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AmTrust Financial Services (NASDAQ:AFSI)

Q3 2012 Earnings Call

November 6, 2012 9:00 AM ET

Executives

Hilly Gross - VP, IR

Barry Zyskind - President and CEO

Ron Pipoly - CFO

Analysts

Randy Binner - FBR

Matt Carletti - JMP Securities

Mark Hughes - SunTrust

Donald Chun - JPMorgan

Adam Klauber - William Blair

Ken Billingsley - BGB Securities

Randy Binner - FBR

Mark Hughes - SunTrust

Operator

Good day ladies and gentlemen and welcome to the AmTrust Financial Third Quarter Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow 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, Hilly Gross, Vice President of Investor Relations for AmTrust. You may begin.

Hilly Gross

Thank you. Thank you and good morning. And again thanks everyone for taking the time out to join us with this our third quarter earnings conference call at AmTrust Financial. With us this morning are Mr. Barry Zyskind, President and CEO of AmTrust and Mr. Ron Pipoly, Chief Financial Officer of AmTrust as well as Ms. Beth Malone, Senior Vice President of Investor Relations and Corporate Development.

Before I call on Mr. Zyskind and Mr. Pipoly to give you the review and analysis of these third quarter results, I would with your indulgence read into the obligatory paragraph on forward-looking statements. Since this morning’s earnings conference call may contain certain forward-looking statements that are intended to be covered by the Safe Harbor’s created by the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts included in this presentation are forward-looking statements including statements accompanied by words such as, believe, expect, anticipate, intend, estimate, plan, project and continue or future or conditional words such as will, would, should, could or may. These statements include the plans and objectives of management’s for future operations including those relating to future growth of the company’s business activities and availabilities of funds and are based on current expectations of involved assumptions that are difficult or impossible to predict accurately, many of which are beyond the control of the company. There can be no assurance that actual developments will be consistent with our assumptions.

Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties including the factors set forth in the company’s filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and its quarterly reports on Form 10-Q. The projections and statements in this presentation speak only as of the date of this presentation and the company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise except as may be required by law.

Having dispensed with the legal niceties, it is now my pleasure to call on AmTrust’s CEO and President Mr. Barry Zyskind. Barry?

Barry Zyskind

Good morning and thank you all. I’m very proud of our quarter, our third quarter of 2012. We had a very strong high return on equity, and as you can see from our press release, we had strong growth in almost all the lines of business. We believe the success of our business model is due to our diversified model. As you can see couple a years back when the workers’ comp market was very competitive, we put a lot of energy into growing our specialist and extended and extended warranty, but now we are starting to see a lot of opportunity in the small workers’ comp market and we are taking a lot of advantage of that opportunity.

We are starting to grow on almost every one of our states very, very nicely in the small workers’ comp. Many of our competitors are having issues, because of either package writers throwing in the workers’ comp for many years at below market prices or people writing it at wrong hazard class and wrong rates. We’ve been conservative. We have been disciplined. It’s something that’s niche, something we are very focused on and now we’re just seeing a tremendous amount of business, as well as our expansion into California which is going very, very well.

The California market as many of you know is starting to turn. Pricing is increasing. Some competitors are having real issues there. We entered at a very opportunistic time. We are very fortunate with the acquisition of Majestic and the acquisition of BTIS. We pushed very strongly to, that our book that we’re underwriting should be small workers’ comp, should be our top 60 classes which we like and we are having a lot of success there, not only in underwriting the business, but in getting the pricing that we want. So we think California for the next couple of years is going to be a strong market as well.

We continue to focus on niche businesses in the small commercial package as well. We feel very fortunate that we have not been a property writer. As we always said, we didn’t want to play with our balance sheet. And even though we write a lot of small workers’ comp in New York, we hardly write any property of any New York and the property that we do write is not near the coast so we do not expect this to be an event for us at all. We feel terrible about the event, of people’s personal loss and from an AmTrust standpoint we just feel very fortunate that our balance sheet will be strong and that it will not affect our earnings.

We continue to grow our fee business. And you can see this quarter, we’ve had growth in fee business and that really is coming from the acquisition of BTIS and Case New Holland, it’s coming from our IT in which we’re basically I’m very happy to announce that we completely finished the build out of the IT platform for ACAC and we are billing almost $1 million a month net, which is drop might down to the bottom line. So we continue growing our fee business.

We also announced last week the acquisition of Cartier (ph). This is a fantastic opportunity. This is a company that’s been around for a long time it’s a leader in the U.K. market for warranty and deals with a lot of auto manufacturers. It also has operations in China and Brazil and other parts of Europe. We think this is going to be a great platform for us. We bought it very, very well.

