AmTrust Financial Services' (AFSI) CEO Barry Zyskind on Q2 2016 Results - Earnings Call Transcript

| About: AmTrust Financial (AFSI)

AmTrust Financial Services, Inc. (NASDAQ:AFSI)

Q2 2016 Results Earnings Conference Call

August 02, 2016, 10:00 AM ET

Executives

Hilly Gross - VP, IR

Barry Zyskind - President and CEO

Ron Pipoly - CFO

Analysts

Randy Binner - FBR Capital Markets

Matt Carletti - JMP Securities

Ken Billingsley - Compass Point

Mark Hughes - SunTrust

Meyer Shields - KBW

Adam Klauber - William Blair

Operator

Good day, ladies and gentlemen, and welcome to the AmTrust Financial Services Inc. Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will be conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Hilly Gross, VP of Investor Relations. Sir, you may begin.

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 second quarter 2016 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 of Investor Relations and Corporate Development and Ms. Haya Cooperburr [ph], Chief Communications Officer.

Before I call on Barry Zyskind and Ron Pipoly to give you their reviews and analysis to the second quarter 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 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, and since many of these assumptions are in fact well beyond our control, 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 obligations 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 first quarter earnings, which are available on the Investor Relations section of our website, www.amtrustgroup.com, I repeat, www.amtrustgroup.com.

There, having dispensed with the legal niceties, it is now my pleasure to introduce to you, Mr. Barry Zyskind, President and CEO of AmTrust. Barry?

Barry Zyskind

Welcome and thank you for joining us this morning. We are pleased to report that AmTrust had an excellent quarter. We again achieved a record top line with more than $2 billion in gross written premiums in the period and $4 billion year-to-date. Most important this growth was accomplished while maintaining our margins and profitability which contributed to the significant increase in book value during the period. As you know, we focus on book value as it is a key measure of shareholder value creation.

Since our IPO in 2006, we have delivered annualized book value growth of more than 20% inclusive of dividends to common shareholders. At the end of the second quarter, book value per share was up 26% compared to a year ago. We achieved this substantial increase due to a number of factors including earnings growth both organic and by way of acquisition. Acquisitions were key element of our overall financial performance in the quarter as Ron will detail in his comments later this call. The close of acquisitions such as Republic companies and National Board contributed to our results this quarter.

Republic is a great example of how we are profitably building the business through strategic transactions. This Texas-based business with 100 years of history as the P&C insurer brought us diverse product offerings and an established market relationships particularly in the southwest of the United States presenting further opportunities for growth. With the addition of National Board, we emerge as a global player in surety and we are excited by the profitable growth of another niche offering.

Similarly, we are looking forward to the contributions of ANV Holdings, an acquisition we expect to close God willing in the fourth quarter. With ANV we will have a greater presence in the Lloyd's of London marketplace. Boost our profitability on returns and add talent to our management team in Europe.

As we expand in the property and casualty insurance industry, we believe companies such as ourselves with a low expense ratio and a highly scalable proprietary technology platform will have a distinct growth advantage.

We will continue to invest in our technology as we seek new ways to target our most desired classes of businesses. We’re optimistic about the organic growth prospects of our small commercial business segment, as well as the potential for expansion in other segments like a Warranty business. We remain thoughtful and disciplined buyers as you looked at acquisitions globally. We are uniquely positioned to address opportunities that arise, the pipeline for acquisitions remain robust.

Turning to our financial and operational performance in the quarter here are what we view as the highlights. One, strong organic growth, we achieved strong organic growth in the period. We did this by maintaining our discipline in underwriting, adhering to our goal of focusing on writing our most desired low hazard classes of business. Gaining market share through high quality service and providing consistency in terms of underwriting standards and pricing discipline.

Our strong organic growth comes against the backdrop of stable for range bound pricing in the small commercial business segment. It is a range in which we have a proven ability to earn returns. We are watching the markets carefully and are confident that as in the past periods of more modest pricing conditions, we will retain a significant portion of our business and find pockets of opportunity to build upon.

Warranty continues to demonstrate particularly favorable sales results. Our relationships with key industrial players such as GM and software companies like Microsoft have developed us in the strong partnerships we envisioned when we first formed alliances a few years ago.

