Hanover Insurance Group Inc (THG) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Hanover Insurance Group first 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. Please go ahead.

Thank you, Keith. Good morning, and thank you for joining us for our first quarter conference call. Participating in today's call are Fred Eppinger, our President and Chief Executive Officer, Marita Zuraitis, President of both Property and Casualty Companies, and David Greenfield, our Executive Vice President and CFO. Before I turn the call over to Fred for 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 Investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session.

Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements. 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 statements section in our press release, slide 2 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 developments, ex-cat 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 supplement 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. Overall, we are pleased with our first quarter performance. Weather aside, trends in our business continue to develop favorably, and are generally in line with the outlook we shared with you earlier this year. This quarter was particularly challenging for our industry, due to an elevated level of catastrophe and non-catastrophe with weather-related losses. While we incurred cat losses of $50 million pretax or $0.70 after tax per share, which was above our expectations, we otherwise generated solid earnings in the quarter.

Net income per share for the quarter was $0.64, and operating EPS was $0.53. Our book value per share increased 1% during the quarter, and 7% over the last 12 months. The first quarter is usually associated with higher weather-related losses for us, and we plan for it accordingly. However, this quarter, we saw the record amount of snowfall in Northeast and parts of the Midwest and mid-Atlantic regions, which produced an unusually high number of claims due to water damage, ice dams and roof collapses. Our combined ratio of 100.7 this quarter, reflects 6.5 points of catastrophe losses, as well as a more significant level of winter losses that do not meet our cat definition. We estimated to be approximately 2.5 points in excess of what we usually see during the first quarter.

Reflecting on the progress we've made in diversifying our business, we believe our more balanced business mix allowed us to produce a 100 combined ratio of break-even underwriting result for the quarter. Considering the magnitude of weather losses in the Northeast this quarter, this would have been a very improbable outcome with our geographic mix only a couple of years ago. Adjusting for the impact of excess weather, we are seeing favorable trends in our businesses, and building momentum for improved performance.

Our accident year combined ratio, excluding cat losses improved by more than 2 points in the current quarter, as we continue to work on the strategic leverage that I laid out for you in our last earnings call, when I shared our 2011 outlook. First, we saw improvement in our expense ratio, which reflected an increased impact of the expense leverage in our Commercial Line results. Second, we maintained strong growth momentum in our specialty businesses, and we leveraged these investments we have made in those areas. Third, we continue to improve our geographic and business mix, which has and should continue to drive improved and more stable results in the future. And fourth, we continue to get improve pricing in Personal Lines, while continuing to grow outside of our core concentration states

So I will briefly review each of these areas. Over the last 6 quarters, our expense ratio in Commercial Lines has been higher than our long-term target, as a result of an acceleration of the investments to improve our product portfolio, and expand our footprint. Our expense ratio peaked in the beginning of 2010, when we invested heavily in 3 acquisitions, in our renewal rights arrangement, our western expansion efforts, and the development of additional specialty capabilities.

We put people and infrastructure in place ahead of the premium, in order to ensure the acquisition and retention of attractive business, and to provide the highest quality service to our partners. In line with our expectations, we are now earning in the net written premiums growth we achieved in 2010. And as a result, of our expense ratio has declined for the past for consecutive quarters, from 43.5% in the first quarter of 2010 to 39.5% in the first quarter this year. We believe we will continue to reduce our expense ratio in Commercial Lines going forward.

One of the principal objective in investing in these capabilities, is to drive fundamental margin improvement in our overall book of business, through a (inaudible) towards more distinctive product offering. Growth in our specialty business is a critical part of that shift. Accordingly, our 9% growth in Commercial Lines this quarter predominantly came from our specialty lines and niche offerings. Many of our specialty businesses are now approaching the scale where they will be making a significant contribution to our overall Company performance. In addition, as we deliver more specialty business directly to our agent partners, we are strengthening our position with them that will lead to more opportunities in the future.

