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Edited Transcript of AFSI earnings conference call or presentation 8-Nov-17 10:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 AmTrust Financial Services Inc Earnings Call

NEW YORK Nov 13, 2017 (Thomson StreetEvents) -- Edited Transcript of AmTrust Financial Services Inc earnings conference call or presentation Wednesday, November 8, 2017 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Karkowsky

AmTrust Financial Services, Inc. - CFO & Executive VP

* Barry D. Zyskind

AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President

* Hilly Gross

* Jeffery H. Mayer

AmTrust Financial Services, Inc. - Global Chief Actuary

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Conference Call Participants

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* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Meyer Shields

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Randolph Binner

FBR Capital Markets & Co., Research Division - MD, Senior VP and Senior Analyst of Insurance Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to AmTrust Financial Services, Inc. Third Quarter 2017 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

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

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Hilly Gross, [2]

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Thank you. Thank you, and good evening, everyone, for taking the time out to join us for this AmTrust Financial Services Third Quarter 2017 Earnings Conference Call. With us this evening are Mr. Barry Zyskind, Chairman, President and CEO of AmTrust; Mr. Adam Karkowsky, Executive Vice President and Chief Financial Officer of AmTrust; and Mr. Jeffrey Mayer, AmTrust's Chief Actuary. Also on the call is Ms. Chaya Cooperberg, Chief Communications Officer.

Let me first note that there is a presentation in tonight's call wherein we reference in a slide presentation, which will be available on the Investor Relations section of our website at amtrustfinancial.com.

So before we begin, I would read into the record the obligatory statement on forward-looking statements that we'll refer as well to the slide presentation. Since comments on today's call may include certain forward-looking statements that can include plans and objectives of the management for future operations, including those relating to future growth of the company's business activity or future availability of funds. Since these assumptions are based on current expectations and involve assumptions that are difficult, if not impossible, to predict and since many of these assumptions are, in fact, beyond our control, so there can be no assurance that actual developments will be consistent with these assumptions. Actual results can deliver (sic) [differ] materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including those factors set forth in our filings with the Securities and Exchange Commission. The projection and statements in this presentation speak only as of the date of this presentation. We undertake no obligation to revise any forward-looking statements, whether as a result of new information, future developments or otherwise, except, of course, as may be required by law.

Finally, in the prepared remarks and responses to questions in today's presentation, our management may refer to financial measures that are not derived from generally accepted accounting principles, or as they commonly are referred to, GAAP. Reconciliation of these non-GAAP financial measures to those directly comparable GAAP measures are provided in the press release we issued early this evening, which is available on our website.

There. Having dispensed with the legal niceties, it is now my extreme pleasure to turn the call over to Mr. Barry Zyskind, President and CEO of AmTrust. Barry?

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [3]

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Thank you, Hilly. Good afternoon, and thank you all for joining us. Our results in the quarter reflects a number of items that obscure our underlying -- underwriting performance. So Adam will explain the key variances in his comments to provide a clearer view into the full picture. He will also provide an outlook for the fourth quarter and 2018. And today, we have with us Jeffrey Mayer, our Chief Actuary, on the call to provide some comments on the prior year development that was ceded to the adverse development cover in the quarter.

First, though, I want to review our news from earlier this week. As you may have seen, on Monday, we announced a transformative transaction with Madison Dearborn Partners for a portion of our U.S. fee businesses. We are extremely excited about this deal, which values this portion of the business at $1.15 billion.

On Slide 4. As you can see, we have delivered our stated objective to unlock the value of a unique group of our U.S. fee businesses, which we have brought together and grown over the past several years. We will continue to participate in the future success of the new company and ongoing upside as a significant shareholder with a 49% equity interest in the new entity. The transaction also aligns with our recent initiatives to further strengthen our balance sheet and simplify our organization. The inflow of tangible capital, resulting from the sale, will provide the foundation for much future success for us. Creating approximately $1 billion of new capital will allow us to support new writings, rethink our debt profile and explore changes to certain key reinsurance structures. We will also have significant value in our retained equity in the new joint venture. Unconsolidated from our balance sheet, the new fee business will be free to diversify and grow in a meaningful way. We expect the new company to actively seek organic M&A-driven growth. Together with our new partner, Madison Dearborn, we have a broad and clear vision for how we intend to generate significant value in the equity of this business over the coming years. The new entity's growth will, in turn, drive growth at AmTrust as our company continues to benefit from being an important insurance partner to the new venture. The management team of these businesses will continue to serve their customers and partners as they do today, and we expect a very smooth transition. The gain on the transaction and reduction of goodwill and intangibles will add about $3.50 to book value and $6 to tangible book value. To simplify it, the way I see it with this one transaction, we created roughly the same amount of tangible book value growth that we had created in the first 11 years of AmTrust being public. And remember that we will retain a sizable fee business at AmTrust with operations in the U.S. and internationally, which we now have proven have more implied value than reflected on our balance sheet.

Turning to Slide 5. The sale of these fee businesses to MDP is the next step to realizing our long-term vision for AmTrust. Since our founding 19 years ago, AmTrust has grown into a premier multinational property and casualty insurer and the 15th largest property and casualty writer in the United States. We have grown quickly, and we are still a young company. Our successes come through our commitment to operational excellence, and this is what drives us today. This means outstanding service for our agents and brokers, maintaining underwriting discipline in our target markets and classes and use of our technology advantage to lead the field of innovation. Over the years, we have also shown our ability to carefully allocate capital to generate optimal returns. The transaction with MDP for the fee business is an example of that.

Another example is the personal lines policy management system that we have developed for National General, and we recently sold to them for $200 million. We created significant tangible book value to our in-house technology expertise. Through these and other initiatives over the past several months, including a capital investment of $300 million by my family, we have fundamentally transformed and fortified AmTrust's balance sheet. The agreement with MDP is consistent with the steps we have taken to support strong financial performance and to position AmTrust for the long term as a leading provider of small commercial business insurance and warranty and specialty coverage globally.

Slide 6. Third quarter: solid production performance in core business. Turning to the performance in our quarter and year-to-date. From my perspective, our underlying business demonstrates stability and resiliency in the third quarter amidst a devastating CAT events season. Our largest operating segment, the Small Commercial Business and Specialty Risk and Extended Warranty, representing approximately 80% of gross written premium, continued to perform well.

In our workers' compensation book, our largest product line in the Small Commercial Business segment, we retained more than 93% of renewal accounts with the rates up, on average, around 2.3%. Our new business submissions, we are quoting more accounts relative to the same quarter last year and holding our quote to bind ratio steady. Our average new workers' comp policy size did come down as we continued to target and quote the smaller risks we can get price adequacy.

In commercial auto, it's a different story, where rate was up more than 11% in the quarter. For us outside California, rates have actually increased in workers' comp over the past year as a result of steps our underwriting team has taken to mitigate industry pricing changes. We continued to monitor loss cost trends and workers' compensation across our product lines. We are being very responsive and diligent with our pricing and reserving practices. Adam will speak to our loss performance and to our outlook in his comments, and Jeff will explain why we are confident in the prior accident year reserves and our current accident year loss picks.

Before I turn the call over to Adam, I want to take a moment to reflect on the CAT season we had. AmTrust has never been a big CAT player, and our limited exposure to events in Texas, Florida, Puerto Rico and Mexico, relative to the industry, demonstrates our conservative approach to CAT risk. Relative to the size of our CAT book, we have purchased a sizable amount of reinsurance coverage with a low -- very low level of retention. Most of our losses did come from our operations in Lloyd's. During these times of peril, we more than pull our weight when it comes to taking care of policyholders and supporting our agents and brokers. I am proud of our team's rapid response to the affected areas. Across the AmTrust organization, we gave our time, resources and financial assistance for the relief and recovery efforts. We, as a company, raised more than $400,000, together with our employees, to give back to the communities we serve. It is times like this that remind us what is most important: people and families looking out for one another. At its heart, this is what AmTrust is all about, and I'm very proud of the company we have built. While the results of this quarter are challenging, beyond the surface, the numbers demonstrate that a bright future for AmTrust is just beginning. Our company, driven by talented and loyal employee base and an industry-leading customer support platform, is now highly capitalized and well positioned for profitable controlled growth and prudent enhancement. Even during a challenging period in our company's history, our specialty risk, warranty, our commercial operations, our workers' comp have continued to perform like a well-oiled machine with industry-leading retention rates that drive highly visible, reoccurring profitable results.

With that, I'll turn the call over to Adam.

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [4]

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Thank you, Barry. Good afternoon, everyone. Over the past few months, we have made tangible progress on several fronts to improve AmTrust's capital profile and increase certainty in our future performance.

On Slide 8, I highlight the top 3 takeaways on our quarter and year-to-date. First, we are taking transformative steps to strengthen our balance sheet and capital base. Our initiatives, as Barry mentioned, include several measures to increase confidence in our ability to grow our business and consistently deliver profitable results. We have also taken steps to simplify our story and enhance our disclosure. At the same time, we remained focused on optimizing our reporting and our consolidation processes. All of these swift and decisive actions have allowed us to set AmTrust up for a strong and successful 2018.

