Hanover Insurance Group Inc (THG) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter, 2007 Hanover Insurance Group earnings conference call. My name is Shantilae, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Ms. Sujata Mutalik, Vice President of Investor Relations. Please proceed, Ma'am.

Thank you, Sujata. Good morning, and thank you for joining us on our fourth quarter earnings conference call. Participating in today's call 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, as well as Mark McGivney, Senior Vice President of Finance. Before I turn the call over to Fred for a discussion of (inaudible--highly accented language) results, let me note that our (inaudible) and a current report on (inaudible) were issued last night. Our press release, statistical supplement and a complete slide presentation for today's call are available in the investor section of our website at www.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, slide presentation and conference call.

We caution you with respect to reliance on forward-looking statements and in this respect, refer to you the forward-looking statement section in our press release and slide two of the presentation (inaudible). Today's discussion will also reference the financial measures, such as total segment income, segment income, segment result excluding the (Inaudible) of catastrophes, ex-CAT loss ratio, and accidental loss ratio amongst others. A reconciliation of the non-GAAP financial measures to the closest GAAP measure on an historical basis can be found in the press release or the specific supplemental 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 first quarter earnings call. We're off to a very good start in 2007 with solid growth and strong earnings. Segment income after tax of 60 million compared to 56 million in the first quarter a year ago. Our pre-tax property and casualty earnings were 101 million for the quarter, up 10% from 92 million for the prior-year quarter. Along with earnings improvement, we recorded a 6% written premium growth for the quarter and we grew book value per share by 4.7%, to $40.92. Overall, we reported a solid combined ratio of 93.8% for the quarter, improved from 94.4% in the prior year. Improvement in our property and casualty segment earnings was driven by favorable development of reserves relating to prior accident years indicative of the strength of our balance sheet and the improvements we have made in the quality of our book over the past few years and the expense ratio improvement. Partially offsetting this improvement was a compression in accident year margins caused by some Northeast weather and, as we mentioned on Investor Day, and expected to gain due to high percentage of new business and our book of personal auto. With, that let me highlight some of our accomplishments for the quarter. The fundamentals of our business remains strong in both property casualty business segments through the first quarter of 2007. Our commercial line segment recorded 6% growth in net written premium for the quarter. There is no question that the market continues to be competitive, particularly in the more traditional drive lines, but I continue to see real market opportunity for a quality regional company like ours that targets winning (inaudible) agents with broad product capabilities.

We continue to work with targeted partner agents and established and newer targeted geographical markets to gain growth momentum. At the same time, we are leveraging our specialty capabilities to continue to profitly gain market share with our partner agents. This strategy is working and I continue to see good momentum in most markets as we created a distinct combination of broad product capabilities, advance technology and responsive service. Our specialty business also continues to show solid growth and our capabilities in this area allows us to be more resilient to market conditions by giving us broader options for growth than many of the regional companies we compete with. We now built a specialty business with over 200 million in written premium. Additionally, we're watching a significant upgrade to our small commercial platform during the next two quarters, which would give us some added competitive edge in the market and give us another way to shift share with targeted agents. These initiatives, as well as the progress in our overall execution, give me confidence that we can achieve our overall growth objectives for the year of the mid- to high-single digit growth whole maintaining strong margins. Our accident year margins have remained relatively stable in commercial lines, even with the increased competitive pressures. As we continue to remain prudent daunting our growth objectives with our discipline around profitability. In addition, we are improving our expense position in commercial lines which will help us maintain and grow profitability.

Now, turning to personal lines. Personal lines net written premium growth for the quarter was over 7%, on the high end of our guidance. This growth was driven primarily by unit growth in auto. Our home owners' line also grew by 4%, driven primarily by rate. Overall, our personal lines investment in service, operating model and product enhancements are really starting to take hold. New business production remains healthy and is up over 25%, and our current rollout of connections, home and umbrella, should help us achieve our growth objectives for the year of the mid single-digit growth. As I review our progress, I remain convinced that our agent targeting and total account approach is working and we are building momentum in market share on the shelf base of winning agents. At all times, we are carefully managing our growth and an agent level which continue to attractive margins. To summarize, I feel very good about our performance and believe me, have strategically positioned the company in the best possible way to be a top player in the market. The dynamics of the market are certainly affecting the pace and the nature of our success, but we have the right people and right infrastructure in place to make necessary adjustments as needed to continue to be successful. We remain on track to meet our commitments to you for 2007, we are singularly focussed on creating a top cartel company so we are working on all the critical levels to deliver top cartel return.

