Hanover Insurance Group Inc (THG) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Allmerica Financial Corporation first quarter 2005 earnings conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Vice President of Investor Relations, Ms. Sujata Mutalik. Please go ahead, ma'am.

Thank you, operator. Good morning and welcome to Allmerica's first quarter earning 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, and Marita Zuraitis, President of Property and Casualty Companies. Also here available for questions are Michael Reardon, President of our Life Companies, and Mark McGivney, Chief Financial Officer of our Property & Casualty business. Please note that our earnings press release and a current report on form 8(K) were issued last night. Our press release,statistical supplement and a complete slide presentation that will be used for our call today are available on the investor section of our website at www.allmerica.com. After the presentation we will answer questions in the Q&A session. Our prepared remarks and response to your questions today may include forward-looking statements including statements about our future results of operations.

We caution you with respect to reliance on forward-looking statements and in this respect refer you to the slide two of our presentation deck. Today's discussion will also reference certain non-GAAP financial measures such as segment income after taxes and net operating cash flow or what is designated segment income excluding certain non-cash item. 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,site as I mentioned earlier. With those comments, I will turn the call over to Fred.

Thanks, Sujata, and good morning, everybody, and thanks for joining our call. I am very pleased to report very solid results of the first quarter. Segment income in our core P&C business was up 60% compared to prior year quarter. The substantial improvement in our P&C earnings was driven, once again, by our personal line segment. But also reflects very solid performance in our commercial lines business. Our life segment, however, generated a loss of $7 million in the quarter compared to a gain of 10 million in the first quarter of last year. This business was adversely impacted by a decrease in equity market returns for the quarter, as you know, and a quarter-over-quarter comparison is hurt by higher than normal segment earnings in the first quarter of last year. Ed and Marita will discuss our results in depth in a few minutes and discuss the improvements we've made in both segments. But first I would like to give you an overview as I see the quarter.

I am very encouraged by our continued improvement in our P&C segment. Over the past seven quarters results have consistently improved over the comparable periods for the prior year. This is exactly what we set out to do when we began our journey in the fourth quarter of 2003, to become a Company that improves every day and builds critical positive momentum. And we did that while investing in our business to really create a distinctive position for our future. We have made important progress in each of our major Property & Casualty segments during the first quarter. In commercial lines, for example, we are achieving our overall long-term objectives, growing the business while maintaining strong margins. Here, due business flow has picked up considerably. For the quarter new business premium of 48 million was up 14 million, or almost 40% over the first quarter of last year. And I'm very encouraged by the quality of the new business. As I have frequently stressed, it is our objective to aggressively grow our commercial lines of business, but we will do so very thoughtfully and we will always maintain our focus on underwriting. Our goal is to generate profitable growth within the business cycle.

I am pleased that the growth we have achieved is consistent with our plans. New business in the target market, policies with the account size of 25 to $100,000 accounted for approximately 40% of the commercial lines new business in the quarter. Written premium growth in our specialty lines, in the marine, umbrella, bonds, was 10 million in the current quarter, an increases of about 44% compared to prior year quarter. I and we are particularly pleased with the growth in our specialty lines. We believe that our investments in our specialty lines represent, in effect, a source of additional profitable growth and it also helps us build great partnerships with our new winning agents. Our strategic focus in development deeper partnerships with winning agents is also contributing to the growth in our commercial lines business. Overall, written premium growth with our winning agents was 19% for the first quarter. Clearly, we believe that we are beginning to gain traction in commercial lines. Our long-term strategy should produce the desired results, positioning our Company for continued success.

In personal lines our margins remain strong and we continue to invest in the business in products, our operating model and technology to make us easy to do business with, setting the stage for growth beginning next year. For example, we've initiated the rollout of our enhanced auto products with multivariate capabilities beginning in Illinois, Tennessee and Maine this week. Our enhanced auto product, which was developed on an ambitious schedule in less than a year, it followed budget wise and it is a key component of our personal line strategy. It is expected to enable our partner agents and our Company to write more business and more profitably. With this product introduction we should be position to underwrite with much greater precision and to price our products more competitively. And it will enable our agents to serve a significantly broader spectrum of their markets. Let me now turn to our life segment. Our Life Companies continue to perform as we expected. The current quarter's segment loss and net operating cash flow of 36 million are consistent with expectations, given the equity market performance. Our Life Companies capital remains strong with adjusted statutory capital of 589 million and a risk-based capital ratio of over 500%.

We have made excellent progress in our journey to position our Company as one of the very best in the industry. We have delivered strong and consistently improving financial results, building earnings momentum, significantly strengthening our P&C return on equity, and maintaining a solid capital position. At the same time, we are making important operational and organizational improvements, strengthening our leadership in frontline teams, and enhancing our product and service capabilities. While all of this is obviously positives, there is still a lot of work to be done in order to build on our success and generate long-term value for our shareholders. As I have said many times, our objective is to become a Company that delivers top core top performance in our industry. That means to become a Company that consistently generates above average earnings growth and above average return on equity. While our progress is solid and I'm very optimistic, I recognize that the journey is not without challenges.

