AmTrust Q4 2007 Earnings Call Transcript

Feb.26.08 | About: AmTrust Financial (AFSI)

AmTrust Financial Services, Inc. (NASDAQ:AFSI)

Q4 2007 Earnings Call

February 21, 2008 10:00 am ET

Executives

Hilly Gross – Vice President, Investor Relations

Barry D. Zyskind - President, Chief Executive Officer & Director

Ronald E. Pipoly, Jr. - Chief Financial Officer

Analysts

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Dan Schlemmer – Fox-Pitt Kelton

Nicholas Prendergrast – Signal Hill Capital Group

Operator

Good morning everyone and welcome to the AmTrust Financial Services fourth quarter 2007 and year end earnings conference call. Today’s call is being recorded. At this time I’d like to turn the conference over to Mr. Hilly Gross, Vice President of Investor Relations. Please go ahead, sir.

Hilly Gross

Good morning. It’s my pleasure to welcome you to this fourth quarter earnings conference call of AmTrust and with me this morning are the President and CEO of AmTrust, Mr. Barry Zyskind and the Chief Financial Officer of AmTrust, Mr. Ron Pipoly. Before I introduce these gentlemen to you permit me to read into the record the mandatory paragraph on forward-looking statements.

Since this morning’s conference call may 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 expectation 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, effective performance of financial markets on investment income and fair value of investments, developments of claims and the effect on the loss reserves, accuracy in projecting those loss reserves, the impact of competition in pricing environments, changes in the demand for the company’s products, the effective 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 statement.

Having dispensed with the legal niceties it is now my pleasure to introduce AmTrust’s President and Chief Executive Officer, Mr. Barry Zyskind.

Barry D. Zyskind

Good morning. I’m pleased to report that AmTrust had an excellent fourth quarter as well as an excellent full year for 2007 achieving both top line and bottom line growth for the year. Gross written premium for the fourth quarter was $246 million an increase of 61% over fourth quarter 2006. Our net income was $23 million an increase of 33% over fourth quarter 2006. For 2007 our gross written premium was $840 million an increase of 60% over 2006 and net income was $90 million an increase of 85% over 2006. Our three business segments continue to perform very well. We continue to demonstrate discipline in both pricing and risk selection in our workers’ compensation segment as some regions have experienced increased competition. However as mentioned in previous calls because we operate in small niche markets our renewal rates remain high. In the fourth quarter we wrote $73 million in premium for the small workers’ compensation segment an increase of 14% or $9 million over the fourth quarter in 2006. Gross written premium for the full year in 2007 was $309 million an increase of 19% or $50 million over 2006. I’m also pleased to report that integration of Associated Industries Insurance Company is complete and we are very satisfied and happy about that acquisition.

Our specialty risks and extended warranty segment continues to grow. In the fourth quarter of 2007 we wrote $113 million in premium an increase of approximately 140% or $66 million over the fourth quarter in 2006. Gross written premium for the full 2007 was $306 million an increase of 131% or $174 million over 2006. This segment’s growth is attributable to both organic growth as well as acquisitions specifically the successful integration of IGI in the UK. We continue to push for growth both in new products and geographic regions. As a result we continue to allocate more capital and resources to this segment and we see further opportunities and less competition in this segment.

Our third line of business, our specialty mail market segment continues to grow organically through existing programs and the addition of new programs. In the fourth quarter of 2007 we wrote $60 million in premium an increase of 45% or $19 million over the fourth quarter in 2006. Gross written premium for 2007 was $224 million an increase of 67% or $90 million over 2006.

In all segment lines as we successfully grow our business we continue to be focused and disciplined in underwriting and pricing. We look forward to the closing of the Unitrin transaction and have already begun integration activities. The close of the transaction which we hope will be completed around the end of the first quarter is pending regulatory approval. We believe this is a strong addition to AmTrust as it will enable us to diversify and enhance our product offerings to our agents and brokers through the addition of small commercial property and casualty packages which will complement our small business workers’ compensation segment. Our quota share agreement with Maiden Insurance Company effective July 1, 2007 has already proven accretive to AmTrust. We anticipate that our arrangement with Maiden will enable us to continue to leverage our balance sheet, increase our writings, decrease our expense ratio and most importantly increase our return on equity.

As we previously mentioned we have no exposure to sub-prime mortgages and we carefully monitor our investment portfolio. Of our $1.3 billion portfolio we have approximately $1.2 billion in bonds, cash and short term investments. 60% of our bond portfolio is AAA rated and 92% is A or better. Our investment income continues to increase and we feel confident in our portfolio as we have increased the quality of our assets and continue to be very conservative in our investments.

As our business grows we have successfully achieved economies of scale in all lines and continue to reduce our expense ratios. We feel very good about the prospects for all three segments and believe we are in an excellent position to build on our success in 2008 as we continue our adherence to carefully managed growth, disciplined underwriting and pricing, strategic acquisitions and diligent cost control.

And now I would like to turn the discussion over to our Chief Financial Officer, Ron Pipoly to report on our fourth quarter and year end financial highlights.

Ronald E. Pipoly, Jr.

Good morning. The fourth quarter not only provided significant premium growth it also produced very solid earnings per share. Operating earnings per share for the fourth quarter was $0.43. This compares to operating earnings per share of $0.24 for the fourth quarter of 2006. Driving the increase in the earnings per share was a combination of continued profitable premium growth as well as the effects of the premium cessions to Maiden Insurance Company. Gross written premium for the fourth quarter was $246.4 million which was a $93.9 million increase over the fourth quarter of 2006. In our specialty middle market as well as our specialty risk and extended warranty segments we experienced significant growth in each quarter of 2007 compared with the previous year’s quarter. For the year ended 2007 our gross written premium was $839.4 million compared to $526.1 million for the year ended 2006. Net written premium was $126.5 million for the fourth quarter of 2007 compared to $122 million for the fourth quarter of 2006. The slight increase in net written premium was impacted by the company’s seeding $56.5 million of premium to Maiden during the fourth quarter. For 2007 the net written premium was $419.9 million compared to $436.3 million for 2006. The slight decline was the result of ceding $247.1 million of premium to Maiden during the year.

Earned premium for the fourth quarter of 2007 was $113.3 million as compared to $103.2 million for the fourth quarter of 2006. AmTrust ceded $47.2 million of earned premium to Maiden during the fourth quarter of 2007. Offsetting the cession of earning premium was the $19 million of ceding commission revenue that the company recognized in the fourth quarter of 2007. The total revenue for the fourth quarter was $140.5 million compared to $120.2 million for the fourth quarter of 2006. For the year ended 2007 total revenues were $573.2 million compared to $384 million for 2006. For the quarter our small business workers’ compensation segment increased gross written premium production by $9.1 million. The workers’ compensation marketplace continues to be competitive and the company continues to demonstrate pricing and risk selection discipline. The specialty middle market segment increased premium production by $18.6 million. This increase was the result of the company growing both existing programs organically as well as increasing the number of programs underwritten. The specialty risk and extended warranty segment increased gross written premium production by $65.6 million. The growth in this segment was the result of both organic growth as well as expanding existing relationships and the successful integration of IGI.

The overall combined ratio for the fourth quarter was 75.4% compared to 91.6% for the fourth quarter of 2006. The components of our fourth quarter combined ration were a loss ratio of 57.6% compared to 62.1% in the fourth quarter of 2006, the expense ratio for the fourth quarter was 17.8% compared to 29% for the fourth quarter of 2006. The significant decrease in the expense ratio was primarily caused by the $19 million of ceding commission revenue recognized by the company during the quarter. The company reduces its expenses by the ceding commission revenue and arriving at the expense ratio. The company continues to be comfortable with the trends it observes in both loss and expense ratios. Loss ratio for all three segments improved in the fourth quarter of 2007 compared to the fourth quarter of 2006. The loss ratio for the workers’ compensation segment was 50.2% for the fourth quarter compared to 59.3% in the fourth quarter of 2006, the specialty middle market loss ratio was 60.7% compared to 65.3% for the fourth quarter of 2006 and the specialty risk and extended warranty loss ratio was 66% compared to 68.1% for the fourth quarter of 2006.