This brings me to our second key point. To get a clearer view of the actual performance of the business, there are a number of items in the third quarter results that need to be stripped out. I will walk you through the various impacts for the period, so you can understand our expectations for the business for the fourth quarter and next year. You will see that our adjusted underlying third quarter loss ratio reflects a measure of increased caution and provides us with a higher degree of confidence in the 2017 accident year loss picks on a year-to-date basis. We believe this stance positions AmTrust for much greater profitability and predictability in 2018.

And the third takeaway. Even after giving effect to the prior year development, calculated without the benefit of the cover, our largest business segments continued to perform profitably. We have provided additional disclosure an accident year loss ratios, and Jeffrey Mayer will provide some color on the prior year development in his comments.

Now I'll turn to the summary of our financial results on Slide 9. I'll first note that we have included several additional slides on our performance by segment in the appendix to the presentation. But in the interest of time, I will let the segment slides speak for themselves. Consolidated gross written premiums declined about $43 million for the quarter or 2.1% to nearly $2 billion. The decline reflects lower premiums in our Specialty Program segment, where we have terminated several programs into runoff as previously communicated. The decline was substantially offset by growth in our Specialty Risk and Extended Warranty segment, strong production performance and high policy retention levels in our Small Commercial segment, particularly in our workers' comp business, as well as the impact from recent acquisitions. Also, our results were significantly affected by the negative impact of foreign currency translation of European operating results. As a reminder, about 20% to 25% of our business is written in foreign currencies, which can result in large noncash FX swings when we translate our results into U.S. dollars for consolidation and reporting.

Net earned premium declined 0.3% to $1.19 billion from $1.2 billion. Earned premium reflects the decline in specialty programs, premiums and the impact of the acceleration of ceded premiums from exhausted CAT layers.

Service and fee income was up 34.8% in the quarter to $180.5 million. The increase is driven by some organic growth and includes the impact of new fee businesses added earlier this year as well as a reclassification of an item that was previously an offset to expenses and is now booked as service and fee income.

Investment income in the third quarter totaled $61.1 million, up 2% compared with the quarter a year ago. In addition, there was a net realized gain on investment of $24.5 million or $15.9 million after tax on fixed maturity and equity investments compared with net realized investment gains of $8.2 million a year ago.

Loss and loss adjustment expense in the quarter was $1.3 billion versus $800 million in Q3 last year, resulting in a reported loss ratio of 106.1% compared with 67.8% in the year-ago quarter. There were 4 primary drivers of the elevated loss ratio in the quarter. One, as we reported earlier this week, we took a reserve charge of approximately $327 million on the accident years 2016 and prior. The entire amount was ceded to our adverse development cover. The prior year development represented 27.4 points of the reported loss ratio. The second driver of loss was catastrophe events, which amounted to $75 million of pretax loss in the quarter. There were 4.5 loss ratio points related to the catastrophe events and 1.3 points related to reinstatement premiums and the acceleration of ceded premium to CAT reinsurers. Excluding the reserve charge ceded to the adverse development cover and excluding the impact of CAT events, the adjusted underlying loss ratio was 72.9% for the third quarter. In the year-to-date period, excluding all reserve charges and CAT losses, the adjusted underlying loss ratio was 68.4%. The third driver of higher loss ratio is our application of greater caution on the current accident year to further increase certainty and confidence around reserves. In addition to these primary drivers of the elevated loss ratio in the quarter, we also had some seasonal and onetime items that were a little unusual, so I'll point a few of them out.

There was a higher attritional loss ratio in the quarter related to our property book in our Lloyd's business. There was a higher-than-expected current accident year loss ratio in one niche commercial auto market in the Northeastern U.S. There were some losses attributable to our crop product line, where losses were earning faster than premiums, but this trend is expected to normalize over the remainder of the accident year. And we had elevated paid losses in our Specialty Risk and Extended Warranty segment related to some areas of consumer products and yellow goods. The warranty business remains a profitable business. These types of movements are not unusual and tend to normalize over a full accident year.

Our overall expense ratio was 28.3% compared with 25.4% a year ago. Factors contributing to the higher quarterly expense ratio were higher direct acquisition costs related to our 2016 acquisitions of Republic, Nationale Borg and ANV, and the expense ratio was negatively impacted 0.5 points for accelerated reinstatement premiums related to CAT as well as the aforementioned reclassification.

