Hanover Insurance Group Inc (THG) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Allmerica Financial Corporation fourth quarter 2003 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Ms. Sujata Mutalik. Please go ahead, ma'am.

Thank you. Welcome to Allmerica's fourth quarter conference call. I'm Sujata Mutalik, Vice President of Investor Relations. With me this morning are Fred Eppinger, President and Chief Executive Officer, and Ed Parry, Executive Vice President and Chief Financial Officer. On the call today, Fred will provide an overview of our results, as well as comment on our progress in 2003. Following that, Ed will provide greater detail on our financial results for the quarter and for the full year.

Before we begin the call I want to highlight that both our commentary and our responses to your questions may include forward-looking statements. In particular, Fred's remarks about our general strategy and our hundred day plan initiative, as well as our comments about capital levels, ratings, future annuity redemptions, life company cash flow, the impact of the decision regarding our broker-dealer, as well as the anticipated impact on the cost of the GMDB hedging program all forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties that are discussed in some detail in readily available documents. These include the Company's Annual Report on Form 10-K for the year ended December 2002, the Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and yesterday's press release, which have been furnished to or are on file with the SEC.

In particular, we note that Allmerica's future operating results and financial condition will vary materially depending upon equity market and bond market conditions, surrender activities and rating actions, among other factors.

Also, I would like to mention that Allmerica's quarterly earnings call, including today's call, our earnings press release, statistical supplement and documents filed with the SEC are all available under the investor relations section of our website, which is located at www.allmerica.com.

Finally, to point out that today's discussion will also reference certain financial measures, such as net operating cash flow, that are not as derived from Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to our GAAP financials is provided in yesterday's press release and is posted on our website.

With those comments, I will turn the call over to Fred.

Good morning and welcome. I am pleased to be with you today, and I will review our fourth quarter earnings, which Ed will provide more detail on in a moment. I will also comment on our progress in 2003 and our positioning for 2004.

We reported strong fourth quarter earnings which were in line with our expectations. I am pleased with the solid core earnings performance in our property and casualty segment. Adjusting for an unfavorable comparison as a result of unusually low catastrophes last year, property and casualty segment earnings for the quarter were up 7.6 million or 17.8 percent compared to the prior year quarter.

Year-to-date trends were also solid. Despite our uncompetitive or rating during all of 2003, we maintained a market presence, improved our margins and generated positive earnings growth both in the quarter and for the year, clearly a solid result. Excluding catastrophes and the unusual charge we took in the second quarter relating to our participation in a voluntary pool we exited in 1996, segment earnings were up 9.3 million or 4.3 percent for the year. This performance is suggestive of the core strength of our franchise and also demonstrates the strong relationships we have with our agents. The strength of these partnerships has enabled us to remain a player in the market during some difficult times.

Our life company also had a strong performance with net operating cash flows of $39 million for the fourth quarter and 145 million for the full year. We made some very difficult decisions regarding this business, both last year and more recently this year with the cessation of the VeraVest broker-dealer. These decisions were clearly the right strategic decision for our company.

I'm also very pleased with the recent ratings upgrade from A.M. Best. As we now announced last week, A.M. Best upgraded Allmerica's property and casualty company's financial strength ratings to A- or excellent. The life company's financial strength ratings were upgraded by two notches to a secure rating of B+. I believe this is a clear validation of the financial stability of our companies, and it also send a strong signal to the market that we are well positioned to win and we're back in the game.

Let me now turn to the progress we have made this year. When I spoke to you last quarter I talked about the hundred day initiative that was underway. That initiative is now complete. Every major process within the Company has been reviewed. This process led to a thorough understanding of our core strengths, as well as our challenges. I'm going to briefly share with you my assessment of where we stand today.

Our financial strength is very good. We have healthy levels of capital in our property and casualty companies, as well as our life companies. Our property and casualty surplus now stands at $1 billion and our life company's RBC ratio is 366 percent. Our balance sheet is solid. Our asset portfolio is of high-quality, consisting primarily of fixed maturities with less than six percent below investment grade quality.