Two, the second highlight of the quarter is our service and fee businesses. Year-to-date our service and fee business has delivered the high-margin growth we have come to expect from these operations with revenues rising 28% from a year ago. The business benefitted significantly from the Warranty Solutions acquisition that has been an important addition to AmTrust.

Not only has Warranty Solutions generated solid revenue and profit, it has brought outstanding new members to our management team and provided opportunities to further penetrate important auto extended warranty market.

Three, the third highlight of the quarter are invested asset portfolio, another key driver of shareholder value. We have grown our invested assets to a record level more than 9 billion while maintaining our focus on high-quality conservative investment. Ron will provide more detail on the mix of our asset. As you’re aware our strategy has always been to generate underwriting profit but we are actually clearly benefiting from our ability to accumulate invested assets at a meaningful pace.

In closing, AmTrust has had a first - a great first half of 2016 and we're looking forward to the balance of the year. Our success is due to the discipline we have maintained throughout what has sometimes been a challenging environment. We continue to rely on our culture and our people to deliver the type of superior returns that our shareholders have come to expect. Our focus remains on building book value and those shareholder value regardless of economic, political and market conditions.

In fact we saw an opportunity in this environment to buyback our stock at levels that we believed do not fully reflect the value of the company and therefore an excellent use of our significant free cash flow.

Ron I will now turn the call over to you.

Ron Pipoly

Thank you, Barry. Good morning. Gross written premium for the quarter was $2.07 billion, an increase of $395 million or 23.5% from the second quarter of last year. Our acquisition of Republic contributed to $153 million of gross written premium during the quarter. Without the Republic acquisition increase in gross written premium would have been $242 million or 14.5% increase.

AmTrust total gross written premium over the preceding four quarters is $7.4 billion. For the quarter, we generated net income of $134.8 million or $0.78 per diluted share, this compares to $70.7 million or $0.42 per diluted share for the second quarter of 2015.

We had operating earnings of $140.3 million or $0.81 per diluted share this compares to $130.5 million or $0.78 per diluted share for the second quarter of 2015.Life settlement contracts contributed $0.04 per diluted share for the quarter. Annualized return on equity for the quarter was 21.1% and annualized return on equity from operating earnings was 21.9%.

For the six months, we generated net income of $235 million or $1.34 per diluted share. This compares to $225.4 million or $1.35 per diluted share for 2015.We had operating earnings of $276.9 million or $1.58 per diluted share for the first six months of 2016, this compares to $251.9 million or $1.50 per diluted share for the first six months of 2015. For the six months, life settlement contracts contributed $0.07 per diluted share.

Our small commercial business segment produced gross written premium of $1.06 billion, an increase of $185 million or 21.1%.During the quarter the Republic acquisition contributed $102 million of gross written premium to the small commercial business segment. Without Republic the increase in gross written premium would have been $83 million or 9.5% increase.

Workers' compensation premium increased by $55 million during the quarter. California and New York were the states with the largest premium growth. Our workers' compensation policy count increased by 5% during the quarter.

Specialty risk and extended warranty segment produced gross written premium of $652 million, an increase of $172 million or 35.8%.Growth during the quarter was driven in part by the Warranty Solutions acquisition which was closed in September 2015 and produced $23 million of gross written premium during the quarter.

Additionally despite the weakness of the British pound we experienced growth in our European operations which was led by our AmTrust at Lloyd's platform. 67% of the gross written premium was generated outside of the United States this quarter which compares to 57% for the second quarter of 2015.

We continue to monitor the events surrounding Brexit and we believe regardless of the ultimate resolution we are well-positioned in Europe to continue to serve our clients. Our specialty program segment produced $361 million of gross written premium, an increase of $38 million or 11.9%.During the quarter the Republic acquisition contributed $52 million of gross written premium to the specialty program segment.

During the quarter approximately 54% of the premium in this segment related to workers' compensation programs, this compares to 51% from the second quarter of 2015. For the six months our gross written premium increased by $600 million or 17.5% from $3.4 billion to $4 billion. Small commercial business segment gross written premium totaled $2.12 billion, an increase of $350 million, specialty risk and extended warranty gross written premium totaled $1.18 billion, an increase of $230 million or 24.2%.