In commercial lines, for example, our long-term success depends on our ability to generate meaningful and profitable top-line growth. As I said, we made good progress this quarter. Continued success will depend largely on the effectiveness and competitiveness of our new operating model, our special products initiative, and our ability to increase the number and depth of our partnerships with the winning agents. Additionally, the dynamics of the commercial lines market could effect the pace of this growth. As I have said, we are committed to profit growth and I will maintain discipline around our margins. Similarly in personal lines, our ability to continue to generate earnings growth as we move through 2005 and in 2006 will become increasingly dependent on our ability to gain market share outside of the four states that currently make up 80% of our volume. This is why we are so focused on the competitiveness of our product portfolio, including the multivariate auto product, our new homeowners product, and our account rounding strategies. It is also why we continue to work so diligently on building the presence in the six to eight additional states we are now focused on.

Lastly, we have made the explicit decision to build our business model to support sustainable future growth, which has resulted in an expense ratio which is about three points or so higher than ultimately needs to be. We expect about one half of that expense ratio will come -- or improvement in that expense ratio will come from premium growth and the other half will come from diligent expense management, including the impact of our new operating models in commercial lines, operating models both commercial lines and personal lines operating models that we are implementing by the end of last year for commercial lines and through this year for personal lines. We've been at this for about 20 to 21 months and we have a lot more to be done to consider ourself the consistent top quartile player. But I continue to be proud and encouraged by our people and what they've accomplished in such a short time. And I remain confident in the long-term success and our ability to deliver on what we've promised. With that, what I would like to do is hand it over to Ed.

Thank you, Fred, and good morning, everyone. Again for me, thank you for joining our call. As we announced in our press release, I will be using a slide presentation during my remarks. So I trust all of you have this available. Please turn to slide five for a review of our consolidated results for the quarter. For the quarter net income was 46 million or $0.86 per share. This is up from 12 million or $0.23 per share in the first quarter of last year. As you may recall the first quarter of last year included a charge of 57 million, or $1.06 per share, for the cumulative effect of adopting SOP 03-1. This was partially off -- partially offset by a benefit of $30 million, or $0.56 per share, related to a favorable tax settlement with the IRS for tax years 1979 through 1991.

As you can see from the slides, segment income after taxes was 34 million for the quarter, or $0.64 per share, versus 33 million for the first quarter of last year, or $0.62 per share. Let's now turn to slide six for a review of the segment results. While total segment income after taxes has remained relatively flat quarter over quarter, as Fred said our P&C earnings improved strongly with a 60% increase. This increase was offset by a loss in the life business and by somewhat higher taxes. For the current quarter, P&C segment income of 62 million was $23 million higher than the prior year quarter. These results were driven by improved loss performance as well as lower catastrophe losses. Our personal line segment was the driver of P&C earnings growth for the quarter, offset by somewhat lower commercial lines income due to less favorable development of prior year reserves. Life Companies segment income was $17 million lower in the current quarter, compared to the first quarter of a year ago. This was driven by a decrease in equity market returns for the quarter and higher than normal earnings in the first quarter of last year. Our effective tax rate was up in the current quarter, as compared to last year, because of strong P&C earnings and a somewhat lower benefit from tax-exempt securities.

Now let's turn to slide seven for a review of our P&C results, starting with a discussion of personal lines. Personal line segment earnings of 39 million in the quarter, were $28 million higher than the prior year quarter. This increase was driven by four factors as we show on this slide. First, catastrophe losses were $8 million lower in the current quarter compared to last year. Second, favorable development of loss in LAE reserves was $6 million higher, primarily from improvement in the 2004 accident year. Our 2004 accident year results have developed favorably in both personal auto and homeowners, primarily due to lower frequency. Third, current year underwriting results related to involuntary pools improved by $5 million, primarily in the Massachusetts Commonwealth Automobile Reinsurers Pool, or car, for the car pool. And lastly, better current accident year loss performance drove approximately $9 million of improvement. The earned impact of rate increases taken last year in both personal auto and homeowners and continued favorable frequency trends, drove these improved results.

Now let's look at commercial lines, which we describe on slide eight. Commercial line segment earnings were 21 million in the current quarter, or $6 million lower than the first quarter of last year. As you can see on the slide, this decrease was driven by the following three factors: First, we had $12 million of lower favorable development of prior year reserves; For the current year's quarter we saw modest favorable development in C&P and commercial auto, although at a lower level than a year ago. This continued favorable development was driven by a decrease in frequency. Partially offsetting this was some adverse development in Workers' Comp. in the current quarter, primarily in the 2004 accident year, as rising medical costs continue to adversely impact ultimate losses. Next, catastrophe losses were $1 million lower in the first quarter of this year. And lastly, current accident year loss performance drove approximately a $5 million improvement as the 2005 accident year results through the first quarter of this year are better than the 2004 accident year results through the first quarter of last year.

