Hanover Insurance Group Inc (THG) 2004 Q4 法說會逐字稿

Welcome to the Allmerica Financial Corporation fourth-quarter 2004 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.

Welcome to Allmerica's fourth-quarter earnings conference call. With me on the call today are Fred Eppinger, our President and Chief Executive Officer; Ed Parry, our Executive Vice President and Chief Financial Officer; Marita Zuraitis, President of our Property & Casualty Company. Also here available for questions are Michael Reardon, President of our Life Company; and Mark McGivney, Chief Financial Officer of our Property & Casualty business. On today's call we will review our fourth-quarter and full-year financial results and provide some guidance on our 2005 outlook.

Today's discussion will reference certain non-GAAP financial measures such as segment income after taxes and Life Company net operating cash flow or what is designated, Segment Income Excluding Certain Non-cash Items. 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 website. Our prepared remarks and responses to your questions today include forward-looking statements, in particular, remarks about our general strategy, comments on underwriting conditions, written premium expectations, retention, improvement in both Personal Lines and Commercial Lines, maintenance of margins and loss development, as well as expectations regarding Commercial Lines' business growth, pricing, pre-catastrophe and reported earnings, adjusted statutory capital levels, ratings, future annuity redemptions, Life Company cash flow and earnings, the expected utilization of tax benefits and the performance of our GMDB hedging program, should be considered forward-looking statements.

These statements are subject to a number for 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 our third-quarter 10-Q and yesterday's press release which have all been furnished or on file with the SEC. In particular, Allmerica's future operating results and financial condition made vary materially depending upon weather, equity market and bond market conditions, surrender activities, regulatory actions 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 are available in the investor section of our website. With those comments, I'll turn the call over to Fred.

Good morning, everybody, and thanks for joining the call. Obviously, let me just say that I'm very pleased with the fourth-quarter results. We continue to build momentum and we also continue to advance the journey to become a world-class Property & Casualty company. In fact, in each quarter this year the Property & Casualty earnings surpassed those posted for comparable periods last year, even during the third-quarter when the earnings were reduced considerably by hurricane losses.

On a consolidated basis our after-tax segment income was 59 million for the quarter, or up 94 percent compared to the fourth-quarter last year. Our after-tax segment income for the full year was 141 million, up 52 percent for 2003. Our Life Companies made a solid contribution to earnings in the fourth-quarter, with income of 16.5 million and the cash flow of approximately 14 million. For the year, our Life Companies generated GAAP earnings of 11 million and a cash flow of 119 million, just slightly below the 120 million guidance we gave you. I'm very pleased with our financial performance and the progress we made in repositioning the Company in 2004.

I'm also very pleased to inform you that the Massachusetts Division of Insurance approved our request for a $75 million dividend from the life Insurance Companies to our holding company. I believe the Division's approval of that dividend is further testimony of the solid financial performance and the condition of our Company. Given our position and our continued strong Property & Casualty earnings, the relative strength and stability of our Life Companies, and other factors, I think it's now appropriate to work with the Board to consider reinstituting the shareholder dividend.

We made certain commitments to you when we talked to you about our strategic priorities and goals last year, and we've delivered on every one of them. I would like to use this time we have this morning to review the progress and reaffirm our guidance for 2005. We've invested a great deal of time and energy over the last year and a half to build a foundation on which we can grow profitably and sustain to quartile performance. We concentrated on building and sustaining a strong financial position, attracting and developing world-class talent, and creating a strong culture of execution.

Today our financial position is excellent. The financial improvements in 2004 speak for themselves and they are a reflection of the solid earnings growth and significant improvement in our capital we achieved. First and foremost, as I mentioned, we generated strong earnings in 2004. We also increased Property & Casualty surplus by 97 million, boasting our Property & Casualty surplus to more than 1.1 billion. Our Property and Casually levered ROE is now at 11 percent on a stand-alone business, up 4 points from a year ago.

We have reduced the volatility of our Life Companies statutory capital through the implementation of our GMDB hedging program. Our financial house is in good order. At the same time we have been successful at attracting some very talented people to our organization and building a culture of execution. The improvements we have made in these two areas will enable us to create a distinctive position in the marketplace. During the past few, we have created a very strong leadership team. We have retained some very talented and valuable people who I believe will help us achieve our vision, but at the same time we've attracted considerable new talent from some great companies because they believe we can build something special here.

The effectiveness of this team and the change in the culture we have made is reflected in all we accomplished in 2004 and will be even more evident as we look to 2005. We've also invested in our key business strategies as well, improving our local market and agency management, enhancing our products, pricing and underwriting, improving our service and the efficiency and effectiveness of our operating model. I'm very pleased with the progress here as well. In agency management for example, we identified about 500 agents and we deployed three-year business plans with roughly 350 of them. In each of our offices we've outlined three-year plans with winning agents. This planning discipline has allowed us to upgrade and align our talent, consistent with meeting the production goals of these agents.

On the product side we've made important investments to enhance the competitive position of our Company. In Personal Lines we needed to increase the use of data and predicted modeling technology in the underwriting process. With this in mind, we developed Budget Wise (ph), an insurance score tiering product that we implemented in 9 states just as we planned. This new product enabled us to improve margins, rate adequacy and building the next generation, to set us up exactly to build the next generation (indiscernible) product. In addition, in the fourth quarter, we have completed the deployment of an automated underwriting agent for Personal Lines in 15 states which will further enhance the consistency of our underwriting process.

We also upgraded our New Jersey product significantly and brought renewed focus on technical expertise to our Massachusetts business with very positive results. At the same time we put together a team to develop the next generation multi-variable (ph) product. We expect to launch this product in mid year and are confident we will improve our competitive position in the marketplace. In Commercial Lines we have enhanced our bought (ph) product and improved the mix of business. We've also expanded our product portfolio. For example, we substantially improved our marine capabilities to augment our Commercial Lines offering and we have assembled a great team of marine professionals. We are now positioned to grow in this line.

