AmTrust Financial Services' (AFSI) CEO Barry Zyskind on Q4 2015 Results - Earnings Call Transcript

| About: AmTrust Financial (AFSI)

AmTrust Financial Services Inc (NASDAQ:AFSI)

Q4 2015 Results Earnings Conference Call

February 10, 2016, 10:00 am ET

Executives

Hilly Gross - Vice President of Investor Relations

Barry Zyskind - President, Chief Executive Officer, Director

Ron Pipoly - Chief Financial Officer, Executive Vice President

Analysts

Randy Binner - FBR Capital Markets

Matt Carletti - JMP Securities

Mark Hughes - SunTrust

Meyer Shields - KBW

Ken Billingsley - Compass Point

Adam Klauber - William Blair

Operator

Good day, ladies and gentlemen and welcome to the AmTrust Financial Services Inc fourth quarter and full year 2015 financial results conference call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session. Instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference call is being recorded.

I would now like to introduce your first speaker for today, Hilly Gross, Vice President of Investor Relations. You have the floor, sir.

Hilly Gross

Thank you. Good morning and thank you, everyone, for taking the time out to join us this morning for this AmTrust Financial Services fourth quarter and end of the year 2015 earnings conference call. With us this morning are Mr. Barry Zyskind, President and CEO of AmTrust and Mr. Ron Pipoly, Chief Financial Officer of AmTrust. And as always, it is a pleasure to acknowledge the presence of Ms. Beth Malone, Senior Vice President, Investor Relations and Corporate Development.

Before I call on Barry Zyskind and Ron Pipoly to give you their review and analysis of the fourth quarter and end of year 2015 results, I would, with your indulgence, read into the record the obligatory paragraphs as to forward-looking statements.

Since members of our management team this morning may include in their presentation statements other than historical facts, such statements which can include plans and objectives of the management for future operations, including those relating to future growth of the company's business activities or future availability of funds and of course since these assumptions are based on current expectations and involve assumptions that are difficult, if not impossible, to predict, because many of these assumptions are in fact beyond our control. So there can be no assurance that actual developments will be consistent with these assumptions.

Actual results can differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including those 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 revise any forward-looking statements, whether as a result of new information, future developments or otherwise, except, of course as may be required by law.

Finally, in the prepared remarks and responses to questions in today's presentation, our management may refer to financial measures that are not derived from generally accepted accounting principles, or as they are commonly referred to as GAAP. Reconciliations of these non-GAAP financial measures to those directly comparable GAAP measures are provided in the press release of our fourth quarter earnings, which are available on the Investor Relations section of our website, www.amtrustgroup.com. I repeat again, 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. Barry?

Barry Zyskind

Good morning and thank you, Hilly. I am pleased to report that AmTrust had a very strong fourth quarter and a full year for 2015. We remain focused on our niche lines of business. Our small commercial business continues to be a very strong performer for us. Not only do we maintain our emphasis to push our low hazard workers compensation business, we are now seeing marked success in our other niche commercial products.

In recent years, as many of you may know, we have acquired a collection of niche businesses and hired management teams that together have created a business with over $1 billion of premiums that are both profitable and a solid complement to our workers compensation business. We now have niche products that service the not-for-profit segment, financial institutions,, surety, artisan contractors, EAS and of course the habitational which we acquired through both our Tower and Sequoia acquisitions.

I am pleased to inform you that we have successfully integrated these products as well onto our single source platform creating even further efficiencies in our business. We are very comfortable with the pricing they are seeing in our key products and market and although increases in the overall market have slowed we believe, for our niche products, the current pricing is favorable and will provide us high returns that we look forward and anticipate.

We are heading into a market where we believe companies like ours with a lower expense ratio will have a distinct competitive advantage. We continue to invest in our technology platforms and are looking for new ways to target our most desired classes of business. We are optimistic about the prospects of our small commercial business segment, which for the year 2015 produced over $3.3 billion of premiums. We believe we can continue to grow this segment profitably.

Moving to our specialty risk and extended warranty segment. We are most pleased with this segment. In the U.S., this segment continues to be primarily our warranty lines of business. We continue to invest in this line of business. Our recent acquisitions of Warranty Solutions, TMI and Car Care Plan are producing very strong returns.

Our organic growth is also strong. If you adjust for currency, we grow specialty risk by 16.7% in 2015. We continue to sign new clients as well as growing organically with existing clients. As a fully integrated provider of each specialty lines, we believe we are on our way to be one of the premier insurers in this market.