Our geographic expansion has also contributed to our efforts to improve our business mix, as we ended the first quarter with approximately $225 million of direct premium in the new western region. This growth has come from a limited number of high-quality new partner agents. The establishment of a national network of partner agents will give us a very distinct a platform for future growth. The strong shelf space we now have with partner agents, combined with a more distinctive product offerings, will allow us to profitably grow and achieve better pricing.

This quarter we saw average price increases in our core business of approximately 2%. Increases were even higher in many of our specialty businesses. We have always remained disciplined, resourceful and growing without compromising profitability. And we remain optimistic, we will continue to do so, given a slightly more receptive environment including higher renewal retention and more rational competition on new business. I'm also pleased with the improvement in our Personal Line business mix. We continue to grow the percentage of our business that is in full accounts, which now represents almost a full two-thirds of our total Personal Lines, and our book continues to shift towards a more diversified geographic profile.

In states targeted for growth, we grew by 5% during the quarter, as compared to a year ago. At the same time, we successfully managed our core states, with a focus on profitability. We achieved effective price increases of 6% in Personal Lines in the quarter, while we improved retention. Adjusting for the unusually high non-cat weather we experienced this quarter, our personal accident year loss trends notably improved. And we believe mix improvement, coupled with consistent and disciplined rate increases should drive higher earnings in Personal Lines in subsequent quarters.

Overall, I am pleased with the improved underlying profitability of our business, and I'm happy with our earnings prospects. Marita and I are just returning from our annual President's Club event, where we met with our 125 of our best partner agents. .As a group, our agent partners are energized by the strides we've made to continue to deliver on our promise to be a more distinctive partner for winning independent agents. They are excited about our investments, delivering broader and more differentiated products, establishing a national network of skilled professionals, and providing greater franchise value by limiting appointments. This momentum we have with our partners should continue to support profit growth. I will now turn the call over to Marita.

Thanks, Fred. Good morning, everyone, and I'm glad you could join us today. As Fred mentioned, we are seeing continued strong momentum in our top line, as well as our core underwriting results. Our distinct agency strategy allows us to continue to improve on our already high quality mix, while also achieving rate in both Commercial and Personal Lines. Additionally, we're seeing the benefit of our 2010 growth as we earn in the premiums, and reduce our expense ratio. We believe that our ongoing agency relationships, our strong position in the marketplace, and our broad product set positions us well for continued improved performance, and makes us less vulnerable for the competitiveness of the current market environment. Additionally, our agency strategy will allow us to take better advantage of new opportunities in the marketplace when it begins to turn.

Starting on slide 7, our first quarter combined ratio was a 100.7% all-in, and 94.2% excluding catastrophes. Our ex-cat ex-development combined ratio was a 97.9% in the quarter, representing a significant improvement from the 100.1% in the first quarter of 2010, and the 98.8% in the fourth quarter of 2010. At the same time, we increased our net written premiums by 3% in the quarter, driven by 9% growth in Commercial Lines primarily in our specialty businesses.

I will review our businesses, starting with Commercial Lines on slide eight. Pretax income in the first quarter of 2011 was impacted by lower favorable prior year development, and higher catastrophe and non-catastrophe weather losses, which we partially offset by a lower expense ratio due to a higher net earned premium base.

The majority of our catastrophe-related claims this quarter came from a 4-day winter storm at the end of January beginning of February, which brought record snowfalls and sub-zero temperatures to most of our Eastern states. Most of the claims were associated with roof damage from snow accumulation, often resulting in ice dams or collapses. And accordingly, the majority of our catastrophe losses were recorded in our C&P line. Favorable development of prior year loss and LAE reserves was $14 million, or 4 points in the first quarter of 2011, compared to favorable development of $22 million or 7 points in the first quarter of 2010.

Included in the first quarter development last year, was approximately $8 million or three points of favorable development due to a one-time benefit in LAE reserves. Commercial Lines segment income excluding catastrophes and prior year favorable development was $32 million in the current quarter, compared to $20 million in the prior year quarter despite higher non-cat weather-related losses, which resulted in ex-cat accident year loss rate ratio of 60.9%, consistent with the 60.4% in the first quarter of 2010.