As many of you know in the U.S. we used to be only an underwriter and over the years we've progressed not to only be an underwriter but we've become an administrator as well. We think that in this specialty risk and extended warranties, it's important not just to be the underwriter but as well to have a fee business, it be the administrator to control the business. This acquisition of Cartier (ph) will give us that, will give us a great opportunity to be not just an underwriter but an administrator with a great client base, with great markets, geographic markets to expand. So we're very excited about this acquisition. We think we bought it very-very well. We hope to close it at the end of 2012 or beginning of 2013, just it's subject to regulatory. But some of that we think it’s going to be very accretive to AmTrust given its great growth opportunities, as well as solidifying the whole European business model, not just to be an underwriter, but to be an administrator as well.

Our balance sheet is solid. We continue to grow in assets, investment assets. We have very strong cash flows. We continue to be very conservative about our investment portfolio. We're not really taking a lot of risk either way; we continue to keep our duration short. We don't where interest rates are going to go. We know we have to make money and we have to make investment return but at the same time we don't want to be cowboys, we don't want bend either way, so we're trying to be as disciplined as possible.

And just to wrap it up, we think it's a very strong quarter for us. We continue to manage our expense ratio, make sure that it's low. We continue to be disciplined underwriters. We continue to be very opportunistic. We believe that this event of last week is actually going to really push the market. We’ve been seeing a firming of the market. As you can see our program business has been growing, we can see a lot of opportunities, not just in the worker’s comp but in the programs. So we think that this is going to be an event that's going to just push the market further and the players that have been disciplined and have solid balance sheets and have enough capital and rule to write the business are going to have great opportunities. So we think the next couple of years are going to be very strong for AmTrust. We hope to continue and we feel confident that we'll continue to be able to have high returns on equity and we're very excited about the years to come.

I'd like to turn over to Ron Pipoly.

Ron Piopoly

Thank you, Barry and good morning. We had another record quarter in terms of our gross written premium as well as our total revenues; additionally we had very, very solid quarter in terms of operating income as well as net income. I believe that these results reaffirm our approach to maintaining pricing and being risk selection discipline.

Gross written premium for the quarter was 737 million, an increase of 31.2%, from the third quarter of last year. In terms of premium by segment, our small commercial business premium increased by 98.2 million or 67.5%. The increase in premium in this segment was driven by a combination of a $44 million increase on our small compensation product combined with $13 million of growth in our servicing carrier premium we write as part of our NCCI, National Reinsurance pool arrangements as well as $24 million of business produced by BTIS.

We recorded $30.3 million in premium in our personal line segment which represents our core share agreement with ACAC. Special risk and extended warranty at top line premium growth of $4 million or 1.5%. Without the effect of foreign currency, the increase would have been approximately $11 million of 4.5%. We continue to experience growth both domestically and internationally. For the quarter 73% of our gross written premium came from international operations.

Our speciality program segment increased by $70 million or 52.5%. This growth is attributable to additional programs during the quarter. For the nine months, our gross written premium increased by $412 million or 26.3% from $1.56 billion to $1.97 billion. Small commercial business increased by $229 million, specialty program increased by $152 million, specialty risk and extended warranty increased by $17 million and personal lines reinsurance increased by $13 million.

Our net written premiums for the quarter rose to $483.7 million, compared to $321.9 million for the third quarter of 2011. Premiums ceded included approximately a $189 million to Maiden. For the nine months, our net written premium was $1.24 billion and we ceded $575 million to Maiden.

Net earned premium for the quarter totalled $387 million, which is a 34.1% increase. Small commercial business accounted for 42% of our net earned premium. Specialty program 31%, specialty risk and extended warranty was 30% and personal line reinsurance was 7%. For the quarter we ceded approximately $179 million of earned premiums to Maiden. For the nine months, net earned premium is $1.03 billion and we ceded $514 million of earned premium to Maiden. Our combined ratio came in at 90.2% for the quarter compared to 89.3% last year. The loss ratio totalled 66% this quarter compared to 64.2% for the same period last year.

The increase of loss ratio is primarily attributable to the changes of business mix within both the U.S business as well as internationally. Our expense ratio was 24.2% compared to 25.1% in the third quarter of 2011. Without the effect of Maiden cede intermission our expense ratio this quarter would have been 25.4%.

Our service fee income totalled 44.6 million and was up 54.6% from the prior year quarter. The increase from last year was driven largely by the acquisition of BTIS as well as the acquisition of Case New Holland insurance agencies during the third quarter. They contributed $3.6 million to $4.4 million of fee income respectively. Additionally, our fee revenues associated with acting as a sourcing carrier for the NCCI national reinsurance pool increased by approximately 4 million quarter-over-quarter.