Finally, let's turn to production, which is described on slide nine. Overall, written premium was 549 million for the current quarter, down 2% compared with the first quarter a year ago. In commercial lines, net written premium increased by about 9% for the quarter. This was offset by an 8% reduction in personal lines. As Fred said, we are pleased with the increase in commercial lines premium, which is driven by growth in new business, solid retention, and exposure growth. While personal lines premium was lower in the current quarter, this decline was in part the result of our strategies aimed at running off certain sponsored business and reducing our Massachusetts auto book. However, PIF also declined in our core business, particularly in Michigan. The PIF decline in Michigan has started to moderate, however, in the current quarter and Marita will discuss this in more detail in her remarks.

With that, let's discuss the Life Companies, which is on slide ten. The life segment reported a loss of 7 million for the quarter. This compares to an expectation of breakeven results, given our assumption of equity market appreciation of 2% quarterly. Accordingly, the segment loss of $7 million is due to higher amortization of DAC and higher GMDB costs net of hedge gains, resulting from a lower than expected equity market return as measured by the S&P 500 Index, which was down 2.6% in the current quarter. As we have said before, we expect volatility and GAAP segment income, driven by equity market volatility, and its impact on our GAAP accounting for our hedge program, the new SOP 03-1 rules on GMDB reserves and DAC accounting. Now let's look at Life Companies cash flow on slide 11. Life Companies cash flow is a non-GAAP measure, as you know, intended as a measure of operating performance and liquidity. It does not represent statutory income or distributable capital from our Life Companies. As you may recall, we discuss and compare our quarterly cash flow results on a sequential quarterly basis.

In the first quarter of 2005 the Life Companies generated net operating cash flow of 36 million, which is $22 million higher than the fourth quarter of '04. The primary reason for this increase in cash flow is a $6 million gain on the hedge program in the current year's quarter, versus a $20 million loss on the hedge program in the fourth quarter of last year. As you know, the hedge program is designed to generate gains during a falling equity market, as we saw in the current quarter, and losses during a rising equity market, as we saw in the fourth quarter of last year. All of this is to offset changes in the underlining GMDB exposure from our variable annuity business. With the equity market down in the current quarter, we recognized a gain on our futures contracts of about $6 million. This gain is meant to fund the expected increase in future GMDB costs resulting from the market decline. As in prior quarters, our hedge program continues to perform as we expect it to. Now let's look at our statutory capital on slide 12. Adjusted statutory surplus for the quarter increased by $7 million compared to the fourth quarter of last year.

Capital increased by approximately 14 million, resulting from payments from the P&C companies to the Life Companies pursuant to our tax sharing arrangement. This was partially offset by a $7 million reduction in capital relating to policy holder dividends, which we believe will reverse in future periods of this year. Statutory operations were at breakeven for the quarter as a result of the relatively weak equity market performance in the quarter. As you can see, our capital position continues to remain strong, with an RBC ratio over 500%. Before I complete my review of the Life Companies, I would like to comment briefly on redemptions for the quarter. Variable annuity redemptions were 21% for the quarter, which is an increase over the fourth quarter level which was about 19%. This first quarter increase is not unusual and is consistent with somewhat higher redemption levels observed in the first quarter of prior years. There remains our expectation that variable annuity redemptions will approximate 18% for the full year.

In closing, we are very pleased with our P&C results, which were strong in relation to the prior year quarter despite a more difficult winter. Our Life Companies results while generating a GAAP loss, were also in line with expectations when you take into account the weak equity market performance. Life Companies cash flow remains in line with our guidance, after giving affect to actual equity market performance versus the assumed 8% annual return. Once more, our results for the first quarter are on track and have not resulted in any material change in our expectations which we shared with you during our fourth quarter conference call. With those remarks, I will turn the call over to Marita for her update.

Thanks, Ed. Good morning and I like, Fred and Ed, would also like to thank you for joining the call. I'm pleased with the performance in our P&C business and to have the opportunity to update you on our progress. Ed highlighted the financial drivers of the P&C results, so I will focus more on a few specific aspects of the performance in the quarter. First in personal lines. We have consistently improved our bottom-line performance in personal lines over the past several quarters. And our margins continue to remain solid in both personal auto as well as the homeowners line of business. In particular, given the difficult winter weather this year, we are even more encouraged by our results. We are seeing good lift in the earned rate from rate actions taken last year. Loss trends remain favorable and pricing in the market is consistent with our expectations at the beginning of this year. And while written premium is down 8% year-over-year, we are beginning to see a stabilization in our books.