As Fred mentioned, our expense ratio in the Commercial Lines decreased in the fourth consecutive quarter, as we continued to see the value of the investments we've made, and the benefits of the renewal rights transactions. The expense ratio also benefited from the timing of certain expenses, which should normalize as the year progresses, and does not change our full-year expense expectations. As we continue to earn in growth from 2010, and our newer businesses continued to gain scale, we should see this translate into further improvement in our expense ratio going forward.

With a focus on our strategy and continued improvement in our portfolio mix, we have been able to increase the earnings power of our organization, despite difficult current market conditions. Our ability to consistently improve our underlying margin, in combination with strong growth, provide the best supporting evidence that what were doing is working.

I'm now on slide 9. In line with our expectations, our core commercial growth moderated in the first quarter, as we finalized the OneBeacon renewal rights transaction. Approximately $8 million, or 2 points of our overall Commercial Lines growth, is due to the remaining renewals eligible from the OneBeacon transaction. We are seeing some growth in our small commercial business. Virtually all the remaining growth is coming from our specialty lines. Our specialty business is a key component in the value proposition we offer our agents, demonstrating our commitment to product innovation and franchise value. These businesses, distributed through a limited number of partner agents, is becoming a robust source of earnings growth.

We continue to write mature programs through our AIX platform, which contributed 3 points to the overall Commercial Lines growth in the quarter. Additionally, we saw high-quality growth from our Hanover professionals offering, as well as newer specialties like miscellaneous professional liability and healthcare. As these businesses grow, we will begin to earn in our investments. We continue to be satisfied with the quality and pace of the growth in our specialties businesses overall, as it is associated with solid agent partnership, controlled books of business, and strong underwriting expertise.

Our core businesses also continue to perform well in the quarter. Our retention improved substantially, while we remain selective in our new business writings. A growing portion of our new business premium came from consolidation activities, primarily with our partner agents. Our OneBeacon and Western expansion initiatives, which drive our earned premium growth continued to perform well, and even ahead of our expectations in most operating metrics, including loss trends.

Before I move to Personal Lines, I'd like to share a couple observations on the Commercial Lines pricing environment. Given our mix and agency position, we continue to see price increases of 2% in our core commercial lines, and even more in our specialties. And the market seems to be slowly moving to the positive, especially in the workers comp line. We believe our ability to deliver differentiated product capabilities continues to resonate with our partners, and will help us generate an increasing flow of quality Commercial Lines business going forward.

Now turning to Personal Lines on slide 10. Pretax segment income excluding catastrophes was $52 million this quarter, compared to $50 million in the first quarter of last year. This improvement was driven by better underlying loss ratios, in both our auto and homeowners line. Our Personal Lines accident year loss ratio excluding catastrophes, improved by one point compared to the first quarter of last year. We believe there is an additional 3 points improvement that was masked by higher non-cat weather losses. The lower underlying ratio was a result of continued rate increases and actions to improve our mix of business. On our auto book, we experienced favorable liability trends which were partially offset by higher weather-related physical damage losses. In our homeowners line, we attribute the underlying loss trend improvement to our rate actions, and we believe there will be more room for price increases in many of our geographies going forward, considering persistent active weather.

Other underwriting expenses were lower by 0.8 points during the first quarter of 2011, compared to the first quarter of 2010. This was mostly due to timing, and the recognition of certain expenses. We expect our Personal Lines expense ratio to remain relatively in line with the 2010 ratio for the subsequent quarters. Overall, we are on track to achieve our return targets in Personal Lines, through our rate and, per- spend business mix improvement strategies, which I will discuss using slide 11.

Our Personal Lines net written premiums declined by 2.3% quarter-over-quarter, with 2 points of that decline coming from Louisiana and Florida, as we lessen our exposures in Louisiana, and aggressively manage profitability in Florida. Putting aside the impact of these planned actions, Personal Lines net written premiums in the quarter was roughly flat. As we have said before, given our significant market position in our 4 core states, we manage these states with a focus on margin, not growth. In our growth states, we continue to gain positive momentum, with premiums increasing about 5% in the quarter. We are effectively executing our account rounding strategy while growing, and our underwriting results in these states supports the effectiveness of the approach.