Already our expense ratio for the first quarter is at a level we need to be, roughly one percentage point lower than our full year ratio in 2006 and in line with our commitment. We expect this trend to hold for the full-year as promised. Additionally, we will actively manage capital and look for opportunities that will enhance our franchise with a focus on improved bottom line returns. Over the last three or four weeks, I have met with over 400 agents in a number of our markets and while the market is competitive, our efforts are taking hold.

We continue to see good growth opportunities with attractive margins. I remain convinced our best-of-both strategy combine the product, technology and people quality of the best nationals, with a local presence and responsiveness of the best regionals, makes up a distinctive carrier for winning independent agents that are consolidating their markets. And, it should enable us to take advantage of the market to opportunities as weaker companies struggle to this difficult market. Obviously, we must remain focused on the quality of our business and business partners and success will not happen overnight. But, if we focus on the execution every day as we have the last three and a half years, we will continue to create significant value for our agents and shareholders through the cycle. With that, I will turn it over to Ed to review the financial.

Thank you, Fred and good morning, everyone. Thanks again for joining our call. As usual, I'll be using a slide presentation during my remarks and I trust all of you have this available. If you would, please turn to slide five for a review of our consolidated results for the quarter. For the quarter, we reported net income of $64 million, or $1.22 per share, up from 41 million or $0.75 per share the year ago. Net income in the first quarter of '06 was impacted by a loss in the disposal or variable life insurance and annuity business in the amount of $20.1 million or $0.38 per share and in the first quarter of this year, the impact from this transaction was nil or about $200,000. Income from continuing operations were 64 million for the first quarter or $1.23 per share up from $60 million or $1.12 per share in the first quarter of last year. Now let's turn to slide six for a discussion of our segment earnings which drove this increase. Segment income after tax for the quarter was 60 million, up from 56 million a year ago. The property and casualty segment generated 101 million in pretax segment income, up from 92 million in the prior-year quarter. This increase was driven primarily by favorable development of prior-year reserves in both personal line and commercial line. Our light companies posted a $1 million loss from continuing operations, versus a loss of $2 million a year ago. The segment loss in the current quarter relates to legal expenses associated with a market time and lawsuit we are currently defending. We continue to expect a life segment earnings to be at break even for the full-year.

Now let's's turn to slide seven for a review of our PNC results starting with the personal lines. The personal line segment generated pretax segment of 48 million in the current quarter compared to 49 million a year ago. The pretax net impact of CATS was seven million in the first quarter this year, compared to 4 million last year. Excluding CATS, segment income was 55 million in the current quarter, up from 53 million a year ago. This increase is primarily due to higher favorable development of prior-year loss reserves and stronger, net investment income,. partially offset by higher current actions in your losses and somewhat higher expenses. Prior-year loss reserves developed favorably by $21 million in the first quarter of '07, compared to 8 million a year ago, representing an increase of $13 million. This increase was driven by improved frequency trends in personal auto liability lines, relating to the most recent accident years, primarily '04 and '05. Current accident year losses were higher in the first quarter of '07 compared to the prior year first quarter. A loss ratio excluding tax and prior-year development was 59.3% in the current quarter, up 3.7 points in the prior-year period. This increase was driven by an increase in non-catastrophe weather-related claim frequency and growth. '06 benefited from usually mild weather in the Northeast and '07 results reflect a more normal weather result. Additionally, underwriting and loss adjustment expenses were 5 million higher in the current quarter.. This primarily due to higher employer-related expenses.

Then lastly, the current period of earnings benefit from higher net investment income, driven by increased operating cash flows and the benefit of a (inaudible) fall premium. Now, let's look at commercial lines which, is on slide eight. Commercial lines pretax segment income was 49 million in the quarter compared to 39 million a year ago. As you can see, the pretax impact of COPS in the first quarter of '07 was 7 million compared to 4 million last year. You explode COP segment income was 56 million in the current quarter, up 13 million from $43 million a year ago. This increase is primarily due to favorable development of prior-year reserves and to a lesser degree from higher net earned premium. The favorable development of prior-year reserves was 31 million in the first quarter of '07, compared to $20 million a year ago. Reserves developed favorably-- favorably across all lines. However, the increase from last year's first quarter came primarily from Workers' Compensation. This improved outlook for COP is primarily attributable to improved claims practices, combined with relatively conservative aggregate case reserves. Commercial line segment earnings also benefited from an 11% growth in net earned premium. Importantly, at the same time, accident year loss ratios held relatively stable at 50.1% this year compared to 49.8% a year ago.

Now let's take a brief look at production, which is on slide nine. Overall, net written premium was 612 million for the current quarter, up 7% from a year ago. Commercial lines net written premium increased by about 6%, while personal lines was up by 7%. Total new business growth was 15% with personal lines growing at 25% and commercial lines at 7%. Marita will discuss production in greater detail in a few minutes for her remarks. And, before I turn the call over to Marita, let me give you an update on guidance for the full-year. As you recall, we provided some reasonably detailed guidance at our Investor Day meeting on March 1. As Fred said, we continue to feel good about that guidance as follows: mixed single-digit growth in personal lines, in mid, high, and mid- to high single-digit growth in commercial lines An expected CAT low of 3,5 to 4 points. And expected increase in the overall for an actual year loss ratio of roughly two points, a 1.5 point decrease in aggregate OUE and LAE. Net and investment income, $10 million higher in '07 than in '06. A PNC effective tax rate in the range of 33 to 34%. And PNC earnings consistent with a levered 12% PNC return on equity.

Further, while we don't provide specific guidance on prior-year reserve development, we still expect meaningful development this year. However, at levels less than we saw in '06. And finally, for a life segment, we expect pretax segment earnings from continuing operations to break even and expect to generate 20 to $25 million in dividendable surplus over each of the next two to three years. So with that update in guidance and those comments, I'll now turn the call over to Marita.

Thank, Ed, good morning and thanks for joining our call. I'm also pleased with our performance for the quarter. Earnings were solid in both our personal and commercial line segments--segments delivered strong results. Gaining momentum in the market, while maintaining overall returns that are consistent with our objective. Our property and casualty business reported top-line growth of 6.6% and a combined ratio of 93.8% for the quarter. These results are consistent with our objective of growing, but growing profitably. As usual, my comments will focus primarily on the quality of our growth and my view on our prospects. Commercial lines growth was 5.7% for the quarter and most of this growth came from our specially line that we have aggressively developed over the last couple of years. We reported robust growth in our inland marine and bond businesses, which grew 36% for the quarter. In the first quarter of 2007, we had 47 million in premium in these businesses, that compares to 34.5 million over the same period last year. These lines, as Fred mentioned, now represent 19% of our commercial lines book, providing us with better breadth and diversification of our earnings space. This strategy of expanding our capabilities to include specialty is clearly paying off for us, especially in this current market. There is no question that the market has become significantly more competitive and our traditional drive line showed relatively flat growth for the first quarter of 2007. This is clearly reflective of this competitive environment.

However, we still generated 39 million in new business premium in our traditional lines and we held our overall retention rates at around 80%. Obviously, when the market is competitive, it's even more important to remain consistent and disciplined in your underwriting and we're holding the line on both quality and price. For the quarter, our overall pricing trend, including exposure growth, remained relatively flat and our accident year results in these lines continue to remain solid with a 50% loss ratio for the quarter excluding CATS. We will and we have maintained our underwriting discipline and we have walked away from new and renewal business due to overly aggressive pricing competitions and will continue to do so. To conclude on commercial lines, I would like to reiterate I'm pleased with a 6% growth. Obviously, we have to continue to push harder with partner agent appointments and continue to increase the yield from existing partner agents. The industry is at a high retention level which makes all of this more challenging for us to penetrate.

