Hanover Insurance Group Inc (THG) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Hanover Insurance Group fourth quarter 2005 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I'd 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 an welcome to the Hanover Insurance Group fourth quarter earnings call. With me 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 and is Mark McGivney, Chief Financial Officer of our Property and Casualty business. Finally, joining us for his last call is Michael Reardon, who was, as you know, President of our Life Companies and is now serving in a similar capacity with Goldman Sachs.

Before I turn the call over to Fred for a discussion of our results, let me cover the housekeeping items. Please note that our earnings press release and a current report on Form 8K were issued last night. Our press release statistical supplement and a complete slide presentation for today's call are available in the Investors Section of our Website at www.hanover.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 two of the presentation deck.

Today's discussion will also reference certain non-GAAP financial measures, such as total segment income, written and owned premium, excluding reinstatement premiums, segment results, excluding the impact of catastrophes and ex-cap loss ratios excluding reinstatement premium among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on the historical basis can be found in both the press release and the statistical supplement, which are posted on our Website. As I mentioned earlier. With those comments, I will turn the call over to Fred.

Good morning. And thank you for joining the fourth quarter conference call. The fourth quarter was our strongest quarter last year. Even after you include the 7% upward adjustment for the gross third quarter Katrina reserve. Underlying loss trends were strong in the quarter as they have been.

And we turned the corner on personal lines policy in force. In addition, we successfully closed the LIAC transaction as planned and initiated the 200 million share buyback program we committed to in August. Fourth quarter pretax segment earnings for the property and casualty business were 90 million, up 22% over our earnings for the same period last year. We achieved this increase despite having to add 35 million to our Katrina reserves. With over four months of additional claims information available to us today, we now have greater clarity around the issues surrounding the settlement of losses compared to what we had when we released our estimate last quarter. In a few minutes, Ed will provide an overview of our financial results for the quarter in more detail.

We continue to generate strong fundamental results in both our main property and casualty business segments during the fourth quarter. Our pretax personal line segment earnings showed an improvement of 62% compared to the prior year quarter. Commercial lines earnings were down compared to prior year, due to the Katrina reserve adjustment, which related entirely to our commercial lines business. Without this adjustment, earning in our commercial line segment would have doubled. The underlying earnings power of our Company was -- has clearly increased, demonstrating that the investments and the improvements we have made in each of our business segments are taking hold.

We remain committed to our core strategies and we continue to make very important progress on the priorities that we believe will position us for the success in the future. In commercial lines, as I've said before, we are focused on positioning the Company as one of the best in the small to mid-market segments. Creating a distinctive, technology supported operating model that is tailored to this market. And one that focuses on partnerships with winning agents through our team of experienced local underwriters. We are also developing expertise in specialty businesses that can be leveraged across our independent agency distribution system and provide opportunity for higher growth and improved margins.

Our commercial lines segment recorded 6.5% growth for the year, which exceeded the industry average. Commercial lines growth in the fourth quarter, however, at 3%, was lower than our run rate for the year. Obviously, the disruption following the Katrina ratings announcements hurt our new business production in the fall. But once our Katrina losses were clarified and the strength of our financial position was established, we bounced back and our new business rebounded in November and December. Our overall growth momentum remained strong in commercial lines.

We continue to sustain our margins and generate high quality new business while improving our mix. At the same time, we've developed better partnerships with our agents and we've upgraded over 40% of our underwriters in the last 18 months. We now have a very strong field team, which continues to improve our position in the market.

Now turning to personal lines. In personal lines, we continue to focus on strengthening our foundation by improving profitability in the mix of business while investing in products and an operating model that will allow us to aggressively compete in the market. On the product fund, we have talked to you about the rollout of our multi- variate product, Connections Auto. This product has been launched in eight states, including Michigan, our largest personal auto state. And is expected to be implemented in all of our core states by mid-2006.

The response to our launch remains very strong. We turned the corner on policy growth in the quarter, thanks in large part to the success of Connections Auto launch, along with improved retention, which we believe is due to the introduction of our new personal lines operating model. Marita will review this in more detail in her comments.

Before turning the call over to Ed to review our financials, I'd like to provide some perspective on a few items. First, our LIAC transaction proceeded as planned. We successfully closed on December 30 with transaction proceeds of 360 million. And should -- in conjunction with the close, we initiated our share buyback program for the full 200 million and have been active in the market since the beginning of the year. Our plan remains to substantially complete this buyback by mid year, subject to market conditions, of course. And Ed will provide more details on each of these items, the closing figures for the LIAC sale and the progress of the buyback program.

The completion of the LIAC sale was a very important milestone for our Company. It represents the final step towards redefining the Hanover as a property and casualty Company. Consequently in the fourth quarter, we renamed our Company, the Hanover Insurance Group. Further strengthening our image and brand as a property casualty Company.

I am very proud of all that we've accomplished during this very challenging 2005 year and how far we've come on our journey to become a top quartile player. But we have more to do and many plans for 2006. We continue to focus on the process of improving on building a top quartile Company. I am very optimistic about our prospects as we work to capitalize on our strong foundation and deliver value to our shareholders. We have an investor conference, as you know, scheduled for February 28 in New York. And I look forward to seeing all of you there and sharing all of our plans for 2006. I will now turn over the call to Ed to review the financials.

Thank you Fred and good morning, everyone. And thanks again, for joining us. As I've done here recently, I will be using a slide presentation during my remarks, which is available online and I trust that you have it in front of you. If you would, please turn to slide five for a review of our consolidated results for the quarter. As you can see for the quarter, we reported net income of 115 million or $2.11 per share, up substantially from the 63 million or $1.18 per share in the fourth quarter of last year.

For the full year, we reported a net loss of 329 million or $6.10 per share. And as you know, this loss was driven by two significant events. First, the sale of our variable business generated an after-tax charge of $444 million or $8.23 per share. We also sustained an after-tax loss of 162 million or $3 a share from Hurricane Katrina.

Now, let's turn to our after-tax segment results, which are on slide six. Segment income after taxes for the quarter was $77 million, up from $42 million for the fourth quarter last year. The property and casualty segment generated $90 million in pretax segment income, up from 74 million in the prior year quarter. This increase was driven primarily by favorable loss development at both personal and commercial lines, offset by the $35 million increase in the quarter for our Katrina-related losses.

Our life companies posted $1 million loss from continuing operations, versus a loss of $9 million a year ago. This improvement is primarily due to higher investment income and lower expenses. Tax expense on segment earnings was lower by $11 million in the current quarter compared to last year. This unusually low fourth quarter effective tax rate reflects an adjustment to our full year tax provision in the quarter, associated with the additional Katrina reserves we put up in the quarter.

Now let's turn to slide seven for a review of our P&C results, starting with a discussion of personal lines. The personal lines segment generated income of $74 million in the current quarter, compared to 46 million in the prior year. This $28 million increase in segment income is primarily due to improved loss performance and lower expenses. Net catastrophe losses were not material to this segment's results in either period. And the X-cat calendar year loss ratio improved by about 9 points to 48%.

This improvement was primarily due to $10 million of favorable development of prior year reserves in the quarter, as compared to $6 million of adverse development a year ago. Favorable development for the current quarter was driven by an improved outlook for the 2004 accident year for both home and auto. Current accident year results in personal lines also improved relative to last year, due to the continued favorable frequency trends. Fourth quarter expenses were also $8 million lower in this segment compared to a year ago. This is primarily due to the lower contingent commission payouts, resulting from changes we made to the program this year and certain nonrecurring year-end adjustments.

Now let's look at commercial lines, which is on slide eight. Commercial lines segment earnings were 15 million in the current quarter, down 11 million from the fourth quarter of last year. As you can see from the slide, this decrease was driven by the catastrophe-related losses. Net catastrophe losses were $39 million higher in the current quarter as compared to the fourth quarter of a year ago. This is entirely -- almost entirely due to the increase in Katrina-related losses that I will talk about in more detail in a moment.

Partially offsetting this decline in the quarter was an improvement in underlying loss performance. The x-cat loss ratio improved by 12 points to 42% for the quarter. This improvement was driven by prior year reserve development and an improvement in the current action year results, as well.

Prior reserves developed favorably by $18 million in the current quarter, driven by the improved outlook for the 2003 and earlier accident years in commercial auto and the 2004 accident year in commercial multicar loan. The current action year results for the quarter also improved relative to last year, reflecting a recognition of the progress we've made in improving the quality of our book over the last two years. Additionally, the commercial lines expense ratio is relatively low in both the quarter and year to date at 36% and 37% respectively. This is due to certain expense adjustments made in the fourth quarter that we don't expect to recur.

Now let's look at production, which is on slide nine. Overall, net written premium was 503 million for the current quarter, down 2% from a year ago. Commercial lines net premium increased by about 3% in the current quarter compared to last year. This was offset by a 5% decline in personal lines. Marita will go into these production numbers in more detail in a moment.

Before I get into the life companies briefly, let me highlight the changes we made to our Katrina loss adjustment, which is on slide 10. As I mentioned, we increased our Katrina-related reserves in the fourth quarter by $35 million pretax and $23 million after tax. This additional provision, as Fred said, was the result of a year long review of our claim activity. It reflects the additional insight we have regarding matters affecting the settlement process of our claims. As you can see from our revision, the personal lines loss is lower than our original estimate, offset by an increase in commercial lines.

The net effect of these changes on our two business segments was a $4 million increase to segment income for personal lines and a $39 million decrease to segment income for commercial lines. With these fourth quarter adjustments, our total net losses related to Katrina are $250 million on a pretax basis and $162 million on an after-tax basis.

With that, now let's look at the life companies, which are on slide 11. At year-end, we completed the sale of the Variable Life and Annuity business to Goldman Sachs. Proceeds were 360 million, $13 million higher than the 347 million we estimated at closing, which was based on the November 30 data. Approximately $47 million of these proceeds will be deferred and received over a three year period with 50% of this amount due at the end of 2006.

Lastly, the life company guidance we've provided in the past remains unchanged. Before I hand the call over to Marita, let me update you on the status of our share repurchase program briefly. As we reported in our press release, we initiated the $200 million share repurchase program at the beginning of the year. As of January 27, we purchased nearly 1 million shares at an average price of $44.29 for a total cost of $44 million. With that, I will now turn the call over to Marita.

Thanks, Ed. Good morning, everybody and thanks for joining the call. I'm very pleased with our fourth quarter results. The solid improvement in our underlying financial performance speaks to the substantial improvements that we've already made in the business models. And that we'll continue to build on that strength in 2006.

Ed reviewed the financial results in detail, so I will focus on some of the key operational highlights for the quarter. I'll also spend a few minutes providing you an update on our reinsurance program that renewed on January 1 of this year. So, let's begin with the highlights for the quarter. At the top of the list is the turnaround of our personal lines policies in force. As we have noted in previous calls, we have been observing improvement this trend each quarter and we had expected to reach the turning point in December, which we did.

Our total personal lines policies in force for the month of December grew by roughly 500 policies over the total policies in force in the month of November. Total personal lines policy in force increased on a monthly sequential basis, despite the fact that we continue to strategically reduce our volume in Massachusetts and we continue to exit from certain sponsored business. This turnaround was driven primarily by the success of our Connections Auto product. Though the improvements we have made in our personal lines operating model were also meaningful.

Connections Auto has produced the new business momentum we had expected. Also, the changes to our operating model have improved our renewal retention. Our year-end retention is currently 81%, reflecting a 2% improvement over the same period in the prior year. We have now launched Connections Auto for new business in eight states; Tennessee, Illinois, Maine, New York, Indiana, Virginia, Florida and now Michigan, our largest personal auto state. These states have recorded a significant increase in personal auto new business.

Overall, new business accounts written on Connections Auto in the original launch states was over 26,000 policies through year-end. This is roughly 40% higher than the new business generated in these states for the full year of 2004. The November launch of Connections Auto in Michigan and Florida was also very successful and the early results here so far are very positive. Since its introduction, we have written over 50 million of new business on Connections Auto.

The response to this product and the platform from our agent partners has also been outstanding. We're encouraged that this product will help us deepen and expand our distribution network. Previously dormant agencies are already engaging with us and we also appointed 184 new personal lines agents in 2005.

While I'm very pleased with this turnaround in policies in force and I'm encouraged that we're back in the market growing our book of business, I want to clarify the quarter-over-quarter written premium trends that Ed highlighted. Written premiums for the quarter was down 4.5%, compared to the prior year. This 4.5% decline compares favorably to declines of 6% and 10% respectively in the two previous quarters. This is clearly the right trend.

As we have discussed in previous quarters, most of the decline during the year resulted from our strategies to reduce volume in Massachusetts and from exiting certain sponsored market business and improving our mix in core states by implementing multitier products and credit. While we have started to grow sequentially and we're very encouraged by our results, it will be closer to the second half of 2006 until we expect to see countrywide year-over-year premium growth.

Turning now to commercial lines, our underlying financial performance was strong. Despite competitive pressure, we have maintained our X-catastrophe margins and we've found opportunities to grow. Our commercial lines written premium grew by 3% for the quarter. This is lower than the 6% we saw in the third quarter of this year. As you would expect, October production was adversely affected by the disruption following Hurricane Katrina. Once the environment stabilized, we saw a rebound in production in November and December with growth more consistent with our year-to-date performance in 2005.

Our basic strategy of developing deep partnerships with winning agents and developing leverageable specialties is working. Specialty lines production continues to be a good story for us. Written premium in inland marine and bond business increased by $11 million, or 40% compared to the fourth quarter of 2004. We are also making good progress developing strong partnerships with winning agents. Written premium from our winning agents grew at 19% for the year.

As we said last quarter, we are seeing increased competition in the marketplace. Although pricing in both personal lines and commercial lines held up in the quarter, there continues to be uncertainty about the pricing outlook in the market. This is obviously a risk we will have to manage, particularly as competitors' growth rates are slowing. As we have said consistently and our results demonstrate, we are committed to profitable growth and maintaining acceptable margins. The investments we have made should enable us to continue to grow without yielding those margins.

Before I close, let me review the changes we have made to our reinsurance program. Both our property catastrophe per occurrence treaty and our catastrophe aggregate treaty came up for renewal on January 1. Overall, we have enhanced our program and we're pleased with the placement. Obviously prices were up but all things considered, we fared pretty well.

On the per-occurrence treaty, we increased our cover from 410 million to 500 million. At the same time, we raised our retention from 45 million to 60 million. We now estimate we are buying cover that is beyond a 1 in a 100 year event, which we believe is prudent in light of the changes of rating changes evaluations of companies' reinsurance programs. On our catastrophe aggregate treaty, we are still buying 50 million of cover, excess of our retention. However, we raised our aggregate retention from 80 million to 90 million, with no change to our co-participation rate at 10%.

We believe the increases in retention in these treaties are appropriate, given the current reinsurance pricing environment, as well as our substantial increase in the levels of earning and capital we are now generating, compared to when these retentions were originally established. We renewed our program for an overall cost of about 50 million, which represents a 30% price increase compared to our expiring program. We believe this to be a competitive price given the current market. And with that, I'll turn the call over to Sujata.

Operator, we'll now open up for questions.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Dan Farrell with Fox-Pitt Kelton.

Good morning.

Good morning, Dan.

A couple of questions. Firstly, can you just give a little more detail on the commercial lines expense ratio and some detail on those unusual items that load it? And X-those items, where do you think the commercial lines expense ratio will be running?

Dan, it's Ed. I think we'll probably get into a little bit of detail on this at our conference we have coming up as we think about next year. But as I said, we had a reasonably sizeable adjustment at year-end because of some changes we made to our contingent commission program and some unnecessary, I would say accruals that we made during the year. We also had some compensation-related adjustments at year-end. Our bonus accruals were in an amount that was higher than what was ultimately funded in our bonus plan. And then there was just a hodgepodge of similar adjustments. So, whatever it is, the 37ish% that we have, we think is a little bit low than what we'll see next year. But we'll talk about our expectations for next year, I think, in a couple of weeks when we get together in New York.

Just with regard to this year, what's the magnitude that it was lower by? Was it 1 point? 1.5 point ?

By about 1 point, yes.

About 1 point?

Yes.

Okay. Just my next question, last year's fourth quarter, you mentioned that there was some seasonality in non-cat weather-related losses which, I think, helped loss levels. I'm assuming some of that flowed through, as well. Can you give any numbers around what you might have seen this quarter? And maybe talk about it in terms of the movements in frequency or severity this quarter versus where they were in the third quarter?

I don't have numbers at the top of my head. Clearly that was the case a year ago and that's helped on the comparison. I don't have a number available. We can get back to you with some detail on that.

Okay. And then just one final question. You also said you had some benefit from lower contingent payments in the fourth quarter. Was that cost shifted to other quarters in the year? Or is that a reduction for the full year?

It was a reduction. If you remember, we had a bunch of special contingent commissions we first started when the rating downgrade occurred. There were a number of things put in the commission structure on retention bonuses, et cetera that worked its way through the system. And we reallocated our contingent commission to really target towards partner agents that profitably grew with us versus folks that either shrunk with us or frankly didn't make money with us. And so, it's a more targeted program. Plus, it's the kind of ending of some of the programs that occurred, as I said, when we were -- just before I got here, there were special programs put in and it kind of ran its course. That retail retained the business.

And is that a benefit that should carry through going forward?

Yes.

And as I mentioned in my comments, the lack of October growth following Katrina adversely affected the agents' contingent commission that didn't grow in that month.

Okay. Great. All right, that's it. Thanks, guys, nice quarter.

Thank you.

We'll go now to Cliff Gallant with KBW.

Good morning.

Good morning, Cliff.

Good quarter. Two quick questions. One, in terms of the tax rate, that's been bouncing around a bit, what kind of a normalized tax rate should we expect going forward?

Again, I think when we talk about next year we will talk about this -- we'll talk about it when we get to New York here in a couple of weeks. I think what we've consistently said though, from an operating standpoint, we see our -- in a normal environment, we see our P&C tax rate in the sort of low to mid-20's.

More of a big picture, Fred, you started your comments by talking about how the results -- still a lot more to do to get the Company to be a top quartile Company. Could you sort of give us a preview and tell us a little bit about what's hot on your to-do list for 2006?

Yes, obviously we've spent -- we're right at a transition point as a Company. We've spent a lot of the last 28 months fixing things. Upgrading our talent, repositioning ourselves with agents, focusing on margins because we had a lot of business and a lot of states that were not at adequate margins. And so now we essentially, have a good portfolio of talent and of kind of profitable business. And pools of profitable business with our better agents. And it's time for us to be thoughtful and targeted in our growth with our agents. And that -- a lot of what we're doing now is really trying to deepen our relationships with some of these agents and grow with some of our agents.

We also, obviously, still have some heavy lifting, in my mind, to complete the rollout of Connections. We have some big states remaining, we have Georgia, we have Connecticut, that are still to go. New Hampshire. So, we have a few states, I'd like to make sure we get that product. We're also in the middle of upgrading our homeowners product, as well. So, we are a good turning point. I think we have a good portfolio of products and services. But this is a year where we have to execute against a lot of those improvements, across the country and across our partner agents.

Thank you.

And I guess one other that I would mention and Ed reminds me here, we are also investing a tremendous amount in claims this year. That's a big priority for us. And we will talk about it at investor day. We're automating notice of loss and working on the operating model. It's something that we've said in the past, we have a good, very experienced claims organization. But we hadn't spent the technology -- in technology like some of the best in the industry. And so this year we've started that investment and that operating model improvement and we'll continue throughout the year.

Thank you.

Okay.

[OPERATOR INSTRUCTIONS] We'll go now to Sacket Cook with Menemcha Capital.

Hi, good morning. A couple of questions.

Good morning.