Similarly we have strengthened our umbrella team in order to effectively complement our product offerings and we now have umbrella specialists in most of our offices. Finally we have taken action to improve retention in Commercial Lines which was adversely impacted by the ratings downgrade in 2002. These substantial changes to work flow and profit improvements that we implemented this year have yielded very strong improvement and retention rates. We've also made good progress in service operations. For example, our new portal provides our agents with centralized access to information and tools they need to conduct business in the most efficient manner possible, 24 hours a day, 7 days a week.

Our point-of-sale system, we made some very significant improvement. To screen flow, we added preview (ph) capabilities to improve the ease of business. And most importantly we implemented a new Commercial Lines operating model following successful pilots in Michigan, New York and New Jersey. This operating model leverages technology and workflow improvements to effectively manage our routine processes such as small renewals and endorsements in order to free up front line underwriters to work more closely with agents and retain key accounts and prospect new business.

This new model gives us the advantage of having local underwriters in the local markets, pricing and underwriting accounts. Adults, if you will, making decisions while maintaining the attractive cost structure. The gains we have made in each of these areas and many others position us for continued progress in 2005. Having said all of that, let me provide you with some guidance on what you should expect for this year.

As we said at the investor conference we hosted in December, we think of this as a journey to achieve top quartile performance throughout the cycle, and that's not an easy thing to do. We believe strongly, however, that we can make the improvements needed to go from good to great and stay there. We are at different stages in our journey for both Personal Lines and Commercial Lines. So let me talk about Personal Lines first.

In Personal Lines, 2004 was all about margin improvement, to make sure that we had good business on the books and being rate adequate, particularly in the anticipation of a soft market. And we did that, we did it well. In 2005, we are focused on creating something distinctive while we finish the hard work of maintaining that margin improvement. With this in mind, we will focus considerable attention on product enhancements in umbrella, auto and homeowners. We believe our product portfolio represents a competitive advantage of the regional companies that do business in the markets we compete in, and we will focus on exploiting and extending this advantage.

We are also piloting a new Personal Lines operating model that will approve our efficiency. In this business as you know, efficiency is focused all around first call resolution, creating a model where you can respond to inquiries and resolve business quickly. By taking advantage of automation and workflow enhancements, we think we can get this done. So in Personal Lines this year, we are investing in the business and positioning the Company for growth and we expect to maintain our margins at the levels we achieved in 2004.

Having said all that, we do not expect 2005 to be a premium growth year for us in Personal Lines. In fact we will continue to refocus our book in some difficult market segments and continue our withdrawal from unprofitable sponsored business. Overall, we expect to maintain rates at approximately 2004 levels and that written premium will decline modestly. We believe the combination of these action will help us achieve long-term profitable growth going forward and improve earnings modestly in 2005.

Our goals are different in Commercial Lines where we have had roughly one year head start. The hard work of reunderwriting the Commercial Lines business was really completed mostly in 2003, and as a result we started 2004 with a book of business that generated solid margin. We made significant investments in that business this year positioning the Company for profitable growth. We have built an outstanding team in the field to ensure that we are able to respond to profitable growth opportunities in the market. I have said before we've upgraded roughly 50 percent of our RVPs (ph) as an example.

Success in our target market, defined as a small to mid size commercial market, is not determined by price alone. The best agents want to work with companies that are financially strong, offer competitive products, are responsive and have a long-term commitment to their market. And we fit that bill nicely. While we continue to invest in our Commercial Lines business in 2005, we expect the investments we have already made to enable us to generate new business equal to about 20 percent of our base premium in 2005 while we maintain existing margins.

We've achieved a great deal over the last year and a half and as a result we are positioned to meet the challenges of 2005. As I look ahead I am confident that we will respond to the challenges of the marketplace, the competitor pressures, the softening prices, the changing commission practices and others, and continue to deliver value to shareholders, aided through customers. We are committed to continue this year to improve both our financial position and our long-term competitive position just as we have for the 5 quarters since the journey began. With that, I will turn it over to Ed.

Thank you, Fred, and good morning everyone. As Fred said, we are pleased with our strong performance throughout 2004, and in particular our fourth-quarter results which is our strongest quarter this year. We reported net income of 63 million or $1.18 per share in the quarter, versus 14 million or 26 cents per share in the fourth-quarter last year. For the full year we reported net income of 125 million, or $2.34 per share, versus 87 million or $1.63 per share in 2003.

Now let's turn to segment income after taxes which was 59 million for the quarter, up 94 percent from 30 million for the same quarter last year. For the full year, total segment income was 141 million, compared to 92 million in 2003, an increase of 53 percent. As a reminder, after-tax segment income excludes certain items that are included in net income such as net realized gains and losses, among others. A reconciliation of segment income to net income is provided in the press release in our statistical supplement.

With that now let's look at our pretax segment results. For the quarter we reported P&C segment income of 74 million, up 40 million from last year from equal improvements in Personal Lines and Commercial Lines. The overall combined ratio improved by 5 points to 99.3. The launch ratio, excluding catastrophes, which was the driver of the lower combined ratio improved by about 6 points in both Personal and Commercial Lines and stood at 56 percent overall. The Personal Lines loss ratio improved primarily to continued favorable frequency trends driven by our strategies to improve margins as well as some industry factors.

The improvement in Commercial Lines loss ratio is primarily due to a 12 point reduction in adverse development of prior year loss reserves, partially offset by an increased ex-cat current action at year loss ratio. With respect to the lower level of adverse development of prior year reserves, you will recall that in the fourth-quarter of 2003 we saw over $20 million of reserve strengthening in our workers compensation line.

