Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Amtrust Financial Services Inc. (NASDAQ:AFSI)

Q3 2007 Earnings Call

November 9, 2007 10:00 am ET

Executives

Hilly Gross - Vice President, Investor Relations

Barry Zyskind - President & CEO

Ron Pipoly - CFO

Analysts

Bijan Moazami - FBR

Adam Klauber - FPK Securities

Bruce Wilcox - Cumberland Associates

Operator

Good morning, everyone and welcome to the Amtrust Financial Services Third Quarter 2007 Earnings Call. Today's call is being recorded. At this time I would like to turn the conference call over to Mr. Hilly Gross, Vice-President of Investors Relations. Please go ahead, sir.

Hilly Gross

Thank you. Good morning and welcome to our third quarter earnings conference call. With me here this morning is our President and CEO, Barry Zyskind and our Chief Financial Officer Mr. Ron Pipoly.

Before I introduce both these gentlemen to you, I would like to read in to the record the mandatory paragraph on forward-looking statements. Since this morning's conference call will contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that actual developments will be those anticipated by the Company.

Actual results may differ materially from those projected as a result of significant risks and uncertainties, including non-receipt of the expected payments, changes in interest rates, effect of the performance of financial markets on investment income, and fair values of investments; development of claims and the effect on loss reserves, accuracy in projecting those loss reserves, the impact of competition and pricing environments, changes in the demand for the company's products, the effect of general economic conditions, adverse State and Federal Legislation, regulations and regulatory investigations into industry practices, developments relating to existing agreements, heightened competition, changes in pricing environments, and changes in asset valuations. The Company undertakes no obligation to publicly update any forward-looking statements.

Having taken care of the legal formalities, it is now my pleasure to introduce AmTrust’s President and Chief Executive Officer, Mr. Barry Zyskind.

Barry Zyskind

Good morning and welcome. I am pleased to report that AmTrust has had an outstanding third quarter, carrying forward the momentum of our record first and second quarter. We achieved both top line and bottom line growth this quarter. For the quarter, our gross premium was $193 million, an increase of 42% from the third quarter of 2006. Our net income was $24.4 million, an increase of 96.8% over third quarter in 2006.

For the nine months, our gross premium was $593 million, an increase of 59% over the same period in 2006. Our net income for the nine months was $67.3 million, an increase of a 115% over the same period in 2006.

As our business grows, we continue to reduce our expense ratios. Our quota-share arrangement with Maiden Insurance Company, which is effective July 1, 2007, has really proven to be accretive to AmTrust. We anticipate that our arrangement with Maiden will continue to enable us to leverage our balance sheet, increase our writings and most importantly increase our return on equity.

Our three segments continue to perform very well. In our workers' compensation segment we continue to demonstrate pricing and risk selection discipline, as certain regions have experienced increased competition. However, because we operate in small niche markets our rates of renewal remain high. Integration of Associated Industry Insurance Company is going very well. Associated with one of the lean providers of workers' compensation for small businesses in Florida and we believe it will be an accretive acquisition for AmTrust.

On September 5th, 2007 Unitrin announced that it had reached an agreement in principle to sell its Unitrin Business Insurance segment to AmTrust. We are currently in the final stages of documentation and discussion with Unitrin. We believe that Unitrin should be a very strategic acquisition for AmTrust, as it would allow us to diversify and expand in to the area of property and casualty, commercial packages for small businesses.

Should this acquisition be completed we anticipate it would be immediately accretive to AmTrust. In addition it provides us with other profitable niche products, namely small commercial packages that we can offer through our agents and brokers. [Feasibility] to market more commercial packages is important in the climate we are operating in. Furthermore we anticipate that UBI's expenses can be leveraged down by our existing infrastructure.

The Specialty Warranty segment continue to grow. In the third quarter we wrote $76.2 million, an increase of 88% over the third quarter 2006. This growth is attributable to organic growth as well as acquisitions. Because of the specialized nature we enjoy in this segment and unique expertise we have in underwriting, this segment affords us a stability that leaves us more sensitive to market cycle.

Our Specialty Middle Market segment continues to increase through the growth of existing programs and addition of new programs. In third quarter of 2007, Specialty Middle Market wrote $50 million, an increase of 69% over third quarter 2006. We feel very good as to the prospects of all these segments continuing the possibility during the remainder of 2007 and 2008. Because our segments are specialty niche business, we are not as sensitive to the market cycle. As we continue to growing our businesses, both organically and by acquisition, we will continue to focus on specialty lines that have stability in all cycles of the markets.

As we reported during the last conference call, AmTrust has no investment exposure to sub prime mortgages. Virtually all of the mortgage-backed securities in our portfolio are government or agency guaranteed. We continue to be conservative and diligent in our investment activities and protecting our balance sheets.

In summary, we believe that our continued success comes from a focused adherence to carefully managed growth, strategic acquisitions, disciplined underwriting and pricing and diligent cost control. We believe we are in an excellent position to build on this success and momentum through the end of this year and 2008.

And now, I would like to take the opportunity to turn the discussion over to our Chief Financial Officer, Ron Pipoly to report on our third quarter financial highlights.

Ron Pipoly

Thank you, Barry. Good morning. I am pleased to report that the third quarter of 2007 produced a significant increase in our earnings per share. Overall, earnings per share from operations, was $0.43 per share compared to $0.17 per share for the third quarter of 2006.

Driving the increase in earnings per share was a combination of continued profitable premium growth as well as the effects of the premium accessioned to Maiden Insurance Company. Gross written premiums for the third quarter, was a $193.2 million, which was $57.3 million increase over the third quarter of 2006. Our Specialty Middle Markets and Specialty Risked and Extended Warranty Segments experienced significant growth during the quarter. For the nine months ended September 30th, 2007, our gross written premium was $593 million, compared to $373 million for the nine months ended September 30th, 2006.

The Company ceded a $190.8 million of premiums to Maiden during the quarter. This cession caused written premium to be $293.4 million for the nine months ended September 30th, 2007, compared with $314.3 million for the same period in 2006. This was expected as the Maiden re-insurance agreement covered 40% of the company's subject unearned premium as of June 30th, 2007, as well as, the subject premium written during the quarter.

Earned premium for the third quarter of 2007 was $81.8 million, as compared to $83.5 million for the third quarter of 2006. The decrease in earned premium was also a result of our re-insurance agreement with Maiden. We ceded $63 million of earned premium to Maiden during the quarter. Offsetting the session of earned premium was the $40 million of ceding commission revenue the company recognized during the third quarter.

Total revenue for the third quarter was $137.5 million, compared to $97.9 million for the third quarter of 2006. For the nine months ended September 30th, 2007, total revenues were $432.7 million compared to [$263.8] million for 2006. As discussed during the second quarter conference call, the Maiden re-insurance transaction has been accretive.

For the quarter, our Small Business Workers’ Compensations segment increased gross premium production by $1.2 million. As Barry mentioned, the company continues to demonstrate pricing and risk selection discipline at certain regions have experienced increased compensation

The Specialty Middle-Market segment increased premium production by $20.3 million; this increase was the result of the Company’s growing build, the existing programs organically, as well as, increasing the number of programs underwritten.

The Specialty Risk and Extended Warranty segments increased gross written premium production by $35.8 million. The growth in this segment is a result of both organic growth and existing relationships, as well as, successful integration of IGI, which produced $24.8 million of premium during the quarter.

The overall combined ratio for the third quarter was 74.6% compared to 91.6% for the third quarter of 2006

The components of our third quarter combined ratio were a loss ratio of 63.9% compared to 66.3% in the third quarter of 2006.

The expense ratio for the third quarter was 10.7% compared to 25.4% for the third quarter of 2006. The significant decrease in the expense ratio was primarily caused by the $40 million of ceding commission revenue recognized by the Company during the quarter.

The company reduces its expenses by this ceding commission revenue in arriving at the expense ratio. The Company continues to be comfortable with the trends it observes in both the loss and expense ratios.

Loss ratios for all three segments improved in the third quarter of 2007 compared to the third quarter of 2006. The loss ratio of the Worker’s Compensation segment was 60.2% for the third quarter compared to 61.8% for 2006.

Specialty Middle Market’s loss ratio was 63.8% compared to 65.9% for the third quarter of 2006. Specialty Risk and Extended Warranty loss ratio was 74.5% compared to 81.6% for the third quarter of 2006.

Now turning to some of our nine months highlights. As previously mentioned our gross written premium for the nine months – the first nine months of 2007 was $593 million, which represents a 59% increase over the nine months ended September 30th 2006.

Gross written premium for small business workers compensation was $235.5 million for the first nine months of 2007, which represents a 20.9% increase over the equivalent period in 2006.

Specialty Middle Markets gross written premium was a $164 million for the first nine months of 2007, which increased by $71.3 million or 76.8% over the first nine months of 2006. Specialty Risk and Extended Warranty's gross written premium for the first nine months of 2007 was a $193.5 million, which was a $107.9 million or 126.1% increase over the equivalent period in 2006.

Our overall year-to-date combined ratio was 85.9%, which compares to 92.3% for the same period in 2006. The loss ratio for the nine months ended September 30, 2007 was 64% compared to 64.7% for the nine months ended September 30th 2006.

The expense ratio for the nine months was 21.9%, which compares to 27.7 for the nine months ended September 30th 2006. Again the expense ratio was positively impacted by the effect of $40 million of ceding commission revenue that the company received from Maiden.

The combined ratio for the small business worker's compensation segment was 84.5%, compared to 90.8% for 2006. The combined ratio for the Specialty Middle Market segments was 91.4%, compared to 92.7% for 2006. Specialty Risk and Extended Warranty's combined ratio was 83.9% compared to 98% for 2006.

For the third quarter of 2007 net income was $24.4 million or $0.41 per share, and for the nine month period, net income was $67.3 million or a $12 per share. For the third quarter our investment income was $13.9 million and realized losses were $2.1 million.

For the year our average rate of return on fixed maturities, cash and short term investments was 5.8% and average rate of return, including realized activity on invested assets was 6.3%. The Company’s commission and fee revenue income for the third quarter was $7.9 million, compared to $2.9 million for the third quarter of 2006. For the nine months commission and fee revenue was $16.7 million, compared to $8.9 million.

The Company continues to develop fee generating business. Annualized return on equity was 26.9% for the third quarter and 25.3% for the nine months ended September 30th, 2007. The Company generated over $72 million positive cash flow from operations in the third quarter and it has generated over a $188 million of positive cash flow for the nine month period.

Total shareholders' equity was $383.2 million which represents the book value of $6.39 per share; our debt-to-total-capitalization was 24.4%. We also declared a quarterly dividend of $0.025 per common share during the third quarter.

Total assets as of September 30th, were approximately $2.2 billion. Total invested assets were approximately $1.2 billion, which consisted of fixed maturities of $808 million, equity holdings of $94 million and cash in short term investments of $289 million.

Thank you, with that I would turn it back over to Hilly.

Hilly Gross

Thank you Ron and thank you Barry. Both Mr. Zyskind and Mr. Pipoly have indicated their willingness to entertain any of the questions, you in the listening audience of the conference call may have. For that purpose I will turn it back to control which will outline to you the correct procedure in accessing us. Central control.

Question-and-Answer Session

Operator

Thank you, sir. Today's question and answer session will be conducted electronically. (Operator Instructions) And we'll take our first question today from Bijan Moazami of FBR.

Bijan Moazami - FBR

Good morning, everyone, a number of questions, first of all, did the quarter included any of the benefit of the Associated acquisition?

Barry Zyskind

Associated, we closed that transaction on September 7th, and the premium associated with that was $4.3 million for the month.

Bijan Moazami - FBR

How much of additional premium volume per quarter you are expecting from the Associated?

Barry Zyskind

We would expect Associated for the fourth quarter to produce a premium of somewhere between $12 million and $13 million.

Bijan Moazami - FBR

Wonderful. And if you guys close on the Unitrin transaction what would be the expected time of the closing?

Barry Zyskind

If we closed, we probably would sign documents, Bijan, by the end of hopefully this month, and then closing would be some time first quarter or the end of first quarter of '08.

Bijan Moazami - FBR

First quarter of '08. Barry, regarding with what's going on in the capital market and also with the spreads, would you be considering to investing some of the higher yielding securities going forward?

Barry Zyskind

Can you repeat the question again, Bijan?

Bijan Moazami - FBR

I am just wondering if you would take some investment risk and maybe invest in securities that would be yielding higher that what you are earning right now in your investment portfolio?

Barry Zyskind

I think right now, Bijan, our philosophy is during this market environment we want to stay as conservative as possible, and really safety of principle, and as we've been taking opposite approach we've really applied to quality. We’ve been putting more of our assets in higher quality, and right now we really don’t want to increase the risk on our balance sheet until we feel that the environment is a safe environment.

Bijan Moazami - FBR

Thank you.

Operator

And we will take our next question from Adam Klauber of FPK Securities.

Adam Klauber - FPK Securities

Thank you. Could you give us an idea what you think the expense ratio is going to look like going forward, and also an idea with why was the ceding commission higher than usual this time? And mechanically, what's the difference between now and how it's going to unfold in the future?

Ron Pipoly

In terms of the mechanics, obviously, if you are hitting a portion of the $191 million that we ceded to Maiden during the third quarter related to unearned premium that was on our books as of June 30th. So the ceding commission for the quarter reflected that initial cession. So, on a go-forward basis, our ceding commission revenue recognized will be based on the premium ceded during that quarter as opposed to being a combination of quarterly plus the initial unearned premium cession.

Adam Klauber - FPK Securities

Okay. And Ron, just a jump-in, what's the ceding percent we should look at?

Ron Pipoly

Our ceding commission is provisionally 31% of subject premium.

Adam Klauber - FPK Securities

Okay.

Barry Zyskind

I think, Adam this is Barry, a way to look at it would be, when you look at the nine months numbers that is in just the quarter, that's a pretty good indication because what you did by taking the unearned premium you effectively almost took what you wrote for the year and ceded around 40%. So that's a good indication of how we would look going forward.

