National General Holdings' (NGHC) CEO Michael Karfunkel on Q4 2015 Results - Earnings Call Transcript

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National General Holdings Corp (NASDAQ:NGHC)

Q4 2015 Earnings Conference Call

February 10, 2016, 11:00 ET

Executives

Dean Evans - IR, Director

Michael Karfunkel - Chairman & CEO

Michael Weiner - CFO

Analysts

Randy Binner - FBR Capital Markets

Matt Carletti - JMP Securities

Adam Klauber - Analyst

Operator

Welcome to the National General Q4 2015 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Dean Evans. Sir, the floor is yours.

Dean Evans

Thank you. Good morning and welcome to the National General Holding's Corp fourth quarter earnings conference call. My name is Dean Evans, the Director of Investor Relations at National General and with me in the room are Mr. Michael Karfunkel, our Chairman and CEO; and Mike Weiner, our CFO.

Before Mr. Karfunkel and Mr. Weiner review results, I must note the following with respect to forward-looking statements. Members of our management team may include statements other than historical facts in their remarks. Such statements may include the plans and objectives of management for future operations including those relating to future changes in the Company's business activities and earnings results or potential

These statements are based on current expectations and involve assumptions that are difficult or impossible to accurately predict, many of which are beyond our control. There can be no assurance that actual developments will be consistent with these 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 our filings with the Securities and Exchange Commission.

This projections and statements in this presentation speak only as of the date of this presentation and we undertake no obligation to update or revise any forward-looking statement whether as result of new information, future developments or otherwise except as may be required by law. Finally, our management will refer to financial measures that are not derived from generally accepted accounting principles or GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information is provided in the press release for our fourth quarter 2015 earnings which is available in the investor relations section of our website at www.NationalGeneral.com. With that, I now present our Chairman and Chief Executive Officer, Mr. Michael Karfunkel.

Michael Karfunkel

Good morning and thank you all for joining our fourth quarter 2015 earnings conference call. I would first like to briefly discuss our quarter's results. Operating earnings per share were $0.39 per share, 20% growth from the fourth quarter of 2014. Net written premium grew by 52% driven by organic growth from our P&C and A&H segments and the addition of the premiums from the QBE lender service and Assurant Health acquisitions.

Underwriting profitability was solid within a 94.2% combined ratio and both segments posted improved profitability versus the prior year. We're pleased to report a 13% ROE for the quarter and a 14.6% ROE for the full-year 2015. The 13% ROE reflects undeployed equity raised during 2015.

Now I'd like to touch on a few key strategic points. M&A is an important part of our strategy to grow enhanced shareholder value. During the last quarter of 2015, we closed on the QBE Lender-Placed Insurance and Assurant Health.

The QBE acquisition gives us a platform to write approximately $475 million of relatively low-loss ratio, home and auto business. We're working feverishly to expand the customer base for this business and hopefully we will have some significant announcement in the not-too-distant future. The Assurant Health transaction will provide us with meaningful scale in small group self-funded and supplemental business lines as well as an enhanced infrastructure that we can leverage for future growth.

In January, we announced agreements to acquire Century National Assurance Company and Standard Mutual Insurance Company. Century National is a California-based underwriter who writes homeowners, personal auto and commercial auto on the West Coast. The company has strong track records of growth, a diverse portfolio and complementary geographic footprint. This transaction helps our expansion of standard and preferred and business in homeowners and personal auto and enhances our ability to grow new products and improved customer retention.

Standard Mutual is an Illinois-based carrier that underwrites personal auto and homeowners in Illinois and Indiana. This transaction will provide us entry into these states for both homeowners and packaged products and adds to our expansion of standard and preferred lines. This is National General's first demutualization, but we see this as offering substantial opportunities for the future.

We expect to realize substantial benefits from transitioning both of these companies into our state-of-the-art system, technology system, advanced analytics, comprehensive reinsurance structure and shared services platform. We expect both transactions will be immediately accretive to earnings per share and close by the end of second quarter.

I would like now to briefly discuss the progress we have made integrating our recent transactions. Tower personal lines closed on September 2014 and the integration is mostly complete at this point. National General Lender Service and Assurant Health both closed on a October 1, 2015 and we expect both integration processes will be substantially completed during the third quarter of 2016.