We continue to make improvements in our European operations. Our management team is doing a great job in managing the different books of business and reducing expense ratios. I am pleased with the progress that our management team, led by Max Caviet and Peter Dewey and others have done in turning around Lloyd's platform. AmTrust at Lloyd's, which was formally known as Sagicor is now a profitable company with prospects of high returns in the future. We also have approved our medical mal book in Italy and are very pleased with our 2015 results in terms of both underwriting performance and profitability.

We continue to look at acquisitions throughout the world and believe we are well positioned to take advantage of wherever opportunities arise. We are working on obtaining regulatory approvals in closing the acquisitions we have announced. We are very comfortable with our pipeline of acquisitions and believe that with our strong balance sheet, low expense ratio, superb IT platforms and economies of scale we can continue to extract significant profits through acquisitions. We remain very prudent in our investment philosophy and have very limited exposure to both the mining and energy sectors and most of the positions that we do hold in these classes are highly rated high quality names.

We look forward to both investment income and our service and fee income to continue to grow and contribute to future profitability. I am pleased to announce that we have put to work most of the capital raised in 2015 and are confident that 2016 will be a strong and profitable year for AmTrust and its shareholders.

And now I would like to turn it over to Ron Pipoly, our Chief Financial Officer to give some financial highlights.

Ron Pipoly

Thank you, Barry. Good morning. For the quarter, we produced gross written premium of $1.6 billion. This represents a 10.2% increase over the fourth quarter of 2014. Without the effect of foreign currency fluctuations, as it relates to our specialty risk and extended warranty segment, the increase for the quarter would have been 13.6%. For the full year, gross written premium totaled a record $6.8 billion, an increase of $710 million or 11.7% over 2014. Again, without the effective for currency fluctuations in our specialty risk and extended warranty segment, the increase for the year would have been 14.2%.

Organic growth drove both the increase for the quarter as well as the year. For the quarter, we generated net income of $63.9 million or $0.37 per diluted share. This compares to $0.44 per diluted share for the fourth quarter of 2014. We had operating earnings of $123.9 million or $0.72 per diluted share. This compares to $0.73 per diluted share for the fourth quarter of 2014.

During the fourth quarter, the company declared a two-for-one common stock split. Our earnings per share data as well as book value per share disclosures reflect the effect of this stock split.

Total revenue for the quarter was $1.2 billion, which is an increase of $164 million over the fourth quarter of 2014. Increases in revenue were driven by increase in earned premium, investment income and fee revenue.

For the full year, we generated net income of $472 million or $2.80 per diluted share. This compares to $434 million or $2.72 per diluted share for 2014. For the year, we had operating earnings of $527 million or $3.13 per diluted share. This compares to $450 million or $2.87 per diluted share for 2014. Our Luxembourg reinsurance captive did not contribute materially to our 2015 operations.

Total revenue for the year was $4.66 billion, which is an increase of $580 million over 2014. Consistent with quarterly results, the increase on a yearly basis was driven by increased earned premium, investment income and fee revenue. Annualized return on equity from operating income was $21.7% percent during the quarter and 25.3% for the year. Return on equity was driven by strong operating earnings results as well as the efficient capital structure.

In terms of our segmental performance, small commercial business segment results continue to be strong. Gross written premium for the quarter increased by $113 million or 17.8% to $746 million. During the quarter, workers compensation premium increased by $66 million. The increase was primarily driven by continued growth in California, New York and Florida.

For the quarter, our workers compensation policy counts increased by 9.9%. Workers compensation premium represents 68.9% for the gross premium production of this segment. This is consistent with 2014. On an overall basis, we achieved approximately a 1% average rate increase on a year for our workers compensation business. We continue to be encouraged by our loss trends. Average workers compensation severity increased by less than 2%, however the effects of that increase were more than offset by a decline in frequency. Our non-workers compensation premium in the small commercial business segment across all lines of business were able to achieve an average rate increase of 4.5%.

Specialty risk and extended warranty produced gross premium of $631 million, up $35.5 million for 6% from the fourth quarter of last year. During the quarter, approximately 87.7% of the premium in this segment was written outside of the U.S. This compares 84.4% for the same period last year. Premium growth in this segment continues to be affected by a stronger U.S. dollar. Assuming a consistent exchange rate with 2014, gross written premium would have been approximately $50 million higher. Growth in this segment for the quarter would have been 14.3% without the effect of currency fluctuations.

Specialty program produced gross written premium of $232 million. This is consistent with prior year's fourth quarter. Workers compensation represents 35% of the premium during the quarter, which is consistent with prior years. We continue to closely watch pricing trends within this segment and will adjust our underwriting approach as necessary. We achieved an average rate increase of 5.6% on all non-workers compensation lines of business within this segment for the year.