Let me now turn to our results for the full year where segment income increased by about $80 million or 70 percent. This increase is despite a $40 million higher catastrophe losses in 2004. The $80 million increase is primarily due to an increase of Personal Lines earnings of $100 million. This was partially offset by a $41 million decrease in Commercial Lines. And lastly, earnings in our other Property & Casualty segment increased by 20 million due to a charge taken in 2003 resulting from a single large property claim from a voluntary reinsurance pool.

Now let's look at the driver of this improvements. The overall combined ratio improved by 3 points for the year, and stands at 101 percent. In Personal Lines the ex-cat loss ratio improved by 8 points for the year and stands at 58 percent. The loss ratio was favorably impacted by the same trends that were highlighted a moment ago in the discussion for the quarter. Most of the decline in Commercial Lines was driven by an increase of $26 million in catastrophe losses, although higher expenses also contributed to the decline.

We continue to show progress in our Commercial Lines underwriting results reporting an ex-cat accident year loss ratio in 2004 that improved by over a point from 2003. Our Commercial Lines expense ratio stands at 38 percent for 2004, up 1.5 points over the prior year. As we discussed before, this increase is driven by higher expense levels associated with investments in people and technology as we build out this business. The Commercial Lines LAE ratio stands at 9.8 percent in 2004, up about 3 points from a year ago.

The 2003 loss adjustment expenses were unusually low and benefited from comparably higher favorable development of prior year reserves which drove 2.5 points of this increase. The remaining increase is due to higher personnel and legal expenses. Finally let me briefly comment on production. Overall written premium for the year is consistent with the year ago. Net written premium in Commercial Lines increased 8 percent for the year driven by rating action offset by a 3 percent reduction in Personal Lines written premium from a decline in policies in force, or PIF.

As we said before, roughly half of this decline is intentional and relates to our strategies and in improving margins. The other half of this decline is in our core business which Marita will touch on in some detail in her remarks. Before I turn to the Life Companies results, let me spend a few minutes elaborating on the 2005 outlook that Fred discussed. In Personal Lines we will continue to emphasize margins and expect to maintain margins in this segment at the improved levels we've seen in 2004. We're also very focused on the retention of existing business where we expect to improve our renewal retention rate by about to 2 to 3 points over the 2004 levels. At the same time we will continue our efforts to reduce volume in Massachusetts, and we'll complete our initiative to withdraw from unprofitable sponsored business.

These actions to maintain margins are particularly important since we don't expect any leverage from rate increases as our average rate increases are expected to be nil in 2005. The lack of rate taken together with planned policy count reductions should yield a modest decline in written premium for 2005. Now let's turn to Commercial Lines. As Fred said, our efforts in 2004 have been on building the foundation for growth. While we continue to improve our Commercial Lines' foundation 2005 will be about executing for profitable growth in our target markets. Our goal is to increase new business in 2005 by 25 percent of our 2004 premium base.

Our overall financial objective for 2005 is to deliver topline growth in the low to mid double digits while maintaining the solid margins we currently have in this business. In order to maintain margins at the current level we will continue to focus our efforts on improving retention, most of which that are currently underway. In fact, we expect we can gain 2 points in our renewal retention over our 2004 base. Also we expect premium increases including expected exposure growth in the low single digits.

In summary for Commercial Lines, pre-cat earnings should show a moderate in improvement in 2005 as the earnings impact of our expected topline growth will only fully be realized in 2006. However, reported earnings can be expected to improve appreciably with the return to a more normal level of catastrophes in 2005. Now let's discuss the Life Companies. The life segment income -- the life segment reporting income of $17 million for the quarter versus 6 million in the prior year quarter. For the full year the life segment income was 11 million compared to 9 million in 2003. The earnings in the current quarter were favorably impacted by stronger equity market returns resulting in lower amortization of deferred acquisition costs and lower GMDB costs. We also saw lower operating expenses as a result of the shutdown of our VeraVest distribution operation last year.

As we have said before we expect volatility in GAAP segment income due to the impact of the hedging program, the new SOP 03-1 rules on GMDB reserves and DAC accounting. The factors that impact volatility have been disclosed in our 10-Q. Now let's turn to cash flow. As you know last year we introduced the concept of net operating cash flow. This non-GAAP metric was intended as a measure of operating performance and liquidity. It represents GAAP segment income adjusted for certain non-cash items such as DAC amortization and GMDB reserves. We have provided a reconciliation of this non-GAAP measure to our GAAP earnings in our press release and our statistical supplement.

As I have said before this cash flow measure does not represent statutory income or distributable capital from our Life Companies. The distribution of capital is directly related to statutory earnings and statutory capital levels, and of course is dependent on regulatory approval. In the fourth quarter of 2004 the Life Companies generated net operating cash flow of 14 million, which was $24 million lower than in the previous quarter. The primary reason for this decrease in cash flow between the two quarters is the $20 million loss on the GMDB hedge program in the fourth quarter versus a $6 million gain in the third quarter.

As you know we implemented a GMDB hedge program in late 2003. The program is designed to generate gains during a falling equity market and losses during a rising equity market to offset changes in the underlying GMDB exposure. This program continues to perform as we expect it would. With the market up in the quarter, we recognized a loss on our futures contracts of about $20 million. This loss is offset by an expected decrease in the future cost of the guaranteed minimum death benefit resulting from the market appreciation.

On a year to date basis, cash flow was at 119 million, consistent with the guidance we provided earlier as we began the year of about 120 million for the full year. Now let's look at statutory capital. As Fred said the regulators approved a $75 million dividend from the Life Company to the Holding Company effective at year end '04. The approval of this dividend is further indication of the solid performance and financial strength of our Life Companies. Statutory surplus for the year increased by $29 million, after the reduction of $75 million for the dividend. Before giving effective dividend, total adjusted statutory capital increased by $104 million. That increase is due to the following factors.

First, approximately 20 million is from our underlying statutory operations. Second, another 30 million is from a tax settlement with the IRS related to prior years which we discussed with you in the first quarter. And finally 55 million resulted from payments by the P&C Companies to the Life Companies pursuant to our tax sharing agreement. This payment relates to the P&C Company's utilization of the Life Companies' net operating loss carryforwards and the benefit to the P&C Company from the Life Company current year tax losses.

Before I close I want to spend a few minutes talking about the 2005 guidance for the Life Companies. First, we continue to expect GAAP earnings for the Life Companies to approximate breakeven levels. As you know, the fourth quarter market performance was very strong leading us to increase our expectations for 2005 cash flow. We've updated the cash flow guidance from the 75 million that we provided on investor day to now be in the range of 90 to $100 million for the full year. You will recall the $75 million guidance provided earlier was based on asset levels that September 30th. This new guidance is obviously based on asset levels at year end.

Furthermore in 2005, we expect total adjusted statutory capital to grow by $25 million from operations assuming a 10 percent market return. In addition, we expect to continue to see growth in surplus from the utilization of Life Companies' tax losses and NOLs against our expected P&C earnings. The amount of this benefit is difficult to project but we estimate it at between 40 and $50 million for 2005. This brings total expected increase in the Life Companies' statutory capital for 2005 to 65 to $75 million. Lastly, we continue to expect GAAP earnings from the Life Companies to approximate breakeven levels, of course deepening on large part on equity market returns. With those comments, I will now turn the call over to Marita.

I'm pleased to report the fourth quarter results for our Property & Casualty companies. These results represent a strong finish to a year of solid performance. Our Personal Lines segment was our earnings driver for both the year and for the quarter. Our results in Personal Lines have been very consistent, strong earnings growth driven by margin improvement. Segment income in Personal Lines was 46 million for the quarter, that is up 81 percent over the prior year quarter. Full year results were even stronger with segment earnings of 135 million, that is up almost 300 percent compared to the prior year. Our Personal Lines combined ratio improved by approximately 4 points for the quarter, and about 6 points for the year, with our full year combined ratio just under 99 percent.

The improvement in the combined ratio is driven entirely by the loss ratio, the ex-cat calendar year loss ratio improved by about 6 points in the quarter and by about 8 points for the year and was at 58 percent for the full year. The significant improvement in our loss ratio continues to be driven by the combination of internal strategies to strengthen margins and also by favorable industry loss trends. The key factors that contributed to the improvement realized in the fourth quarter are consistent with those in prior quarters.

Specifically we benefited in the quarter and the year from the impact of disciplined rate action in all the states in which we do business. For example we filed rate increases and we've taken, in personal, auto and homeowners have increased earned premiums in '04 on average 6 percent for the quarter and about 6.5 percent for the year. Prior year reserve development also improved and contributed positively to earnings especially for the year. For the year results were positively impacted by about 10 million of favorable prior year reserve development in both homeowners and personal auto, while the prior year was adversely impacted by 25 million of reserve strengthening in the personal auto line.

Furthermore, the frequency of losses continue to trend favorably in auto and home compared to both prior years and previous quarters. These factors are reflected in the ex-cat current accident year loss ratios which by 5 points in personal, auto and 7 points in homeowners. Also improved results in our Massachusetts book contributed significantly to the earnings improvement in the fourth quarter and for the full year as Fred has mentioned. Our 2004 accident year, personal auto loss ratio in Massachusetts was about 7 points lower than it was in 2003. Fewer weather-related losses and continued success on our effort to better control this difficult marketplace has improved claim frequency.

Our Massachusetts operation has also benefited from actions around premium pursuit and improved session strategies developed to minimize the adverse impact on this State's unique high-risk driver pool. As you may know, on December 31st the Massachusetts Insurance Commissioner improved an order implementing reform. This first phase of reform is effective January 1, 2005 and will result in a redistribution of the high loss ratio ERPs. For those of you that are unfamiliar with the Massachusetts market, currently in Massachusetts an insurer is assigned a certain number of exclusive representative producers, known as ERPs, based on market share and is required to accept all policies written by that agent. Not all ERPs have the same personal auto loss ratio. Therefore, a distribution based on ERP count is not always a fair distribution of the high risk driver pool in the State. A redistribution of the high loss ratio ERPs under the new rules should result in more equitable share of the high-risk pool's performance among the insurers in the State and clearly have a positive impact on our business in 2005.

Our margins have clearly improved in Personal Lines, however, as Ed pointed out net written premium has declined. Overall net written premium for the year is down 3 percent despite the rate increases which I imagined that averaged 6.5 percent, and policies in force are down 10 percent. As we discussed about half of the decline is by design resulting from our strategies to reduce volume in Massachusetts and from exiting certain sponsored markets. However, PIF was also down in our core business, particularly in Michigan.

As I said last quarter an executive -- an aggressive rollout of our Budget Wise product in Michigan, along with rate increases on both new and renewal premium, resulted in more of an impact on the flow than we anticipated but had a positive impact on margin as we expected. In response we implemented many service and operational enhancements to ease any work flow burden on our Michigan agents and we also made some adjustments to our rates which should strike that optimal balance between business generation and margin improvement that we constantly strive for.

Although it's early we did see slight moderation in the PIF decline in the fourth quarter in Michigan. In Commercial Lines we generated segment income of 26 million in the quarter. This compares to income of 6 million in the prior year quarter. The increase quarter-over-quarter is primarily due to an improvement in the prior year development of reserves. As Ed noted in the fourth quarter of 2003, we increased our workers compensation reserves by about 16 million. That was following an extensive review of our workers compensation book.

This obviously impacted earnings last year as compared to this year. Excluding prior year development, current quarter earnings also benefited from somewhat lower catastrophe losses offset by some large loss activity in commercial auto cost and C&P during December causing an increase to the ex-cat current accident year loss ratio for the quarter. It is also important to note that the fourth quarter of last year was a very favorable quarter.