Century National and Standard Mutual are expected to close by the end of the second quarter 2016 and we would expect integration to be completed near the end of 2016. We plan to continue to grow both organically and through acquisitions and our M&A pipeline remains robust. We will look to do deals that add to our franchise, value and are in line with a goal of generating a 15% ROE across market cycles.

Although the A&H segment did not perform up to our expectations for the quarter, our underlying results demonstrated continued growth and acceptable level of profitability and we believe we're taking the right steps to build a valuable A&H franchise for years to come. National Health Insurance Company, our domestic underwriting company, continues to post impressive growth with premiums up more than fivefold over a year ago. Both of our distribution subsidiaries Vela Point and HST are selling a significant amount of NHIC products.

While the quarter's results generated an underwriting loss of $4.2 million due to largely to a euro accident, reserve strengthening, full-year 2015 results produced nearly $5 million of underwriting income in the A&H segment, a vast improvement versus 2014 and a step in the right direction. We continue to expect that the A&H segment will make a substantial contribution to our overall results in 2016 and beyond.

With the strong steps we have taken over the past two years to build National General into a top-tier personalized franchise, I expect 2016 to be a breakout year. On behalf of National General team, I'd like to thank you all for your investment, trust and continued support. Now I'd like Mike Weiner, our CFO, to review our financial performance.

Michael Weiner

Thank you, Michael. Fourth quarter 2015 net income was $13.7 million versus $11.2 million in the fourth quarter of 2014. Operating earnings were $42.3 million versus $31.2 million in last year's quarter. Q4 2015 operating earnings exclude the following after-tax items, $17.5 million of non-cash impairment of goodwill, $5.3 million of amortization of intangible assets, $4.4 million of OTTI losses, $0.9 million of our FX losses, $0.4 million of net and realized investment gains and $0.1 million of equity losses on unconsolidated subsidiaries not related to our life-settlement entities or real estate investments.

Operating EPS was $0.39 compared to $0.33 in the prior year's quarter based on weighted-average diluted shares outstanding of $108.2 million as of December 31, 2015. Fourth quarter 2015 operating earnings included two unusual items, approximately $4 million or $0.02 per share of losses related to a string of tornadoes that hit in Dallas, Texas in late December, 2015.

A net negative impact of $7.5 million or $0.05 per share within our euro accident subsidiaries as reserve strengthening was partially offset by deferred purchase price adjustments. Shareholder's equity was $1.51 billion and fully diluted book value per share was $11.96 at December 31, 2015. A growth of 42.9% and 14.2%, respectively, from December 31, 2014.

Fourth quarter return on average common equity operating return was 13% while for the full year our 2015 operating ROE was 14.6%. Our company-wide operating results for the quarter are as follows, net written premium was $618.1 million, a growth of 52% from Q4 2014. Q4 2015 combined ratio was 94.2% in line with Q4 2014. I'll discuss the underlying results by segment in greater detail shortly.

Investment income was $20 million, up 25% to the increased size of our portfolio and growth in retained earnings. Q4 2015 included $0.6 million of realized net-investment losses and $6.8 million of OTTI losses. Cash and total investments grew to $2.7 billion as of December 31, 2015.

Other revenue was a loss of $0.5 million in the fourth quarter driven by an FX loss of $1.4 million related to currency fluctuations within our European subsidiaries. Interest expense was $8.2 million, up $4.5 million from Q4 2014 reflecting an increased amount of debt on our balance sheet. Preferred dividends were $4.1 million in 2014 compared to just $1 million in the prior year's quarter reflecting our preferred share issuance in 2015.

Equity earnings on unconsolidated subsidiaries was a gain of $1.7 million reflecting gains from both our investment and life settlement entities and real estate investments.

During the Q4 2015, mortality events outpaced premium payments and we expect this trend to continue going forward. We had two mortality events including two policies in Q4 2015. Q4 2015 also included pretax income of approximately $1.5 million related to our real estate investments which we invested in in early 2015.

The Q4 2015 effective tax rate was a negative 3%. Q4 2015 taxes included an $18.2 million benefit related to reduction in our DTL associated with our equalization reserves and our Luxembourg reinsurance company subsidiaries. Excluding this benefit, the Q4 and the fourth quarter non-cash impairment of goodwill of $17.5 million which is non-tax-deductible, the tax rate for the quarter would have been 53.5%.

For full-year 2015, we reported an effective tax rate of 15.9% including a Luxembourg DTL benefit of 26.7%. The annual 2015 tax rate was 29.6%, excluding the impact of the Luxembourg DTL benefit and the $17.5 million of non-cash impairment of goodwill. We continue to expect an annual tax rate between 28% and 30% range excluding the impact of the Luxembourg reinsurance company DTL benefit.

As of December 31, 2015, the DTL associated with our Luxembourg subsidiaries was $13.8 million while remaining goodwill balance, as associated with the Luxembourg subsidiaries, stood at a $8.4 million. The full-year 2015 benefit related to Luxembourg subsidiaries was $9.2 million including the benefit attributable to the deferred tax DTL reduction and the non-cash impairment of goodwill expense.

Now I'd like to give you some additional detail about our two operating subsidiaries. Within our property and casualty subsidiary, net premium grew 38% to $529 million driven by organic growth of approximately 5% and the addition of $125.7 million of net written premium from National General Lender Services acquisition which closed on October 1, 2015. Within the P&C segment, price is still fairly stable, increasing in the mid to single-digit range.

The loss-trend environment remains relatively benign. We have seen a moderate to better loss trend than the overall industry driven by improved severity which we attribute to the mix of business and claims initiatives. We continue to monitor the impact of lower gas prices on the economic conditions on our frequency trends which have increased in recent quarters. We note that our rate increases continue to outrun loss trends.

City commission income was a loss of $0.5 million compared to a gain of $48,000 in Q4 2014 reflecting a sliding scale adjustment related to the termination of our third-party quota share. Service and fee income grew 27% to $55.2 million driven by underlying premium growth. Acquisitions completed over the year including ARS, National General Lender Services and growth in fees earned in the attorney-in-facts and managed the reciprocal exchanges.

The P&C combined ratio was 92.4% compared to 92.8% in Q4 2014 excluding amortization of intangible assets with an improved loss ratio but a higher expense ratio. The loss ratio was 65% compared to 66.5% in Q4 2014 with most of the improvement driven prominently by mix shift within our book, most notably the addition of National General Lender Services as the lender-placed business tends to run at a lower loss ratio than our traditional P&C businesses.

We noted that fourth quarter 2015 results included approximately $4 million or 0.7 points of weather-related losses related to the tornadoes that hit in Dallas, Texas in late December. The expense ratio of 27.3% compared to 26.3%, it's a slight increase in expense ratio which is driven by business mix shift largely related to the addition of lender-placed business which typically runs at a slightly higher expense ratio than our traditional P&C businesses. Total P&C underwriting income was up $41.5 million in the fourth quarter excluding intangible assets and amortization, a 54% increase versus $27 million in the prior-year's quarter.

Now within our accident and health business, net earning written premium grew 300% to $89.2 million from $22.4 million last year's fourth quarter. The Assurant Health acquisition which closed on October 1, added $53.1 million of net written premium to the current quarter. Our domestic operations continue to deliver strong growth with $22.2 million in net written premium, at our U.S. underwriting subsidiaries compared to $9.8 million in the previous quarter as well as we continue to make steady progress transforming the business previously written on third-party carriers to our own paper.

Euro Accident also delivered strong growth, net written premium growth of $13.9 million from $12.6 million in the prior year's quarter. Service and fee income grew $44.1 million from $13.8 million in the prior year's quarter driven by the additional fee income from the Assurant Health and HST acquisitions and strong growth within our Vela Point and Tabs businesses. The A&H combined ratio was 104.2 versus 112.1 in Q4 2014 excluding non-cash amortization of intangibles.

The loss ratio was 92.7% versus 88.8% in the prior year's quarter while the expense ratio was 11.5% versus 23.3% in the prior-year's quarter. Fourth quarter 2015 A&H results include the net negative impact of $7.5 million dollars within our Euro Accident subsidiaries.

This includes an increase in IBR reserves reflecting a conversion to the National General reserving philosophy from the prior carrier's reserving philosophy for the business that was acquired in 2014 that is now written on National General papers. Partially offset by the benefit of the corresponding adjustment in the reduced deferred purchase price of the initial acquisition of Euro Accident.

The A&H segment reported underwriting loss of $4.2 million for Q4 2015 compared to an underwriting loss of $3.7 million in Q4 2014, both excluding the impact of intangible amortization. While we're disappointed with our A&H results for the quarter, we're pleased that the full-year 2015 A&H segment generated $4.6 million of underwriting income compared to an underwriting loss of $5.8 million in 2014, more than a $10 million favorable swing. And we believe we're the right track to building a profitable and growing A&H franchise.