Additionally, consistent with our account strategy, our overall retention improved on a year-over-year basis. Excluding our Louisiana run-off, retention actually improved by approximately 1%, despite applied rate increases in our book of business, with 5.3% in auto and 4.6% in home. With the run-off of our Louisiana book, and profitability actions in Florida nearly complete, improving trends and retention, coupled with a favorable pricing environment, and momentum in our growth states, we are confident that our Personal Lines growth should begin to stabilize.

In summary, this quarter continued to demonstrate the effectiveness of our strategy. In Commercial Lines, we are seeing positive pricing trends, and have never been happier with the quality of our book. Additionally, the benefit of our recent growth is demonstrated through our improved expense ratio. And with that I'll turn the call over to David.

Thank you, Marita. Good morning, everyone. I'm pleased to be here with you today, this being my first of many earnings calls. Fred and Marita have covered a great amount of information about the quarter and our prospects. I would just like to add a few additional comments about our overall results, and the strength of our balance sheet. We are pleased with our results for the quarter. Net income for the quarter was $29 million or $0.64 per diluted share, compared with $42 million or $0.87 per diluted share for the first quarter of 2010.

Segment income after-tax which excludes the impact of realized gains and losses on investments and some other non-operating items was $24 million or $0.53 per diluted share, compared with $32 million or $0.66 per diluted share for the first quarter of 2010. As Fred and Marita both noted, our solid underlying performance this quarter was overshadowed by the high level of cat and non-cat weather-related losses. On an actual year basis excluding cat losses, the combined ratio grew by more than two points to 97.9% this quarter, compared to 100.1% in the first quarter of 2010. Our segment income included $29 million or 3.7 points of favorable prior year development, compared to $37 million or 5.6 points in the first quarter of 2010.

In line with our expectations, we continue to see lower favorable developments than prior periods, as we take favorable development from prior years into consideration when making current accident year selections. Included in our operating results this quarter, were also approximately $3 million of expenses associated with activities related to our offer to acquire Chaucer Holdings PLC. These expenses were recorded in our other P&C segment, which mostly is reflects our holding company income and expenses.

Turning to slide 14, I'd like to touch briefly on our investment portfolio and yields. As of March 31, our total cash and invested assets reached $5.2 billion. The composition of our portfolio remains largely unchanged from year-end. We continue to maintain a well-diversified portfolio with fixed maturities duration of 4.5 years, and a weighted average credit quality of A plus

Cash and fixed maturities represent 96% of our total cash and invested assets. Net investment income for the quarter was $60 million, slightly down from $61 million in the prior year quarter due to lower reinvestment yields. Fixed income new money yields were 3.75% in the first quarter, compared to 4.19% in the first quarter of last year. Our pretax earned yields on our fixed maturity portfolio was 5.28% for the quarter, down 20 points -- 20 basis points from a year ago, as lower new money rates impacted our portfolio yields.

To mitigate declining yields, our current strategy for our fixed maturity portfolio is to continue to emphasize corporate debt in other credit spread sectors while maintaining a high-quality, well-laddered portfolio. Only about 10% of our portfolio is projected to mature in each of the next 2 years. So all things being equal, it should take a relatively long time for our installed book yield to decrease materially.

First-quarter net income also benefited from net realized investment gains of $3.3 million. Pretax net unrealized investment gains in our portfolio increased by $2 million during the first quarter. Our portfolio will 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.

Let's turn to slide 18 for a discussion of our balance sheet and capital. Book value per share increased by about 1% this quarter, and 7% over the last 12 months, bolstered by segment income, and an increase in net unrealized investment gains. At March 31, 2010 book value per share included a benefit of a $1.98 per share related to a release of deferred tax valuation allowance, as a result of the implementation of certain tax planning strategies last year. These are essentially permanent benefits that are currently recorded in accumulated other comprehensive Income on the balance sheet, and will gradually be reflected as a tax benefit in non-segment income over the course of future periods.