As you know, our personal lines written premium declined throughout 2004. And as we discussed then, about half of that decline was by design, resulting from strategies to reduce volume in Massachusetts and from exiting certain sponsored market business that Ed talked about. The other half of the decline was a result of lower policies in force, even in the core book, particularly in Michigan. As you may recall, the Michigan premium decline was due to disruption caused by an aggressive roll-out of budget-wise, which was our insurance score auto product, and we responded promptly to that issue with corrective actions. We implemented many service and operational enhancements to ease any work flow burden budget-wise caused to those Michigan agents. We also made some adjustments to our rates to strike that balance between business generation and margin improvement. Even though policies in force were declining in Michigan, the profitability of the book of business actually improved during that period and this does suggest that we are retaining and writing better quality business. The actions we have taken started to produce results in the fourth quarter of last year and we also continue to see those in the first quarter of this year.

I am pleased to report that indications are that PIF decline is slowing and new business is gaining momentum. In fact, a higher proportion of the decline in policies in force in the first quarter was due to our actions to reduce volume in Massachusett, and the sponsored business, and a lesser portion of the decline in policies was in our core business. Now I want to elaborate on the new auto product with multivariate capabilities that Fred began to talk about. As he mentioned, we are rolling out our new multivariate auto product. We successfully launched this product on April 23rd in the states of Tennessee, Illinois and Maine. It is currently available for new business quotes and policy issuance with May affective date. We are implementing this new product in the smaller states first, so that we can learn from our experiences in these markets and further improve the product before we role it out in our larger markets. Implementation has been put into three phases. Michigan is schedule for the fourth quarter and that's assuming a successful roll-out in the smaller states. The introduction of this product is just one example of the kind of Company that we are building.

We developed this sophisticated highly segmented product in a very aggressive timetable. And as the result of the hard work and determination of a lot of people, we have significantly strengthened that product portfolio. With the additional of this new product, our agents and our Company are better positioned to write more business, more profitably. Before some perspective on commercial lines, I would like to update you on a couple of regulatory issues, one in Michigan and the other in Massachusetts. As you know, the insurance commissioner of Michigan issued a proposed regulation banning the use of insurance score and personal lines in that state. This ban was to take effect on July 1, 2005. We, along with other companies, challenged the ban with a lawsuit filing for injunctive relief. A hearing to invalidate the ban was held earlier this month and I am pleased to say that a decision was reached by the trial court in our favor just this week. Consequently, the ban will not take effect as proposed by the commissioner. The commissioner has, however, indicated that she will seek a review of the decision in the Michigan Appellate Court. And we'll update you on this issue as appropriate.

In the meantime, I want to assure you that we are managing our Michigan market very thoughtfully and that we will continue to protect our interests in this state. We are also managing our Massachusetts market thoughtfully. We are doing everything we can to advance much needed reform in the auto insurance market. When I spoke to you last quarter, I mentioned that the Massachusetts insurance commissioner had approved an order implementing auto insurance residual market reform that I believed would be beneficial to our business. However, on January 31, 2005, a Superior Court judge placed that reform on hold. And that was in response to a suit filed by certain carriers and agents in the state. Regardless of reform, we do remain committed to further improving our results in Massachusetts. For example, as we've talked about before, we are taking steps to reduce claim frequency, enhance our premium per policy, and to actively manage our ERP business and our session strategy. Let me remind you that the Massachusetts auto business improved significantly in 2004 from these efforts.

The solid results that we achieved last year have continued through the first quarter of 2005. Turning now to the commercial line segment. As Ed said, our margins remain solid and written premium grew 9% in the quarter. Our new business growth is solid and our retention levels remain in the low 80s. As Fred indicated, new business premium in the current quarter was 48 million, which is 14 million or almost 40% higher than it was in the first quarter of last year. This is good progress. Not only is growth in new business strong, but it is also largely being generated by our preferred agency partners. Developing deep agency partnerships has been and continues to remain a core part of our commercial line strategy. While total premium grew by 9% in the quarter, written premium from the winning agents grew at a 19% growth rate for the quarter. Growth in our specialty lines, as Fred indicated, is also strong. Written premium increased by 10 million, or 44%, compared to the first quarter of 2004. Developing our specialty lines expertise is certainly another key component of our commercial lines growth strategy.

We continue to enhance our bond, umbrella and inland marine capabilities to specifically compliment our core product offerings. The investments we've made in specialty lines are producing results, generating strong new business growth in what has been historically profitable lines for us. Finally, let's look at our new business by account size. We have identified, as we've talked about before, the low end of middle market or policies with account size between about 25 and 100,000 as a targeted business for us. We believe this to be a large yet relatively under served market, one that is less price sensitive and yet one that requires underwriting and benefits from local market knowledge. This is perfectly -- we are perfectly suited to this market. We developed a new operating model, designed to be responsive to that market, and implemented it in the fall of last year. Again, we have achieved positive results. As I said, new business in the current quarter was 48 million, and 40% of this new business, or about 20 million, was from accounts that fell in this first tier middle market category. We are very encouraged by the progress we are making in our key strategic initiatives by our results to date.

We will continue to push top-line growth in commercial lines and we will go as far as the market permits without compromising margins. Our commitment to underwriting quality and margins has and will continue to be a top priority for us. There is no question that the market has softened. But we are still earning modest increases in premium, primarily through exposure growth, pricing on new businesses is challenging, as our competitors are working aggressively to retain their best business as we are as well. However, we are, as our results suggest, still able grow premium and hold on to margins. Overall, our results in both lines show continued progress and demonstrate the effectiveness of the strategies that we've put in place. And with that, I will turn the call back to Sujata. Thank you.

Operator, we will now take questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from Angelo Graci from Merrill Lynch.

I have a couple of questions. The first one is with respect to premium growth, you did provide a good amount of detail about where you are experiencing new business growth. And I was wondering if you can touch upon those results relative to your expectations and how it fits into concerns that the rating agencies might have with your premium growth overall.

Yes. I would say that we are very pleased with our premium growth in commercial lines. We are very pleased that it's coming from the agents that we are targeting it to come from, as referenced by the 19% growth with those targeted agents as opposed to 9% overall. We are pleased with the mix of business and the fact that it is coming from our sweet spot as we define it. And we are actively looking at mix of business, type of business, but I would say we are very pleased with the growth that we are seeing. And it's right in line with what our expectations were at the end of last year. It's in line with our plans. We know where it's coming from and I think it's exactly what we expect as we look at that growth against margins and continue to build those margins. So I think it's coming from the right places and we're very pleased with the results.

And on the personal lines, which I think most the analysts would say that they think about the personal lines business and what's happening in the personal lines business, I'm sure. I guess that's what you're referring to. I'm actually feeling very, very strong and good about personal lines. If you look at budget-wise implementation last year, we were late to the game in credit. And so when we started this effort, we quickly put a new product in place. And even though we've had PIF declines in personal lines, our margins in every single state have improved and it's because our mix of business is so much better. And as I look at that rate and that credit introduction works through this system, we are starting, as Marita says, we are starting to see that turn and I feel pretty positive about the second half of this year. And also, I guess, I would also tell you about our growth is that everything we've done has been positively responded to.

So let's talk about this multivariate, even though it's the first week. Having been around the country now and visiting these states, we've introduced the energy and the response has been tremendous. Yesterday, for instance, we had one of the training sessions in Illinois and we had over subscription and 70 good agents show up and there's a lot of energy and the first week of submissions is right on what we expected, which is significantly higher than we've had in those states before. So I feel very good about the product introductions we are doing and on the commercial side, as Marita said, it's coming from exactly where we want it from. It's where we had upgraded the underwriting teams. Where we have good people in place and we've matched them up with these winning agents. And every time we've done that, people have positively responded. Now, we will never do that ahead of our skills and we'll never do it to get business at a wrong margin, but I feel very comfortable that we are actually one of the companies that has the most buzz in the marketplace right now in the agency plan and therefore are getting more turns at bat, and the better turns at bat, than almost anybody we face.

Just to complete the thought, with reference to the rating agencies and where we stand with them with respect to our growth plans, as Marita said and Fred said, we are right on plan. So by definition, we are right on, if you will, with the rating agencies. We've had recent conversations, and what I mean by that is over the last couple of months, both in terms of our plans and our actual results with both of AM Best and S&P. We have discussions coming up with Moody's. So we feel very good about our performance relative to the commitments and detailed commitments we've made to the rating agencies.

Great. In personal lines would you say that we are starting to reach an inflection point or bottoming out as far as the overall premium decreases or -- ?

Yes. If you see what we did with rate increases last year by state, I think we are going to -- it won't happen until at the end of the second quarter because we took a lot of aggressive action, particularly in a couple of the bigger states, in the spring and then into summer on homeowners. And so for me, I look at it -- obviously, I look at it very carefully by week but I see that occurring at the end of the second quarter.

I think we still have work to do in some of the key states and in the sponsored market business. But we are beginning to see that slow and we are beginning to see new business gain momentum. So we are starting to see that shift. But there's still work to be done in some of our key states and with some of our sponsored business. But the good thing is we are starting to see some new business momentum that tells us that the plans that we put in place are starting to take hold.

Just to sort of clarify that a little bit with respect to the two tranches, as we think about personal lines. Our continuing business, which is obviously most of it, and then the other business, which is not so continuing around a sponsored business and around Massachusetts. I think the inflection point that Fred talks about is we get through the second quarter is more with respect to our continuing business. We are going to continue to see a drag on the overall, at least to some degree, particularly around Massachusetts and our reductions there. Keep in mind that our auto premium in Massachusetts is still well over $150 million and we are reducing premium annually at 15 to 20% rates. So in sponsored, the reduction there, I think we started with over $100 million of sponsored premium and we're probably only about halfway through the reductions there, as we work our way through the various states and the rules associated with those. So that will continue to produce a drag, but with respect to the business that we are interested in being in, yes, the inflection point looks like it's the middle of the year.

That's great detail. Going back to commercials, looking at the market conditions, as one would expect competition initially heated up in national accounts. We've heard commentary from other companies about middle market becoming more competitive. Can you describe the competitive environment in your target segment of the market, in particular up to 50,000 in premium? What have you been seeing over the past quarter or two?

Well, I'm, and Fred can comment as well, but I'm really glad you asked that question because I think it's one of the fundamental keys of our commercial line strategy that makes us unique and why we are so focused on this market segment. I do agree that the competitive environment on the very low-end of small and the high-end of the national accounts market is obvious, but in this sweet spot it really is dependent upon local people at the point-of-sale who know agents, who can have quick turn around time and our operating model allows that. I do believe that although it is a very retention market, where people are holding on to their accounts, we are seeing opportunities for quick turn around and local expertise, building market expertise. I also think that this market is somewhat under served and that our products and our models, because they are built for this segment, are winning more often than other companies' models that try to go into this segment not quite as directly as we've gone into it.

So I think we've built the operating model. We have the people. We call it we are breaking the ties. And we are seeing some good growth in that -- in that segment and actually it requires a little more hustle and I think we are out hustling many of our competitors in that marketplace.

And again, I would say that we are consistent with the other companies you've heard and I think the high-end is softening to some extent. I also think the bulk market is somewhat more competitive. As Marita said, I think we are seeing some softening but we have seen our segment be a little less volatile or a little less changing. And we have to be thoughtful about it, but it seems like we can still do well and I'm cautiously optimistic about it for most of our markets.

Angelo, this is Sujata. If I can just jump in and ask you to let some of the other people ask a question first and then if there's time we will take you again later.

Sure, great. Thank you.

We will now move on to Sam Kitston of BlackRock Financial.

Will dividends or share repurchase or anything like that? Thank you?

I'm sorry,Sam, this is Ed, your question was where are we on that question?

Yes.

We haven't talked about share repurchase. We have talked about re-instituting our common stock dividend and we continue to very actively consider that. We are right now sort of the -- this is the time for us to be dealing with rating agencies now and over the next several months. And, of course, a part of the analysis around this is as we get towards the end of the year, thinking about our holding Company cash flow position, which quite frank is very positive, as you know, and having conversations with our board. So we are still very actively considering that. We will have more to say on that as the year progresses.

And is that part of your discussion with the rating agencies currently?

Yes, yes. As we talk about -- as we talk about our financial plans, we've introduced the topic of getting back to a common stock dividend.

What's their view on that?

We haven't -- we haven't -- we are at the stage right now where there really hasn't been any disposition of those conversations. It's really been more us talking about our plans and that we are really not to the point yet where there's been a whole lot of dialogue. I think our calendar is such that over the next two or three months we will start to have some of that dialogue.

Okay. And then just finally, I don't know if I missed this earlier but any update on additional dividends out of Life Companies?

No, that's turned out to be really sort of an annual event as we get to the end of the year. That's certainly been the case over the last couple of years and, as you know, at the end of last year, which was only a hand full of months ago, we saw a $75 million dividend. We continue to think the results in the life business are very positive. We continue to think we have a very strong capital position there. So again, this is one where as the year progresses we will have dialogue, continued dialogue, and heighten dialogue toward the end of the year around that question.

All right, thanks, great results, guys.

Thank you, Sam.

Your next question will come from Jeff Thompson of KBW.

Good morning. First on personal lines, if you look at the combined ratio and you exclude some of the reserve development, it looks like the accident year is sort of 99%. One, is that right, and then two, I'm surprised it's so high considering your actions and can you comment on your thinking there?

Yes, I think that's about right. But I would say that the seasonality of our book is probably one of the most severe of anybody in the industry, given Massachusetts and Michigan which represents about three or four-points, Jeff. So about $15 million. So you are absolutely right. And so the way we look at it is we had -- it was a little bit of a tough winter and it's about seasonality if we look over the years, would be about three or four-points. It helps a lot.

It's certainly in line with our expectations for the quarter.

Yes.

Okay. And then secondly on commercial lines, can you talk about what your agents see when you offer them products, when you offer them service, why are they using you and we think about this growth, is it a package policy, is it something else, what are the agents actually selling?

One of the things, and Fred, please, one of the things I would say is because we are so focused on this sweet spot or this target market for accounts around 25 to 100,000 is that our underwriters are aggressively looking for this business. We don't have a small commercial underwriter that's trying to stretch into this marketplace or we don't have a middle market underwriter who thinks this is too small. We have people focused on this. This is what we do. We can offer some specialty expertise and round out the account as it relates to bonds, inland marine, an umbrella. We have local people at the point-of-sale. We have a product and an operating model that allows this to be done easily, locally at the point-of-sale, with some efficiency behind it. But I think it's our focus and our attention.

I think another key is who we are doing it with. The agents that we've picked to do business with aggressively and assigned our best underwriters to are those who also have a lot of this business and there's a match in what they do and what we want. So I think it's alignment, focus, quality of underwriting, hustle, turn-around time, our service model. I really think it's the whole integrated strategy and focus on what it is that we do.

And, Jeff, as you remember from the winter, the strategy meeting, the way I think about it is that what we've done as of November and when we put in the imaging and all the pieces of paper in commercial and we change the operating law that allows underwriters to travel, our agents now see, these winning agents -- these underwriters are able to travel and be out with agents three days a week. So they are able to see the kind of business they need quick response for. So that's very different. The other thing is we can get them to them in a two to three-day time frame instead of thirty-day time frame on underwritten business for most people in middle market and get them an answer. On top of that, because we put umbrella people in every office and we now have marine people dedicated most of the offices, we can round out their portfolio and their overall book of business and be an alternative for all of that too.

And an underwriter can quarterback all that for them. So, what I think is we pay attention to this kind of business that's an afterthought for a lot of folks. We are actually there. It's kind of like Cincinnati Financial with technology. In the offices. We are talking to them. And again I would argue that 30% of this business is not competitive in new business. Somewhere between that 30 and 40. But they need a quick turn around, where they kind of know what the price is in the marketplace, as long as you get it to them you get it. If we get more of that business, that's why we will win. And again, that's why we are so focused on them being able to have the technology so they can be out there. As you heard me say before, I believe very strongly with having underwriters in this business within 30 miles of their agents so that we can cost-effectively get them in their offices. And so you've seen us through this technology put people on the ground, for instance, in Charlotte and in Baltimore, where we had business before but now we have feet on the street. Nashville.

A lot of places where we now get that kind of coverage. So every day we have better partnerships and more high touch involvement with these guys and it will be able to get us to win when the margin isn't at steak. And I think that's what they are seeing. And again, you build it one location at a time, one agent at a time, but it's been in place since November and we have now seen constant movement toward it working. So I'm pretty confident that it will continue to work.

Great. I have a quick follow-up and then Uca has a life question. Just on the total commercial, do you know what percent of the premium is coming from winning agents right now?

19% of the new business growth in the first quarter came from our winning partner agent.

But, can you translate into that, into the total commercial lines? Is it 20% of commercial lines premium coming from winning agents or -- I don't know if that's the right way to think about it.

What you are asking is is of our total commercial lines business how much of that is with what we described as winning agents.

Right.

And it's less -- our total premium, it's less of the total premium than is of the new business. So it's in that 15ish range, Jeff. The issue for me is that the reason that's a little bit of a subtle question, I don't want to take it, but some agents that are going to be winning agents where still in what we call those three-year planning process and it's really what happens is if we get comfortable that they can be real partners, we allocate the resources to them. So a lot of our business today is in these kind of agents. But I would say that our plans and three-year plans aren't committed enough to really know that they are winning agents. So I see that percentage going up relatively dramatically both because of new business but also because we reach an agreement in these planning processes to convert them to those kind of agents.

Right. And Uca has a question.

Sure.

The surrender rate in the quarter, can you give us any additional color in terms of why you think it's higher in the first quarter than the rest of the year?

Uca, it's Michael Reardon, historically we've clearly seen this pattern in the past. Part of it relates to tax planning that's done with respect to qualified business. The products are also designed with a penality free amount that resets on a January 1st basis. So we see higher partial withdrawals in the first quarter as well.

Okay.

And then activity tends to taper off as we move into the summer months.

Okay. And then secondly, Michael, do you have the -- your expected future costs of the hedge as of the end of the quarter?

It was 36 million as of the end of the first quarter, which is up from 32.7 at the end of the year.

Thank you.

We will hear from Wayne Archinbow of BlackRock Financial.

Thank you, just going back to the life insurance business. We, as large shareholders, continue to believe that there is a lot of value to shareholders to monetize that business. Where are you in that process, if at all? Are you -- is that on the table to monetize? Or is it your plan to continue to own the life insurance business indefinitely?

I think what we've -- we haven't changed our point of view on that. So, overall the strategy is to maximize value for the shareholders, which could be to keep all of it. It could be to sell all of it or it could be to sell parts of it. On the monetization question, we think really over the last 18 months or so we've done a reasonable good job on the monetization question with the dividends that we've taken from the life business, $75 million just a few months ago and 25 million really as the first dividends coming out of the very difficult times that we had in 2002. So, we feel good about the way we are managing it. We feel good about the cash flow, the capital position and our ability to take it out. That's not to say, however, though, if the right opportunity didn't present itself that we wouldn't seriously consider it around -- and that would be an opportunity where we would monetize the value much more quickly.

As we've said, though, on this subject, and this really hasn't changed, it's a rather unique property. It's rather large and it lacks a lot in the way of strategic value because there's no ongoing distribution or product development related to the property. So, while it's right to say that it's possible that monetization can be accelerated or in a disposition, it also needs to be recognized that that's difficult to execute given the characteristics of the business.

I would just certainly just mention that certainly if there are interested parties in this business, that management has an obligation to shareholders to take those interested parties seriously and monetize that asset if there are people in the marketplace that are genuinely interested in buying that business from you.

We agree with that entirely.

Thank you.

Heather Hunt of Smith Barney has our next question. I apologize. We will move on to Dan Farrell of Fox-Pitt Kelton.

I apologize if my question was asked, I actually accidently disconnected myself for a minute. Firstly, on the commercial lines competition, can you comment on what you are seeing from some of the larger carriers, Hagan and St. Paul, and relate that back to your position in the marketplace?

As Marita said earlier, what we see is this is a market where everybody is holding on to renewals very aggressively. And the bigger they are, the more they are holding. And so that's what we see. The new business competition, again, our segment is a little bit isolated from those guys to some extent, a lot of our competition has been regional companies. But we see, while a softening market, a reasonable market on the business that actually gets to the marketplace. But what happens is the incumbent -- where you get a little bit of an issue is the incumbents will really react if they get last look and aggressively hold on to their business. And I see that very aggressively in the big guys; more so even than the regional companies. So, that's the - that's how I would characterize the market, Marita. I don't know if there's any -- ?

I completely agree and I would sum it up but saying that this has not been an irrational market at all. There are good underwriting companies out there and it is definitely a protect and defend kind of market. And we are not seeing the irrational swings that may have been present in other softening markets.

Okay, great. Then secondly, I just want to follow-up on the seasonality question. I think you said seasonality had about a three to four-point impact this quarter. Was that just in Massachusetts or total Company?

It's total Company. So what that represents is average loss ratios over time in the first quarter as compared to average for the year over time. It's across our entire Company, but as you might imagine, it's heavily influenced by our northeast exposure and our upper midwest exposure.

Sure. Now I don't think cats were necessarily larger than expected, so does that imply that those larger loss trends are flowing through the non-cat losses that you're booking, correct?

Exactly. That's not cats, that's just -- that's storm related. Quite frankly, it's more auto than property and it's what you'd expect. The snow comes, the ice comes, it's a long winter and people bouncing their cars off of standing objects and one another.

And this year we had a lot of drive time storms, it's interesting, commuter time storms. You see it, but it's predictable because we have enough years to know that that's kind of what's happening.

Interesting. Okay, thanks, guys.

[OPERATOR INSTRUCTIONS] Our next question will come from Scott Swinn of SLF Capital.

Just relating to that earlier question about the life business. And, Ed, you're right, you have consistently said that you will monetize it, you will sell it, you will keep it, you will do whatever is best for shareholders, but then at the same time you just essentially said that it's a tough asset to sell. Strategic guys would not particularly be interested. So I'm trying to reconcile those two thoughts, meaning if you are sort of open to anything and -- which is the first part of that and the second part of it is you recognize it's a tough, to use your word, unique asset to sell. Then it seems like a very tough thing to actually explore all alternatives unless you are actively searching out the nonstrategic people who you, I wouldn't think, know because your business is not guys who buy financial assets for your business or is insurance companies, so your friends in your business are not going to be interested, but people who you might not know might be interested. So the question is if it's tough and unique to sell, have you hired someone to help you try and find these potential buyers who are not strategic?

Yes, it's a good question. It's half of our book value and a reasonable amount of our stock price, and it is unique and we recognize it's unique. And you are absolutely right to point out that, as I've said, it doesn't have a lot of value necessarily to the commonplace strategic buyer. So therefore by definition, because it's so important to us and to our shareholders, you might imagine that we've made it our business to understand sort of the nontraditional, unconventional M&A marketplace for a property like this and understand it in great detail. Not only in terms of who those buyers might be and what form they might take, but what the various structures might be and, probably most importantly, how one would think about, in terms of a transaction the in the money death benefit riss and how those might be thought about by prospective buyers and lots of other factors. So, although we are not in the life business now actively and when we were in the life business it was in a traditional way, we've been very diligent about our thinking here.

And sort of an open ended question that they probably won't want to answer, but in that search, that study to see how M&A might transact in this life business, can you share with us some of the things that you learned about the valuation of that business, because both the buy side and the sell side analysts have come up with all different methodology and we haven't had a whole lot of confirmation from you guys. But if you have done that kind of study, maybe if the M&A guys are looking at it differently from what at least you've read on the sell side or spoken to some of your investors about if it's, if they look at it materially different, can you share with us sort of how they look at it?

Yes, I don't think -- I don't have an answer to -- if that's what you are looking in terms of valuation. But I think in a very basic level people look at cash flow. They consider hedging strategies. And some other of the major assumptions around the property which would include surrender rates and policy holder behavior. So, I don't think anybody that looks at the business considers the factors, the basic factors any differently than, quite frankly, what you read about in some of the analyst reports.

Thank you.

Operator, I think we running out of time?

Yes, ma'am. And that does conclude the question and answer session today. At this time, Ms. Mutalik, I would like to turn the conference back over to you for any additional or closing remarks.

I think we'll be all done, we are completely out of time. Thank you all for joining the call.

That does conclude today's teleconference. Thank you for your participation and have a great