For the full year Commercial Lines segment income was 58 million, down from 99 million in 2003. The decline in segment income reflects significantly higher catastrophe losses in 2004 as we discussed last quarter and increased expenses as we invested substantially during the year to position our Commercial Lines business for profitable growth this year. Our margins in this business remain solid. For the year the ex-cat calendar year loss ratio in Commercial Lines was 51 percent; this is down 2 points from last year.

The improvement in our loss ratio was a result of continued rate action and lower adverse development of prior year reserves. Our ex-cat accident year loss ratio improved by over a point. Rate increases including exposure growth for the year, averaged about 6 percent across all lines. In addition, 9 million less in reserve strengthening added to the calendar year performance. Turning to a discussion of expenses in the segment. Loss adjustment expenses increased due to higher catastrophe related activity and less favorable development of prior year LAE reserves. Operating expenses also increased in 2004 primarily due to increased staffing and technology costs associated with the buildout of our Commercial Lines business, as well as from higher profit-sharing payments obviously driven by better margins in 2004.

Our Commercial Lines expense ratio was 38 percent in 2004; this is up almost 2 points from 2003. While this is clearly higher than we want it to be, let me assure you that this increase is intentional. We are thoughtfully managing expenses related to every initiative. With our new operating model and other process improvements we have gained efficiencies in many of our critical processes. However we have chosen to reinvest these efficiency gains in the business to build the foundation that will further our long-term growth strategy. The ex-cat combined ratio for Commercial Lines is 98 percent for 2004. The higher than normal catastrophes added 7 points to the combined ratio.

Now let's turn to Commercial Lines premium growth. Top-line growth was approximately 10 percent for the quarter and 8 percent for the year. While this growth was primarily driven by average rate increases of 6 percent, the underlying trends for positive future growth continue to remain favorable. For example both retention and new business have improved. Retention for the year was up 7 points compared to 2003 and stands at 78 percent. This represents good progress, though it's still not where we want it to be. Our retention rate clearly has benefited from our ratings upgrade early in 2004. However it is also improving due to changes we've made in our frontline workflows.

We have leveraged technology to automate more of a small renewal and endorsement processes that Fred mentioned, and as a result of these changes now more than 80 percent of our small renewals are processed without an underwriter's involvement. That's up from 50 percent previously. We believe there may be additional room for improvement in this area and our goal is to improve the retention ratio another 2 or 3 points in 2005.

These same work flow enhancements have improved our ability to generate new business as well. As our underwriters have been relieved of routine processing responsibilities they been able to spend more time working with our agents and prospecting new business. New business production increased to 47 million in the quarter, up 40 percent over the fourth quarter of 2003 and for the year new business increased from 138 million in 2003 to 179 in 2004. That's an increase of 23 percent. The flow of new business continues to match up well with our target business mix with standard package, the line we want to grow the most, representing 23 percent of new business in 2004; that's up 3 points from 2003.

Similarly we have improved new business flow in our middle market segment comprised of accounts with premium between approximately 25,000 and $100,000. For 2004 first tier middle market accounts represented almost 25 percent of new business, that's up 6 points from 2003. We have significant growth opportunities in this market. We feel good about the progress we made in Commercial Lines in '04. While we are clearly not yet where we want to be we've generated important momentum. We believe that the combination of both home office and field office talent that we've assembled during the year has created a solid foundation on which we can grow profitably in 2005. And with that, I will turn it back to Sujata who will open up the call for questions.

We will now take any questions from the listeners.

(OPERATOR INSTRUCTIONS). Bob Glasspiegel with Lena McClenny.

It was an encouraging quarter. Ed, I'd like some more guidance just on the life dividend outlook for '05. Is there any reason, or what would be the factors that would cause the dividend to be much different than that 65, 70 million of statutory earnings growth that you anticipate in the year?

As I think you are aware it's really a function of two things, our management of the exposure that we have in that business to the equity market, and of course that is all around our GMDB hedging program, on the one hand. And on the other hand how we build statutory surplus because we said we expect statutory surplus to be up pretty close to the $75 million dividend. We feel pretty good about, if we perform as we expect to, we feel pretty good about next year's dividend.

Will that be the base or the foundation that we should think about, what the corporate dividend might be, or are there other factors that would enter into that?

No, there are clearly other factors. You talk about dollar amount, there are clearly other factors. We haven't yet begun an internal discussion of that. We will here, as Fred said, have discussions with the Board probably over the next couple of meetings, so there will be more on that to come. But there are in number of factors that go into the thinking on what are common shareholder dividend would be that go beyond dollars available to the holding company from the Life Companies.

You are saying we shouldn't look for that magnitude of a dividend?

I think that would be a very high dividend for us. But again give us a little bit of time, if you would, to do some work on that. As Fred said we feel very good about where we are. We are going to retain that dividend, that $75 million dividend of the holding company. So we feel we've got much more flexibility than we've had in the past and we feel very good about it, but we need a little bit of time to work on that.

Just on Personal Lines, you said your outlook for '05 was no rate increases and some reunderwriting positives that would emerge flat combined ratios, although I do think you are raising the guidance a little bit given that the fourth quarter was a little bit stronger than probably you had been looking for. Are you saying in the absence of rates or things being equal, you can hold margin and losses aren't growing in your forecast? Or are there some sort of reunderwriting positives that are offsetting some frequency increases in '05 in your guidance?

I think what we are saying broadly is, as we think about margins we are suggesting to people that they think about us delivering the kind of margins in '05 that for the full year we delivered in '04. We recognize on a net basis, we don't expect to see any rate when you think about rate increases and what loss cost expectations might be. And yes, we are going to continue to see some improvements as we talked about in our opening remarks and as we have talked about in our prior conversations around continued exit from sponsored business from continued premium pursuit efforts around homeowners and to some extent personal auto across all of our geographic areas. And then thirdly, continued improvement in Massachusetts in part due to some of the fundamental changes that we have made there, and in part due to some of the benefit that we're just getting in general in the Mass marketplace because of the prospect of reform.

So you are saying there is some sort of macro loss cost growth embedded in your model for the industry conditions?

Clearly.

Thank you. Appreciate it.

Colin Devine with Smith Barney.

I was wondering if you could clarify for me one more time what the reserve development was and split it up on both Personal and Commercial Lines this quarter. It seemed to me a little confusing from your comments as well as the way the press release is written. Secondly, if we could talk about the plans for the dividend. If you mentioned that in the first 2 minutes of the call, I missed it. What are you planning to do with the 75 million this year? And then lastly, if you can give us an update on the status of the Life and Annuity businesses. Is it your plan now just to continue to hold these things? And if that's the case, how do you address the question of shareholder value creation given the ten buck difference between your stock price and its current book value?

Three-part question. I'll start and I talk about the development piece. Overall, we had about $9 million of adverse development in the quarter. The vast majority of that, about 7 million of that was in Personal Auto. The remainder of it obviously would be in Commercial Lines. In Personal Auto it was mostly in the 2003 accident year and it was mostly around BI. But I would tell you for the size of our business the magnitude of our reserve position, just the way this actuarial process goes on a quarterly basis, we don't view either the Personal Lines amounts or the Commercial Lines amounts to be really of any consequence or suggestive of any real trend. So that's where we are on development.

I think your other question is around the dividend and I think we talked about that a little bit in the opening remarks and a little bit in response to our question that was asked by Glass and that is, we feel very good about getting the dividend. It was a year end event so we received the approval for this money about a month ago. And our plans right now are to retain it in the Holding Company although we're going to very actively consider a common stock dividend. And as we have said in the past, we continue to be very focused on upgrading our A.M. Best rating to A from A-, and to the extent that capital is part of the equation having the flexibility of having that money at the Holding Company and being able to put it into the P&C Company gives us -- is good. It is positive obviously; it gives us flexibility.

As we think about it now, that is how we are thinking about it. In terms of the broader question on the Life Company, our point of view has not changed on that. We are very focused on maximizing shareholder value no matter how we go about it. Right now we're going about it, I think quite obviously, in generating reasonable amounts of cash flow, strong statutory earnings, we've tripled our dividend from a year ago making that money available for the benefit of the shareholders. So far, our executing to our strategies around holding the business we think has worked out probably better than we had anticipated, better than we suggested it might.

That is not to say however though, if there's an opportunity to dispose part or all of that business to present value some of those cash flows that we'd expect to garner over time, it's not to say we wouldn't actively consider that and look at that. I think that's what we've said consistently and we continue to maintain that posture.

I have two points to come back. First, why then do you think the market is not recognizing what you feel is a good performance by the Life business and your stock price which continues to trade at substantial discount to buck? And then secondly, and I would really like to direct this question to Fred, if you could explain to me how for a company such as All-America that is a small to maybe small midsize Commercial Lines writer, an A rating from AM Best if it's achievable, is going to substantially improve the company's growth prospects?

On the stock price question, I don't think I have much to say about that. I think there are a lot of factors that go into determining why a company is traded the way it does. I think in our case, clearly there's been some improvement, substantial improvement in the P&C results. I think we're starting to see that reflected in the stock. I'm not sure it's fully reflected. And on the life company, you know, I think it's a little bit difficult to understand. And I think as time progresses and we continue to generate statutory surplus and continue to free up dividends, I'd like to think that it would be understood better and that would manifest itself in some additional value to our shareholders. I have no reason to believe that it wouldn't. So that's how I think about the stock price.

On the other, and we talked about it quite a bit and I feel even stronger today if you've seen the actions on asbestos, continued actions of asbestos that have come out in the last quarter. What I've said continually and I'm going to reinforce it even more, our belief very strongly is that the reason our value creation is going to be distinctive is because a superregional has an enormous advantage over the legacy players that have large legacy issues that are going to keep coming through the system. But when those legacy issues keep coming through the system or other things like Spitzer and other things that concern the market in general, people are going to look at the quality of the balance sheet even harder than they do today. You're going to see a lot more focus from agents on about where are they going to partner up with companies that are going to be in it for the long haul.

So that rating is going to become even more important than it is today. Historically in P&C, obviously it's been mostly a large account commercial thing because -- and particularly those with bank debt. But where are you going now? When you start talking to people, the first thing they start talking to you about is your outlook, your rating and where they think you're going to be long-term as they decide who they increase their volume with on their shelf space.

Now let me say one other thing. We have had tremendous positive conversation with Best, and I would argue from our conversation with Best that it is becoming more and more about just time and track record and less and less about capital levels. That is why we have suggested that we're having the conversations about a shareholder dividend because I'm getting more and more convinced that they are getting comfortable with our run rate and our ability to fund a dividend out of P&C performance. And so right now I would say to that, we are getting closer. I would say overtime as we prove our ability to execute, we will get the upgrades we're looking for to position ourselves in the marketplace. So again in my view, that's why it's worth it and reasonable to have the conversation with the Board about reinstituting the shareholder dividend.

I would like to add one thing to that, if I may Fred. From a Commercial Lines underwriting perspective, the agent placement of business is not contingent upon a full A rating and we have no issue with writing all the types of business we want to write within a Commercial Lines book of business. Obviously the brand recognition and the financial strength would give us something to celebrate. But we have no issues with the placement of commercial business between the two.

Again, to me the question is there's a short term issue, which you are absolutely right, it hasn't held us back. There's a long-term issue which is this is a consolidating industry towards the stronger players. And it's obvious that what's going to happen is the better stronger players that can continue to invest in their business and the technology and the products and the people are going to have the advantage and this continues your march toward consolidation. Again, you look at the asbestos and environmental numbers that are coming back again, round two is coming. Those things are distracting at minimum for people. And in my view that is going to really affect agents. They're going to pause when look at the industry and say who are they going to partner with as they go forward, particularly those that are very successful and growing which is where we are matching up. That's who we're going to, that's who we're talking to. I feel great about what we're doing and the investment we'd made on our balance sheet.

Dan Farrell with Fox Pitt Kenton.

First question. Can you comment a little bit on your efforts in Personal Lines in states outside of Massachusetts and Michigan? What is the growth rate right now of those states and how long do you think before we start getting some meaningful traction out of those 14 or so states that you are targeting for growth in Personal Lines?

I think that meaningful traction is not going to begin to happen until toward the end of the year as we roll out our plans in states other than the big states that we have today. We clearly have growth plans in some targeted states with the rollout of our new product. But I think it will take, as it did in Commercial Lines, the full year to get the products in place before we begin to see some meaningful momentum there.

Versus the total segment, is the growth rate in top-line in those other states roughly flat versus the single digit decline that you are predicting for the whole segment?

We are obviously going to see some descent growth rates in some of these states. The problem is they are so small to begin with, it's not going to have a meaningful impact on the overall result until they gain some more momentum.

Can you just comment generally about competition in the auto market, what are seeing from competitors on pricing and also on acquisition or advertising costs?

Are you referring to Personal Auto?

I'm sorry, Personal Lines.

From a personal auto perspective we are seeing I think net, net overall, relatively flat. There's been a lot of discussion in the marketplace about some decreases, some increases, but overall Personal Auto I would say across the board is relatively flat. That's going to differ by state, it's going to differ by type of market. But overall it's relatively flat.

One of the things I should say about our plan, we are watching this very aggressively because there's a real question in my mind whether the second half of the year we might see some increases, particularly in our states. And so my view is there could be an opportunity here in the second half of the year as people kind of put through rates. I would say that most people that -- what you are hearing and what I see is people are thinking about inflation essentially. We have a very unique portfolio compared to the world. So ours is very unique; a Massachusetts, a New York, a New Jersey, a Michigan, I can go on for hours, about each one of those. And so they are very different dynamics.

But what I see is we were very aggressive, as Marita said. Our goal was to -- we hammered rates this year. We were late to the game on credit as a company, we were late to the game on really rate adjustment and we hammered them. And so for us, we're ahead had a little bit here and there and so the question for us is very specific by segment, by state, by frankly territory, where we need to make adjustments and get inflation or where we can (indiscernible). It's flat but we're really watching this because my belief is that some of the states we are in we're going to see some movement in the second half of the year.

It is exciting to think about the fact that we make money in some relatively difficult states and taking that expertise to other states, I'm looking forward to building some margin in some new states for us, as well, over time.

That's helpful, thanks.

Jeff Thompson at KBW.

I wanted to focus first on your comments on the higher growth agents. You identified 500 and have contracts with 350. I guess, have a lot of these contacts come from the new hires or have you had relationships with these agents before and you're establishing something new? Also what is the organic growth rate of that group?

It's great and I will go through it and Marita can talk about some early indications there, Jeff. Most of them are in the 1850. The issue we had as a Company is that in the states, our portfolio states, we had appointments for a lot of these. But there is roughly 500 that we've identified, that we call winning agents, growth agents. What we did is we profiled folks that were growing their business and had the kind of mix we have. Obviously there are the growing agents that write carnivals, that aren't in the kind of business we write. So we have been focused on those folks that seem to be investing in their business, they have the right kind of mix, and good retention with their partners.

And so as I said, the 350 or so, what we've done is started doing these three-year plans because the notion for us is we should be matching up our best underwriters and the right kind of capabilities against those that have the greatest growth potential. And so we watch, Marita and I now track, we track growth rates in all those what we call winning agents. And some of those agents relationships, as you said rightly so, they are enhanced because of who we hired because a lot of what we did is we profiled those agents and said who is the best underwriters that work with them in that territory and we went and got them.

In other cases we had relationships with them but we did not have the right underwriting internally approached or matched up with them, so we shifted underwriters to match up with them. In other cases, the operating model with such that our underwriters sat at their desk and didn't spend enough time in their office and so now with the new operating model they're spending time with them. There's a number of factors that give us confidence that we're going to see significant increases in flow. The other thing I would say to you that is really important, is that while we never got dinged significantly in adverse election from the downgrade, I wouldn't say our mix was A. A lot of what we're doing with those agents, is that we are asking for the best business now.

I mean so on the margin, the comp, smaller comp, less percentage of comp, the right kind of commercial auto, the right package for these kind of partner agents. The other thing I think we're seeing is we're really working the mix. One of the things we talk about is 25 to 75,000. So not only are we seeing more growth from these guys, we're seeing more in our sweet spot which is this 25 to $75,000 kind of account.

It's a big deal for us and if you remember on the analyst, the investor day, we talked about how we now image all of (indiscernible) paper and we're able to create this operating model where agents, underwriters, visit more. These are the guys they're spending time with. So it is a fundamental shift. It just started in the fourth quarter to get real retraction in a consistent way. But it's a big deal for us as we look at 2005.

I completely agree with what you said. I think to answer your question, it's a really nice combination between agents that we currently already had a strong relationship with as well as some new agency appointments. The new agency appointments give us some lift but in most cases we had a relationship with these agents. It was just a matter of focus. You have to ask for it, you have to want it. And I think the agents are enjoying our focus in Commercial Lines. The fact that we spent some time, to Fred's point, in '03 developing the products we needed for this segment, the service that we needed for this segment and again to Fred's point we put adults at the point-of-sale with good agency management abilities and asking for the business that they want to write. And it's really adding up to be quite a winning combination.

Second question, when you give your combined ratio guidance for next year, how do we think about the expense ratio in relation to that? Will the expense ratio go up and the loss ratio come down a little to meet that guidance or will both be flat? And then what does that imply for the expense ratio maybe in '06?