Now turning to our outlook. Jeffrey will provide more color on loss picks, but the takeaway is that we are carrying our 2017 accident year loss ratio above the average loss ratios of the affected accident years 2012 to 2016, excluding Specialty Program. This gives us a high degree of confidence in our current reserve position, and we expect that we won't need to provide much in the way of earnings adjustments going forward. We believe that the year-to-date adjusted underlying combined ratio of 95.5% is a better proxy for the likely go-forward profile of our business. Allowing for a degree of positive or negative variance driven by marketing conditions in our core lines, particularly worker's compensation, business mix by quarter and some seasonality. This combined ratio profile, combined with continued solid investment income results, will allow us to generate our targeted 12% to 15% operating return on equity on our adjusted book value and generate the consistently profitable results our shareholders can rely on.

Turning now to Slide 10 for other key variances on the income statement. There was a foreign currency loss of nearly $63 million in the quarter versus about $11 million for the same period last year. As discussed previously, the weakening of the U.S. dollar during the period compared to the British pound and euro continued to generate significant FX swings.

We had a tax benefit in the quarter of $62.6 million, which resulted in an effective tax rate of a benefit of 28.3% compared to an income tax expense of $23.2 million in Q3 2016, which resulted in an effective tax rate expense of 19.9%. This primarily results from the decrease in pretax earnings in the period. The operating loss in the quarter of $7.5 million or $0.04 per share reflects all of these variances.

Turning to Slide 11. This is a summary of the prior development that has been ceded to the average development cover. On this slide, I just want to highlight that the charge resulted in the deferred reinsurance gain in our balance sheet, totaling $337 million, which includes about $14 million in deferred gain from the second quarter. This deferred gain will be accretive to GAAP book value over AmTrust's claims settlement period. As long as the deferred gain sits on our balance sheet, we will report an adjusted book value metric, which includes the deferred reinsurance gain, to reflect the actual present economic value of the adverse development cover policy. We think this is the right way to measure the company's total underwriting capital. I'll remind everyone that under statutory accounting, AmTrust immediately receives the full benefits of the ADC in the calculation of statutory capital.

On Slide 12, we show how the adverse development cover will affect line items on the balance sheet and income statement over the course of the claims settlement period.

On Slide 13, a few balance sheet items. Total capitalization at September 30, 2017, was $4.8 billion or about $5 billion, including the tax effect of deferred gains on the adverse development cover, compared with $4.5 billion at December 31, 2016. Debt increased to $1.29 billion from $1.23 billion at December 31, reflecting a real estate purchase in the U.K. market. Reflecting all of this, debt to capital decreased to 27.1% -- or 25.7%, including the tax effect of deferred gain in the capital, down from 27.7% at December 31, 2016. Total assets as of June 30 were approximately $25.8 billion and included cash and invested assets of $9.6 billion. The sequential decline in invested assets reflects the amounts provided to our reinsurer for the adverse development cover.

With that, I'll now turn the call over to Jeffrey.

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Jeffery H. Mayer, AmTrust Financial Services, Inc. - Global Chief Actuary [5]

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Thank you, Adam, and good evening. I'll be referring to Slide 14 for my comments. We provided these tables earlier this week, and I know that there are many questions around how we came to this result for this quarter. I will review the key elements and takeaways of these tables and be available for questions as well. In the 3-month period ending September 30, 2017, we recognized unfavorable prior year loss reserve development of $327 million. This adverse development was primarily a result of the following: first, for Specialty Programs, there was approximately $120 million of adverse development in this segment. We have had challenges in this segment, consistent with industry peers who have written programs in the past. The majority of the observed unfavorable development is driven primarily from long-tailed terminated programs, many of which are general liability related. We have also significantly re-underwritten and repriced many of our active ongoing programs to help ensure the profitability and that results are in line with our expectations. Outside of general liability, results were also driven by auto liability for accident years '13 through '16 related to severity growth that continues to exceed our previously revised expectations.

Moving on from our Specialty Program segment and into Small Commercial. For worker's compensation, there was approximately $88 million of adverse development. It was unfavorable development related to emerging loss experience beyond our prior indications, primarily from accident years '13 through '16. But even with this development, workers' comp continues to perform very profitably with strong loss ratios averaging approximately low to mid-60s as shown on the slide. In the non-workers' compensation commercial line segment, there was approximately $48 million of adverse development, emanating primarily from commercial auto liability. Development in the auto liability book of business was driven by continued deterioration of claims severity even above the revised expectations arrived at in our previous quarters, similar to that of the industry. In our Specialty Risk and Extended Warranty segment, there was approximately $69 million of adverse development across several of our Lloyd's and European business lines and segments, including some older years for Italian Medical Mal. Overall, our Italian Med Mal business is performing very profitably.

