Hanover Insurance Group Inc (THG) 2004 Q1 法說會逐字稿

Good day and welcome to the Allmerica Financial Corporation first quarter 2004 earnings conference call. This call is being recorded. At this time for opening remarks I would like to turn the conference over to the Vice President of Investor Relations, Mr. Sujata Mutalik. Please go ahead.

Good morning everyone and welcome to Allmerica's first quarter earnings conference call. I'm Sujata Mutalik, Vice President of Investor Relations. With me this morning are Fred Eppinger, our President and Chief Executive Officer, Ed Parry, our Executive Vice President and Chief Financial Officer. Also with me today are Michael Readron, President of our Life Operations, and Mark McGivney, Chief Financial Officer of our P&C Operations.

Fred will lead the call today with a comment on results and an update on our strategic initiatives. Ed will then follow with greater detail on the financial results for the quarter.

Before we begin I just want to summarize the changes that we have made to our segment reporting implemented for the first time this quarter. Consistent with our Property and Casualty focus are results are now reported in four operating segments, Personal Lines, Commercial Lines, Other Property and Casualty, and the Life Companies operating segment.

The Personal Lines segments include our two major drive lines, Personal Auto and Homeowners, along with some other ancillary coverages. The Commercial Lines segments includes three major drive lines, Commercial Multiperil, Commercial Auto and Workers Comp, along with some other commercial coverages. And the Other Property and Casualty segment includes AMGRO, our premium financing business and Opus Management, our investment management business, both of which were previously included in our former Asset Management segment.

Also included here are the runoff voluntary Property and Casualty pools that we no longer participate in. Previously these results were principally reported in our Commercial Lines results. When combined these three segments now represent our Property and Casualty operations. Our fourth operating segments, Life Companies, contains our life annuity and our GIC businesses, which as you know we're not actively selling any more.

In addition to the regrouping of our segments we have also changed the reporting of corporate expenses. Previously these expenses were shown separately in our Corporate segment. Beginning this quarter these expenses have been allocated to each of our four operating segments. This is consistent with the way we have handled these expenses all along on a statutory basis.

A historical restatement reflecting these changes for the last eight quarters has been mailed out and is also available on our website, which is located at www.Allmerica.com.

I also want to highlight that both our commentary and responses to your questions today may include forward-looking statements, in particular remarks about our general strategy, comments on underwriting conditions, expected growth, retention and loss development, as well as expectations regarding capital levels, ratings, future annuities redemptions, Life Company cash flow and the performance of our GMDB hedging program should be considered forward-looking statements.

These statements are subject to a number of risks and uncertainties that are discussed in some detail in readily available documents, including the Company's annual report on Form 10-K for the year ended December 31, 2003 and yesterday's press release, which have been furnished to, or on file with the SEC.

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

Allmerica's quarterly earnings call, including today's call, our earnings press releases, statistical supplements and documents filed with the SEC team are available in the Investor Relations section of our website.

Finally today's discussion will reference certain non-GAAP financial measures such as segment income after taxes and net operating cash flow. A reconciliation of these non-GAAP financial measures to the closest GAAP measure is included in both the press release and statistical supplement which are posted on our Web. With those comments I will now turn the call over to Fred.

Good morning and thanks for joining our call. There are several topics I want to cover with you today relating to our progress on strategic priorities. First, we are very pleased with our earnings for the quarter and we continue to see improvements in our core businesses. After-tax segment income of 33.2 million was about 40 percent higher than last year and better than our expectations.

Our Property and Casualty operations generated solid earnings of 38.6 million, which is in line with the prior year, despite the $10 million higher catastrophe losses than last year, and slightly better than our plan. Life segment cash flow and earnings were also strong for the quarter. Ed will review the financial results in detail very shortly.

But first, let me share some information on our progress on the strategic priorities that we shared with you in February. We continued to work hard during the quarter on three areas of focus that I believe are critical value areas, first, improving our local market management and our agency management, a focus on building strong profitable partnerships with the best agents; second, enhancing our product, pricing and underwriting capabilities; third, improving our service and the efficiently and effectiveness of our operating model.

We have made tremendous and meaningful progress in each of these three areas and at the same time we have advanced our efforts to create a culture of execution and accountability, and to build our bench strength. Our goal to create a world-class regional P&C Company depends more than anything on the quality, focus and passion of our people, and we have made progress in each of these areas.

So what does that mean for our Personal and Commercial Lines business? In Personal Lines, where our plans for the year are really about achieving meaningful margin improvement, we have continued to gain positive momentum. Our Personal Lines' combined ratio is 4.5 points better than -- and has moved to 103.7 percent in the quarter. While this is still not where we want it, the improvement from the first quarter of last year when we had a combined ratio of 108 is meaningful.

Our primary focus and improvement has been around product, pricing and underwriting. Rate increases have been favorable. In the first quarter we realized an average base rate increase of about 6 percent, which is consistent with our plan. This increase is primarily the result of rate actions taken last year, and we expect the trend to continue. We have rate increases planned in most of our states where we do business. The majority of these planned increases have already been filed and where needed approved by the states.

In addition to improving margins through rate action we have invested and enhanced our products. For example, we've introduced an insurance score tiering product which will improve our pricing segmentation. We're right on schedule with that rollout of this product, which is currently deployed in Michigan for new and renewal business. And the rollout should be completed in other states by the fourth quarter.

In the areas of market and agency management we have also made good progress. In addition to managing profitability more effectively at the agent level, we have also been focused on our geographic mix of business with a view toward getting a better geographic balance and reducing our exposure in the Northeast.

We have very specific strategies aimed at improving profit margins in the more regulated states of Massachusetts and New Jersey where we plan to both improve the quality of the business and reduce our concentration. We have formed dedicated teams to manage our Massachusetts and New Jersey operations respectively, applying a greater focus and more thorough understanding of these markets.

With several initiatives underway encompassing a variety of actions relating to effective session strategy, residual market management and focus profitability has improved in these states and volumes were down in the quarter.

In New Jersey we've had a very positive set of discussions with the Department of Insurance on a number of initiatives. As result of these discussions we recently received approval of a base rate increase of 5.7 percent on new and renewal business.

We are also awaiting approval of new products which would increase segmentation capability by increasing the number of tiers in use from 7 to 15 on renewal. All existing business will be -- on renewal all existing business will be re-underwritten using the new tiered product and under the new rate structure. This model is expected to result in improved profit margins.

In Commercial Lines our plan is to develop the foundation for topline growth in 2005, and we have made meaningful progress in this area. In terms of agency partnerships and local market management the first order of business was to focus on improving retention. Along with better agency management, we have redesigned process workflows and added resource to positively impact our retention. We redirected our attention to the small renewal and endorsement process by expanding the guidelines on renewal bypass in all lines, and by pushing the adoption of this model more extensively in our branches. More than 80 percent of the small end renewals are now effectively handled without underwriter attention. The combination of these actions has resulted in significant improvement in retention since the fourth quarter to 80 percent in the current quarter.

The second area of improvement of improvement has been to improve the quality of mix and flow. We have been successful in changing our mix of bought business, increasing manufacturing and -- increasing manufacturing and retail classes and reducing our contractor class.

We're focusing more attention on increasing our standard package. We're very pleased with the response of our agents who have adapted quickly to our changes and are delivering to the mix target that we've established. As a result new business production has increased from 36 million in the current quarter from 31 million in the fourth quarter. And just as importantly, we're pleased with the mix. Our core mill (ph) market account segment from 25 to 75,000 policy size, the segment we want to grow, represents 25 percent of our new business up from 20 percent in our last quarter.

Lastly, while topline growth continues to be modest it is in line with expectations and we're seeing positive trends in new business growth and mix. And we're achieving our rate targets realizing additional premium on renewed policies of approximately 8 percent.

Our efforts to generate new business growth are on track, with some of the work involved in building agency partnerships underway, but with significant work left to be done through the year. We will focus on the hard work required to make sure we achieve profitable growth that will build the value in our franchise.

In addition to focusing on these core business strategies, we have also made great progress in building our bench strength. We announced three weeks ago that Marita Zuraitis has joined us as President of our Property and Casualty operations. Marita is one of finest, most effective leaders in the industry and brings tremendous knowledge and skill to our Companies. She will help us even more quickly achieve our goal of becoming one of the best regional insurers in this country.

We also have hired a new Vice President of Human Resources, Bonnie Hasse. We believe that talent is key to our success. Bonnie comes from General Electric and brings 20 years of Human Resource experience and tremendous energy and focus, both of which will benefit us greatly.

We have also failed other key roles. We have appointed Vince Saponar to head our Massachusetts Personal Lines Operations. With experience at Plymouth Rock, a regional leader in Personal Lines insurance in Massachusetts, Vince brings the expertise and track record we need to manage this business.

And Jose Transeco (ph), who joined us as our new Personal Lines Product Vice President. Jose brings a wealth of industry, and especially product experience, having a long career at Progressive with additional experience at Allstate and GMAC.

We have added other talent committed individuals to our already strong field team as well, with significant hires in lead underwriting roles in critical markets. And we continue to recruit for other positions.

We have made meaningful improvements in the first quarter reflected both in our financial results and our operational progress. While we're pleased with our accomplishments, we fully realize that we still have a lot more to achieve -- to achieve our goal of the top quartile operation of financial results. We'll continue to push on all fronts, and expect to have more positive news to report in the second quarter. With that, I will turn it over to Ed. I will be available at the end of the call to answer any questions.

Good morning everyone and thanks joining our call. As Fred pointed out, we're pleased with the first quarter results. The P&C business produced solid earnings reflecting an improvement in our underwriting results. The Life Companies posted strong cash flow as well as segment earnings. We reported net income of 12 million or 23 cents per share in the quarter versus 37 million or 70 cents per share a year ago.

The decrease in net income was primarily attributable to a non-recurring charge of $57 million, or $1.06 per share, related to the adoption of Statement of Position 03-1, partially offset by an unusual benefit of $30 million, or 56 cents per share, related to a favorable tax settlement with the IRS for tax years 1982 and 1983.

Now let's look at segment income after taxes which were $33 million for the quarter, representing a $9 million increase over a year ago. As a reminder, after-tax segment income excludes certain items that are included in net income. Such as the accounting changes and tax adjustments adjustment I just mentioned which along with other less significant items total a loss of 21 million or 39 cents a share for the quarter compared to a gain of 13 million or 25 cents a share a year ago.

