Hanover Insurance Group Inc (THG) 2005 Q3 法說會逐字稿

Good day and welcome to the Allmerica Financial Corporation third-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.

Good morning and welcome to Allmerica's third-quarter earnings conference call. With me today are Fred Eppinger, our President and Chief Executive Officer; Ed Parry, our Executive Vice President and Chief Financial Officer; Marita Zuraitis, President of Property and Casualty Company. Also here available for questions are Michael Reardon, President of our Life Companies and Mark McGivney, Chief Financial Officer of our Property and Casualty business.

Before I turn the call over to Fred for a discussion of our results, there are a few items I need to cover. 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 for today's call are available in 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 responses to your questions today, other than statements of historical fact, may include forward-looking statements. There are certain factors that could cause actual results to differ materially from those anticipated by the press release, the slide presentation and the conference call. We caution you with respect to reliance on forward-looking statements and in this respect refer you to the forward-looking statements section in our press release and slide 2 of the presentation deck, which you will note is tailored to the forward-looking information we are providing in this presentation.

Today's discussion will also reference several non-GAAP financial measures such as total segment income, written and earned premium, excluding reinstatement premiums and segment results, excluding the impact of catastrophes. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in both the press release and the statistical supplement, which are posted on our website. With those comments, I will turn the call over to Fred.

Good morning and thanks for joining our call. Our third-quarter earnings, as you would expect, were heavily impacted by the losses sustained by Katrina as well as the projected GAAP loss in the previous announced sale of Vergo (ph) Life and Annuity business. These items on an after-tax basis totaled $140 million and $475 million respectively in the quarter. I will go through the numbers in detail but I would like to kind of cut through it all and cover three specific topics in my remarks.

First, despite being overshadowed by the Katrina losses, the underlying trends in our core P&C business remains strong. Next, I will talk about the capital management in our share buyback program and then I will close with an update on our life transaction.

So let me start with a discussion of the underlying trends in the P&C business. The property and casualty segment results for the current quarter were obviously dominated by the Hurricane Katrina losses. While third-quarter results are usually volatile due to the hurricane season, and you may recall our prior year's third quarter earnings were also adversely impacted by the multiple hurricanes in Florida. The magnitude and the losses associated with Katrina are really unprecedented.

However, excluding the impact of catastrophes in both periods, earnings in the current quarter were up $19 million or 20% compared to the prior year. And on this basis, both personal lines and commercial lines business recorded earnings improvement. 12% earnings growth in personal lines and about 40% earnings growth in commercial. This represents meaningful positive improvement in both our core segments.

While improving our core financial performance in each quarter, we have also continued to make important progress on the strategic initiatives that we believe position us for future success. For example, in commercial lines, we're focused on positioning the company as one of the best in small business, bringing a distinctive operating model that is tailored to the segment and one that focuses on partnerships with lending agents through a team of seasoned local underwriters.

We're also developing expertise in the specialty businesses that can be leveraged across our independent agent distribution system and is providing opportunity for higher growth and improved margin. We continue to make significant progress on this strategy and our financial results reflect this progress with overall commercial lines growth of 6% in the quarter compared to prior year's quarter. Obviously, market conditions have been more difficult in this year. But we believe we're generating high-quality new business that is aligned with our appetite and will sustain our margin.

In addition, we have generated growth even though we have continued to improve our mix. We have moved to reduce our exposure in coastal areas, improved our worker's comp and (indiscernible). These actions will ensure that we have continued strong results.

In personal lines, our strategy has been to strengthen our foundation by improving profitability and mix of business while investing in products and an operating model that will allow us to aggressively compete in the market. On the product front, we have talked to you about the rollout of our new multivariate product Connections Auto. This product has now been launched in six states and will be implemented in all our core states by mid 2006. The response of our launch states continues to be very encouraging and Marita will describe it in more detail in her comments. But I believe we're right on track and on schedule to begin growing our personal lines business by the end of the year.

I am very proud of the progress we have made on our journey to become a top quartile organization and our recent experience with Hurricane Katrina is further testimony about how far we have come in the last two years. As you know, Hurricane Katrina was an unprecedented event for the industry. This one storm is expected to cost the insurance industry more than any previous natural disaster in the United States. This storm hit us directly in our largest concentration of coastal business, Louisiana and will cost us more than any single catastrophe in our company's history.

Providing for responding to such event is our business and it is what we must do if we're going to be a top quartile company. So I'm very proud of our response to this event. We have done an excellent job responding to our agents and our customers under extraordinarily difficult circumstances. We have overcome tremendous challenges, quickly getting adjusters on the ground in affected areas, assessing damage, making advance payments and helping our agents and customers rebuild their lives.

During this already challenging time, we were further tested by the rating agencies who put us on Credit Watch negative driven by uncertainty around the magnitude of our loss from Katrina and its potential effect on our capitalization. Once again, we are convincingly able to demonstrate the strength of our financial position. Despite Katrina, we expect to end the year with more capital in our P&C companies than we had at the beginning of the year having improved our capitalization ratios and operating leverage. AM Best has already responded by reaffirming our A- rating and I expect the other agencies will reaffirm their current ratings as well.

In the last two years, we've worked hard to upgrade our science around underwriting and reinsurance purchasing. As a result, we have managed our exposure down in coastal areas, particularly Florida and Massachusetts. As I review our reinsurance program, I believe we have had a very well thought through approach and obviously last year's decisions to buy up was appropriate. We have more work to be done in some targeted geographies but our focus and pace of these efforts are excellent.

As I look forward, I feel good about our growing sophistication in this area. I know that many of you have asked the question and have speculated on the impact Katrina might have on our capital management strategies, specifically on the share buyback program. So let me respond to that very directly. I remain committed to fund the share repurchase program from the proceeds of our Life transaction. As you recall, we discussed our intentions to fund a buyback based on our expectation that we would have access capital following the closing of the sale of our variable life and annuity business.

Our objective of the buyback was to return access capital and drive a higher return on capital consistent with our objective of creating value for our shareholders. However, you will also recall from the very beginning of this journey, the first day I took this job, I have consistently emphasized the importance of having a solid A financial strength rating from AM Best as well as investment-grade holding company debt ratings. Hurricane Katrina and its impact on our ratings highlight the importance of this objective.

Now what will it take to secure this upgrade? To date, the rating agencies have been very clear concerning our capital level. Our pursuit of upgrades was not a capital issue but rather about demonstrating a track record of solid operating performance. What is more, nothing about our conversations with the rating agencies since Katrina has suggested that this has changed. However, as you know, there has been a fair amount of discussion and speculation in industry about how the agencies will view the effect of this storm on catastrophe reinsurance and on capital levels.

I believe that over the next couple of months the implications of the storm losses for the industry will become clearer. In our case, the agencies should begin to guide companies on these questions. We are scheduled to have our annual meeting with AM Best in mid-December. We will meet with the other agencies after that. Accordingly, as we get into the first few months of next year, or perhaps sooner, we should have a clearer opinion of how our capital management strategy would be affected, if at all.

Again, the Board and I are committed to share repurchase and effective management of our capital position. We are committed to delivering value to our shareholders. But as you would expect that over the long term, we cannot accomplish this objective without a solid rating to enable us to compete aggressively and effectively in the marketplace.

Finally, let me close with an update of our Life transaction, which is going well. Although the Mass. Division of Insurance has yet to schedule a hearing, we expect that they will soon and we are hopeful that we can close by the end of November and certainly by the end of the year.

We have some updated numbers to share with you on our projected purchase price and GAAP loss on sale, which reflects the actual performance through the third quarter. As you know, our projected proceeds from the transaction are expected to be $45 million lower than we announced two months ago. This is again driven by the lower P&C earnings due to Katrina and its effect on the utilization of our life and (indiscernible). Ed will explain this in detail but all said, this transaction is still a very good value for this business. The Life sale is of course important in many other aspects as well and it is the final key step toward redefining our company as a property and casualty company. We have been working toward this since 2003 and we have been successful. In the coming weeks, we expect to share with you and others plans to further strengthen our image and branded property casualty company with deep roots in this industry. I will now turn it over to Ed to review the financials.

Thank you, Fred and good morning, everyone. As usual, I will be using the slide presentation during my remarks, which is on our website and I trust all of you have this available. So if you could please turn to slide 5 for a review of the consolidated results for the quarter. We reported a net loss of $562 million or $10.51 per share resulting from an after-tax loss of 475 million or $8.87 per share under disposal of the Life business and on after-tax loss of 140 million or $2.62 per share from Hurricane Katrina. Net income for the third quarter of last year was 18 million or $0.33 per share.

Now let's look at our segment results. As you can see, segment loss after taxes was 109 million for the quarter or $2.04 per share as compared to $20 million of income or $0.38 per share for the third quarter of last year. Again, the segment loss from the current quarter is due to the catastrophe losses sustained from Hurricane Katrina.

Let's now turn to slide 6 for a more detailed look at the segment results. For the quarter, the P&C segment generated a pre-tax loss of $128 million compared to $37 million of income in the prior year quarter. The current quarter's results were adversely impacted by cat-related losses of 246 million, up from 62 million last year. On an ex-cat basis, the P&C segment generated 118 million in pre-tax income, up from $99 million a year ago. This increase was driven primarily by the favorable development of prior reserves in both personal and commercial lines.

The Life Companies results from continuing operations remained relatively unchanged with a current quarter loss of $1 million versus a loss of $2 million a year ago.

Now let's turn to slide 7 for a review of our P&C results in detail starting with personal lines. Personal lines reported a segment loss of $28 million in the current quarter compared to segment income of 42 million a year ago. The $70 million decrease was driven by cat-related losses, which were $78 million higher in the current quarter than last year. However, the ex-cat calendar year loss ratio improved by 2.6 points in the current quarter to 50.4%. This improvement was driven primarily by improved favorable development of prior year reserves in the current quarter, particularly in the auto line for the 2004 accident year.

Personal lines results were also favorably impacted by lower expenses compared to a year ago period due primarily to lower contingent commission expense as well as adjustments to our premium tax and variable compensation accruals. However, these expense reductions were offset by a volume related decrease in earned premium. You might have noted that our personal lines expense ratio for the quarter was 27.1%. We believe this to be somewhat lower than normal and expect our expense ratio will return to a run rate closer to just over 28% for the year.

Now let's look at commercial lines on slide 8. The commercial lines segment reported a loss of 101 million for the current quarter compared to a loss of 7 million last year. As you can see, this decrease of $94 million was driven primarily by cat-related losses, which were $106 million higher in the current year. Partially offsetting this was a $50 million improvement in the development of prior year reserves. In the current quarter, prior year reserves developed favorably by $11 million. This favorable development occurred across all lines except worker's comp and relates to the more recent accident years of 2002 through 2004.

You might recall that last year we saw adverse development in the third quarter of $4 million primarily related to worker's comp. In addition, commercial lines earnings were favorably impacted by lower expenses in the quarter compared to a year ago primarily due to the same factors I've just described for personal lines. This was offset by a slight increase in our current accident year loss ratio for the quarter as compared to the prior year quarter. Nonetheless, the current accident year results continue to track well against our prior full year experience.

As you may have noted, commercial lines expense ratio for the quarter was 35.3%. Again, like personal lines, we believe this to be somewhat lower than normal and expect that our expense ratio will return to a run rate closer to 38%.

Finally, a brief comment on production, which is on slide 9. Overall, net written premium was 542 million for the quarter compared to 582 for last year. Excluding the impact of the reinsurance reinstatement premium, net written premium was 569 for the current quarter, down 2% from last year. Marita will discuss this and further details with regard to production in her remarks.

So why don't I now segue into the Life Company conversation, which is on slide 10. In August, we announced the pending sale of the variable life and annuity business to Goldman Sachs as you know. As you may recall, at f the time we announced the transaction, we said the purchase price was subject to change depending upon various factors, including the level of total adjusted capital and AFLIAC, the entity that we are selling at the time of closing as well as changes in equity market levels, implied equity market volatility, interest rates, and surrender activity.

With the third quarters now in, I'd like to update you on our projected proceeds in the GAAP loss on the sale. Total proceeds from the variable life and annuity transaction are currently projected to be 340 million, including 15 million in expected dividends and cash from our remaining life business. Total cash proceeds at closing are projected to be 310 million, which represents the total of 340 les s$30 million of deferred payments. These numbers compare to our original production of total proceeds from the variable business of 385 million.

Total cash proceeds at closing were then projected to be 315 million, which represented the difference between 385 million and the 70 million in deferred payments. So if you go through all the math, it is clear that the total projected proceeds for the transaction are down by $45 million. However, the cash proceeds at closing are now projected to be at 310, which is very close to the 315 that we projected initially.

This $45 million reduction in total projected proceeds is driven by first, a $60 million decrease in the projected stat surplus of AFLIAC at the close of the transaction, offsetting the $60 million decrease is a $15 million increase from additional proceeds from certain noninsurance subsidiaries. The $60 million decrease is primarily related to a lower expected utilization of NOL tax carryforwards driven by lower than previously expected P&C earnings, which are obviously materially affected by the recent hurricane losses.

Lastly, the equity market performances have relatively little impact on our projected proceeds. As you know, we implemented a hedge to substantially protect the purchase price for movements in interest rates, equity market levels and implied equity market volatility through closing. This hedge doesn't protect us from any purchase price adjustment, which could come from the acceleration of surrender activity, changes in AFLIAC's total adjusted capital however. So to date, the hedge program seems to be working quite effectively.

It is important to note as we move forward that the final purchase price is going to be determined at closing, as we have said, and it remains subject to adjustments related to all the things we've talked about, including changes in the equity market levels, implied equity market volatility, interest rates, surrender activity and probably most importantly and certainly as we have seen this quarter, changes in the actual surplus of AFLIAC at closing.

Now let's look at the projected GAAP loss on the sale of variable business, which we have described on slide 11. The reported after-tax GAAP loss on the disposal of the business is 400 -- is now projected to be -- was recorded at $475 million. This compares to our estimate in August of $385 million. This increase in the expected GAAP loss is due to two factors. First, as I just mentioned, we're now expecting the purchase price to be $60 million lower. This obviously affects that. Then second, the current estimate of the AFLIAC GAAP equity at closing, for other reasons, is $30 million higher than before due to a refinement in the number of our underlying assumptions.

In closing, despite the material net impact of cats, we are pleased, as Fred said, with our core P&C results, which were up in relation to the prior year on an ex-cat basis. Our P&C results are currently tracking well against the guidance we provided at the end of the fourth quarter and updated in last quarter's conference call.

I would also like to point out that our commercial lines growth rate of the mid to high single digits is probably a better estimate of our expected growth for this line than the double-digit guidance that we've provided in the past.

Now, just a few comments on the life segment guidance. First, the life segment results from continuing operations, which as you know, includes the FAFLIC retained business, which reflects the expected sale of the variable business, are projected to be a loss of approximately 25 million in 2005 compared to the original projection that we gave you a few months ago of $30 million for 2005.

For 2006, we're now projecting a loss of 15 million compared to our original projection of 7 million. This increase for 2006 is due to the inclusion now of onetime expenses related to the outsourcing of the policy administration of our remaining life business. We now project the FAFLIC retained business to have statutory adjusted capital of $145 million after the transition period in 2006. This compares to the original projection of 175 million.

Additionally, FAFLIC continues to have tax attributes in excess of 170 million, which for the most part are not included in statutory adjusted capital. Over time, we continue to believe we can generate 20 to $25 million of dividendable surplus each year, which represents the amount of tax attributes projected to be utilized by our P&C companies.

And finally, the income from the Life Companies in our discontinued operations are projected now to be 40 million for 2005 compared to our original projection of $25 million. This increase in income for discontinued operations is primarily due to favorable equity market performance that we experienced in the third quarter.

So with all of that detail, but I'm hopeful that it is helpful detail, I'll turn the call over to Marita.

Thanks, Ed. Good morning. We obviously have a lot to share with you this quarter so I'm going to keep my comments brief. It is easy to overlook the strength of the core business in light of Katrina, yet it is our core business that will continue to generate long-term value to our shareholders. So today, I will spend a few minutes to briefly highlight the progress we have made this quarter on our core strategy.

In personal lines, our underlying financial performance, ex-cat, continues to be favorable. And our margins remain solid in both the personal auto and homeowners lines. Building on this foundation, as you know, our focus this year was on product development and building out our operating platform and I'm very encouraged by the early success of our new multivariate product, Connections Auto. We have now launched Connections Auto for new business in six states, as Fred mentioned; Tennessee, Illinois, Maine, New York, Indiana and Virginia and in these states have recorded a significant increase in personal auto new business.

Overall, new business counts for personal auto in these states were about 14,700 policies through September. This is roughly twice the level of new business generated in these states for the full year of 2004. Since the introduction of this new product, we have written approximately 16 million of business through September on Connections Auto. In fact, our policies and force in our continuing retail business, excluding Massachusetts, grew in the month of September. The response to this new product and platform from our agent partners has also been outstanding. Agents tell us that Connections Auto delivers a broad market reach, competitive rates and the ease of doing business that they have really been looking for.

Connections Auto is helping us get our foot in the door as we had anticipated. We are seeing activity in certain target agencies that we hadn't seen prior to the Connections Auto launch. In addition, leading with Connections Auto, we're now able to better leverage our full personal lines product portfolio. Agents are experiencing firsthand our ability to provide a broad range of competitive personal lines products that offer a total account solution, including auto, homeowners and umbrella coverage.

Consequently, we're seeing a list on the new business and homeowners as well and our umbrella lines of business in all the states where we have launched Connections Auto. While these are still early results, the indications are very positive. In November, we will roll out the new Connections Auto product in Michigan, our largest state, and in Florida. We expect to complete the introduction of Connections Auto in the remainder of our key states, other than Massachusetts, in 2006.

Before I close with personal lines, let me comment on the trends in written premium. Written premium for the quarter was down 6% compared to the prior year quarter. This 6% decline compares to 8% and 10% respectively for the two previous quarters and is as we had expected. As we have discussed in previous quarters, most of this decline results from our strategies to reduce volume in Massachusetts, from exiting certain sponsored market businesses and by improving our mix in core states by implementing multitier products and credit.

However, as I said earlier, the progress we made this quarter is very encouraging. Personal lines new business in the current quarter was up 50% over the same quarter in 2004 and continues to get stronger and the loss of PIF continues to moderate each month with a current quarter loss of less than 1.5%. With the introduction of Connections Auto scheduled for Michigan in November, we are optimistic that we could see a reversal of the trend of declining PIF that we have been experiencing for some time now.

Turning now to the commercial lines segment. Our core financial performance remained solid. Despite competitive pressure, we have maintained our ex-catastrophe margins and we have found opportunities to grow. Commercial lines written premium grew by 6% in the quarter driven by our specialty lines. Growth in our specialty lines continues to be strong. Written premium increased by 11 million or 42% compared to the third quarter of 2004. Premium in our core business has remained relatively flat compared to last year reflecting the increasingly difficult market conditions.

Despite the market, we continue to invest for the future through the rollout of our Avenue Suite of commercial products. As we said last quarter, we are seeing increased competition in the marketplace. Pricing is relatively flat with slight premium increases coming in the form of policy level changes. However, we are maintaining our position in our core business and we're leveraging our specialty strategy to gain market advantage. As you know, developing our specialty expertise is a key component to our commercial lines growth strategy.

We continue to enhance our bond, umbrella and inland marine capabilities to specifically complement our core product offerings and gain market opportunities and it is working. There is no question that the market is becoming more challenging and we are committed to maintaining our underwriting discipline as we grow. We do not intend to sacrifice margin in order to gain volume. We continue to work within the market constraints to find opportunities for profitable growth. So whether they come from specialty lines, from our preferred agents or from aggressively managing retention, our strategy is to grow profitably throughout the business cycle and we intend to aggressively leverage our field leadership, our operating model and our underwriting expertise to gain market advantage without yielding margin. We are confident that our strategies are sound and we are committed to working hard to achieve profitable growth wherever we can.

With that, I'll turn the call over to Sujata.

Thanks Marita. Operator, we will now take questions.

(OPERATOR INSTRUCTIONS.) Dan Farrell, Fox Pitt, Kelton.

A couple of questions, just first on the capital management. You said you are definitely committed to doing share repurchase but you actually didn't mention the number that I think has been previously floated of the 200 million. In relation to your comments regarding the rating agencies and concerns with them as well, is their risk that you might not do that full 200 million, that you may pare back the amount of share repurchase?

Right. What I said, Dan, was we have not got any indication of best point of view that is they have changed their mind that this is a capital issue. So I go in with the assumption that the 200 is still the right number. The question is going to be is this an industry changing event from the rating agencies point of view and will they ask about capital levels. As I recall, as I told you guys from our last meeting, we walked out of the rating agencies, each one said it was more about continued performance. If our car ratio meets their criteria and they are currently stated for an upgrade, we will have 50 million more at the end of this year or so on our capital base when you look at the end of the year.

So I kind of -- my view is if they keep where they are, the 200 is the right number. The question is I just don't know if there will be an industry changing event here from their point of view on what capital requirements are. Obviously even if they change their perspective on reinsurance, which I think there has been more talk about, that doesn't really affect our need for capital. It just means that our expense -- and we have estimated that in our budgeting process -- the thought process of spending more on reinsurance this year but we have not gotten any indication.

But I want to be clear. I mean if there is an industry changing event, we have to react to it and we should react to it so that we can get the upgrade that I think we do given our track record over the last 2, 2.5 years of delivering on everything we've said. So right now, it is the number we have. It is the number we are planning for and we have got to see what happens to the industry. But again, I don't want to say that -- we just had all these conversations with them about affirming. There was no discussion about a change in their philosophy. So there's nothing we have heard except what everybody has heard about the industry speculation that there could be some change.

That's helpful. The next thing, can you comment a little bit about the current state of your risk management controls? You talked a little bit about pulling back from coastal exposures and you do have the reinsurance that you've always had in place. But that said, your losses relative to other primary companies from these events are going to be significantly higher on a net basis. I am just wondering how you view the risk management that you have in place now currently and anything that you might be doing going forward to try and adjust that so that there is less exposure to a larger loss like this going forward.

I actually think if you look at the primary guides, we are not going to be out of whack as a percent but we can go through that some other time. The issue for us is pretty clear. Since, in the last 2.5 years, from the first week I was here, we brought in Benfield. We have done a tremendous amount of analytical efforts on where our exposure is. One of the advantages we have is we don't have a lot of Southern exposures. We don't have a lot of homeowners concentration in cat prone areas but we had this -- we had two concentrations. We had the Louisiana concentration when I started -- actually three -- the Louisiana concentration, the Tampa area concentration and the Cape Cod concentration. And in all cases, from day one, we have been working on both the underwriting guidelines, which I feel very good about, but more importantly the concentration in two fronts.

We don't have big homeowners concentrations. Our concentrations are a combination of home and bought. And so what you have seen us do is take product action and frankly just reunderwriting actions. In Florida, we're down dramatically in our PMLs for instance. Louisiana was our biggest concentration and the issue with Louisiana obviously is that it is really a one city state. So even though you manage your dispersions, by definition if you have $76 million, you have some concentration because there isn't any northern cities in Louisiana. They all kind of hover around New Orleans.

So we've taken a lot of actions about our mix of business and geography but a magnitude storm like this, which is really one that's above what most people plan for. You plan for -- like when I got here, the other thing we did obviously is we took the 100 year storm and we went up to about -- depending on which model you look at, we either took it to about a 142 year storm or a 126 year storm. So we increased our cap aggressively because I didn't want to lose momentum from any extraordinary event. But this event is obviously off the charts. You don't typically plan for a 200 or 250 year storm but this is the one place where we had the concentration that we have been working on and it is a legacy of 40 years or more of being there.

But again, as I look at our portfolio and you look at what we have done as far as growth and where we are investing in connections, where we are investing in our commercial offices, we have a pretty attractive spread compared to most. We have a lot of Midwest concentration like Michigan, like Indiana and where we are growing is the nice spread across the country. So the combination of increasing our science and improving our spread, I think we are actually going to have a nice profile to perform better than the industry average, particularly those in personal lines. A lot of folks in personal lines are stuck in big Southern states and that's why you've heard a lot of announcements of spot (ph) writing homeowners because that is where they have hundreds of millions of dollars worth of business in the growing Southern states where they have basically grown the last 10, 15 years.

We really don't have big concentrations of homeowners. Our exposure was in a couple of geographies, BOP-oriented exposures, which we worked hard at to improve and again, I look at our growth and our mix is only going to get better. So again, I feel pretty good about our exposure. I might have to admit it feels a little unlucky to get the one concentration dead spot on target having the worst storm in history hit our one big concentration but I think we managed through it well and our reinsurance covered us well and we were able to bounce back quickly.

Let me ask this, from your comments it seemed like you realized that this may have been a higher exposure in Louisiana and was it an area that you were thinking about pulling back and it was something you recognized and were in the process of changing? I mean I just want to understand risk management now or what is (multiple speakers) going forward. Have you been able to learn from this to manage geographic exposures in a better way?

Yes. Again, we were already acting on this, right? The reason they -- it is the place where our PML is defined, Louisiana. So we obviously bought up our reinsurance and we also have been doing a lot of actions pre this date. The issue is that it is hard to just withdraw from states like Louisiana and so we had done a lot on our mix, etc. Could we have done more on the margin? Perhaps, as far as canceling more good commercial business.

But my view on this is that one of the things that it will allow us to do -- we had been introducing a new product with more limited business interruption. This allows us to do some things on bare bones BOP, which I think the regulators would not be as receptive to before these storms. So, yes, I think we would do some things in business different on the margin but we were doing a lot of this ahead of time and we've bought our reinsurance up purposely because of this concentration in Louisiana. And so, yes, I do think we have learned some things. But we have been after this for the last 2.5 years. I think that is why our Florida exposure has been reduced so much.

One thing I would add to that, Fred, is because we don't have a lot of the other volatility issues from an underwriting perspective that other large companies have, the only real issue we have is weather. So we take the science of managing weather and cat management very seriously. We have introduced all the modeling tools and we get better at it every day.

Fair enough. Thanks.

Tesha Jackson (ph), Credit Suisse Asset Management.

I was hoping you could maybe go into more detail on your discussions with the reinsurers and how you think it is going to affect you upon renewal with them and then as a corollary to that, how quickly you should be able to pass on any price increases?

I guess what I would tell you is that from the beginning of the journey, I have talked about this issue. Obviously one of the biggest trends in our country in insurance is the coastal concentration of people moving to the coast and property values increasing on the coast. It is our biggest -- it is the biggest issue facing insurance and it is why I am so bullish about a superregional type concept versus a single state regional company.

I mean if this tells you anything, being a single state regional company is a damn hard thing to do now given if you think about the concentrations on the coast and if the regulators at all require additional reinsurance, it is going to affect single state companies much more than it is going to affect anybody that has some spread of risk. And so for me, in the long term, I believe very strongly that having the spread of risk that we have and the breadth and the science that we have that most of the reinsurers are going to be positively disposed to folks like us that are actually not in the hairy stuff and spread in the flow of business.

So our early conversation with the reinsurers, and there are two levels, it was the general conversations we've had with a lot of senior people at reinsurers, at Greenbriar and other places, and we started our real conversations actually this week at a more granular level and I think people really -- they look at what we have done in Florida. They look at what we've done in Massachusetts. They looked at what we have done despite of the storm in Louisiana. They see our PMLs change and they see that our science is better and that we have a plan and we have executed exactly what we told them we were going to do.

And so my view is that they are positively disposed of working with us. That said, I do think that pricing obviously -- this has been an amazing year and so you're going to see pressure on pricing. What I am hopeful is that folks like us that have better science and more spread and the fact that we have never blown through our reinsurance before will bode well in our negotiation.

As far as what we buy up to, again, the early indication that we have heard is that there are some folks -- there is some talk, particularly with reinsurers, about what levels of capital they carry and what they have in reinsurers. For us, I am not sure how significant that will be. Clearly, we will be thoughtful about that and if we have to take it up a little bit, I think that structuring our program, we have plenty in our budget. I think it is going to be a reasonable increase given everything we can do and everything we have already done to decrease our PMLs.

So there will be some increase but I would also say to you that it is going to be broad-based given the reinsurance capital requirements. The biggest change in this industry is not even the primary losses. The biggest change in this industry is going to be the fact that reinsurers are going to be required to carry more capital, which means that that the price increases are going to be broad-based, not just people that are affected. So therefore I am bullish on the impact this could have on the property business. An I am hopeful that you'll price increases. If it's broad-based the way I expect it, I would say that we could get it back.

If this was isolated to some geographies, obviously you are more restricted by the regulatory environment of homeowners in isolated states. But the two things that give me some optimism is one, the broad-based and the fact that a lot of this is commercial-based, the loss of business interruption in particular. And therefore, I think that the ability to get price increases there. So again, what we're doing is paying a lot of attention to this now and making sure that we have a philosophy and an approach toward getting our pricing appropriate in all our markets in the slow business.

But again, I am optimistic that you're going to see some price changing because of this. And again, what will unfold, I think, as you hear reinsurers talk about the requirements they have because it really is about their pricing and how broad their pricing is. And what I see is they are the biggest -- the implications of all this is bigger on them than even the primary guys.

