for several years. If the company cannot generate enough premium to maintain equalization reserves and utilize them for losses, the company will be forced to release the reserves and incur a taxable event. As a result, the old – then seem to sell the reinsurance company at a discount to its fair value rather than least equalization reserves that protects liabilities. This allows many companies, including AmTrust, to purchase these reinsurance companies at a discount of fair value. We are effectively buying the reinsurance company at a discount of total book value, allowing us to generate earnings and capital over time.

These captives are fully consolidated in our financial statements and have no impact on our loss ratio. They give us the opportunity to purchase $100 of assets, usually for $90 they sell in, who have to sell to avoid paying tax coming down the reserves. AmTrust utilizes these equalization reserves through internal financial entrench agreement which are fully disclosed Luxembourg regulatory authority and are fully netted out as all intra group transactions, so, as said earlier, there is no impact on our loss ratio. Since 2009, AmTrust has purchased 12 captive reinsurance companies, bringing in an aggregate of $100 million of discount which only approximately one-third has been recognized in earnings to-date. This means, that over the next three to five years we’ll recognize in excess of $60 million for these captives with little or no risk. I think the best way to explain is to give you an example.

In December 2012, AmTrust purchased [inaudible] from a large supermarket chain. The seller had established the captive many years before. The captive had accumulated 124 million of equalization reserves. The seller all previous liability except for the equalization reserves which were redundant reserve. Again, we acquired a clean company, with no other liabilities except for the equalization reserves which as I said earlier, are redundant reserves. We purchased the [inaudible] for 119 million, 6 million of which was capital and 113 million was for 124 million equalization reserves. So in total, the assets were 130 million in cash, the liabilities were 124 million and the liabilities consisted of redundant equalization reserves in addition to 6 million in capital. Essentially, we’ve bought cash and investments of $130 million for a purchase price of $119 million. On day one, we effectively had a gain of $11 million. In order to realize this gain, we had to put into place reinsurance agreements to utilize the redundant reserves over time. So what did we do? We entered into a stop loss agreement between our Bermuda Reinsurance company AmTrust International and [inaudible]. The agreement provides the coverage is triggered at AmTrust losses exceeds certain attachment points, obligated to captive to pay Bermuda a maximum of $100 million of losses. In 2013, these stop loss agreement generated losses, net of premiums of $58 million to [inaudible]. This result in the dropdown of $58 million of redundant equalization reserves and allows AmTrust to recognize a gain of approximately $5.2 million. So still has 67 million of additional equalization reserves which over the next several years we expect to utilize in drop down. This stop loss agreement is an internal reinsurance arrangement between AmTrust International and [inaudible] and entered into solely for the purpose of drawing down equalization reserves. Because it’s an internal reinsurance arrangement, it has no effect on AmTrust’s loss ratios. AmTrust’s loss ratios will be same with or without [inaudible]. This a typical of a transaction that we enter into related to our Luxembourg reinsurance companies. To-date, we have about 12 reinsurance companies in Luxembourg all with similar characteristics. We have acquired an aggregate of $100 million of discounts to the purchase of these reinsurance companies. We have recognized as I mentioned before, approximately one-third of the benefit of this 100 million. Again, which means over the next three to five years through various intercompany reinsurance agreements, we’ll recognize additional 60 million of profits with very little of risks. These profits will float through our income statement as a reduction to our deferred tax assets although will have no effect on our consolidated loss ratio. We have no hidden losses in our Luxembourg captives.

I want to address the referencing to Schedule Y to annual statements filed by our U.S. insurers. Schedule Y intended to show the net income effect of reinsurance agreement with affiliated insurers within a holding company group. Schedule Y shows correctly the aggregate net income affect to our Luxembourg company resulting from their assumption of intercompany financial losses from AmTrust International. It corresponds to the reduction of their equalization reserves. Schedule Y also shows the net effect, AmTrust international all intercompany reinsurance including its session of a net loss to the Luxembourg company. I hope this clarifies any confusion and Ron and I look forward to answering any questions you may have and other question. In conclusion, getting back to what counts, we are both proud and confident of AmTrust’s performance and momentum we have as a company. Our priorities growing the long term shareholder value of this company, and we are confident that our performance for the quarter and the full year 2013 emphasizes this. We believe we are very well positioned to further grow our top-line, our bottom-line, increase our book value per share and we strive every day to do that. We believe that 2014 is going to be an even better year than 2013 for AmTrust and shareholders.