On the life side, with the implementation of the hedging program we have reduced the volatility of our surplus related to equity market declines. As part of our hundred day plan initiative we had our property and casualty reserves separately reviewed by two independent firms. This study included a review of our direct and indirect environmental and asbestos reserves, which stand at $70 million. Separately, we also conducted a review of our case reserves. The result of these reserves was to increase case reserves in workers compensation by $16 million for the quarter. The independent studies indicated that our reserves are solidly within the range of reasonable estimates. In short, our financial position is both strong and stable.

Turning to our strategic position in our property and casualty business, we have a strong franchise. As I mentioned earlier, we have a large base of loyal and profitable agent relationships. This enables us to withstand the impact of our ratings downgrade this past year. We also have in place a solid underwriting culture derived from over 100 years of experience as a superior property and casualty insurer. This discipline is evident in the improved (indiscernible) year results for this year, despite our ratings situation.

Our front end technology is very good. Our point-of-sale system is a big winner with our agents. Agents can quote and issue policies from their workstations. They also have the ability to perform subsequent transactions on these policies. By improving workflow this technology significantly improved agent productivity through the ease of doing business. This technology was first rolled out late in 1999 for our BOP product and subsequently we have added commercial auto and we are now completing the rollout of workers compensation, personal auto and homeowners. Product expansion and deployment of this technology in all states will give us a clear competitive advantage.

Finally, our claims department is extraordinarily efficient. This year's LAE ratio is eight percent, which is well below the industry average of 12 to 13 percent. Overall, we are well positioned to be the regional carrier of choice.

Despite the strong position and positive momentum generated in 2003, we're not without challenges. While our commercial lines margins have improved in 2003, our challenge is growth. Recognizing that our uncompetitive ratings in 2003 have hurt us gaining market share, we need to turn this around. We will work to deepen and expand our relationships with winning agents to increase our presence in this market.

In personal lines, while we continue to see improve profitability in both lines, we need to improve some more, particularly in personal auto. In technology we must continue to develop and refine our applications to make us easier to do business with and to improve our efficiency.

In the life companies, our capital position is a solid. The business is generating excess cash flows of around 125 to $140 million annually. And the surplus volatility has been significantly reduced through the hedging program. Our challenge over time is to maximize and monetize the value of this operation for policyholders and shareholders.

In addition, for both businesses we will continue to build a culture of execution. This is an execution-based business and to build a world class franchise we much completely be focused on delivering results to our agents, policyholders and shareholders every day.

As you know, we are hosting an investor conference on February 17, 2004 in New York. At that time I look forward to discussing our strategy with you and providing greater detail to our 2004 operating plan that will address these challenges that I have briefly highlighted today.

Now, I will turn the call over to Ed for his review of his review of our financial results. I will be here to take questions during the allotted time at the end of the call. Thanks.

Thank you Fred. Good morning everyone, and thank you for joining our call. As Fred pointed out, we're pleased with our solid fourth quarter earnings. What's more, we continue to feel very good about our financial strength. I will now review with you in some detail our financial results for the quarter, as well as provide a quick summary of our full year performance.

For the quarter we reported net income of $14 million or 26 cents per share versus 14.9 million or 28 cents per share in the fourth quarter a year ago. For the full year we reported net income of 86.9 million or $1.63 per share versus a loss of 306.1 million or $5.79 per share a year ago.

I would now like to focus on our segment results. Total segment income was up 41 percent or $7 million to 29.5 million for the quarter. For the full year total segment income was 86.3 million compared to a loss of 504.4 million last year.

As a reminder, segment income is a pre-tax measure of earnings. It also excludes a number of items that are included in net income such as taxes, realized gains or losses, restructuring charges and certain other items, the details of which are included in our press release and statistical supplement. These items total a loss of 15.5 million or 29 cents a share for the quarter and a gain of 0.6 million or 1 cent for the full year.

In our property and casualty business segment income for the quarter increased by 5 million or 14 percent to just over $40 million. The increased earnings for the quarter were primarily due to an improvement in current (indiscernible) year loss trends, particularly in personal lines, as well as the favorable impact of rate increases across all lines. Partially offsetting these items was a $16 million increase in workers comp case reserves and higher operating expenses.

For the full year segment income in the P&C operation was 143.6 million compared to 184.3 million last year. Full year 2003 segment earnings include catastrophe losses of 59.4 million, which were $28.1 million higher than in the prior year. Current year earnings also include the unusual charge of 21.9 million resulting from an adverse arbitration decision related to a voluntary insurance pool we exited in 1996. If you adjust for these two items, segment income increased in 2003 by just over $9 million. This increase was essentially due to the same factors that I just discussed that impacted of the quarter, namely rate increases offset by higher operating expenses and lower net investment income. The full year, of course, was also impacted by the fourth quarter $16 million workers comp adjustment.

Now turning to our calendar year loss ratio where we saw strong improvement in the quarter; the improvement was seen across all major drive lines except workers comp and was due to improvement in the current accident year loss trends. For the quarter, the calendar year loss ratio improved by 6 points to 63.5 percent. For the full year the reported calendar year loss ratio was essentially flat at just over 65 percent. However, adjusting for the comparatively low catastrophe losses last year of 1.3 points and the unusual charge related to the exit a voluntary pool of 1 point, loss ratios for the full year this year were 2.4 points better than a year ago.

Turning to expenses, the fourth quarter underwriting expense ratio of 33.8 was 4 points higher than last year. For the full year the expense ratio increased 1.6 points to just over 30 percent.

The expense ratio in the quarter was unusually high due to several items. First, higher contingent commission expenses triggered by increased agent profitability and the commission specials we implemented due to our ratings situation contributed just over one point to the ratio. Higher year end expenses, such as involuntary pool assessments, as well as lower production volume in the quarter, added on another 0.7 points (ph) to the ratio. The balance of the increase is due to planned higher level of operating expenses, such as we experienced all year, principally related to technology.

Now I would like to comment briefly on our results by line. Let's start with commercial lines where our overall results continue to be solid.

Our three major drive lines of commercial multiple peril, commercial auto and workers compensation have benefited from significant rate increases over the last two years. In 2003 we took an average rate increase of just under 10 percent across our entire commercial book. These rate increases, a change in the portfolio mix and the agency actions to curtail our relationship with over 600 unprofitable agents at the end of 2001 have now worked their way into our results. This can clearly be seen in our improved core calendar year loss ratios.

As I said earlier, the reported 2003 loss ratio was adversely impacted by unusually low CATS last year. In fact, catastrophe losses added three points to the loss ratio for the current quarter and just over three points to the loss ratio for the full year. If you adjust for this, the loss ratio improved 1.7 points for the quarter and 2.7 points for the year.

I will now review our current accident year loss ratio for commercial lines, where each of our major drive lines showed improvement for the year. Starting with C&P, our largest drive line, the current accident year loss ratio improved almost a point to just under 48 percent for the year. Commercial auto improved by just over 8 points to just under 48 percent for the year. And workers compensation, our smallest drive line, improved by 4 points to just over 62 percent in 2003.

As Fred said, while we're pleased with the margin improvements in 2003, our challenge in commercial lines is growth. Net written premium declined by eight percent for the full year. Commercial lines premium in 2003 was notably lower then we had hoped. It is clear that the uncompetitively low rating during all of 2003 had an impact. However, our recent A.M. Best rating upgrade positions us well to resume the growth of our commercial lines book in 2004.

Now turning to personal lines, where our margins improved both year-over-year and in the quarter. Premium rate increases in both personal auto and homeowners have improved the profitability of these lines in 2003. During 2003 we took an average rate increase of about seven percent in personal lines. As expected, the increase in rates improved the current year loss ratio in both lines, which has improved, of course, our calendar year results as well. The calendar year loss ratio improved 10.2 points for the quarter to just over 64 percent. For the year the ratio improved by 1 point to 69.4 percent.

Now turning to current accident year results for personal auto, where we saw a 1 point improvement in 2003 to just under 68 percent. The homeowners line improved throughout 2003, resulting in an accident year loss ratio of 52.4 percent for the year. This represents a two point improvement from a year ago. The benefit of an average almost 12 percent rate increase in 2003 can clearly be seen in this number.

Now I would like to briefly discuss Allmerica Financial Services, where we reported segment income of 11.9 million for the quarter versus a loss of 0.7 million a year ago. Results were favorably impacted by the stronger equity market and lower operating expenses. Our decision to cease manufacturing our proprietary products in late 2002 and the shutdown of our broker-dealer operation in late 2003 drove lower expenses in the quarter. Net operating cash flow was 39 million for the quarter and 145 million for the full year. AFS's is GAAP earnings and net operating cash flow for the quarter were in line with our expectations.

For the full year we reported segment income of 26.9 million versus a loss of 625 million a year ago. As you know, prior year segment results included a charge of almost 700 million related to our decision to cease the manufacture and sale of proprietary variable products, as well as the impact of the decline in the equity market throughout all of 2002.

I would like to point out that our GMDB hedging program went into effect on December 3, 2003 and has been performing as we expected. Because the market has been up since the implementation date, we have recognized a pre-tax loss on our hedge position of just over $8 million. This loss is reported outside of segment income as a loss on derivative instruments. This loss is in line with our expectations based on the program design, and is offset by a similar change in our estimate of the future guaranteed minimum death benefit costs.

Variable annuity redemptions were just over 500 million for the quarter, up only slightly from the prior quarter of 494 million, but of course was significantly lower than a year ago where they were $1.3 billion.

In the third quarter we disclose to a restructuring charge related to the broker-dealer shutdown that we would report primarily in the fourth quarter of 2003, and to a lesser extent in the first quarter of 2004. We provided guidance that the charge would be in the range of 25 to $30 million on a pre-tax basis.

In the fourth quarter we in fact recorded a related pre-tax charge of $22 million. We expect additional charges of about 3 to $5 million during 2004.

I will now comment on asset management where segment earnings were lower in the quarter and the year due to the continued runoff of our GIC business. Interest margins were also lower due to the strategic repositioning of our portfolio into lower yielding or higher quality fixed income securities. Asset management earnings were consistent with our expectations, given the runoff of our GIC business in these portfolio changes.

Now I would like to give you a brief update on the statutory capital position and risk based capital positions of our insurance companies. The consolidated total adjusted capital for AFLIAC, our lead life insurance company, increased to 553 million from 547 million at the end of the third quarter of this year. It's important to note that this increase is after the payment of the $25 million dividend to the holding company. Moreover, the risk-based capital ratio of AFLIAC increased to 366 percent at quarter end compared to 349 percent at the end of the third quarter. What's more, the surplus in our P&C companies increased by $170 million during 2003 and now stands at just over $1 billion.

Finally, a comment on the new statement of position number 03-1 related to GMDB reserves which must be adopted by all companies effective January 1, 2004. We provided guidance in the third quarter that the adoption of this SOP would result in a pre-tax charge in the range of 80 to $140 million. While we have not fully completed our work on this first quarter 2004 item, we expected the charge to be closer to the lower end of the range.

With those comments, I will now turn the call back to Sujata.

Operator, let's now open the call for questions.

(OPERATOR INSTRUCTIONS) Bob Glasspiegel, Langen McAlenney.

Have you guys made an estimate of what the potential savings from having an A- rating versus B+ as far as reduced contingent and fronting (ph) costs?

What I can tell you is that we had about $4 million in the '03 number for special commissions and we have a like amount for the reinsurance arrangements. So the number is somewhere between 6 and $8 million for '03. We expect to see a little bit of that in early '04, given the arrangements that we had made ahead of time with the reinsurers. But certainly we will see some benefit in '04 as you compare the numbers.

Any comment on first quarter weather? Northeast and Michigan has had some cold and snow. Any significant CAT loss exposure yet?

It looks like so far we're right on track for the first quarter of what we budgeted. So it doesn't seem to be anything above our budgeted amount at this point.

With the market higher, does that affect further earnings run rate for financial services? I think you had said 10 million a quarter.

I think what we're going to do is -- particularly with the new accounting around this SOP for GMDB I think what I'd like to do is beg off on how to think about earning in '04 in the life business until we have our conference, which I think will be three or four weeks from now. So why don't we do that then, if we could. And of course, I continue to believe that the better measure of that business is this cash flow concept that we've been talking about and will continue to talk about.

Fred, you hinted at a possible securitization of the life business. What are some of the theoretical options that you're pondering at this point that would be able to do that? And how soon could they be realized?

I think your questions probably more broadly is around this monetization point (multiple speakers) the value of the life business. There are any number of strategies that ultimately would need to manifest themselves in dividends, but you can certainly see dividends coming out with our existing structure; you can see us front ending some cash flows through some sort of financial re-engineerers (ph) and securitization transactions; you can see dispositions of underlying parts of that business. There are any number of things that we can do and we're actively considering our options and have more to say about that as 2004 moves forward.

Thank you.

Sam Kidston (ph), Blackrock.

Fred, now that you've gotten in there and taken a look around, do you think there is anything that needs to be done in terms of the reinsurance agreements, specifically with CAT?

As part of the 100 day initiative we actually took pretty aggressive look at some of that and I'm pretty comfortable. One of the things that's interesting about our CAT (indiscernible) here, we've handled what I call kitty CATs very well. We have a lot of, as you know, winter storms and freezes is more of an issue for us than wind. We actually have up pretty thoughtful program that addresses that. We made some slight changes to it this year, but I'm pretty comfortable where we are in that. You won't see, I think, any dramatic changes in our philosophy there.

Also, just on the investment portfolio, obviously you guys have brought down the below investment grade percentage significantly in the last year. Is the work there done in terms of the percentage below investment grade versus investment grade? Or is there still some work to go?

I think the work is done. We're at about six percent of the overall portfolio, which really puts us right in the heart of the median of comps, whether you think about life businesses or P&C businesses. So we're comfortable where we are at this point.

Thank you.

Angelo Gracie (ph), Merrill Lynch.

I have a question about ratings and what discussions you have had with the rating agencies, in particular S&P and Moody's. Can you provide any color as to what those discussions have led to as far as potential for upgrades in your opinion?

We continue to have regular dialogue with all of the rating agencies. Of course, we just saw the recent upgrade with Best. We're having active conversations with both Moody's and S&P now as we finalize our year end numbers around all of our businesses. And we think that the Best ratings are the right ratings for our business where we standing right now, and of course it's not difficult to see that the other two rating agencies are comparatively lower. So we're actively working them in that regard.

I guess my point is I think part of it, because of the importance of our P&C business, both of those rating agencies were looking to Best and the actions they take -- were going to take on our business. So I am optimistic about how they're going to react to that. I also think Best's review of our operating plans and our thoughts about how we go forward will give them confidence. Again, I'm optimistic that the other folks will start looking at us in a more positive light.

From a business perspective, I think it's fair to say that the Best ratings is the most important to our P&C business. I think where S&P and Moody's comes into play more is on the life business and really on the life business (indiscernible) ultimately to the holding companies a rating there, and the benefits of an increase rating on our holding company would give us financing going forward. So we're very much focused on that for 2004.

How keen are you on kind of moving away from the business side, looking at bond investors? And right now senior debt rating is high yield. Would you say that it's a key objective to get your -- at least your senior debt ratings back into investment grade status?

That was the point I was trying to make (multiple speakers) that's exactly (multiple speakers). It is clearly an objective of ours to get the underlying business ratings up to support higher holding company rates to get them out of the junk category.

Looking on the P&C side, a separate question. Do you see any changes in the premium mix over time? Do you like the type of premium mix you have right now? Or do you see some areas that you would like to shift the focus into in a significant way?

I think, as we talk about it on the 17th we'll talk a little bit about this. But I think we see ourselves getting closer to a 50-50 mix between commercial and personal. I'm very excited actually about our Main Street business, small commercial mix on the commercial side. We're probably a little light on comp because of the lack of cross-sell. But I think in general our commercial mix is quite attractive and the issue is going to be growing that vis-a-vis the personal lines business.

Thank you.

(OPERATOR INSTRUCTIONS) Ira Zuckerman, Nutmeg Securities.

Ed, one comment -- first of all, is there any way of getting a hold on the stat supplement since it doesn't seem to be posted on the Web site?

I'm told it is, so --

As of the start of the call it was not. In any case, I will try to (multiple speakers)

Please, Ira, if after the call if you fail again, give us a call and we can help you out with (multiple speakers)

The question is it looks like we're getting close to the end of the underwriting cycle on the P&C side. And your expense level is still significantly higher than your competitors'. A lot of the small competitors appear to be losing share to the bigger guys, especially in the small to medium commercial side. What's your outlook as to where you can go from here and how you can generate business in this kind of environment?

I think actually our outlook is very good on small commercial. I would argue that where you've seen some share shift is frankly BOP business. And for somebody like ourselves that's not a micro-sized regional company that has plenty of scale for automation, we have a great position between 25,000, say, and 50,000, which is where the bread and butter profitability is in small commercial, and frankly have a lot of that business. So for me the combination of our scale and our automation and our ability to have the relationships with the agents that have that business, which tend to be the mid-size agents to the small regional brokers, gives us a huge advantage there to grow that business and be pretty successful.

As far as the pricing environment, as you know, as you go down the pricing environment much less sensitive to this hard market. Small commercial has not gone up as much and will not go down as much in the cycle as some of the other parts of the business. But I think for us the BOP portion of the business, which is the lion's share of small commercial when you talk to people like Travelers and the Hartford, is not necessarily where the bulk of our business is. It's kind of a non-BOP package of the industry which is where historically regional companies have done well and where our automation and our efficiency is going to be able to let us win against the small regional, as well as the large player.

So I'm actually very bullish. If you looked our mix, we don't have workers comp problems in California. We don't have any of that. We don't have a lot of (indiscernible) problems. We don't have a lot of the constraints that those national players are going to have, which means they're not going to be able to allocate as much capacity to small commercial because they've used it in the middle market, whether it's because of terrorism or wind or the fact that they're overexposed in comps. So in my view, we have a tremendous opportunity because of our size and focus.

Specifically on the numbers you mentioned, the expense ratio, clearly our expense ratio for the year, and to a greater extent for the quarter, is not where we'd like it. But as I pointed out in the prepared remarks, we suffered quite a bit in that ratio from where we have been for the last 14 or 15 months on ratings. So our volume is down. It is down more in commercial lines than it is in personal lines. And there are costs, sort of outlay expenses, or expenses -- costs that we outlay related to the downgrade in the form of extra commissions, in the form of some special reinsurance costs that would work their way into those expense ratios. If you go back to our expense ratio prior to this last 12 or 15 -- 12 or 14 months, we're sort of in a 29 all-in. At one point we were at a 28. But we are sort of maintaining a 29, which I would maintain is very competitive.

Thank you.

Jeff Thomson, KBW, Inc.

I had some questions on the commercial lines side. Your comments alluded to -- what I heard was rate increases of 10 percent overall for the commercial lines business. It sounded like you said that was one of the reasons why you didn't grow -- your product was priced too high. Did I hear that?

No. The rate increase is directionally right, but the attribution is not right. So if the comments came across that way, that was incorrect.

SO it had to do more with the rating?

Exactly. What happened is the agents were quite loyal to us. As far as retention, we had no adverse selection. But what was happening to us is obviously in kind of the small commercial in particular the rating affected our new business flow.

Okay. So if we look out into 2004, your rates versus other competitors' and agents' offices, are you rate competitive or do you need to come down a little?

We're right there. We're actually very well positioned. And our underlying lines have good returns. So we're right up there. As I look forward, you're talking probably 7.5 percent or something rate increases as you think about this year, which is right in line with most of the folks that I see out there.

I think the proof of that is in retention. While retention was off a little bit in commercial lines in '03 -- we think because of the ratings -- it didn't fall off a cliff. And of course if our rates were uncompetitive we would have seen that.

So you expect a positive written premium growth number for commercial lines in '04?

Yes.

The mix of business -- I know you write a lot of multi-peril. How much is property versus casualty for your overall commercial lines book?

We obviously are much smaller in comp than most. I think we're at the 10 percent range in comp. So we're very much more of a package kind of property writer than most folks. That is kind of bread and butter line.

A lot of companies I've heard already this quarter, small commercial lines writers, have been saying that frequency was way down in commercial property this year. Did you see that? And if so, can you give us a sense as to what's normal and what the loss ratio might look like this year relative to last year?

We did see that trend. I think what we would like to do in terms of forward-looking information is beg off until our conference three or four weeks from now when we've got some of the business people there and I think we can get into details around this.

One last question. On personal lines, we were hearing sort of news -- it was last quarter or the quarter before -- that PIP in Michigan was running high and it was causing some pressure. It looks like this quarter that's not the case. Is that true and what has happened to claims costs in personal lines?

You're right -- PIP was running a little hot and has been over the last several quarters. It's still running a little bit higher than we'd like it, but not to the degree that we've seen it over the last couple of quarters. So the trend is good in the fourth quarter. We will look at it again, obviously, in the first quarter.

Thanks.

Peter Monaco, Tudor Investment Corporation.

I had to step out briefly, so apologies if you have addressed to this. If you are free cash flowing 125 million or so at the life sub operations, and if you have started, albeit in small size, to be allowed to receive dividends from the operations, when might we think in terms of the Company being able to pay down debt at the holding company level or even buy back stock? Or can we only talk about that when and if you successfully affect the monetization of the essentially closed life operations now?

It's the latter. It doesn't make sense to talk about what we might do with capital proceeds out of the life company until we're closer to getting meaningful amounts out. So the question is really more about -- I think -- what are we doing about that. As you rightfully pointed out, I think we made terrific progress just in this first-year since our difficulties in late 2002 with the $25 million dividend. So what we're doing about that is working with regulators, having conversations with the regulators, talking to rating agencies about what they're comfortable with and developing strategies around the business, some of which were alluded to earlier in the call, to monetize those assets so that we can get the value out.

If I may follow-up, are you intend on receiving, albeit modest, regular dividends until that time that you hopefully successfully do monetize the operations? Or is your thinking sort of the other way around that the more capital that builds up there, the easier it will be for you to succeed in the monetization?

I think it's a little of both. I think that our plan -- I know that our plan would be to service our holding company obligations over time with the excess capital position in our life business. And of course, that's what we did with this $25 million and the dividend for 2003. So I see that and I see perhaps some more on a regular basis than that 25 million. But I think the real win isn't until we come up with a more substantive plan about monetization and then ultimately disposition of the capital.

Thanks a lot.

Ira Zuckerman, Nutmeg Securities.

On the personal lines side you made some -- again, the previous question about Michigan. What's the situation now in Massachusetts and the outlook there?

Massachusetts, I think as we all recognize, it is a challenging state, particularly in personal auto. There was a rate increase approved this year of just over two percent, which will clearly help us on the top line. We continue to manage this business much like everyone else does in the marketplace. And I tell you we have met with increasing success. That is to say our results are better in 2003 and we've got some pretty good plans together for 2004. Those, combined with the rate increase, should result in meaningful improvement in our Mass results and when we have our conference we'll talk about that a little bit.

Thank you.

Bob Glasspiegel, Langen McAlenney.

Two more questions on P&C, if I could. Fred, what sort of combined ratio do you need at P&C to get to your required return -- hurdle rate returned on that business, question one? Question two is on personal lines Glenn Renwick at Progressive is saying there's early signs of competition breaking out as far as commission rates and increased advertising in some of the companies. Are you troubled by that or do you think that's perhaps an overreaction on his part?

I'll go to both. Obviously it differs by line and areas of the country for obvious reasons. To me you've got to be in that mid-90s range to get to where we are going to want to perform. In my view it's very important to kind of get down there and maintain it because it's one of those lines that once you get behind on rate it's very hard to catch up, which is I think what happened to a lot of folks over the last three or four years.

As far as the competition of personal lines, I think it's a somewhat true. I think if you look at it, you're seeing some of the companies getting pretty significant adverse selection out there because they didn't invest in technology and ease-of-use, and they had a problem -- they didn't invest in the multivariate like product. So because of that and because of the rates they've achieved, say, in homeowners over the last couple of years, they're being very aggressive on commissions and other things.

But again, one of the things that I see in personal lines is kind of a flight to quality to some extent, particularly with the mid-size agents, because they kind of know that this is a business where you want to match up with two or three competitors and get most of your shelf space with them. So I'm actually pretty comfortable that if you have a good agency management strategy and the right kind of products with peers and credit, etc. that you can withstand that in the agency channel. I think it's a less certain thing when you're direct, where people can switch a lot easier and it's a lot more transparent. So in my view, as long as you are focused on the components of product and agency management, you can be quite successful in personal lines.

The other thing I would add is that one of the advantages we have over some of the folks that kind of dabble in lots of states is that when you have the kind of share we have you actually are much more effective at understanding claims trends, etc. You can do things on products. Like in Michigan we were the first ones to put in significant deductibles and the market had to follow us. And the reason we could do that is because we were a market leader. That makes a heck of a big difference in that kind of business.

Again, in my view there is some sign that it's getting more competitive. I would argue that it is kind of -- it can be managed effectively through the components that I talked about.

Thank you very much.

Ken Zuckerberg, Stadia Capital.

I just want to ask a high-level question about the environment. We're seeing several mergers of equals in the business, both in life and the non-life side. When you think about potential opportunities, either from a staffing or from a business -- winning business in the field, is that something that Allmerica now is positioned to capture? And any thoughts you can (multiple speakers)

We'll talk a little bit about this on the 17th. I personally believe that there is a flight to quality and there really is a have and have not thing going on here because we have so many small, small companies in this industry that have not been able to keep up the technology and investment required around both the product and the service. And so you're going to see, I think, continued consolidation of the industry.

My view is you don't have to buy balance sheets to do that; you can win in the marketplace, you can do it through book rolls, you can do it through a lot of ways at the agency level. But my gut tells me that you're going to see continued transactions. And again, I believe very strongly if we build the kind of capabilities that I know we can, that we can participate in some significant growth in this industry. I'm not clear that acquisitions of balance sheets are the best way to do it, given the legacy issues that most of these players have. By the way, one of the best things that ever happens to us is acquisitions because of the distraction that causes at those companies. And very few people do that well.

But again I think there will be opportunities that will present themselves in the marketplace over the next few years, because I just can't see the folks that are under-performing and subscale continuing to hang on in this environment.

With the A- from A.M. Best, does that position you now at least to be a party at the table (multiple speakers) when folks are considering the book rolls?

Absolutely. One of the things that people should understand, in an environment where almost everybody is being downgraded and we get upgraded the comparison is very positive about us because agents step back and say, "in all this environment where most people are down you're upgraded," any given the issues we have with life company and to go up two grades on the life side to me has -- it's been incredible, the feedback we've gotten from the agents. They know we're going to be one of the winners.

One of the things I tell everybody, from 1979 to 1995 this is one of the ten best underwriting P&C companies in the country. So we have the front-line capabilities to be outstanding. We just kind of weren't focused on the P&C business as much as we should have been over the last four or five years. We refocus on this industry, not only do we have the capability to do it, we now have the balance sheet to do it. And so I think it's very positive.

And I would also argue as we think about the monetization of life business, that's a little bit of a secret weapon for us because of that free cash flow allowing us to think about a continuing strengthening balance sheet and the continuing availability of capital to be able to capitalize on growth opportunities. So again, I believe it does place us at the table to be a winner.

Thanks very much.

That concludes our question and answer session. I would like to turn the call back to Sujata Mutalik for concluding remarks.

Thank you operator. Thank you all for joining the call today. We look forward to seeing you at our investor meeting in New York on February 17th.

Thank you.

This concludes the Allmerica Financial Corporation conference call. We thank you for your participation. You may disconnect your phone line at this time.