Good morning. I was hoping the reserve releases were actually pretty significant this year and I know that you gave some commentary on where these were coming from. I guess my question is; looking at the pot and knowing that we're getting to some more recent -- or greener accident years, what would you say as far as guidance for what kind of reserve release potential remains? And if you want to kind of split that out per personal versus commercial would be great?

Well, we haven't given guidance on development going forward and I don't think we're going to do that per se. But I will say that notwithstanding the febrile development that we've seen this year, that we talked about here this quarter, we remain confident with our reserve levels. And quite frankly, wouldn't be surprised to see continued development on the business that's been put on the books over the last few years. The other thing I'd say is that our current accident year picks have been, for this year, are at or lower than the current accident year for a year ago. So, not only are we seeing the benefit of the development on the older action years and wouldn't be surprised to see some going forward, we feel good about our current accident year picks as well, as we improved the margins in the underlying business.

And one of the things we've worked hard at all through this year, actually, and -- is really about mix of business. Both in -- on the commercial side, both BOP and worker's comp, we've done a lot on mix and quality business. And obviously, the personal lines actions we took with the deductibles, with credit, with enhanced product was all about mix, as well. So, I would concur with what Ed was saying.

So, you don't view the $90 million as kind of -- some really good years that gave back some really good stuff? So, I'm just trying to see if this year looks like it was really good? And I understand there may be some more reserve releases in the future but I'm trying to establish if this year was kind of special?

Again -- I know you're trying to peg a number. And we don't -- we haven't and I'm not sure that we will, try to give a range of numbers on what we think development will be. But I think our characterization, both mine and Fred's of how we think about the balance sheet and how we think about the underlying performance of the business should be taken into account as you come to a view on what you think might happen.

Let me go down a different track and maybe this is going to come up on analyst day and I'm happy for you to kind of defer me to that. But I just want to review kind of the -- where you are -- you mentioned a lot of initiatives, you mentioned a lot of expenses. And I don't want to put words in your mouth, but it seems like if you've done a lot of initiatives and the commercial lines expense ratio is -- the best we're going to get is 37%. I'm just kind of wondering -- that's a lot higher than other companies we look at. I want to make sure that maybe there is an improvement coming? Or how would you characterize where the levels are now with all the work you've done?

We will spend quite a bit of time talking about this at the investment. But I will give you three observations. Our mix of commercial is quite unique. Our average policy size is very small compared to a lot of folks you would compare, which in itself creates a different mix between expense ratio and loss ratio. Now, I would also say we've invested a significant amount of money in commercial lines because we believe that there's an opportunity to participate in the growth and consolidation of the commercial Lines area. And we've spent a lot of money on IT expenses and on personnel.

We believe we've spent a lot to set in place a very strong field operation that can capitalize on what we see as a growing consolidation in the market. So, in my view, that will come down. The question is over what time? What kind of investments will we make over time? How much will it come down because of growth and the stopping of other initiatives, which we will spend time going through at our investor day. Because I want to be able to outline the investments for you to give you a sense of what we're doing.

But again, one of our basic premises in this Company is we are focused on being a top quartile Company. And my view is if we can have top quartile returns, I will often make the decision to make investments for profitable growth down the road. So, our goal is not to just manage our expense ratio. Our goal is to manage our total return and profitable growth and so we often look for opportunities. And in our business, our whole -- if you look at the better companies, whether Progressive, et cetera, when you look at what they did in commercial auto, if you're going to grow in a segment, you have to invest in the talent before the growth comes. That's just the way it is. Unless you want to be re-underwriting down the road.

So, again, our goal is overall top quartile and profitable growth. And the expense number, while high, we believe over time will come down. But we will always be thoughtful about how we invest in it. And again, the commercial lines one is the one that's obviously high because it's the place that we've invested the most money. So, again, I appreciate the question and we will spend some real time on this.

My last question is -- and thank you for the detail on your reinsurance programs. I thought that was pretty detailed. But I guess my question is; I can see that you've increased retentions on both programs. And I'm just wondering if you can talk a little bit about what happened to the exposure? Maybe how much premium was Katrina-exposed? And what happened to that book -- or what will happen to that book in '06 over '05?

Yes, what I would say to that, if I may, is because we don't have the severity of exposures that a lot of commercial companies have, weather is really the only thing that we have to manage. So, we take it very seriously. And for the last couple of years, even prior to Katrina, I think we had a very strong underwriting drill around weather-related losses and around looking at cap management. And we look at it clearly on three levels. We have an individual account underwriting drill, where we have specific underwriting criteria and authority for individual accounts. And we make individual account decisions based on what I would say pretty conservative cap management guidelines.

The second level that we look at it is the geographic concentrations that we have. The zip code analysis, how much we write in a given area. And then lastly, we look at it as it relates to the balance sheet. The reinsurance programs that we set up, how much is too much? How big our concentrations are? And we learn in every hurricane whether that drill is correct and we shore it up and we make it stronger. And I'm very pleased with our reductions in PML's, in cat-exposed areas and the reinsurance programs that we've set up to mitigate that risk.

So, I would say we're in good shape. We look at it every day. And we have a very strong drill around weather from an underwriting perspective.

How much premium -- I guess I'm trying to get -- if there is -- and I appreciate that a lot of companies are -- have gone through this kind of learning phase post-Katrina, which I think is good. And I'm just wondering, how much premium is getting shedded on the exposure side? Obviously, that's going to feed through into your commercial line segment. So, I'm trying to kind of nail that down.

I would say that we are seeing substantial decreases in premiums in Louisiana specifically, just by virtue of the hurricane occurring. As well as working very aggressively to reduce our PML's in that area. We continue to work very closely with the regulators in Louisiana as we navigate this. But we have seen reductions in our PML's and cat-exposed areas.

See, we started -- just to clarify, we started two years ago on this because we had some issues on Cape Cod for our PML's are down 30-plus% in the coastal areas that we have any concentration at all. And we took our premium down. And remember, we're 2/3 personal lines, so, a lot of our reduction, frankly, was in homeowners, like on Cape Cod and Florida. And a lot of the re-underwriting in Florida, in the Cape, was finished this fall. We reduced, relatively significantly for us, the premium in both locations. And as Marita said, Louisiana is always a little bit trickier because the rules, when you're on at risk, how hard it is to get off. And so, we were halfway home there before the storm. And we still have a lot to go in Louisiana. But in my view, a lot of the material decreasing of our property risks has happened over the last two years in those locations. And I feel comfortable with our reinsurance approach. And again, Louisiana is an exception to that because we have more work to be done but it will occur.

Great.

Maybe, if I could, maybe a perhaps different perspective on the increased retention. As we think about it -- obviously we think about PML's. And I think Marita and Fred have covered that quite well in terms of the impact that that has on our decisions on where to attach our program. But in addition to that, as we all know, the earnings power of the Company has increased significantly over the last couple of years. We take that into account. We also, obviously, take into account the improved capital position. So, for us, it's really more about the top end of the program and making sure that we're protected against the most catastrophic of events, which we saw obviously with Katrina. So, we've increased the top end of the program significantly, which goes a long way to protect our capital base. And we think we can well afford the really relatively small increases at the lower end, given what we've done with PML's and given the increased earnings power of the Company.

And we do have a unique -- I will just say one other thing. Our goal is to have boring earnings growth. Right? We are -- we don't have any esoteric lines, long-tail lines. And one of the unique things about our plan, even though we added retentions; remember, I took retentions down and took the top up when I first got here because of the earnings power of the Company. And we also have the aggregate, which is a unique thing. We handle [kiddie caps], which, to us, is really the way we manage risk. It's not just the retentions, it's actually having this aggregate cap for kiddie caps. Which we've obviously used in the last two years because of the way the weather has unfolded. But I feel comfortable where we are and that our earnings power and what we bought is appropriate.

Does -- those are very thorough answers. I've got one more question and this is kind of a hard one. I know that you all have kind of restructured the personal lines side and clearly you've been pretty open about kind of the move downwards and now you're starting to get policy and force growth back. I guess my question is, would you change your comments about what you want to do in the personal lines side given competition? And I would caveat this by saying some personal lines companies we've talked to, particularly in the auto, have seen things -- their view six months ago is a lot different than today as far as competition. So, I just wanted to see what you have to say and if you have any state comments, that would be great.

Yes, that's an excellent question and it's one of the things I want to talk about at the investor group -- the investor meeting, but my point is not any different than where we started. Our personal line strategy from the beginning -- because I believe a lot of those folks that are having trouble are very much a single line approach to the business. And what you're seeing is the product has worked its way through. It's not about just an auto product now. And see, our philosophy is much different.

This whole best of both, agency management of mid-size agents, cross-sell to ancillary lines, deepening your penetration with agents is why we have such an upside. We compete more aggressively with the regional players. A lot of our mid-size agents have a portfolio of these regional companies that are subscale, have not invested in the auto product and frankly, don't have sophistication in the ancillary lines, as well. And what we have is a very different approach than just hammering home auto, right, through automation.

What we're doing is really helping them solidify their retention against the captives and the direct writers by writing more of the entire count with the mid-size agents, particularly in the Midwest and off the Coast. So, again, we see tremendous consolidation that's going to occur still, in the agency channel because there's 200 to 300 little subscale companies that are not as sophisticated. That is a very different approach than large agents and cities, auto only. And again, we get that that's part of our business, as well.

But if you look at what we've done with our product, the way we've combined our bills, multiple line, make ourselves easy to do business. The way we have actually have regional presidents that think about book rolls and conversion, automated conversion from regional companies to us. I believe we still have some room to grow. Now, we will be very thoughtful about that. And I'm not going to go head-to-head in areas that people are being overly aggressive. But I'm not --again, I believe that if we're thoughtful and targeted on the right agents, we will continue to participate in some growth.

Agents -- particularly mid-size agents, need people that can help them to effectively compete against the captive and the direct. So, again, I would argue that our -- we have not seen the same kind of intense pressure because we're not on a shelf space next to the nationals. We're on a shelf space compared to a lot of these regionals that have not invested.

And one comment I'd make, we went to Indiana, for example, when we rebranded the Company. And we have about 110 agents. I went and spoke and 280 agents spoke up. The need for super regional and secondary cities in the mid part of the country with sophisticated products is enormous. This is a very different play than going head-to-head in Hartford, Connecticut with every national player. So, again, I believe that we have some opportunity here, but we will be absolutely thoughtful about where we are.

Great, thanks very much for your time.

Yes.

[ OPERATOR INSTRUCTIONS ] We will go now to Larry Greenberg with Langen McAlenney.

Thank you. You actually just answered my primary question. But just as a follow-up, has there been any additional thinking about the realization of value from what's left of the life business beyond the tax benefits you expect to receive over the next four to five years?

A little bit, Larry. But only a little bit. For a couple of reasons. First, we're quite focused with the limited resources we have right now in our Company -- in our life business in getting the business appropriately converted to Goldman Sachs and doing a good job under our service level agreements as we're administering that business for them preconversion. So, we're very focused on that.

We feel just as good as we have in the past around the benefits we think we will get related to the tax positions there. In terms of the underlying remaining businesses, I think what we've said is there's a -- there are a couple of relatively small fixed-type life businesses on our whole life close block, real estate mutual business, as well as individual pension contracts that have some value. That I think as we get into the latter part of next year -- mid to latter part of this year, I'm sorry, we will start to think about. But there's not tons of value there. And I think quite frankly it's more important for us, at least in the near-term, to focus on the things I said we're focused on.

Great. Thanks. And you said that the life guidance is unchanged and just so I'm sure, we're talking about a $16 million loss that will be realized in the first six months of '06?

Yes, that's right.

Thank you.

Yes.

[OPERATOR INSTRUCTIONS] And it appears that we have no further questions at this time. I will turn the conference back over to management for any additional or closing comments.

Well, thank you very much for joining our call. And we look forward to seeing you again on investor day.

Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation. You may disconnect at this time.