Specialty program gross written premium totaled $698 million which is flat when compared with the six months last year. Regardless of segment we have written $2.9 billion of worker’s compensation gross written premium over the proceeding four quarters.

Our net written premium for the quarter rose to $1.26 billion from $1 billion in the second quarter of last year. We retained 61.2% of our gross written premium for the quarter compared to 60.1% in the second quarter of 2015. For the six months our net written premium was $2.49 billion. We retained 62.1% of our gross written premium for the year compared to 60.2% in 2015.

Net earned premium totaled $1.18 billion for the quarter, an increase of 21.9% from the second quarter of second quarter of last year. Our small commercial business segment accounted for 49% of our written premium, specialty and risk and extended warranty was 31%, and specialty program was 20%.

For the six months our net earned premium was $2.25 billion, an increase of 17.6% from 2015. Our combined ratio came in at 91.7% for the second quarter compared to 90.5% last year. The loss ratio was 66.4% this quarter and compares to 65.9% for the same period last year. For the six months our combined ratio was 91.4% which compares to 89.8% for 2015. The loss ratio for the six months is 66.5% which compares to 65.3% last year.

Our expense ratio for the quarter was 25.3% compared to 24.6% in the second quarter of 2015. The increase in the expense ratio is a result of an increase in acquisition cost based on premium distribution. Worker's compensation which has the lowest direction acquisition cost of products within our small commercial business segment represented 60% of the small commercial business this quarter while it represented 66% in the second quarter of 2015.

The slight increase in the expense ratio for the six months is also related to a change in the premium distribution related to Worker's compensation. Worker's compensation accounted for 66% of the small commercial business for the first six months of 2016 while it represented 71% for six months 2015.

Our servicing fee income for the quarter totaled $138.3 million which is an increase of approximately $30.5 million from the prior year quarter. The increase was primarily driven by the acquisition of Warranty Solutions which generated approximately $20 million of fee revenue during the quarter.

In terms of the contribution of fee income for the quarter AMT Warranty produced fee income of $35.7 million and specialty equipment $11.5 million, car care $9.5 million and IT servicing and licensing totaled $11.5 million.

Our service fee income for the six months totaled $282.5 million which is an increase of approximately $61.8 million from the first six months of 2015. The increase again was primarily driven by the acquisition of Warranty Solutions which generated approximately $44 million of fee income during the six months. The largest contributor of fee income for the six months were AMT Warranty with fee revenue of $68 million and for specialty equipment $20.6 million, IT servicing and licensing $21.7 million and car care $19.1 million.

Our total revenues for the quarter were $1.39 billion, an increase of 22.9% over the second quarter of 2015. For the six months total revenues were $2.66 billion, an increase of 19.8 over 2015. We generated $50.7 million investment income for the quarter and had $9.8 million of net realized gains. For the six months we’ve generated an investment income of $100.2 million and had net realized gains of $15 million.

Total shareholders' equity at June 30, is $3.2 billion which represents a book value of $15.10 per share. The increase in book value per share since December 31, 2015 is $1.31 per share or 9.5%. We also declared two quarterly dividends totaling $0.30 per common share. Under the equity method of accounting, our current carrying value of our national general common stock is $149 million. The current market value for the stock is approximately $263 million.

During the quarter the company repurchased 3.58 million common shares under our share repurchase plan at an average price of $24.82 per share. For the year through July 27, the company has repurchased 5.85 million common shares at an average price of $24.72. Our total capitalization at June 30 was $4.5 billion. Total assets at June 30, were approximately $21 billion, total invested assets as Barry mentioned are $9 billion which is an increase of $2 billion from year end 2015. Fixed maturities comprise 75% of the portfolio, cash and short-term investment 19%, equity securities 2% and other investments 3%. The average yield on the portfolio was 3.47% at the end of the quarter.

Now turning to a development that took place last week of which I know many of you are already aware. On Thursday July 28, the Tower Group, a PMC insurer acquired by the privately held ACP Re in September 2014 was placed into conservation. Shortly after the California Insurance Department announced the conservation plan which provides for the orderly resolution of the Tower Group’s legacy liabilities. This represents a welcome development for AmTrust.

To remind you, AmTrust acquired Tower Group commercial lines of business in September of 2014 to strengthen our position in the small commercial insurance market. The business has become fully integrated into our commercial insurance operations and is performing well. AmTrust has generated substantial premium through that portion of the commercial book we chose to renew.

