Hanover Insurance Group Inc (THG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006, Hanover Insurance conference call. [OPERATOR INSTRUCTIONS] I would like to turn the presentation over to the host of today's call, Miss Sujata Mutalik, Vice-President of Investor Relations. Please proceed.

Thank you, operator. Good morning, and thanks for joining our fourth quarter conference call. Participating in today's call are Frederick Eppinger, our President and Chief Executive Officer, Ed Parry, our Executive Vice President and Chief Financial Officer, and Marita Zuraitis, President of our Property and Casualty Companies, and Mark McGivney, Senior Vice President of Finance. Before I turn the call over to Fred for a discussion of our results, let me 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 the within at www.hanover.com. After the presentation we will answer questions in a Q&A session. And other than statements of historical facts these statements may include statements that are forward looking statements. There are certain factors that could cause actual results anticipated by this press release, the slide presentation and the conference call. We caution you, with respect to the lines on these forward-looking statements, and in this respect, refer you to the forward-looking statements section of our press release and slide two of the presentation. Todays presentation will contain certain non-GAAP financial measures, such as total segment income, segment results excluding impact of catastrophes, ex cap lock ratios and lock rations excluding insurance premiums and accident loss ratio among others. A reconciliation of the non-GAAP financial measures to the GAAP measures on a historical basis can be found in the press release of the statistical supplement which are posted on the website as I mentioned earlier. With those comments, I will turn the call over to Fred.

Good morning and welcome to our fourth quarter earnings call. I am very pleased with our 2006 results both for the quarter and for the full year. We ended 2006 with $328 million in P&C segment income with P&C level of equity of over 13%, about the target, we promised our investors when we started the year. We also grew book value. Our P&C standalone book value increased by 19% to $37.74 per share and our overall book value appreciated by 7.7% to $39.10 per share.

As reflected in our press release, segment income after taxes was $61 million for the fourth quarter of 2006 which was $16 million lower than the fourth quarter a year ago. This entire shortfall was driven by a tax quote change in '05. As you may recall the fourth quarter in '05 had a minimal tax expense of $1 million because we adjusted our tax provision in the fourth quarter to fully reflect the effect of Katrina losses on the full year earnings. Putting aside this tax anomaly we continued to show improvement in our earnings power.. Pretax property and casualty segment income was $97 million for the fourth quarter of '06, our strongest quarter since we started the turn around of this company. And $8 million higher for the quarter of '05.

As I said throughout this year, I feel very good about our performance and believe we have made significant progress in building a defensible strategic position. Three years ago, we started this journey to create a special company that focused on delivering a package of products, technology and service responsiveness to meet the needs of the best agents in our business. Obviously we still have work to do in order to prove that we are a top quartile company. However, 2006 was a real turning point for us. One in which the performance demonstrated that we are different than many of our competitors. Over the last three years we've aggressively invested in new database products, innovative operating models, and assembled a tremendous team to create a distinctive offering for winning independent agents that could allow us to hold margins and grow throughout the cycle as top quartile property and casualty companies have done. In 2006, you have started to see how our investments are beginning to differentiate us from our competitors. Particularly our regional competitors. We are among the few to deliver strong financial results in 2006 while growing our business, recording premium growth of 6% for the year.

Our commercial line segments reported growth -- 10% growth for the year. This is ahead of our guidance and consistent with our objective of delivering growth that is above industry averages. The investments we made in our inland marine and bond businesses were sound, and we saw a strong contribution from these businesses in '06 as they balanced out our core portfolio and provided another profitable growth lever for the company. At the same time our traditional drive lines performed as expected and grew 3% country wide.

As I look forward to 2007, I see continued momentum in commercial lines. Our operating model continues to mature and improve, the number of partner agents continues to grow, our specialty businesses continue to provide growth and value to our agent partners. This gives me confidence that we should sustain profitable growth into 2007. Personal lines reported written growth of 5% in the quarter, consistent with our latest guidance. I am proud of the way we turned this business around from a segment that was shrinking in '05 and much of the prior decade to one that is growing and gaining momentum in new states with high penetration potential. It is even more encouraging when Massachusetts personal lines is excluded. In Mass, as you know, we have taken a conservative position towards growth. And this year because of our coastal actions, a state-mandated redistribution of high rate loss ratio ERPs and a reduced assignment in the involuntary pool, we are experiencing some one time reductions in premium. Growth outside of Massachusetts was 8%.