Ron Pipoly

And to put it in light, in terms of the effect of the one-time transaction we’ve made, our expense ratio for the nine-month period without the effects of Maiden was 25.8%. So our expense ratio has been very consistent with where we were for the first two quarters of the year.

Adam Klauber - FPK Securities

Okay, that’s helpful. And as far as the Unitrin transaction, after you took a hard look at their book of business, how much premium do you think that will bring on to your books?

Barry Zyskind

You know this acquisition is different from the other ones, and the reason being is, this is a very healthy company, some of the acquisitions we have done in the past, when we picked by renewal rights in distress situations, we looked at the books and we took a smaller percentage. We feel, based on the book and based on the performance of the loss ratios, and based on the niche and the geographic areas that they are in. And we think that we would take a majority of the book going forward.

Adam Klauber - FPK Securities

Okay.

Barry Zyskind

There will be some falloff because of transition which is normal, we can carry as a paper to paper, but our intent would be to take a very high percentage of the book based on our review and based on the quality of the business.

Adam Klauber - FPK Securities

Okay. And Unitrin is a good sized deal for you. It's the second deal you've done in the last six months or so. Are you pretty full, and is your plate full or can we look for more acquisitions over the next twelve months?

Barry Zyskind

I think, we are always looking for opportunities, I mean Unitrin will be a big opportunity for us. It has a very important strategic long-term plan for us of being able to have these additional products. One is being able sell some of the small comp to some of their agents and vice-versa. Taking some of there products and regions where they are not in and offering it to some of our agents.

So, we think because of the importance and what are the positive affects this could have on AmTrust, this is really going to be a very big undertaking in terms of management's time and everything. So, unless something comes up that's very attractive for us, this is the number 1 focus for us right now.

Adam Klauber - FPK Securities

Okay. And as far as the gross premium line, very strong growth, but obviously down from 2Q. Could you remind us of the couple of lumpy hits in 2Q that bumped it up or is there another reason that sequentially third quarter is down from second quarter?

Barry Zyskind

I think historically in our program division second quarter and fourth quarter are higher, because of some of the programs and some of the renewals that they have. So if you probably look at Q2 and Q1 compared to Q3 comp, historically it's slower in the second half of the year, compared to the first half and program peaks in the second quarter and the fourth quarter.

Adam Klauber - FPK Securities

Okay and finally in the loss ratio, is there any development either way in that number?

Ron Pipoly

From a loss ratio perspective, for actually all three of our segments we are very encouraged by the trends we're seeing. We continue to believe that our loss reserves were set at a very conservative loss peaks and there is nothing really to report on in terms of any dramatic changes now vis-à-vis to last year and any of the underlying data that supports that.

Adam Klauber - FPK Securities

So, no favorable or negative development in the number this quarter?

Barry Zyskind

No.

Adam Klauber - FPK Securities

Okay. Thank you very much.

Barry Zyskind

Thank you.

Operator

(Operator Instructions) We will go next to Bruce Wilcox of Cumberland Associates.

Bruce Wilcox - Cumberland Associates

Hi good morning Barry and Ron. Hi guys. I am a little -- I mean on the accounting restructure, I feel like I'm missing a $20 million of equity. You had net income of $24 million. You had second quarter ending equity of $379. So I am assuming some of the losses ran through other comprehensive income, but could you just parse that out for me, please?

Ron Pipoly

That's correct. I mean in terms of the effects on the quarter, I mean obviously we had very stronger earnings but partially offsetting that was an increase in other comprehensive loss for the quarter, as well as for the year. Again we are in a position on the both the equity securities that we hold they are currently valued at before we have an unrealized loss position as well, some of the fixed maturities that these situations are temporary, and we are positive that they will turn in future.

Bruce Wilcox - Cumberland Associates

So that was about $20 million bucks?

Ron Pipoly

It was about 17.4 million.

Bruce Wilcox - Cumberland Associates

All right. Thanks for the quarter. What was the split between equity and FI?

Ron Pipoly

It was about half in half.

Bruce Wilcox - Cumberland Associates

Okay. And I am not sure that, I mean, I know you've got a lot of capital with usage on your plate, but have you guys given any thought to bumping your quarterly dividend?

Barry Zyskind

Currently not, but we will review that with the Board. We are always looking at the dividend, we increased it this year compared to last year, but if something if there is excess capital we are always looking to increase dividends then increase our return to our shareholders.

Bruce Wilcox - Cumberland Associates

Okay Barry, thanks a lot.

Barry Zyskind

Thank you.

Operator

And gentlemen we have no further questions at this time Mr. Gross, I will turn the call back over to you for any additional or closing remarks.

Hilly Gross

Thank you, Jana. We thank every one of you for joining us. We wish you a pleasant day. Jana, take it back from Central control.

Operator

Thank you, sir. And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Amtrust Financial Services Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts