AmTrust Financial Services Earnings Call NUGGETS: Service and Fee Income, Price Increases

On Monday, AmTrust Financial Services, Inc. (NASDAQ:AFSI) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Service and Fee Income

Randy Binner – FBR Capital: I just wanted to try and breakdown service and fee income a little bit, if we could. 33 million is a good result, kind of comparing 2Q ’11, but it was lower than 1Q ’12 and as the Company is growing there’s different drivers in there. so, just kind of wondering if there was anything unusual in this quarter with the fee and service income line and if you could give any breakout of, if Warrantech or some of the arrangements were kind of notably different this quarter, that would be helpful for modelling?

Ronald E. Pipoly, Jr. – CFO: It’s Ron. Related to the service and fee income, it was lower than the first quarter, but we have a lot of positive momentum in the service and fee income. There’s a sort of seasonality associated with it, in terms of the administrative fees we earn from warranty administration. If you compare our first quarter and second quarters, second quarter tends to naturally be a smaller quarter, when it comes to that. The integration of BTIS, as we continue to migrate BTIS premium onto our platform we’re earning a little bit less than the service and fee revenue, but again, it’s very, very positive in terms of some deposit fees that they’re able to generate. I guess my comments surrounding service and fee income on an overall basis is that, currently we’re at $73 million through six months which would annualize through about $156 million, and I think we will – we are on that run rate, and I would expect this – we achieve final integration of the ACAC operating system. We’re on a full run rate there. We’ll see that pick up in the third quarter. Our acquisition which I’m sure we will speak about in terms of Case, New Holland is going to be added into our service and fee income. So, we really have a lot of positive momentum when it comes to that line item within our income statement.

Randy Binner – FBR Capital: Great. And then so on Case, New Holland, at least a portion of that is going to kind of just into Warrantech. So Warrantech continues to kind of grow quarter-over-quarter, is that correct?

Barry D. Zyskind – President, CEO and Director: Some of that’s going to go into Warrantech administration fees related to the business, and some of it will be in general fee business that will go into the general line.

Randy Binner – FBR Capital: And then, I guess just to clarify, was there any significant reserve activity in the quarter, either plus or minus?

Barry D. Zyskind – President, CEO and Director: Randy, in terms of reserves in total, no, there was no significant development, and as we said on prior calls, we were constantly evaluating what our ultimate picks in our reserves are by line of business, and we certainly have movements within lines of business on a quarterly basis, whether it’s adverse or whether it’s positive. But from our perspective, fortunately, in total, we have not had any adverse development.

Randy Binner – FBR Capital: Okay, let me ask one more on reserves and I’ll (jump) back in. With the growth in California, what accident year loss ratio are you running in California (indiscernible) kind of in the first half of the year?

Ronald E. Pipoly, Jr. – CFO: In California, we’re being cautious with California. Right now, our estimate for activity in 2012 for California, we’re going to carry probably around 71% from a loss ratio perspective and again, California is something that that we talk about at our monthly business review meetings obviously, a great deal, but we’re seeing very positive momentum in California in terms of rate. We’ve right sized that book of business in terms of average policy size and risk profile and I think that the claims operation that we acquired as part of the Majestic Renewal Rights acquisition does an excellent job and we continue to look at the trends and continue to be encouraged.

Randy Binner – FBR Capital: That’s great. Just one more, if I could on California, in the first half of the year, do you have a kind of a sense of where your average rate increase, you’ve been able to get on cases there?

Ronald E. Pipoly, Jr. – CFO: No, if you can give me one second, California for the second quarter, our average increase in rate was about 19.2%, which was (indiscernible) I believe that at the end of the first year, I believe we commented that it was around 18%, during our first quarter CALL.

Price Increases

Mark Hughes – SunTrust: That’s interesting California data. As you look more broadly within workers comp, any comments you can make about 2Q price increases as compared to 1Q or end of last year?

Ronald E. Pipoly, Jr. – CFO: Mark, it’s Ron. In terms of overall all states in, the average price increase in the second quarter was really very consistent with the first quarter, which was about 5.7%. Within their – the vast majority of the states we’re seeing rate improvements, there’s a few indiscernible notable states such as Montana, which has dramatically lowered its rate, and those are states we’re obviously very cautious in but, when you look at our largest three states being California, Florida and New York, our rate increases are pretty consistent, first quarter over second quarter, with New York coming in at a little over 8% for the six months and Florida being right around 7% for the first six months. So, we’re obviously very encouraged with those three states and encouraged by what we see overall from a worker’s comp perspective.

Barry D. Zyskind – President, CEO and Director: This is Barry, just to add to Ronald’s comments. Obviously, our book of business is a lower hazard class of business and it’s something where we’ve been profitable through the cycle. We do have an opportunity. We look at bigger business, we see it come through the system and obviously rates on that are going up much higher but on the smaller stuff, if we can get these rate increases. We’re very comfortable that the line’s going to be even that much more profitable.

Mark Hughes – SunTrust: Any change in behavior among competitors and I’m thinking over the last three months, folks that might be pulling back from the business or across the board raising rates?

Barry D. Zyskind – President, CEO and Director: Yes, I think there’s two – we look at the business and there’s clearly two different segments in the business. Smaller low hazard stuff, I think has performed well for anyone who’s been in it overall. So, that really has – we’ve already said that too, most of the cycle stays in a very tight pricing range. Obviously, you benefit in a hard market, because you see a lot more business with package writers not being so easily willing to write the business and then the higher stuff, the more hazard stuff and just the higher numbers, you’re seeing clearly a lot of competitors pulling out of the market, pricing going up and some of those competitors also have smaller book and we feel that’s why we’re seeing, I would say the momentum in the small comp is very strong in terms of submissions, successive buying, pricing, elimination of discounts. It’s very, very strong. This is something we’ve talked about last quarter and the quarter before that, but clearly, the wind is blowing in our back and this is something that – you could see how we move around the capital, but clearly we see a lot of opportunity to write the small comp now in many of the states and we’re pushing very hard, because something that we think we’re very good at we know how to do it and we think now it’s the right time to write as much of it that we can in the classes that we think we know well.

Mark Hughes – SunTrust: Ron, you had suggested that fee business annualizing, if I heard you correctly to $156 million, was that right off of a $73 million in the first half, or did you mean a $140 million…?

Ronald E. Pipoly, Jr. – CFO: Actually I apologize, just, I (didn’t mean) $146 million, but again – just to comment on that again, I think if you look at the momentum there that I think that $146 million, $150 million is very reasonable for the fee income, especially when you consider the acquisition of Case, New Holland.

Mark Hughes – SunTrust: Okay, so bouncing off of a Q2 seasonality?

Ronald E. Pipoly, Jr. – CFO: Yes.