With that said, I believe that the model that we built is the right one. Our broad product offering combined with talented local field management and underwriters and our superior service commitment should produce results that make us a successful player in the commercial market. We just have to continue to work hard and it may take us a little longer to maximize our commercial lines value proposition. In the meantime, as Fred mentioned, we're launching our small commercial platform which should further enhance our distinctiveness with partner agents. This platform will be rolled out in the second half of the year and it will result in improvement in our front-end interface, making us a lot easier to do business with. The new platform will also include enhancements in our products with the edition of new BOB classes and expanded small worker's compensation appetite and the adoption of a multi-tier rating capability in our commercial auto product. We believe these enhancements should provide another lever for growth in the latter part of the year and help us to counter balance the competitive pressures of the market. I still believe we will see mid- to high-single digit growth in commercial lines, while building momentum in our poor lines as we move through the year.

Now turning to personal lines. We recorded 7.2% growth in the quarter, which is stronger than the guidance we provided. This solid growth was driven primarily by personal auto, which grew 8.5 points on policy growth, while our home owner's line reported 4% growth driven primarily by rates. As expected, the growth in personal lines was supported by an increase in new business from Connections Auto in our rollout states. We now have Connections Auto, our multi-varied product in the planned 17 states. New business was 75 million in the quarter and that is up 25% from the prior year. Additionally as we had intended, Connections Auto has enabled us to start to increase our presence outside of our big four states of Michigan, Massachusetts, New York, and New Jersey. In fact, our growth rate was 30% outside of our big four states. Although we have some challenges ahead of us, I'm very pleased with the momentum and personal lines. As you know, our Massachusetts personal auto business will be impacted by a double-digit rate decrease effective in April. Additionally, Michigan continues to be a challenging environment. The economy in Michigan is putting strong pressure on the insurance market. And will have to work harder to maintain our market share in this, our core state.

However, these challenges were clearly factored into our plans for the year, as well as the key initiative targeted to overcome them. We have introduced our Connections Auto home product in 10 states, the first wave included Illinois, Maine, Connecticut, New York, Ohio, Tennessee, Michigan, Indiana, Wisconsin, and Arkansas. This new product, which primarily enhances the ease of doing business for our agents, was very well received and while it's still very early in the implementation stage with April effective dates, the initial news is encouraging. Additionally, as we talked about it Investor Day, we have entered into a strategic partnership to extend our product capability in personal lines, to complete our total value propositions. With this partnership, we can offer our agents an even broader personalized product portfolio and strengthen our total account approach to the market. I remain convinced that our strategy of being a total account writer is on target and exactly the model we need to maximize the results under today's tough market conditions. I know it won't be easy, but we have the right model and the right people to make effective decisions that will enable us to sustain our objective of driving profitable growth through the cycle. And with that I will turn the call over to Sujata.

Yes, ma'am. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Dan Farrell of FPK. Please proceed, sir.

Hi, good morning.

Morning, Dan.

Just -- with regards to the reserve development, you mentioned most of it is coming from '04 and '05 accident years. Can you comment on the '06 accident, I realize it's early, but have you seen any development coming out of there and what is your expectation on that?

Yes, in fact we have. To a lesser degree than what we're seeing in '04 and '05, but we did see favorable developments coming out of '06. I think what I said on Investor Day is we expect over time '06 to develop favorably but at levels that are less than what we've seen with some of the prior accident years. The actuaries over the last few years watched the favorable development come through and I think they're being-- they're reflecting that current text. So, while we expect some, we expect it in a decreasing amount over time.

Okay, and then just on the personal auto and, I guess, specifically in Massachusetts, how much is Massachusetts now as a percentage of your total book and as the price decreases flow through in second quarter, is it going to be a noticeable sequential change in the results or as you said-- you said you did factor into your guidance. Can you give us a little more color on that?

Yes. I think that I'm going from memory here, but I want to say it's 10 to 15% over our auto book.

Uh-huh.

Much smaller than it's been historically. Obviously earned premium -- it defects earned premium. It really doesn't have any material impact on the bottom line because we continue to see pretty good (inaudible) development there as well. (inaudible) Quite frankly, our Massachusetts results as we look across all of our states, for this year I think over the next year or so, I expect-- we expect them to be at very healthy margins.