Our total revenues grew by 35% for the quarter and for the nine months; total revenues grew by 39%. We generated approximately $18.4 million in investment incomes for the quarter and have 1.4 million of net realized gains. For the nine months, we’ve generated investment income of $49.3 million and had net realized gains of 2.4 million. Additionally, our investment in ACAC has generated equity income of $3.2 million from the third quarter and $8.7 million for the nine months, this income is included in our operating earnings.

For the quarter, we generated net income of 43.2 million or $0.66 per diluted share, operating earnings of 48.8 million with $0.75 per share. A gain on life-settlement contracts for the quarter was $0.01 per share. For the nine months, we generated net income of 122.7 million or $1.93 per diluted share. We have operating earnings of 138.2 million for $2.17 per diluted share; a gain in life-settlement contracts for the nine months was $0.03 per share. Our effective tax rate for the quarter was approximately 23%. Annualized return on equity from quarterly operating income was 18.8% and annualized return in equity from quarterly net income was 16.7%.

Shareholders equity has exceeded $1 billion for the first time in our history; shareholders equity is $1.07 billion which represents a book value of $16.01 per share. The increase in book value per share since December 31st 2011 has been $2.54 per share. During the quarter, we cleared a 10% stock dividend and those shares were delivered on September 22nd. Additionally, we also declared a quarterly dividend of $0.10 per common share.

Total assets as of September 30th were approximately 6.7 billion, total invested assets were 2.6 billion, fixed majorities comprised 72% of the portfolio. Cash in short term investments 23% of the portfolio, equity securities 1% of the portfolio, other investments 4%.

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

Hilly Gross

Thank you Ron and thank you Barry, both Mr. Zyskind and Mr. Pipoly have indicated their willingness to entertain questions to those of you who all are listening to this conference call. To facilitate your access then I am going to momentarily turn it back to our moderator so that you will get instructions as how to reach us, Kevin.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Randy Binner with FBR.

Randy Binner - FBR

I think you all covered this in the commentary with Ron, but the loss ratios were about 200 basis points higher across each of the major segments and that’s a function of business mix, but I was hoping you can walk us through that in a little more detail, about why the loss ratios are higher and in particular if that’s the reflection of any prior adverse development or higher current accident year loss picks?

Ron Pipoly

When you look at the quarterly loss ratio of 66 for the 2012 third quarter compared to 64.2% for third quarter of 2011, we are pleased that where we are from a loss ratio perspective and to answer to the second part of your question first, we did not have any aggregates, negative loss reserve development in the third quarter.

Based from a quarterly basis, the increase in the loss ratio as it relates to small commercial business is primarily driven in what I am set changing business mixes is that, as California becomes a bigger part of our overall comp book, California ultimate loss picks are higher than our other states’ national average. So that builds up the loss ratio from there, but it’s not anything that’s beyond our expectation, in fact, we are very pleased with where we are in California from a loss ratio standpoint. So that would be the answer for a quarterly perspective.

And then on a year-to-date, I think it’s important to look at things on a nine month basis because quarters can have some noise in them. We are certainly very pleased with where we are at, in terms of our loss ratio and an overall basis we’re actually about 1.1% lower for the first nine months of 2012 compared to first nine months of 2011. So hopefully that answered your question.

Randy Binner - FBR

What rate increases level did you get this quarter in California comp?

Ron Pipoly

Yes. California comps for the third quarter was hovering right around 18%.

Randy Binner - FBR

Okay. 18%, and then, I guess and especially, the loss ratio explanation, I get it for commercial but it was also higher like program for instance saw kind of a jump up in the loss ratio, and then there is a lot of growth there too. So, maybe reconciling those two things could be helpful?

Ron Pipoly

Right. The increase in loss ratio from specialty program perspective again is attributable to a change in business mix in terms of the program structure. The programs that we've added even going back to the third quarter of last year, the programs were designed to have lower expense ratios and higher loss ratios. I think as you see that those new programs are becoming a larger part of the overall earned premium for that segment, you're seeing a natural slowed up in the loss ratio, but at the same time you're seeing a pull-back in the expense ratio and again that was by design, these programs were structured to have a slightly higher loss ratios in lower direct acquisition costs.

Randy Binner - FBR

What would be an example of a typical program where it would have a lower acquisition cost but a higher loss?

Barry Zyskind

Some of the workers' comp programs that we're on, over the last couple of years we've realized as we've talked about that we're going to deemphasize comp, but if we're going to stay in it. We wanted to make sure that we would have returns similar to the returns that we were getting on our business. So being that there's not that many markets or programs on workers' comp, we changed it around where we're giving less commissions and we're demanding better combined ratios. You're going to see maybe some depending on the mix of what stayed and so and so forth you'll see a higher loss ratio, but a lower expense ratio, all in the name of getting the combined ratio we think we needed for the return.