Looking at the tables on the slide, here are some of the key takeaways on the accident year loss ratios, all after the effect of the development in Q3. In workers' comp, the loss ratios for accident years '12 through '16 averaged 64.2% after the effect of the prior period development. For accident years '15 and '16, as you can see, we're showing ratios of 62.3% and 62.9%, respectively. Those ratios are down from the '12 through '14 years because of achieved rates and state mix shift. The effective rate changes achieved in our major states that were growing percentage of the book helped drive our loss ratio improvements in accident years '15 and '16. For accident year '17 for workers' comp, the loss ratio was set at 65.3%, higher than the most recent years, as we're sensitive to the rate environment as well as taking a more cautious view of the current, most immature accident year, consistent with our cautious stance on prior years' post-recognized development.

In Specialty Program, accident years '12 through '16 loss ratios averaged 78.9% and were particularly adversely influenced by accident years '12 and '13, which, themselves, were disproportionally affected by outlier programs that would terminate going into the subsequent accident years, for example, for monoline auto and non-admitted general liability. The loss ratios for Specialty Program accident years '14 through '16 have benefited by the reviews performed by the actuarial group to put poor performing programs into runoff, achieve rate on the remaining program and shift our profile to a higher focus on workers' compensation and less on general liability and commercial auto. The workers' comp piece now makes up approximately 2/3 to 70% of our Specialty Program book. Our accident year 2017 loss ratio for Specialty Programs is at 75%, recognizing the benefit of programs and termination, yet taking once again a more cautious view on this still immature year. Programs that should be noted is a shrinking book of our overall portfolio.

In our core commercial lines, loss ratios averaged 65.2% across accident years '12 through '16, and the current accident year is sitting at 64.5%. Since our disclosure for the 2017 excludes the impact of CAT, you are seeing a lower loss ratio because our well-performing core property book is currently a larger part of our commercial portfolio, thereby favorably influencing the current year loss ratio.

In our Specialty Risk and Extended Warranty segment, the fully developed 2012 to '16 years averaged 70.5% with our current accident year 2017 at 70.9%. You will notice that accident year '16 shows a lower-than-average loss ratio at 63.6%. This year was specifically favorably influenced by the onboarding of ANV, Nationale Borg, which have lower loss ratios, as well as favorable development on a specific niche business that affected accident year '16 alone, all of which combined to produce a lower loss ratio for 2016. Despite that, we continued to book the 2017 accident year at a level consistent with the longer-term average, thereby consistent with our more cautious approach on this more recent year. In the aggregate, as you can see, even with the effect of the adverse development allocated to its contributing segments, our overall book of business continues to be very profitable while taking into account -- while taking action to reduce the effect of the underperforming Specialty Program book of business.

So what drove the recognition of adverse activity this quarter? Each quarter, we go through -- the actuarial group goes through an extensive reserve evaluation process, which incorporates all updated and new information to date, in this case through Q3 '17. These analyses and diagnostics demonstrated trends and adverse experience that were above our expectations from prior studies. We have chosen to take a prudent approach and reflect the trends and adverse experience to an extent that we believe had significantly increased our confidence around the reserves associated with accident years 2016 and prior and consistent with our prudent approach for accident year 2017.

With that, I'll turn the call back to Barry.

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [6]

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Thank you, Jeffrey and Adam. To conclude, 2017 has been a year of transformation for AmTrust, and we are setting up for a strong clean story in 2018. In the first half of the year, with the close of our fee business transaction, we will be operating with the highest capital position in our history and tangible book value about 80% above where we stand today. We are exceptionally well positioned as an underwriting partner for our agents, brokers and insurers, and we are poised to create more value for shareholders through strategic capital allocation.

Now, operator, please open the call for question and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Mark Hughes with SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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The guidance or your kind of thought of the model going forward at 95.5% combined ratio, is that something that you think is achievable within a quarter or two? Is that 4Q? Or does that take a little while to trend in that direction?

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [3]

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No. I think that's achievable starting with the next quarter. That's our goal. That's where we're shooting for. We think with the actions that we've taken this quarter, we're set up for that.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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The expense ratio, the 28.3%, I think you mentioned 0.5 points had to do with the reinstatement items. Is that kind of high 20s? Is that the right expense ratio going forward?