I would now like to turn the call over to moderator and open up the floor for some questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question is coming from [indiscernible].

Unidentified Analyst

This is [indiscernible] from Morgan Stanley. Just wanted to get an understanding on the margin improvement outlook for the recent acquisitions that you have done. The integration like you mentioned are expected to end sometime this year, so how do you expect the combined ratio and the margins to look for these businesses?

Michael Karfunkel

We don't really give targeted -- we don't really have guidance for this. What I will say as follows, while the lender-placed business was very accretive to us in the quarter, we think of the business running in the high 80s low 90s in terms of the combined ratio. Obviously we're going to enter the year with that being higher than will ultimately end in the year as we go through a lot of transition related items, costs and whatnot that goes through the business. And that’s kind of the same thing on the assurance business. We bought both of these businesses that will need to be transitioned to our plant form and there will be a probable cost in doing that. But those were all factored into the purchase price which we paid for these businesses.

Unidentified Analyst

Okay. And for the Century National acquisition, I believe there might be some excess capital on that book. Do you plan to utilize that in terms of expanding the business or actually for more balance sheet flexibility for National General?

Michael Karfunkel

Both, because we pool our capital together. We're in the process of really identifying how best we're going to access that capital. So we tend to think of our businesses in a total capitalization setting. So we will be able to utilize the capital not just for the growth in their business but in growth in all of our businesses in totality. So we have that flexibility.

Unidentified Analyst

And finally, just on M&A, I wanted to understand where you are seeing more opportunities considering you mentioned you have a robust pipeline. Are you trying to grow the existing platforms or actually expand into new geographies and products?

Michael Weiner

Well basically, the opportunity is in the small both home and auto companies which are relatively $100 million $200 million which have a higher expense ratios. They don't have analytics. They don't have state-of-the-art platform, the cost of operation is very, very high and what we can do is purchase them very close to book or maybe sometimes below book and put them into our platform and make it instantly profitable.

Unidentified Analyst

And you anticipate any capital raises for future opportunities on M&A side?

Michael Weiner

Not for the foreseeable future. We hope to do acquisitions for our capital and retained earnings.

Operator

And the next question is coming from Randy Binner. Randy, please mention your affiliation and pose your question.

Randy Binner

Yes, sure. Randy Binner, FBR Capital Markets. I wanted to just pick up on the last question about the need to support any future M&A with capital. So I guess a more specific way of asking is there's a $140 million cash payment for Century and I believe that’s due in June, 2016. I would be curious to hear looking ahead with the benefit retained earnings in the first half of '16, what is the cash situation going to look like at the holding company after that $140 million is paid out and you hold a buffer for other holding company needs? Just trying to get an idea of how dry powder you would have in cash after you pay for Century?

Michael Karfunkel

Relatively de minimus. We raised about a $100 million of additional capital which we will deploy for that acquisition which we're holding at the holding company in October and that was senior debt that we issued. So we will pay for with that. We will have our normal cash generation ability at the holding company which is -- it is what it is it meets all of our working capital needs. I will note that also in the quarter, we modified our revolving line of credit, that line of credit has increased to $225 million plus we have about a $50 million accordion future on that. So we have that but keep in mind those monies are subscribable to buying quite frankly what I call goodwill. We have a substantial amount, particularly with the Century National deal of the surplus which we can use to support underwriting and to the extent we can use some of that to buy other investments or insurance companies, we'll do that and that's actually what we're doing on the mutual deal which we also announced.

Randy Binner

Okay. So thinking of premiums to surplus or premiums to capital in your case is that maybe a better proxy for thinking about future deal capacity?

Michael Karfunkel

Correct. But every deal is different. MGA deals is going to use holding company capital and insurance company is going to be able to leverage statutory capital where we have that ability. But the way I like people to think about our capital in totality is we have more than enough capital to support our organic growth in our businesses right as well as some acquisitions in the insurance companies. So new capital would really only come on if needed to support what I'll consider these goodwill type acquisitions where you need holding company. So our continued leverage ratio still stands for all of our business including our mix of business.

Randy Binner

So you can run -- I mean again I know it's a general rule of thumb, but you can run forward in 12 months net premiums are in the total GAAP capital of as high as $1.7 million is that right?