For the year, our total gross written premium increased by $710 million or 11.7% from $6.1 billion to $6.8 billion. Small commercial business increased by $320 million or 10.7%, specialty program increased by $215 million or 19.4%, specialty risk and extended warranty increased by $175 million or 8.9%. Consistent with the quarterly results, growth in the specialty risk segment for the year was affected by a stronger U.S. dollar. A consistent exchange rate would have resulted in an additional $155 million of gross written premium for the year which would have represented a 16.7% increase in this segment year-over-year.

For the year, our gross written premium for workers compensation regardless of segment, increased by 17% to $2.8 billion compared to $2.4 billion for 2014. Workers compensation gross written premium represented 41% of our total consolidated premium production for 2015. This compares to 39% for 2014. For the year, we issued approximately 215,000 workers compensation policies which represents an increase of 24.6% over 2014. We continue to focus our underwriting efforts on small low hazard businesses.

Our net written premium for the quarter increased 18% to $1.07 billion compared $898 million for the fourth quarter of 2014. We retained 66.2% of our premium during the quarter. For the year, our net written premium was $4.3 billion and we retained 62.7% of the premium for the year. Our net earned premium for the quarter was $1.06 billion. Small commercial business accounted for 46% of the net earned premium, specialty risk and extended warranty was 32.3% and specialty program was 21.7%.

For the year, our net earned premium was $4 billion which is an increase of 14.6% from 2014. Our combined ratio came in at 91.9% for the quarter compared to 90.8% for the same quarter last year. The loss ratio was 61.8% this quarter compared to 64.7% for the same period last year. The increase in the quarterly loss ratio was driven primarily by higher accident loss year for both specialty risk as well as specialty program segment.

For the year, our combined ratio was 91% compared to 90.7% for 2014. The loss ratio for the year was 66.7% compared to 66.4% for 2014. As mentioned on previous calls, we continue to evaluate our loss reserves on a monthly basis. For the year, our gross loss reserves increased by $1.5 billion and $1 billion on a net basis. IBNR represents approximately 53.3% of our reserves at December 31, 2015 as compared to 49% at December 31, 2014.

Our expense ratio was 23.8% for the quarter compared to 26.1% in the fourth quarter of 2014. For the year, the expense ratio was 24.3% which was consistent with prior years.

Our service and fee income totaled $131.4 million for the quarter, an increase of $29.8 million or 29.3% from the prior year quarter. The increase in fee revenue was primarily attributable to acquisition of Warranty Solutions, which had fee revenue of $24.3 million during the quarter. For the quarter, fee revenue was delayed by AMT warranty with $31.7 million, AmTrust Specialty Equipment with $11.2 million, IT service and licensing fee revenue with National General of $10 million, Car Care with $9.4 million and NCCI assigned risk carrier fees of $8.8 million.

For the year, we generated $478.2 million of fee revenue, an increase of 16.7%. The increase in the fee revenue for the year was driven by AMT Warranty as well as the acquisitions of Warranty Solutions and TMI. For the year, fee revenue generated by AMT Warranty was $118.2 million and AmTrust Specialty Equipment was $47.2 million NCCI assigned risk servicing carrier fee revenue was $35.2 million, IT service and licensing fees with National General was $35.9 million and Car Care with fee revenue of $39.2 million.

We generated $45 million investment income for the quarter and recognized $14.7 million of after-tax net realized investment losses. For the year we generated investment income of $156.3 million and had net after-tax realized investment gains of $5.3 million.

As it relates our life settlement portfolio, for the year we had mortality events involving eight policies. The total death benefit on those policies was $56 million and resulted in a cash gain of $40.9 million and an economic gain of $39.3 million. Since the acquisition of the life settlement portfolio, we have had total death benefits of $151.7 million which have resulted in cash gains of $111.8 million and an economic gain of $102.2 million. As of December 31, 2015, the gross clearing value of our life settlement portfolio is $267.3 million.

As we continue to wind on our Luxembourg Reinsurance Captives, all of which were acquired from 2009 to 2013, we have fully recognized the benefit associated with these acquisitions with the exception of the remaining $11 million in deferred tax liability as well as the offsetting $6.4 million of goodwill and intangibles as of December 31, 2015.

The company paid a dividend of $0.30 per share during the fourth quarter of 2015 and declared a $1.10 per share for the year. Total shareholders equity was $2.9 billion, an increase of $870 million from year-end 2014. Book value is $13.81 per share, up $2.64 per share or 24% from a year ago. We are carrying our common equity investment in National General under the equity method. As a result, the caring value at December 31, 2015 was approximately $142.6 million. The market value was approximately $269 million .