Roundly, Jeff, you should expect to see over time as we build the top line, the ratio to come down. Most of the heavy lifting on investing that we plan on doing in the business has been completed although we continue to invest in technology in a meaningful way going forward, but of course that amortizes in over an extended period of time. What you can sort of envision is absolute dollars kind of staying flat, but as the top-line grows you'll see the ratio come down. We're also going to continue to see efficiencies coming out of our operating model changes both in Commercial Lines and then into the new year, into 2005 in Personal Lines. Some of that will be reinvested in the business and some of it will come through to help on the ratio as well.

Again as you know, we've been pretty clear. We are 3 points probably in total overall company, too heavy on expenses. We talked about this three-year journey, the top quartile. I fully expect, as Ed said, this is -- you might see more on the statutory side than the GAAP because of so much IT spend. But this is a transitional year for us. I don't see a lot of lift from the expense, but I certainly see where we are going which is we are going to be -- what we're doing is investing on an efficient operating model.

This is about, we know that we're heavy here and we have explicitly made those investments. And we are, in my view, doing pretty good about every pilot we've done. We are seeing the kind of efficiency we invested in. I'm comfortable that we're going in the right direction there, but it is a good observation. It is a place where I think as markets -- one of the nice things about us is that as I look at 2006 if we did see some continued softening, we are in control of our own destiny because that expense number can come down for us and still improve performance.

It is reasonably to say then, based on your comment, that pick a year, 3 years, 4 years, 5 years, your expense ratio should be 3 points lower than it is now.

We have to. We want to be in the top quartile over the player even because our mix is a little bit smaller commercial than guys with the large commercial, that kind of change the number a little. Yes, that is exactly right. That is what I see us going to and that is why, again, this may be a transitional year but as I get closer to that 2006, we want to see this thing come done.

And a quick numbers question, you're tax rate seemed a little high this quarter. Was there any unusual rule?

It's sort of the way taxes work. As we get into the fourth quarter it was clear to us that our expected full year taxable income was going to be higher than we anticipated earlier in the year. So the way the tax accounting works is you need to adjust for that in the fourth quarter which is what we did. We have a higher effective tax rate in the fourth quarter than we would expect on a full year basis going forward.

And the full year full year is the right basis?

I think we gave guidance at our investor day that we're sort of in the low-ish to mid-20s for an effective tax rate going forward.

That excludes the Life base?

Right.

Just a couple of quick ones on the Life side. The operating expenses both variable and other have been sort of going down through the year and then kind of ticked up a little bit. Can you give us some color on that?

In the fourth quarter we had a little bit higher allocations of corporate expenses and some slightly higher legal expenses that I can point you to. I think overall we expect the downward trends to continue.

First of all, originally the expected talk of the hedge was 70 million. I think last year you had hedge losses of 25. Do you have the numbers in terms of what is the expected future costs now and what is the variance so far?

I don't have that updated through the fourth quarter, Andy. I can get back to you with that.

Lastly, do you have a carbon allowance number that is on the (indiscernible) balance sheet at the end of the year?

295 million, I belief.

Thank you.

Angelo Graci from Merrill Lynch.

I got in there right in time. Great quarter. I wanted to go back to a question someone had asked about the common dividend and also the ratings, it was a combination of that discussion. It did center around the A.M. Best rating, getting that up from A- to A. I was wondering if you could provide some more color about the importance of getting the senior debt ratings back to investment-grade and how that factors into the whole discussion of reinstating the common dividend?

Angelo, as you know we've had that as an objective as well. It doesn't get as much discussion from many of the analysts perhaps as it should. We are very focused on that as well, working with all the rating agencies. As we think about our ratings for the P&C business what matters most in the marketplace is Best, and you've heard what we've had to say about that. But certainly S&P and Moody's matter as it relates to the senior debt rating. We continue to be focused on that. We're trying to balance the importance of getting that rating backup into investment grade with the importance, quite frankly, of reinstituting the common stock dividend.

I don't think all things being equal, that getting a common stock dividend back in the likely amounts that we will have it, will be particularly material to the decision on upgrading the holding company ratings back to investment-grade because first of all, the charge associated with that will be fixed, a fixed charge. Secondly, as it relates to dividend capacity, either when you think about Life or P&C, it's not particularly material. So I don't expect that to be a big deal as we work with rating agencies to get the holding company rating higher.

Is that a management view or a view that has been discussed and let's say agreed-upon with rating agencies?

That is a management view. Remember we really just got ourselves into the position where we can start thinking about our common stock dividend. We will work with rating agencies on that. That's my view at this point. But we will vet that with rating agencies.

Although I would tell you, we had -- last year, when we met with them we obviously had a very positive set of conversations with S&P and Moody's, etc., at the end of last year and laid out what we wanted to do. We have done every single thing we've talked to them about doing. So I believe at the beginning of this year we are going to have a very positive conversation. We have outperformed many of the numbers that we talked to them about. So I feel good about our conversations and our position.

You mentioned before that it's not really a capital issue. I agree with that. And you did mention in at conference in December that it's really just a matter of continuing to report results. It almost sounds like there is really nothing more you can do to accelerate an upgrade process?

I think that is roundly true, whether you're thinking about financial strength ratings from Best or anybody else, around the operating insurance companies or on the senior debt ratings from any of the rating agencies. I think that is right.

One numbers question. Can you provide the cash and marketable securities at a Holding Company at year-end?

I think before the dividend it was about $50 million.

It's 130 million.

Then when you add the dividend of 75 million, I think it gets you to around 120 or $130 million.

Thank you very much.

Ms. Mutalik, I would like to turn the conference back to you for any additional or closing remarks.

We will just end the conference here. We've run out of time. But I just want folks to know that we are going to be at my desk for any further questions, if you have any. With that, thank you very much.

This does conclude today's conference. We thank you for your participation. You may disconnect at this time.