In the first quarter of this year, we realized $2 million or $0.04 per share of these benefits, which flowed into net income from AOCI as a result of sales from our investment portfolio. We continue to remain strongly capitalized for our business profile, as evidenced by recent rating agency affirmations following the Chaucer announcement. Our total capital at March 31, 2011 was over $3 billion including $561 million of debt. In February, we repurchased and retired $48 million of par value of our Junior Subordinated Debentures with an 8.2% coupon for $50.5 million, allowing us to reduce our overall debt cost, as well as freeing capacity with a goal to optimize -- optimizing our capital structure.

As we mentioned on our investment -- investor call on Chaucer, we are planning to raise $250 million of senior unsecured debt to supplement the funding of the acquisition. All coverage and capital adequacy ratios are expected to be comfortably within the rating agency requirements for our current ratings. Holding company cash and investment securities are approximately $479 million, including a dividend of $99 million paid from the insurance subsidiaries to the holding company in April. About $235 million of this liquidity will be used to fund the Chaucer acquisition, along with the $250 million of senior unsecured debt previously mentioned. We are making good progress on the Chaucer acquisition. The Chaucer shareholders meeting and vote is scheduled for June 3, and we still anticipate a closing early in the third quarter. Following the close, we expect our holding company cash and investment securities to be in excess of $200 million.

Before we open it up for questions, I wanted to provide some comments on April catastrophe activity. Between April 14th and 28th, hail and strong winds swept through several states with devastating tornadoes affecting the southern and southeastern United States causing massive destruction and unfortunate loss of life. With over 800 reported tornadoes, last month could end up being the most active April on record for tornadoes, and has already been compared to the number and severity of tornadoes experienced in 1974, the worst tornado season on record.

Based on the April weather activity, it's clear that our cat losses will be elevated in second quarter, compared to our overall expectations. However, it is too early to put reliable estimates on these April events, as they relate to our second-quarter or full-year results. Now I'd like to open the line for questions.

Thanks.

(Operator Instructions).

Oh, yes, we do have a question from [Mariza Costa] from Stifel Nicolaus.

Good morning, everybody.

Good morning, Mariza.

Hi, I have a quick question regarding your agent relationship. I guess [Sasha] does have their own agent network, I guess. How are you going to work with that? And if your agent -- the number of agency work is going to increase significantly?

No I don't think so. Again, our focus has been on roughly the 1,000 most significant agents in the US. And I think that's going to continue in the US. Those folks generate, obviously a tremendous amount of business, and also access the vast majority of them, access Lloyds in one way or the other today. And so my view is that we won't see a significant increase. Chaucer does have some, cover holders in the US. There's quite a bit of overlap of the ones they access in the US, and who we access. And there's a few new ones, obviously, but I wouldn't see that it would be material at all.

Can you remind me what the total number is, that you have right now in the US?

As I said, most of our efforts are around the top -- we have -- the large of it is because of our personal is business in some of our more mature core states, but the vast majority of our business is with about 1,000 agents.

Okay.

And so that's really the bulk of who we do business with. A 1,000 would represent well over 80% of our business, so.

Okay.

And they are typically the most sophisticated agents. They vary in size, but they tend to be as we say winning agents, that are consolidating their marketplace, investing in their business, and broadening their capabilities. So they are very active guys, We have been very, very proactive at selecting and planning with these guys. It's been our whole strategy for the last few years. And we have now got very good shelf position with these folks. Now if I contrast that by the way, from 19 -- from 2004, our business, we would say about 50% of our agents had that kind of concentration, versus now we have 70% with those kind of agents or 80. So we moved materially deeper with the best agents in the country.

Okay. And the growth in the Western states. Was that -- I'm sorry if I missed it, was that from specialty lines? Or was it from the OneBeacon deal, where did that come from?

So we opened up on the West Coast essentially, except for California which we have a small commercial, but everywhere else out west, it was essentially specialty and niche business.

Right.

And the OneBeacon business. And again, so what you'll probably -- what we would get it, is about two thirds of that number, maybe a tad higher, would be OneBeacon renewal right, and the rest of the growth. Now the agents, almost all of the agents, would have had some OneBeacon business. So what you have is, business from those agents comes in two places, right? The OneBeacon stuff, and it gives us additional business in specialty and the other lines, just like we planned. That's will expand a tad, as we grow our small commercial which we are launching right now in the other states. So we are complementing that capability now, with small commercial in the remaining states, between now say, in the next three months, three, four months. And so our product portfolio will be similar to what is everywhere else, as far as Commercial Lines for the second half of this year.

