Hanover Insurance Group Inc (THG) 2010 Q4 法說會逐字稿

Good day, and welcome to the Hanover Insurance Group, Incorporated, fourth quarter earnings conference call and webcast. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva, AVP, Investor Relations.

Thank you. Good morning, and thank you for joining our fourth quarter conference call. Participating in today's call are Fred Eppinger, our President and Chief Executive Officer, Marita Zuraitis, President of Property and Casualty Companies, and Steve Bensinger, our Executive Vice President and CFO. Also with us today is David Greenfield, who will assume the role of CFO with Steve's departure in March.

Before I turn the call over to Fred for a discussion of our results, let me note that our earnings press release, statistical supplements and a complete slide presentation for today's call are available in the investor's section of our web site 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, include forward-looking statements. These include statements regarding expectations of pretax segment income, after tax separating earnings per share, segment earnings, pricing, accident year loss ratios, premiums, expenses, development of loss and LE reserves, estimates of winter weather losses, and their impact on quarterly earnings, estimates of excess capital, returns on equity, and other projections for 2011 or 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 catastrophes and development, ex-cap loss ratios, 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 supplements which are posted on our website as I mentioned earlier. With those comments, I will turn the call over to Fred.

Thank you, Oksana. Good morning, everyone, and thank you for joining us today. Overall, we are very pleased with our fourth quarter results. They represent a meaningful improvement from last year, but more importantly, they indicate that we are well positioned for future success. Today I will begin our call by reviewing our 2010 performance. Marita will then share more insight into our fourth quarter results and discuss some key trends, Steve will then follow and provide an update on our financials including our capital activities, and then I'll come back to outline our priorities, and our financial outlook for 2011. Fourth quarter results improved with net income of $1.27 per share, up 11% over last year, and operating income of $0.95 per share was up 15%.While we had more weather related losses in personal lines than we expected, our accident year loss ratio for personal lines excluding cats, improved 3 points over the prior year quarter.

The commercial lines results were fundamentally as we expected and reflect the significant investments we made in the later part of 2009 and into 2010. We had significant growth, about 37%, and continue to improve the quality and mix of our business, and while the expense ratio improved slightly due to our growth in operating model improvements, we continued to invest in the quarter including a successful launch of our technology and health care products in the third and fourth quarters. The fourth quarter was a strong close to an important and impressive year for the Hanover. As you know, over the last year and a half, we have aggressively invested in our business to accelerate our journey to build a more distinctive Company, a Company that can deliver strong results throughout the cycle. Since 2004, we have focused on creating a Company that combines the financial strength, talent and product capability, of the best national companies with the local market knowledge, responsiveness and franchise value, of the best regionals. To create value from the vision, the focus of our efforts have been on three critical areas; improving our financial strength and earnings power, enhancing the quality and distinctiveness of our product mix, and strengthening our position and shelf space with winning agents.

During 2010 we made meaningful progress in all three areas and have created momentum for 2011 and beyond. In 2010 we made good progress on improving our financial strength and earnings power. Our core operating results continue to improve during the year, with 2010 marking our best reported accident year loss performance in four years. We also continued to deliver above-industry growth, increasing our net written premiums by 17%. In 2010, we significantly strengthened our position in our two core businesses; our personal line pricing actions continue to improve the earnings and power lf that book, and our product enhancements with, Think Hanover, and our increased account penetration and geographic diversification gives us confidence we can build and sustain a high return business in personal lines. Our ability to deliver increases and improved retention in 2010 is a good indicator we can continue to deliver improved earnings in 2011. You'll see us continue to manage our core mature states for profit versus growth, but our better geographic diversification of earnings will strengthen the long-term prospects of our business.

For the first time in our nearly 160 year history, our written premium volume passed the $3 billion mark, driven by strong growth in commercial lines. In fact, this was also the first year our commercial premiums accounted for more than 50% of our overall business, reflecting our diversification efforts. One beneficiary of our growth is our small commercial business. Where we now have a strong $500 million business with significant scale. Like our personal lines business, our broad product capability and our improved operating model, have allowed us to receive 3% price increases while we continue to grow and improve retention. As we finished the conversion of the OneBeacon small accounts book, we believe the momentum of improved earnings will continue in this business through 2011. In 2010, we also maintain a strong balance sheet and capital position, and increase our book value per share by 10% to $54.74, even with a 33% increase in our dividend.