Michael Karfunkel

Yes. We’re talking fractions here. Absolutely $1.7 million to $1.9 million. It all relates to mix PML, there is a thousand things that go into that but that’s kind of a rule of thumb where we think our businesses. Don't forget we're getting into -- we’ve substantial cat reinsurance the provides that gives us the cushion there. But in terms of the tail of our businesses in totality that’s getting shorter. We’re seeing our A&H business growing at a faster pace than our other businesses and as with the LPI or lender-placed business comes on those are relatively short tail businesses without someone of the long tail liabilities which capital is many cases is required for.

Randy Binner

And then I would like to ask some questions about accident [ph] frequency. You mentioned that you're seeing elevated frequency and that's a pretty normal feature of the [indiscernible] lines space. So can you quantify the impact and if you're seeing in particular -- I assume these statements are all for your nonstandard book, like can you quantify that and maybe let us know if there's a particular geography where you are seeing the higher frequency?

Michael Karfunkel

Well I think we’ve seen it everywhere. Our frequency increases are coming in through both BI, PD and also collision [ph]. So we're seeing that on all that and we ascribe a large part of it to miles driven which is the greatest predictor of behavior and obviously with our nonstandard book they tend to react differently than more of a standard preferred book.

The good thing about our businesses in specific to National General is about a year ago we made a strategic decision to take quite a bit of rate ahead of it right and we’ve continued -- which is still -- there is a little of that still learning end but we've also taken additional rate measures starting at about the third quarter as the industry as a whole has done it, so we feel that all the rate that we're taking is still well above watch trends. But to give you a sense and just kind of looking at the sheet and I'm looking at first quarter over quarter looking at some of the fast-track data in the industry, you know, we're seeing frequency in the industry, we're seeing elevated in the 2% to 2.5% range. So we're lower than that.

Randy Binner

So you are saying your lower than 2% to 3% so you'd be below average from -- that’s year-over-year frequency delta, correct?

Michael Karfunkel

Correct, but keep in mind the reason we're below is that and I can't stress this enough, is that our diligent approach to doing very deep business reviews a year ago identified a slight in-take in frequency. We took actions at that point which put us ahead of that and we did the same thing that we did this summer and actually I think you'll see most of the industry did the same action we did in the summer. So that’s why we feel so good about it.

Randy Binner

And then the last quantification question there is -- so how far -- you’re getting rate of then 4% or 5% can I prefer that over 2% to 3% higher loss cost in auto is that right?

Michael Weiner

Our total is 5% to 6%. So then you just subtract 2%, 2.5% from that it's kind of how you answer the question.

Randy Binner

There are two other follow-ups I’ve, one you mentioned in your script that you had improved severity, I was wondering how you improve that or if it's just natural? And then you mentioned that your nonstandard book has greater sensitivity to miles driven, are you suggesting like your non-senior drivers are more elastic to gas prices and more likely to drive?

Michael Karfunkel

Yes. That’s certainly has been our experience and it has been the reciprocal experience when we go back and we back test all of our analysis I guess in the 2008, 2009 crisis when gas prices went up dramatically, we saw the complete opposite prior to this acquisition. So yes what we’re seeing that they have a much greater elasticity than that between nonstandard and standard preferred. It is what it is.

In addition to it, we tend to have a lot of premium in high mile driven places, North Carolina, California, places like that where people drive a lot, Texas, Louisiana. Going back to your other question in terms of severity in the industry, a few things we tend to have lower cost vehicles like the industry as a whole, we all talked about our standard book cover the cost of replacing the bumper has gone up dramatically because of the technology and that's how quickly that is moving. We tend to have a lower on older fleet of vehicles because of that but we have also done a lot of work which in terms of claims initiatives to get out there, and get out there quick and I think we're doing a real good job on that. We're measuring that quite aggressively. We're not an independent adjuster company. We have well over a thousand or so claims adjusters. So we like to do all of our adjudication ourselves and we use technology to do best of our advantage on that.

Operator

And the next question is coming from Matt Carletti. Matt, please mention your affiliation and pose your question.

Matt Carletti

Sure. Matt Carletti, JMP Securities. Just had a couple questions, a lot of might have been answered. One is on the acquired assurance business and it looks like I read the release right, it was $53 million of premiums in the quarter and going from memory, I think the last ballpark guidance given was that the annual benefit would be what about $160 million. I guess my question is, is it just coming in better-than-expected? Is there some seasonality to that book that makes Q4 just naturally a little stronger quarter and you still think $160 million is probably the right number?