I would now like to turn the call over to, Ron.

Ronald 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 1.06 billion during the fourth quarter. This represents a 36.8% increase over the fourth quarter of 2012. For the full year 2013, gross written premium totaled 1.4 billion, an increase of 1.4 billion or 49.7% over 2012. The top-line gross written premiums reflects growth within all of our operating segments with the exception of the personalized reinsurance segments which represented our quarter share reinsurance relationship with National General. As previously disclosed, this reinsurance relationship is terminated on a one-off basis. Growth was driven by policy accounts and lines of business where pricing remains attractive, the continued expansion of distribution as well as the successful integration of recent acquisitions.

For the quarter, we generated net income of $64.7 million or $0.82 per diluted share, and operated earnings of $81.9 million or a $1.3 per diluted share. For the quarter, we had a net gain of approximately $2.2 million or $0.03 per diluted share related to our investment in life settlement contracts. Earnings per share amounts are affected by the 10% stock dividend that was declared in August of 2013. For the full year, we generated net income of $286.9 million or $3.67 per diluted share. Included in net income, was approximately 40.3 million of net gains related to the acquisition of Car Care, Sequoia and First Nonprofit Insurance Company. These net gains accounted for earnings per diluted share of $0.51. Additionally, we recognized a net gain of 5.6 million related to the successful offering completed by National General Holding Corp. in our subsequent conversion of the preferred share into common equity. This gain increased earnings per diluted share by $0.07.

For the year, we had operating earnings of $264.6 million or $3.39 per share. We had a net realized gain of approximately of 2.3 million or $0.03 per diluted share related to our investment in life settlement contracts. Annualized return on equity from operating income was 25.1% during the quarter and 19.9% for the year. Our small commercial business segment results continue to reflect a firm pricing environment. Most written premiums for the quarter increased to 228 million or 93.3% to 471 million. This increase was primarily driven by growth in small workers’ comp business in California, New York and Florida and we continue to see both an increase in policy count as well as an increase in rate. Additionally, premium growth during the quarter benefitted from a workers’ comp placement policy that was issued in the state of New York. Specialty risk and extended warranty produced gross written premium of 383 million, up 31 million or 8.8% from the fourth quarter of last year. Specialty program produced gross written premiums of 205.9 million, an increase of 55.9 million or 37.3% when compared to 2012.

For the year, our gross written premium increased by 1.4 billion or 49.7% from 2.7 billion to 4.1 billion; small commercial business increased by 726 million or 77.8%; specialty program increased by 300.7 million or 52%; specialty risk and extended warranty increased by 393 million or 35.1%. The increase in gross written premium for the year benefitted from approximately $210 million of premium related to acquisitions that were depleted during the year. Car Care contributed $98 million in gross written premium, Sequoia contributed $80 million and First Nonprofit Insurance Company contributed $32 million. For the year, gross written premiums for workers’ compensation across all segment was 1.6 billion. This compares to 930 million for 2012. Our net written premium for the quarter rose to 665 million, compared to 413 million for the fourth quarter of 2012. Premium ceded included approximately 332 million – I apologize 322 million to Maiden. For the year, our net written premium was 2.6 billion and we ceded 1.15 billion to Maiden. Our net written premium for the quarter was 708 million. Small commercial business accounted for 45% of our net earned premium, specialty risk and extended warranty was 31%, specialty program was 21% and personalized reinsurance was 3%.

For the quarter, we ceded approximately 275 million of earned premium to Maiden. For the year, our net earned premium was 2.27 billion which is an increase of 59.7% from 2012. We ceded 986 million of earned premium to Maiden during the year. Our combined ratio came in at 89.9% for the quarter, compared to 90.5% for the same quarter last year. Our loss ratio was 66.5% this quarter, compared to 66.6% for the same period last year. For the year, our combined ratio was 90.5% compared to 90.1% for 2012. The loss ratio for the full year 2013 was 67%, compared to 65% for 2012. Our expense ratio was 23.4% for the quarter compared to 23.9% in the fourth quarter 2012. For the year, our expense ratio was 23.5% compared to 25.1% for 2012. Our deferred acquisition cost as of December 31, 2013, was approximately 440 million. Deck represents 16.5% for our gross unearned premium and 26% of our net unearned premium. To be clear, our deck is calculated with the requirements and methodologies prescribed in AFC 944. The expenses that we defer are those that are specifically outlined in AFC 944 as eligible for deferral. To compare our deck percentage of either gross or net unearned premiums appears as a difficult task. We write multiple lines of business across varied geographies. Direct and indirect acquisition costs varied by line of business.