Over time, however, it became apparent that the Tower Group’s legacy liabilities related to business produced prior to its acquisition by ACP Re were understated and that the company was in a compromised liquidity position.

Under the conservation plan which is subject to court approval, Michael Karfunkel Family Trust and members of the Michael Karfunkel family will contribute $200 million to the Tower Group receivership. This contribution will significantly increase Tower Group's liquidity and facilitate the orderly resolution of its policyholder liabilities.

This is beneficial to AmTrust since in connection with the conservation plan our $125 million stop loss reinsurance agreement with the Tower Group will be cancelled. In consideration of these developments the term of the AmTrust loan that helped finance the ACP Re acquisition of the Tower Group will be restated with a maintenance guaranteed by the Michael Karfunkel Family Trust resulting in a stronger credit profile to secure ACP Re's outstanding loan obligations.

The new terms of the loan are available on the 8-K we filed on July 29. In summary the maturity date were changed from September 15, 2021 to the 20th anniversary of the date on which the reinstatement becomes effective. Our interest on the outstanding principal balance of $125 million were changed from a fixed annual rate of 7% to a fixed annual rate of 3.7%. The family’s contribution to the conservation plan allows AmTrust to cancel the stop loss agreement and avoid credit exposure from any potential reinsurance recoverable. We’re very pleased with this outcome.

We appreciate that California State Commissioner's leadership in this matter and coordination with other state regulators to protect the policy holders covered under Tower's legacy policies.

We appreciate the Michael Karfunkel Family's contribution, which demonstrate their commitment to excellence and integrity in the insurance industry and their continued support of AmTrust.

Thank you. And with that I will turn it back over to Barry.

Barry Zyskind

Thank you, Ron. In summary we had an excellent quarter. We generated a record level of gross written premiums exceeding the $2 billion mark. We delivered operating earnings growth of more than 27% and book value per common share a key measure of shareholder value creation increased by 26% to $15.10.

With that, I'd like to open the call to Q&A.

Question-and-Answer Session

Operator

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

Randy Binner

Hi, good morning thanks. I wanted to ask just one on specialty risk and extended warranty kind of more of a model question but the loss ratio there was pretty good in the quarter, so I was wondering if there was anything unusual there if med mal or something like that had a particularly good quarter and if this level of loss is sustainable or we should expect higher loss ratio given kind of generally soft market conditions. Again this is specialty risk and extended warranty segment.

Ron Pipoly

Hi, Randy its Ron. I mean in terms of the loss ratio in specialty risk and extended warranty there isn't any one thing in particular. The business performs well from - it has continued to perform well from a loss ratio standpoint, the med mal business that we continue to write it really performs well. We’re seeing our ability to get increase in pricing in terms of condition.

So I would look for the specialty risk and extended warranty loss ratio to remain kind of consistent with this run rate.

Barry Zyskind

One addition Randy, remember the Lloyds business also comes up in that segment and that traditionally has lower loss ratio.

Randy Binner

Okay. So a little bit of mix in there to as Lloyds builds in.

Barry Zyskind

Right.

Randy Binner

And then I wanted to ask a couple on Worker's Comp, so I guess first just specifically in Florida which is becoming a big state for AmTrust, there was Supreme Court decision earlier this year that will basically kind of wipeout reforms there, I guess as the best way to putting it and there is potentially large 17% rate increase I think filed there, and so how does that affect the AmTrust. It seems that if you roll back reforms, the initial reaction would be that it has to be a headwind but I know that you write business that was litigated there. So, I'd be interested to hear how you will navigate those issues in Florida.

Ron Pipoly

Randy, it’s Ron. You make a good point in terms of, we continue in Florida to write small low hedges book of businesses we do on a nationwide basis and 77%, 78% of our claims are medical only claims and obvious those are not claims that get litigated.

So I think structurally we have an advantage in the business that we focus on. We'll obviously continue to monitor developments in Florida and we'll see how the state department reacts, the state insurance department reacts to the MCCI proposed rate increase. Really what we’ve seen in Florida set aside recent Supreme Court rulings, what we’ve seen in Florida is from an average rate perspective, we’re down about 3.4% year-over-year in Florida that was a rate reduction in January but really from a forecasted loss cost perspective for 2016, as I said we’re down 3.4% on the rate side but we were down 3.5% on projected lost cost.