And as you know, the rate is affected after the first quarter and it's about 11 and it's going to earn its way through as Ed said, we actually think we have enough transparency to our mix of business and include profitability that we feel very good about Massachusetts. And for the foreseeable future.

Okay, great. Just one last question. Your assets at the holding company continue to grow. Can you comment on your capital position and would you foresee anything in that area or going forward?

You know, I think -- I don't think we have anything different to say than what we outside Investor Day, which is, we're obviously comforted by the increasing physician and surplus, we're obviously very comforted by where we are in the life business compared to a year or two ago. But you know, we're growing at a pretty good clip. We think we're putting the capital to good use with respect to that growth and what we think are healthy margins. As you know, we're sort of in the process with agencies right now. We're focussed particularly with (inaudible--poor sound) in. The others are getting upgrade and looking at upgrade hopefully for the holding company, which is in getting that, takes into account ratings of the underlying P&C business. So, for the moment, we're not talking about share repurchases. I think that is specifically what -- the question is you asking.

Uh-huh.

You know, keep asking us as the year progresses, but I suspect even as the year progresses, if we continue to grow at these rates, and we continue to be focussed on those upgrades, you won't see anything particularly material coming from us this year in that regard.

Okay. Thank you very much.

Your next question comes from the line of Jay Gelb of Lehman Brothers. Please proceed, sir.

Thanks and good morning.

Hi.

Good morning. I want to circle back in the last issue. Given the premiums, the surplus position and the free cash your generating at this point, can you just walk us through, again, why you won't have excess capital to deploy in terms of share repurchases that could help the ROE thanks.

Jay, let's talk about premium and surplus ratios for a second. Clearly ours have improved as a financial resulting business, improved over the last two or three years. But the if you look at our premium and surplus ratio and look at the premium and surplus ratios of A-rated companies, you will see that there's more leverage in our business than what we're seeing-- what you'll see in those businesses. So we're fighting, if you will,-- we're fighting the tape on that a little bit and, Fred has long said -- we've long said that in upgrade at the holding company to investment grade and an underlying rating from at best, a solid A is critically important to the long-term prospects and the success of this business. And, given -- given that strategic objective and given the leverage that we're seeing with competitors, which-- ,which are very obvious. You can go out and look at the data. We're less likely to do share repurchases than we otherwise would.

As we look at the year, obviously, we are going to be informed by the rating agency conversations that we're in the middle of and the -- you'll see a number of announcements come out through the next couple of quarters, I'm sure, but it-- we always do the same thing, right? So we're going sit back after the conversations, we're going to see how the year progresses, and we have no interest in just holding excess capital. So, we're going to do that assessment like we do and make a decision near the end of the year. I mean obviously, we have very good trends right now. And so that is going to go into our conversations with the rating agencies as well as our consideration with what we do with the capital.

Okay, and then on the separate issue, Fred, could you update us on the CFO search?

Yes, that's gone very well. We're about seven,-- six, seven weeks into it, I guess. There's a number of very attractive candidates. Obviously, I'm taking this very seriously. Ed's been here's long time and has been a very good thought partner, so this is very important position and so I'm going be very thoughtful about it and make sure the fit is there. But, there has been a lot of interest, and we've got a lot of candidates. So, I don't think there is going to be any issue about fulfilling it over the next few weeks here, so. I feel very good about it.

All right, still looking externally as well as internally?

We are looking essentially externally now, Mark has decided to take another position recently, he hasn't-- not disclosing yet exactly where, so we are essentially focussed on the external candidates right how.

Okay, well thank you very much.

Okay.

Your next question -- question comes from the line of Clifford Gallant of KBW. Please proceed, sir.

Good morning, good quarter.

Thanks, Cliff.

Two questions. One, the non-CAT weather in the quarter. Is there any way to quantify what the impact was in the quarter and I guess I'm just trying to get at to what underlying frequency and severity terms were in the auto business. And a follow-- as a second question, in terms of the-- as we discussed on the invest-- on the Investor Day, the loss ratio going up because of growth of new business, at this point is that expectation an actuarial-driven estimate of what is a reasonable expectation or do you actually have actual paid loss data, which is-- which verifies that view?