For example, we have competitors in the warranty space that have deck as a percentage of unearned premium in excess of 40%. If you want to remove our net deck assets and net unearned premiums related to our U.S. warranty, our deck in net unearned premium ratio would decline to 23.2%. I would also like to point out that prior to the revision and the clarification regarding the manner and the expenses that are eligible for deferral, there were several PNC companies which took large one-time adjustments for their deck. We were not among those company. Our share to fee income totaled 93 million for the quarter, an increase of 39 million or 70% from the prior year quarter. The increase over last year was driven by the acquisition of Car Care which contributed to fee revenue of 9.1 million during the quarter, AmTrust consumer services which contributed 16.2 million, and First Nonprofit which contributed 6.1 million. Additionally, fee revenue generated by acting as an NCCI assign risk carrier was 7.4 million. This was an increase of 2.5 million. AMT warranty had fee revenue of 21.3 million, which was flat with the fourth quarter of 2012. IT services and licensing fees that we generated associated with National General, was 5.8 billion. This was an increase of 1.3 million and Case New Holland was 8.1 million, an increase of 3.9 million.

For the year, we generated 332 million of fee revenue, an increase of 159 million or 92%. The increase in fee revenue for the nine months was driven by the acquisition of Car Care, which accounted for 31.6 million of fee revenue; AmTrust consumer services which accounted for 44.6 million of fee revenue, and First Nonprofit Company which accounted for 22.7 million of fee revenue. Additionally, fee revenue generated by NCCI assigned risk business was 34.6 million, an increase of 14.6 million. AMT warranty generated fee revenue 84.9 million which was an increase of 13.5 million; IT services and licensing fees with National General was 24.5 million, an increase of 9.6 million; and Case New Holland was 30 million, an increase of 21.5 million. We generated around 21 million around investment income for the quarter and recognized a 3.2 million after-tax net realized investment loss. For the year, we generated a total of 84.8 million in investment income and had net after-tax realized gains of 10.1 million. For the year, our cash flow from operations was approximately $900 million. As it relates to our life settlement portfolio, we had two mortality events during the fourth quarter. A total debt benefit on those policies was 16 million and that resulted in a cash gain of 13.2 million and an economic gain of 11.9 million.

For the year, we had five mortality events with total debt benefits of 25.1 million, which resulted in a cash gain of 21.9 million and an economic gain of 20.3 million. The company paid a dividend of $0.14 per share during the fourth quarter and for the full year 2013, $0.56. Total shareholders’ equity is 1.45 billion, an increase of 302 million from year-end 2012. Book value is $17.85 per share, up $2.37 per share from a year ago. Total assets as of December 31st were approximately 11.3 billion and included total investment assets of 4.6 billion. Fixed maturities comprised 74% of the portfolio, cash and short term investments 23% and other investments 3%. Other investments include our common stock investment in National General. Under accounting rules, we are required to use the equity method of accounting for our common stock investment in National General. We currently this investment at approximately $90 million. However, based on National General’s recent successful offering, the value of our common stock and from a market value perspective will be approximately $172 million. Therefore, there is an additional $80 million of value that we have that did not appear on our balance sheet. During the year, we also successfully completed a $115 million perpetual preferred share offering as well as a $250 million senior placement of debt.

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

Hilly Gross

Thank you, Ron, and thank you, Barry. Both Barry and Ron have indicated their willingness to entertain questions from those of you in our listening audience. To facilitate this access to us and to ask question, I’m going to momentarily turn it back to our moderator for specific instructions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of Randy Binner of FBR. Your line is now open.

Randy Binner – FBR Securities

Good morning. Thanks for the disclosure on Luxembourg it’s helpful. I have a question about the geography change there and the expense ratio in the change into the tax line. So the first question is that – as far as kind of Luxembourg accounting changes, is that income statement geography change the only change we should expect there?

Ronald Pipoly

Randy, this is, Ron. Yes if only characterized as geography change yes, that’s the only change you would expect.

Randy Binner – FBR Securities

And then, it was – so the expense ratio was higher and the taxes were lower I think. And so were there other items going on in the expense line that’s related to that and the tax line related to that. Just trying to kind of understand what the core tax rate should be going forward because it seems like it’s going to be lower going forward because of this change?

Ronald Pipoly

Yeah, Randy from a core tax perspective I agree with your observation. If you look at the changing geography and the fact that you reduce our tax provision by the amount of rating takedown on a year-over-year basis one would expect a slightly lower tax rate. But again, as Barry said, we have approximately $60 million over the next three to five years. I don’t know if that would be appreciably lower yet again, so I would say that our effective tax is still going to be something that is going to be in the mid 25% up to 28% just depending on where we’re earning our premiums and geography associated with that while we’re actually earning premium effective tax rates and those profits are.

Randy Binner – FBR Securities

Okay. And then were there any one-timers in the other expense the other underwriting expense line that offset the change there or was that a normal operating result outside of this change?

Ronald Pipoly

Yeah, that was a normal operating result outside that change.

Randy Binner – FBR Securities

All right. Let me squeeze one more in and I’ll drop back into the queue. I was just curious what management’s thoughts are on deployable capital and the buyback program really pro forma of whatever business is on-boarded for Tower. And I think that number’s been better than 100 million in the past, but just to be curious about buyback thoughts now that quarter is reported and what deployable capital is currently?

Barry Zyskind

Well, then you see from the business that we’re creating a lot of operating earnings, and we have very strong cash flow and we’re also growing the fee business tremendously and having a lot of free cash flow there. I would say that our plan right now depending where the stock is, if it is hanging on the levels that it was we’re going to use as much excess capital we have to, to buy back stock. And then obviously we will also look at the opportunities that are out there. If there is opportunities to do very accretive acquisitions that will ultimately grow earnings and grow book value, we’ll deploy there. But depends on the stock trends and depends where the capital is and depends on what opportunities we have. But right now, we announced a buyback at the end of the year of 150 million, if the stock stays where it is, we feel we have enough excess capital to go out spend and buy stock back.

Randy Binner – FBR Securities

Just a quick follow up there would be, could you quantify the deployable capital is as you think pro forma what you’d onboard for Tower your excess capital?

Ronald Pipoly

Randy, this is Ron. The interesting thing about Tower in terms of the nature of the transaction, because we are taking I’ll use a number approximately 250 million of unearned premium as part of what I would characterize stage one in this transaction, that in and of itself generates capital because that hit is going to have immediate earnings momentum behind it. So, you have 250 million of unearned premium, so you just assumed may be an average earnings duration on that of nine months, but really self-capitalize from an earnings perspective. So again, we’re in a very strong capital position. Total capitalization in excess of $2 billion at year-end, but we certainly feel that we have we’re very strong from a capital position. Obviously, we continue to work with and work with them as part of our announcement of our participation in this Tower transaction. And again, from a capital perspective I certainly still think that we’re in the $200 million to $300 million range of the ability to go out and do transactions and if those [inaudible] transactions would be accretive.

Randy Binner – FBR Securities

All right. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Bijan Moazami of Guggenheim. Your line is now open.

Bijan Moazami – Guggenheim Securities

Good morning. I have a quick question from observation on the small commercial accounts. What is the average price increases that you guys are achieving in your small commercial accounts ?

Barry Zyskind

Workers’ comp perspective for 2013, we’re hovering right around 6% on an overall rate increase obviously California led the way again, with an excess of 12% on a year-over-year rate increase. But really across all of our states, we’re very encouraged with what we’ve seen from a rate environment that’s something that obviously we gain on a monthly basis. We look at our largest class set of business and how we’re performing on a rate perspective on a year-over-year basis and we’re certainly very encouraged with what we see. Overall, from the commercial package perspective, again, I would say that the average rate increases are slightly less than that again, but the business that we’re going after and the business that we’re targeting, we’re achieving rate increase. If we can’t achieve rate increase, then we’re not going to business

Ronald Pipoly

We’re also are seeing an improvement in payrolls and improvements in audits. When you start adding up the numbers in small business, it has significant impact on the premiums and really we believe for small business, the increase in payrolls does increase we’re getting on a premium is higher than we’re taking on in exposure. There is some built in rate with that as well.

Bijan Moazami – Guggenheim Securities

So let me absolutely clear on that. You have higher retention ratio on that book of business, you have higher prices on that book of business, you’ve doubled it 2013 over 2012 you’ve tripled its fourth quarter over last year. Your loss ratio was already conservative and I’m looking at it and you’re booking it about four points higher loss ratio than the average which is kind of the selective traveler select accounts and Cincinnati. So, why so much additional conservatism in these numbers?

Ronald Pipoly

Randy – I’m sorry Bijan, this is Ron. One of the things don’t forget from the California book of business perspective, I mean we’ve been in the market, we entered the market from a renewal transaction with Majestic and got a very quality staff not only from a underwriting perspective there. But again, we’re being cautious with our ultimate selects in California and we’re certainly very encouraged by the loss trends that you see on a monthly basis and frequency average to vary client those types of things that we look at on a monthly basis. But again, as we grow confidence in California I mean this will cause us to look and we’re carrying our ultimate loss by year. Again, we feel that we’re going to be conservative we’re very comfortable with where we’re at from a loss carried, loss reserve perspective not only on workers’ comp and small commercial business but across all lines.

Barry Zyskind

And I’ll just add Bijan, definitely we saw 2012 you saw loss ratio and comps starting to go the other way and starting to go down. And that was the first where it started going back down is ‘13 was a very solid year. So far all in the ‘13 looks back to probably like a 2006 and 2007 years which were phenomenal years. So I agree with Ron. Right now, we’re taking it slow but we’re definitely think that the trends that losses, frequency, severity is very solid and it’s fine to be prudent now, but as we get more and more comfortable in ‘14 during this year we’ll clearly know because of how quickly we’ll close claims how ‘12 and ‘13 is really panning out. But I agree that there is conservatism in the numbers, but it’s better to be safe.

Bijan Moazami – Guggenheim Securities

And that $60 million of additional that you guys are going to have for equalization reserve, that’s not reflected on the book value just like the National General $14 a share is not reflected on your book right?

Ronald Pipoly

Hi, Bijan. This is Ron. Yeah that’s correct.

Bijan Moazami – Guggenheim Securities

Okay. And then finally on Tower I just wanted to clarify, the commercial UPR on Tower balance sheet is probably around 500 million. So the 250 that you guys are getting after the reinsurance that Tower has bought on those coverage?

Ronald Pipoly

Yes.

Bijan Moazami – Guggenheim Securities

Okay. Of the 300 to 500 that you are suggesting you will be writing, that doesn’t include the UPR, that’s in addition to the UPR over the next 12 months after…

Barry Zyskind

I’m looking at the UPR right now, the net 250 that we’re taking probably on a full year basis that book is probably a 500 plus book of business. So, because of what happened to Tower and because of some of the things that market placed on, I’m being conservative I’m saying okay we’re in there we’re trying to write new business. We’re actually writing new business when we’re comfortable. But I can’t tell you how much of that small commercial is going to stick. We’re definitely are trying and putting things in place to make sure it does. So, I’m saying somewhere between on a full year business once we close, what the business will be somewhere between those numbers.

Bijan Moazami – Guggenheim Securities

Okay. And then just clarification again for Ron, the 250 UPR is going to be earned over nine months or over six months?

Ronald Pipoly

Bijan again the policies that we’re in other premiums December 31, 2013, I use nine months as an example. I would say that the earnings duration on that is probably somewhere between six and nine months, that we will earn that. Obviously it will decelerate as the months go by, but I would say earnings ratio on that is somewhere between six and nine months.

Bijan Moazami – Guggenheim Securities

All right. Thank you.

Barry Zyskind

Thank you, Bijan.

Operator

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

Mark Hughes – SunTrust

Yeah thank you. Good morning.

Barry Zyskind

Good morning.

Mark Hughes – SunTrust

You retained more of that small commercial business it looked like in the fourth quarter, would that trend persist in 2014?

Ronald Pipoly

Hi Mark, it’s Ron. There is a couple of things that happened in the fourth quarter, we had more retained premium, one was I mentioned that the workers’ comp replacement policy that we issued in the state of New York. Maiden did not participate on that. This structurally wasn’t something that Maiden or either us think of them to assume. But I would say on a go forward basis, if you would look back to kind of the third quarter small commercial business when we retained about 57% of our business, I would say on a go forward basis looking at a normalized 2014, that we will retain somewhere between 57% and 59% of our small commercial business. So I’d say that the fourth quarter was kind of a blip if you will, to place on a single transaction.

Mark Hughes – SunTrust

You talked about the losses being under control, anything different in the California market? Any change in trends there?

Ronald Pipoly

I think the trends that we see in terms of frequencies, severity, claim closure rates are all very, very encouraging. Again, it’s not rocket science, but with these pricing with the claims close the claims as quickly as possible. And our claim closure rate is actually accelerated over the year which is obviously encouraging to all of us here. So, really from a California book of business it seems maintaining the discipline from a pricing standpoint, going after the business that’s our sweet spot.

Barry Zyskind

And again, Mark there are things Southern California and Northern California that a lot of people are talking about and obviously big differential, we actually think there is opportunity in Southern California at the right size to go for the low highs of the business. So, again if you have to get a different price you get to Northern California the bare opportunities there. And we’re watching actually the claim closures and the frequencies vary, Southern California as compared to Northern California as well. It’s not too similar when we got into New York many companies were staying at down all were writing upstate. When we acquired Princeton then we started the benefits of how they did, by being one of the few players in that downstate of New York, it did very well. So it’s picking its spot, making sure we get the right rate on the guidelines direct partners.

Mark Hughes – SunTrust

Specialty risk, the growth there was a little more restrained this quarter. What do you think the outlook is going forward? New teams, new product lines, what should we think?

Ronald Pipoly

Well, I think one of the things from a growth perspective, I think specialty risk and extended warranty are probably more relevant to evaluate on a year-over-year basis. There was some change in audits around new expense coverage for example in new cable accelerated premium more in the first half of this year than traditionally been written at. So again, as Barry said in his earlier comments in specialty risks and extending warrants, we’re certainly very encouraged about our growth opportunities not only with all the additional relationships that we developed, with marketing needs and clients here in the United States, but we also had continue to look to expand our European platform, the acquisition of Car Care all benefited us $31 million of fee revenue for the year, $98 million of premium for the year. So we’re certainly very encouraged about our growth opportunities not only domestically but internationally.

Mark Hughes – SunTrust

Thank you.

Operator

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

Robert Farnam – KBW

Hi there. Thanks. A couple of questions. It sounds like lot of the people that had with the short[ph] had issues with Schedule Y. So can you, I don’t know Barry or Ron, can you just go over again how Schedule Y does work or doesn’t work as it relates to your relationships with Luxembourg?

Michael Saxon

Schedule Y is a representation of transaction among companies within the holding company system, not limited to insurers transactions. To the extent that there is management fees or other organization vertically integrated organizations are disclosed in Schedule Y. Schedule Y on a particular column that people like to reference, that is a net number of premiums lost it. It’s not like Schedule F in the reinsurance activity, it’s just a recast among affiliated companies with the holding company. And again as Barry said in his comments, Schedule Y represents the net ceded loss to our Luxembourg captives based on our reinsurance structure. And again as Barry said, and I’ll just emphasize it, that on a consolidated basis, we use U.S. GAAP to implore all of our financial statements and we are required to consolidate all subsidiaries which Luxembourg reinsurance companies are subsidiaries, they’re consolidated. The losses that are ceded to Luxembourg are mainly financial losses generated between are Bermuda in Luxembourg and that our incurred losses as presented in our income statement and our loss reserves is presented on our balance sheet are appropriate. Our reserves are within our actuarial ranges and there is no hiding of losses or moving of bad policies or whatever want to put out there. The fact of the matter is we account the Luxembourg appropriately and in our opinion, it’s a very low risk lay of making a nice profit.

Robert Farnam – KBW

Thanks for the additional disclosure. That was pretty helpful. And Ron any reserve draw during the quarter?

Ronald Pipoly

Hi, Bob. It’s Ron. Yeah we had not particularly during the quarter but for the year we had a very minor amount relating some program years. But again it’s significant if you look at the total of our reserves. Our net reserves are 2.63 billion at that gross reserves are about 4.4 billion it’s really insignificant.

Robert Farnam – KBW

All right. Okay. Is that workers’ comp or is that general liability or what kind of programs are those?

Ronald Pipoly

General liability commercial vehicle on a couple of programs that more off of those programs.

Robert Farnam – KBW

Okay good. Thanks.

Ronald Pipoly

Okay.

Operator

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

Kenneth Billingsley – Compass Point

Good morning. Just a couple of follow up questions. You talked about earlier in the call, some international growth opportunity. Where was the biggest impact on which segment would that have the biggest impact going forward through ‘14 and ‘15?