This is the highest year-end book value our P&C Company has had in our 160-year history, and we continue to be thoughtful about capital management. In March, we completed a $100 million accelerated stock repurchase, additionally in an effort to lower our cost of capital, we continue to be opportunistic repurchasing high-interest debt, giving us more flexibility in the future. Earlier in the year, we also issued a $200 billion of senior debt at favorable terms. As validation of our strong financial condition over the past nine months, both Standard and Poor's and Fitch have placed our ratings on positive outlook which obviously follows our upgrades from 2008 and 2009. In 2010, we also made significant progress in improving the quality and distinctiveness of our product portfolio. Over the last two years, we have had improved and significantly enhanced the quality of our business mix. Along with the efforts to enhance our product distinctiveness and earnings power in our core small commercial and personal lines offerings, we have created a much more distinctive portfolio in our commercial offering. Over the last couple of years, we have been building out our industry-focused niche businesses, as well building out our specialty and program businesses. In 2010, the portfolio we brought to market was materially enhanced. These businesses which we expect to have a higher margin, are now about $800 million of our written premium, or roughly 25% of our business, up from 3% 2004.

The first area product investment opportunity is our industry solutions. As winning agents continue to focus on growth opportunities in specific industry segments and areas of specialization within their agencies, we ramped up our product segmentation capabilities, making the product portfolio much more relevant to them. Through our renewal rights transaction with OneBeacon, we added 10 segments and approximately 20 affinity groups to our core product mix. Separately, we continued to develop additional products and enhancements, including our exciting new technology offering. We now have a full array of industry solutions which is on par, or better, than the market leaders in this area. We have also continued to grow and expand our specialty lines of business. In 2010, we successfully completed three acquisitions, further expanding our portfolio to include healthcare, and architects and engineers within our specialty offering, and establishing a national platform with our surety business with the acquisition of ICW Group surety business in July. We also continue to grow our program business, as well as our management and professional liability line. As a result, our specialty business now represents 19% of our total business. Finally, we have materially strengthened our position with winning agents in 2010. With our enhanced product set and recently completed national network, we are solidifying our position with some of the most successful agents in the country.

Although more work needs to be done, our promise to agents to provide franchise value through limited appointments, product innovation and local response to professionals, continues to get significant traction. Out West, for example, we ended the year at over 200 million of premium with some of the best agents in the country. They continue to build their book of business with us through attractive seasoned business to solidify our partnership. As we end 2010, our potential pipeline with mature business being moved to us, is as strong as it has ever been. And so today, at the bottom of the soft market, our strong results continue to validate our agency focused strategy that we adopted in 2004. I feel very good about all we have accomplished during the year, and I believe we have put our Company a very good position to win going forward. I will now turn the call over to Marita.

Thanks Fred. Good morning everyone, and I'm glad you could join us today.

As Brad mentioned, the positive underwriting trends we have seen in recent quarters continued in the fourth quarter. Starting with a discussion on slide eight. Our fourth quarter combined ratio was 97.8 all in, and 95.6 excluding catastrophes, which is 1 point better than our ex-cat combined ratio the same period last year. Our ex-cat, ex-development combined ratio which is a stronger indication of the underlying quality of our earnings, was 98.4 in the quarter, representing a significant improvement from the 100.8 in the fourth quarter 2009. And our ex-cat, ex-development loss ratio improved 3 points over the prior year quarter and year-over-year. For the full year, are ex-cat combined ratio was consistent with 2009, despite higher investments in our business and lower favorable development. At the same time, we increased our net written premium by 14% in the quarter, and 17% on a year-to-date basis.

Our results continue to validate the agency-focused growth strategy we adopted more than seven years ago, now making us less venerable to the competitiveness of the current market environment. So, for each of our businesses, I'll give you an update on the underwriting performance and trends, and then discuss the drivers of our growth, to put it all into perspective, starting with commercial lines on slide nine. Pretax segment income in the fourth quarter of 2010 was impacted by lower favorable development of prior year loss reserves, and to lesser extent, higher catastrophe losses. Excluding catastrophes and favorable development of prior year loss reserves, commercial line segment income was $36 million in the current quarter. That compares to $30 million in the prior year quarter, driven by lower ex-catastrophe accident year losses. Our expense ratio decreased for the third consecutive quarter, as we continue to earn in the premiums associated with the renewal rights transaction, and our specialty investments. Our expense ratio was also 0.5 point lower than it was in the fourth quarter of last year. As we continue to gain scale with our newer businesses, we should see this continue to translate into a lower expense ratio going forward. Our ex-cat accident year loss ratio was 47.1%, compared to 48.8% in the fourth quarter of 2009. Our full-year accident year loss ratio also shows improvement in every line, which we believe is the best indicator of the underlying quality of our commercial lines book. The primary reason we have been able to achieve these results while consistently outperforming the industry on growth, is that we have remained disciplined, consistent, and resourceful in our search for growth opportunities.

As shown on slide 10, our commercial lines written premium grew almost 37% in the fourth quarter of 2010. Consistent with prior quarters, about 24 points of our overall growth came from the renewal rights transaction, 6 points was driven by specialty businesses, and the remaining 6 points came from our core commercial lines growth, including new business writings from former OneBeacon agents.

