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AmTrust Financial Services, Inc. (NASDAQ:AFSI)

Q1 2014 Earnings Conference Call

May 1, 2014 10:00 am ET

Executives

Hilly Gross - VP, IR

Barry Zyskind - President & CEO

Ron Pipoly - CFO

Michael Saxon - COO

Beth Malone - SVP, IR & Corporate Development

Analysts

Bijan Moazami - Guggenheim

Randy Binner - FBR

Ken Billingsley - Compass Point

Mark Hughes - SunTrust

Bob Farnam - KBW

Adam Klauber - William Blair

Christine Worley - JMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the AmTrust Financial First Quarter 2014 Earnings Conference Call. (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, Nicole. And thank you everyone for taking the time to join us this morning for this AmTrust Financial's first quarter earnings conference call. With me this morning are Mr. Barry Zyskind, President and CEO of AmTrust; and Mr. Ron Pipoly, Chief Financial Officer of AmTrust. And 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 this first quarter results, I would with your indulgence read into the record 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 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, etcetera. And since these statements are based on current expectations and involve assumptions that are difficult or impossible to predict accurately, many in fact which of course 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 on 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 first quarter 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. Thank you for joining us on our call today. We are very pleased with the strong results we reported in the first quarter. We experienced substantial growth in all of our division. The combination of both organic growth and through acquisitions both contributed to the rise in the top and bottom line results. Growth was particularly strong in our workers compensation division with our largest market seeing the biggest rate increases.

Our ability to grow market share was demonstrated by our strong rise in policy count. We are benefiting from the fact that some competitors have pulled back so more producers, more [technical difficulty]. We are achieving this growth without compromising our discipline. Our focus still remains very much strong low house of business. Our renewal rates continue to be strong as well.

Technology is making a difference for AmTrust. Our technology not only contributes to lowering our expense ratio but also provides real-time critical market intelligence and business analysis that allows us to remain responsive even as our business grows. We believe this has allowed us to recognize trends in the marketplace before some of our competition.

Rate increases in workers comp commercial package business have benefited our results particularly when combined with market share gain. In addition, loss trends remained stable. We expect a favorable rate environment to continue for the near future.

We are winning new business with superior agent interface and responsive client relation and not compromising on our price. Acquisitions remained an important part of growth with the acquisitions of Sagicor, Insco Dico, Car Care, Sequoia, First Nonprofit and AmTrust consumer services all adding to our first quarter results.

Acquisition opportunities remain attractive. We have a full plate and are continuing to do due diligence on a number of transactions, both foreign and domestic and both on the insurance carrier side as well as on the fee business.

Tower transaction is progressing and is already contributing to our first quarter results. The cut-through reinsurance agreement we entered into at the beginning of this year with Tower International generated significant gross written premiums in the small commercial business segment. The agreement also contributed to operating earnings in the quarter. We look forward to closing this transaction in the summer of '14.

We are excited and believe this small commercial business of Tower will be a positive addition to the AmTrust model and will be accretive to our earnings. The small commercial businesses seem to benefit from raising rate, as I mentioned before, and overall improvement in the economy. Economic improvement is reflected in expanded payrolls and increased demand for workers compensation. We are seeing particularly attractive rate environments in our key states of California, New York, Florida and New Jersey.

Our Extended Warranty and Specialty division experienced growth in revenues and profit while maintaining margins with new products and the benefit of the Car Care acquisition. Economic improvement drove increased consumer demand for warranties. In addition, we are benefiting from the introduction of new products and relationships and the development of innovated distribution sources.

Our specialty program division is enjoying some of the same favorable trends that we are seeing in small commercial business with competition leaving the marketplace which allows for rate increase and more market share gains diving our profitability higher in this division.

Our service and fee income continues to be a very important contributor to both top and bottom line. Our service and fee business are also benefiting from increased growth in our core businesses.

We continue to believe that this is a great diversification for our company and believe long-term will provide great value for our shareholders.

Investment income continues to grow as we now have approximately $5 billion in invested assets. We are excited and believe that what we've created is a model that will produce great results in both hard and soft market.

In closing, we continue to remain very bullish on 2014 and further. The high return model focuses on niche markets with a lower expense ratio is proving to be a superior model that has worked to both soft and hard cycle. In the first quarter, we created over $100 million of capital and we believe that this is a trend that will continue for the remainder of 2014 and beyond.

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

Ron Pipoly

Thank you, Barry, and good morning. Gross written premium for the quarter was a record $1.67 billion, which is the fourth consecutive quarter that AmTrust has surpassed $1 billion in gross written premium. AmTrust gross written premium over the last four quarters has been $4.8 billion.

Gross written premium increased by 76.5% for the first quarter when compared to the first quarter of 2013. The growth in premium coupled a strong fee revenue has enabled us to continue to generate strong bottom line results and operating income, net income and earnings per share.

Net income for the quarter was $99.9 million or $1.27 per diluted share. Operating income was $97.4 million, or $1.24 per diluted share. Operating earnings for the quarter included approximately $1.6 million or $0.02 per dilute share relating to gains on life settlement contracts. Annualized operating return equity was 27.8%.

In terms of gross written premium by segment, our small commercial business segment gross written premium increased by $563 million or 150% to $939 million. Growth was driven in part by the Tower commercial lines renewal rights transaction which provided $268 million of premium during the quarter. Gross written premium without the effect of the Tower renewal rights transaction would have been an increase of $295 million or 79%. Additionally, we continue to deliver strong growth from our small workers compensation business.

States with the largest growth were California, Florida, New York and New Jersey. Growth from a workers compensation perspective was driven by both increases in policy count of 40% as well as an increase in average policy size of 20%. The increase in average policy size was a result of rate increases as well as an expansion of payroll.

Specialty risk and extended warranty produced gross written premium of $447.2 million, an increase of $118.9 million or 36% from the first quarter of 2013. Growth in this segment was driven by an increase in production in U.S. based business as well as international growth driven primarily by the acquisition of Sagicor's Lloyd facility. Sagicor which has been renamed AmTrust at Lloyd's produced premium of $84 million during the quarter. Growth with the Sagicor acquisition would have been $35 million or 11%. Approximately 74% of the gross written premium in the segment is written outside of the United States.

Specialty program produced gross written premium of $280.1 million which was $70.9 million increase in the first quarter of 2013. 59% or $46 million of this growth was driven by workers compensation programs. Regardless of the reporting segment, we wrote approximately $697 million of workers compensation premium in the first quarter of 2014. This compares to $436 million in the first quarter of 2013.

During the preceding 12 months, we have written $1.9 billion of workers compensation premium.

Net written premium for the quarter rose to $1.13 billion compared to $532 million for the first quarter of 2013. We retained 68% of the gross written premium for the quarter compared to 56% in the first quarter 2013.

For the quarter, we received $409 million of premium from Maiden.

Net earned premium is $829 million for the quarter, up 103.2% from the first quarter of last year. The small commercial business segment is the largest driver of earned premium of growth and accounted to 45% of earned premium for the quarter.

Specialty risk and extended warranty accounted for 33% of earned premium and specialty program was 21%. Earned premium related to the Tower renewal rights transaction was approximately $92 million during the quarter.

For the quarter, we ceded approximately $313 million of earned premium to Maiden.

Our services fee revenue totaled $91 million, an increase of approximately $30.3 million or 50% from the first quarter of 2013. The increase was driven in part by our 2013 acquisition with AmTrust Consumer Services which contributed fee revenue of $15.3 million in the quarter. Additionally, (inaudible) 2013 acquisition of Car Care produced additional fee revenue growth of $7.2 million during the quarter.

The largest fee revenue generating operations for the quarter were AMT Warranty producing fee revenue of $22 million, AmTrust Consumer Services producing $15.3 million, Car Care which produced $10.3 million, Case New Holland insurance agency produced $10 million, NCCI service and carrier fee revenue was $9.3 million, National General system licensing agreement produced $5.2 million and First Nonprofit Company produced $4.8 million.

We generated $28.5 million in investment income for the quarter and recognized $3.6 million of after-tax net realized investment gain. For the quarter, we recognized $3.8 million in equity income from our common stock investment in National General. Additionally, during the quarter, we realized a $14.7 million pretax gain related from National General's second successful 144A offering. This gain was excluded from our operating earnings.

Our current carrying value of our common stock in National General is approximately $108 million. The yield on our fixed maturity investment portfolio at March 31 was 3.2% and the duration on our investment portfolio inclusive of cash is 4.6 years. The combined ratio was 89.9% for the first quarter compared to 91.3% last year. The loss ratio was 67.4% this quarter compared to 66.7% for the same period last year.

Expense ratio for the quarter was 22.5% compared to 24.6% for the first quarter of 2013. The decrease in the expense ratio was in part attributable to certain economies we achieved as well as a reduction in our New York workers compensation assessment. The reduction of the assessments resulted in 0.7% improvement from the March 31, 2014 expense ratio. Without the reduction, our expense ratio would have been 23.2% for the quarter.

Total shareholders equity increased to $1.58 billion from $1.45 billion at year end. Book value at March 31, 2014 is $19.48 per share. During the quarter, we declared a dividend of $0.20 per share. Total assets, as of March 31, were approximately $12.2 billion and included total invested asset of $4.9 billion. Fixed maturities comprised 81% of the portfolio, cash and short term investments 15%, equity securities 1% and other investments 3%.

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

Hilly Gross

Thank you, Ron. And thank you, Barry. Both Barry Zyskind and Ron Pipoly have indicated their willingness to entertain questions from those of you and all listening audience. To facilitate your access to us so that you may ask those question, I'm going to momentarily turn it back to our moderator for specific instructions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Bijan Moazami of Guggenheim. Your line is now open.

Bijan Moazami - Guggenheim

First question for Ron. On the expense ratio, of course, there's technology improvement and a change is the New York assessment, could you give us a little bit more detail in terms of what the actual gross is, the gross expense ratio, because I would assume the high retention and higher net to gross would also have an impact in terms of the difference between gross and net?

Ron Pipoly

Bijan, its Ron. In terms of gross expense ratio I was talking about the exclusive of the Maiden session. Going off of our reported expense ratio of 22.5, our gross expense ratio would have been about 23.8. So our expense ratio benefited as a result of session for Maiden. As I said, the deduction in the New York assessment was about 0.7% improving our expense ratio.

Bijan Moazami - Guggenheim

But you had less of a benefit from Maiden on the expense ratio. Is that correct because you have the higher?

Ron Pipoly

Correct, that is, yes, less of a benefit from Maiden during because we had a higher retention, yes.

Bijan Moazami - Guggenheim

Secondly, you have some amazing ROE, and that's decreasing your long-term debt to capitalization ratio. What is the right amount of debt that you want to be carrying at some point or at what point do we have to think about getting that back up?

Ron Pipoly

Hi, Bijan, it's Ron again. I mean, you're correct obviously in your observation. Our debt to capitalization at 3.31 is up 26%, debt to equity is about 35%. We certainly feel very comfortable with those and we continue to evaluate opportunities from a capital raise perspective as we go forward. But we certainly think it was our ability to continue to generate capital and certainly that expands our ability to look at other ways to raise capital whether its deferred debt whatever the case may be, just explore some opportunities.

Barry Zyskind

This is Barry. From our standpoint exactly what Ron said, as we're creating more and more capital that gives us more opportunities to do alternative capital for acquisitions, grow with debt preferred convert type instrument. Always keep in your mind that the last time we ever want to do is raise equity.

Bijan Moazami - Guggenheim

And the next question is for Mike Saxon. It's kind of hard for me to figure out what is organic growth and what is the price. So when I think about the small commercial account could you give us any indication in terms of how much price increases you're achieving? And is there a dramatic improvement in the fees count on organic basis?

Ron Pipoly

Bijan, from a workers compensation perspective -- I'm sorry, this is Ron. From the workers compensation perspective you can look at the growth that we achieved in the first quarter; about 60% of that was as a result increased policy count. We increased policy count by about 40% to roughly 11,000 policies quarter-over-quarter. The remaining 40% of the growth that we achieved could be attributed to about, from a small commercial business perspective, workers comp standpoint, about the third of that would be relative to rate that we're achieving. Right now on our small commercial business comp, we're achieving about 6% average rate increase for about I believe increase in policy size is related to rate increase, but less of that would be related to expanded payroll either writing accounts that have more employees or having expansion payroll that is on renewal accounts.

Bijan Moazami - Guggenheim

Can I clarify what you consider small package policy versus your comp? So the rate increases, is it on the comp or under the entire book of small commercial?

Ron Pipoly

My comments were related to our workers compensation that is part of our small commercial business segment.

Operator

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

Randy Binner - FBR

Just a follow-up on Bijan's capital question, I guess without any additional hybrid or debt raise, what would you think of as your perspective premium to surplus kind of at the end of the year assuming you continue to generate this $100 million? Because it seems like premium to surplus runs a little high but maybe we're missing the capital generation piece.

Ron Pipoly

Hi Randy, it's Ron. In terms of looking at total cap to net working premium and again, remember this first quarter we did have $268 million related to the Tower and (inaudible) transaction. So there was component, as we discussed in the transaction description, that related to on our premium that's not going to recur obviously in the second quarter. I mean, that was about $172 million of premium.

So when you look at the retention on a go forward basis we think we'll be able to accomplish, we think our total cap, at the rate we're generating capital now, we think we're going to be somewhere around 1.4, 1.45 at the end of year.

Randy Binner - FBR

Wait. 1.4 to 1.5?

Ron Pipoly

1.4 to 1.45 of net written premium --

Randy Binner - FBR

Premium on the ratio, not the capital.

Ron Pipoly

So premiums on total capitalization, yes. Net written premium to total capitalization.

Randy Binner - FBR

And then I think you just answered my next question. And so, of the $268 million that was identified as premium from Tower, is $172 million of that from the (inaudible) and then the remainder is from kind of what you did initially on the cut-through?

Ron Pipoly

Correct. Approximately $172 million would have been policies that were in force as of December 31 when we took over the premium line. The rest would be same policies either new or renewal policies that are subject to the 100% quota share cut-through arrangement.

Randy Binner - FBR

The 268 minus 172 are around a $100 million a quarter. Is that what we should expect is kind of like the run rate renewal you do on the Tower book?

Barry Zyskind

Well I would tell you, Randy, its too close. These things are really tell you what the exact number, but I think last we said our goal is on an annual basis, something between $350 million and $500 million, and depending maybe on the market size that's a face number.

Randy Binner - FBR

And then I'd like to try and buck it out because the top line was impressive. And so that covers the Tower piece of it. And then just maybe there is a follow up to what Ron said in the opening script. But could repeat, Ron, please the workers comp premium in the quarter?

Ron Pipoly

The workers comp premium, and this is all comp inclusive of the comp that we write in our specialty program segment as well as the small commercial business segment, our total comp is $637 million during the quarter which should carry to about $436 million in the first quarter 2013.

Randy Binner - FBR

Okay, this is helping. The delta is its Tower, its workers comp, and then AmTrust at Lloyd's was significant with the $84 million. And in that regard or the former Sagicor, so is that 1Q bigger for that block and that is familiar with that block kind of seasonally, like is it going to do $84 million a quarter or does that going to peter out as the year goes on?

Ron Pipoly

I think that we would probably -- I think that's probably little high for the first quarter, but I think on average we think its somewhere we're not -- we'll see how the year goes to, but some between $200 million to $300 million.

Randy Binner - FBR

And you said how much of that is international?

Ron Pipoly

Specialty risk and extended warranty segment 74% of the premium that's written outside of the U.S.

Randy Binner - FBR

And then just on, if I could, because I want to make sure I get this. I guess on the fee for service business well the $91 million of revenue is obviously a good number; it's actually a little bit low relative to the quarter-on-quarter trend. And so that's a block of business that's new. So I'm not sure if there's a seasonality, (inaudible) or anything unusual there. I mean, do we kind of consolidate around this $90 million level or is this something that can kind of keep growing up towards $100 million a quarter?

Ron Pipoly

It's Ron again. I certainly think that there is a seasonality especially when you think U.S. extended warranty products, folks on consumer products obviously the fourth quarter is a big buying season. So certainly when you look at quarter-over-quarter, sequential quarters, we're down slightly $2 million I guess on fee revenue sequentially quarter-over-quarter, but we certainly think that we're going to achieve a run rate as we go forward greater than the $91 million we produced in the first quarter. There's a seasonality with it and we're certainly very pleased with where we are at on the fee revenue and point to the EBITDA margin has remained consistent and, as Barry said, we think that there is a lot of embedded value in our fee revenue business.

Barry Zyskind

And Randy, we think there is growth opportunity to grow from an organic standpoint and from an acquisition standpoint. So it's something that now, yeah, the run rate is somewhere in the 90s but we do think building it both organically and through acquisition.

Randy Binner - FBR

But so we can claim so out of growth I think there's going to be from GM, I think longer term. So should we plan on like fourth quarter being bigger and first quarter to be in lower when we think about the model going forward?

Barry Zyskind

I think fourth quarter is always a little higher more because of consumer and holiday season and a lot of things. If you look at retailers how the fourth quarter plays out, but I think as we continue diversifying the model and going to underlying we hope to continue growing it throughout the year.

Operator

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

Ken Billingsley - Compass Point

I wanted to ask a couple of questions about the filing also of Tower (inaudible) recently. Specifically on the $125 million of reinsurance that's in place, if I read that correctly ACP Re is going to essentially cover reinsure you for that $125 million reinsurance fees, is that correct?

Ron Pipoly

Yes.

Ken Billingsley - Compass Point

Now, from a regulatory standpoint, is that being done because it gives capital credit ACP and constructing the deal and how does that work if essentially you're being reinsured by the same person you're reinsuring?

Barry Zyskind

Well I think if you look at it we're actually reinsuring the Tower companies and then we're ceding it back to ACP Re. So I think it was more to give capital credit to the entity, the Tower entity that's being acquired. And then from our standpoint, we're then ceding it back to ACP Re.

Ken Billingsley - Compass Point

And then since you'll be administrating the run off, in the past you said you were aware of Tower Group's third quarter '13 reserve increase. I would imagine you're still working on behalf of ACP Re right now looking at the Tower Group's current reserve a bit.

Barry Zyskind

Yes.

Ken Billingsley - Compass Point

And for the loss ratio that you talked about some rate increase seen in general across the board but the loss ratio picks were up a little bit. Specifically in the small commercial business segment, were you booking those Tower Group reserves at higher picks than what you did to your traditional AmTrust business?

Ron Pipoly

Yes, and this is Ron. That's correct. I mean, Tower was $92 million of earned premium, as I mentioned in my comments, and we are booking it at a higher loss pick. And then the one thing I'll comment overall too is that when you look at the trends if we discuss our performance on a monthly basis we're certainly encouraged by the trend that you see not only in workers comp but really across all of our lines of business in terms of frequency and severity but quite frankly we're going to continue to be very prudent with the reserving and we're very comfortable with where we are at $60,000 for the quarter.

Ken Billingsley - Compass Point

And then the $125 million that you'll be loaning, is that essentially something is going to be filed or how is that going to be structured with ACP?

Barry Zyskind

I don't understand the question. What do you mean filed?

Ken Billingsley - Compass Point

Essentially, how is that the loan of $125 million going to be structured with ACP? I believe you said not less than seven years.

Barry Zyskind

Yes, right now, it's actually being -- it's actually in negotiations between the independent committee. So we're still working on it but the intent is really to loan the money to ACP Re and over time as the run off has come down will be paid out from the capital of that unit of Tower company that are being acquired.

Ken Billingsley - Compass Point

The last question I have is just on the expense ratio side. You mentioned the 7/10th reduction related to your workers comp assessment. Is that going to be one-time in nature?

Ron Pipoly

The first quarter effect is certainly a one-time event in the sense that you have multiple years of assessment accrual that you deal with so you had a deduction in the first quarter, but on a go forward basis the overall assessable base and the assessments that being set aside for New York will decrease. That way I have a much more muted effect on future expense ratio but 7/10th was really kind of a cumulative price adjustment based on recent changes in the way New York (inaudible) accepting workers comp policies but there are no future savings but again it will be muted.

Ken Billingsley - Compass Point

Yes, because that was multiple years that were included in that, correct?

Ron Pipoly

Correct

Operator

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

Mark Hughes - SunTrust

Was there anything else in the expense ratio related to the Tower transaction that might now recur any ceding commissions that were low for a short period of time but may increase within a couple of quarters?

Ron Pipoly

Hi Mark, it's Ron. When you look at the Tower's, if we talk about the agreement provided for ceding commissions in two tranches. One arm is under premium piece which was going to be each 20%. The other related to the policy new or renewal that accepted after January 1, 2014 which are subject to the 100% closure/cut-through, and the ceding commissions provided for those at about 22%. So when you look at the overall expense ratio associated with the $268 million of Tower business, there's blended about $26 or so. So does our expense ratio in the first quarter did a benefit from the Tower transaction? Yes. I would consider it necessarily a one-time event because as we sit here today, we continue to assume business that's subject to 100% quota share cut-through arrangement at 22%.

As that business transitions on to our platforms in the future, I don't expect to see an appreciable change in that. I mean we've reached scale with our operations and our technology in terms of we believe to add significant amount of premium. Again, we've always talked about the ability to leverage our expense ratio. So certainly the Tower and New Life acquisition and notable ceding commissions positively impacted the expense ratio but I don't think that it’s something that will wash away in few quarters.

Mark Hughes - SunTrust

That's helpful. The $92 million earned premium from Tower in Q1, is that a good run rate going forward? I'd love to talk about the unearned premium bucket, but when we look to earned; it’s earned on a run rate basis here.

Ron Pipoly

Mark, that's a good question. What I tried to talk about on our fourth quarter call was because we didn't see a block of unearned premium that had the earnings momentum associated with it. So I believe the $90 million is a good run rate. I mean, it will transform over time meaning that's majority of the $92 million earned in the first quarter related to the unearned premium and function. It starts to transition away, but the $90 million is a good run rate.

Mark Hughes - SunTrust

Then a follow-up question, the 20% average increase in policy size, some of that is related to rate, but it sounds like you're getting policy holders that have bigger employee bases. Can you talk about that? How much of a difference is that? Is that difference in strategy?

Barry Zyskind

This is Barry. I don't think we have a different strategy at all. One of the things we monitor every month is how much is the business is in our lower has it top 60 and that number has been actually increasing, so more and more is on the lower has it in the smaller. I think some of the increased premium is just a combination of moving around states. So when you start having a big percentage of California, the average premium size, what a $5,000 policy in Europe can be a $9,000 or $10,000 policy in California. So I think that is some of the mixture.

In addition, I think the comment which really more do have is employers hiring a little bit more so and an increase in payroll and audit premium; so all of that add to an increase. But when we tend to look at our average policy size and where we are we're very much very consistent where we've been historically and where we plan to go on in the future.

Operator

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

Bob Farnam - KBW

Not to keep hammering on it, but I wanted to go back to the premium leverage question for Randy. I'm just trying to figure how you getting to 1.4 to 1.45 at year end, just kind of how are you getting there?

Ron Pipoly

Bob, I think the first quarter in terms of the net retained premium of being approximately $1.1 billion is on a higher run rate. We have retained 68% of our premium this quarter. I don't anticipate that if you look at 2013 we retained about 63% of our premium for the year. I expect that we moved forward and we will move more towards that number.

Maiden did not participate in the assumption of the unearned premium or the cut-through. At this business transitions on to back, one, we are certainly going to Maiden the opportunity to evaluate and participate in this program. So I think as we go forward our retained premium as a percentage of gross written premium will decline and that will bring it more in the line. I too believe the first quarter will probably -- the first quarter 1.13 million of net written premium is the high watermark.

Bob Farnam - KBW

The denominator, I am not sure if you have group policyholder’s surplus or something like that. I'm just kind of curious what we should think of the denominator especially in regard to rating agency scrutiny if they are looking at leverage ratios getting high, just what they would be just considering?

Ron Pipoly

I think my comment earlier, 1.4 to 1.5 on net written premium to total capitalization and then when you look at it at any measure or at any level whether be the U.S. domestic insurance companies or international operations, when we look at their regulatory requires whether RBC here in the U.S. or any of the other regimes in terms of according to their capital requirement (inaudible) in a good position from the total surplus at our insurance operations. So gain, we are very comfortable at our run rate and not only from support it from an insurance company surplus prospective, but also at a holdco level if you look at its total capitalization.

Bob Farnam - KBW

We'll move on. The operating cash flow for the quarter?

Ron Pipoly

A little over $400 million earning quarter of operating cash flow which was up from about $200 million from first quarter of 2013. One of the comments I would like to make about the invested assets is we are at $4.6 billion at the end of 2013 and now stood at $4.9 billion, so an increase of $300 million. One thing you have to keep in mind too is that if you look at the repos that we have they were down about over $100 million during the quarter as well. So we are certainly generating a tremendous amount of positive cash flow.

Bob Farnam - KBW

And the equity in earnings of unconsolidated subs remain obviously pretty, pretty strong this quarter, but what should we expect from that going forward?

Ron Pipoly

I know that that National General have their call today. I mean I think the 3.8 is solid. As I mentioned $14.7 million pre-tax gain that we also had in the first quarter was excluded from the operating earnings as a one-time event based on the successful second 144A offering. But again, we have every confidence that our investment in (inaudible) is a very strong investment and they will produce very solid returns for us. I'll reemphasize something I said on the fourth quarter call. I mean our carrying value is $180 million on our book because we use the equity method of accounting. And if you look at net market our 12% - 14% ownership that's just about $172 million from market prospective. So again, embedded value within our organization.

Bob Farnam - KBW

And you expect to ever recognize that or you plan on keeping your net investment indefinitely?

Ron Pipoly

But we think it’s been a great return for us so far us in terms of what we have invested and where it is, and we think we still have a very, very bright future and that there is a lot to go on that valuation. So right now I would say status quo.

Operator

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

Adam Klauber - William Blair

Couple of different questions, just want to clarify that the Lloyd's Sagicor, if that's how it's pronounced, is that in the specialty or is that in a small commercial bucket?

Barry Zyskind

We are going to refer to an agreement with AmTrust at Lloyd's, the premium that was produced in the first quarter was about $84 million and that would be one our specialty risk and extended warranty segment.

Adam Klauber - William Blair

Okay, that's what I thought. And how much is that businesses property oriented?

Barry Zyskind

I would say that was a business around probably 35% of the Lloyd's platform is property. Yes.

Adam Klauber - William Blair

And for 2014, could you give us a range? I mean, how much of the overall premium of that syndicate are you taking in?

Barry Zyskind

I think the number I told was around somewhere between 200 to 300. That's right now what we think we'll see how the new ones go. We'll see how our underwriting is currently, looking at it and we are working very closely with the management. The area I'm making sure its just fits our appetite in terms of cash and so forth on liability inline, but we feel very good about it. We think we bought it well and we think it’s going to be a real contributor at AmTrust over time.

Not only do we think at some of business they had it was very strong and very good, we also view it as vehicle which was the initial reasoning of why we were getting into it was really could be an important business to the Lloyd's market and a lot of global account especially on warranty side really needs this type of platform to expand and want to expand with us. Without saying names of clients we have some global clients that we do business with. We started in the U.S. and then we went to Europe and now they want us to go to Asia and settle in the South American market. So that is something that we are working with them. So we think it is long term, it has a lot of viability and its going to be net net a very strong positive for us.

Adam Klauber - William Blair

Okay. And then Ron, just a numbers question. You may have said it but net investment income, was there a one-time gain in there, the $28 million?

Ron Pipoly

No, Adam, there wasn't. Again, I mean, we believe that from investment income prospective we've been very successful in generating a lot of cash flow and, as I said, the portfolio shifted to $4.9 billion. So there was no one-time event of $28.5 million.

Adam Klauber - William Blair

Okay, great. And tax rate operating at around 20%, 21%, is that right? And how should we think about it for the year?

Ron Pipoly

I think tax rate depending -- I mean, if you will look at it from a rate reconciliation perspective, our effective tax rate is around 25%. I think that's probably in the ballpark of somewhere between 25% to 27% depending where is the source of the income, is it European operation and some of the nuances that go on there, but I would say 25% to 27% is reasonable.

Adam Klauber - William Blair

Okay. Thanks. And then at the Tower transition, how is it going with the Tower agents in the Northeast? How many of the marketing reps did you retained? And again just how is that process going?

Ron Pipoly

I think the process is going very well. We are actually keeping all the marketing people. And we are actually doing short meetings together. Our marketing people, their marketing people, and I think Tower served a very, very distinct purpose in the market. They had some niches that the market really recognized them for especially when we talk about the small commercial, its certainly the most attractive piece on the commercial end. So we are doing everything we can to make that transition go smoothly, to communicate to the agents.

The beauty about the transaction as well as we had a lot of crossover in terms of producers in the northeast. We were actually much heavier mostly on workers comp and they default commercial and workers comp. So I think they know us, they know the name and know of our technology. So I think net-net it's very positive and we are trying to communicate as well as we can. And obviously the best thing is to get the transaction closed, but we are doing a good job so far. We've done it in enough times and once the transaction closes, that is the best source of communication.

Adam Klauber - William Blair

Okay. And then finally as far the deal pipeline from referred its pretty active market in general that is a good number of properties out there, but you tend to look at more distressed property. Is there good pipeline in the distress level that you like?

Barry Zyskind

I think I mentioned in the call, we are looking at a lot of things and not necessarily distressed. (inaudible) wasn't distressed, GEICO wasn’t distressed, First Nonprofit wasn't distressed. Sequoia wasn't such. For us we like opportunities for one reason or another is the motivated seller and that's what we try. Sometimes it is distressed like a Tower or a Sagicor where the parent didn't wanted to get out and there was a reason of capital, they didn't wanted to really provide on the capital. So always for different reasons for it but I think those are at types of opportunities we look for, and those are the types of opportunities that we do very well. So I know there is a lot of properties out there for sale that are in the typical process where you have a lot of people lining up. That's not typically was in place. Some of the smaller ones will engage in a process when they're smaller deals, but we do believe that there are lot of strategic opportunities not necessarily distressed ones for ones that make lot of sense for us and for the seller.

Operator

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

Christine Worley - JMP Securities

Hi, its actually Christine Worley on for Matt. I just have a question on the loss ratio in the small commercial line. If we had to strip out the impact that Tower had on the quarter, was there any change in the accident year last ratio pack versus where the line was running in 2013.

Ron Pipoly

Hi Christine, its Ron. No, there wasn't.

Christine Worley - JMP Securities

Okay. Was there any development in any of the lines this quarter?

Ron Pipoly

No. We did not have any development in any of the lines.

Operator

Thank you. We have a follow up question from Bijan Moazami of Guggenheim. Your line is now open.

Bijan Moazami - Guggenheim

Is it fair to assume that the investment income that you will be receiving from ACP Re is going to be more than the average yield that you have on your investment portfolio? Number one. And number two between that investment and aggregate stop loss color that you provide, is there any impact on your overall surplus or on your (inaudible) ratio?

Ron Pipoly

Hi Bijan. In terms of the negotiations that's going on between the independent numbers of growth the board (inaudible) its going to be commercially reasonable terms in terms of $125 million note to ACP, well its commercially reasonable terms apply. That's all I can say about.

Barry Zyskind

And in terms of having an affect on (inaudible) we don't will have any negative effect to at all.

Operator

Thank you. I'm showing no further questions at this time. I'd like to hand the call over to Mr. Hilly Goss for any closing remarks.

Hilly Gross

Thank you. Since there are no further question, that concludes our first earnings conference call of 2014. (inaudible) Barry, just Ron Pipoly and all of us at AmTrust we thank you for taking you time out of your schedules to join us. We wish you all a healthy day.

Operator

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

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