Operator

Our next question comes from Matt Carletti with JMP Securities.

Matt Carletti - JMP Securities

Thanks. Just to follow-up on Randy's question Ron, just to make sure I'm understanding it right. Would it be fair to say that if we look at the nine month loss ratios within those segments, that that's a reasonable run rate going forward, after maybe in the program segment some slow continued shift up in loss ratio down in expense ratio?

Ron Pipoly

Hi Matt, it's Ron. And I would agree with that. I would agree also with your observation that from a specialty program perspective, these new programs are and they continue to be more and more our earned premium on a quarterly basis, so therefore I think the trends you would see with loss ratio holding pretty solid and slight declines in expense ratio.

Matt Carletti - JMP Securities

Okay. And there's one other on the fee income, it jumped up quite a bit in the quarter and I know that second quarter is seasonally light for you guys from a warranty perspective. Is the third quarter seasonably heavy in any regard or is that more of a true run rate to look at going forward.

Ron Pipoly

You know Matt, I think it’s a pretty accurate run rate but you know the one thing that I'll say on that is the Case New Holland acquisition, this was in the fourth quarter for Case New Holland. They contributed $4.4 million of fee income to us. So, it’s an accurate run-rate we take that in to consideration.

Operator

Our next question comes from Mark Hughes with SunTrust.

Mark Hughes - SunTrust

Yes. Specialty program business, nice reacceleration in written premium. Could you give a little more detail on where that comes from? How sustainable is that kind of increase?

Barry Zyskind

Well, this is Barry. If you look at our track record for many years, we deemphasized the program business, we felt that it was based on the market conditions it was something that we did not want to grow while we grew the other lines of business. The last 18 months and especially I’d say the last nine months, there’s been a lot of dislocation in program business, lot of carriers having issues and we’re just seeing probably the biggest amount of programs we’ve ever seen. We also believed that this was the one line of business where the market started hardening we would see a lot of growth in, whereas the other lines of business we were able to grow either even in the soft markets through acquisitions to being aggressive not in pricing but aggressive going after the business like specialty risk and extended warranty and now we’re starting to growing comp. So, we actually are one of the few players left standing in the program business, we’ve been at it for long time, we’ve been disciplined. We have a lot of, our producers coming back and wanting to move programs from other carriers with us because of our consistency. So, we think actually that this is something that’s going to grow over the next couple of years very nicely. Is something that I could tell you right now is going to be a 10 year strong growth, I don’t think so. It’s truly going to depend on the market, whether it’s going to be something that will get it up to a level where once you get at a certain level, it’s easy to hold down for the business. But right now, I’d say for the next 18 to 24 months we think it’s going to be growth segment for us.

Mark Hughes - SunTrust

On the acquisitions, I think you’ve given; BTIS contributed 24 million of small commercial then a 3.6 million contribution that on the fee income is that right for the carrier?

Barry Zyskind

That is correct, Mark. Yes.

Mark Hughes - SunTrust

Then the Case New Holland, 4.4 million ceded income is generating revenue in other segment or other…

Barry Zyskind

Yes. We've been underwriter for Case New Holland for many years. We write around, I see around 45 to 50 million a year in premium with them.

Mark Hughes - SunTrust

And how much of that would have been incremental with the deal that we’re dealt in that quarter?

Ron Pipoly

Mark, this is Ron. In terms of related to the acquisition, but in case New Holland, insurance agencies operations, there really was no quarterly incremental increase in the premium and we expect to be able to grow that premium on a go-forward basis by developing new products for the case New Holland distributors and their clients. But really the biggest effect on the third quarter, really the only effect is the additional fee income as well as the net income, net debt that operation generated for us.

Mark Hughes - SunTrust

And then just a big picture on numbers $0.75 this quarter, is there some reason why that wouldn’t be a baseline going forward? Would you consider this quarter as being usually profitable, how should we look at that?

Barry Zyskind

We don’t project earnings but I would say that we feel very good about the earnings, sustainability of the company. And if you just look at the earned premium increasing, the fee increasing, the balance sheet of assets increasing, investment income increasing, we believe that we will be able to very, very nicely continue to build on our earnings momentum.

Operator

Our next question comes from Donald Chun with JPMorgan.

Donald Chun - JPMorgan

I may have missed this but, can you mind us how much growth in small commercial was on acquisitions versus sign risk for?

Barry Zyskind

The growth from acquisitions were 24million written in the third quarter of this year, related to our average of BTIS and then if you look at Majestic from an acquisition perspective, although, we did own them in the third quarter of 2011, Majestic produced additionally an incremental increase of $13.5 million. And then the rest of it would have just come from natural expansion of the book of business increase of policy counts increasing rate as well.

Donald Chun - JPMorgan

And can you actually give us, what were the growth acquisitions expenses before ceding commissions?

Barry Zyskind

The expense ratio without the effect of the ceding commission would have been, I believe it was 25.4%.

Donald Chun - JPMorgan

And in terms of NI, it seems to increase sequentially, despite average assets increasing 9% NI was up 13%, what drove the increase?

Barry Zyskind

Well, I mean if you look at quarter, sequentially quarter-to-quarter, obviously we earned substantially more premium this quarter, we were nearly at 400 million this quarter compared to about 330 million for the second quarter you look at sequentially an increase in investment income, the increase in fee income on that growth trajectory. At the end of the day it was a very, very solid quarter all along in the total revenues in particular.

Donald Chun - JPMorgan

I guess, lastly in terms of retention and specialty risk and extended warranty and specialty programs, it seemed to be to change materially sequentially in year over year, what drove the change?

Barry Zyskind

When you refer to retention, you mean looking at most of our...

Donald Chun - JPMorgan

(Inaudible)

Barry Zyskind

From a program perspective the increase in the net retentions is really a by-product of looking at the expense structure associated with the new programs we have written and as I mentioned earlier on the call that the program design is what one in which you are going to have a higher loss ratio in a lower expense ratio. And when we gained the opportunity to look at those but mainly our feeling deep down was that given our ceding commission structure was made in, it probably wasn’t going to fit nicely in the Berkshire, so we’re just retaining more risk on those new programs because of the structure doesn’t blend itself to the Berkshire.

Donald Chun - JPMorgan

Okay. So how should we think about going forward? Should that would be more of the run rate?

Barry Zyskind

I think, the run rate is going to obviously vary quarter by quarter, but I think that their run rate should be pretty consistent to the extent that during the fourth quarter of this year or how it is will change 2013 to the extent that we write programs that are more traditionally structured than those would be subject to the main Berkshire. So lots going to be predicated on business mix. Given the current business mix, this is a reasonable risk retention rate.

Donald Chun - JPMorgan

Okay. And then what about specialty risk? Seemed a lot lower for them to reach you?

Barry Zyskind

Yes. There is still some noise hanging around with the especially risk as a result of, if you look at the nine months last year we had butchered half the way in there, for a portion of the year that agreement and then Maiden came in and took 40% of the risk and then we also commuted our reinsurance agreement with Berkshire so that change some of the retention. So at the end of the day, I think the third quarter is probably, given our current business mix, again, probably a good representative retention.

Operator

Our next questions comes from Adam Klauber with William Blair.

Adam Klauber - William Blair

Couple of different questions, on the workers’ comp books early, some nice volume. As we go into next year, are you seeing market conditions as far as competitive to go with that rate? Are they falling down or does this national momentum look like its continuing?

Barry Zyskind

We believe it’s continuing. We’re starting to look at the business already for January 1, for example in California; we’re seeing a tremendous amount of opportunity. Florida has just authorized a 6% rate increase for January 1. We have almost $100 million of business in Florida. We’re seeing tremendous momentum, we had a very strong October in New York. So we are just continuing to see a lot of business on the street. I think if you see some of our competitors are having some issues. Some of the people that would have been normally in the small commercial business are having issues, for one reason or another, you're seeing package riders getting up. So we believe that the market is actually, 2013 will be even stronger, significantly stronger than 2012 for small workers' comp.

Adam Klauber - William Blair

Thanks. Also on the workers' comp, so probably the second year you're getting a reasonable rate, next year will probably be the third generally you'll get decent rate in the comp book. When would we expect the accident year loss ratio in the comp book to start coming down?

Ron Pipoly

I think, looking at it now as we discuss our loss reserves on all of our lines of business on a monthly basis, we're very encouraged with what we see with the trends and not only accident year 2012, but how far accident users are behaving in terms of our claim total rates and ever severity. So, looking at the environment in 2013, we're very confident in terms of our ability continue to produce very, very profitable combined ratios within our comp business.

Adam Klauber - William Blair

Okay. In line with that, Majestic has been new and you tend to be conservative when you put up those accident years, still a little early but how's the Majestic business trending compared to where you thought it would trend?

Ron Pipoly

Yes. Majestic is something that, obviously we spent a significant amount, I'm talking about on a monthly basis where in terms of looking at the wash reserves or the trends that we see and we're very encouraged with what we see in terms of where our reserves are relative or where our paid are relative to our loss and reserves looking at Majestic's historic trend, the California comp bureaus, their ultimate loss fix, those types of things. I mean we're very encouraged with where we're at. As long as we continue to see those trends, our belief is that our loss ratio in California will come down over time absolutely.

Barry Zyskind

And another thing we’re seeing is, we're seeing those trends starting to look very favourable but at the same time we're still seeing continued rate increase in California. So we think a couple of more quarters of good rate increases and good trends is going to turn that into a very profitable book for us.

Adam Klauber - William Blair

Okay. And then some more question on the Italian med mal. That tends to be just a longer tail than some of your other lines of business and I know you tend to put up conservative accident years. How are the pace and how's the experience coming in compared to where you're been putting up your loss fix?

Ron Pipoly

I think we feel very good about that book, we watch it very carefully. As we said historically, as we've said in the past week, we're taking a different approach than historically people have played in that market. We do our own claims. We have our own people, our own employees that work for us. We have spread our claim operations around the regions in Italy where we write business. Another thing we do different is we’re trying to take an aggressive American approach of closing claims quickly, not letting them sit out there. Some of the players that have written it for years, let that business just linger out there and go through the court systems and we’re taking a different approach, we’re taking an approach that we take similar to how we’ve been successful in workers’ comp. We feel a good claim is a close claim. We want to close them as quickly as possible. We want to be on top of them. We want to reserve them and that for ourselves to make sure we’re reserving, what we think we can close that. So, all that is being watched very carefully and so far I would say that it’s all very much in line with our expectations and we believe we’re going to make a lot money in that line of business.

And to date, the pricing is holding up, and I said it many times, as long as the pricing is holding up and we can get the price and the terms and conditions that we want, we’re going to stay in that line of business. If it changes, the competitors come in and it becomes aggressive pricing, we don't think we can get the return, then we will not stand in that line of business, it’s an opportunistic play for us.

Adam Klauber - William Blair

Okay. And then on the car care plan acquisition, typically when you do acquisitions you would also book and many times you reduce, get rid of some of the bad business. How about with car care? Do you think you’re going to have to call the book of business?

Ron Pipoly

Not at all, I think if you look at that, historically that’s really been in cases where we did it on small commercial or workers comp, or program business. When you look at specialty risk and extended warranty, the acquisitions of (inaudible) for example we did not cut, maybe a little premium amount of business, something we didn’t like but on the car care plan business, excellent business, it has very stable loss ratio, it has been around for a long time has solid management. So, I think on the contrary, I think we’re going to try to keep as much of that business as possible. I’d like to keep all of it and the big play over here is to continue growing it in the UK, in Europe, in China, in Brazil and making into a really solid play for us. So, it’s a totally different play when you compare it some of the other lines of business we have to call it back.

Adam Klauber - William Blair

Okay. And then, I think, one of the advantages of this acquisition it gives you a base in China and Brazil. Can you talk about will you use that for other lines of business or is that mainly for auto related, auto warranty related business?

Ron Pipoly

No, our long term plan actually is, it’s actually take the whole car care plan administration and use it for many other lines of business. So, whether its cell phone insurance, laptop insurance, whether it’s other good. We’re going to try to actually expand using the administration platform that they have and what we’ve created in the U.S, and to expand on that. So, we don’t want to just be an auto on a GAAP administrator which is fine, we make good money on that, we want to expand these other products and in every territory that we going in, we know that market well, we think that where we have a large consumer market, that market make sense, obviously every country, different term and conditions, different ways of distribution, different products that appeal to different people in a different geographic areas, but we feel that this is just a beginning for us, and this is for us to really expand it and to become a very large administrator/underwriter to the rest of the parts of the world.

Adam Klauber - William Blair

And how long will it take for, if it is successful for the other type business to ramp up and some of those markets is that 2013 more like 2014?

Ron Pipoly

It depends, we’ll hopefully, we’ll close 2013, we are ready. Because we're already out in Europe and different parts of the world already writing business and underwriting business, so we're hopeful that some of the accounts today that we underwrite, that we’ll be able to hopefully shift some of that to our administration where we have that capability of doing it. Because some places now, historically we've been controlling the administration but not doing it. We've been giving it out to other people, so our goal is to bring some of that in-house as soon as possible and then to really go on and target the business. So I would say, for 2013 that's what we put on the press release. So I’d say conservatively, we expect it could be around 140 million in gross revenue and around 40 million pre-tax. But 2014 is when we hopefully to see nice growth coming in in the core business and additional products.

Operator

Our next question comes from Ken Billingsley with BGB Securities.

Ken Billingsley - BGB Securities

Good morning. Just one question to follow up on the car care acquisition. You have been very opportunistic in identifying that opportunities that may be other people can take advantage of. What was the reason for you being able to pick this one up, what were their desires to do that transaction?

Ron Pipoly

Well, I think if you look at our car care plan, it’s being sold by Ally is the former GMAC that took the treasury on a Fed, I am not sure, which one but they own a significant portion of that company. And I think they are a bank holding company now and if you look, they've been selling at all the year. They made an announcement maybe a year ago, year and a half ago that they're going to be selling all the insurance entities and we've done a few deals with them. Based a deal that you may personalize through them, made in original, the original Maiden buying a GMAC reinsurance was from them. Maiden also did an international play there, so there was relationship there, (inaudible) was the CEO of Maiden. He actually used to run the insurance operations at GMAC which is now Ally, so we were familiar with the business, we knew what the business, we knew what the management, we knew what the reputation and I think putting that altogether that would really put us in a good position and we’re in there, especially with external warranty in Europe, as we had an appreciation for it. We knew of the business, so we knew of its history. We knew it’s a good platform and we are able to move and make it happen.

Ken Billingsley - BGB Securities

And you’ve obviously done this, between you and Maiden have done a significant number of acquisitions with GMAC platform. Was this an open bid procedure or was this something that’s because of the relationship that was something you guys were able to get done that may be they would not have done?

Ron Pipoly

No, I think there was a bid process, but I don’t think that they were that many, I am not sure, it wasn’t a big bid process, I think it was shown to three players.

Ken Billingsley - BGB Securities

Okay. Competitive, but not a lot of players?

Ron Pipoly

Right. But, especially external warranty with an insurance carrier, it’s how you specialize, if you look at, some of the assets that have been trading in specialty non-extended warranty, they are mostly administrative fee business, we have a lot of private equity. When you go into look at the insurance entities, when you have underwritings and fee business, there is not that many players that are in that line of business that want to do acquisitions and growth throughout the world.

Ken Billingsley - BGB Securities

Just on a comment that you made earlier starting at the workers comp and paying the brokers less commission on some of that business. How long you think you can do that and how long until there is the risk from a selection process that by not being competitive maybe on the brokerage commission that you could be impacting the loss ratio?

Ron Pipoly

Well, when we talk about the fees, it’s in excess to what the retail broker gets, on the program side. So I think that’s one thing we’re always careful about is what the retail broker gets. But I think if you look at our capabilities from our system, our underwriting our knowing the workers’ comp market, our claims capability. We are able to do programs where it’s our claims platform, it’s our underwriting system. We know workers’ comp pretty well by now, and we’re able to put together the underwriting guidelines and watch those underwriting guidelines very, very carefully, so I think we have a competitive advantage.

At the end of the day, we’re not out there looking to do a ton of workers’ comp program. So we feel we can do a better job in-house, but there are some highly specialized; that we’ve been doing business with and there is a few niche players out there that have programs that are controlled that we’re able to do some business with them. And I think they appreciate our understanding of the workers’ comp business and there is very few program writers out there right now for workers comp. So it’s something that is becoming more specialized in our opinion.

Ken Billingsley - BGB Securities

On a related party fee income, I believe you said that was related to the technology build out for ACAC, was that correct?

Barry Zyskind

It's everything, the asset management that we do for ACAC for Maiden and all, but I think the growth has, the IT platform is really, I think it was 3 million this quarter, 3 million above our expenses, so 3 million as a profit, just goes to the bottom line. So it's almost $1 million a month, which is what we were projecting when we would get the system to full capacity.

Ken Billingsley - BGB Securities

So that run rate would likely to continue then.

Barry Zyskind

Yes. We believe so and hopefully will grow as well as ACAC is growing.

Ken Billingsley - BGB Securities

Last question here for Ron, just a clarification, someone asked question about reserve pieces in a specific line but reserve releases net of, were they flat for the quarter?

Ron Pipoly

Yes. Ken this is Ron here. We did not have any reserve releases for the quarter.

Operator

Our next question comes from Randy Binner with FBR.

Randy Binner - FBR

There’s a couple of kind of follow up questions. The first is on net investment income. I just wanted to clarify, it was a better result than we expected, was there anything unusual in the net investment income result like bond, prepayments or anything kind of onetime there or is that just kind of putting the cash to work?

Barry Zyskind

I think, if you look at the asset base, it was right around 2 billion at year-end, it's around 2.6 billion at the end of this quarter and it's been growing every quarter and we've been very aggressive about putting it to work. Our cash, potential cash is down as well. So I think it's really just having a big bond portfolio. One of the things that we've done also, where historically the European assets were really kept in cash, big portion of it and we made a decision probably around nine months ago, to almost a year ago, to start putting that money to work as well. So it's a combination of really having more invested assets and investing a bigger percentage.

Randy Binner - FBR

Okay. And then as long as we're talking about cash, could you update us on the current cash position, we get the investments in cash but not just the cash. You said the total is 2.6. So what is the cash balance down to?

Ron Pipoly

The cash balance as of 9:30 is approximately 604 million, it represent about 43% of the portfolio. The one thing that I want to keep in mind when I say that from a relative cash position, it's up obviously over prior quarters, just because our portfolio, our investable assets has increased and just to highlight that for the third quarter on a standalone base we generated nearly a $180 million of positive cash flow from operations and nearly 400 million for the year. So obviously the growth in our investment portfolio is held significantly better in gross written premium and in particular workers’ comp which obviously everyone is aware is the longer tail line of business. So, we are very encouraged by what we see in terms of our overall portfolio and our ability to continue to generate significant positive cash flow from operations.

Randy Binner - FBR

I understood. So, you’re still, I mean that would be a little bit, I mean you’d rather it be more like 300 or 400, right? You still have a little bit too much cash relative to where you want to get it invested, is that fair?

Ron Pipoly

That’s fair. When we announced the car care, I mean obviously the acquisition for that’s going to be internally financed. So, we’re cognizant of managing our cash position to know some of the things that we have coming down to sight.

Randy Binner - FBR

Yes. That’s a good say. My last question is just on CCPH here so, I mean we had estimated you maybe at a 100 million remain, kind of dry powder from the December 2011 convert deal on this you paid 70 here, its internally financed as you mentioned. So, does that mean, is your kind of dry powder for further M&A pretty much used up at this point or am I not reading those number correctly?

Barry Zyskind

No. I think, Randy, couple of things, first of all, the car care, there is going to be excess capital in that company that we’re buying it and we’re buying it below book values. So if you think about it on a big picture, it’s going to cost less than 70 million from a capital standpoint. In addition, we’re creating a lot of capital that we created almost 44 million capital in the quarter and we still have line of credit that’s untapped and we continue to create capital. So, I think we think we still have at least a 100 million for dry powder.

Operator

Our next question comes from Mark Hughes, SunTrust.

Mark Hughes - SunTrust

Underlying demand for the European warranty business, I know you have been more cautious there perhaps, but what’s your testament of how consumers are acting?

Barry Zyskind

From a consumer standpoint, obviously you are seeing probably we’ve seen, let say the last 18 months, we’ve seen some slowdown but at the same time we’ve been aggressive what we did the same play, the same play book we did in the U.S. during 2008 and 2009, our plan was, when we saw a drop in consumer demand, we just went out when we like to say we got more real estate. So, we went out and get a lot more accounts. So, we didn’t feel the hit as much as a matter of fact, we were able to grow. That’s really the same play here. We’re looking to do more acquisitions in Europe. I think, we have a good base there now, we’re aggressive. We’re looking to grow in regions as well. We have good teams, so we are expanding. So I think the answer is yes, probably in the general, you're seeing a slowdown in consumer but at the same time, we're taking an aggressive position to bring on more accounts, so we’ll still be able to grow in these lines of business.

Mark Hughes - SunTrust

And Ron what is the right share count for the fourth quarter?

Ron Pipoly

From an EPS perspective, obviously the 10% stock dividend for us will be fully dilutive for the fourth quarter standalone basis. And then again, just using that September 22nd delivery date for the share count, on a full year EPS basis, so you’re talking about that being nearly fully absorbed as well in the year end share count, but it will be fully absorbed for EPS for the fourth quarter.

Mark Hughes - SunTrust

What was it in the third quarter; I think the question was?

Ron Pipoly

Okay. I'm sorry. Yes. The share count for the third quarter, the fully diluted share account is 65.124 million shares and our full share count right now hovers at around from a book value perspective right around 67 million shares.

Operator

Our next question comes from Donald Chin, JP Morgan.

Donald Chin - JPMorgan

As a follow up on car care plan, of the 14 billion pretax profits that you've mentioned, how much is that from underwriting versus the…?

Ron Pipoly

Yes. I’d rather not comment on that now until we close the transaction and we get in there, for this point, we'll just say it's around 50-50 between underwriting and investment income.

Donald Chin - JPMorgan

Okay. Got it. And will be there any intangible amortization associated with the acquisition?

Ron Pipoly

No we don’t anticipate right now, we’re buying it at a global price.

Operator

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

Hilly Gross

Thank you. And on behalf of all us at AmTrust, we thank you for taking the time out to listen to us. We wish you all a pleasant day.

Operator

Ladies and gentleman that concludes today's presentation, you may now disconnect and have a wonderful day. Thank you.

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