Tower Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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 |  About: Tower Group, Inc. (TWGP)
by: SA Transcripts

Operator

Good morning, ladies and gentlemen. My name is Tyrone, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Tower Group's Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Bill Hitselberger, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

William E. Hitselberger

Thank you, Tyrone, and good morning, everyone. Before I turn the call over to Tower Group President and CEO, Michael Lee, I would like to remind you that some of the statements that will be presented during this call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in these forward-looking statements. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time.

As we noted in our earnings release, in October 2010, the Financial Accounting Standards Board issued a new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. We adopted this guidance effective January 1, 2011, and therefore adjusted our previously issued financial information. Adoption of this guidance reduced the carrying value of our deferred acquisition costs as of December 31, 2010, by $78.7 million, and Tower Group Inc.'s stockholders' equity had $42.6 million. Diluted operating earnings per share for the fourth quarter 2010 and for the year ended December 31, 2010, were reduced by $0.04 and $0.31 per share respectively, as a result of this change in accounting.

As a reminder, Michael and I will be speaking today and referencing the slideshow that is available on our website, www.twrgrp.com under the Investor section. Also, a replay of this call will be on the Tower website immediately following the call. Now I'd like to turn the call over to Michael.

Michael H. Lee

Thank you, Bill, and good morning, everyone. I'd like to thank all of you for joining us on this conference call to discuss our fourth quarter and 2011 operating results. Let me start on Page 2 by giving everyone a brief snapshot of our fourth quarter and 2011 results. We had an operating income of $25 million during the fourth quarter, which was in line with our expectations. We also began to see some positive market trends in the fourth quarter, especially for workers' compensation, homeowners and coastal commercial property business. We expect these trends to continue into 2012. For the year, we were pleased with our operating results.

Excluding the weather-related losses, we generated a combined ratio of 95.2% and an ROE of 9.8%. We were pleased with our accomplishments, including the successful implementation of the organic growth initiative. We were also pleased with the progress that we made with key technology projects and the integration of our acquisitions.

As shown on Page 3, our operating income for the fourth quarter was $25 million or $0.63 per diluted share compared to the operating income of $33.3 million in the same quarter of last year or $0.80 per diluted share. During the quarter, we had a $15 million favorable development from the third quarter Hurricane Irene losses. We strengthened our 2011 action year loss reserves by $15 million in the fourth quarter, consistent with our goal to maintain a more conservative loss ratio selection for the current and future action year results. We also experienced a $7 million loss from the Halloween winter storms in the fourth quarter. For the year, our operating income and earnings per share were $56 million and $1.37, respectively, compared with $97.2 million and $2.23 per share in 2010. Excluding the storm losses, our operating income and earnings per share were $104.3 million and $2.55, respectively, a slight improvement on an EPS basis from 2010. Our book value decreased by 1% to $1.034 billion from $1.045 billion due to our earnings being offset by share repurchases of $64.6 million since the fourth quarter of last year, and us making a $28 million in dividend payments. Even after the unprecedented storm losses, the significant increase in our annual dividend payment to $0.75 per share, and adjustment to our book value from adjusting our deferred acquisition costs, our book value per share increased by 5% to $26.37 in the fourth quarter from $25.19 during the same period last year.

As shown on Page 4, we continue to see great strength in our core business especially in terms of profitable growth. During the quarter, we generated $434 million in gross premiums written and managed after taking into account of $23 million in premium reduction resulting from a commutation of a reinsurance treaty that we entered into during the third quarter. Excluding this premium reduction, we increased our gross premiums written and managed by 6% over the same period last year as a result of organic growth. For the year, we increased our gross premiums written and managed by 21% to $1.8 billion from $1.5 billion last year, driven partly from the continued growth from the OneBeacon Personal Lines acquisition in 2009, as well as from organic growth. Our combined ratio excluding the reciprocals was 97.3% for the fourth quarter and 100.8% for the year, which compared favorably with the industry combined ratio for 2011, which is projected to be 107.5%. Our ROE was 9.6% for the quarter and 5.4% for the year. Excluding the storm losses, our ROE was 9.8% for the year, which is slightly below our near-term target of 10% to 12%. We believe we will be close to this near-term target in 2012 and within this range the following year as Bill will further explain later on this presentation.