Premium growth in 2006 was driven by new business growth and Connections Auto. At the same time the personalized investment in service, operating model and product enhancements are also starting to take hold. New business production across our entire network is up significantly, now accounting for over $280 million in premium year-to-date. As I look forward in personal lines I can also see continued momentum, Connections Auto is now in 17 states that we plan to be in for the year. We also released a significant upgrade to our homeowner's product in September. Enhancements to this product will make it easy for agent-partners to do business with us, and it really paves the way for our new homeowners product, Connections Home, that we expect to roll out at the end of the first quarter of '07. We also appointed a thousand new agents in the last 18 months, which will help us further grow and penetrate markets outside our dominant states. During 2006, while we have grown in both segments of our business, we have done so very responsibly, as you know we attacked our P&Ls during the last three years, reducing them in all our areas of concentration. Over the last couple of quarters, given the latest RMS models the unfolding reinsurance market, we have taken a more conservative position in some selected geographies. Cape Cod, Long Island, Florida. And in Rhode Island, where we transferred our personalized property booked to Narragansett Bay Insurance Company. While this impacts our growth it makes us a much more stronger financial company. Even with these actions and the current market conditions, I believe we will continue to grow our overall personal lines book over the next year.

In addition to top line growth, I am also pleased with other aspects of our performance this year. Our accident year margins continue to be strong and we continue to benefit from favorable reserve development, further demonstrating the strength of our balance sheet. And we continue to actively manage the risk profile of our company, monitoring and reducing P&Ls as needed and supporting our underwriting appetite with the right reinsurance program. As you know our cap reinsurance treaty was renewed in January and we have successfully placed our program at a competitive price and bought up the limits. Marita will discuss our reinsurance structure in more detail during her remarks. Before I hand the call over to Ed to review our financial results, let me just summarize my reflections for '06 and '07.

You know, our company has made great strides in each of the past three years since we started the journey to reposition the company as a top quartile performer. In '06 even more than any of the previous years, we strengthened our position and proved that we can differentiate ourselves from our competitors. The market conditions were fairly competitive. Yet we were able to grow in 2006 without sacrificing margin. As I have said before, we are committed to delivering profitable growth, and I remain convinced that a top quartile player can grow profitably through the cycle. They just grow less. With the investments we have made, we have repositioned the company well, and given ourselves the chance to compete successfully and responsibly throughout the cycle. I am confident we are on the right path and I am more convinced than ever that the best of both strategy of combining our people, products, technology and service capability of the best nationals with the local presence and responsiveness of the best regionals is working, and that we will be a strong company in a challenging market environment. We have an investor conference scheduled for March 1 in Boston. Myself and my management team look forward to sharing with you the insights and our capabilities, and the opportunities and challenges we face in '07.

Pricing pressure will continue. Competition will increase and it is going to take hard work and careful execution to weather the market successfully. But our market performance in 2006 gives me renewed confidence that we are up to the challenge will build on our success to deliver value to our shareholders in '07. With that, I will turn the call over to Ed for a review of the financials.

Thank you, Fred, and good morning, everyone. I'll be using a slide presentation during my remarks and I trust that all of you have this available. Of course, it is available on our website.

Please turn to slide five for the fourth quarter financial highlights. Net income for the fourth quarter was $46 million $0.88 per share. Down compared to $119 million or $2.19 per share in the fourth quarter of '05. You may recall results in the 4th quarter of last year benefited from several factors. Including a $30 million favorable adjustment to reflect the actual purchase price and the sale of our variable life and annuity business and $9.5 million favorable federal income tax settlement, and as Fred said, unusually low taxes for the quarter due to a rate adjustment driven by Hurricane Katrina losses. As I will discuss in a moment, pretax segment income for the quarter is up over last year. For the full year we reported net income of $170 million or $3.27 per share. This compares to a net loss of $325 million or $6.02 per share a year ago. The loss in '05 was driven by the sale of our variable business, which generated an after tax loss of $444 million and by the $162 million after tax loss sustained from Hurricane Katrina.

Now, let's turn to slide six for a discussion of our segment earnings. Segment income after taxes was $61 million for the quarter, down from $77 million in the fourth quarter of '05. This decrease is due to the unusually low tax expense in the fourth quarter of '05, as I said, driven by the tax rate adjustment related to Hurricane Katrina. Pretax segment earnings were $97 million up from the $90 million in the fourth quarter of '05, the $7 million increase was driven by lower catastrophe losses in the quarter, partially offset by higher operating losses in our P&C segment.