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [5]

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I think what we -- there are some things in the expense ratio that may be pushing it up a drop, but I think high 20s is the right target. We've been pretty consistent, I think, over the last few quarters in that range, so I think that's probably a good target.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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The reclassification into fee income, could you expand on that just for a second? And I -- maybe as part of it, your other expenses, which, historically, had some relationship with your fee income, they had been trending more like 120% of fee income. This quarter, they are down below 100%. And again, that's just looking at other expenses relative to the fee income. Is the -- does that have to do with the reclass? Or could you...

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [7]

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Yes. What's happening with the reclass is that we had a contra-expense and other expenses that's now basically forcing expenses up, but it's also grossing up the fee revenue. So there's no change to the P&L resulting from this classification at all, but it does change those 2 lines.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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So you just moved some from the expense into the fee income.

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [9]

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Well, we moved something that was contra expense to fee income.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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Okay. Anything -- through this period of the last few quarters with capital moves and development in the reserves, anything from brokerage partners? Have you felt any impact on your business related to that?

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [11]

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This is Barry, Mark. This -- obviously, there's been a lot of news, and we've been in the story. But I think once we got through the first part of the year and got financials filed and made a lot of these strategic capital moves, we've communicated very strongly with our producers our brokers our agents. And that communication has been very well received. And you could see by the numbers, the mentioning that I mentioned in terms of submissions, bind ratios, hit ratios. Remember, our business is a much more business focused on smaller business with a lot of partners, a lot of distribution partners throughout the country and the world. So it's been -- we've actually used it as an opportunity to communicate a lot with our brokers, and it's going very well.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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Barry, how do you -- when you look at the -- at all this and you think about the number of eyes that have been looking at your books and your company the last 4 quarters, you had the new auditor came in and took a close look and signed off on the books. Your independent actuaries, they're clearly signed off on the books. Premia came in and did the adverse development cover, and you raised a lot of capital. Your family made a large capital raise, but there continues to be movement, including this quarter. How do you get comfortable with the situation?

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [13]

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I think many of the things you said is what makes us comfortable. It's a transformative year. We have new actuaries that came in and really in the end of '15 and '16 and have come up to speed. We have a new auditor. We have a new CFO, and -- but we made a lot of moves that we think, as I mentioned, have really transformed the company. We view this as a transformative year. But at the same time, you could see there's been a lot of value that's been created. If you step back for a second and not focus on a specific noise but focus on growth of tangible book value or book value, by the time we close this transaction, we'll have really increased our book value tremendously. And if you actually just track this year and the last 11 years, we've created a lot of book value. So yes, it's been a lot of noise. It hasn't been easy. It's been challenging, but I think everyone here has risen to the challenge to really work together. And we think that our company now is in very solid foundation. I'll turn it over to Adam if you want to add anything.

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [14]

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I agree. I think we have a lot of comfort in our process. We have a lot of comfort in the way we go about things. I think we have a high degree of professionalism here. I think Jeffrey and his team have brought a lot more rigor to our process as has our new auditor. I think where we stand today, the company has never been stronger.

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [15]

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And I'll just make a comment. If you study the industry, many, many of the key successful players today and some of the names that are very well known and very respected have all gone through something in their history, a lot -- some of them a lot bigger than what we went through and a lot more noise. And I think when you -- if you take -- if you rise to the challenge as an organization and you realize what you have to do and you make the changes, you come out much stronger. And I think we clearly believe we're coming out much stronger this year than we ever were before in terms of balance sheet, in terms of process, in terms of professionalism. So we feel very good about the future.

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Operator [16]

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And the next question will come from the line of Meyer Shields with KBW.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [17]

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A couple of lovely, small questions. Is there any estimate as to the duration of the claims settlement process, so we could model the amortization of the reinsurance gain?

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Jeffery H. Mayer, AmTrust Financial Services, Inc. - Global Chief Actuary [18]

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Yes. Meyer, it's Jeffrey. I would say you're probably talking north of 8 years, I mean, for attaching and then going into that above the $6 billion with a attached would be something you can work with. But I don't have the exact precise number, but yes, I can certainly do some work and let you know. But I don't have the precise number in front of me.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [19]

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No. I just wanted a general number. But if I understand you correctly, that means it doesn't start like in the fourth quarter of '17? It will be later.

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Jeffery H. Mayer, AmTrust Financial Services, Inc. - Global Chief Actuary [20]

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No, no, no.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [21]

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Okay. In terms of -- I guess, Adam, the 95.5% that we're all going to grab on to, does that incorporate the totality of rate and trends that you're seeing now? Obviously, California workers' comp is most prominent, but I was happy you talked about that.