So in summary, given the unusual weather-related losses, 2 of which represent the single largest storm losses in our 21-year history, we're pleased with our 2011 operating results, especially when comparing them with other insurance companies in our industry writing property business. Page 5 provides a more detailed explanation of our organic growth initiative, which we implemented in the third quarter of last year. Through this initiative, we're focused on improving our capabilities in 3 areas: our products, people and functions. With respect to products, we will focus on expanding our line of business offering. We have expanded into surety line of business this quarter through our relationship with a small insurance company with a managing general agency that focuses on this line of business. We also recently established a commercial property department to focus on underwriting, commercial property business on a stand-alone basis rather than as part of our package offering. In addition, we're in the process of expanding our products across different industry and customer groups, as well as leveraging our existing products across the country. We're also seeking to improve our ability to generate organic growth by transforming our existing business units into autonomous self-sufficient business units led by entrepreneurial managers tasked with the goal of expanding our products across the country. We recently hired a head of personal lines to expand our personal lines business outside the Northeast, and to expand into package and high-value homes market. We also created 2 business units, Customized Solutions and assumed reinsurance, that produced $20 million in gross premiums in the fourth quarter and $158 million in 2011. Finally, we have worked diligently to improve our internal capability to identify and develop new products and to expand into new markets. To facilitate this, we have established a department to research, analyze and identify growth opportunities across existing and new product lines and customer groups. We have also strengthened our ability to enhance existing products, develop new products and acquire top underwriting talent. We believe this initiative will enable us to develop a pipeline of organic growth opportunities to supplement our acquisitions and investment strategy, which will continue but in a more selective and focused manner.

Page 6 outlines our operating results for each of our segments. As I mentioned at the beginning of the presentation, we began to see positive market trends during the fourth quarter of 2011 across all business segments. We also benefited from the implementation of the organic growth initiative. Our overall commercial business grew significantly this quarter, mainly driven by the growth in the 2 newly created business units. This segment also showed strength as reflected by 78% retention rate and positive renewal change of 2.2% with a combined ratio of 95.3%. In the commercial general business units, we're seeing signs of stabilization with modest improvement in our middle-market commercial business. We plan to expand our small workers' compensation business in 2012 and began to see meaningful growth opportunities in this business during the fourth quarter. We're also planning to expand our small package business outside the Northeast as we complete our web-based small business technology platform in the latter half of this year. In the Commercial Specialty units, the 2 newly created business units, Customized Solutions and Assumed Reinsurance generated $158 million in gross premiums written during the year and generated 6% organic growth in the fourth quarter, excluding the reduction in premium resulting from the commutation of one reinsurance treaty that I mentioned previously.

In 2012 we will continue to refocus on writing Specialty Business through the national program business and Customized Solutions business units. We will also seek to make strategic investments in managing general agencies with profitable specialty business. We're willing to assume risk on their business. We're also focusing on writing excess and surplus homeowners business and coastal property business to take advantage of the significant price increases that we're seeing in those niche markets. Finally, through our Assumed Reinsurance business unit, our risk-sharing partners are operating in markets that are seeing anywhere between 5% to 10% pricing increases. The growth from our personal lines business in the fourth quarter was essentially flat from the prior period, due primarily to the continued re-underwriting of the personal auto business and homeowners business that we decided to cancel after the OneBeacon Personal Lines acquisition. Our personal lines business segment overall had a 91% retention rate and a positive renewal change of 2.5%, with a combined ratio of 104.7%, which was elevated by 5.1 points due to the $7 million loss from the Halloween winter storms that I mentioned at the beginning of the presentation.

Finally, in our insurance segment, we generated approximately $8 million, our fourth quarter 2011 fee income from managing the reciprocals. We recently expanded the licensing of the reciprocal insurance companies and plan to write additional business in these reciprocals to increase our fee income in 2012. Now I will turn the call over to Bill for him to provide additional financial highlights. Bill?