So I mean it’s a stable environment. We’ll continue to monitor what happens with rate increases and I think as we’ve proven in the past to the extent that we need to revise our underwriting guidelines, we will do that and we continue to monitor our business on a monthly basis so we can see those emerging trends very quickly and react.

Barry Zyskind

And I’ll just add to Ron's comments. We entered Florida in 2004 when we did the partnership with Associated Industry which we ultimately bought but they were there for many years before and they were there before the reforms and did very well. So, I think the talent we have and the amount of years in Florida is good for us and we've been through this before and we think that we’ll be able to navigate it well.

Randy Binner

Great. And then just on California and New York you mentioned that’s where most of your growth is but rates there are, it’s certainly lower than they’ve been in the last few years and so where would you kind of peg those cycles, those Worker's Comp cycles in those two states, kind of what inning are we in of those cycles particularly in California because you've done well kind of timing the cycle in California but all cycles come to an end I suppose. So just curious kind of where you think we are in the process with those two states.

Ron Pipoly

Well, New York, actually the rate of - the rate increase has actually picked up in the second quarter. As we sit here now, our average rate increase in New York is about 9.1%, forecasted kind of loss cost trends in New York are actually lower than they were in the first quarter and they now hover around 1%, so obvious that’s very encouraging.

When it comes to California, I don’t how to characterize what inning. I mean, our view is that regardless of what inning there is always going to be opportunities as very good profitable business as long as you are underwriting the risks and pricing it appropriately. What we’re seeing in California is that our rate is pretty consistent with where we were in the first quarter up about 1.2% and lost costs are hovering around 0.

So again the way we look at California we still think there is opportunity there, there is opportunity in New York and again to the extent that look at this on a monthly basis at a very detailed level if there is any emerging trends that we need to react to, we’ll be able to react to very quickly.

Barry Zyskind

And just to add to Ron, Randy this is Barry. In terms of innings it’s clearly California has taken huge rate increases over the last four or five years, but I think that you have to recognize is that the market is priced we believe at very profitable levels now.

So the question is we really don’t need rate increases but we want to watch the business which we’re doing like Ron says very carefully, we’re doing what we’ve done in previous cycles, we’re being very, very aggressive about keeping our renewals at the right price. As I mentioned in previous calls, our new business is not as strong as it was '12, '13 and '14, '15, we’re still growing in California, we’re growing slower because of where we are in the thing. But the business that we're writing is powerful business, it’s a low hazard we continue to focus on our top 60 preferred classes.

And I'll just echo what Ron said in New York, New York the cases of rates are going up. The bureau just recommended further increases in New York. So we actually feel very good about New York where it's priced and where the loss trends are. And we’re there for a long time. If you think about it we got into New York when we bought Princeton in 1995.So we've been here for a long time and it's been one of the most profitable states.

Randy Binner

All right, great. Thanks a lot.

Operator

And our next question comes from the line of Matt Carletti with JMP Securities. Your line is now open.

Matt Carletti

Hi, thanks good morning. Two questions, Barry if I could start with life settlements, I mean the income there has progressed very nicely over the past several quarters. I know the books maturing, we’ve kind of got in this kind of 12 million run rate a quarter. How do you feel about, I mean is that - if we reach kind of a more sustainable level or is it still an investment that could have a bit of volatility to how the incomes recognize going forward?

Barry Zyskind

Yes, I would say, I would agree with your initial comments there’s no question that it's the portfolio is maturing, we've been on it for many years, we know it well and we feel very good about it. We once in a while we were able to buy policies here and there and not likely able to buy in '10 or '11 when the market was on the floor. But now there's more competition in it and a lot of big private equity and institutions buying.

So we don't really buy that much. I would say - I wouldn’t say that it's 12 million a quarter I would say some quarters we’ll make, some quarters they might be flat or small loss.