Slide 11 illustrates sources of our premium growth for the full year of 2010. Approximately 60% of our commercial lines new premiums in 2010 are attributable either to our rights agreement, new AIX programs, or acquisitions. In all three instances, by virtue of extensive upfront underwriting and due diligence, we had clear visibility into the historical margins of these businesses. We also knew what rates we needed to charge considering historical performance and characteristics of these risks. About 30% of our commercial lines new premiums in 2010 came from what we broadly call consolidation activities, primarily with partner agents. Whether it is in our specialty lines, our middle market niches or segments, the common theme of our growth strategy is converting business in blocks through our book consolidation efforts, our agency great value, and our strong specialty capabilities, as well as our segmented and niched products.

Our practice of limiting access to these products, creating franchise value, makes the Hanover an even more attractive choice of our agents. This allows us to access controlled, profitable business, rather than engaging in aggressive price competition on undifferentiated new business. As our partner agent strategy gains momentum, our pipeline of book consolidation opportunities continues to expand. And finally, the remaining portion, less than 10% of our new premiums in 2010, comes from traditional agents' new business activities in support of their premium development efforts. In the context of our overall commercial lines growth, this is a rather small component. As you can see, most of the business that contributed to our growth this year is not new to our agents, in fact, the lion's share of that business has remained with the same agent for a long time. This is the principal reason we believe that we've been able to consistently outgrow the market without reducing our margins, as we were to avoid under-priced new business.

As Fred mentioned, as a result of the combination of our organic growth, and OneBeacon renewals, we've built a significant small commercial portfolio of approximately $500 million which we believe will provide future earnings growth and stability. The market in general remains soft in the fourth quarter with larger accounts continuing to experience the most competition. However, new money in our sweet spot, small and middle commercial lines, continued to be marginally positive, with a slight improvement in December driven by exposure growth. Our more specialized core commercial product set, which now includes a growing suite of industry niche and segments, allows us to win business based on value, the strength of our offering, account solutions and added services, and not principally on price.

Moving onto slide 12 for a review of our renewal rights transaction. As we close 2010, I'd like to provide a couple of concluding observations of this very successful transaction. From the beginning, we aimed to build deeper partnerships with winning agents, increase or segmentation focus, accelerate our geographic expansion and build operating efficiencies. We have delivered on all of those fronts. As of year end, out of the $400 million former OneBeacon business we considered, we renewed approximately $300 million in direct written premium, with $66 million renewed in the fourth quarter. This equates to an overall retention of 79% which is very high for a renewal rights transaction. We appointed fewer than 300 agents, and also strengthened the relationship with many of our existing agents, resulting in about $30 million of additional new business premiums. Through the transaction, as Fred mentioned, we added 10 industry segments and roughly 20 affinity groups, and over 75% of the renewed premium was with these new products consistent with our small and middle market strategic focus.

We strengthened our talent pool, adding 165 professionals across the country. We now have over 100 employees in our new Western region. In the West, we renewed nearly $100 million in premiums, jumpstarting our expansion in the region. We achieved renewal rates which were relatively in line with those that we achieved on our legacy commercial lines renewals, and we will continue to gain scale and expense leverage from this transaction in 2011 and beyond. We continue to believe this transaction was externally successful. We received overwhelming agency support, and were very pleased with both the quality of the business we wrote and the partnerships we built and enhanced through this initiative. Simply put,, the transaction has achieved the strategic benefits that we had anticipated. We believe our commitment to invest in product capabilities our agent partners continue to need, is the best part of our strategy, and will help us generate an increasing flow of quality commercial lines business going forward.

Turning to personal lines on slide 13. Our pretax segment income excluding catastrophes was $47 million in the quarter, compared to $26 million in the fourth quarter of last year. This improvement was driven by higher favorable development of loss reserves, as well as better underlying loss ratios in both the auto and homeowners lines. The ex-cat personal lines accident year loss ratio improved by 3 points, compared to fourth quarter of last year, driven by continued rate increases and actions to improve our mix of business. That being said, our accident year loss ratio was adversely affected this quarter by a higher incident of large homeowner losses and weather-related losses in personal auto. Large losses can be lumpy in any given quarter. Our large loss experience was favorable over the first three quarters of 2010, and we expect it to come back to more normal levels going forward, although this is admittedly hard to predict. In our auto book, we saw an uptick in physical damage losses, which is typical for the fourth quarter, considering the amount of snow and sleet we saw in many of our geographies.