Now let's turn to slide seven for a review of personal lines. The personal lines segment generated pretax earning of $49 million in the fourth quarter versus $74 million in the prior year quarter. And then net impact of catastrophes was $5 million in the current quarter compared to a benefit of $2 million in the fourth quarter of last year. Excluding the impact of tax, pretax segment income was $54 million this quarter, down from $72 million in the prior year quarter. This $18 million decrease was primarily driven by higher expenses due to an increase in variable compensation expense, investments we are making in our new claim operating model, the impact of new accounting for stock based compensation, increased technology spending and to a lesser extend an increase in the proportion of overhead expenses absorbed by our P&C segment.

Now, let me comment on loss trends. Current accident year results remain solid at 54% for the quarter, about three points higher than the fourth quarter of last year. As you may recall, accident year loss ratios came down strongly in the fourth quarter of last year as the favorable loss trends we were experiencing during the year last year were fully recognized in the fourth quarter. For the full year, our current accident year loss ratio for '06 was 54% or about 1 point better than a year ago. And finally prior year reserves developed favorably by $10 million in both the fourth quarter of '06 and fourth quarter of '05.

Now we will look at commercial lines results which are on slide eight. The commercial line segment generated pretax segment income of $43 million for the quarter, compared to $15 million in the prior year quarter. The impact of cat was $12 million in the current quarter compared to $41 million in the fourth quarter of last year. Excluding the impact of cat, pretax segment income was $55 million in the current quarter or about even with the $56 million in the prior year quarter.

In this year's fourth quarter, we saw an increase in favorable prior year reserve development set off by higher operating expenses and an increase in the current accident year loss ratio. Let me comment on each one of these items. Prior year reserves from losses in loss adjustment developed favorably by $28 million compared to $18 million in the prior year quarter. Most lines develop more favorably with the most significant increase development coming from worker's comp. Expenses were comparatively higher by about $9 million. The factors contributing to these higher expenses include increased variable compensation expense, increased technology spending, investments we've made in support of our specialty lines business, the impact of new accounting for stock based compensation and to a lesser extent, an increase in the proportion of over head expenses absorbed by this segment. Additionally, the current accident year ratio for the current quarter was three points higher than the fourth quarter of '05. So in the personal lines, the accident loss year ratios came down strongly in the fourth quarter of last year. With a full year, our current accident year loss ratio for '06 is 48%, or about 2 points better than 05.

Let's now turn briefly to production beginning on slide nine. For the quarter, the company reported an increase in overall net written premium of 6% with 5% in personal lines and 11% in commercial lines. New business net written premium remains strong in the fourth quarter, increasing significantly in both commercial and personal lines. Commercial lines new business premium in the quarter was $71 million. An increase of 39% while personal lines new business premium was $72 million, an increase of 43%.

Now, let's turn to slide ten. For the full year, excluding the effect of reinsurance reinstatement premiums in '05, the company reported an increase in overall net written premium of 6%. Roughly 3% in personal lines and 10% in commercial lines. New business net written premium was $306 million in commercial lines, representing 43% growth. And $279 million in personal lines, representing 91% growth. Marita will discuss production in more detail in her remarks in a moment.

Now lets turn to the life companies for a quick update. Life companies continuing operations reported nil segment earnings for the quarter compared to a loss of $1 million in the fourth quarter of '05. In discontinued operations, we reported an after tax loss of $4 million which is in line with expectations. Further, we have obtained approval from the Massachusetts division of insurance for a $40 million dividend from our life companies. This dividend is somewhat higher than the guidance we had provided of $20 to $25 million. And lastly as you know we are hosting an investor day, as Fred mentioned, on March 1 in Boston. As we did last year, we will provide guidance for '07 at that meeting. With those comments, I will turn the call over to Marita.

Thanks, Ed. Good morning and thanks for joining the call. I am also very pleased with our perform performance for the year. Both our personal and commercial lines segments delivered strong results. Gaining momentum in the market while maintaining a strong loss performance and overall returns that were consistent with our objectives. Our property and casualty business reported top line growth of just under 6% for the quarter and the full year. Not taking the benefit of reinstatement premium on reported growth, and a combined ratio of just over 94% for the quarter and under 97% for the year, which includes an increase for Katrina reserves in 2006. These results are consistent with our objective of growing, but growing profitably.

Let's look at growth. Our commercial lines growth was just over 10% for the year and 7.5% for the quarter. This figure was impacted by a commutation of a reinsurance treaty that affected premium and masked our underlying production results which were closer to 8% or 9% for the quarter. This is somewhat lower than our full year production figure but it is consistent with our guidance. Over the past couple of years our commercial lines production has consistently dipped in the fourth quarter. It was lower in the fourth quarter of last year and it is again lower this year but to a lesser extent. This is due to increased competition we see in the market during the month of December as companies push hard to achieve their growth targets for the year. We have maintain and continue to maintain our underwriting discipline, and we have walked away from some of our new and renewal business due to overly aggressive pricing by our competitors. However, as we continue to grow our commercial lines by building more relationships with partners in 2007, this seasonal pattern should continue to become less significant.

With that said, let me give you more insight as to why I feel so good about these numbers. As I have said before, we are growing exactly in the places and lines we expected to. We reported robust growth in our inland marine and bond businesses, which grew 64% over the prior year. In addition our more traditional drive lines grew at a rate of 3% for 2006 despite continuing to shrink in our worker's compensation line. Our growth rates reflect an intended change in premium mix with significant growth in traditional high margin inland marine and bond businesses, where we realized early in the game we had an undercapped opportunity in the market. At the same time we also improved our market share in our standard lines, which grew 3.4%. As you know, we have invested heavily in both inland marine and bond businesses over the last couple of years, and these investments are paying off. In 2006 we have over $153 million in premium in these businesses. Again, a 64% increase over the same period last year. These lines now represent 17% of our commercial lines booked, providing us with better breadth and better diversification of our earnings base. The growth in our traditional lines is also in line with our strategy, as we are growing in our sweet spot. C&P and commercial auto growth is being driven by first tier middle market, which is our sweet spot. Again, defined as accounts with premiums in a range of $25 to $200,000. In this segment year-to-date C&P growth was 12% and commercial auto grew by 16%. We monitor the quality of our business very closely. Using various metrics including class mix, line of business mix, policy size mix, and transactional quality. And I remain satisfied with the quality of our new business.

Finally as expected we are growing with our partner agents at a rate that is over twice the growth rate of our overall franchise. For all these reasons, I remain satisfied with our commercial lines production. It is coming from the right places, in the right lines and in the right market segments. Although the market has been tight, pricing is hanging in there. For the year our overall rate increases including exposure growth were about 1.5%. Further, our accidents year results in these lines also continue to remain solid, with a 48% loss ratio for the year excluding cats.

Now turning to personal lines. We recorded 5% growth in the quarter and 3.4% growth for the year. Excluding the benefit of reinstatement premium in the reported numbers. This is in line with the guidance and comes despite a continued cautious approach in Massachusetts and some actions taken to continue to reduce our catastrophe concentration in coastal areas. As expected this growth was driven by personal auto and is supported by our new business from our Connections Auto roll out states. We now have Connections Auto, our multivariant product, in the 17 states that we had planned for rollout in 2006. As you may remember, we took some action to reduce homeowner's policies on the coast, including the Cape and in Rhode Island. This did put pressure on top line growth in some states. Furthermore, we continue to shrink our position in Massachusetts. Over the last three years we had a focused strategy to improve our profit position in Massachusetts. Our plan included focusing on partner agents, reducing coastal exposures, and improving our claim and technical capabilities. This led to a reduction in our premium in Massachusetts and one we believe will drive profitability over the long term. A tradeoff we are willing to make every day. We now have built a very strong and profitable business in Massachusetts and could even begin to cautiously grow our voluntary position in 2007.

In the states outside of Massachusetts, our personal lines growth rate was over 8% for the quarter and for the year. I remain satisfied with the growth in our personal line segment. Connections has provided the competitive leverage that we expected it to. It is enabling us to diversify our footprint and our exposure base outside of our big four states. Of course, given the sophistication of this new product we expect to make ongoing adjustments. But our analysis is thorough and we can identify and respond to issues quickly. We carefully monitor new business distribution and profitability as well as flow and hit ratios by agent and by risk tiers. Our overall hit ratio is where we like it to be, within the 20% to 30% range overall, and is some what higher in the more attractive risk tiers. While our turn around in personal line started with the introduction of Connections Auto, we expect that as we move forward, our growth in 2007 will be driven by our total account approach to the personal lines market. And with Connections Auto in our product portfolio, we have successfully entered and built new agent partnerships in new states.

Our success in 2007 and beyond will depend on our ability to leverage these relationships and deepen our penetration in these states across all of our product lines. With that in mind, we have a new homeowner's product, Connections Home, that will be introduced next year and focus on deepening the umbrella penetration in 2007. Of course, the market remains competitive and it will take hard work to achieve above industry targets in 2007. But we believe we can. Clearly it is going to take hard work and excellent execution to achieve these growth objectives with responsible margins in both personal lines and commercial lines. But I believe we have positioned ourselves well and I remain optimistic about the outlook. And of course I look forward to our discussions on Investor Day, where we will provide more insight as to why and how we will achieve these goals in 2007.

But before I turn the call back over to Sujata, let me give you an update on our reinsurance renewal. As you know, our catastrophe reinsurance treaty renewed on January 1st, and I am pleased with the results of that placement. As I mentioned earlier, we have an active exposure management program. And with the many actions we have taken this year, we have been able to grow while reducing our aggregate exposure to catastrophes, which is a key factor in the favorable renewal of our catastrophe reinsurance program. We renewed our catastrophe occurance reinsurance treaty very similar in structure to the expiring program, with the following changes. We increased our retention from $60 million to $90 million while at the same time we bought extra $100 million in limit, increasing our limit from $500 million expiring to $600 million. We have a 15% coparticipation on the reinsured amount, similar to the expiring which was a 16% coparticipation. And also, after careful consideration, we decided to nonrenew our catastrophe aggregate treaty. As you recall, this treaty was a frequency cover and protected us from multiple catastrophes in a year. It at that attached at $90 million and provided $50 million in protection once aggregate catastrophe losses exceeded $90 million in a given year. Given the high attachment point and pricing in today's market we saw little expected economic benefit from this cover. We believe our new reinsurance program gives us the right balance of reinsurance protection and economic benefit. With the higher earnings power we have sustained over the last three years and with increased capital level in the P&C companies, it is prudent to accept higher retention levels and to eliminate the aggregate treaty. At the same time, buying up the co-occurance limit made sense to protect our capital from a significant event while also helping with the rating agencies new capital requirements. With the elimination of the aggregate treaty, we were able to renew our new program for just under $50 million, a cost that is below what we paid in January of 2005. And with that I will turn the call back over to Sujata.

Operator, we will now open the floor to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jay Gelb representing Lehman Brothers.

Thanks, and good morning.

Morning, Jay.

With the recent change of administration in Massachusetts, can you talk about what the prospects are to have attractive personal auto insurance reform in the state?

Sure, Jay. Thanks. We obviously spend a lot of time with the administration and my observation is I think the administration is quite thoughtful. We are working with them. They just introduced a working group to assess all the components of where we are in reform. And I am actually quite optimistic, because what it is, is a combination of academics and economic folks to look at overall impact of it and in my conversations with the governor and the administration give me pretty good comfort that we will make progress. It won't happen overnight, but we will move forward on enough of the components. As you know in the last three years, we are now, in my view, the most successful underwriter in the state on auto, because of the work we have done on fraud and seeding, etcetera. So I feel we are going to continue to be successful and I look forward to the state to being more normal. I do think there will be progress made. But every conversation I have had and the actions they have taken and the way they are looking at it gives me a positive outlook on how we will move forward. I am not concerned it all stop or anything like that.

Okay. And then separately, a lot of the investments were made this year which impacted the expense ratio. Can you give us your -- and I think you talked about trying to improve that -- over, by a few points over the next couple of years. How do you think that plays out?

Absolutely. As I have said all along. In my view, what I did is, I invested probably about 3 points in excess of where I want to be on the long haul. And in investment. And as you know this is the high water mark year. We accelerated some expenditures in the second half of this year to get the homeowner's product out quicker, altogether at the end of the first quarter and also, one of the exciting things we are doing is a bunch of improvements to our commercial suite of products and capabilities that are also coming out in the first quarter. So we accelerated some expenditure. So I look forward to you know, moving that expense ratio down. I think you will see a significant move next year, a reduction. I do think it will take two or three years to get the whole thing but we will see a significant reduction next year. You know, I look at it and say,given our growth goals, it will be easy to see a point reduction next year, that's the way I think about it. But we have investments that will continue in the first quarter. Those investments that I talked about. But I think over time you are going to see us move to that more normalized expense ratio over the next two or three years.

When you say at least one point. Do you mean 2007 or 2008?

2007. I think as we go through the year, again, as I talked about it last year. These big investments. I accelerated them and a lot of them are in that first quarter and second quarter. We also have some of the claims investments. But you can see them coming to a normalized end. And as we grow, and our throughput gets better, I see improvement next year. Great.

And then finally can you update us on your conversations with the rating agencies. Specifically AM Best and how that might affect capital management plans.

You know, we just received from the state as Ed announced, it occurred in the last day or so, the announcement of the dividend. We also had met with that in December as we always do, and now we have to, now that the end of year numbers are in, we'll return. You know, I feel good about all our rating agency conversations. You saw that we got positive outlook from both Moody's and S&P last year and I feel good about where we are with Best. As far as our capital management, it is early yet to sit back and add it all given I think that the conversations with Best will get more refined as they see the year-end numbers. I would also tell you, I do believe that we are going to continue to grow. So I want to look at capital in regards to how they think about it and how we think about our needs as far as the opportunities to continue to grow. But as we did last year, it is something that we are going to think about carefully over the next couple of quarters, or couple of months. Excuse me. To think about what our capital position should be. I don't know if there is anything else with the rating agency conversations that you want to talk about it.

No, I think that pretty much says it for us. They have been very positive with all the agencies including our update here on these quarters numbers and you know, the timing plays out such that even with Best. You know, as Fred talks about, we're flying conversations and then the other two it's sort of April, May, June, time frame. So at this point what I'd say is just bear with us and there is more to come on that.

Great. Thanks for the answers.

Thank you.

Your next question will come from the line of Dan Farrell, representing South Pit.

Thanks. It is actually Fox-Pitt.

How are you doing, Dan.

How are you doing? Just first question, can you give a little more color on the dividends that came out of the life subsidiary? And in the past you've talked about being able to take the tax attributes, which is the 20, 25, so presumably you were able to pull out more capital than tax attributes so can you just talk a little about that and some of the conversations you had the Mass regulators and how they're thinking of the runoff operations as we go forward.

Sure, Dan. In fact the $40 million approximates the tax amount for the year. So while the projected tax amount was in the 20, 25 tax range, it ended up being $40 million. Largely because the profitability was so strong and so we did, we got what we thought we would get. An amount that we expected to be equal to the tax benefit. So that's about the $40 million. Largely because the profitability in the P&C business was so strong. So we got what we thought we'd get, right. We said we'd get an amount that we expected to be about equal to the tax benefit. So that's about the $40. I will say from the company's perspective we continue to feel very good about the strength of the capital position of the life insurance subsidiary. Even with that dividend our risk-based capital at the end of '06 is about 400%. So what that means to me is we look forward around future dividends and monetizing the value of that life business, as we discussed we will. It makes me feel comfortable that over the next two, three, four years, we will be able to take meaningful dividends. So if anything, we feel, you know, more positive I think on that score than we have over the last 12 or so months

Great. And then I think Fred mentioned that you added over the last year or 18 months about a 1000 new agents. Has the overall agent count increased over that time period? And then can you talk a little about the composition of the agent force now? It used to be a certain percentage that you had called in and target agents or talked to your agents. Has that mix shift --has that shift changed or has your perception of the agent force now changed now a bit?

No, what has happened in the net is obviously a little less than a thousand because we actually refined some of our partnerships. And you know, groups and some the more densely populated and densely penetrated states that we have. As well as it kind of got refined around what winning agents we had in some of the mature markets. So I would say we are probably up 700 or so. Right, Marita?

Yes.

It is right around that number within 50. What I would tell you though. This is a very important point. We are differentiating ourselves pretty significantly from our competitors on this point. While we have increased our agents, we have done that in all these emerging markets we've created. We have invested a ton in the platform and our portfolio of states and geographies in states and micro markets. We still, very differently than, say, some of the bigger companies and some of the auto only companies. We don't believe this is a commodity product. We don't believe in and appointing everybody and putting a desktop. We are very much in the mindset of a Cincinnati Financial where we have a portfolio of partners in a local market. So we give a franchise that is worth something. That's why we are seeing such great growth.

So when we appoint something, it's a very detailed review process that says how you are going to get to $2 million with us, or more. So the way we think about it in all our states is we are going to have a core group of partner agents that make up the vast majority of our business and most of our micromarkets, in the 70 range. So it is not 600 agents. It is the 70 partner agents. So it hasn't changed. What has changed is, we now have personalized and small commercial capability in almost all our micro markets. So now we have enough to actually appoint agents in a Tennessee, in a Georgia, in a Minnesota, and a Wisconsin where we now have the portfolio of products in place that we can provide this partnership coverage. You know, we have a little bit unique approach to this.

