Tower Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 7.12 | About: Tower Group, (TWGP)

Tower Group (NASDAQ:TWGP)

Q2 2012 Earnings Call

August 07, 2012 9:00 am ET


William E. Hitselberger - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Michael H. Lee - Chairman, Chief Executive Officer and President


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

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


Good morning, ladies and gentlemen, my name is Tyrone, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Tower Group's Second Quarter 2012 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.

William E. Hitselberger

Thank you, Tyrone, and good morning, everyone. As a reminder, Michael and I will be speaking today and referencing a slide show that is available on our website at, under the Investor section. Also, a replay of this call will be on the Tower website immediately following the call. Finally, unless otherwise noted, all ratios and results exclude the underwriting results of reciprocal businesses.

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.

With that, 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 second quarter 2012 operating results and other strategic initiatives.

As previously discussed during our call on Tuesday, July 30, we preannounced an after-tax reserves strengthening of $42 million and its effect on our earnings guidance for this quarter and the full year 2012. Consistent with that call, and as stated in yesterday's press release, we had a net loss of $15.1 million or $0.39 per diluted share in the second quarter, primarily due to this reserve charge. We also had minimal severe weather-related losses of $3.3 million after-tax during the quarter. Excluding this reserve charge and severe weather-related losses, our operating results were very strong for the quarter. Furthermore, due to our organic growth initiatives and improving market conditions, we had a strong 15% top line growth during the quarter.

Finally, as previously announced, we executed an agreement with Canopius Group to merge Tower with Canopius' Bermuda subsidiary, Canopius Holdings Bermuda limited, to create a global specialty insurance company with greater diversification and profitability. Through the merger, we will create an efficient international holding company structure through which we will be able to access our 3-core insurance markets: the U.S., Bermuda and Lloyd's. We believe that the merger will allow Tower to achieve its ROE target of 13% to 15% within 18 months of the finalization of the agreement.

As shown on Page 4, our operating loss for the second quarter was $15.5 million or $0.39 per diluted share compared to the operating income of $26 million in the same quarter of last year or $0.63 per diluted share. The second quarter of 2012 results include an after-tax charge of $42.3 million associated with prior year's reserve strengthening and also reflect $3.3 million or $0.08 per share in an after-tax severe weather-related losses.

Operating income in the second quarter of 2011 was impacted by favorable development of $0.5 million or $0.01 per share and by severe weather losses of $4.6 million or $0.11 per share. Excluding the reserve strengthening and storm losses, operating earnings would have been $30.1 million or $0.70 per share in the second quarter of 2012 compared to $30.3 million or $0.73 per share in the second quarter of 2011.

Our stockholders' equity decreased slightly to $1.018 billion from $1.073 billion after taking into account $95 million of share repurchases and dividend payments since the second quarter of last year. Our book value per share increased slightly to $26.53 per share at June 30, 2012, from $26.01 per share at June 30, 2011.

As shown on Page 5, our combined ratio excluding the reciprocals during the quarter was 110.9% compared to 95.4% for the same period last year. Reserve strengthening added 15.6 points to our loss ratio in the second quarter of 2012 compared to the positive reserve development of 0.1 point in the second quarter of 2011. Excluding the effect of reserve strengthening and storm losses, the combined ratio would've been 94.1% in the second quarter of this year compared to 93.4% in the second quarter of last year.

Our ROE was negative, 5.9% for the quarter, compared to 9.9% in the second quarter of 2011. Second quarter of 2012 ROE was affected by 16.2 percentage points of reserve strengthening and by 1.3 percentage points of storm losses. Excluding the effect of reserve strengthening and storm losses, ROE would've been 11.6% in the second quarter of 2012. We expect our ROE to gradually improve throughout the remainder of this year and next year to bring us to our 10% to 12% ROE target. If we are able to successfully complete the Canopius transaction, we expect our ROE to be in the 13% to 15% range 18 months from the date the transaction closes.

Turning to Page 6. Due to the organic growth initiative that we implemented last year, our premiums written and managed for this quarter increased by 14.9% to $538 million compared to the same period last year. Most of this growth was driven by the maturation of the assumed reinsurance business that we began writing last year. During the quarter, we continue to make progress with our organic growth initiative that we implemented last year. We continue to expand our products into commercial property, inland marine, surety and personal package policies.

We're also making significant progress in rebuilding our businesses into smaller, more entrepreneurial franchises with a focus on higher-margin specialty business. While assumed reinsurance growth -- most of the growth in the second quarter, their personalized business unit grew by 10% this quarter compared to the same period last year. We also expect other newly created business units, such as customized solutions and national commercial property units to drive our growth in the near future.

In addition, we expect our growth rate to moderate in the second half of the year due to the significant reduction in national program business, positioned in competitive market segments that will offset the growth in higher-margin property and specialty businesses. Through our newly revamped marketing department, we continue to make progress in conducting research and analysis into new markets to develop a robust pipeline of organic growth opportunities.

As part of our 2013 business plan, we're currently working on several new organic growth opportunities in profitable specialty markets. Through our organic growth initiative, we will continue to allocate capital through higher-margin specialty business and withdraw from competitive markets. Our underwriting actions that we took in the second quarter are consistent with this strategy.

Page 7 outlines our operating results for each of our segments. As I mentioned during our previous earnings calls, we continue to see improving market conditions across all lines of business but -- particularly in property lines of business in the U.S., and internationally, through our strategic underwriting partners. Through our organic growth initiative that we implemented last year, we have shifted our capital from competitive markets and reallocated it to more profitable markets.

Consistent with our strategy in the general commercial area, we have been focusing on small commercial business and taking underwriting actions in the middle market segment. Due to the improved market conditions, we've been able to achieve rate increases, especially in the workers' compensation and commercial package lines of businesses.

In the Commercial Specialty area, we have completed most of our corrective action plan that we started in 2010 and terminated most of the national program business, positioning competitive markets. To replace this business, we have focused on program underwriting agents that either assume risk on their business or are positioned in profitable specialty markets. We have also successfully deployed our capital to augment the underwriting capacity of insurance companies and Lloyd's syndicates, favorably positioned in U.S. and international specialty markets. While the second quarter was adversely affected by the unfavorable underwriting results from terminated programs, we're clearly seeing the positive underwriting results from this shift in our underwriting strategy reflected in our ongoing results. We expect our results in the second half of the year and 2013 to benefit from these underwriting actions.

Our personal lines business unit grew by 10% during the quarter and performed well as demonstrated by a 91.9% combined ratio, a 92% retention rate with a positive renewal change of 2.6%. We're very excited by the successful rollout of our personal lines system during the second quarter and expect complete transfer of our personal lines business into our new system by the middle of next year. This will enable us to eliminate the transitional services agreement that we entered into with OneBeacon as part of our acquisition of their personal lines business in 2009. Termination of this agreement will eliminate approximately $20 million to $24 million of expenses, divided equally between the reciprocals and our stock insurance companies, beginning sometime in the middle of next year. This has been a significant investment and endeavor for us, and the completion of this project should help us to lower our expense ratio, as well as to help us grow our personal lines business, especially in the affluent market outside the Northeast.

Finally, in our Insurance segment, we generated approximately $9 million in fee income from managing the reciprocals. Having recently expanded our licensing capability in the reciprocals, we are developing a plan to begin writing business through our reciprocals outside New York and New Jersey. This should help us to expand our fee income, as well as to provide additional underwriting capacity to grow our personal lines business in our stock insurance companies.

Slide 8 details our loss ratios for the second quarter of 2012, the reserve charge that we took in the second quarter and the positive reserves and underwriting outlook. Our loss ratio for the second quarter was elevated at 77.3% as a result of the $65 million pretax reserve strengthening and $5 million pretax severe weather-related losses that collectively added 16.8 points to our loss ratio. Excluding these items, our loss ratio was 60.5% during the second quarter.

As a follow-up to our call last Tuesday, I wanted to use this opportunity to provide more details on the reserve strengthening that we took in the second quarter. The first point that we want to emphasize is that we have a strong track record of underwriting profitability and stability in our reserves, demonstrated by the minimal amount of adverse development that we took or we recorded since we went public in 2004.

Excluding the late December 2010 winter storm losses that we recorded in January of 2011, which amounted to about $7 million, we had a total of $23 million in pretax adverse loss development since we ran public in October of 2004 to the first quarter of 2012, against a span of over 7 years and over $5 billion in premiums written and managed during that period.

The second point I want to emphasize is that our business from 2008 to 2011 not only continues to be profitable even after the reserve strengthening, but also continues to measurably outperform U.S. property and casualty industry averages at approximately a loss ratio of 62%, excluding weather-related losses and 64.7%, inclusive of all weather-related losses. Furthermore, the loss ratio of our ongoing business in accident year 2012 continues to be favorable at roughly 61.5%, reflective of the benefits from various underwriting actions, improved pricing environment and change in business mix that I have cited earlier that in aggregate amounts to approximately 2 to 4 loss ratio points.

Our loss ratio in 2012 reflects the loss emerges -- emergence from prior accident years for lines of business such as workers' comp, compensation and commercial auto that were affected by the adverse loss development but has benefited from the favorable loss ratio on property and specialty lines of businesses produced by the newly created business units.

Finally, despite the adverse impact on our second quarter earnings as a result of the reserve strengthening, we believe this action is strategically important and that it allows us to move forward and permits our future operating results to fully reflect the profitability of our ongoing business. I believe we have now covered this issue thoroughly, and I would like now to turn the call over to Bill to provide further financial details on our operating results and future earnings guidance. Bill?

William E. Hitselberger

Thank you, Michael. Page 9 of the presentation details our expense ratio for the stock companies for the second quarter of 2012, as compared to the same period in 2011. Underwriting expenses were $150.2 million, representing an increase of 20% over the same period in 2011. The increase in expenses was primarily due to commissions on increased business production, as well as the change in the methodology of allocating loss adjustment expenses, which increased the expense ratio by about a point as compared to 2011. We also continued our spending to support our ongoing efforts to build out our information technology infrastructure, to support our personal lines policy administration and claims processing technology platform.

The commission portion of the underwriting expense ratio, net of ceding commission we received, was 19.2% in the second quarter of 2012 compared to 17.8% for the same period last year. Compared to 2011, we expected to see a higher commission rate in the first half of the year, reflecting a change in the proportion of our earned premiums derived from assumed reinsurance, which has a higher commission cost than our direct business.

By the fourth quarter, this year-over-year increase in commission expense is expected to be less pronounced as the proportion of earned, assumed reinsurance business should be more consistent at that time between 2011 and 2012. The other underwriting expense component of the ratio, net of fees, was 10.9% in second quarter 2012 compared to 11.3% for the same time period last year. The organic growth initiative that Michael mentioned earlier should lead to increased scale savings in 2012, and we have seen a reduction in our other underwriting expense ratio into 2012 from this increase in scale, as the rate of organic growth is significantly outpacing the rate of growth in other underwriting expenses. This improvement, while muted by the change in methodology in allocating loss adjustment expenses, should become more apparent in the second half of this year, as the costs associated with the personal lines technology platform begin to decrease.

On Page 10, I will speak about our investments. As of June 30, 2012, our invested asset base was $2.4 billion, up about $157 million from the year-ago period. Operating cash flows for the -- were higher by $19 million for year-to-date 2012 compared to 2011. At June 30, 2012, we held an additional $75 million in cash reserves to fund the equity state that we are taking in the Canopius Group. This investment will be accounted for under the equity method of accounting and will be included in our investment portfolio as an other invested assets upon the closing of the Omega transaction, which is expected to occur in August. We believe that this investment will be accretive to investment income beginning in the third quarter of this year.

Tax-equivalent book yields in our portfolio have been flat, between 4.6% and 4.8%, since the second quarter of 2011. We have seen a flattening of tax-adjusted book yields since 2010, which is the result of deployment of invested assets into higher yielding corporate securities and also opportunistic increases in our tax-exempt portfolio to combat the steady decrease in reinvestment rates. We've also been allocating funds into dividend-paying equity securities, which has improved our tax-equivalent portfolio yield.

We made some alternative investments in real estate and other private ventures in 2011 and have seen several of these investments start to generate positive returns, which have helped our yield in 2012. Our consolidated balance sheet now contains the cash and other invested assets, which is where we are classifying most of our alternative investments. We are continuing to look at real estate and private investments as alternative asset classes to enhance our investment returns. Despite the reinvestment rate challenges that we have been seeing, our net investment income remains flat compared to the second quarter of last year. The actions that we have been taking in asset classes other than fixed maturities, have allowed us to maintain our level of investment income.

In summary, we have been seeing stable tax-equivalent book yield returns since year-end 2010 and an upward movement in our total portfolio investment yield due to continued positive operating cash flows, as well as to our revised asset allocation and alternative investment strategy.

Slide 11 details a high-level overview of how Tower is currently structured and how it will look upon the completion of the merger agreement. We currently use our Bermuda operations as a captive reinsurer for our U.S. pool business. Our current reinsurance and Lloyd's business is written through our domestic pool. Upon completion of the merger, this business will all be sourced out of our Bermuda operations. In addition, our Bermuda operations will own our 10.7% equity stake in Canopius. We will be filing with the SEC, an S-4 document in partnership with Canopius, which will have more detailed financial information on the balance sheet of CHBL and CBL.

The major steps that are necessary to finalize the transaction include the following: number one, a registration of CHBL shares; also, a secondary sale of the premerger CHBL shares to new investors; and finally, approval of the merger transaction from the SEC; insurance regulatory bodies in both Bermuda and the United States; and finally, Tower shareholder approval. After the completion of these steps, the new Tower entity will be comprised of 2 distinct insurance businesses, 1 in the United States and 1 in Bermuda, controlled by a holding company located in Bermuda. The shares of this holding company will be NASDAQ-listed at the time of the merger.

We, along with Canopius, will undertake the secondary sale of shares of CHBL only when we believe that such sale and the resulting merger economics are advantageous for current Tower shareholders. Under the terms of the merger agreement, we have 1 year to affect the secondary sale of shares. We believe that the merger allows for Tower to deliver improved operating results to its shareholders, and we expect EPS accretion by the end of the second full year of operations to be double digits in terms of percentage points.

On Page 12, I will conclude by summarizing our second quarter 2000 (sic) [2012]

results and providing some guidance as to what we expect to see on the rest of this year and trends that we believe will occur in our business in 2013 and beyond.

In the second quarter of 2012, we experienced another period of significant growth in our business aided by increased organic ratings in our assumed reinsurance and other newly created business franchises. We expect growth throughout the remainder of this year, and we expect to end this year at the higher end of our projected growth rate of 5% to 10%. We expect to see our loss ratio between 66% and 67% in 2012.

With the reserve strengthening in the second quarter, we believe we can now move forward to focus on important strategic initiatives and allow our profitable ongoing business to be unencumbered by our past results. Our loss ratio should improve as premiums earned from business sourced from non-risk-taking MGAs winds down, with the potential to see lower loss ratios beyond 2012 from anticipated price increases.

We did anticipate a modest uptick in our expense ratio in 2012, as increased commission costs will offset scale-driven expense savings. We expect to see an improvement ratio -- improvement in the expense ratio for the balance of 2012, as earned premium volume outpaces expense growth. We believe that this trend will continue beyond 2012 and expect to see lower expense ratios being driven by scale savings in our underwriting expenses. Our combined ratio should be between the 99.5% and 101.5% in 2012, absent significant catastrophe activity. Beyond 2012, we believe that scale savings, as well as lower information technology costs associated with the completion of some major initiatives, should lead to a reduced combined ratio.

We expect to see investment income increase in 2012 due to an increase in our investment base, as well as the increasing impact that we expect from alternative investments in our asset allocation. We do expect to be below our 10% ROE target for full year 2012 due to the reserve charge. But we expect that we should see an improvement in our earnings in the second half of the year and into 2013. And we expect to be at the 10% to 12% ROE range during the second half of this year and into 2013.

With that, let me turn the call back to Tyrone for any questions. Tyrone, if you can, please open the call.

Question-and-Answer Session


[Operator Instructions] First question is from Randy Binner of FBR.

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

Just wanted to kind of touch right at the end of those comments that Bill made about the combined ratio being better in 2013. I think that we would certainly assume that to get to the low end of the $2.85 EPS guidance. So is there any kind of further parameters you can give us around what we should think about for the loss in the expense ratio? It sounds like the expense ratio gets better on some of these initiatives, but would be curious kind of how you're thinking about the loss ratio for the '13 guide?

William E. Hitselberger

Randy, I guess my perspective on it, and I'll turn it over to Michael to give a little more color as to the development of the loss ratio. But we expect to see an improvement about a point or so in the expense ratio into 2013. And we expect to see, I think, a consistency in the loss ratio, absent the reserve charge into 2013. I think that our expectation is that pricing will get a little bit better, but I think given what we just experienced, we're going to take a pretty cautious view into looking at the 2013 accident year.

Michael H. Lee

Yes, and just to add to what Bill said, during the last several years, we've been building our 3 segments, the commercial, specialty and personal, so in order to reduce the expenses, we need to scale those operations, and we're doing that. And our fixed expenses are going to stabilize. And another thing is that we've been shifting claims expenses into underwriting, which has elevated our expense ratio. That should stop, along with the improvement -- reduction in technology costs. So we've been through a period of 2 to 3 years where we've been hit with significant investment in technology, shifting of claims expenses to underwriting and the lack of premium volume associated with those 3 segments. So any kind of incremental amount of volume that we generate above and beyond what we have today, should quickly translate into lower expense ratio and continue to enable us to reach scale. And that's what we have done with our commercial business. From 2004 to 2009, we've significantly decreased the expenses as a result of the increase in premium volume, paying for the infrastructure associated with 1 segment. Starting in 2009, by expanding our businesses from 1 business -- core business unit to 3, we had to restart that process, and we're pretty much at a point where we're going to scale those businesses to drive the expenses -- expense ratio lower. So in summary, what we are seeing is, us having to expand our business from 1 to 3 segments, and with the increase in volume, we're quickly able to scale those businesses, and thereby, driving our expense ratio lower. And that's what you're going to see in 2012 -- rest of 2012 and into 2013.

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

Okay. Just a couple of follow-ups. That's all very helpful. If I can, one's on the loss ratio. So I guess, absent more specific guidance, is there any reason why we wouldn't assume that second half '12 loss ratio goal you have kind of -- that hovers around 62% for the company, overall? I mean, should we assume that that's implicit in the '13 number? And maybe to add the other question, your fee income, your management fee income in the quarter was better than our expectation. Is that expected to grow too and contribute to that '13 number, maybe taking a little bit pressure off that loss ratio?

Michael H. Lee

Randy, we feel very comfortable of our run rate of around 61.5% to 62%, and that should continue. And the reason that we feel very comfortable with the loss ratio is because we've reduced about 2% to 4% in our loss ratio due to various underwriting actions and, as well as change in the business mix that we have achieved over the last several years, shifting our capital from commoditized, sort of general commercial area, to more specialty and property lines of business -- businesses. So that shift, as well as the termination of unprofitable business and the pricing increases that we're seeing, amounts to about 2% to 4% benefit. So our 61.5% to 62% loss ratio is really equivalent to more like 64%, 65%. So we're at a loss ratio level where it fully takes into account of the loss emergence that we've seen in workers' comp, as well as commercial auto and benefits from the various actions that I've just described, so we feel extremely comfortable with our loss ratio. In addition to that, the actions that we took this quarter in strengthening our reserve is really not just driven by what we saw in the second quarter. It was a thorough review of our reserves, and the move was done to get us within a comfort zone that we felt was -- that we wanted, so although reserves are somewhat uncertain and it's hard to predict, you can be certain that it can be viewed in terms of where we are in terms of the ranges, and we felt that the move that we made got us closer to the range where we felt more comfortable. So with that move, we're now positioned where we feel comfortable that our reserve position is where we want it to be within that range -- actuarial range. For that reason, we don't think we're going to be this kind of dramatic change in our reserve position that we did -- that we took -- that we made in the second quarter. As I mentioned during the presentation, over 7 years since we went public, we had $23 million in adverse development based on about $5 billion of premium writings when you take out about $7 million of adverse development from weather-related losses. So we have a very strong track record of having a very favorable underwriting result, as well as having integrity in our loss reserves. So I think that will continue, and what you saw in the second quarter was clearly an aberration, a move on our part to get us in a more comfort -- at a more comfortable level within the actual range, as well as to transition from soft to hard market and to position us -- to enable our earnings, positive earnings to be encumbered by past results.

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

I want to be courteous to the other callers, but I just -- could you just touch on the fee income piece, too, real quick? That will be helpful, and I'll drop offline.

Michael H. Lee

Yes, go ahead.

William E. Hitselberger

Randy, one of the things that we did in the first quarter this year was to transfer one of our insurance companies that has expanded licensing under one of the insurance exchanges. So we do expect to see growth in the fee business during the remainder of this year. I don't know if the rate of growth will be as significant on the year-over-year basis as it was in the second quarter, but one of our growth plans clearly evolves around developing worth fee income and taking full advantage of the capital that's allocated to the reciprocal businesses . As you know, I think, we've talked about this before. We have agreements with our insurance department that monitored the reciprocal businesses, the level of net premiums. And we do have capacity to put more business in that -- into those reciprocals. And given the trends that we're seeing in personal lines businesses, we think it's a good strategy to do that right now.


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

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

Could you give us a range of how much income you're expecting from the Canopius Group investment for next year?

William E. Hitselberger

The Canopius Group, not -- this is not from the merger, Adam, this is solely from the $75 million investment?

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

Yes, that's correct.

William E. Hitselberger

Yes, we expect that Canopius is -- should have an ROE, and they've an ROE that's consistently been in the double digits, absent the year 2011, which as, I'm sure you know, was a significant catastrophe year. So we would expect to see on a pretax basis, an ROI that's probably low double-digits from that investment. So it's a significant improvement in our base over the 4-odd-percent that we were getting from deploying those assets in the fixed income investments.

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

Okay. And that will flow through investment income, is that correct?

William E. Hitselberger

Yes, it will flow through, Adam. And my expectation is we talked about it being accretive in the third quarter, it's going to be on the margin, very marginally accretive in the third quarter, more significant in the fourth quarter, and then we think pretty substantive in 2013.

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

Okay. And then as far as your core workers' comp in commercial auto, a lot of the reserve charge came from more of the program business. What sort of rate are you getting on the core workers comp and commercial auto business -- the nonprogram business?

Michael H. Lee

Well, Adam, this is Michael. I think what we focus more on is the segmentation of our business. And in the workers' comp area, our franchise, our core business that has been profitable is in the small accounts areas. So with the business that our underwriters write that's not outsourced to underwriting managers, what we're trying to do is go back to our core and eliminate the middle market business or reduce it significantly and focus on the small accounts. And we have done that. So more than the rate increases, it's really going back to our original underwriting guidelines and to focus on small accounts across the country. Having said that, we're seeing about, I would say, upwards of 10% rate increases in some of the states that we're operating in. As far as the workers' comp that comes from program underwriting agents, we believe that it's -- we're better off underwriting that business using our own underwriters. We don't think that, that type of business is somewhat commoditized and is better off being underwritten by our own underwriters. And as a result of that, we eliminated many of the programs -- workers' comp programs, underwritten by outsource to the program underwriting agents. So while we expect the rates to improve in that segment, we're just not interested in continuing with that business model. As far as the commercial auto is concerned, you can break it up into the core commercial auto accounts that we have written historically very well, and it's part of our package offering. That has performed very well -- continues to perform well. What has not performed well are the trucking business, written by some of our program underwriting agents, primarily, businesses that we picked up from our SUA acquisition. We spotted that as a problem after we acquired SUA and we have put into action plan to eliminate that business. It is just taking longer than we expected, but we're -- we have completely terminated that portion of our commercial auto business, allowing us to continue to -- allowing us to benefit from the favorable loss ratio associated with our core commercial auto business. So while we're seeing some rate increases, I think what is important to emphasize is that we have re-underwritten our book of business to go back to our core, and that's what's -- that will drive the profitability. Despite the fact that we're getting rate increases, we're not interested in going back to some of the segments within those lines of business that really doesn't fit with our underwriting profile going forward.

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

A question on -- I guess, why did you put the stock company with a [ph] reciprocal? Did that have rating agency implications? And also -- so is that stock company now controlled by the reciprocal board?

William E. Hitselberger

Yes, and that's a good question, Adam. We took one of our pool companies and de-pooled it, and clearly talked about it with the rating agencies, so you'll note actually when you see Fitch and A.M. Best ratings that they took the one company, which is Mountain Valley Insurance company out of our ratings unit. We put it -- it's actually under the control of the reciprocal board, but we did it to actually give them additional licenses. Today, Adirondack, which is the exchange that purchased it, that company had licenses only in New York. With Mountain Valley, they have expanded licenses in about 10 other states, and they're are able to expand their personal lines appetite.

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

How much premium in capital went with it?

William E. Hitselberger

Capital was small, it was $16 million, and so from a standpoint of the pool capital, the capital was unchanged, because we got rid of or we reduced the capital. That company was carried as an investment by another insurance company, and that insurance company, in essence, received cash equal to the statutory capital with an adjustment made to market investments off the market.

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

Okay. And then on the OneBeacon technology, when should that be fully complete and you're going to be running on one system?

Michael H. Lee

This is Michael. As I mentioned during the presentation, it's been a 3-year effort, and we will hit the 3-year mark in July of next year, and that's when we should complete the project. And as I mentioned, that should eliminate about $20 million to $24 million in annual expenses that's currently divided between the reciprocal and our own insurance companies. So that should be completed in the middle of next year. All of the deployment has been completed, and we're writing new business -- new businesses through our own system, and what remains is the transfer of the business from the OneBeacon system to our new system, and that we plan to do throughout the year and to complete that transition by the middle of next year.


Thank you. There are no further questions at this time. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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