For the full year of 2010, our accident year loss ratio improved by 2 points in auto and over 6 points in home, for an overall 4 point improvement in personal lines. We attribute this improvement to our continued rate activity, and actions to improve our mix of business, as well as more normal, non-catastrophe weather in 2010. Moving on to expenses. Other underwriting expenses were higher during the fourth quarter when compared to the fourth quarter of 2009. This increase was driven by higher agency contingent commissions, as a result of improved agency performance in 2010. For the full year of 2010, the personal lines expense ratio declined 0.5 point, compared to the full year 2009. Overall, we have a good line of sight towards achieving our return targets in personal lines, through our rate and business mix improvement strategies which I will discuss using slide 14.

Our personal lines net written premium declined by 2.4% quarter over quarter, with 1.5 points of that decline attributable to our exposure management initiative in Louisiana. Putting aside the impact of our Louisiana actions, personalized net written premium in the quarter would have declined by less than 1%, which is essentially in line with the flatish growth trends we saw most of the year. As we've said before, given our significant market position in our four core states, we managed these states with a focus on margin, not growth. That written premium in these states declined by approximately 3% and reflected continued auto contraction as we remain focused on writing new business at profitable rate levels. In our growth states, we continue to gain positive momentum, with premium increasing approximately 7% in the quarter and for the full year.

As we said in prior calls, as 2010 progressed, we took increased levels of rate, in both auto and home, across our personal lines footprint. In the fourth quarter alone, written premium reflected applied rate increases of 6% in auto, and 7% in home. We also planned, and have filed additional rate increases, in both lines in 2011. Also, our overall retention improved slightly on a year-over-year basis. Excluding our Louisiana actions, retention actually improved by almost 1%. This significant increase reflects the shift to more account business in our mix which tends to have a higher retention rate. We have confidence that our pricing discipline, business mix improvement and our partner agent strategy will continue to drive future profitability in personal lines.

In summary, 2010 was a very successful year for organization. In commercial lines, we capitalized on the renewal rights transaction, controlled business conversion opportunities and product innovation. In personal lines, we continue to improve the quality of our business and margins through rate and non-rate actions. And overall, with strong support from our partner agents, we continued to produce strong and improving results. And with that, I will now turn the call over to Steve.

Thanks, Marita, and good morning everyone.

Today, I will review the Company's financial results, referencing the slide presentation and starting with slide 16. Our solid underwriting performance, already noted by Fred and Marita, combined with stable net investment income and a strong balance sheet, drove improved operating earnings in the quarter. These trends were consistent throughout the year, although they were undermined by significant catastrophe activity in the first half of 2010, which led to lower segment income results for the full year compared to 2009. For the fourth quarter, favorable development of prior year loss reserves amounted to $20.7 million, or 2.8 points of the combined ratio, compared to $26.5 million, or 4.1 points in 2009. Favorable development for the full year of 2010 totaled $88.5 million, or 3.1 points of the combined ratio, compared to $133.1 million, or 5.2 points last year. Fourth quarter net income also benefited from pretax net realized investment gains of $12.9 million.

Turning to slide 17, I'd like to touch briefly on our investment portfolio and yields. As of December 31, we held $5.4 billion in cash and invested assets. The composition of our portfolio remains largely unchanged from the third quarter of 2010. Cash and fixed maturities represents 97% of our total invested asset at the end of the quarter. Roughly 92% of our fixed income securities are investment grade. The average duration of the portfolio is four and a half years. Fourth quarter net investment income was $63 million relatively in line with $63.8 million in the prior year quarter. For the full year of 2010, net investment income amounted to $247.2 million, also just marginally lower than last year. The earned-yield on our fixed income portfolio of 5.37% this quarter was just slightly lower than the fourth quarter of last year. Fixed income new money yields were about 3.7% in the fourth quarter, compared to 4.9% last year.

We believe the lower interest rate environment will continue to pressure new money yields. However, growth in our invested assets, coupled with our well-laddered portfolio, should help alleviate the effect of lower yields on net investment income going forward. About 10% of our portfolio is projected to mature in each of next two years, so it will take a relatively long time for our installed book yield to decrease materially. And, given the relatively small amount of liquidity we have to reinvest any given time, we have been finding pockets of opportunities with attractive risk reward characteristics in the fixed income area.

Turning to slide 20, I'd like to highlight a few points about our investments in municipal bonds, as this area of the market has recently become a general point of concern for investors. As at December 31, we held $965.6 million, or approximately 18% of our total investment portfolio, in municipal bonds. Taxable bonds represent approximately 84% of the portfolio. Specific revenue bonds represent 60% of the portfolio. And the total portfolio has an average rating of AA. Our portfolio is actively managed with an emphasis on the quality of the underlying credit. It is well diversified, both by geographic region and by sources of payments, whether it's on the state level, by municipality, or by project type. On average, our exposure to a single issuer is about $3 million, and no single state represents more than 5.8% of the municipal portfolio. Overall, we are quite comfortable with the quality and composition of this portfolio.