Now let's look at segment income after taxes which was $33 million for the quarter, representing a $9 million increase over a year ago. As a reminder, after tax segment income excludes certain items that are included in net income, such as the accounting changes and tax adjustments -- tax adjustment I just mentioned, which along with other less significant items total a loss of 21 million, or 39 cents a share for the quarter compared to a gain of 13 million, or 25 cents a share a year ago.

Let's look at our pre-tax segments results. First, our P&C operations contributed $39 million in pretax segment income for the quarter. This is a slight increase over the $38 million reported a year ago. However, earnings for the current year quarter, including a more normal level of catastrophe losses of $21 million, which were $10 million higher than a year ago. Accordingly, on an ex-catastrophe basis our P&C income increased by $11 million or 29 percent from the prior year.

Personal Lines was the driver of earnings growth for the quarter, offset by somewhat lower Commercial Lines income. Let's look at each of these segment separately, starting with Personal Lines.

Personal Lines reported solid segment earnings of 11 million in the quarter. This represents a year-over-year increase of $13.5 million, which includes $10 million more in catastrophes. Our margins improved due to continued rate increases and lower loss frequency. Loss frequency improved in part due to fewer weather-related claims and generally more favorable loss trends.

As Fred mentioned, the Personal Lines combined ratio was 103.7 for the quarter, or almost 5 points better than a year ago. In Personal Lines the calendar year loss ratio, excluding catastrophes, improved by 7 points to just under 64 percent. Both personal auto and homeowners showed improvement.

In personal auto the calendar year loss ratio, excluding cats, improved by 7 points to just under 70 percent. Continued rate increases and lower frequency of losses drove this improvement. For the current accident year the personal auto loss ratio, excluding cats, was 65.7 percent which was about the same level with the year ago. We benefited from rate increases of approximately 4 percent in personal auto in the first quarter. Furthermore, as Fred mentioned, our strategies in Mass. and New Jersey have started to improve the profitability in those states.

In Homeowners we've also seen improved underwriting results. The calendar year loss ratio, ex CAT, improved by 9 points to 47.9 percent in the quarter. Once again the homeowners' line benefited from rate increases of about 13 percent and from lower frequency. Excluding CAT, the current accident year loss trends in the Homeowners continued to improve with a loss ratio of 49.5 percent in 2004, down from 50.6 percent for '03.

Turning to premium, overall Personal Lines net written premium is essentially consistent with last year at $366 million. This is driven by a 10 percent increase in the Homeowners line, offset by a 3 percent decrease in Personal Auto.

In Personal Auto the premium decrease is the result of our strategic decision to reduce our concentration in certain states. Excluding Mass. and New Jersey net written premium increased slightly.

Now let's turn to the results of our Commercial Lines segment where income decreased by $13 million from a year ago. This decrease is due to $16 million in reduced favorable development from prior accident years, and to a lesser degree increased expenses. Segment earnings in the first quarter of last year benefited from $32 million in favorable development from prior years. The current quarter includes a benefit of only $16 million.

Our combined ratio for Commercial Lines was 95.1 percent for the quarter. Despite the lower level of favorable year development in the quarter, calendar year loss ratios on an ex-CAT basis remained relatively flat at 46.5 percent. In the aggregate for Commercial Lines the current accident year loss ratio, ex CAT, was 53 percent in 2004 versus 52 percent in 2003.

This slight increase was driven by Commercial Auto due to somewhat higher loss activity in the current accident year. The current accident year loss ratio, ex CAT, improved in all the other commercial drive lines. The expense ratio in Commercial Lines increased in the quarter from 33.5 percent to 36.4 percent. This reflects higher expenses in technology, increased staffing and higher contingent commissions.

Now let's turn to Commercial Lines premium. Net written premiums of 196 million are 7 percent higher than the prior year. We continue to benefit from rate increases which averaged 8 percent across all lines. The benefit of rate on topline growth was partially offset by almost 5 -- almost a 5 percent decrease in policies in force.

As you recall, our new business and retention rates began to decline as we moved throughout 2003. This decline reflected our ratings disadvantage and our commitment to maintain margins through that ratings period. Although production has not completely rebounded at this point, we're encouraged by the improvement in our retention rate, which for Commercial Lines averaged about 80 percent for the quarter. Earnings for the Other P&C segment were essentially flat year-over-year, and were not material to the results for the quarter.

Now let's turn to our Life Companies. The Life segment reported income of 10 million for the quarter versus a loss of $2 million a year ago. Results are up from a year ago due to lower operating expenses and a more favorable equity market. Operating expenses were lower by about $20 million, or about 40 percent, from a year ago.

These lower expenses were driven by our ongoing expense management efforts and our decision to shut down our broker-dealer, VeraVest, in the fourth quarter of last year. Offsetting the expense benefit is some reduced net revenue of $8 million quarter over quarter from VeraVest. Segment earnings of $10 million for the quarter were slightly better than the 5 to $8 million we expected.