Now turning to some of our yearly highlights. As previously mentioned our gross written premium for 2007 was $839.4 million which represents a 60% increase over 2006. Gross written premium for small business workers’ compensation was $308.8 million for 2007 which represents a 19.3% increase over 2006, specialty middle markets gross written premium was $224.2 million for 2007 which is an increase of $89.9 million or 66.9% over 2006, specialty risk and extended warranties gross written premiums for 2007 was $306.4 million which was a $173.6 million or 130.7% increase over 2006. The overall year to date combined ratio was 83.2% which compares to 91.9% for the same period in 2006. The loss ratio for 2007 was 62.4% as compared to 63.9%. The expense ratio for 2007 was 20.8% which compares to 28.1% for 2006. Again the expense ratio was positively impacted the effect of $59 million of ceding commission revenue that the company recognized through Maiden. The combined ratio for small business workers’ compensation was 81.7% compared to 91.2% for 2006. The combined ratio for specialty middle market segment was 90.1% compared to 93.8% for 2006. The specialty risk and extended warranties combined ratio was 80.8% compared to 93.2% for 2006. Loss ratios for all three segments improved during 2007 compared to 2006. The loss ratio for the workers’ compensation segment was 58.5% for the year compared to 60.1% for 2006. Specialty middle markets loss ratio was 61.9% compared to 62.8% for 2006. Specialty risk and extended warranties loss ratio was 70.5% compared to 77.9% for 2006.

For the fourth quarter of 2007 net income was $22.8 million or $0.38 per share and for the year net income was $90.1 million or $1.50 per share. For the fourth quarter our investment income was $12.6 million and realized losses were $4.3 million. For the year our average rate of return on fixed maturities, cash and short term investments was 5.3%. The company’s commission and fee income for the fourth quarter was $3.7 million compared to $3.5 million for the fourth quarter of 2006. For the year commission and free revenue was $20.4 million compared to $12.4 million. The company continues to develop key generating business and was recently awarded service and carrier contracts for NCCI Workers’ Compensation Reinsurance Pools in three additional states. Return on equity was 24.7% for the year. The company’s book value before other comprehensive income was $7.04 per share. The book value per share including other comprehensive income was $6.51 per share which is a 14.6% increase over the book value at December 31, 2006 of $5.68 per share. The company declared dividends of $0.105 during the year. The company generated over $240 million in positive cash flow for the year. Our debt to capitalization ratio was 24.1%, total assets as of December 31st were approximately $2.3 billion. Total invested assets were approximately $1.3 billion which consisted of fixed maturities of $890 million, cash and short term investments of $294 million, equity holdings of $79 million and other invested assets of $27 million.

Thank you and I will turn it back over to Hilly.

Hilly Gross

Both Mr. Zyskind and Mr. Pipoly have indicated their willingness to respond to any questions you and our conference call audience may have. To facilitate that process as to how you communicate your question I am going to turn it back to our control booth that will outline your correct number to use to ask your question.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question is from Bijan Moazami with FBR

Bijan Moazami - Friedman, Billings, Ramsey & Co.

I have a couple of questions for Ron and a couple of questions for Barry. Ron, did you have any kind of reserve release this quarter, a and b could you tell us what percentage of your invested assets now is in the common stock.

Ronald E. Pipoly, Jr.

In terms of reserve releases, no, we did not have any prior year reserve releases. The decline in the workers’ compensation loss ratio in the fourth quarter was a result of our ability to reset our ultimate loss projections for accident year 07. So as the year progressed we saw positive development in our loss trends for accident year 2007 and were able to lower our projections in the fourth quarter. And in terms of the investment portfolio, right now about 6% of our invested assets are in equities.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Barry, couple items, could you give us an update about the Unitrin acquisition in terms of what you’ve done so far to integrate the two companies and do you still expect to close this transaction by the end of the first quarter? Secondly, the credit spread are widening. At what point we should be expecting AmTrust to get interested in maybe a little bit of investment risk in the portfolio?

Barry D. Zyskind

The first question of Unitrin, as I think I mentioned previously, we started our integration as soon as we felt comfortable that we were going to proceed with the transaction. RIT and our operations people have been consistently going back and forth to Dallas working very closely with the Unitrin people. We already recognized and decided which employees will be joining AmTrust and we’ve done a lot of work on the systems and we fully expect, pending regulatory approval, which we are confident we will get hopefully by the end of the first quarter, that we’ll be able to close and everything will be on our system. In addition our senior management have been on a road show with the Unitrin senior management meeting with a lot of the Unitrin agents telling them about AmTrust to make sure that the transition goes very smoothly. In terms of the investment portfolio, Bijan, as we mentioned in the last previous call no question about, spreads are widening, we still want to be on the safe side of investments and as I mentioned last time we’re positioning the portfolio more towards higher quality because we don’t know how long this will last and if the economy goes into a recession and what happens with the credit market. So we’d rather be safe, maybe give up some possible returns by not getting in as early as some other people but we’ll make it up at later dates. But right now we continue to push the portfolio to a higher quality portfolio.

Operator

Our next question today will come from FBK’s Dan Schlemmer.

Dan Schlemmer – Fox-Pitt Kelton

On the loss ratio sort of follow up, I want to make sure I understand the 57.6 for the current quarter and 62.4 for the whole year. There was nothing in this particular quarter, it really sounds like it was mostly just a true up to get the whole year’s experience right. Is that accurate that there wasn’t – I mean there wasn’t a particular event this quarter or anything that drove it lower as much as just a full year look at the losses? Is that accurate?

Ronald E. Pipoly, Jr.

That is very accurate, yes.

Dan Schlemmer – Fox-Pitt Kelton

Is there any underlying experience change that you’re seeing there that’s driving that whether it’s reforms in Florida or any other pieces or large losses, etcetera? Any background you can give, I guess, I’m just curious.

Ronald E. Pipoly, Jr.

I think it’s a combination of both reforms in Florida as well as reforms in certain other states coupled with the fact that as we continue to gain credibility in terms of the premium volume we have earned our loss development factors is measured against other standards, be it NCCI or state board. Loss development factors continue to improve and we just continue to see positive loss development trends in workers’ comp and really all lines of our business.

Dan Schlemmer – Fox-Pitt Kelton

Switching to the investment income, did you have a yield rate for the quarter? I sort of guessed at it because you don’t – the invested assets I don’t have. But I have it going down fro a 5.9 in Q3 to a 4.7% in Q4. Is that ballpark correct or is that about what you’re seeing?

Ronald E. Pipoly, Jr.

Certainly there was a slight decline in the fourth quarter as short term rates declined. I don’t have the yield calculation for the fourth quarter. As I said in my comments the yield for the year was 5.3%.

Dan Schlemmer – Fox-Pitt Kelton

And last question is on the $19 million of ceding commission. Can you walk us through the - I guess what the percentages are and how that works? My understanding is it’s just a direct percentage off of the amount you’re ceding and it’s approximately 30%. So it’s about 30% of the earned premium for Maiden. Is that right and is that the same going forward?

Ronald E. Pipoly, Jr.

Yes, our ceding commission is 31% with Maiden and that is the basis for our ceding commission revenue.

Dan Schlemmer – Fox-Pitt Kelton

And there’s no change in that going forward?

Ronald E. Pipoly, Jr.

There is no change in that going forward.

Operator

Got a question from Nick Prendergrast with Signal Hills.

Nicholas Prendergrast – Signal Hill Capital Group

Just a couple of questions. This is kind of a follow up on that last question regarding the ceding commission. Just looking at our numbers again it’s just marginally lower than what we were expecting obviously since this is a new transaction is a bit lumpy. Do you guys have any idea roughly what you’re looking at in 08 or can you give a general run rate possibly of what you’re looking at in the quarter as far as the ceding commission goes?

Ronald E. Pipoly, Jr.

I would expect in terms of our top line growth I think we’re very comfortable without taking into consideration the [inaudible] transaction our top line growth will be about at least 15% in 2008. And in terms of lumpiness obviously we traditionally had a larger first quarter and then it picks back up in the fourth quarter. I would expect our premium writing trends to continue in 2008 as they have been in 06 and 07. But again Maiden is going to take 40% of the subject premium so I would expect - obviously our cessions this year were $247 million for the year, and I would certainly expect that those would approach at least $400 million next year.

Nicholas Prendergrast – Signal Hill Capital Group

Also, I’m looking at the other insurance G&A. It came in roughly around like $13.8 as compared to say last year’s quarter was $5.2 and just last quarter your Q3 07 was $8.3 million. Is there anything specific in there that is causing this to increase? Should we expect that to be indication possibly of future quarters going forward?

Ronald E. Pipoly, Jr.

No, I would think that in the fourth quarter of 2007 the other insurance G&A, we had some additional integration costs with the two major acquisitions we did in 2007 and I think with UBI we’ve really already started that integration so I would expect that as a percentage of written premiums that the other G&A line will decline next year.

Operator

That concludes our questions for this time. Mr. Gross, I’ll turn the call back over to you for any additional or closing remarks.

Hilly Gross

We thank our listening audience for attending our fourth quarter earnings conference and have a good day. Thank you.

Operator

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

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