Total capitalization at December 31, 2015 was $3.9 billion compared to $2.8 billion at December 31, 2014. The combined surplus of our insurance subsidiaries as of December 31, 2015 is approximately $2.85 billion as compared to $2.5 billion at December 31, 2014. For 2015, our net written premium leverage ratio to combined surplus was 1.52, which compares to 1.56 for 2014. Total assets at December 31 were approximately $17.1 billion and included total invested assets of $7.2 billion. Fix maturities comprised 76% of the portfolio, cash and short-term investments 20%, equity investments 2% and other investments 2%.

For the year, we generated positive cash flow from operations of approximately $1 billion. Our average yield for the year was 3.3% and average duration was 5.6 years. However when you factor in cash, average duration decreased to 4.5 years. During 2015, we raised approximately $960 million of additional capital. We raised $487 million through the issuance of common stock. Additionally, we successfully issued $185 million of perpetual preferred stock, as well as the issuance of $285 million of 40 year subordinated debt. Our consolidated debt to capitalization ratio at December 31, 2015 was 25.8% as compared to 27.1% at December 31, 2014.

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

Hilly Gross

Thank you Ron and thank you Barry. Both Mr. Zyskind and Mr. Pipoly have indicated their interest to respond to any questions from all those of you in our listening audience. To facilitate your access to us to answer those questions, I am going to momentarily return us back to our central control for instructions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Randy Binner from FBR Capital Markets. Your line is open.

Randy Binner

Good morning. Thanks. I have a question just on cash available at the holding company for potential M&A and other uses. We had sized that approximately $500 million at the end of last year. And it wasn't clear from the comments on the call if that's changed at all. So I would be interested in the dry powder number you have now from your perspective? And any update or color you can give us on the M&A pipeline you are looking at?

Ron Pipoly

Hi Randy. This is Ron. In terms of dry powder, the number you alluded to, $500 million is a very reasonable number I would characterize that number to be somewhere between $400 million and $500 million of dry powder holdco cash available to execute on M&A and continue to support our organic growth.

Barry Zyskind

In terms of pipeline, Randy, I made a comment and I think we are very comfortable with our pipeline of acquisitions. It's something that we feel in order to be successful in doing M&A as a core competency, we have to have a pipeline and we have continued building the pipeline and we have a couple of deals that we have announced that are waiting to close in the next couple of months over here. But at the same time, we have, what we believe is a very healthy accretive pipeline.

Randy Binner

Is it more likely that you would pivot to warranty and fee type businesses rather than casualty insurance focused business opportunities?

Barry Zyskind

I think, they both. They really depend on the situation. Clearly we have a very strong appetite for fee businesses, especially in this part of the cycle. We think it's a smart thing to accumulate fee businesses with a high return and then ultimately at the right time to be able to put that business back onto your paper when you see the market is right for it. But at the same time, there are still situations out there where we see carriers and things where there is big economies of scale play for us.

We could take a regional player. We could take a company with high expense ratio. We could put it on our platform. We can reduce the IT costs, reinsurance costs, the overhead cost, back office and especially going into a market where you are seeing a deceleration, price increasing and you are seeing probably a flat over the next 18 to 24 months and maybe decreasing in pricing, I think the companies with high expense ratio, when loss ratio starts pushing up in the industry to see a high 60s, low 70s that becomes attractive opportunities for us.

Randy Binner

That's great. And that segues to a question or update I was trying to get on Republic. So I think you have had more time to think about what that might be and there is a homeowners book there which is a risk AmTrust has not historically taken and then they basically have a county mutual model, which is almost like a distribution model in Texas. So how should we think about those two pieces of Republic coming in to AmTrust as we look forward in our earnings model?

Barry Zyskind

Well, I think we feel very comfortable about the county mutual model. We view that as a fee business and we don't see any change to that. In terms of the personal lines, the homeowners, I think I mentioned in one of my previous calls, management of Republic feels very strongly about, it's a regional approach and they sell the products together. So for now, we have not made any decision. And after we closed successfully, we will sit down with management and we will listen to them and hear how they want to play the market.

Randy Binner

Okay. One more now and I will let the others ask questions. But I just wanted to touch on the DTL. So I heard from the opening remarks that the DTL is down to $11 million now and I think there is about, I think you said, $6 million of goodwill remaining, Ron. Is that right? So I mean the number is a lot smaller than it used to be the last time we had an update. And so, I guess I just want to understand exactly, I think the last DTL number that we had was like near to $90 million. And so I just want to confirm, it's all being used and that it's not going to be a feature of the model going forward? And if that's the case, I guess from my perspective, it got used quicker than I thought. So just trying to understand that with a little more detail and to confirm that it's a more normal tax rate going forward?