Like so we entered Minnesota. We led with specialty businesses. Started with some core agents and now we have our product portfolio there we are able to appoint another 70 or 80 agents to make our partnership complete. So we have a lot of levers which are a little different than other people to grow with these partner agents in most of these geographies. Not only do we have new geographies, we have new lines of business and new products that are almost complete now. And the whole portfolio that are just starting to get going.

So, again, I am, I am happy with the appointment process. My guess is there is still about 250 I'd like to do. We have some where we just opened an office in Minnesota and Wisconsin, and there is more that we will do this year. There is a little bit of penetration in Arkansas that we're doing this year because of our growth there and the way we penetrated that market as well. I see Missouri on the horizon for us, a few more appointments as we close that in. And so, again.

We just -- What it is, then, you heard from a lot of people, this blanket let's appoint everybody and put it, we don't care if it is only $100,000 from a lot of agents. We don't believe in that. We don't believe in a new business penalty, we don't believe creating a product that is a commodity. We believe in picking agents that have to do a portfolio of lines of business with us. And it is pretty detailed process. It is just that we have a lot of geographies now that we've rounded out. Which is 2006 was such a big year for us as we enhanced all our products and people. We hired this year about 700 professionals to complete our portfolio in the 4200. We upgraded and now have penetrated the market footprint that we had planned for. So again it is all part of the integrated strategy around partner agents. It is not a change in strategies. It's just that we're there at that point. I don't know Marita if there is anything else.

No, I think you said it well. The majority of our new appointments in 2006 were definitely due to new geographies and some of the micro markets that Fred talked about, predominantly in personal lines. In commercial lines, we know that we want to convert, if you will, another 200 agents in 2007. To that partnership status that we talk about. But those will come from our existing agent plant, so that the majority of the number increases you se do come from new geographies, micro markets, territories where we have good products and want to penetrate. So that's well said.

That was very helpful detail. Thank you.

Thank you.

Your next question comes from the line of Ron Bobman representing Capital Returns.

Hi.

Good morning.

Congrats on another fine, fine quarter. Great job.

Thank you.

I have one question and it relates to Florida which I know is not anywhere near your biggest state. But pretty topical. And I guess to the extent we all understand what's transpired so recently. I am wondering for '07 does it leave you with a desire to write more homeowner's business in Florida in '07, does it leave you with a desire to write about the same or less? And when I say more or less, the same, as measured by exposure or policy count?

Yes.

Less so by rates. And of course share your broader thoughts, I would appreciate it.

Yes, sure. And Marita has been studying this like crazy this week. A lot has happened. Let me just make a macro point. I guess three things I would just leave you with. One, it is obviously much more impactful at the immediate for the reinsurers than it is the primary guys, but I will tell you why I have some observations that are concerning about the macro issues.. It clearly is a reinsurance, immediate reinsurance impact.

My second observation about us is we have a teeny personal line homeowners book, we have $14 million of homeowners, which has grown just because our rates have gone up so much there. It is not a big part of our portfolio. But, let me just give a macro review of what I think happened. And I do want Marita to give her reflections because she has obviously studied this very closely. Two things. I am surprised to tell you the truth, that the citizens of Florida have taken on a private liability of such magnitude. I think when people step back and they realize in any kind of normal 10 year period the amount of debt the state is going to take on is enormous. And I am not sure that is completely sunk in. And while there could be some short term savings that are paper only, the issue for me is the amount of bonds they have to issue are incredible, and the question I worry about is if you don't have the political stomach to get market based rates or actuarially sound rates now, how are they going to feel about getting coverage on those bond obligations when they all come due. And again I think that is going to all play out in the next year in some of these sessions as people actually add up the potential liability to the citizens of Florida.

The second point, I would make to you about the reform from a macro point of view. Is that the thing that concerns me the most, probably in the short term is the roll back of citizens rates. What that essentially says is, they have decided that everybody in Florida should subsidize those who have higher hazard positions. And you know the rate rollback is going to have a significant impact on that cost subsidy and cause tremendous deficits in that pool because they are not, in my view, actuarially sound. Now we can debate what actuarially sound is, but we have gone from needing significant rate increases to rate roll backs in that segments of the population.