Turning to redemptions, variable annuity redemptions were 634 million for the quarter compared to 506 million in the prior quarter. The redemption rate was about 22 percent in the first quarter of this year, up from about 18 percent in the fourth quarter of last year. This increase was an expected result from the shut down of VeraVest, which as I said and as you might recall, was a third-quarter event for last year.

As you all know, we implemented a GMDB hedging program in late 2003 for our Life business. During the quarter the program performed as expected. The GMDB hedge generated a loss of 5.4 million for the quarter, which was slightly more than offset by reserve releases and reduced DAT (ph) amortization.

Now let's turn to cash flow. As you know, last year we introduced the concept of net operating cash flow. This non-GAAP measure was intended as a measure of operating performance and liquidity for our Life business. It represents GAAP segment income adjusted for certain non-cash item, such as DAT amortization and changes in GMDB reserves. We provided a reconciliation of this measure to our GAAP earnings in our press release and in our statistical supplementary.

As I have said before, the cash flow measure does not represent distributable capital for our Life Companies. The distribution of capital is directly related to statutory earnings and statutory capital levels, which I will discuss in a moment. In the quarter the Life Companies generated net operating cash flow of $40 million, which was slightly higher than the level we expected. Consistent with our previous guidance, we expect Life Company cash flow to be about $120 million for the full year.

Now let's briefly look finally at statutory capital specifically for the Life business. During the first quarter statutory surplus increased by $36 million. This was largely due to the unusual benefit of $30 million from the favorable tax settlement, which I mentioned a few moments ago. This brings our total adjusted capital for our Life businesses on a consolidated business -- consolidated basis to 590 million, up from 553 million at the end of '03. Following this our risk-based capital ratio also improved to 420 percent at quarter end up from 365 percent at the end of year.

So with those final comments on our Life business, let me turn the call back to Sujata. And I think we will take questions at this point.

Operator, can we turn the call over for questions?

(OPERATOR INSTRUCTIONS). Bob Glasspiegel at Langen McAlenney.

Let me first of all say that I very much appreciate the new reporting format and increased disclosure. I think that it helps. With that said, I haven't gotten the rhythm of the new format and have one nitpicking question on the other line in Personal Lines, page 8 of the stat supplement. That has been a pretty significant positive item in the prior quarters that you restated. And it was a negative item this quarter. Was there anything that drove that swing?

Bob, a couple of personal umbrella -- forgive me -- losses this quarter.

Bob, are you looking on page 8 on the other line?

Yes, page 8, Personal Lines Other -2.4.

Yes, that is the (indiscernible) DAT amortization. The big negative over there is really because of our DAT amortization expense. That is flowing through into other weeks, since we are reporting everything else on a statutory basis. And DAT increased year-over-year, and that is probably why you are seeing the big increase.

I'm just trying to think. You're shrinking Personal and you had been growing. And now that you're shrinking it is a negative? It is that what you're saying?

We had --.

It's been -- it was a positive for the last eight quarters.

Obviously we don't have this one at the tip of fingertips. And you as you can probably tell we're struggling will our new presentation as well. So let us dig that detail question -- answer that detail.

Okay. And on the tax line do you have -- two general questions. Do you any other -- this goes back 20 years, so we are looking at years 0 to 19 going back other sort of -- it was a pretty significant gain that you gained. Are there any other battles you're fighting? And this year's tax rate, any sort of guidance in what we should be thinking for the full year?

Yes, on your first question, no more big rabbits in the hat. We've got a couple of items that relate to our Life business that we're still contesting, but they won't be of the magnitude that we see here.

For those of us that have followed us in the past and go back to when we first went public, and we talked a lot about this in our Life business, this is so-called upgrade issue which many companies resolved over the last three or four or five years with the Service. So we've got some more normal items that could benefit us in the future, but none to this extent. In terms of --.

(multiple speakers) Are you ahead of the curve for the industry on DRD recoveries?

I think we're sort of -- I think we are sort of where the industry is. I will tell you in our view, from an accounting standpoint -- from a tax accounting standpoint, I think we're relatively conservative.

So there is more to come there if the industry --?

I think -- my view is that if there is something to come out of an IRS review on DRD deductions it will be more likely to be positive than negative for us.

In terms of tax rates, you know for -- let's look at it separately for both Life and P&C. On the Life side our GAAP income is so low and our permanent differences are so high, like around DRD, that there is tax benefits expected for the full year on the Life side. On the P&C side we are probably slightly expecting a rate given our income and our permanent differences -- slightly at a rate above AMT, which AMT is 20 or 21 percent. So I would say in the low 20s on the P&C side.

That's including the tax exempt interest or excluding the tax exempt interest?

Including it, Bob.

Sam Kidston (ph) with Black Rock.

I just wanted to ask a quick question on the capital level in the Life Company, obviously extremely strong there. Just wondering if there's any news on what you might be considering doing with that capital?

It's a good question. And one we have been -- we talked about going back to our meeting with the Street in February, and something that we will work on. I guess I would first say -- first agree with you that we're very comfortable with our capital positions there -- our capital position there. And we have talked about over time having an objective to monetize that cash, which means -- monetize our capital I should say, which means freeing it up from our Life entities to put it to use elsewhere in the business. We're continuing to work on alternatives with regard to that.

I will tell you that our view for use of that capital is to support over time our P&C objectives, and those largely growth related. We don't at this point have any plans to use that capital for something else. So as we continue to move forward and we continue to grow the P&C business and it continues to need capital our view is that we will work out a process to free that capital up for the Life business in support of the P&C business. But at this point our view is that our P&C business is very reasonably capitalized on its own.

Keith Walsh with Smith Barney.

With respect to the expense ratio on the Commercial Lines business that has ticked up a little this quarter. Where do you see that heading throughout the rest of year? Is this going to stabilize or continue to trend up? And then with respect to Travelers St. Paul, any further disruption there as far as new business -- opportunistic pickups of new business there?

Go to the first one. Obviously our Commercial Lines expense ratio is not where we want it to be ultimately. This year we are continuing to work on a number of things around our operating model. And as I said at last call, at the same time we're doing that we are also making some very strategic investments in technology and people right now. And so I see that being flat with the rest of year. And we will continue to manage it. And obviously long-term we're going to manage it down.

On the second question, which is I think a very important question, we see obviously a lot of disruption in the marketplace because of the different appetite of the two companies as they come together. We also have seen a lot of disruption in their field personnel. And I think that both of those things will create opportunities for us. And we have current discussions with a number of our lead agents across the system to continue to partner with them to grow; not specifically against any one company but to grow.

And I think part of that opportunity is created by people's concern of the number of markets available. Obviously in the last 24 months we have seen between Atlantic Mutual, Oil (ph), Kemper, and now St. Paul Travelers we do see a number of markets available to them. And so we have had just numerous conversations with what I would say regional brokers and large agents that have concerns about the concentration of their business to make sure they build a deeper partnership with folks like ourselves to spread their opportunities.

So I continue to see opportunity there, and I think that is going to allow us, if we're thoughtful and careful about doing it in the right places for the right underwriting capability, to move forward and grow our Commercial business. So it is a significant opportunity.

And again I would say that one transaction short-term view. The long-term view is that I think you're going to see continued disruption on balance sheets of some of the national players, given asbestos and California comp and things like that, which are going to restrict their capital and probably alter their focus, which all will lead to folks like ourselves being able to further penetrate the growing brokers and agents in the country. So we're pretty excited about the outlook and the conversations we have going on right now.

Jeff Thompson with KBW.

I had a couple of number questions first. You talked about reallocating the corporate expenses. Can you give us some guidance as to how much went to each segment, and maybe you only do PC versus Life as opposed to all four, but at least some sense.

Yes, we can give you those.

64 percent going to P&C and the rest goes to Life.

And in the P&C is that all in the expense ratio or where do you see it on the income statement?

It is all in the statutory expense ratio. And as we pointed out, Jeff, it is always been that way. For a statutory basis -- statutory basis we have always allocated all of our expenses back to the two businesses. So if you look at our P&C business historically, you would see those corporate expenses there. We have just treated them differently for GAAP. And we treat them differently for GAAP historically, because we're a multiline Company and we file our reporting that way. At this point essentially GAAP is following stat reporting.

And the GAAP expense ratio now is higher versus the way you reported it before for that reason?

Yes, well we never actually reported a GAAP expense ratio. We can calculate one, but we never actually reported one. We think of our expenses on a statutory essentially cash basis.

Oh, I used to calculate it. So my number is going to look higher for that reason. (multiple speakers) Okay, and paid losses, do you have that for the quarter?

What's that?

Do you have paid losses in Property Casualty for the quarter?

We do. I don't have it at my fingertips. We will dig it up.

Okay. And I guess looking at the overall book value it seems to be up more than net income. And maybe I'm just naive, but can you explain why that is?

Which companies are you talking to, the total companies? (multiple speakers)

I'm looking at the whole enterprise.

The whole enterprise?

Yes.

FAS 115 is the driver of that.

That's right. Okay. The interest rates were down. Okay, sorry. Credit scoring, you talked about rolling out some new products. Are you allowed to do that in the state of Massachusetts? And what are you going to do there if you can't?

We're not in Massachusetts. Although we are -- let's talk about Massachusetts right now. There are kind of three levels of initiatives going on in Massachusetts there. One is the regulatory effort. We have been working closely with the state government at all levels and the Commissioner on reforming the residual market, and trying to introduce our dirty rate, if you will, so there is a better allocation of the residual market, which has essentially been our biggest issue there.

They have ERPs, as you know, that allocate that residual market versus just allocating the residual market by a share of premium. So we have been working hard on that with them in that reform effort. And I think we are going to see something this year. And I feel relatively comfortable that we will see something to better allocate those -- that residual market.

The second level is kind of our mix in total. And we are -- we have been managing our volume down in Massachusetts to shift our mix away. And we -- our PIF (ph) count is down and we're growing that. We're being thoughtful about where we did out and how we do that. But we're trying to reduce our exposure.

The third area of focus, and the reason why we have a new leadership team and we have reorganized, is around a lot of the things that we did not do as well as the market leaders in Massachusetts, whether it is seeding strategy, or the way we do our agency management, or the way we manage our personnel and claims personnel, for instance. We are being very aggressive on a series of initiatives that we think are going to significantly improve our position in Massachusetts regardless of the reform.

But as you know, it is a very difficult state right now. And we're down to essentially 14 major writers in Auto. And so the Massachusetts regulars have a lot of reason to pay attention and work on reform so that we can make it a better place to be. And the governor has spent -- we have spent a lot of time with the governor as well. And I'm feeling comfortable that we will start seeing action and movement there.

But we are doing all three. Regardless of what happens on the reform, we are managing our mix more aggressively, and we have a very intense program to be as good as anybody else that competes in Massachusetts. And I feel we're going to make significant progress there. But it is critical to us.

Right. And the person you hired from Black Rock what was his role there?

Plymouth Rock.

I'm sorry, Plymouth Rock.

And if you -- Vin used to run -- they outsourced. They had a management company that managed other carriers' residual market and he ran that for Plymouth Rock.

Yes, Plymouth had their core business, of course, where they were the manufacturer or underwriter for their own accounts. But as Fred points out, they have a separate subsidiary which provided all of those services around agency management, claim management, all the things you would expect. And all of them unique to Massachusetts for companies that participated in the state but didn't have their own infrastructure in place. And then Vin ran that organization really from the beginning of time for Plymouth Rock up until reasonably recently.

That sounds good. And then one final question. You talked about the Commercial Lines retention rates of about 80 percent this quarter. How does that compare to 2003, and ultimately what do you expect as a retention rate once everything is in place?

Obviously, what happened last year during the quarter is we had some issues that the rating downgrade lasted longer. And it is always tricky month to month -- quarter to quarter, month-to-month based on exactly how you want to measure it. But there is somewhere between a 4 and 6 point improvement in retention from the fourth quarter to the first quarter. So I'm very happy with where it is and where that retention improvement came was with the best business, some of the best agents. So I'm happy with that improvement. We would like to see continued improvement. We're roughly at what we planned for now, but we will continue to work that lever, because I do believe there is still some room there.

Okay. Great. Very good quarter. Thank you.

Jeff, let me answer your question on paid losses. Overall for both current and prior year it is roughly $380 million in the quarter. That is down from a year ago of 412. On the current year they are about flat at around 140. So the benefit of the reduction comes from prior year, which as we would expect it to be given some of the favorable development we're seen in our reserves for prior years over the last year or so. So our paids are behaving as we expect them there at those levels.

Okay. Paid was 380 versus 412 in the prior year quarter?

Yes.

Angelo Gracie (ph) at Merrill Lynch.

I will reiterate the comments of other people that it was definitely a good quarter. I want to ask a couple of questions. In particular in Personal Auto can you provide some more detail about what is going on in Michigan? What kind of loss ratio we're seeing there, and how you see that ratio progressing throughout the year?

Right. Michigan has been good a performance for us. We're rolling out right now in Michigan. You know this -- we have implemented that new product which allows us a lot more kind of variability on rate, which I'm feeling very good about. We've also rolled out in Michigan -- we're in the middle of it -- our point-of-sale technology which makes us easier to do business with.

And so currently on the Auto side we have seen strong results in Michigan. And we believe that we will continue to see strong results as we improve our product and our ability to segment our business. So Michigan has been quite solid for us. And on the Homeowners -- you didn't ask -- but the Homeowners we have had significant rate increases we put in the form of both rate, base rate and also increased deductibles. And we have another round going in May. And so we see improvement in profitability occurring on that side as well. Retention remains strong for us in Michigan. And we -- again Michigan has been a strong and stable.

The CAT, a lot of the CAT activity this year versus last year was Michigan related to the freeze in the first quarter. But last year was actually a low number. And this year's CATs are within our plan, so nothing unexpected, but there was obviously an increase of CATs which was driven by a lot of the freezing we had at the beginning of the (inaudible).

In the Personal Auto loss ratio in Michigan, how is it relative to the overall book?

It is about the book. It is a little but lower because the influence of Massachusetts and New Jersey. I don't have that number right on (multiple speakers).

You would be thinking about the Mass. impact is a couple of points, right. So obviously Michigan is better.

Great. And how do you see that loss ratio progressing? It looks like you might be maybe just about 3 points or so off of kind of the run rate you had a few years ago?

I think that's right. We've got to continue to focus on it and improve it to that point. I think that's right.

So I think over time, as Fred points out, where we're going to see -- where we are going to get that back is continued rate around PIP which has been an issue in Michigan, we have talked about that -- BI, so those two coverages. And the new product where we get better tiering, which will give us better selection. So those are the things that will get us there.

We're looking at more like a two-year process?

Probably not two years. You know more like an 18 months process.

Eighteen month? Okay. And you did mention that you are looking to change the geographic mix. Which states do you like?

Well, we are -- we right now obviously are focused on margin improvement. But we have listed eight or so states that we participate in that we would like to see more of our mix over time as we enhance our product and feel comfortable with it. We will -- I would rather not disclose all the states yet, because it is kind of unfolding as we think about some of them. But it is -- in February we sat down with all of you, and I can get you that data that we gave you in February, which gives you this in essence what we think are growth states. But as far as the absolute sequence of when we aggressively go which state, that will unfold over the next quarter or so. But we do have that footprint that we can send to you that we shared with the analysts in February. (indiscernible).

Andrew, I can get back to you on those.

Okay, great. Just listening to your comments about the Life capital and how you would like to pretty much reinvest it in the P&C operations, I guess what is your appetite for M&A? Do you feel that you can get to your targets organically, or do you think you might have appetite for that in the next --?

I think right now we would say given the disruption in the marketplace it wouldn't be our preference to buy a balance sheet. But I think as we see the disruption occur, and I believe when the market softens you're going to see folks that have not invested in upgrading their product in Personal Lines or in their automation around small commercial -- you're going to start seeing some businesses struggle. And I think there might be some opportunity in the marketplace to do some things with agents to take the book, to book roles or some kind of renewal rights.

But our preference, I think, would always be to not necessarily be involved with someone else's balance sheet. Now I don't think we're ready for that yet. I think we still have a ways to go on our margin in Personal Lines and our product. And we are intensely working on that to make sure we have the kind of margins that we feel comfortable, and as well wouldn't get kind of a cross subsidy probably when you have when you take over a book roll session. We don't have enough breadth in some of our products until we implement some of the new products to feel comfortable with that.

And on the Commercial side, while I feel good about our profitability, our operating model is not where it needs to be from a cost point of view, as you all know. And so we have again a lot of actions in place to get that operating model more efficient, more effective, that combines more technology with our high touch to allow us to roll that stuff in profitably. So I don't think it is going to take a long time to be prepared, but I think this year is really incredibly important for us to get that platform ready so that we can capitalize on these opportunities.

and one quick numbers question. Can you give -- do you have the number for Holding Company cash and marketable securities at the end of the quarter?

Yes, it is about $55 million.

It looks like you are still well covered, I guess, through -- well into '05 as far as coverage?

Yes. Absolutely.

Ken Zuckerberg with Stadia Capital.

One question for Fred and one for Ed, if I may. Fred, congratulations on Marita joining the team. I wondered if you could provide us with her business plan for the next twelve month? And then Ed, getting back to cash flow, just given better Life Company cash flow and the favorable Moody's announcement a week or two back, I am just wondering if you can set some parameters for future potential dividend, reinstating the dividend and/or share buy back?

Ken, why don't I start with your first question. And I just want to reiterate how pleased we are that Marita has joined us. What I think as I think about Marita's skill set she obviously -- Jay and the team with Marita have done some things over the last three years at St. Paul where they grew business but grew it in a very thoughtful way to grow margins at the same time as they grew. And obviously she has a twenty-year track record of doing that effectively there. And with -- before that with USF&G in that turnaround.

And so as I look at her skill set it is a great addition to the team as we think about building our plans with the agents around profitably growing our business in a thoughtful way by matching up the right skill sets locally, getting the operating models in place to do that and take that business on effectively.

And so a lot of what Marita does is fit nicely into our developed plans that we shared with you in February. What it does do, it gives me comfort that we will have another set of eyes and more experience so we won't make mistakes as we're improving some of our mix, improving some of our balance in the field. And so a lot of what I have asked her to do is zero in on the effectiveness of our field, our execution capability of doing what we need to do.

She is also zeroing in on our portfolio of Products. And our capabilities, as you know from our February meetings, we write about 13 percent comp. If you think about us as a successful commercial company that will probably settle out somewhere in the 20, 25 range. That will require us to continue to enhance our ability to write middle and small workers comp. And so she will help us there as we upgrade the talent that we have set forth.

So there's a number of areas both on products and in field operations that I think she's going to help the team. And again just -- somebody's question earlier, the feedback I've gotten from the brokers has been quite positive because it gives them confidence that we going to do what we said we were going to do, which is build a world-class institution that attracts and retains the best people in the industry.

And I think that it gives our broker partners comfort that we're not just -- it's not words, that we're willing to do this. So it will be easier for us to do some of these three-year partnerships and partner arrangements and discussions with these brokers and agents that I've talked about in the past. So we're quite thrilled by our (indiscernible).

Ken, on your cash flow question, you know the story there remains the same. Obviously we're pleased with the cash flow. We're pleased with our capital position in our Life business. In our designs for the use of what we think of excess capital on the Life business, as I said earlier, is to support our initiatives on the P&C side. And so we're going to think about freeing up the capital over time in order to do that.

I do think however though at some point in the future, although we're not actively thinking about it at this point, we are going to have to think through about whether we are going to reinstitute a common stock dividend. But quite frankly that is not a priority in our thinking for this year. The first priority is as I described.

Bob Glasspiegel at Langen McAlenney.

Just to follow through on Ken's question with Marita. You now have in yourself and Marita two seasoned PC executives from national companies that are much larger. So it seems like you have a management team that can deal with a much larger company then Allmerica. And I think in your goals you're describing objectives to become a much larger national property casualty company. And you are certainly investing in the infrastructure. Is that a correct read?

The way I would describe it, Bob, is that what we're building is what I would characterize as a super regional. So the notion that we have here is that there is a huge gap that is becoming quite apparent in the marketplace. You have a number of the national folks, many foreign owned, that are concerned about their capital commitment to the United States, and they have some capital issues that they have got to be wrestled with, which is going to translate into their market focus.

At the low end you have 300 plus small regional companies that do not have the scale to invest in what we have all seen has been a dramatic increase in the need to use data to segment your business, and automation to automate your operating model so that you can cost effectively do business.