So when is your reinsurance renewed and kind of if it is, the losses are more BOP related, how quickly does it take to renew a that book and put pricing increases to kind of makeup for the margin squeeze?

Commercial is annual and in Louisiana, we are still under the rules right now, BOP renewals. But again, commercial is much more available to kind of put your rate increases through immediately on the annual rate given what you expect in your losses to be and on the renewal of our reinsurance, that comes up in January. So we are going to know this -- we are working on it right now. So we're going to know this very soon.

Yes, to Fred's point, we are in the market now. We are negotiating the renewals. We don't have any firm indications from the reinsurers yet. But to Fred's point, those reinsurers who use science to drive their pricing models should continue to see our program as attractive because we have been a very profitable account over the long haul. And to the second part of your question, as Fred said, commercial accounts come up during the year so we will have the opportunity as they renew to pass through any appropriate rate increases depending on the individual accounts.

And is there any concentration in terms of one quarter versus another being a higher renewal period on the commercial?

No, our commercial lines book is pretty well spread out throughout the year.

Great. Well, thank you very much.

Ron Bobman, Capital Returns.

I had some questions really about Katrina and Rita. Fred, you mentioned a $76 million number either at the end of your prepared remarks or in the early part of the Q&A. Is that basically the Louisiana premium for the company?

Yes it is. It was as of the full year in 2004.

Got you. And then what was the approximate split between personal lines and commercial and then could you give us some claims count information from the storms as well?

The commercial lines represented about two-thirds of the total estimate; personal lines is about one-third.

I'm sorry, premiums? Because I know you disclosed that in the law side, it was two-thirds/one-third.

I thought that was the question you were asking.

What's the 76 split approximately between personal and commercial for starters?

About half and half.

And then how about claim counts so far and what you have paid so far?

You know I don't have the claim count stuff handy. When we made the announcement, we had in about 90 to 95% of what we expected ultimately to get. And I know in the last ten days those claim counts have slowed down considerably. So I expect at this point we have virtually all of our --.

And as you know, the commercial claims count of those estimates were about 2000.

I didn't know that. I'm sorry.

So they were very -- about 2000 for commercial.

9000.

9000 for personal and again, the commercial -- we were very proactive obviously calling out on anything that we thought was going to have a loss. So that it is about what the exposures were. Again, there is an extraordinary amount of exposures.

And how about (indiscernible) and then just my last and final question and thanks for your help on this, any particular lines of business or account types that represented a disproportionate amount of the commercial losses?

No, again, the BI estimate, the business interruption estimate, is probably the healthiest estimate that I have ever seen in industry. The thing that we were conservative about on this one is business interruption. The reason being is that, as you can imagine, a lot of those businesses can't get up and running if you can't get into the territory, into the area.

With the impact of the flood and the closing of these geographies creates a situation where we were, as is everybody else was, as I think about the estimates for the primary guys, there was robust estimates about business interruption and that's why what I was saying earlier, the one place that I'm going to be very aggressive, and you have heard me say this in multiple calls, we have been aggressive since I've been here about trying to change contract language on BOP around business interruption in putting limits because my view is that that's an industry that needs to change. And what you will see now in coastal areas in particular I believe is an introduction of a bare bones BOP with very limited business interruption because that is really where you get it, in a situation like this, coastal where you have potential for the mix between wind and flood and all this other stuff.

So again this is one we are going to work hard to kind of lead the way on this. Because other than that, our other commercial accounts again in my view were more traditional. The losses were what you would have expected. Our model in a lot of ways held and it was just this interruption we ended up being quite conservative on because again I think overall on the same boat, which says a lot of these businesses are going to take a while to open because of the unique circumstances of Katrina.

And how about the paid numbers so far?

Ron, the paid numbers for total caps for the quarter are about $16 million.

And that is through 9/30 not obviously --.

Well, that is for the quarter. That is in the quarter. I can have Sujata call you back if you'd like. I don't have the year-to-date number for cat.

I'm waiting for that. That would be great. Thanks a lot.

(OPERATOR INSTRUCTIONS) It appears there are no further questions. Ms. Mutalik, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks, operator. Thank you all for joining our call and as always, you know we are here available for questions so you can always call me with any further details that you might need. Thank you.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.