Barry Zyskind

We haven’t to specialty extended warranty so you know specialty and extended warranty have all the warranty business worldwide and also all our four business really gets imported our throughout the segment. So anything that would happen outside of United States would be reported in that segment.

Kenneth Billingsley – Compass Point

And regulatory changes that are occurring I know some other companies have mentioned ability to pick up some business, do you see opportunities there as some of the regulatory changes occur in the EU?

Ronald Pipoly

Hi, Ron – I’m sorry Hi, Ken it’s Ron. If you’re talking about final implementation of in tune, we certainly think that is an opportunity. That becomes more focused I think you’re going to find some smaller carriers that are going to look at two requirements and say that the balance sheet doesn’t support all the premium that they are writing. They will actually look to potentially partner or look to offshore business. So I think that’s an opportunity for us. We’re very well positioned from solvency two perspective. It’s certainly got a very early to ensure that we would be in good shape from a capital perspective. So yeah we certainly view that as an opportunity.

Barry Zyskind

And just one step we’ve done a lot of acquisitions we have a pretty sizeable book of business. Our plan going forward is really to take some of the IT technology preference we built in US and really take those products and that infrastructure to Europe. And we think that will allow us to get in target some of the smaller business and have an expense ratio advantage to some of the competitors out there. So our long term plan is not only from the capital standpoint, but as well as from an IT standpoint. If we can go compete in those markets in low expense ratio, like we do here, we think we’ll have the competitive advantage.

Kenneth Billingsley – Compass Point

And speaking of that, I apologize if you mentioned this earlier, but the expense ratio within the specialty risk and warranty is down quite significantly year-over-year. Can you talk about and I missed this I apologize, can you talk about what’s driving that and is that going to maintain?

Ronald Pipoly

Yeah I mean, if you were to look at the product distribution as being the biggest contributor to overall expense ratio. Given the current construct of that segment in terms of the it’s not unreasonable to think that the expense ratio will be in that general area. To the extent that we develop an additional relationships, may be outside of Continental Europe and to the extent that obviously the acquisition costs are higher, you can see a movement up in the overall expense ratio. But given the current lines of business and the geographies that we’re writing, yeah it’s fair to say it should be fairly consistent.

Kenneth Billingsley – Compass Point

Last question, regarding Tower Group and can you talk about little bit about your plans there? Obviously they’ve announced their third quarter in the reserve charge when you guys were doing your due diligence and looking not just the cut through agreement but also the plan on taking on assets. I believe your plan was obviously you’re still interested in acquiring the assets and that’s still moving forward despite the announcement by Tower Group. So part one, if you could just confirm that. And then number two, was the reserve charge that they were going to be taking the increase, was that part of the due diligence when you guys were looking at the business earlier this year?

Barry Zyskind

Ken this is Barry. It’s going to be taking the balance sheet and yes the transaction was still we’re planning to go forward with the transaction and a lot of the reserve increase will wear off. And I think if you look at, some of the write down of the assets, a lot of it was related to actually fixed assets. So I think that has to do with the fact that the purchase price was below the carrying value. So I think we feel very good about where the bouncing in and we look familiar with where the potential outburst of could go. And as we stand today, we look very much forward to getting it done I think it’s going to be very accretive for AmTrust International National General and having and to make money other time.

Kenneth Billingsley – Compass Point

And would Maiden at least have opportunity to be participating in that with the part of the agreement?

Barry Zyskind

I think it should be part of the yes they have opportunity acquisitions but the small comp the small commercial really fits in with what we’re doing now. So, I see no reason why it should not be going into the main course here.

Kenneth Billingsley – Compass Point

Congratulations on the quarter and thank you for the enhanced discussion and disclosure.

Barry Zyskind

Thank you.

Operator

Thank you. And I’m showing no further questions. I’m going to hand the call back over to Hilly Gross for any further remarks.

Hilly Gross

Thank you. As there are no further questions, that concludes this fourth quarter and yearend earnings conference call. On behalf of our [inaudible] and all those financials, we thank you for taking the time out of your schedules to join us this morning. We wish you all a pleasant day. Thank you.

Operator

Ladies and gentlemen thank you staying in today’s conference. This does conclude today’s conference. You may all disconnect. Have a great day everyone.

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