And if you look at what we're trying to do, we're trying to bring a scale of what some of the national folks are. We're going to be much more effective at using operating centers and automation with the local market contact and touch that we have. You know we have no aspirations to cover 50 states, but we clearly are going to be a bigger and better institution than we are today.

And so my view is if we can have lots of touches in our local markets, but do it in a cost-effective way and combine that kind of knowledge of your local markets with this scale, we will have something that the agent really, really needs right now. I mean there is not -- they're having a little bit of a vacuum, particularly if you look at that 25 to $75,000 range, it is very cost inefficient to use some of the small regional companies that have no automation. And if you look at that 75 to 200 range, as I said earlier, they have lost four big markets.

And so a lot of those folks are quite frightened, particularly when they give most of their large business to a Hartford and a Travelers and (indiscernible). They give much more of their small and middle business to those guys. And so we see ourselves being what I would call a super regional if we continue to invest in the capabilities.

Could you do that organically? Can you become a super regional organic only?

I believe we can. Now as I said, we are focused on winning in the marketplace organically. But I also believe that there is going to be tremendous continued disruption over the next two or three years. I mean there is a lot of folks that have not made investments that look okay on the surface, but their results are still not good. And they have not invested in some of the product stuff. And you are seeing adverse selection occur. So I believe very strongly that disruption is going to lead to some things happening in the marketplace like we saw with Atlantic Mutual. You're going to see a few of those.

And the question for us is are we ready? Do we have the capabilities to capitalize on that in the marketplace to grow. And so for me I'm very happy to make most of it organic, but I want to make sure as institution we have the skills, the capability, the infrastructure so that when this disruption occurs that if we wanted to do something else, we could. And that is why this capital base that Ed talks about is so important to us. We are so focused on that.

And I would also argue that there is a flight to quality in our industry. That we're not about being an A- company, we're going to become an A company, because in my view we are going to have two or three more disruptions and people are going to start looking at that egg (ph) with more and more focus. And therefore that balance sheet strength that we have and that we're building is going to be critical as people partner over the long term.

What is the timing of the answer being a yes to the question which I thought -- it sounded like you are saying is a no, no. Do you have the strength to do these acquisitions?

You know, I think this year is a foundation building year for us. I mean we have these SWAT teams and these initiatives to really build and enhance our products on both sides in our personnel. And so the way I have been thinking about it is that this year is focused on giving us the opportunity to grow in 2005. That is why we talk about margin and infrastructure and building our bench strength right now, because I have just had too much experience working with 30 or so big insurance companies that get ahead of themselves. And we refuse to do that. We are going to have the skills in place to do it. But I think -- again I think we have the time this year to do that. And we are going to continue to focus on it.

We will take our final question now. It comes from Erin Callen (ph) with Karsch Capital (ph).

Two quick questions. Have you gone back to the regulator in Massachusetts to ask -- and have a sense of how much capital you might be able to get out of the Life company at this point in time?

And then my second question is, Fred, I think you guys at the analyst day laid out a discussion that you could get to get to a 12 percent ROE target in the P&C business by within a three year period. Do you have any more sense as to how we should be thinking about how that walk should happen over the next three years?

On the question of the Mass. regulators, you know we continue to have very proactive dialogue with Mass. and let me just leave that one at that. But the other comment I would make is one that I tried to make earlier and that is that as we think about it the use for that excess capital on our Life business is going to be for our P&C business. Right now for what we're doing this year we're comfortable with our capital position in our P&C business.

So quite frankly we have got some time to work through this matter of freeing up capital for the Life business to support the initiatives in the P&C business. So that is the answer on that.

And one of the things on the improvement, what I would say to you is this isn't about a hockey stick. We're going to improve every single year. So we're focused on quarter to quarter continuing to improve performance over the next time frame to get to top quartile performance.

So while we're investing our business we believe we can continue to invest in our business and continue to improve returns. But this isn't about flat until we puff out in three years. This is about continued performance. We have proven it this year, and next year as we go towards it. And I believe that is very achievable through, as we said earlier today, both better agency management, but also the rate underwriting stuff that we're doing, and we're trying to push very effectively. And frankly in the operating model stuff we're doing now that in the tail end of that time frame is going to really help us on the expense side. So we're really focused on continued and steady improvement in our numbers.

I think the only thing that I would add to that is if you think about us for this year it goes back to what we said in our New York meeting, which is some improvement in our margins in Personal Lines versus a year ago around the things that we have talked about. In Commercial Lines it is not about earnings growth this year, it is about building the foundation -- the whole things that we're talking about.

And all of that sort of suggests something to you as you think about the gap between our 8 or so percent ROE and the 12 that we're going to over that three year period, which should mean to you that you'll see more of the earnings increase and more of the ROE improvement coming in the second and third year than you will in the first year.

And with no other question standing by, I would like to turn the conference back to management for any additional or closing remarks.

I just one to thank everyone for joining the call. And we look forward to talking to you as needed. And with that, we will just end the call.

Thank you.

Thank you everybody.

Once again, ladies and gentlemen, this will conclude today's conference call. We do thank you for your dissertation participation and you may disconnect at this time.