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [22]

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Yes. I think it encompasses the entire view of the business today. I think there -- when we think about the business, there are going to be some variances from quarter to quarter. We're not going to hit that 95.5%. I'm not -- I don't want that to go down as a promise of a specific number every quarter. I think what we're trying to say to you guys is we're trying to direct you to what we think more -- is more representative of the likely result going forward. And so there'll be variance for specific results and trends and particularly in workers' comp that are going to have an outsized effect on our book. So depending on how -- sorry, there's a lot of background noise there. I don't know if it's on your end.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [23]

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Yes, it is. I'm sorry.

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [24]

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But there's definitely going to be some variance in that number that we'll see come through in different lines, particularly workers' comp. But Jeffrey maybe can comment specifically on California workers' comp. But yes, what -- when we're viewing our strategic target, it's -- and where we think we're going to be, it's with a comprehensive view of the business.

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Jeffery H. Mayer, AmTrust Financial Services, Inc. - Global Chief Actuary [25]

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Yes, absolutely. And this is Jeffrey again. I think that at one point, Adam, I think that what we've done here this quarter and the move and the adverse development that was taken and the sense of caution and prudence in the results we've set up, I think, as Adam said that, of course, quarter-to-quarter, of course, you can have some moves, but I think we're put in a position where those moves can be clearly either direction. I think we've taken that look to make sure that we have this very cautious and very comfortable view of where these loss ratios are, on comp as well as the rest of the business, obviously, both California and non-California. So hopefully, any of these movements quarter-to-quarter should be nondirectional on either direction.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [26]

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Okay. No. That's very helpful. And then last question. Both in the press release that came out a couple of days ago and in Barry's comments tonight, you talked about reviewing the reinsurance profile. I'm probably misquoting it, but I was hoping you could talk to what you're thinking about in the context of reinsurance.

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [27]

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Yes. I mean, I think, Meyer, I think it's no secret. We cede a lot of our premium to Maiden, and we've been very cautious over the years. But as we've taken these moves and as we've increased the capital tremendously, and we'll see where the opportunities to grow in the industry, obviously there's been a lot of chatter and a lot of talk about pricing increasing and not just in the CAT market but would overspill into the other parts of the commercial. If we see that and there's growth opportunities, great. If not, with having excess capital, one of the opportunities is to relook at some of our reinsurance and maybe slowly start taking back some of that premium. And we have some inbuilt growth in the organization. If a company that's writing $8 billion in premium and ceding a couple billion away, there's opportunities to work with that over time and enhance the capital return for our shareholders.

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Operator [28]

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(Operator Instructions) And the next question will come from the line of Randy Binner with B. Riley.

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Randolph Binner, FBR Capital Markets & Co., Research Division - MD, Senior VP and Senior Analyst of Insurance Research [29]

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I was -- it was very helpful to get the reserve charge breakout by business segment as it's reported and the way we drive our models. Is it possible to get a similar breakout for the CAT losses in the quarter? Barry, I think you mentioned that the majority was at Lloyd's, so should we assume that most of it was at -- was through Lloyd's?

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [30]

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Yes. Definitely going to assume that the majority was at Lloyd's. I don't want to tell you that most of it was, but we will work on getting you something after the call that's a little bit more specific.

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [31]

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Yes. I'll just give you a little bit more comment. So if you look at -- I would actually say if you look at where the CAT losses came and the first one in Harvey, being that we had Republic, we did have some CAT losses, but it really was not a lot. We had more from Lloyd's than we had in our own Texas operations. And then if you look at the rest of the events, it really was almost all Lloyd's. So the only one where we had some CAT really besides Lloyd's was really in Harvey, and it wasn't a big number. So I would say that most of it really did come from Lloyd's, but we can get you the breakout of that.

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Randolph Binner, FBR Capital Markets & Co., Research Division - MD, Senior VP and Senior Analyst of Insurance Research [32]

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Okay. But just, I mean, rough numbers. Is it like 60% at Lloyd's and 15% at small commercial, something like that?

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [33]

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Yes.

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Randolph Binner, FBR Capital Markets & Co., Research Division - MD, Senior VP and Senior Analyst of Insurance Research [34]

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Okay. It's just helpful for doing underlying margins at the segment level. And then on the warranty, you mentioned the [paids] were higher. And I think that's the second quarter in a row there. Can you just give a little more color? That's been a pretty predictable product over time and so just looking for more color in understanding what's happening with that trend.

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [35]

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Yes. I think, actually, last quarter was actually lower, so it was lower than usual. So typically, what Adam said, we price it for a certain -- whether it's a price for an 85% or 80% or 75%, depending on the expense ratio associated with it, and you will see, just by the nature of the business, because it's a very short-tail line of business, it's -- think of it as a mini property. So your attritional loss ratio moves up, but typically by the year-end, it falls in line. So sometimes we'll have an unusual low quarter, sometimes a little bit higher. But overall, it really flattens out and gets to the desired loss ratio. But Jeff, I don't know if you want to add anything.

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Jeffery H. Mayer, AmTrust Financial Services, Inc. - Global Chief Actuary [36]

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No. I agree, Barry. I mean, there's not a lot of projection or estimate, if you will, on that. And a lot of it is driven by the payments for the quarter. I mean, in terms of prior development, if, for example, there's no development on this -- on that warranty stuff, nothing to speak of, so it is very much just the nuance and the eccentricity of the particular quarter, where you may have had more or less payments than expected. As Barry said, Q2, I think, was stable in that regard, and the Q3 went the other way.

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [37]

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And there's -- as you know, Randy, I've said this many times. There's a lot of different lines within the warranty and specialty risk, where things pop up and you have to fix it. So for example, one of our lines is GAP, just where new car prices or old car prices, depends where you are in the economic cycle, that's something that has a much higher loss ratio, and we've done a lot of changes. And some of those changes take a while to flow through. So you have pieces, but that's how it goes. Sometimes, you'll write washing machines and refrigerators, and they have a very high loss as you have to take it down. You have to fix it. And some things are extremely low, so it's balancing the portfolio. But overall, it's a very predictable line of business, and it's very consistent. But you'll get some movement quarter-to-quarter.

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Randolph Binner, FBR Capital Markets & Co., Research Division - MD, Senior VP and Senior Analyst of Insurance Research [38]

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All right. That's helpful. And then on the FX side on -- that -- I guess relative to other pound-exposed companies or cover, I guess, we don't cover as many that are exclusive to euro, but the loss seems large there. So I just wanted to just kind of understand what that is. Is that -- is there derivatives or something that gives that number kind of more leverage than we would think would otherwise be there?

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Barry D. Zyskind, AmTrust Financial Services, Inc. - Chairman of the Board, CEO & President [39]

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No. I think just -- I'll comment, and then Adam will take it from me. But typically, what we do a little bit different and I think some of this we really don't hedge it, so we just -- we have to translate it as we're consolidating at the end of the quarter, at the end of the period into dollars. So it's really -- as we said many quarters have been around. If you look back in our history, we've had huge gains in foreign currency. We didn't take it into operating earnings, so depends where the dollar is. It either goes against it. There always will be movement, but it's a noncash. We keep the liabilities really in their local currency, so it doesn't affect our obligation. We're just not -- we just don't go into hedging on it, and we actually translate into dollars. I don't know, Adam, if you want to add anything.

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [40]

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Yes. Just the only clarifying point, Randy, I would say is that we have pretty good mix of business in Europe in terms of euro and pound. So there are 3 currencies that are kind of working in tandem in our FX movement. So sometimes, we'll have spread in 1 versus 2. Sometimes we'll have a spread in 2 versus -- in 2 of them but not in the other. So the pound may not move to the dollar, but the euro may move relative to both. I think recently it's been both moving relative to the dollar that caused our headaches for the last 2 quarters. But just remember, it's a noncash item. And at the end of the day, as Barry mentioned, liabilities and assets are booked locally under the same currency, so there's not real exposure here.

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Randolph Binner, FBR Capital Markets & Co., Research Division - MD, Senior VP and Senior Analyst of Insurance Research [41]

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All right. And then the last question I have is now that the current adverse development cover has hit its limit, and so is there any thought that you'd have on negotiating in other similar structure going forward?

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Adam Karkowsky, AmTrust Financial Services, Inc. - CFO & Executive VP [42]

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This is Adam. We have no intent.

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Operator [43]

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Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the conference back over to Mr. Gross for closing remarks.

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Hilly Gross, [44]

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Thank you. There being no further questions, that does conclude our Third Quarter AmTrust 2017 Earnings Call. On behalf of our Barry Zyskind, Adam Karkowsky, Jeffrey Mayer and all of us at AmTrust, we thank you for taking the time out of your schedules to join us this evening. We wish you a pleasant evening.

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Operator [45]

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