William E. Hitselberger

Thanks, Michael. Exhibit 7 details our loss ratios for the year-to-date period ended December 31, 2011. While we are required to present the loss ratios, including the reciprocal business in our consolidated report, on this exhibit we will analyze the loss ratios excluding the reciprocal changes as these ratios are more relevant for our operating results. In the fourth quarter, we experienced favorable development on our Hurricane Irene claims and our loss for this event was reduced by $15 million. We opted to strengthen our current accident year incurred loss reserves by $15 million in the fourth quarter. Prior year reserve development was very modestly favorable in the fourth quarter, a benefit of $300,000. We also incurred $7 million in winter storm losses in the fourth quarter from a snowstorm occurring on East Coast in the last week of October. For the year, we experienced 5.3 points of loss ratio from Irene, the first quarter winter storms, second quarter tornado losses and from the fourth quarter winter storm compared to 1.4 points of catastrophe losses in 2010. For the year, we had 1.2 points of adverse development, all of which occurred in the third quarter 2011, and which was primarily attributable to development in certain programs that we ceased writing in 2010 and 2011. Excluding the storm events and adverse development, our loss ratio of 61.1% is moderately higher than the 59% we recorded in 2010. We experienced some improvement in the underlying loss ratio in 2011 compared to 2010 due to a shift in business mix, as assumed reinsurance at a higher proportion of our book in 2011 versus 2010, and private passenger auto a lesser percentage. This mix improvement was offset by our decision to strengthen the current accident year reserves in our core book in the fourth quarter.

Exhibit 8 of the presentation details our expense ratio for the stock companies for the fourth quarter and year-to-date 2011 as compared to the same periods in 2010. Underwriting expenses were $146.5 million and $588.1 million for the quarter and year ended December 31, 2011, increases of 3% and 16% from the same periods in 2010, respectively, while operating expenses for the stock companies were $126.2 million and $503.9 million for the quarter and year ended December 31, 2011, respectively, each an increase of 9% from the same period in 2010. The main driver of the aggregate increases were costs associated with the acquisition of OneBeacon Personal Lines. In addition, the company has incurred cost during 2011 under the transition services agreement with OneBeacon. These transition costs are for moving the personal lines technology platform from mainframe environment to Tower server environment. As Michael mentioned, we are making good progress on this initiative. The commission portion of the underwriting expense ratio net of ceding commission we receive was 17.6% and 17.9% for the quarter and year ended December 31, 2011, respectively, slightly above the 15.7% and 17.7% for the same periods in 2010, as our shift into assumed reinsurance has offset the increases in business flow from retail agents. Our board's bureaus and taxes are flat for the year. We expect to see commission expense increase again in 2012 as we will have a full year impact of the increase in the assumed reinsurance business. The other underwriting expense component of the ratio net of fees was 10.9% and 11.6% for the fourth quarter and year ended December 31, 2011, respectively, improved from the same periods in 2010, largely attributable to economies of scale from earned premium growth in 2011. The organic growth initiatives that Michael mentioned earlier should lead to increased scale savings in 2012, and we expect to see a reduction in our other underwriting expense ratio into 2012 from the increase in scale, as the rate of organic growth is significantly outpacing the rate of growth in other underwriting expenses. This improvement should become more apparent in the second half of the year, as we complete several technology initiatives. At year end, our invested asset base was $2.4 billion, excluding the reciprocal exchange investments, up about $100 million from the year-ago period. Operating cash flows for the year were lower in 2011 than in 2010, the result of the severe weather losses and also the sum funded reinsurance arrangements that we initiated in 2011. We used $92 million in cash flow to fund common share repurchases and pay dividends in 2011 so investment growth has been somewhat tempered. Yields in our portfolio have been flat at between 4.6% and 4.8% since year-end 2010. We have seen of flattening of tax-adjusted book yields since year end, which is the result of deployment of invested assets into higher yielding corporate securities. We have also been allocating funds into dividend-paying equity securities, which we believe will improve our tax equivalent portfolio yield. We have made some alternative investments in real estate and other private ventures in 2011 and expect that these investments will help our yield in 2012. Our consolidated balance sheet now contains the caption Other Invested Assets, which is where we are classifying our alternative investments. We are continuing to look at real estate and private investment as alternative asset classes to enhance our investment returns. Despite flattening tax equivalent yields, our net investment income increased by 20% from year-end 2010. The actions we are taking in asset classes other than fixed maturities have allowed us to continue our trend of growth in investment income.

In summary, after declining yields for the past few years due to the deployment of significant amount of new money at low rates, we are beginning to see stabilizing fixed income yields in an upward movement in our total portfolio investment yield due to our revised asset allocations and alternative investment strategy. On Exhibit 10, I will conclude by summarizing our 2011 results and providing some guidance as to what we expect to see in 2012 and trends that we believe will occur in our business beyond 2012. In 2011, we experienced another year of significant growth in our business. The full year impact of the OneBeacon Personal Lines acquisition was the main reason for this, but we are very encouraged by our organic growth in 2011 as well. We expect to see continued strong organic growth of between 5% to 10% in 2012, and we believe that we can improve upon this beyond 2012 with continued focus on organic growth, coupled with selective acquisitions and business flow generated from some of our strategic investments. We expect to see our loss ratio be between 62% and 63% in 2012, with a potential to see lower loss ratios beyond 2012 from anticipated price increases. We expect to see a modest uptick in our expense ratio in 2012, as increased commission costs will offset scale-driven expense savings. We believe that this trend will reverse beyond 2012, and we then expect to see lower expense ratios being driven by scale savings in our underwriting expenses. Our combined ratio should be between 95.5% and 97.5% in 2012, absent significant catastrophe activity.

Beyond 2012, we believe that scale savings, as well as lower technology costs associated with the completion of some major initiatives should lead to a reduced combined ratio. We expect to see investment income rise in 2012 due to an increase in our investment base. Beyond 2012, we expect a continued flattening of interest rates, but this should be offset by increases in investable assets. We expect to be below our 10% return target in the first half of 2012, but expect that we should see an improvement in our earnings in the second half of this year and beyond 2012. And we expect to be solidly in the 10% to 12% ROE range by next year. So with that, I'll open the lines for any questions. And Tyrone, if you could, please open up the lines

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Randy Binner of FBR.

Randy Binner - FBR Capital Markets & Co., Research Division

Just focusing on the growth plans. I guess my impression was, and I think it still is, that there's going to be more commercial lines than personal lines focus going forward because of better pricing. So I mean if you could elaborate on that and then maybe size the homeowners and the coastal and the E&S opportunity relative to commercial opportunities in 2012?

Michael H. Lee

As far as growth, I mean, I think we did a lot last year to think about how we can grow organically and put a what I would call a comprehensive strategy to generate organic growth. That involved looking at our internal functions, improving those functions especially in terms of research, as well as product development. We also are looking to hire talented underwriting managers to handle -- to manage these various units that we are transforming into self-sufficient business units. So we did a lot, and I think what you saw in 2011 was a by-product of the efforts that we've made to improve organic growth. So in terms of where we're looking to grow, I think we follow the market and the opportunities that we're seeing. Right now, property rates are up significantly, and we're seeing a lot of opportunities, especially in the property area. We're seeing significant opportunities, especially in various coastal areas where the capacity is quite constrained. So what we have done in those states is to release some capacity that we have since we're concentrated in the Northeast unlike other companies. We have capacity in various coastal states, so what we're doing is focusing on these homeowners' lines of business where we can write them on an E&S basis, and we feel that we could be opportunistic and be able to deploy our capacity to take advantage of the pricing increases. We're also seeing similar trends in the commercial property area. So what we're doing next year is really allocating our capital based on what we're seeing in the marketplace. But over long term, we're still focused on building our diversified business platform this year. We're also looking to expand our workers comp business across the country. We have a 50-state platform, automated platform, that enables us to leverage that product across the country. We're also completing our personal lines technology project that will also allow us to expand our products -- homeowners and personal auto products across the country outside the Northeast, and then we're entering into new areas like high-valued homes and the packaged market. So we just recently hired someone to head up that unit, so we expect that business unit to see some meaningful growth. And then later on, we have our automated small business platform coming out, and that will also enable us to expand outside the Northeast. So in addition to that, we're also seeing growth in our assumed reinsurance segment. So overall, I think what we're trying to do is: one, deploy our capacity in markets where we're seeing pricing increases, and that's in the homeowners as well as property market. Secondly, over in a medium- and long-term timeframe, we're looking to complete our automation project, which would allow us to expand and leverage our existing product lines outside the Northeast. We couldn't do that before, but with all these automation projects coming to a close, we now will be able to leverage our existing products across the country. So we have a pretty good pipeline of growth opportunities. Of course, we're continuing to look at acquisitions, as well as make strategic investments in managing general agencies that focus -- that write specialty business. So we think we have a very comprehensive approach to growth. And while we have budgeted about 5% to 10% organic growth, that excludes acquisitions, and if we were to continue to make acquisition, I think we will be able to continue the type of growth that we have seen historically.

Randy Binner - FBR Capital Markets & Co., Research Division

Great. Just a couple of quick follow-ups. One is, I guess, on the coastal E&S, is that Florida or is that more like Virginia and the Carolinas? It'll be helpful to know where that is.

Michael H. Lee

I think it's pretty much across the country. We're in Texas, somewhat in Florida, and we're looking at some opportunities in Hawaii. But what we're trying to do there is to make sure that we have a separate reinsurance program. As you know, in the Northeast, we have a higher retention. In these states, we're looking at a much lower retention, and the rates are such that we can afford to lower our reinsurance retention. So on a risk-adjusted basis, with the pricing increases that we're seeing, we think we could minimize our downside and take advantage of what we believe is a very strong market with strong growth potentials. And then I don't think we're looking at making a necessarily long-term commitment as much as making an opportunistic play, that's how come we're going into these states on an E&S basis.

Operator

The next question is from Bob Farnam of KBW.

Robert Farnam - Keefe, Bruyette, & Woods, Inc., Research Division

The commutation of the assumed arrangements treaty, what was the story behind that, and will that impact the rest of 2012 or is that just a one-time impact on the first quarter?

Michael H. Lee

We're participating -- we were thinking about participating with 3 syndicates. And we decided to cut back to 2 Lloyd's syndicates, and we made that decision. And since we weren't going to continue in 2012, we've decided to commute that one particular reinsurance treaty, so it will not affect our assumed reinsurance business plan because we were only looking to support 2 Lloyd's syndicates to begin with.

Robert Farnam - Keefe, Bruyette, & Woods, Inc., Research Division

And the strengthening of the current year reserves, did that go into any lines in particular?

Michael H. Lee

No, no, I want to clarify this point because we didn't strengthen -- I think, just we didn't maybe use the right words or there's not the right words to distinguish between establishing the loss ratio for the current year as opposed to strengthening prior year -- prior action years. What we did was we looked at 2011 reserves or loss ratio since this is a new year, you wouldn't be necessarily looking at reserves as much as looking to select a loss ratio for the current year. And what we did was we decided to select a loss ratio that was conservative. And the reason for that is, since 2010, we'd been increasing our loss pick. And as Bill mentioned, we're at a point where we're going to probably level off at 62% to 63%. And consistent with that, we increased a loss pick, and quite frankly, the opportunity from the favorable development that we saw from Irene provide us with the addition funds to be able to increase our loss pick rather than putting that through our earnings. So we also had a $7 million storm losses, so our quarter was impacted by that. So not only did we have a favorable $15 million development from Irene, we also had offsetting that $7 million from the Halloween storm losses. And on top of that, we decided to increase our loss pick for 2011. So where we are is that we feel very confident about our reserves, our prior-year reserves. And I think to ensure that we don't have any adverse development going forward, you're going to see us pick up the loss ratio selection to about 62% to 63%. And our plan for 2012 does also call for us to select a loss ratio on that conservative basis. And as long as we continue to that, we think that we're about 2, 3 points higher than what we have seen in the prior action years, and that we believe will enable us to transition through the market cycle and ensure that some of the action years in the past where we saw some pricing erosion were not going to have adverse development for those years. So it was a preventative measure to ensure that we don't have any prior accident year reserve development. But I highlight the fact that it was a loss selection decision, as opposed to prior action year loss reserve strengthening decision. So I just want to make that point clear.

Robert Farnam - Keefe, Bruyette, & Woods, Inc., Research Division

Yes, got that. And last question from me, the lower tax rate, it looks like there was a true up and maybe some other things in there. What was going on there, and maybe what should we expect from the tax rate going forward?

William E. Hitselberger

Yes, Bob, it's Bill. Lower tax rate in the fourth quarter is really -- there's 2 elements to it. A very significant piece of the tax rate change was the result of our reciprocal of changes. We actually reversed a valuation allowance, so we tried to spike out the tax rates between the reciprocals and the stock companies. That said, the stock company's fourth quarter tax rate was lower than we would expect it to be. It was about -- for operating earnings, it was about at 19%. And then for our net income, it was 21%. We expect, in 2012, the tax rate for stock companies to be about 30%. And the driver of that versus the statutory rate is predominantly the tax advantage investments that we have.

Operator

[Operator Instructions] The next question is from Adam Klauber of William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

What level price increases are you getting in the homeowners and commercial property? And have those been getting -- accelerating in the last couple of months?

Michael H. Lee

This is Michael. We're not -- we're currently not in those states, so we can't compare that with our renewal book. But we are seeing, for the programs that we're participating, we're seeing anywhere between 10% to 20% in some of those states. So I think if you read the press, you'll see that many large homeowners writers are seeing that type of rate increases. And I think that's driven by the CAT losses, as well as the RMS model 11.0 change that we saw. So I think when RMS made its version change earlier last year, we didn't really appreciate the full ramification associated with that change, but now we're really seeing that. The full impact of that change, especially in certain areas where capacity is constrained. So we're taking advantage of that, and most of the opportunities that we're seeing in the fourth quarter really came from those types of programs associated with homeowners, as well as commercial property business.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. How big is the assumed reinsurance book? And do you think you'll see the type of growth in 2012 that we saw in 2011 in that business?

Michael H. Lee

No, I don't think so. I think we're happy with where we are. I think that segment accomplished a purpose that we had when we entered that business. What we wanted to do was to achieve more risk-adjusted returns by introducing some element of volatility but on a controlled basis. And what I think that assumed reinsurance book is doing for us is to give us the ability to reduce our reinsurance costs -- direct reinsurance costs by assuming non-core related business from other parts of the world. And that in effect is lowering our reinsurance costs. And not only that, I think what it's doing is also offsetting our high-frequency, low-severity business. And we just want to take that approach on a modest basis. And what we have accomplished in 2011 and going into 2012, the volume that we will see pretty much accomplishes that objective. So beyond that, we'll be trying to increase our business in other areas, in lines of business that we've been historically in, more primary business. And for that reason, as Bill mentioned, we're going to see the commission rate decrease as we increase more of the business from retail and wholesale agents, and that business has a lower acquisition cost associated with that. So I think what you saw in 2011 and what you'll see in 2012 is pretty much the upper end of what we wanted to write as far as that assumed reinsurance business was concerned.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. As far as the auto business, did that grow in 2011? What are your expectations for auto in 2012? Also, what type of rates would you expect in the auto book of business?

Michael H. Lee

Auto is -- we're writing that through the reciprocal insurance companies. We have about I would say a little over $100 million of that business out of about $1.8 billion in total premium writing. So it's a small part of our book. But combined with what we're writing in the reciprocal insurance companies, it does give us a platform, and we were looking for that platform. And what we want to do is use that platform to write package and high-valued homes business, which requires us to provide auto coverage. So we will continue to write monoline auto business in a limited way, but the underlying purpose for getting into that business is to be able to offer auto coverage in the context of our package offering. So I don't think you're going to see us expand that line of business except to the extent that it's necessary to be able to offer personal package policies.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. And then when we take a look at 2012, what are you thinking about your reinsurance costs? Are they going to be -- do you think they're going to be up?

Michael H. Lee

No, I don't think so. It may be up slightly, but I don't think so, and the reason for that is that we're utilizing the reciprocal insurance companies to write additional homeowners' business in the Northeast. And I think you're going to continue to see us utilize and leverage that -- those reciprocals to provide additional capacity for us in the Northeast. And for that reason, I would say our homeowners business is probably trending. It's going sideways, and our exposure is probably -- will decrease as a result of our planned use of the reciprocal insurance companies.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay, one other question. On acquisitions, it clearly sounds like there's better organic opportunity today than they were 12 or 24 months ago. But on acquisitions, would you be more interested on the commercial side or on the Personal Lines side going forward?

Michael H. Lee

We talked about acquisitions, and since we started the organic growth, we discussed how acquisition strategy is going to be altered as a result of our focus on organic growth. You have to remember after 2009 when we acquired CastlePoint, we had significant amount of capital to deploy, and it made sense that at the time to make use of acquisitions to be able to deploy that capital. We've completed our -- that strategy after we acquired CastlePoint. For that reason, now we're focused on increasing our margins on our business. We're looking at driving organic growth, but we're also looking on a selective basis and more focused basis on acquisitions, mainly to fulfill our strategic objectives and to go into lines of business that we want to get into. And then I would say specialty is an area that we're looking at, but I think we -- and also, as you know, we announced that we'd be looking to enter the Lloyd's market, which we did by supporting a lot of the Lloyd's syndicates, but we're definitely looking at that as well. So going forward, I think what you can expect is for us to be more selective and focused and use acquisitions as a way to enter a specific area that we feel that we can't enter on an organic basis.

Operator

Thank you. This ends the Q&A portion of today's conference. I'd like to turn the call over to management for any closing remarks.

Michael H. Lee

Thank you, Tyrone, and thank you all for joining this call. Just to sum it up, excluding the storm losses, we were very pleased with our operating results for 2011, and the positive trends that emerged from that year that we believe will continue into 2012. So thank you, everyone, for joining this call, and we look forward to getting together with you again next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may disconnect, and have a wonderful day.

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