In my view, every time you step away from good economics, is a concern. Because, our business is based on spreading of risk and solid economics. So, when I look at that, the reason we are carefully studying, even though it's a small piece and it seems more of a reinsurance in the short term. It obviously makes us concerned about the economic viability of Florida, particularly on the homeowner's side over the long haul. And of course this kind of stuff, it happens so quickly and it will play out in the further sessions and who knows how the people, when they start thinking through the economics unfold. But it is something that makes you pause. Because it is not -- it is rates that are not actuarially sound. Which says they are a little random. And in our business when you have random rates it is the not the way to sustain top quartile returns. So, I don't know Marita, if there's any further --

I don't know if there is too much more to be said. As Fred said, it is not a significant state for us. We do well over $100 million in the state and as Fred said only $14 million of that is homeowner's. I would express our disappointment. We made significant progress with cat management, with mix management in the state and we have seen some targeted growth with PML reductions. We also have very limited distribution in the state with some of the best agents. So, although the recent legislation is new, we are still reviewing all our options as well as the ramifications. We obviously see the short term interest of providing Florida consumers with short term rate relief. But we also are concerned with the long term financial impact to consumers if a weather related event were to hit next year. So, everything Fred said is right. We are spending an awful lot of time with our best people reviewing what our options are as well as the long term ramifications.

And again, one of the things that everybody knows, one of the benefits we have, when you don't have that great a concentration. It is quite populated state, it's quite spread. We are thoughtful about our micro management of exposures at the sub-ZIP code level. And because we are smallish we tend to have more flexibility. We have a small distribution channel. We can put the risks we have there in specific places. So you know, in the short term, I don't feel at risk or anything. But I think again, the long term notion that this is essentially not about actuarially sound rates. It is a little frightening because it tells you don't really know what is going to happen when we have a few storms.

Back to the specifics of my original question -- and I do appreciate your thoughts -- but what is, as far as what transpired what they passed and presumably come March or April, you are going to be faced with rate pressures or state mandated rate pressure on your homeowner's rates by virtue of this factor they are going to come up with. So back to my question. Do you desire to have you know, more homeowner's exposure this year, the same or less or directionally can you give me some indication of what it is?

Obviously, I don't think it is a great market of opportunity right now. I don't see us growing our exposures significantly in Florida given this uncertainty, right? The issue is what are the total economics going to tell you about your options available given the law. But again, I don't see this as this big opportunity and it doesn't, and to tell you the truth that doesn't really change where we were last year. We haven't thought of Florida as one of those tremendous opportunities for us. What we are are trying to do is maximize our mix. Given the fact we have some presence there, we have a very good auto presence, we have a very good commercial auto presence, we have a very good liability presence where we make money. So the issue for me is just making sure that we maximize the returns in Florida given these changes. But there's nothing in this that makes me excited about growing our homeowners. Now again, the rate, we've got [inaudible] rate. Obviously our premium level has gone up. Because the rate levels we have been able to achieve have gone up, but our exposure management is still very aggressive.

I guess that relates to other lines of business and the contingent assessment exposure you are going to face there, right?

Right, that is a the economic analysis you have to do. So that is exactly what we are in the process of doing. Because that's new, obviously. That component of how they are sharing that and so, it is the thing we have to work through, the offset being, you know, the reinsurance cost etcetera. But it is very important for us to work through the whole economics.

Okay, thanks. And if you'll extend me one more question. Are you seeing any pressure from agents trying to get a little more commission, as business is being harder to come by.

You know, it as great question. Right. Because what you have seen is a couple of competitors launch what I call blue light specials. And in my view, that is not exactly understanding the agent economics. Agent economics are more driven in an account retention in a market like this where people are under pressure to hold on accounts than they are strictly by commission.

So one of the things we have done, and it has actually benefited us in some of our core states, is we are helping people consolidate their books a little bit in this period, so they get more contingent commission as a percentage of their book with us without affecting the overall commission structure. In addition the notion of umbrella, you know, cross selling around umbrella particularly, helps the retention. That actually helps their earnings significantly more than a lot of other things. Because you know the issue you got in a market environment is that rates are relatively flat and the question for them is how they continue to grow their earnings. And for a lot of them the best lever for them is actually consolidating to fewer markets where they have a little bit better retention and a little bit better contingent commission.

So, again, do I see some conversations about commissions? You always do. But to me what you are going to see is people that arbitrarily move around. That's such a short term phenomenon that most agents are going to be very suspect about that. And I feel good about our commission structures where we are and how they're aligned. So again, I don't know how else we are going to see three or four people do something dramatic. But to date in our states we haven't seen anything that's moved to the flow of business.

Thanks a ton and best of luck.

Thank you.

[OPERATOR INSTRUCTIONS] There are no further questions at this time and I would now like to turn the call back over to Miss Sujata Mutalik.

Thank you, for joining us, and we look forward to seeing you at our Investor day on March 1st.

Thank you, everybody.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.