Okay. Thank you so much.

Thank you.

Thank you.

And the next question comes from Cliff Gallant of KBW.

Good morning.

Good morning, Cliff.

David, I was wondering if you could make a comment on the Chaucer's investment portfolio, just how it is positioned versus your own? Also in terms of your capital ratios, what will the -- do you have any preempts to statutory surplus? I'm not sure how that works in this case, but what does that look like pro forma? Those are two questions.

Sure. I don't have a premium stats surplus number in front of me, but someone may be able to get that before I'm finished. In terms of the Chaucer investment portfolio, if you recall from the materials we provided about two weeks ago, roughly half of their portfolio is invested in cash, and very short-term liquid securities. The remaining portfolio is in particularly high-quality highly liquid sort of assets. And overall, the portfolio is extremely conservative, much like ours, other than it's got a much shorter duration than we have.

And I think the commentary that I provided a couple weeks ago essentially is, we'll look at, on a combined basis how we can manage the portfolio more effectively across both businesses. But by and large, there is really no issues in their portfolio whatsoever, from the standpoint of a illiquid assets or concerns about the investment strategy that they've undertaken. In terms of the premium, the stats surplus, Cliff, I don't have those numbers in front of me, but we can do some calculations and get that to you.

But it's important to recognize the, they obviously operate in a different business environment than the US markets. And so their capital and statutory surplus to use that phrase should be looked at a little bit differently, from the standpoint of our US business. And we'll be able to -- we can talk more about that I think, as the year wears on. But overall, I think we're going to be in a very strong capital position to run the combined business going forward, and we'll have many levers in which we can utilize our capital more efficiently across both businesses.

And I think because we said in the call, we specifically planned this capital, this debt raise, allows us to excess, additional excess capital at the holding Company to capitalize the potential term. So we didn't -- we're not stretched by any sense of the imagination. We have excess to capitalize on additional growth, as it comes through.

I had one follow-up. How about in terms of your reinsurance purchases, I -- could you remind us when your renewals are up? And how you will approach that? There is some talk in the market that the pricing might be up.

Yes.

And also, when you look at the Company pro forma with Chaucer, will you -- will you change how they buy reinsurance? Will you buy it as a group, what will be the strategy?

I think as we said, most of our stuff, is the cat (inaudible) is January 1. And additionally, we locked in -- last year we purchased additional on top in the summer, which we did already, we locked it in early. We kind of anticipated some market changes, and we wanted to get that done early, and we did get it done. So the vast majority of the cat stuff is done for us. There is some of the specialty lines and casualty treaties come in July. But pretty much all the cat stuff comes -- the individual risk, is I think Marita, what June?

7/1. Yes.

7/1. And so, I think -- as we might have mentioned actually in the Chaucer call, we believe that the structure of that for us will likely remain the same as it is today, as we go into that. But that's what's the real -- kind of what's remaining for July 1. I think as far as combined, I think that it's too early to talk about that right yet. Obviously, we're in the middle of implementation, planning and consolidation planning right now. And we will kind of look at and see what the most appropriate approach is for the combined entity. They both have very good programs. We also, as we mentioned in the call, we've looked at concentration risk, we have no transitional issue this year that we're worried about, given the analysis that we've done and we've looked at. So that is something we're going to look at, during the implementation planning. But I'm not at all concerned about where we are.

All right. If I can get one more. In the fourth quarter call you talked about 2011 guidance of $3.70 to $4.00. Is there any update to that number, particularly in loss of the cat losses we've had?

Yes, Cliff, if you will recall, we gave some updates, or we updated that guidance about two weeks ago when we concluded the Chaucer call. My commentary, that I just mentioned about April, is, we're looking at the guidance down for the rest of the year. Obviously, there was a lot of activity in April that continued well into the end of the month, and there still seems to be a bit of elevated activity around those storms. So it's really difficult at the moment, to come up with reliable loss estimates so early in the quarter, and so early in the process of looking at this storm.

So I was a little bit concerned about giving you a too soft of a number today. What I would say is, of the guidance we have out there, it's likely we would be at the lower end of that range at this point. But I'm just not prepared to give you a definitive number, and we'll just have to see how the quarter develops over the next several weeks. And then we can talk about maybe updating that.

All right. That's fine. Thank you very much.

Thanks.

Thank you. And next question comes from Larry Greenberg with Langen McAlenney.

Good morning.

Hi, Larry.

Hi, Larry.

How you doing? A couple of questions. Marita, can you give us a little bit more color on maybe when the crossover point for Personal Lines premiums to stabilize and perhaps grow might be? And then also, you made a comment about loss trends in OneBeacon and the Western states coming in better than what you had kind of had expected. And I was wondering if you might be able to give us a low bit more color on that as well?

Sure, absolutely. I think in the script, we were pretty clear about Personal Lines, and the fact that the work we've done in the Louisiana and Florida is almost behind us. And that we'll begin -- without that, we were relatively flat. So with the growth that we're seeing in the growth states, obviously the growth states are much smaller than our big four. Our big four, as we've said before, we manage for margin not for growth. But we're seeing nice growth in those growth states in the quarter about 5%. So with a lot of -- our defensive action behind us, we'll start to see some of those growth states begin to earn in. But they're much smaller than the big states, so it's going to take a while for that to come through in the numbers. But as we said, without Florida and Louisiana, we were relatively flat in the quarter. On your Western states --

So it would be fair to assume that with Florida and Louisiana almost done, the second half of the year they would be reasonable to think, kind of break-even or better, is that fair?

Yes, I think that's fair.

Okay. Thanks.

Yes. And on the western state question, one of the benefits of a renewal rights transaction, and we've talked with this before, is you only take, what you want to take. So the intensity of the underwriting of the individual accounts, the hand-picking of agents, the ability to start from scratch, certainly gives you more predictability if you will, in the loss trends. And that's clearly what we're seeing in the West. We hand-picked the accounts that we wanted to write. We very thoughtfully, as Fred said, only entered small commercial in California, and now we are expanding beyond California.

So the ability to start with a limited number of agents, to pick the agents that have better profitability potential, and to pick the business, clearly gives you a benefit from a loss trend perspective. And that's what we are seeing in the results. We are pleased with what we are doing in the West. And as Fred said, the majority of the business is specialty business, it's niched business. It's where we have an underwriter with a little expertise, aligned with a producer with a little more expertise. And I think that it's the best example of our strategy planned through and we're seeing it in the loss trends.

Larry, let me give you a little color on that first line question, just so -- obviously, the Louisiana, in particular has another quarter to -- there's going to be some more. So I think the comparison, second -- next quarter, is going to be similar to comparison in this quarter, because of the work. But what I see is the rate taking, like in places like Massachusetts and Michigan, where our retention is going up, and where I see rate -- other people taking rate. We actually feel pretty good about the tail end of this year. I mean, we're looking at our competitive position with our agents, and we're seeing good retention, and we're seeing people take rate, and we're doing well.

And so kind of the ironic thing, or I think the opposite side of some of the storms, is that I believe very strongly that this has really hurt regional companies. And what we're seeing, is our ability to hold what we wanted and grow. So I feel pretty darn good about the tail end of this year. But I just want to -- next quarter, I just think that the [PIP] stuff in Florida has a little bit left to go, the Louisiana stuff, there is some stuff to go. And I do think you're going to see it come more at the tail end, which is what Marita said. I just want to be clear, because I don't think it's immediate.

Great. And then just going back to the loss trends on the OneBeacon stuff. I mean, clearly, you renewed a lot more -- I don't know what your exact expectations were, but you renewed a lot more of that business than kind of the base line -- 50% trigger for an additional payment at the beginning. So is it fair to say, that underlying profitability that you saw in that business was just that much better than?