But overall we still believe that the portfolio we have is going to bring a very strong returns. So it's something that you have to just put out there for a very long time. But it's hard to – we can’t project what it's going to be on a quarterly basis, it’s really based on the mortality rates and things of variables. But overall it's a strong portfolio, it's priced well. We think we still feel very good about where we are positioned. In terms of cash flow we’re doing great I mean it’s more than self-funding itself. In terms of the premium claimants and we’re almost sort of point where we’ve almost gotten back almost everything we’ve invested in the initial portfolio.

Matt Carletti

That’s great. And a couple of other questions, Italian hospital liability I saw that you guys have kind of settled the case and put it behind and I know you can’t say too much about that. But more broadly just what is your view of that market today and how does kind of getting the case behind you, does it change any relationships in that market really to push forward, better or was it really not an issue in the first place?

Barry Zyskind

No, I think it’s a little bit of both. First of all, we are very pleased to get it behind us. As we mentioned in previous calls we've since the litigation started we went direct and we really build a very significant business there now. And now we’re dealing directly with the brokers where we’ve created our agency there. We've been underwriting the business at higher rates, improving our claims than – and the trends further '14 '15 '16 years look very, very strong.

So we feel very good about the business but there’s no question about it with this behind us and I met with a guy who runs Italy on Sunday and we are looking to go forward and really to expand profitably in other lines in Italy. And we think with Solvency 2 and some issues in Italy we do think that there's actually some good opportunities to expand and diversify the portfolio. So I would say sitting where we’re today we think Italy has a very strong potential for future growth and potential for acquisitions and getting it into new lines of business.

Matt Carletti

Okay, great. And then last question just on the buybacks, if I’m doing the math right, it seems like you've used a lot of the authorization that we saw, given where the stock is and kind of your capital needs, should we expect to see more buybacks going forward and possibly another repurchase authorization or was it more of a moment in time given where the stock was and - the capital that you had that you’ve kind of accelerated an effort?

Ron Pipoly

Matt, this is Ron. In terms of the share buyback authorization we actually got an increase in another $150 million on Board. So yeah we have plenty of capacity should the opportunity present itself. So demonstrated buying 5.8 million shares back on a year-to-date basis, we’re going to support the stock at prices where we think it’s a value.

Barry Zyskind

Yes, we look at it from our standpoint we look at it and say would be buy a company at these levels and where we see the projected of earnings and growth. And we say yes, so why not buy our own stock and we're generating if you look at the quarter 150 million in capital on a quarterly basis.

So we think we have potential plenty of capital to support the growth of the company, look for acquisitions and if our stock is at a level where we would buy a company at this price we’re definitely going to buy our own stock first.

Matt Carletti

That makes sense. Thanks for the answers and congrats on the quarter.

Operator

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

Ken Billingsley

Hi, good morning. Thanks for taking my question here. I wanted to ask about the Tower group piece and a part of that says that the there is going to be increased expenses or at least expenses associated with on that line but there’s not going to be any fee income, is that going to have an impact on your guys expense ratio, is it going to be marginal or can you guys quantify that at all?

Ron Pipoly

Yes I can. It's Ron. I mean the impact on overall basis is going to be very, very marginal to us. We don't get any kind of significant change in any of our trends either on the expense side or any kind of claims adjudication. So yeah, it’s going to very, very minimal to us.

Ken Billingsley

And so not even a basis point that we would necessarily say?

Ron Pipoly

No, correct not even – not anything that you would say.

Ken Billingsley

Okay. And I would imagine most of that business is already been loaded up on your system so there is not additional people will needed to be hired essentially it’s already the process and people are in place?

Ron Pipoly

Absolutely and I think even in the California insurance commissioners in press release he noted – he only noted that a contribution in terms of our data capabilities and bringing much more incredible systems to there. Claims were actually the first thing that that got integrated in the acquisition on to our platform. So yeah, there’s no additional cost for us at all to handle this.

Ken Billingsley

Okay. And my next question is just a bigger picture build versus buy going forward there's been a little more of a shift in the last year or so where you guys were buying actually four companies and taking on the liabilities or prior to that most of that was renewal rights in general on the underwriting side. Where do you see going forward from an opportunity standpoint at least over the next 18 months?

Barry Zyskind

I think it really depends on the cycle of the market. So we've seen both and where we see the opportunities and we can get comfortable with the balance sheet we’ll take the balance sheet and if the opportunity comes along. But really, really depends on the cycles. So typically after where we find after – after a very long soft cycle is when company start having issues, balance sheet issues and that's when you want to do a renewal right, you don’t want to take the balance sheets.

In a more healthy environment when companies are coming off the good couple years of healthy pricing and everything then we would be more willing to look at balance sheet if we get comfortable with it. So really depends on the cycle and the opportunity that's there and again some of the acquisitions when we – when we do buy a company we're buying it from an institutional seller someone that is a larger company and they’re willing to stand behind the liabilities and give reps some warranties that that can get us comfortable as well.

Ken Billingsley

Great. Thanks for taking my questions.

Operator

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

Mark Hughes

Thank you. Good morning. The loss ratio in a small commercial up a bit you have described good pricing and good claims trends in number of your largest states, why the loss overall again with small commercial?

Barry Zyskind

Well, I think Mark again looking on a quarterly core basis in loss ratio sometimes it makes it a challenge. I think it’s easier at times to look at on a sequential quarter basis which small commercial business segment is very consistent on a sequential quarter. If you think about fourth quarter of '15, first quarter this year and second quarter and on a quarter-over-quarter basis a lot of it has to do with the premium distribution. In terms of some of the things I cited with the expense ratio.

In terms of having workers' compensation which continues to perform very, very well be a lower percent of the overall book of business in spite of that we continue to grow it as we fold in acquisitions whether it was the Tower acquisition which was much more commercial package oriented business. Republic on a – which really has a very little effect on this quarter because we just acquired it. But again most of that business that will renew is going to be commercial package oriented in majors. So I think it's really just premium distribution.

Mark Hughes

You had given some details on the acquisition contribution, do you have a overall organic growth number and perhaps by segment as well?

Barry Zyskind

Well, yeah, I mean in the small commercial business segment, we grew by 180 million approximately for the quarter which was about 21% 102 of that was acquisition oriented with Republic occurring about 102 million without Republic we’d have been about 9.5% growth rate.

Within the specialty risk and extended warranty we grew nearly another $180 million about 20 million was Warranty Solutions oriented.

And then within the small commercial - the specialty program segment our growth was about 38 million but Republic contributed 52 million of growth in that segment. So consistent with the first quarter results in that segment, we’d have been down slightly quarter-over-quarter which is as we continue to evaluate programs and knows where we don't think we’re getting the appropriate rate we’re moving away from.

So you know it's a good mix between organic growth which we still see pockets of opportunity to grow organically as well as M&A.

Mark Hughes

On the specialty program side, I know you’ve been pretty consistent in being disciplined on that business. Do you see that continuing or are you’re seeing any softening - not softening but any sort of easing on the pricing pressure that might lead you back to your growth trajectory in that business?

Barry Zyskind

I think right now what we said we actually don't see that as a potential growth right now and that something we've said going back to the beginning. That's one of lines of business, when there are opportunities to grow and there’s opportunities sometimes to rain in and pull it back. We definitely in that segment, I would say we're in a position where we’ll try to grow if we can find the business.

But realistically you could see from the last couple of quarters we’ve been pulling it in. We’ve cancelled couple of programs, we're underwriting some. So it really depends on where we are in this cycle. But right now let’s say for the foreseeable future that's a more of a maintain your best accounts, underwrite them, do a good job with your expense ratio and then wait for the market to shift on that segment.

Mark Hughes

And then finally Ron what's your look from the tax rate account?

Ron Pipoly

I read that question every quarter. The tax rate for the quarter was approximately 16%, again tax rate in and itself when we acquired Sagicor our Lloyd's platform several years ago we had put a valuation allowance on NOLs associated with that.

And given the job that the team over there has done in returning our emphasis at work profitability and we are able to take down that valuation allowance this quarter. And so you saw the impact of that within the tax rates. So I think kind of the normalized tax rate absence the takedown of the NOL would have been about 24%.So I will talk still in the mid-20s but I - every quarter is unique.

Mark Hughes

Thank you.

Operator

And our next question comes from line of Meyer Shields with KBW. Your line is now open.

Meyer Shields

Great, thanks. Good morning. Sorry about that. Industry wide obviously a lot of large losses I was wondering if you had any large exposure or exposure to any of the large losses that have been dandling about this earning season?

Barry Zyskind

I think actually Republic before we acquired them had property losses in Texas with both commercial and personal lines. But that really happened before we acquired them. So it wasn't on our balance sheet and overall Lloyd's have had some losses but very manageable nothing, nothing major.

Meyer Shields

Okay. That's fair. Was there any reserves development overall or for any individual at Phineas?

Barry Zyskind

Again on an overall basis I think we do a very good job of setting reserves at adequate levels in order to take the claims to conclusion. I mean you’ll see pockets of movements within individual lines of business on an aggregate basis, there was no any material adverse development related to prior accident years. But again we continue to monitor movements within individual lines of business.

Meyer Shields

Okay. One last question if I can, if we look at the growth in service and fee income obviously very strong, the growth in other expenses is actually bigger on a dollar basis. And I was wondering if there’s a way of parsing that out in terms of how much of that pertained in the service and fee business and how much was just underlying corporate expenses?

Barry Zyskind

Yes, the biggest change in the quarter and on other expenses as we describe it, would really be an increase in our overall intangible amortization as we do acquisitions and create intangible assets. So that's the biggest piece because all of our depreciation and amortization we put into the other expense line. So overall while we don't necessarily breakout the margin separately, our service and fee business continues to perform very well for an EBITDA perspective.

Meyer Shields

Okay. And if I can, one more, the net investment income was up a little bit more than $1 million it looks like average invested assets were up a lot more on a sequential basis, was there anything unusually adverse in net investment income in the quarter?

Barry Zyskind

Well, I think when you start talking about the average build I mean for example, we didn’t have Republic for the entire quarter and it was part of that acquisition that brought significant invested assets with it. You talk about closing Board for example right at the end of the quarter. So really we continue to have a lot of momentum from an investment income standpoint.

On this two consecutive quarters with over $50 million, right at $50 million of investment income. So we continue to gain momentum there but there was nothing from a rate perspective in fact our average rate was slightly up from March 31 which was hovered around 3.35 or around and now we’re at 3.47. So again we've a lot of momentum from the investment income perspective.

Meyer Shields

Okay, fantastic. Thanks so much.

Operator

And our next question comes from the line of Adam Klauber with William Blair. Your line is now open.

Adam Klauber

Thanks. Could you give us an idea of the timing of the ramp-up of profits from ANV and I guess inside of that question is, we’ll take a little while to put that in Sagicor together and when can we'd start to look at getting normalize margins?

Barry Zyskind

Well, I think like I said Klauber, we hopefully will close in the fourth quarter of - of this year of 2016. And we think it will probably take us I mean there is a lot of planning going on about combining and there will be savings obviously a lot of savings on reinsurance and file costs and back office.

But I think we really think that'll probably - just to can certainly take us a full year to get all everything completely migrated to one facility. And so 12 months and during those 12 months we'll make a very nice returnable. We think really going into '18 is where you'll see a significant profits and very high return on that business.

Adam Klauber

Okay, that makes sense. And then on the Tower reinsurance, so can you help us parse through this, at what point - how much more losses does that old Tower book have to incur for AmTrust to start taking losses on their own books?

Ron Pipoly

And part of this structure that stop-loss agreement that was in place was canceled. So really any reinsurance exposure that we would've had with two Tower directly which we then would've retroceded off has been completely eliminated and will be canceled as part of this overall conservation plan.

So Towers legacy liabilities will remain with Tower and we have no exposure.

Adam Klauber

Okay. And then just following-up on the earlier question, I know you didn’t have any big weather losses but did weather had total loss ratio all during the quarter?

Ron Pipoly

Adam it's Ron again. No, I mean as Barry mentioned there was some cat events that affected Republic before we close.

Adam Klauber

Yes.

Ron Pipoly

There were few minor cat events since then but nothing that meaningfully adjusted to loss ratio.

Adam Klauber

Okay, great. Thanks a lot.

Operator

And I’m not showing any further questions at this time. I would now like to turn the call back over to Mr. Hilly Gross for any closing remarks.

Hilly Gross

Thank you. There being no further questions, I will conclude our second quarter AmTrust conference call. On behalf of Barry Zyskind and Ron Pipoly and all of us at AmTrust, we thank you for taking time out of your busy schedules to join us this morning. We wish you all a pleasant day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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