Michael Karfunkel

No. I think it's a relatively excellent job in terms of retaining the book. And I really attribute the acquired assurance team to that business. It does tend to have a seasonal impact in the business, so I wouldn't advocate you just straight lining it out. But it is coming in stronger than we forecasted a little. But again, I caution about straight lining it out because of open enrollment and all that on the business but we feel really good about it. And I probably would think of the business more maybe of $180 million - $190 million range, but again it's hard to do.

Matt Carletti

And one other quick one. Just thinking about the evolving mix on the auto side, once we get say towards midyear, end of the year, specifically once we get the two recently announced acquisitions closed, how should we think about National General's auto book in terms of just rough split preferred standard, nonstandard?

Michael Weiner

40:60, so I would say that we're going to be shifting into the standard preferred space with these acquisitions. And again these acquisitions we’re targeting to close in the second half. But we're also having great traction in terms of -- I spoke about this a number of times, about our package business and that package business is all high-end and standard preferred. And we also have a recently launched our premier business which is our super high-end business. So all of those are growing at a much faster rate. So I think at the end of the day we're pretty proud of it being able to settle down for that 60:40 range and doing a lot more standard preferred. And keep in mind the standard preferred business has what I consider the most important thing, retention, retention, retention.

Matt Carletti

Right. How would that split be at this moment in time? More 50-50-ish?

Michael Weiner

75/25.

Operator

And the next question is coming from Adam Klauber. Adam please mention your affiliation and pose your question.

Adam Klauber

A couple different questions. The lender-placed business, you said the quarter was more profitable than probably normal because of light weather and is that is suggestive of low mid-80s?

Michael Karfunkel

Yes. I think it's a combination of some purchase price accounting in that business as well. As well as we had a relatively benign weather environment, particularly that in would be the southeast of the country, there was a lot of concentration exposure. But I wouldn't say that it's in the mid-80s I think it will be a little higher than that.

Adam Klauber

Okay. And as far as the premium flow there, was there an unearned premium package that flowed through during the quarter?

Michael Karfunkel

No, because the way this work is that we buy bought businesses, right. So from accounting perspective, this was a business combination accounting for both the assurance and the QBE deal as opposed to when we bought the tower business that was treated from an accounting perspective it's a technical term as more of a renewals rights [ph] deal because it was an affiliated transaction. So there wasn't a bit [indiscernible] unit transfer. So you just assume you merge the two businesses along and you'll earn in the business as it comes. It wasn’t a big uber transfer.

Adam Klauber

Okay. So then what drove the big jump in earned premium on a sequential basis?

Michael Karfunkel

It would be those acquisitions. We had 5% of the organic growth right and then we acquired those businesses. You literally take the business and you layered on top of your current balance sheet and then that business will earn in.

Adam Klauber

Okay. And then as far as the lender-placed, is there any seasonality to premiums there over that 2/3rds of what we saw during the fourth quarter, is that a good run rate?

Michael Weiner

I think that's a good run rate. The seasonality of the business, the triggering event of the business is much more related to general economic conditions, credit scores and that, so that's what we really look at. We think of it in terms of penetration rates in terms of where the markets are. It really isn't a seasonal impact into that. Potentially don't forget, it could go in terms of a little bit of impact when we have like on the nonstandard businesses when tax seasons and tax refund comes we tend to see a little bit benefit of that but it's not that dramatic. Again I will stress that general economic conditions and obviously inorganic growth in the business are the primary drivers of the that premium.

Adam Klauber

Okay. And to that point, are you seeing growth in that business? I mean it's obviously very early and you just have control, but does that would you say stable, growing or contracting right now?

Michael Karfunkel

We said that we're working feverishly and getting new clients and hopefully will help to grow this business very significantly. It's focus first.

Adam Klauber

Okay. And then as far as again [indiscernible] the integration costs, what are the majority of the integration cost going for in the early part of this?

Michael Karfunkel

Well we have to sell separate for the QBE, but at the end today we would hope to take out some very, very significant cost from the operations and put it on to our platform which is a lot, lot cheaper than the QBE platform.

Adam Klauber

So are you moving the main technology system onto your platform?

Michael Karfunkel

Yes.

Adam Klauber

Okay. And should that be done in '16 or is it going to take till 2017 to get that done?