Yes, Cliff, the -- two terrific questions. First, just a couple of points in personal lines. The weather stuff. And I think you saw what 3.7 and 3.8 overall in personal lines. That means that there's about another two that's related to growth, which is what we talked about. The commercial lines, actual year (inaudible) the loss ratio as I said is holding in. So, what the experience we had in the quarter was very consistent with what we thought would occur. On the second question, it's really an actuary effect at this point there. (inaudible--poor sound) Is little paid data in this stage of the game and, you know, as the year develops, we'll have a better picture and it's an -- [ Indiscernible ] This morning.

Thank you.

Your next question comes from the line of Larry Greenberg of Langen McAlenney. Please proceed, Sir

Hi, Larry.

Hi, thanks, good morning. Just curious if you could maybe walk us through your rationale on still believing that reserve development this year will be less than last. I know it was viewed a little bit to the second half of last year. And, the comparisons get a little bit tougher on that front, but is there anything more to, just, prudent, cautious thinking on this?

Yes, I'm embarrassed to say it's not particularly scientific,. It's sort of our best guess and what we think will occur based on the underlying data. And I'll say two things more. First of all, the first quarter development is higher than I would have guessed it to be. Certainly I will acknowledge that. What drives my point of view on it being in a lesser amount is what I've said earlier on this call, I said Investor Day. And, I think that is that over time, the current accident year picks start to reflect as they're initially made. The development--, verbal development, the actuaries are seeing on some of the prior accident years. And, since we've in a verbal development position here, a reasonably healthy amount over the last couple of years. I fully expect that those more recent accident years are going to reflect that in the current accident years and as time goes on, we'll see less development. It is--, it is really nothing more scientific than that.

It's really nothing more specific than that.

And, obviously, Larry, one of the things that is a little bit unique about us and you have seen it in the way we've managed the company over the last three and a half years, because we knew we needed to over-invest in products and folks, we clearly were very aggressive in improving the mix of our business. And so, unlike some of the others in the hard market where it's just pricing that changes their portfolio and their assumptions about margins, what we've done and with every single state and every single line, it's fundamentally improved the mix of business. When we got here, as you recall, we didn't even have credit in our first line product portfolio. We had a number of miscellaneous dates that we could choose from. In BOB, we had a mix that I thought was less than attractive which we changed. In comp, we had a mixed change that was relatively dramatic, both in size and in class. So in almost in every place, because we knew we were going to make investments and expenses, we had to be really buttoned up on the mix of business we reported on the books, because we didn't want to take more than one risk at a time. And so, I think what you've seen is a tremendous improvement in our book of business and can you hear the confidence in Marita and I, that we believe we've got a fundamentally better book of business than we had before.

But because of all of that change on top of price increases that we've put through, it's,-- , it is not as easy to look out and really understand completely the reserve development, although we are confident that what we've got here is something that is going to be a 12% return on investment through the cycle and that is what we managed to. So, again, I feel good about where we are in our underlying trends, but it is, as said, a little different than all you were doing is anticipating price increases that went through and looking at frequency changes in the industry. I mean it's really a mixed improvement as

That -- let me expand on that a little bit -- just to expand on it. That is a very good point because that mix improvement would be reflected more in the '05-- '04 and '05, (inaudible) And, it's something that emerges that when actuaries are making their picks in '04 or '05, they wouldn't be picking-- they wouldn't-- because they haven't seen it, sort of through the rearview mirror. ANd, so now, we're seeing it. But, it sort of gets you to, as Fred says, having done that, get the book to a healthy level of profitability so you wouldn't expect in the actuaries start to see that and believe it and reflect it in the (inaudible) picks. So you wouldn't expect to see that over time and that level emerge from the (inaudible).

Great. That's fair. And second, a second question, you know, Fred in the past you have talked about benefiting from some of the dislocation from smaller mono-state companies that might be overexposed from a CAT standpoint. Are you seeing tangible signs of that at this point?

Absolutely. Let's break yet down into the two pieces. In personal lines, people talk about being more disciplined. That's not what's happening. Frankly, almost all the small companies are shrinking personal lines. Almost everyone under 500 million is at a tremendous disadvantage on pricing and segmentation. And, so, what we're seeing is on the shelf space, one of the things we're benefiting from, people are looking at the regional companies and slowly but surely deciding to shift. To me, what we're going to see -- is a couple more quarters that people bump along like this. But, what's going to happen is their adverse election of not being able to grow, frankly four or five years of shrinkage here, for a lot of these guys that haven't invested in their product. That adverse selection is going to show up in their book because they can't cover it up with rate increases anymore. And that is what is going to, emerge over the next three, four quarters. So, I full expect that our success with agents, telling the story is going to accelerate as they see this adverse, election emerge in three, four quarters because it will. You've got people shrinking at 6, 7,-- 5, 6, 7, 8% and showing 90.

The real reason is because their releasing reserves because their business is shrinking. That runs out, right? What happens is, the business that runs off is the stuff that is priced robustly and the stuff staying in the books is underpriced and then they going to have to jam it with rate and you know what is going to happen. They're hanging' on and it's going to happen. So, when we look at our pers-line book, I feel very confident that as we get to know these agents and (inaudible) with the agents, we're positioning ourselves so that as they start moving books, we'll be in a good position. Again, I can see it and it's just going to take some time. A lot of these days as you know, we rolled out last year. So, we're still in the early phase of this and, of course, our umbrella in home are just being rolled out now. But, I'll tell you, the conversations we're have with agents and the discussions we're having about book movement is significant. On the commercial line side, again, I would argue it's a tale of two markets. What you're seeing in the large account stuff is very much one account at a time. People are not shopping as much because they have gotten rate increases in the last year so, you've a little bit of a retention market and when something goes to the market, there is a flurry of activity and you seeing rate decreases on the large stuff. What I'm seeing in the small accounts is that winners are winning.

So, there is a consolidation and the under-$50,000 business just like there is in personal lines and, again, the reason we're investing so much there, is as we work with these better agents, again, they-- they can see the concentration they're experiencing with the three or four best players and they're looking for an alternative. So, again, does it happen overnight? No, it doesn't happen overnight. But, when I look underneath, what is happening is we're getting great trial because of our specialty business and because of what we did with 25 to 75 and now what they're doing is they're looking at the small commercial and talking to us about moving components of it to us and thinning it out, if you will. So, again, you know, the numbers are irrefutable. From 1995 to 2005, people outside the top 50 insurance companies in this country lost 26 a (inaudible) share. I mean, it's happening. It's happening quietly, it's happening in these segments and, again, what I think we've done is position ourselves. The issue is we're at that inflection point in the market where you always go through. People are kind of posturing right now. They had a lot of margin in their business and in the next two or three quarters, the winners separate themselves from everybody else. That's what-- we're just going through the noise. And what I see is a lot of people are being enamored by large margins and shrinking businesses. And, those companies are just, again, waiting for the adverse collection that is going to occur.

So, again, I personally believe that we just have to stay focussed on these targeted agents, particularly mid-size agents that are consolidators and we will continue to see it. In the last--, as I said, in my script, in the last three, four weeks, I have literally met with 400 agents. I can't tell you how many conversations we're having with folks about them being nervous with one company or another and it's just -- the question is when and how we need some of that business. And so, while the market is difficult, I believe that, if we stay focussed on this consolidation, we're going to emerge in a very good situation to participate in the consolidation that is occurring and will occur more at the tale end of this soft market. But again, it happens every market (inaudible). It's the most consolidation occurs near the tale end of the difficult pricing. And it will happen again-- and again.

This time what's different is personal lines is not automatically going to Progressive. Whereas in the past, really they were the one that wanted the share. If you look at the numbers, because they're struggling because they're into auto only, agents are smarter about protecting retention. So, when they're looking to move their book, they are going to move to people that can do the whole account so they can lock it down and keep it away from the captives and people like -(inaudible). So, again, I believe strongly that what we have done is position ourselves and if we can continue to be focussed, I think we can be very boring and have consistent profitable growth (inaudible)

Thank you.

Yes.

(OPERATOR INSTRUCTIONS) There are no further questions in queue at this time. I would like to turn the call over to Ms. Sujata Mutalik. Please proceed, ma'am.

Thank you, operator, and thank you, all, for joining our call and we look forward to talking to you again.

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