Ron Pipoly

Yes. Randy, this is Ron. Just to roll it forward from year-end 2014, December 31, 2014, we had about $95 million DTL associated with the Luxembourg Reinsurance Captive. It currently at December 31, 2015 is about $11 million. And as I said you that's offset with the remaining intangibles and goodwill of about $6.4 million. So on a go forward basis, as I said Luxembourg Reinsurance Captives didn't have a material impact on our 2015 operations nor will they on our 2016 operations. So we are in the wind down phase of the Luxembourg Reinsurance Captives operations.

And from a tax rate standpoint, the fourth quarter was 28%. Again from an average tax rate I would think, if I would be on the high side of my range, then I would say kind of somewhere between 25% and 27% on a normalized basis.

Randy Binner

Okay. And is Lux too competitive now? Is it not worth the accounting mismatches? Are you done with Lux for now? As far as running off captives there?

Barry Zyskind

Yes. I think we have done well there. But I think it caused undue confusion in the marketplace and I think for now we are just going to move on.

Randy Binner

All right. Thanks a lot.

Barry Zyskind

Thank you.

Operator

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

Matt Carletti

Hi. Thanks. Good morning, Randy asked a couple of mine, but I have a couple left on the list. Barry, just one high-level one, but we have seen in the market broadly that the California workers comp market has got more competitive if you look at WCRB data or other market surveys. I know you guys operate in a very specific corner of that market. Can you just give us your view of specifically in California how you guys are seeing the competitive environment and how that might compare to some of the things we see more broadly?

Barry Zyskind

Yes. I think, Matt, you are spot on. I think clearly the market has become much more competitive. If you go back a couple of years, 2013, 2014, where we felt many times we were the only one in the marketplace. Now there are a lot of players there. The market is more competitive. I think it's still a responsible market. But clearly our growth in California, I think I said this in a couple of calls really back, is going to taper. It's not going to be as strong as it was just because where the marketplace is and the size that we have got to in California.

I will say that we feel very strong about the actual health of the business. Where we play, the niche we play in, the small workers comp, where it's priced in the regions we play, we feel very good about the prospects about the profitability. And all trends we have been seeing so far have been very positive. I think we have a cumulative rate increase since we got in 2011 of over 40%.

So I think we clearly feel good about the business. We are doing well. The results are very good and we are doing a good job of renewing business and writing new business. But it's more competitive. We have to be careful. And we are watching the rates very careful. And we are watching our pricing and we have a lot of discipline. And we have given instructions to our underwriters where we want to see them and when we expect the results to be.

So you will see a more competitive market. But I will tell you from where we play, what we see, we can't see getting the pricing going too much down just because of where we see the trends are, where we see the other market players, where they are priced and where their loss trends will come in. Maybe we will take a year or two to catch-up, but we can't see going that much down, maybe another 5% or 6% down. But after that, I think it will have start going back the other way.

Matt Carletti

Okay. That's really helpful. And then just one other question, just on the National General holding investment you guys have. The gain keeps slowly growing, which is a great problem to have. I am just curious if you could update us on your intentions there. I think in the past you said you are happy holding it. Just curious that's a comment indefinitely? Or if at some point you would plan to exit that position and recognized the gain in your financials?

Barry Zyskind

Matt, I think we feel very good about their prospects about where that company is going and we think it's still in very early stage of where that company has to go. So we think from investment position we are doing very well. Well, we have to carry it in our books, but we feel, we know where the value is, the market value is $260 million. I think our net cost is around $38 million. So we feel very good about it and we think there is a long runway on that company and where that stock price will go ultimately. So for now, we want to hold it. That's our position.

Matt Carletti

Okay. Great. Thanks for your answers and best of luck in 2016.

Barry Zyskind

Thank you.

Operator

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

Mark Hughes

Thank you. Good morning. How should we think about loss picks for 2016? You have been very stable on the loss front for the last couple of years. With pricing dynamics now with losses, do think loss picks, do you think about flat for 2016?

Ron Pipoly

Mark, I think that's a generally good overview. I mean as Barry and we have talked about in our comments, in terms of where we think we are on pricing trend, we are very pleased that we continued, in 2015, to achieve no rate expansion within the comp book as well as really all of the other commercial lines. But I think we are talking a conservative view at where we are on the trend. And I think that's really reflected in the fact that as we sit here at December 31, 2015, 53.3% of our total gross reserves were in IBNR, which is up over 4% from year-end 2015. So I think we are taking a conservative view towards loss picks for 2016. But we continue to be encouraged by the trends that we see and discuss on a monthly basis.

Mark Hughes

Was any of that IBNR improvement, was that a mix shift? Or was that more conservatism?

Ron Pipoly

It's is more conservatism than it is mix shift but the mix shift played a small part of that. But it's more conservatism.

Mark Hughes

Okay. Now on the program business, I think you said you are getting 5.5% rate hikes outside of workers comp. You are clearly being a little more careful there in terms of your underwriting. What do you see and what's going on there?

Barry Zyskind

The program, for us, if you look at our history in that line of business, that's the one line of business that we think really depends on where the market is and for many years, we didn't grow it. And when there was dislocation and price increasing, we actually grew it. I would say going forward, you will see very slow growth out of the program just where we are in terms of the trend of the market. That's something that we want to watch very carefully. We keep on improving underwriting. It takes a lot of work putting everything on our systems claims and so the more that we are in control and the more we have access to the data and the more we monitor it, I think you will see it have decent results.

But it's the one line of business that depends where you are in the cycle. I would say now in this part of the cycle there is stability in the cycle. So that means you won't see a lot of growth and you won't see a lot of future rate increases. And with that will come stable returns, but the lowest return from all of our business. So it's something that we will monitor and even if we have to decrease that line of business because where the market is, we are not scared to do that. And then when the market gets hard again or there is dislocation of programs, we will start it growing again.

Mark Hughes

Where is the commercial auto these days?

Barry Zyskind

From a rate perspective?

Mark Hughes

Both, even rate and then your appetite.

Barry Zyskind

Our appetite is evolving. I think I said in a couple of calls, clearly not on the program side, but on our small commercial where we are doing it ourselves and we have direct access to the brokers and depending on geographic and the classes, it's something that we think this there is a lot of dislocation in the marketplace. You are starting to see dramatic rate increases and that's something that where we are playing in that field. We have good underwriters. We have good systems. We have good distribution platforms for that. So we are continuing to take advantage of that, but that's something that we don't how long it will last but clearly that's a market that needs strong rate increases and we are taking those rate increases and we are going to continue being opportunist.

Ron Pipoly

And Mark, it's Ron. In terms of, if you think about commercial auto we write within the specialty program segment, average rate increase there was about 7.5%. If you think about commercial auto we write within the small commercial business segment, the average rate increase in there for the year was about 6.4%.

Mark Hughes

Then Barry, I am interested to hear, you say you don't think rates are going down much more. Is that just based on your reading of the overall industry combined ratio returns? Or is there some behavior in the marketplace that makes you think there maybe some discipline coming?

Barry Zyskind

No, I think my comment was, I think you will see, depending where you are and depending on the profitability of certain lines, you will see rates go down, but I was saying that in reference to California workers comp where I think the WCRB came out with a 10% decrease and many of the players took it, some didn't and so you are seeing, on average, if you looked at, historically we had almost 40% cumulative rate increases. I think this year, our rates in California were 1% to 2%, I am sorry, a 2% increase.

I would say, going forward, we are probably going to be flat, where the overall market, I think, is declining. I would assume, when you look at where small workers comp performs compared to the overall market, we tend to be better anywhere between 10 to 20 points. So we know where we are booking our California rates and we know when we see the loss trends and if the market continues to decrease, it won't take long for it to reverse itself. We just don't think as that much margin for the average workers comp players unless they want to write in the 80s.

Mark Hughes

Thank you.

Operator

Thank you. Our next question comes from the line of Meyer Shields from KBW. Your line is open.

Meyer Shields

Great. Thanks. Good morning everyone.

Barry Zyskind

Good morning.

Meyer Shields

Sorry for the coughing there. Just looking at the individual segments, I think we saw above year-to-date loss ratios and significantly below year-to-date expense ratios in the fourth quarter. I was hoping you could talk us through this.

Barry Zyskind

From a loss ratio, I think it's really a continuation. If you look at where we were for the third quarter from a loss ratio perspective, we were relatively consistent. And I think again to my earlier comments, it's just a view of conservatism and where we do think we are in the price trends as we head into 2016.

From an expense ratio standpoint, the improvement in the expense ratio in terms of fourth quarter 2014 to 2015 was really predicated on two things. The slight business mix shift as workers comp is a slightly larger component which has a lower cost from a direct acquisition standpoint. But another component of that would really be scale. And what I mean by scale is that if you look at salaries as a consolidated entity relative to our net earned premium, our average salaries for the fourth quarter of 2014 was about 11.2% as a percentage of earned premium and it was about 9.8% for the fourth quarter of 2015.

So we had a combination of business mix that improved the expense ratio as well as, what I would say, scale in terms of being able to earn more premium on a relatively consistent salary base.

Meyer Shields

Okay. So that should carry through going forward, all else equal?

Ron Pipoly

Yes. Again, if I were to talk about expense ratio, as Barry said, clearly we have some advantage as we move forward and I would expect expense ratio to still be in the 24% range, couple of basis points either way.

Meyer Shields

Okay. Fantastic. Second question. If we look at other expenses and we take out the goodwill write-down, I don't know if it's fair to look at that as a percentage of other revenues, but the ratio was mid-70s, has been running at the 90s. So apparently much more profit on the fee based business. Am I thinking about that correctly?

Barry Zyskind

That's a fair assessment in the sense if you look at the $153 million or $154 million of other expenses for the quarter, we had the non-cash impairment of the goodwill associated with Luxembourg of $55 million. Part of that, again, is the successful acquisitions of TMI and Warranty Solutions contributing to expansion of the fee revenue as well as the expansion of margin. Those are two very attractive acquisitions and we are happy to get those concluded in 2015. So yes, that's a fair way to look at it.

Meyer Shields

Okay. And then finally, was there anything unusual in the net investment income side because that popped up a lot sequentially or year-over-year?

Barry Zyskind

Well, I think it's just really growth in the overall investment portfolio. We finished the year at $7.2 billion of investment portfolio. We generated over $1 billion of positive cash flow from operations. So I think the $45 million or so of investment income that we generated in the quarter is representative of what we will do on a go forward basis and if we continue to generate positive cash flow from operations we are certainly able to expand that.

Meyer Shields

Okay. Fantastic. Thanks so much.

Barry Zyskind

Thank you.

Operator

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

Ken Billingsley

Good morning. I wasn't sure if you mentioned this on the call and I may have missed it. Just on the ceding commissions to Maiden Holdings, I want to make sure I was reading the press release right. Did the ceding commissions received go down year-over-year? And more importantly the gross premiums written that are being ceded, did that go down as well?

Barry Zyskind

Well, during the fourth quarter, I think if you compare fourth quarter 2014 to fourth quarter 2015, there was a slight decline in the premiums that were ceded to Maiden. From a ceding commission revenue, we were up year-over-year. We recognized ceding commission revenue on our income statement of $526 million that affected our expense ratio. The total ceding commission based on a written premium rate basis was about $564 million. So our Maiden ceding commission actually increased on a year-over-year basis.

Ken Billingsley

Okay. So this $90.7 million versus the $116 million, where are we making that adjustment?

Barry Zyskind

Yes. Again my comments were more on a yearly basis. It's on a quarterly movement. So we have had more ceding commission from Maiden this year than we did for the last year.

Ken Billingsley

All right. But in the quarter, specifically you ceded less. So that is actually you ceded $394 million versus $434 in the fourth quarter of 2014.

Barry Zyskind

Correct.

Ken Billingsley

Okay. And as we look forward, is there an expectation that there, obviously you have been growing the topline and I know that they are not necessarily taking everything on in these new business that you acquire, however is it expected that on a yearly basis, is that dollar amount is still going to be increasing year-over-year? Or is what we saw in the fourth quarter reflective of what we may see in 2016?

Barry Zyskind

No. I think the yearly results are more reflective. For the year, we retained about 62.7% of our premium, which is pretty consistent with as we were slightly down for what we did full year 2014. I would expect it for 2016 that we will retain, call it 63%, 63.5% of our premium. And again you are right in your observation, I mean, it doesn't participate on every line of business that we write and we continue to evaluate our relationship with them and are appreciative of their commentary about ongoing risk. But like I said, I think will be around 63%, 63.5% written premium in 2016.

Ken Billingsley

Okay. And just curious, in Europe are you guys starting to run into the same customers from a primary standpoint yet? I know you have expanded a bit there and you have some new lines. I know it's on their mind, something that they do but are you guys starting to run into the same customers on a primary basis?

Barry Zyskind

No. We haven't we have run into Maiden yet. And I think we will try to have a coordinated attitude. So there is, for example, they are doing auto. We don't do auto liability, but some of the dealers that do auto, there is opportunities potentially for us to do warranty or vice versa. So I think in cases where we can coordinate our efforts, we are trying, but I think where they play and we play are really different segments.

Ken Billingsley

Very good. Thank you very much.

Operator

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

Adam Klauber

Thanks. Good morning everyone. Investment income growth was very strong during the year. Do you expect that to continue into 2016?

Barry Zyskind

This is Barry. Yes, I think when we look at the asset base now and we look at where we are investing and the mix of where some of the spreads have gone, I think we feel comfortable that the $45 million is a good run rate. And we are going to obviously to improve that as well if the market allows us.

Adam Klauber

Okay. If you can give us an idea, what's your existing portfolio yield compared to what your new money is right now? And where do you see opportunities right now also?

Barry Zyskind

Our existing yield is around $3.3 billion. But if you just look the last couple of weeks, somewhere like the know BBB's and in those areas the spreads that have widened and there is opportunities where you could put some of the money to work closer to high 3s and low 4s depending where the opportunity in the marketplace is. It is still being well-balanced and well diversified and a high-quality portfolio. So we are watching it. We are watching the market. There is a lot of dislocation in the market right now. And so we have good people. We have good teams here. And where there is opportunities, we try to take advantage of it. We are really looking for the long-term, not worrying about the mark-to-market of the bonds, really to the long-term of where we can get long-term yield.

Adam Klauber

Okay. That's helpful. And then on revenue growth, premium growth. I think you mentioned that would have been 16% excluding FX. How much of that, would you say, is organic versus deal related?

Ron Pipoly

The 16% that I referenced was specific to the specialty risk and extended warranty of the year. On a consolidated basis for the year, it would have been 14.2%. But the really the growth within the specialty risk and extended warranty, Warranty Solutions did contribute to some of the premium growth. We close that relatively late in the year. So from a premium standpoint, it wasn't really a needle mover.

So really the expansion that had within our specialty risk and extended warranty segment was what I would characterize as organic growth, meaning writing more premium with the same trading partner on a year-over-year basis. And I think our team does a very good job at expanding those relationships. And as Barry said, we are certainly excited about the opportunities to grow not only extended warranty here in the U.S. but also the specialty risk business that we write internationally.

Barry Zyskind

I would --

Adam Klauber

Sorry. Go ahead, Ron.

Barry Zyskind

No I was just going to add to Ron's thing. When you look at the specialty on the small commercial and the program that clearly really was organic growth, most of that growth. So that was a good job of integrating all the platforms, cross-selling the products, working together. Tower was fully consolidated onto our platform. So we are actually stating to going to grow that. A combination of rate increase and organic growth is helping us grow that.

Adam Klauber

Okay. So it sounds like the majority of small commercial and specialty risk was organic. Is that correct.

Barry Zyskind

Yes.

Barry Zyskind

And as far as on the small commercial loss ratios up a bit in the fourth quarter second half, as we think about the loss picks for workers comp specifically and I apologize if someone else asked this, but loss picks in workers comp in 2016 versus 2015, given the market is more competitive, could we expect the loss picks to go up?

Ron Pipoly

Well I think we continue to look at it this on a monthly basis. My commentary in terms of our overall average rate increase for 2015 was about 1%. As I mentioned, our average claim severity was up less than 2%. But we did a decline in frequency that more than offset the increase in average severity. So I mean, those are very encouraging signs for us. So we are very optimistic in terms of what we will be able to write our small commercial business workers comp at in 2016. But again we will continue to monitor the rate environment and look at the loss trends and I think our claims department does an excellent job at setting case reserves allowing us to make good decisions about how to move the book forward.

Adam Klauber

Okay. And again I am sorry if you said this, but for the fourth quarter and for the year, did you in aggregate have any favorable or adverse development? And if so, which segments?

Ron Pipoly

Really on an overall basis, we had no material adverse loss in all of 2015. Again, from individual lines of business perspective, an individual segment standpoint, you are going to have some movements either way where you may have some slight adverse development, which may be all positive or offset positively by positive development in another segment. But the number won't be material. And again, I think when you think about our reserves, we can't lose sight of the fact that we now carry 53.3% of our gross reserves on IBNR compared to 49% at year-end 2014.

Adam Klauber

Sure. How about the program segment in the quarter? You did have a higher loss ratio. Was there any adverse in that number?

Ron Pipoly

Really if you think about the fourth quarter loss ratio, again it's just re-examining 2015 picks relative to where we think we are at in the pricing environments. So no, there was no material adverse development within the specialty program segment on a standalone basis.

Adam Klauber

Okay. And then as far as the expense ratio in 2016, it does move around with the business mix and I know it always has done that. Is their potential as the business continues to grow, can we just a normal leverage, expense leverage with the expense ratio begin to moderate at some point?

Ron Pipoly

Well, I think business mix is the biggest driver overall. And I think at the end of the day, if you look at where we finished this year and call it 41% of our consolidated gross premium being workers comp and [indiscernible] contributing somewhere around 20% of that, if you think that business mix on a go forward basis, I would say the loss ratio will be in relatively tight range around 24%. To the extent that we are successful in growing extended warranty, you could see that number drop. But given the current business mix, I think the 24%, give or take a few basis point either way, is where we will be.

Adam Klauber

Okay. Great. Thanks a lot, Ron.

Operator

Thank you. That's all the time we have for questions for today. So I would like to turn the call back over to management for closing remarks.

Hilly Gross

Thank you. That concludes our fourth quarter and end of year 2015 AmTrust earnings conference call. On behalf of Barry and Ron Pipoly, we thank you. And on behalf of the entire AmTrust family, we thank you for taking the time out of your busy schedules to join us. Have a pleasant day.

Operator

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day.

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