Hanover Insurance Group Inc (THG) 2009 Q4 法說會逐字稿

Good morning, and welcome to the Hanover Insurance Group fourth quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this conference is being recorded.

I would now like to turn the conference over to Mr. Bob Myron. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us for our fourth quarter conference call. Participating in today's call are Fred Eppinger, our President and Chief Executive Officer, Marita Zuraitis, President of our Property and Casualty Companies, and Gene Bullis, our Executive Vice President and CFO.

Before I turn the call over to Fred for a discussion of our results, let me note that our earnings 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 a Q-and-A session.

Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements. These include statements regarding expectations of segment earnings, after-tax segment earnings per share, pricing, accident year results, premiums, expenses, development of loss and LAE reserves, returns on equity, and other projections for 2010 and beyond.

There are certain factors that could cause actual results to differ materially from those anticipated by this press release, slide presentation, and conference call. We caution you with respect to reliance on forward-looking statements, and in this respect refer you to the forward-looking statement section in our press release, slide two of the presentation deck, and our filings with the SEC.

Today's discussion will also reference certain non-GAAP financial measures, such as total segment income, after-tax earnings per share, segment results excluding the impact of catastrophies, ex-cat loss ratios, book value excluding accumulated other comprehensive income, and accident year loss ratios, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis, can be found in the press release or the statistical supplement, which are posted on our website as I mentioned earlier.

With those comments, I will now turn the call over to Fred.

Good morning, everyone, and thank you for joining us. As we usually do, I will give you some context to our results, as well as share with you our outlook for 2010. Marita and Gene will follow, providing additional insight into our performance and relevant trends.

2009, particularly the second half, has been an extremely busy and important time for Hanover, as we continue to position our business building a stronger franchise and creating significant shareholder value. Obviously the weather, the pricing cycle and the economy made 2009 challenging, but the resulting market disruption enhanced our ability to position the Company to capitalize on the market changes we see in future periods.

As many of you who know our story will attest, we have made tremendous progress over the last six plus years successfully managing through some significant challenges. Over the course of those six years, we've dramatically improved our financial position, assembled one of the best teams in our business, established more and deeper partnerships with winning agents, developed a much stronger product and underwriting capability while creating a more responsive and flexible operating model. While more needs to be done, we have a clear strategic vision. We are in excellent financial condition, and our franchise is viewed as one of the most attractive for winning agents.

As we begin 2010, we take pride in all we have accomplished, and we are prepared to face even more challenges as our business approaches what we believe will be the low point in the cycle, and the economy continues to be challenged. Our operating results for the fourth quarter and the year were below our expectations, driven largely by prevailing market conditions and the state of the economy. 2009 was also a difficult year because of non-cat weather related losses across our footprint. With that in mind, we think it is prudent to adopt a more cautious point of view, and have increased our 2009 accident year loss ratios in some lines of business.

And naturally our expense ratio for the quarter and for the year reflects the significant investments we have made to launch and build out businesses. Our combined ratio of 98 was roughly three points higher than it needs to be for us to meet our long-term financial goals. And we are focused on achieving this through the cycle.

Notwithstanding the short-term challenges imposed by the current market conditions and our investments, we feel very good about the state of our franchise overall, and our ability to continue to create shareholder value now and in the future. We have every confidence that the investments we have made in our business over the course of the year, and that we will continue to make, will enable us to compete, grow profitably, and win over the long term. We are equally confident that the thoughtful capital management actions we have taken, and that we will continue to consider, will enable us to continue to deliver value for our shareholders.

In the fourth quarter, we announced that we would significantly expand our Commercial Lines footprint effective January 1, 2010, with seven state launch in the west. This initiative has been met with a great deal of excitement in the region. This expansion into the western part of the country will enable us to capitalize on the increasing interest in our products and services from the agents in the region, and opportunities to partner with some of the best agents in the business.

This expansion is a key component of our very disciplined and strategic approach to growth. We began this expansion targeting winning agents with our suite of specialty, niche, and segmented businesses. Our renewal rights arrangement with one beacon announced just days after we announced our western expansion plan, further strengthens our efforts to build our presence in the west, with roughly $100 million of mature, profitable premium available in our expansion states.

In addition, this arrangement will significantly accelerate our product segmentation efforts, and development in the small and middle markets, adding many well established programs to our portfolio. It is also creating more opportunities for us to partner with select winning agents, and has enabled us to add many talented, experienced professionals to our Company, and to build on the momentum we've already established.

In small commercial, this transaction will enable to us make product enhancements across more than a dozen programs, including apartments, manufacturers, restaurants, and retail, and increases our scale to more effectively compete with the best competitors in that business. In the middle market, we have acquired product capabilities in several segments, including brewers, cultural institutions, food industries, printers and more.

Unrelated to this transaction, we've also made numerous significant product improvements and introductions, greatly enhancing our product portfolio, helping our agent partners create new and stronger revenue streams, and growing their businesses. In particular, we've substantially enhanced our portfolio of professional and management liability capabilities. Last month we added professional liability coverage for architects and engineers through the acquisition of Benchmark Professional Services, a leading provider of insurance solutions for the design professionals industry.

In addition, we launched a suite of stand-alone miscellaneous professional liability coverages that offer small and mid-size businesses affordable, flexible solutions that can be tailored to their needs. At the same time, we unveiled a team of experienced professionals and a suite of management liability products, including new capabilities for tech private companies against the growing number of financial exposures, as well as coverages for not for profit entities, employment practices liability, and fidelity and crime protection.

And in January, we reached an agreement to acquire Compania Group, which specialize in insurance solutions for the healthcare industry. The Compania Group offers professional and general liability solutions for a range of healthcare providers, including durable medical equipment suppliers, behavioral health specialists, elder care providers and podiatrists. This transaction reflects our commitment to offer a range of products for the healthcare industry, which we think represents tremendous growth opportunities for many of our agents and partners.

We have made significant investments in our personal lines business as well late last year, repositioning our Company as an unrivaled total account writer. Through a marketing and business development initiative we call Think Hanover, we made approximately two dozen significant product, automation and service enhancements. This initiative is intended to help our partners avoid unproductive price competition while meeting more of their customers' needs. It leverages an innovative total account product suite for front line excellence, and distinctive tools and programs designed to help our partner agents attract, ground and retain more accounts. Of course, it is also intended to generate moderate but profitable growth for us in the personal lines market as well.

The investments we've made across our business are paying dividends, as we continue to generate profitable growth. With total net written premiums up 5% for the quarter and 4% for the year, and more importantly we continue to improve our mix toward more commercial, specialty, and controlled business. At the same time, we've been able to take rate, with average increases in the quarter of 5.2% in personal lines and 2.3% in our core commercial lines.

While we continue to strengthen our business, we also continue to be thoughtful about capital management and the optimization of our capital structure. Through our stock buyback program, we repurchased nearly 50 million in stock and open market transactions during the course of 2009, and executed $100 million accelerated share repurchase transaction in December, all at prices below book value. We have also continued to buy back stock in the current calendar year.

Our debt refinancing was completed earlier in the year and resulted in a $34 million pretax gain and a $3 million per annum interest expense savings. The Board also demonstrated its confidence in our financial position and its commitment to deliver value to shareholders by voting to increase the Company's annual dividend by 67% to $0.75 per share, and by voting to move to a quarterly dividend schedule this year.

As shown on slide four of the presentation, as a result of the improvements we've made across our business, our operating results and with the effective use of our capital, our book value per share grew 34% in 2009, and is almost $50 a share, its highest level ever. And even with the operating results impacted by weather, market and economic conditions, and significant business investments we generated an enterprise return on equity of 9% in 2009.

As we begin 2010, we are better positioned than ever to achieve our goals. Our mix of business is good and improving. And we have several levers that can drive improved operating results. In particular, we are moving toward critical mass in many of our specialty commercial lines business segments, with a key component of this being many of the new capabilities we acquired or built during 2009. We expect this will have a bigger impact in the second half of 2010 and into 2011. In general, our core offering in commercial lines is now distinctive, and at this point we have what we need to execute our strategy.

The investments we have made in our personal lines platform substantially improved our competitive position. We expect to begin to realize the benefits of these enhancements we made this year, and the end of last year, while investments begin to taper off. We are optimistic that the upward trajectory of our pricing in both our commercial lines and most notably in our personal lines will continue in 2010. And we will continue to be thoughtful about capital management. With the rating upgrades we have achieved over the last two years, and our very strong balance sheet, we now have the increased flexibility with respect to share repurchases, dividends, and the optimization of our capital structure.

In consideration of all of this, our outlook for 2010 is for an after-tax segment income EPS in the range of $3.85 a share to $4.20 a share, which assumes normal cats of 3.6 of earned premium. We expect net premium growth in the low double digits. In achieving these results, we intend to take full advantage of all the levers that I have described to create increased efficiency in our operating model as the year develops.

Despite this momentum, the first quarter of this year could be very challenging. It is typically our worst weather quarter. We haven't realized the full impact of our recent price increases in personal lines, and we have not yet reached the economies of scale in several of our new business initiatives.

Our outlook for 2010 produces a segment ROE in the high single digits. I assure you, however, that achieving our goal of an 11% to 13% ROE continues to be our focus. We are confident we can achieve that goal as we employ the levers I discussed.

While we don't have visibility to when exactly the market will begin to harden, we will continue to be disciplined in our underwriting approach, and at that time same time we will continue to build our franchise so that we can improve our relative position and capitalize on the markets on many fronts when it does occur.

I would like to welcome Steve Bensinger to our team. Steve is in the room with us today, and having started working with us for the last month. Steve is already proving to be an extremely valuable member to our senior management team. And we are pleased to have him on board as we gain the benefit of his years of experience in the insurance business, and as he transitions into the CFO role.

And at the same time I would like to thank Gene Bullis for all his hard work and guidance over his two-and-a-half years of service with us. This will be Gene's last conference call, and we wish him the best in his retirement once he finishes up with us in May.

With that, I will turn the call over to Marita for a review of our business.

Thanks, Fred. As Fred said, our 2009 results are as much about the reported earnings and revenues as they are about the long-term capabilities and the competitive advantages that we have built during the course of the year. So I will first walk you through the major drivers of our fourth quarter and full year 2009 underwriting profitability and growth, and then I will discuss how our results and new capabilities will impact 2010 and beyond.

Moving to slide eight for an overview of our P&C operations, in the fourth quarter our P&C operations generated $70 million in pretax income. That's down from $98 million in the prior year quarter. For the full year of 2009, we generated a pretax segment income of $270 million compared to $302 million in 2008.

While 2009 was a relatively benign catastrophe year, we did experience a significant increase in non-cat weather. We estimate the non-cat weather impact on 2009 pretax earnings to be approximately $40 million higher than in 2008. Investments in our franchise, the current state of the insurance market environment, and the economic slowdown also put some additional pressure on our earnings for the year.

As you see on slide nine, excluding the pretax net impact of catastrophes, personal lines segment income was $26 million in the current quarter compared to $50 million in the prior year quarter. The year-over-year decline in ex-cat earnings resulted primarily from an increase in the 2009 expected losses in both homeowners and auto liability lines.

In homeowners, higher losses were primarily a consequence of continuing development of non-cat weather losses from the first three quarters of 2009. However, it should be noted that our accident year loss ratio in the fourth quarter of 2008 for homeowners was lower than our run rate for this line, making for a more difficult year-over-year comparison. Going forward, we expect our homeowners results to be solid, driven by significant rate increases and improvement in the elevated level of non-cat weather we experienced in 2008 and in 2009.

In auto liability, we reacted to higher BI severity, and partially attribute this phenomena to a change in insured behavior due to the state of the economy. As has been our historical practice, when we see deterioration in the line of business, we react prudently, with a view towards ensuring that the deterioration is adequately captured in the period in which it is observed.

Lower favorable development of prior year loss reserves in personal auto also impacted personal lines earnings in the quarter. As you can see on slide 10, the same trends drove the full year personal lines results. In addition, non catastrophe weather was also a driver of increased loss activity for 2009, exceeding the 2008 impact by approximately $25 million, split between current and prior accident years. We expect improved accident year profitability in 2010, as our past and recent rate actions impact earned premium, and as our non-rate actions take hold.

As we've said in prior calls, as 2009 progressed, we took increased levels of rate in both auto and home. In the fourth quarter alone, written premium reflected applied rate increases of 5% in auto and 5.4% in home. We have also planned and filed additional rate increases in both lines for the first and second quarters of 2010, and a higher -- that are higher than we achieved in the fourth quarter of 2009. Our personal lines net written premium for the fourth quarter and the full year both decreased by approximately 1% as demonstrated on slide 11.

In the fourth quarter, net written premium in our core states shrunk by approximately 2%. As we've said before, given our significant position in these states and the state of the economy in Michigan and Massachusetts, we seek to manage these states very carefully with a greater focus on margin than on growth. However, because of our strong account product offering, and our strong shelf space, we continue to grow with our best partners. Accordingly, in 2010, we anticipate flat to low single digit net written premium growth from our core states, which will be principally driven by rate increases opposed to an increase in exposures.

We continue to see strong momentum in our growth states, as net written premium increased 7% in the quarter. This growth was the product of both the growing strength of our personal lines product offering and our growing ability to leverage our total franchise value to get preferred shelf space with our winning agents.

As you know, many of these states were reasonably new for the Hanover, and we are now seeing our increased franchise value bringing personal lines, commercial lines, and specialty lines together to help us get more attractive account oriented books of personal lines business. Notably, as of the end of the year, 70% of our new personal lines business was coming from accounts. This is up from approximately 50% three years ago.

In addition, Think Hanover is a significant improvement in our product for agents that want to efficiently sell a tailored account offering. Also, our retentions continue to improve, indicating that the market is supporting our recent rate filings, and validating our premise that accounts improve retention. This gives us confidence that we'll be able to continue to grow our newer states in 2010.

So overall, between rate actions, product improvements and increased franchise value, we see a moderately growing personal lines business with improved margins in 2010.

Moving on to commercial lines starting on slide 12, as you can see on slides 12 and 13, commercial lines ex-cat pretax segment income was $53 million in the fourth quarter of 2009, down from $60 million in the prior year quarter. For the full year ex-cat segment income was $219 million compared to $254 million in 2008. Drivers of lower profitability were essentially the same for both periods. Higher underwriting expenses and higher ex-cat accident year losses, partially offset by higher favorable prior year loss development.

The higher expenses in the quarter and the full year of 2009 results were driven by continued investment in our product capabilities and geographic expansion, as well as higher pension costs. As Fred mentioned, 2009 was an unprecedented year for us in terms of expansion of our capabilities in new products and in new geographies. While these accelerated investments in talent, product capabilities and acquisitions impacted our bottom line in the quarter and the year, we're confident that this money is well spent.

We are also excited about the opportunities now open for us in the west, as well as in new areas of commercial businesses like Allied Health and expanded professional and management liability. These new capabilities, along with our geographic expansion, were planned with and designed around our partner agents. We're confident that these actions position us well for the future, in particular when the market cycle turns.

While our expense ratio in commercial lines was higher than 2008, it was driven by the accelerated investments that we continued to make during 2009. We expect that in 2010 in particular, in the latter half of the year, we will begin to reach critical mass with respect to our newer businesses, and products that we've acquired and developed over the last two or three years. Our operating model is also scalable, which will allow us to achieve economies of scale once the growth from these new initiatives begin to earn through our portfolio.

As shown on slide 14, commercial lines accident year losses were higher in the current quarter by 3.2 points, and for the full year by 1.4 points. Performance in our auto and C&P lines are consistent with prior year trends. However, C&P is prone to occasional large property losses, and thus its performance can be lumpy. And this is what we experienced in the fourth quarter of 2009. However, the 2009 C&P accident year loss ratio is consistent with the full year of 2008, which under these market conditions is a tribute to strong underwriting and disciplined pricing.

The quarter's deterioration in workers' compensation results was driven by two main components. First, audit premiums driven by smaller payrolls had an adverse impact on the loss ratio, and additionally, the high unemployment rate also led to longer return to work times, thus increasing severity in a small number of larger indemnity claims. In general, we're very satisfied with our current workers' compensation book. It's a relatively small book of business, and is predominantly in smaller accounts and lower risk industry classes. We have and will continue to take a conservative approach to underwriting this line.

Accident year results in our other commercial lines reflects an increase in our accident year picks due to some loss activity in our surety line, which was clearly driven by the state of the economy. As we mentioned last quarter, we're watching the performance of this book carefully, and believe that it's prudent to increase our loss picks.

Additionally, we have established a more cautious approach to loss estimates in some other lines, which we know are usually affected by the economic slowdown and have modestly increased our loss picks. This resulted in an increased accident year loss and adverse development in our other commercial lines in the current quarter. In general, our intention with respect to our reserves in our other commercial lines is to set them at a level that mitigates the risk of adverse development in future periods.

At the same time, we have and will continue to implement rate increases in surety in response to the state of the construction market. We are also adjusting pricing on other lines to appropriately reflect higher risk of loss where the economy may be a factor.

Moving on to slide 15 to discuss commercial lines growth, our 15% net written premium increase in commercial lines for the quarter and 10% for the full year reflected the AIX acquisition, as well as growth in our niche, professional lines, marine and segmented middle market businesses. AIX continued to gain traction, reaping the benefits of Hanover's agency partners, as well as our A rating. Our marine segment grew 15% during the quarter and 11% year to date. Our marine book is a highly diversified and profitable portfolio, and we continue to be very pleased with its level of growth.

Our middle market niches and segments grew 14% in the quarter. These industry specific bundled products that have unique endorsements and specialized services are seen as having great value to our partner agents, and give them something distinctive to sell in their markets. They are attractive for us to offer as they have historically had higher margins than more traditional products, which we view as critical in these tough market conditions. We expect an upward trend in these businesses in 2010 as we enter attractive new segments and geographies through the OneBeacon renewal rights deal.

The transaction with OneBeacon expands our capabilities into new niches and segments. It also helps us further strengthen our distribution by selectively adding new agents, while increasing our business and deepening our relationships with many existing partner agents. Notably, in some states where we already have a strong presence, the number of new agency appointments we have to make with respect to the OneBeacon premium is in the low single digits.

We performed extensive due diligence on this book in advance of entering into the transaction. We are convinced that the business we are targeting will ultimately be highly profitable once the associated start-up expenses are behind us. On an overall basis, the OneBeacon transaction should allow us to reach critical mass in terms of business volume and fixed cost leverage in our small and middle market segments.

Lastly, the transaction provides us with an installed base of premiums to offset start-up expenses for our go west initiative, which will allow us to be profitable in these seven western states faster than we otherwise would have been.

We are expanding into the west only in commercial lines. Specifically leading with our niche, segmented, and specialty product, whether acquired through the OneBeacon transaction or part of our existing product suite. We have chosen this approach due to the margin characteristics of this business, as well as the fact that it requires lower levels of start-up expenses in the geographies that we have chosen to focus on.

We also continue to tighten our underwriting on all flow businesses, and hold firm on pricing. Our rates for the quarter were up 4% in small commercial and 1% in middle market. We believe our pricing actions have been ahead of the general market. This reduced our new business flow and to a lesser extent our retention rates. In 2010 we will continue to be selective around the business that we choose to underwrite, as well as the price that we obtain, and we will not sacrifice underwriting quality for growth.

An increasing level of our written premium in commercial lines is coming from our partner agents. For the first time last year, the amount of premium written through our best partners exceeded 50%. This is an important threshold in our journey, as it validates the viability and the relevance of our strategy, and reflects the momentum we have established in our business.

So in summary, results for the fourth quarter of 2009 contain significant amount of noise and were below our expectations. However, 2009 was notable for how much we developed our franchise as we ramped up our capabilities, and continued to invest in our future, as well as continuing to grow in targeted geographies and product lines. Through this growth, we continue to improve the overall mix of our portfolio towards higher margin commercial specialty and segmented businesses. At the same time, we are improving our personal lines mix, focusing on growth states and more attractive whole account business for our best agents. We're very pleased with this continuing shift in our book of business.

We're excited as we look forward to 2010 and 2011, and we will reach another level in terms of product capabilities and agency penetration, as well as achieve greater scale with respect to many of our newer geographies, products, and transactions. With more than 30 new products and product enhancement launches this year, including recent acquisitions, our renewal rights deal and a high level of agency penetration we are achieving with most of our partners, we believe we will significantly enhance our franchise, while producing attractive margins.

We believe that pricing and economic conditions will continue to be difficult during 20 10, particularly in commercial lines. However, we're confident that we will continue our product innovation and segmentation, recent transactions and partner agent support, and will be able to continue to manage our business well and deliver solid returns through this part of the market cycle.

Looking forward to 2010, we are confident that we will absorb the product capabilities we've built, and leverage partner agent relationships that we've developed.

Before I turn the call over to Gene, I want to provide you with some visibility on our leadership structure, as well as give you just a quick update on our January reinsurance renewals. Mark Desrosiers was recently named head of our personal lines segment. Mark has been with the company since 2006, and has been in effect acting in this capacity for the last year.

In commercial lines we've structured our leadership in order to align the strength of our management team with the various challenges and opportunities of our expanding businesses. Notably, Jack Roche, who has been with us since 2006, is leading our small and middle market businesses. Tony de Padua joined the Company in December, and is leading our marine and umbrella businesses, as well as our core commercial product and underwriting functions. Dave Firstenberg, who has been with us since 2001, is leading our surety and Hanover specialty property businesses, as well as product and underwriting functions for certain of our specialty businesses. And Andrew Robinson, who has been with us also since 2006, is leading our AIX and Hanover professionals businesses. We clearly have a strong leadership team, and this structure allows us to leverage that strength.

With respect to our reinsurance renewals, we renewed our largest treaties at essentially the same structure as the expiring programs. We achieved a rate decrease in our catastrophe treaty in the low single digits on a program that was already very competitively priced. For our casualty treaty, our renewal cost was basically flat.

And with that I will turn the call over to Gene.

Thank you, Marita. And good morning, everyone. I'd like to touch on a couple of non-segment earnings items in our income statement on slide 17 before I move on to discussing our balance sheet.

For the full year 2009, net income was $197 million, or $3.86 per share, compared to $21 million, or $0.40 per share in 2008. The favorable year-over-year net income comparison reflects 2008 net realized investment losses of $97 million, and 2008 losses of $85 million related to the sale of FAFLIC. Net income in the fourth quarter 2009 was $57 million or $1.14 per share compared to $34 million or $0.66 per share in the prior year quarter.

Fourth quarter 2009 benefited from realized investment gains of $11 million resulting from some portfolio repositioning. Net income for the fourth quarter 2009 also included a benefit of $6 million related to a release of a deferred tax valuation allowance related to capital loss carry forwards, as a result of the implementation of certain tax planning strategies. In addition, there was a further benefit from this strategy of $27 million reflected in AOCI, which I will touch upon when I discuss our book value for the quarter.

Now I'd like to move on to a discussion of our balance sheet starting with a quick overview of the Company's investment portfolio. I'm now on slide 18. At the end of December, we held $5.2 billion in cash and invested assets. Cash and fixed maturities represent 98% of our total invested assets. Nearly all, or roughly 93% of our fixed income securities are investment grade.

In the fourth quarter 2009, we sold $59 million of our equity holdings and reinvested the proceeds into fixed maturities, which we believe represent better long-term value. Aside from this modest change, the composition of our portfolio remains largely the same as in the prior period. The average duration of the portfolio was 4.2 years.

That investment income from continuing operations in the fourth quarter was $64 million compared to $65 million in the prior year quarter. For the full year 2009, that investment income from continuing operations decreased $7 million to $252 million compared to $259 million in 2008. This decrease is due to lower new money yields, as well as the utilization of fixed maturities to fund the 2009 repurchase of corporate debt.

The earned yield on our fixed income portfolio remained relatively flat at 553 for the full year 2009 compared to 565 in 2008. New money yields were 4.88% in the fourth quarter 2009, and 4.68 for the full year. Skipping to slide 21 for a discussion of our unrealized gain position, our net unrealized gain position decreased by $13 million in the fourth quarter.

A spike in interest rates late in the quarter drove the modest decrease in market values of our portfolio, with longer duration assets being affected more substantially, as in the case with our taxable municipal bond portfolio, which has an average duration of almost seven years. By way of a reminder, our municipal portfolio is predominantly taxable munis due to our rather large alternative minimum tax carry forward position.

We are very comfortable with the credit quality of our entire portfolio, including our municipal bond holdings and CMBS. These portfolios are highly rated and well diversified.

Turning to page 22 for a discussion of recent capital management actions, we continue to open market repurchases of our common stock in October and November for a total cost of approximately $12 million. In December 2009 our Board approved the third increase in our stock repurchase program, and authorized an accelerated stock repurchase transaction under which we have repurchased 2.4 million shares.

Additionally, since the end of December we have bought back another 100,000 shares of common stock for $4.3 million through a 10b5-1 plan. This plan expires today leaving us with approximately 87.5 million remaining under the current share repurchase authorization of 300 million.

Looking ahead, it is our intention to be opportunistic about future share repurchases, as well as other capital management actions.

After a successful restructuring of our corporate debt and drawing the $125 million of Federal Home Loan Bank Loan, our consolidated corporate debt stands at $434 million. This equates to a debt to total capital ratio of 15.5%, which is below our long term targeted ratio of low to mid 20s, providing us with flexibility going forward, particularly in light of the current rate environment.

As Fred mentioned, capital management is an important part of our overall operating strategy, and we will use this lever over time along with earnings growth to achieve our targeted returns. We expect to generate additional capital in 2010, and we will take a balanced approach in returning this capital to shareholders, as well as utilize it to support growth, including the capital required to support premium growth arising from the renewal rights transaction with OneBeacon.

On slide 23, we've displayed changes in our book value per share, which improved by 3.5% in the fourth quarter of 2009 to $49.72, a 34% increase for all of 2009.

Let me go through the changes in AOCI. First, as a result of the annual actuarial review of pension related items, our AOCI pension debit balance decreased by $21 million in the fourth quarter. Additionally, in January, Hanover Insurance Company made a $100 million contribution to the Company's qualified pension plan. And as a result, the plan was fully funded as of that date.

The liquidity for this funding occurred within the Hanover Insurance Company, did not affect holding company liquidity and will not immediately impact book value. The decision was driven by asset liability management considerations. Also, as I mentioned earlier, an additional $27 million release of the deferred tax valuation allowance also ran through accumulated other comprehensive income in the quarter.

Turning to slide 24, our balance sheet remains very strong. Our GAAP equity decreased $48 million during the quarter, reflecting the open market repurchases in ASR for a total of $112 million, as well as dividends of $38 million. On a per share basis, book value increased 3.5%, as I mentioned earlier.

In the fourth quarter, we paid an ordinary annual dividend from the insurance company to the holding company in the amount of $154 million. After this dividend, statutory surplus ended the year at $1.74 billion, and at 1.5 to 1, our premium to surplus ratio remains more than acceptable for our current ratings and mix of business. Holding company cash and investment securities were $293 million at December 31.

This concludes the prepared remarks for my last earnings call with Hanover investors. I will retire shortly at age 65, and I really enjoyed working with all of you over the course of my two plus years at the Hanover. The recent financial crisis definitely made my experience even more interesting. Thanks for your confidence, trust, and support during this difficult period.

With that I will turn the call back to Bob.

Thank you, Gene. Operator, that concludes our prepared remarks. Could you please open the line for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. Our first question is from Jay Gelb of Barclays Capital.

Thanks. Gene, congratulations on everything and best of luck.

Thank you.

If I could hone in on the guidance range of $3.85 to $4.20, you're saying the first quarter is going to be challenging, so I guess that means you are going to earn less, or something less than $1 a share in 1Q. That would mean well over $1 a share for the remainder of the year. What's your level of confidence there, and to what extent does that include expectations of reserve releases?

I think we feel very confident within that range. I think what we're going to see during the year is a ramp-up, and the ramp-up is really a combination of three things. One is, obviously, the growth that we're going to earn in from the renewal rights, and frankly the little acquisitions we've done and the growth we're seeing in the specialty business earns its way in, which has an impact both on obviously the premium growth, but it also has the leverage of all the expenses. Because we have a tremendous amount of, as you can imagine, start-up and conversion expenses to get the product up and running for the conversion we're going to do to our paper, which will occur mid-year on the OneBeacon deal.

Second, the premium increases we're seeing in personal lines are real, and actually accelerating, and so you're going to see that earn-in through the period, and it's -- we're at 5 now, and those are going to go up a little bit as we look forward. So you've got that going through the period as well, and then the third piece is this weather. We typically have, as you know because you've followed us, Jay is that we're in Michigan and Maine and Massachusetts, and we tend to have a little bit of drag on our results in the first and a little bit in the fourth because of that weather. So I would say that that's what the ramp-up looks.

Now, again, because so much of this is kind of just -- is business that's being presented to us, we have confidence that it will improve throughout the year. And again, you can see it in the numbers based on the earned rate we're getting. So I feel pretty good about the range.

And how much will reserve releases contribute to that for the year?

Again, what we've said before is that the reserve releases will probably moderate. They will come down slightly through time, and our accident years will improve. And I think that's what will happen in this next year. And I think that's what we've said before, and that's what will happen.

Okay, and then for first quarter, how much start-up expenses should we expect that to be reflected in the quarterly results?

Again, what you have seen in the ramp-up in the fourth quarter, I think you are going to see continue into the first quarter of next year. We have essentially this level of expenses going into next year that, as a percentage of premium, et cetera, is roughly what it is today. There's a little bit of spike obviously because things like contingent commissions and variable costs, variable bonuses, et cetera, that were lower last year because of our results. But I think you are going to sea a continuation of the expense levels we saw in the fourth quarter.

And obviously with a large renewal rights deal, a lot of those expenses are front loaded and it takes a little longer for that premium to earn its way through to offset those.

Sure. Okay, thanks very much.

Thanks.

Thank you, our next question is from Michael Phillips of Stifel Nicolaus.

Thanks, good morning. Fred, I just want to make sure I confirm, on your guidance, that sounds like that 12% goal by the end of this year you have backed off in terms of time frame a little bit.

Yes, obviously when I talked about that, it was before three acquisitions and three new launches of businesses, but I'm very confident in the trend. So, what I had said before is that the run rate in the fourth quarter was going to get close before we did all these acquisitions and investments.

And so I think it will get -- it gets pushed back two, three quarters, but the trend is good, and again, when I look at it, all of the businesses we brought in have been successful. I mean, if you look at the Hanover special property, we're getting nice traction there with our agents, the percentage of our marine business that's now with our partners is terrific. The LPL stuff has gone very well, and we're getting to a pretty sizable LPL book that's got nice margins.

So I am pretty confident that a lot of those businesses were over the hump, because you can imagine last year, like in LPL, we put all the money in the front end and all the IP systems that we're going to use for the architects and engineers and the CPAs and the miscellaneous that were ramping up. So, I feel very good about the improvement that you are going to see in so many of those levers as we look forward. So again, I have reasonable confidence.

The issue I have is that, as Marita said, this OneBeacon thing, we brought in 150 or so employees January 1. Well, you don't earn all that premium to match that in. And you can -- obviously some of it gets amortized, but most of it just hits your bottom line. But, the IRRs of all these transactions are terrific. So I feel actually terrific about the shareholder value and how it ramps up through the year. But it does push things back a little bit, given the amount of capital that I'm deploying to all these things, and expense.

Okay, thanks. Question surrounding Marita's comments on personal auto and kind of how the economy has impacted the BI trends there. I guess the place that I was most surprised was that line, personal auto in the current accident year, of the uptick year. But if I look at how that line has performed for you guys, even the past couple of years, you have seen an uptick in the accident loss ratios pretty steadily, even one or two points. And almost three points here this quarter. That's somewhat surprising to me given your change in focus to the accounts, given your steady rate change history that you guys like to stick to. So I'm a little surprised by that. So maybe you can comment on that, and a little more detail on what Marita meant by how the economy is affecting it. Is that just a change in attitude towards a willingness to sue or what else are you talking about there?

The first thing I would say is, we have the rate increases we need to offset a lot of this, and perhaps we were a little light and a little slow in putting those rate increases through. But you saw the numbers that we put through in the fourth quarter. The first quarter and second quarter rate increases are just as strong, if not stronger in some of the places where we needed it, and in auto this will earn its way through the book, and it's pretty easy to do the math and see the results that these rate increases will have.

As far as the economy, obviously the unemployment rate, obviously the fact that there is some economic pressure there, just speaks to the fact that the line needs more rate to offset that. And I think we've put the rate needed in place, and you are going to see that earn its way through.

In hindsight, in perfect hindsight, you know we're relatively conservative about the way we put up our reserves, and then we mechanically will release on some of these lines because we try to be thoughtful because we are getting into some new businesses. And if you -- in perfect hindsight, I would say that in the last two quarters and the first two quarters, last two quarters of 2008, and maybe the first quarter of this, we are probably a little light on auto rate, particularly on BI.

And just a comment on the economy. To me, one of the things, the reason we're being a little cautious is this whole notion of kind of the uninsured motorist issues, the PIP issues, and the uninsured motorist, interesting, people have talked about it, right? People are buying down coverages. Now, what's interesting is our customers aren't. But when accidents occur, the people they are hitting have less insurance or more of them are uninsured, so there's a little bit of trend there. Again, all these things are a little here and a little there, but we thought it was appropriate to be a little bit more cautious about our pick.

And what I'm -- not excited about, probably the wrong word, but what has happened in the last 12 months, very clearly, maybe the last 18, is that many of the regional companies we compete against have gotten hammered. I mean, if you look at the regional companies in the midwest, and to some extent the northeast, the accident years, and they're combined, a lot of them are 115 to the 120's.

So the ability for us to achieve rate now and hold retention is very good. And so we're trying to be a little bit more cautious and aggressive about taking rate, because we think it's both appropriate but we think we can, because we see the retention of our business hold, and we see the actions that some of our competitors are having to take.

We've seen, just in Michigan alone, in the last three or four weeks, a couple of downgrades. It is a tough environment in some of these states, and so it allows us, as you say, we tend to take rate every year, so we don't have a 14-point or a 15-point rate increase that we're going to have to take. So we believe that we will see very little disruption as we take this rate level, and I think it's prudent to do, and I think it sets us up nicely for the tail end of next year and 2011.

Okay, thanks, guys.

Our next question comes from Dan Farrell of Macquarie.

Good morning, question on personal lines. When you think about the accident year, picks for next year, obviously there would be some upward pressure related to the non-cat weather and the higher severity in auto, but you are also getting a fair amount of pricing increase coming through. And I wanted to try and get your sense of how much of an offset you think that price increase will have to sort of balance that out, and the flow-through of when that starts to hit a balance in point, if it can.

I think we're going to see some improvements in our -- one of the interesting things about us, a lot of other folks are saying they're going to have decay in their accidents, and I actually believe we have a shot, as you say, to improve our accident rate.

Yes, I would agree. What I would say is, because of the size of our personal auto book, the actuarial science around this is pretty robust. So you can look at the sales, the states, the individual coverages, the rate that you're throwing -- putting through it, and pretty well predict where you think that's going to land. And we're really comfortable that we're going to see marginal growth with slightly increased performance in 2010. I think we've made the right rate actions, and as you know about the line, when you have got that actuarial science and that data, it's pretty easy to run it through and predict where it's going to land, especially when we're seeing the increase in our business coming from accounts. It's with preferred distribution sources, and we feel good about the mix.

And we assumed -- I think we said this in the last call. Because of the weather in the first couple of quarters, and frankly the previous two quarters the year before, and this is non-cat, we didn't assume that it was just because it was above average, we were going to say it was going to go away. We assumed that the vast majority of it was going to be permanent, and we priced accordingly. And we've been putting in rates to achieve that, and some underwriting actions as well.

So if we get close to -- if that improves at all, we feel very good about our ability to improve. And even if it doesn't, we believe we will. I don't think anybody sees the inflation levels or the rate levels we're putting through the book. So I do believe we have a very good shot to improve our accidents next year.

Okay. One final follow-up on the guidance, the per share guidance next year versus your 11% to 13% ROE target. That would still be even pretty far from the low end of the 11% range. I'm trying to understand, as we go even longer term, year, year and a half out, can you talk a little bit more about the levers that can get you to that low end. What's your expectation for, either premium to surplus changing, some further capital management, just if you can expand on what you think ultimately takes you there, even though it might take a little longer to get there.

Great question. Again, what's nice, say we're at 98. So think about us at 95 is when you can get to the kind of returns I'm talking about for our book of business, right. Particularly since you see our growth is kind of in some of the casualty lines with a little bit more tail. So talking about three points through the cycle. Well, gee, a point and a half of that, and maybe up to two in some -- in many cases, is an expense issue.

It's essentially, we've overinvested to try to build these businesses. Well, you can imagine our commercial growth that you can see because of the OneBeacon and what we've done. And the leverage that we're going to get, on the expenses.

Now, again, it's tough in the first half of the year, but I will tell you, you can see that in every line of business we should see improvement next year as we go through the year.

Now, expenses are a little odd, right, because where mix has gone so much to commercial, our total expense ratio might go up because of the mix changes so much to commercial from personal. But in each individual line of business, you can imagine by the end of the year we are going to get wonderful leverage. And I can tell you, our operating model is working. I feel very good about it. Our ability to ramp this up and the ability to take this stuff on is real. And I see that we're going to have greater leverage in all of that.

So that is going to happen. Even with -- even if the market doesn't turn, we believe that there's enough quality business in this OneBeacon book, and there's enough book rolls, books ins that we're getting from our partners. Enough growth momentum from our specialty business, that we're seeing very good business, and we're going to see growth in many of these specialty businesses that will allow that leverage to occur.

Second lever, we have talked, we have probably somewhere between $200 million and $300 million of excess capital still. I have tried to be thoughtful about how we use it. We have started to give it back to our shareholders in a number of ways. If we see additional growth opportunities that get us the kind of returns, we'll go get it, and we'll use the capital that way. But if we don't, we'll continue to be thoughtful to think about the best way to get it back to our shareholders. And we've been fortunate to be able to give it back to them at under book value, which again is a wonderful accretion of value.

So we're not giving up on that. We still have a significant portion of that that there's some opportunity there.

And then on third, it is this, on top of those two, the question of accidents that we've been talking about, we have not been bashful. If you look at our competitors, I would argue that our small commercial and middle market rate increase is as good as anybody in the business, and that our mix has improved every single day. We write a lot less flow than we've ever written, it's a lot more segmented, a lot more niches. Most of that stuff is coming in at better than expiring rates. So our mix of business is improving every day, and in personal lines we know we had an issue, particularly with weather this year. And we believe we've achieved great rate, and the retention, the reason I'm so encouraged about retention is because, I'll tell you, account business, when you have umbrella, home and auto, your ability to retain, when you put in a 5% or 6% or 7% or 8% rate, goes way up.

And so our ability to do that, and remember, we also have limited partners. So we don't have this 10,000 partners with five policies with us. We know everybody that holds our business is going to work to retain that business. And so our confidence in our margin improving in all our lines of business I would argue will go up.

So again, I look at this and I say, it is and it isn't far away. Again, it is -- you look at the run rate, I talk about the run rate and how the back half of next year happens, and as you go forward, we are getting much improvement. And obviously our cost of capital, and everybody's in the industry has changed and gone down a little bit, which is also an added benefit to our shareholders given the rate environment, but I do think all three of those levers are very visible to us. We have obviously taken advantage of the disruption in the current market and made investments.

But we haven't made investments and lost a lot of money doing it. I think we've been thoughtful about it. Have we taken some margin away by doing it through expenses? Absolutely. But everything we've done is accretive. Everything we've done, I look at it, and I say it's built the value of the operation and the enterprise, and I feel really good about where we are.

Frankly, I wouldn't trade our spot with anybody else in the industry, because we have a real upside, I think, and it's starting to really work. I really feel that our position with agents gets better every day. Does it it put some expense strain on the organization? Sure. Is it operationally difficult? Absolutely. But I'd rather do it this way.

Because remember what we're doing, we're doing small face value business with the right 700 or 1,000 winning agents in this country in particular, it's very sticky, it's hard to get, and it's hard to lose. That is so much better than going to the brokers and wholesalers for large accounts to try to cover overhead with workers' comp and large casualty. So while it's harder to do, what we are building is a very, very high value position with agents that is very sustainable. So, again, I feel very good about our book value growth and our shareholder growth in the next two or three years.

Thank you, that was helpful.

Our next question comes from Larry Greenberg of Langen McAlenney.

Hi, Larry, how are you doing today?

I'm doing well, thanks. So you guys do appear to be clearly pushing price a little bit more aggressively than we hear from others. Can you just talk about how your retention rate is doing?

Sure.

And then secondly, just wondering, Gene mentioned a little bit of portfolio repositioning. I'm wondering if you could elaborate on that and talk perhaps about the tax rate for 2010, and whether that repositioning has anything to do with your tax position.

Start with that.

First, on retention, obviously you saw in the material that our retention ratio in commercial lines is down slightly, and as we said in our scripted comments, that we'll take that trade-off all day long as we push rate in these core businesses. Our retention on our specialty niche segmented business actually is a little bit higher, so we feel good about that. And like we said in personal lines, the retention is holding, as we push these rate increases, so that we're going to continue to push that line and find that balance. But in the core commercial business, I think it's right, right now, for us to make that trade-off, continue to push prudent rate, and if the retention slips slightly, that's probably better for us moving forward. Fred's comment about more of our business being with partner agents, more of our business being tied up in total account, whether it's personal lines or commercial lines I think is helping that retention pretty significantly.

On the portfolio repositioning, actually if you follow the cash, we sold some equities in the fourth quarter, and it found its way into the pension. So that really doesn't affect portfolio repositioning too much and certainly doesn't affect the tax rate. It helps cash because you get an immediate deduction for the pension contribution, but we're not ready yet to shift our asset allocation to exempt municipals because we still have an alternative minimum tax carry forward that we'll probably be still feeding off for the next 18 to 24 months.

Okay, thank you.

Operator, is there anyone else in the queue?

Yes, due to our time constraint today, our last question will be from Cliff Gallant of KBW. Please go ahead.

Hi, good morning, I just got in.

Hi, Cliff.

Question was about, in the past, or at least in looking at your core book of business, your partner agent strategy has been very successful in terms of, not just growth, but I think just the comfort with the quality the business those agents produce. When you go into new states and you start to have rapid growth, how do you manage the quality and how do you apply that partner agent strategy to these new states?

Great question, Cliff. We put it on steroids, actually. What ends up happening is we appoint very limited guys, and part of the dialogue is how do we get to a critical mass of controlled business relatively quickly. So we actually get pre-commitment from most of the folks we go to in these states.

And so what you have seen us do in the west, this handful of folks, we obviously start with this OneBeacon book, and with many of them, if not most of them, but what we have done is we go with a portfolio segmented in niche and specialty businesses, which are our higher margin businesses, and we get commitments from folks that get more and more of the control business up-front. So we've done that in pretty much everything.

And if you look at what is happening now in the growth states for the personal lines book, which is really important to us, is that as the commercial franchise gets stronger on the specialty and the niche, we can go to those partner agents and ask for more, what I call ballast, which is mature books of personal lines to thin out their books so we get to critical mass. And that's the thing to me that's interesting. When people talk about us from growth, if you look at our growth, it's almost all experienced, mature books in the form of book rolls, like this LPL.

We didn't just go get a lot of new LPL one at a time. A lot of our partners took their small LPL, that maybe they were going to wholesalers, or they were going to another market, and they gave us books of it, or portions of it. And that's what's most exciting about this. This tends to be controlled business.

And even if it's new, new, like in some of the Hanover special property, it is books of business that have had a long track record of profitability that the agent is selling through the, because of the specialty nature of the business or because of the features that we have.

So I actually feel pretty good about the agency strategy. And, again, the reason we didn't do California previously is I didn't feel that our product portfolio was distinctive enough to make that kind of ask, right. Before, when we were just a pure -- a personal lines and more of a flow commercial, to go to a significant agent and say, I want some unfair advantage, when you didn't have enough distinctiveness was not in the cards.

But the combination of the OneBeacon transaction and the portfolio we now have of niche and segmented businesses, it has actually worked out quite well. I'm actually feeling very good about it. That's why we picked the timing we did.

The other point that's going on, obviously, is that you can't underestimate this disruption. We all say because some of the big guys didn't get blow up, that there isn't disruption. The stress of so many companies, the have and have nots, is starting to separate, and so many of these agents are being very aggressive, trying to get to know us and get to a level where we can have a real partnership.

The dialogue is not one way. It's not just us asking. It is two-way, and it's been received really quite well. I mean, I'm actually as pleased as I could be, the best agents in this country really talking to us about significant change in share for them towards us. So I'm encouraged. Marita, I don't know if there's anything--.

The only thing I would add to it, and Fred said it, is whether we were filling out our existing geography and entering a new state east of the Mississippi, like Maryland or Minnesota, or going west with the OneBeacon transaction, they're not new places. They may be new places for the Hanover, but they're not new places for the leadership, and they're not new places for the underwriters who have worked on these books of businesses, many of them for 20 or 25 years. We've been lucky enough, fortunate enough to hire the veterans of this business, and have great local leaders, and we always put the leaders and the underwriters ahead of the premium, which is part of the investment thing that we were talking about before. Having the leadership on the ground, having the underwriters embedded before you take on the premium certainly helps your long-term profitability of the books. So they may be new, but they're certainly not new to the people who are making the transactional decisions.

Thank you.

Operator, is that it for questions?

Yes, sir, we have no further questions. Do you have your closing remarks, sir?

Just want to say thanks to everyone for participating, and we'll look forward to speaking with you next quarter.

Thank you for joining, this conference has now concluded. You may now disconnect.