Turning to slide 21, pretax net unrealized investment gains on our portfolio decreased $123 million during the fourth quarter, almost entirely driven by an increase in interest rates. For the full year, however, unrealized gains increased by over $100 million. Our portfolio will continue to be subject to market fluctuations driven by changes in interest rates and spreads. However, we are confident we have a balanced and well laddered asset mix which gives us flexibility if unexpected cash needs arise, yet provides a stable stream of income in the current challenging yield environment.

As you can see on slide 22, our balance sheet remains very strong. Book value per share declined about 1% this quarter driven by a decrease in net unrealized investment gains. For the full year however, book value per share increased by 10% to $54.74. As of December 31, book value per share included a benefit of $2.03 per share, related to the release of deferred tax evaluation allowances as a result of the implementation of certain tax planning strategies. These are essentially permanent benefits that are currently recorded in accumulated other comprehensive income on the balance sheet, and will be reflected as a tax benefit in non-segment income over the course of future periods. Statutory surplus totaled over $1.7 billion at year-end, and, at about 1.75 to 1, our premium to surplus ratio remains quite acceptable for our current mix of business which is heavily weighted towards shorter tail lines. We believe we have continuing capital flexibility at the operating Company level based on rating agencies and regulators risk based capital models as well as our own economic capital assessment.

Holding company cash and investment securities were approximate $448 million at December 31, including a dividend of $75 million paid from the insurance subsidiaries of the holding company in December. We feel it is prudent to hold liquidity at the holding Company for coverage of interest, dividends and potential operating contingencies. However, a portion of our holding company investments also represents excess capital. We did not repurchase stock in the fourth quarter. We did, however, take advantage of an opportunity to repurchase a portion of our higher cost debt. During the fourth quarter, we retired $36 million par value of our junior subordinated debentures with an 8.2% coupon. As a result of this transaction, at the end of December, our total debt decreased to $605.9 million, and our debt to capital ratio declined to 19.8%. We are also in the midst of another transaction that could result in the additional repurchase of $48 million par value of the same issue in the first quarter.

Before turning the call back to Fred, I just wanted to note that this will be my last earnings call with the Hanover. The CFO transition to David Greenfield is going seamlessly and I'm confident the financial affairs of the Company will be in good hands. I would like to wish Fred, Marita, and all of my other colleagues at the Company, all the best for much continued success. I believe the Company is extremely well-positioned for the future. And thanks to all of you, I look forward to seeing you again soon. Fred.

Thanks, Steve, and I would like to express my appreciation for your service to the Hanover during the past year, and we all wish you the best in your future endeavors.

Let me turn to 2011, and give you both our set of priorities and our guidance. We will essentially continue to focus our energy and resources on the same strategic priorities we have over the course of our journey. As I mentioned, 2010's efforts have given us tremendous momentum across our business which allowed us to improve the Company's position regardless of the market environment in the coming year. As we continue to drive our strategy forward this year, you will see us focus on three critical areas as I mentioned earlier. First, we will have an intense focus on capitalizing on our investments and increasing the earnings power of our business. Given the investments and improvements we've made, we believe we can drive for improved performance in several areas. In personal lines, we will continue to focus on improved accident year results. Our pricing and retention trends give us confidence in continuing this improvement trend. In commercial lines, we should see significant improvement in our expense ratios. As 2010's net written premium growth has earned in, and a result of our investment in technology and improvements in operating model.

Overall, our mix should continue to improve through growth in a higher margin, especially with businesses with partner agents. Not only should be able to increase the percentage of our business from more attractive segments, many of our start up businesses we invested in, in the last two or three years, should have more normal expense loads as they mature into their established operating model. The second strategic area of focus will be continuing to enhance our distinctiveness of our product set. While 2011 is more about digesting and delivering our many new products, like our healthcare and technology business launches, we will continue to expand our specialty offering in select areas. For example, we expect to soon launch a sports and recreation offering. Because we continue to believe that there'll be continued market disruption, we will be opportunistic to build our product capabilities and diversification of our business mix through additional investments, as well as through strategic acquisitions or renewal rights transactions, if there is a strategic fit and if the price is right. We have demonstrated our ability over the past three years to successfully integrate acquired organizations and teams into our own organization, and to successfully execute a relatively large renewable rights transactions, and we will do it again given the right opportunities. This will obviously require some capital flexibility which brings me to our discussion of capital management.

Whether through stock repurchases or through refinancing of debt, we've been disciplined about identifying and acting on capital management opportunities. Having said that, given the current market environment, we believe it makes sense to maintain capital flexibility in order to take advantage of structural changes in the industry, and to continue to grow our capabilities for the long-term. But obviously, we will continue to evaluate our capital management decisions throughout the year. Our third area of focus is to continue to focus on improving our position with winning agents. The momentum from our product and geographic expansions, as well as our new agents that came with the OneBeacon transaction, give us confidence we will continue to profitably grow in 2011. Our focus will be to deepen partnerships and develop preferred shelf space with winning agents. In commercial lines, we will continue to pursue growth across our businesses, but we expect growth to predominately come from our specialty lines in our segmented in niche offerings. We believe by delivering more specialty business directly to retail agents, we will strengthen our position and earnings power with them. In personal lines, we aim to continue to show momentum in expanding our growth states, while at the same time managing our core states with a focus on profitability.

So, overall, we expect commercial lines will be the main impetus for growth in 2011. Based on these drivers, we believe we will achieve pretax segment income of $300 million to $320 million, or after-tax operating earnings per share of $3.70 to $4.00 in 2011. Underlying this estimate are the following assumptions. Mid to high single digit net written premium growth in commercial lines; relatively flat growth in personal lines. Cat activity in the range of 3.5% to 4% of net earned premium. Lower prior-year favorable development compared to 2010. Net investment income relatively flat as declines in yields are expected to be substantially offset by growth in our invested assets base. Aggressive improvement in expense ratio by approximately 0.5 point for the year, somewhat dependent on business mix, as improvements in commercial lines of 2-plus points are expected to be partially offset by a shift in business mix to commercial lines. An affective tax rate of 34% and weighted average shares outstanding of 46 million shares.

Relative to the first quarter 2011, clearly the winter has been a harsh one. As you know, our loss patterns are reflective of our geographic footprint. We have talked about in the past, are for the first-quarter earnings power is lower due to winter weather, impacting both catastrophe and non-cat losses. This quarter, as you would expect, given the number and ferocity of the winter storms, have started out to be challenging. While it is early, it seems likely that the first quarter weather-related losses will be heavier than the typical first quarter. Due to potential range of outcomes for the first quarter we have included a range of cat ratios in our full-year estimate.

Overall, I am very excited about our Company's prospects, and I look forward to answering your questions.

Thank you sir. We will now begin the question and answer session. (Operator Instructions) The first question we have comes from Sarah DeWitt of Barclays Capital. Please go ahead.

Hi. Good morning.

Good morning, Sarah.

Your guidance for 2011 seems to imply an ROE of roughly 7%. So I'm wondering if you could update us on your long-term ROE guidance and how fast you think you can get there.

Yes, it does. It implies 7.5% ROE. And as I have been saying, obviously next year, there is a pattern of improvement that is quite significant. If you look at the earned in rate for the year, our expense progression will be significant. In addition obviously the rate we're earning both in small commercial and in personal lines will enable us to enhance action years throughout the year. And so what we see is a progression to improvement. And so you'll see the fourth quarter a lot closer to our goal than the first-quarter, obviously. My view on this, as you know -- I talk about this probably more than any CEO. I believe very strongly that we're trying to build a world-class Company which means top core quartile performance which is 11 to 13 through the cycle. After our upgrade, a couple years ago, or 18 plus months ago, we knew that we had an opportunity here to structurally enhance both our mix and our long-term prospects for sustainable earnings. And so we bought five companies in the last 18 months. We also did geographic expansions to a full network. With that comes an additional amount of startup costs. What you're seeing is a very steady and very manageable progression to those targets. Will we get there by the end of the year? Probably not. It will probably go into next year, but what I know, is we will be countercyclical to the industry. What I know is, as the industry is decaying in accident years, the way we have set this up, I can pretty much have visibility to improving profitability next year because of the leverage of our expenses and the improvement of our mix. And so, I feel very good about where we are going and what we are doing and how much book value we will grow and how much value we will create.

Now, would I rather have to do this in a great pricing market? Sure, but if you look at our business, over $2 billion of our business are small accounts that we're getting plenty of rates, and our mix is improving, and we have expense leverage. So, in my view, we are in a very good position. And so, we will continue to be focused on this goal over the next four to six quarters and we'll keep moving in that direction. One other thing I would tell you, too, and we don't use this as an excuse, obviously I could be more precise and I could talk about margin over risk-free rate. We have decreased our beta as a Company more than any significant insurance company over the last three years. And so our cost of capital is also be reduced, so I feel good about that as well. So our returns are getting better, our cost of capital is getting better, and therefore we are going to create significant shareholder values. So I am not at all backing away from this trend. It is still the cornerstone of our long-term rewards to our executives which is a three-year average between 11% and 13% is how they're rewarded on a performance shares, and so that we are very, very focused on this, and we'll get there. I feel very, very confident about our ability to get there. I will tell you that it's going to happen over the next four, six, seven quarters depending on how things unfold as far as our growth and our incremental investments. ,

Okay, so if you think you can reach it in four to seven quarters that would imply -- in 2012 if you are around 11% ROE over $6 in earnings. Is that--?

It depends on our growth, it's going to depend on our mix, right? And what the business looks like at that time. Think about it this way. Our business, all things being equal, needs about a 94 to a 95 combined ratio to get that kind of earnings power depending on kind of the mix and line, and that's what we're moving to. What exactly those earnings are, obviously has a hell of a lot to do with our growth over this period, and what kind of capital we retain, and how much of that capital we apply to the growth, but with a significant improvement in earnings, the math will tell you that, but the precision of that has a lot to do with the mix and how much we grow.

OK, great, and If I can just ask a follow-up. On your comments on capital management, you said you wanted to maintain some flexibility in the current environment. Based on that, how should we be thinking about how fast you could finish the $157 million share repurchase authorization?

So, as I did in the guidance, I essentially guided to zero share buybacks because at this point, as Steve mentioned, we are opportunistically doing some stuff on some debt repurchase which I think is a smart thing to do because of the attractiveness of the debt market right now and the flexibility we would have if we needed to. On the buyback, I've kind of put it on hold as I see what's going to happen. Now, I watch that all the time, but right now, my view is, our growth opportunities could be very attractive over this year, there's a lot of activity going on. I think we're at a point where some of our regional competitors and smaller competitors are tremendously strained which could create some opportunities for us that we are trying to pay attention to and I don't want to get caught short in capital. I would tell you, even with our extensive growth in OneBeacon, which remember, our estimates when we first came out, we said 225, we've way surpassed that. That required capital, right, so we did some shifting, but we still have significant excess capital, I would say probably a couple hundred million of excess capital. So, we have it. What I'm trying to do is, right now, keeping my powder dry and being flexible, practically in the first half of the year as I see how everything unfolds. Because, remember, you guys all follow the large guys, and people have big reserve of leases and stuff, but there's no question there's a strain in the system. There is no question, and if you look at the folks that we compete with, which does do mostly under $50,000 in average size in commercial, the strain is unbelievable. So what you've got is a lot of potential disruption that could occur as this year unfolds and I just want to make sure that we have enough powder to make sure we can capitalize on it if it occurs. So that's what I mean by that. Now, every quarter we will give you an update of that, and I will give you insights to that, but right now, that is what it means.

Great. Thanks for the answers.

The next question we have comes from Michael Phillips of Stifel Nicolaus.

This is actually Melissa for Mike. I have a few questions. On the commercial book, premium growth for 2010 ex-OneBeacon, looks like it grew about 10% and if I'm doing my math correctly, I think workers comp grew about 8% for the year, ex-OneBeacon, it looks like multi-peril and -- was about flat ex-OneBeacon. So can you tell us what opportunity, where you're seeing the opportunity for the workers comp growth out there?

First of all, in the quarter, workers comp grew pretty consistently with the rest of the commercial lines as we grow total accounts consistent with our strategy. For the total year, 2009 workers comp represented about 10% of our commercial lines portfolio, and year end 2010 it was the exact percentage, about 10% of our portfolio. We remain relatively conservative in the line as we've have talked about before. We've got good underwriting D&A in the line, but we are also pretty cautious and conservative with the line. So it is pretty consistent with our strategy overall on the growth we saw in the fourth quarter was really total account growth with package being up 55% and comp being up 60%, that is pretty consistent with a total accounts approach to business.

Okay. Could you touch a little bit on the contingent commissions going forward? What can we expect coming out of that?

They are actually pretty consistent with the exception of a slight uptick in the fourth quarter in personal lines that came from the improvement in the underlying accident year that I discussed in my script. They have been pretty consistent over 2009,and we don't anticipate a significant difference in 2011.

Okay. Going back to capital, if I could possibly be a little bit more specific on what opportunities for the use of capital you're possibly seeing out there.

Again, it's growth of our business. If you see what is happening, in the last three years we grew this Company $1 billion -- in the last four years. While getting out of a lot of low value places like homeowners in Florida and Louisiana, and without any new business penalty, we've done it with some expense risk but really with no new business penalty. My personal point of view, is you've seen us buy five or six small companies before -- there could be some potential in those areas, it could be potential in some renewal rights areas, there could be some potential in blocks of business moving from partner agents to us based on the disruption. Again, what we see, is the historic -- we saw it in personal lines in the Midwest about a year ago and that's kind of continuing, we're seeing it commercial broadly now, again, with some of the small companies. So, for me it's about profitable growth that enhances the book value of this Company, and that's obviously, if I can beat our IRI hurdles, that is a great place to use the capital. So, what I'm trying to do is to make sure I am ready. You look at the last 50 years, every single turn, the same thing happens. We are just like we were 1999 right now. What people -- we're in whatever -- a lot of people call the cheating phase, right?

You can see the difference between the calendar and accident years are getting pretty severe and what's happening is, it's getting tight, and the re-underwriting is starting, and in my view, particularly in where we live, which is a lot of these midsize agents and midsize accounts, a lot of these regional companies are going to start to have problems, and what we are going to see, is more re-underwriting and disruption that is going to cry improvement of books, and so, for me, one of the things -- what I'm trying to do, is make sure that we have the capital to be available to capitalize on that if it occurs. If it doesn't, -- it's pretty clear what the pattern is right? As soon as we believe we have excess and I don't have an alternative, I get it back one way or another, and we will continue to do that.

What I'm saying, I said in the fourth quarter and I'm saying now, I would like to just -- I'm holding. Now, this debt, became real to us, and as we did at the beginning of the year, when that happens, when it's obvious that the math works, I want to do that because it is opportunistic. Those things don't come along, so I try to make sure that we capitalize on it if it makes sense, because we do have access, and the debt market is attractive to us now if we needed to do something. You will see us continue to focus on growing profitably this Company in creating value that way if the availability is there. If it's not, we give back the money. That's what I'm talking about, and again, I'm not saying that tomorrow I'm going to announce something, I'm saying that there's a lot of activity in the marketplace, and I think it's prudent for us to have this flexibility for the next couple of three months.

Okay. One more. Actually I have a couple of more. On the investment side, the ratio, obviously it's a bit higher than most the companies we cover at least, at four years, above four years, is there a plan to lower that given that interest rates are expected to increase. I know you guys are you going to manage your portfolio very efficiently but lots of stuff can creep up.

I don't think we have. No. No significant plans to change the composition of the portfolio. I think it is comfortable right now on a very reasonable range compared to the duration of our liabilities, is well within the range that we feel is acceptable. It's a higher-yielding portfolio relative to the industry, is very well laddered, so even though it's a higher duration it has got liquidity characteristics that are extremely strong. I don't think you're going to see that, and I think as our portfolio mix on the business side continues to move more into commercial lines than I had before, the duration of those liabilities also increases, so you would not necessarily want to be going the other direction on investments.

Okay. And just one very minor question, can you remind us what is in other personal? I know it is a very small piece of the business.

Yes, most of it would be umbrella.

Okay thank you so much.

Thank you.

The next question we have comes from Cliff Gallant of KBW.

Good morning. Talk a little bit about the cash flow of the Company. Just with all the top line growth I just thought asset growth might have led to a little bit more investment income growth in 2011 despite the yield environment being week.

I think you're going to see a delayed effect of that cash flow because of the timing in which those cash flows come in. Remember, there's cash flows more or less parallel, more closely, earned premium than they do written premium because the way the cash flows are timed. And you also have various costs that Fred described, and investments that we've made in the business, and as also part of these transactions in 2010, so I think you are going to see the effects of the positive cash flow a little more back ended.

It's a great question because it is the whole thing between written and earned, right, so you are going to see this growth at the tail end of the year except for we don't have a lot in months to get the return. That is why I get excited about our momentum because if you look at the earn in, its multiplier effect on our earnings as it goes forward and the other thing is, that these businesses we are getting in are a little bit longer tailed but we don't have that investment portfolio because they are young, and as they mature, we actually are going to get more leverage, if you will. So we price it like short tail lines because we don't have that leverage that you would if we had been in these businesses for quite a while, so it is a very good question and to me, that is why we are more convinced than the improvement over time. You can see what happens mathematically based on the way we have gone into these businesses and set ourselves up.

Thank you. Another question on the mid- to high-single digit commercial lines growth. How much of that is a continuation of the OneBeacon renewals? It has been a full year but I know in the first quarter it was a little bit slow in terms of picking off that business and to what degree would you call it organic growth outside of the OneBeacon book?

Almost all organic, although you're right. There is a little bit in the first-quarter that is going to be a continuation of the OneBeacon, not a lot, a couple of days, right, so -- because we fronted right at the beginning of the year. The vast majority of this is kind of our geographic expansion, our specialty businesses, our niche businesses that are growing, and that is where the vast majority of this growth is going to be. Again, there is a little bit of earning from a healthcare company that we bought in March, so you got a tad there, and the little surety business which was teeny, you get a little bit of that coming into the books, but the vast majority of the businesses really are what I would call book rolls and organic--.

And if you refer back to that growth slide that we have in the deck with the exception of Fred's OneBeacon comment, I think you could expect the growth to come from similar places that you are seeing on that slide, book consolidation opportunities with agents, and a big push in our specialty businesses, but very similar to the percentages that you saw on that breakdown with very little of the growth coming from non-differentiated commercial businesses.

Okay thank you.

At this time it appears that we have no further questions. We will go ahead and conclude the Q&A session. At this time I would like to have the conference back over to management for any closing remarks.

We'd just like to say thank you for everybody's attention and look forward to talking to you next quarter.

We thank you, sir, and to the rest of management for your time. The conference is now concluded. We thank you for attending today's presentation. Thank you.