Michael Karfunkel

No. We said it is going to be happening sometime in the third quarter.

Adam Klauber

And then on the A&H business, could you go into more detail why that business, an underwriting loss compared to -- it's closer to breakeven for the first nine months?

Michael Karfunkel

Well, I think there are two components of it. One was the reserves in your [indiscernible] putting that aside, listen we're now with the [indiscernible] acquisition particularly on small group stop loss [ph] at critical mass, right. We had a business of a $25 million, $30 million odd of stop loss and you’re just much more susceptible to large blips and large claims and when you have a premium base that way.

So there's great efficiency in terms of loss ratio on it and don't forget your ability to foresee how that business goes at short tail, that’s less than a year, all always comes to fruition in the fourth quarter because you are always looking at projections really up to the fourth quarter because people are pulling out of their reserve accounts. Again, I really think that the biggest driver of that is going to be the subscale that we had in the business. So that’s why we're so bullish about it as we go forward now that we have scale.

Adam Klauber

Okay. And I guess to that, the euro business, where you took the charge, have you been able to get enough rate to get that priced appropriately or do you still need put rate in 2016?

Michael Karfunkel

Well, the business is performing spectacularly we kind of strip that out, the business is performing in the high 80s. We have some normal rate that’s coming into that. That thing is really an adjustment to our reserving philosophy. They have a long term corporate disability [ph] business which has anemically low case reserving and it's just really a discussion with us [indiscernible] on how much to kind of put in the business. I kind of think about it as we just needed more capital up against the business, obviously it manifests itself in the higher IB&R. I don't foresee that coming back again. I think we’re more than adequately reserved for that particularly on this one small piece of our business in long term care.

Adam Klauber

Okay. And then on the insurance business, could you give us a rough break down by product type of what products are being sold?

Michael Karfunkel

Yes. I think of the business as a whole is probably 75% or 2/3rds of the premium in totality is going to be on the stop-loss business and again what we're doing these are smaller employer groups which we're providing stop-loss for utilizing third-party networks, the [indiscernible] network to do that and then the remaining piece of the business that we acquired was on the supplemental side. So that’s going to be critical illness, cancer, dental is a big component of it. So it's really 2/3rds, 1/3rds is the split.

Adam Klauber

Okay. And as we think about the ramp up of that business throughout next year, I take it you are also doing integration, I guess are you also putting that on your system? And will profit ramp up throughout the year also as you get critical masses as you had said?

Michael Karfunkel

Yes. the same exact thing in terms of, when we do these acquisitions we have TSAs, we basically pay the seller to maintain a system while we get off of that system, right. So in the process of doing that just like we've done in all of our transactions, you have costs associated with your business. You don't fully utilize your platform until you’re fully off of that. And that we anticipate happening this year. And again, it's bumpy because in an ideal situation you like to be able to capitalize all of your internal cost as you dial down where you could some of that cost associated with the transaction. But sometimes you just can't do that. But again Michael alluded to it earlier on both of these deals we look to be fully transition within this year.

Adam Klauber

Okay. And then also sticking with A&H service and fee income jumped up to $44 million. But you, I guess going to what that increase was ?

Michael Karfunkel

Yes. It's really combination of a few things. One is that we collect fees on the stop loss business which is great, we also have the HST business coming in and we’ve had good sales in terms of VelaPoint during open enrollment, they collect fees on behalf of ourselves, captive carriers as well as third-party carriers. Don’t forget we’re also in the distribution business as well as underwriting business.

Adam Klauber

So that normally should be higher in the fourth quarter than--

Michael Karfunkel

Yes. I think so. I think that’s typically that, but again we've modified some of the accounting on some of how that earns in . So we're trying -- some of the accounting doesn’t allow us, it's complicated we will follow-up with you offline. Some of the accounting doesn’t allow us to realize at all [indiscernible] where the carrier race [ph] is in consolidation. So Dean will follow-up with you off-line on that.

Adam Klauber

Okay. And what's the margin look like on the nonstop loss fee business margin profile?

Michael Karfunkel

On the supplemental businesses ? It runs great. You know I think it runs probably about 90%, about 10 points.

Operator

Thank you. And there are currently no more questions in the queue.

Dean Evans

Thank you very much. That’s all we have.

Operator

Thank you ladies and gentlemen . This does conclude today's conference call. You make disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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