So if you recall, Larry, there's a little bit of color on that. There was $125 million of the available business to us, that we chose not to put in the renewal rights deal. So what's a little different about that deal, is we looked at what they had, and didn't take it all at the beginning. So there was about -- over 1000 agents, and over $100 million of business that we did not select that, so in a normal renewal rights, if you took at all, right? If I had added that, my guess is, the retention on that $100 million would have been very different. So at the beginning, we did that. The second thing we did, is out of the gates, we scored every single account over $100,000, A, B, C, and D. Okay? Which -- and some of those, we were very proactive about saying, find another home early. Right?

So the stuff that actually came to us if you will, was very much -- you can describe it as almost the Atlantic Mutual book that have been with OneBeacon for a long time. I mean, if you look at the number of agents, there was there was 300, and really 150 with significant business. That business had been with those agents for a very long time. So it was a little bit of an odd deal, like now -- I would tell you, because we hired the people day one. And we gave them credit on their commission, and fronted day one, it encouraged all these agents to just try to figure out how to get it all to us. Right?

So it was a very -- now it cost a little on the expense side to do that, but from the beginning these guys were all trying to figure out how to get us the business. So that was a little bit different. Now I've been involved in a number of these renewal rights transactions. And this one was a little bit different, because it was a smaller group of agents. It was very much them working with us, to try to get it to us. And it was business that this team had managed for a long time. Now there's probably 15% or 20% of the business that wasn't like that, but it was a huge amount of this business that was again, with these guys plus five years. I mean, it was interesting.

Now remember, also part of that -- about half of that business is what we call segmented and niched. So it was also in these relatively well-defined programs where these people wanted to move the program to us, the (inaudible) program, the -- I mean there was -- and so again, it had some nature to it, that made it good. Now we kept saying, we got the retention, but we also that the rate we wanted. I mean, it was interesting. We haven't had to do anything different on that book, than we did on our book with rate. So it's been successful. Now again, I would argue that we took a little bit of expense risk with it, by hiring the people up front, and fronting the business. But it's all worked out economically really well for us so far. Yes.

Great, thanks. And then just finally, I think you Fred and Marita both referenced kind of an improving trend in Commercial Lines, and the Commercial Lines environment. How do you see this kind of evolving over the next 12 months?

Yes, I mean, I don't think there's any silver bullet here. I don't think anybody is saying, that it's going to happen quickly, but there is quick, obvious movement. What you're seeing is, is almost everybody in the industry, is seeing the same thing. Small commercial, you're getting rate, retentions are going up. Right? What you're saying in lines like workers comp, people are reacting to the bad performance, and rates are going up. Clearly, there's more than needs to be done. It's still very difficult in some of the -- as you get up in size. It's still very difficult in some of the casualty lines and property lines that needs some more room.

But again, I would say that the sense we have, is that we're -- maybe a little bit better than bouncing along the bottom. We're actually getting better. Right? There's things starting to move in the right direction. I still think -- and again, it's difficult. Now the one benefit we have, obviously is, our average policy size is smaller. RIght? So our mix, we've been seeing positive for a while, but I would say the dialogue is a lot more productive than it is. And I've said this a couple times on calls. One of the thing that different above this turn, and any other turn than we've ever had, we've never had four years of shrinkage in a row before.

And so the agents economics are so strained, because of that they are very much incented with us as carriers, to get their retention up, and get some rate into the book. And so what we're seeing, is a lot more act of effort to try to stabilize the economics of their business and in our business. But again, we still -- it's not perfect yet. It's not really quote-unquote, turned like we talk about, but it feels a lot better, and it feels like the dialogue is a lot better.

Yes. The only thing I'd add to that, and I said in my scripted comments, is that we entered this point of the market, this point in the cycle with a book that we feel very good about. We have a very high-quality book of business, that we think has performed quite well. So I wouldn't trade this book for any other book out there. It's a good quality book of business, and we feel good about it's underlying performance.

Great. Thanks for the answers.

Thanks Larry.

Thanks, Larry.

Thank you. And as there are no more questions at this point, I would like to turn the call back over to management for any closing remarks.

Thanks to all of you for your participation today, and we look forward to speaking to you next quarter.

Thank you. That concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating.