Hanover Insurance Group Inc (THG) 2011 Q4 法說會逐字稿

Good day, and welcome to the Hanover Insurance Group fourth quarter earnings conference call and webcast. All participants will be listen only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva, Investor Relations. Ms. Lukasheva, the floor is yours, ma'am.

Thank you, Mike. Good morning, and thank you for joining us for our fourth quarter conference call.

We will begin today's call list prepares remarks from Fred Eppinger, our President and Chief Executive Officer, and David Greenfield, our Executive Vice President and CFO. Also in the room and available to answer your questions after our prepared remarks are Marita Zuraitis, President, Property & Casualty Companies; Andrew Robinson, President of Specialty Lines; and Bob Stuchbery, President of International Operations and Chief Executive Officer of Chaucer. Before I turn the call over to Fred, let me note that our earnings Press Release, statistical supplements and a complete slide presentation for today's call are available in the investor section of our website at www.hanover.com.

Our prepared remarks and responses to your questions today, other than statements of historical fact, include Forward-looking statements such as our guidance for segmenting [company] share for 2012. 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-cat loss and combined ratio, among others. A reconciliation of these non-GAAP financial measures to the close of 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 thanks for joining our call today.

Our fourth quarter results represent a strong finish to an otherwise financially challenging year. Our performance in the quarter clearly reflected the benefits of our efforts to improve the quality and distinctiveness of our product portfolio. For the quarter, we generated a solid segment income of $45.2 million or $1 per diluted share in line with our expectations, in spite of the elevated level of global catastrophes. Losses from catastrophes this quarter totaled $56 million and included $38 million, related to the floods in Thailand, and [$16 million] from the late October snowstorm in the northeast. For the year, even as we experience the worst year of catastrophe losses in our company's history of $362 million or 10 points of our combined ratio, we generated modest after-tax segment earnings of $15 million. We are also pleased that are focus on risk management and our thoughtful approach to growth has enabled us to maintain a strong balance sheet. Despite this year's challenges, we were able to grow book value by almost 3% to $56.24 at the year-end 2011, reaching the highest point in our company's history.

As I discussed at Investor Day, 2011 was a very challenging year for us, and the industry, given the severe weather and the economic pressure. But, it was a year where we continued to make significant progress on improving the earnings power of the Company, and position it for excellent returns through the cycle. As a result of our significant investments, our product portfolio is now very attractive, and each of our businesses is well-positioned to capitalize on the changing market environment. We believe the quality of our new business today is as good as anyone in the industry, and we can see real progress in all the key profitability levers, as we discussed with you on Investor Day. We also mentioned that we see 2012 as somewhat of a transitional year. While we believe our performance will significantly improve, as we discussed as we shared our 2012 Outlook, we believe that it is prudent to assume that the more difficult weather trends we have seen will continue.

Therefore, we are planning to take additional pricing and underwriting actions in 2012 to achieve our ultimate return, that will not be fully realized this year. But, we are very optimistic about where we are, and what we are now accomplishing in the marketplace around pricing, mix management, and profitable growth. We are encouraged by our fourth quarter operating performance and by our financial results on an ex-cat basis. We continue to make progress toward our long-term target returns and to execute on our priorities. In particular, successfully raising rates while maintaining the quality of our business, enhancing our business mix by growing the more attractive lines and segments, engaging in targeted mix management and re-underwriting in certain lines and regions, successfully building out our newer businesses in geographies, enhancing margin by reaching required scale, and solidifying our shelf space and competitive position with the best independent agents and positioning ourselves for profitable growth.

Let me begin by talking about the progress in Commercial Lines. In core Commercial Lines, we continue to accelerate the pace of growth, which resulted in fourth quarter growth of over 10%. We achieved pricing improvement in virtually all lines for an overall pricing increase of 4% during the fourth quarter. Our pricing in small commercial and middle markets, not only improved as compared to the third quarter but also as the months progressed within the quarter. And, January was better than December. At the same time, our retention improved 2 points sequentially, and 4 points from the fourth quarter of 2010, which suggests that we are implementing a successful pricing strategy and business model. We also believe on a product-line and account-size adjusted basis, we are achieving price increases in line with our better competitors.

We believe our strong agency relationships and our consistent pricing message over the years is what's now helping us navigate through the inevitable disruption that happens when the market turns. Our partner-agent focus and our local market knowledge enables us to achieve the proper balance between quantitative and qualitative underwriting processes, resulting in needed rate increases while maintaining or increasing the quality of our book. This approach, coupled with our ever-broadening product suite, allows us to minimize the disruption; and quite frankly, improve our position with the best agents and brokers.

With more normal weather in the fourth quarter, we were able to demonstrate the earnings potential of our company, as we generated stable underwriting loss ratios. Commercial Lines loss trends remained relatively stable. We attribute this in part to our target approach to growth. Currently -- concurrently, excuse me, we improved our expense ratio by 2 points for the quarter and over 3 points for the year. The improvement in our expense ratio was tied to our operating model work, our maturing investments, and increasing scale in commercial line, as we solidify the national footprint in the US. Given the completion of the OneBeacon renewal rights deal and our geographic expansion, we now have a more balanced and mature book of business with over $300 million of core commercial out west with our partner agent.

We also continued to improve our business mix as we grew our specialty businesses by 15% for the quarter and 16% for the year. As we have further improved the quality and diversification of our portfolio. Our growth in the fourth quarter came partly from our program business and the maturing of our newer businesses including private company D&O, management liability, and miscellaneous professional liability. We are successfully bringing these products directly to our retail distribution through a very efficient operating platform, and in many cases, displacing the wholesale or the specialty markets. Overall, we believe we have strong and sustainable momentum for growth and improved profitability in Commercial Lines as we start 2012.

In Personal Lines, we continued to accelerate premium growth in the quarter. We filed rate increases of 5% plus in auto and 7% plus in homeowners. Our retention in this business continue to improve and now stands at 81%, up 2% from the fourth quarter of 2010, even though we continued to achieve industry-leading rate increases and to actively manage our property concentrations. We believe this is a testament to our strong market position and our account focus strategy. Obviously, Personal Lines has been greatly impacted by the increased weather activity over the last 3 years. We believe that we are somewhat ahead of the market, recognizing the impact of weather on results as potentially more permanent. We have been driving rate increases in homeowners in the upper single-digits since the end of 2008. As you know, we are supplementing our disciplined pricing actions with a strategy of surgically reducing our exposure through changes in policy terms and not renewing certain business associated with areas of high concentration. We believe a combination of all these measures will help mitigate exposures and improve our retention -- excuse me, our returns in 2012 and beyond.

Before I turn the call over to David, I'd like to make a couple of comments about our International Specialty Business and our outlook. Cost of generated net written premiums of $207 million in the fourth quarter. More importantly in this difficult catastrophe quarter for international insurance has continued to be accretive to our earnings producing pre-tax segment income of $12 million for the quarter and $32 million since we acquired them on July 1. The Thailand floods exceeded our normal cat-loss estimate for the quarter. However, the current underlying business trends and prior year loss trends are very favorable, increasing the profit for the year. Additionally, we've made some adjustments to the portfolio to reduce volatility and manage our risk appetite for certain lines. For example, lowering our capacity in global marine excessive loss and facultative coverage in the US ¶ We continue to be impressed with Chaucer's experience and talented underwriting team. And, Chaucer's specialty focus platform, with lead positions in numerous attractive segments, provides multiple areas of opportunity for us, especially in an improving market environment. Finally, I'd like to comment on the market trends in our outlook for 2012.

While we believe 2012 will continue to be challenging with historically low returns on invested assets and still meaningful economic pressure, we think Hanover is well-positioned to navigate through this environment. Given our pricing trends we saw in the US and globally in the fourth quarter, we continue to be very optimistic about 2012. There are strong indications that the overall market is becoming more reasonable and more underwriting focused than it was just six months ago. And, certainly much more than it has been in recent years. We are very well-positioned to improve our financial returns using the leverage we discussed and to capitalize on this market environment. All of this has us -- excuse me, of all of this has increased our confidence in the 2012 Outlook. We believe the earnings power of the organization will continue to increase as the year progresses, culminating in even stronger return in 2013.

In conclusion, clearly the fourth quarter with annualized operating ROE of 8%, we still have work to do to meet our long-term financial goals. But, with the acquisition of Chaucer, the maturing of our national footprint, and the ever-improving composition of our product portfolio, 2011 was a very important year on our journey to build a top-quartile insurance company that returns 11% to 13% ROE through the cycle. Given our strong position with agents and brokers, the growth we have achieved in recent years, as well as the additions we've made to our team, our products, and our business portfolios, including access to the platform; we are now in the position to fully capitalize on the changing market environment and achieve our financial goals through a focus on the financial leverage we discussed. And, we are optimistic that we will take a very strong step forward in 2012.

Thank you, Fred. Good morning, everyone.

I'm very pleased with our fourth quarter results, which reflect our strong and diversified earnings power, the strength of our franchise, and how well we are positioned for the future. Equally important, as Fred mentioned, our results demonstrate progress on the key profitability leverage we discussed at our Investor Day last November. Our fourth quarter segment income was $45.2 million or $1 per diluted share, compared to segment income of $43.7 million or $0.95 per diluted share in the prior year quarter. For the year, segment income was $14.6 million or $0.32 per diluted share, compared to $122.2 million or $2.64 per diluted share in 2010. As you know, 2011 was marked by the frequency and severity of weather losses that affected the industry and us.

In the fourth quarter, we saw fewer catastrophes compared to the first three quarters of 2011, although we still experienced two sizable CAT events this quarter. The October snow storms in the northeast of the United States and the flooding in Thailand. Our fourth quarter catastrophe losses were $55.6 million or 5 points on the combined ratio, compared to $16.8 million in the prior year quarter or 2 points on the combined ratio. Offsetting the impact of catastrophe losses this quarter was improvement in our overall accident year loss ratio, due to a better mix of business in our domestic P&C operations and inclusion of Chaucer, which we acquired in mid-2011. We also saw continued improvement in our expense ratio. I will touch on these in more detail in a moment.

For the year, catastrophe losses totaled $362 million, compared to $160 million in 2010. Despite the record level of catastrophe losses this year, an addition to more than 4 points to our full-year combined ratio over the prior year, we were still able to produce positive results for the year. We also benefited in the fourth quarter from a lower effective tax rate as compared to the fourth quarter of 2010. There were two reasons for the favorable tax rate this quarter. First, the lower overall earnings for the year, given the above mentioned CAT losses, drove our quarterly tax rate down as we the chewed up the full year effective tax accrual. Secondly, given the mix of earnings, a portion of our international profit, which is taxed at a more favorable rate, provided a greater benefit to the effective tax rate. In more normal circumstances, we expect our effective tax rate on segment income to be in the 34% range.

Fred has already provided commentary about our top-line growth and pricing environment, so I will focus on our segment results for the quarter. Starting with Commercial Lines, our combined ratio was 97% in the quarter, compared to 99% in fourth quarter of 2010. The 2 points of improvement was primarily driven by an improved expense ratio due to the benefit of higher earned premium and continued progress on our operating model. The current accident year loss ratio, excluding catastrophe losses and prior-year favorable reserve development, was fundamentally flat as compared to the prior year quarter, as we experienced more favorable severity trends in C&P and Workers Compensation Lines, which were offset by higher frequency in commercial auto and a higher incidence of large losses in other Commercial Lines. We are continuing to improve our underlying loss ratios in Commercial Lines given improved pricing and a continued shift to a more profitable mix, including specialty business.

In Personal Lines, the combined ratio was 100% in the quarter, compared to 96% in the fourth quarter of 2010. Breaking down the movement in the combined ratio of this quarter compared to the prior year quarter, we had a 2 point higher impact from catastrophe losses this quarter, primarily associated with the October snowstorms in the US, as well as prior year reserve releases, which impacted the comparison by roughly another 2 points.

Fourth quarter accident year loss ratios in personal auto and homeowners increased, driven by the development of weather impacts from earlier quarters, primarily in property, in homeowners, and physical damage in auto. This was somewhat offset by favorable loss experience in umbrella and other Personal Line coverages. Finally, we experienced a 1 point improvement in the expense ratio, due to lower contingent commissions. If you look at this on a full-year basis, the accident year loss ratio in personal auto improved 1 point over, 2010 while the homeowners ratio increased 4 points. The entire margin decline in homeowners is directly attributable to the higher non-CAT weather losses. The Personal Lines expense ratio for the full year 2011 was 27.1%, compared to 27.8% in 2010.

Moving on to Chaucer. This segment delivered a second profitable quarter as part of our organization, generating $12 million of segment income before taxes. The combined ratio of 100% was impacted by $36 million of catastrophe losses, or approximately 14 points. The flooding in Thailand accounted for $38 million of catastrophe losses this quarter. We also experienced net favorable adjustments from prior catastrophe losses, which overall resulted in a positive impact of $2 million this quarter. Prior year favorable reserve development improved the Chaucer combined ratio by 7 points this quarter, a comparable level to last order. The favorable development came mostly from recent accident years related to non-catastrophe property, UK motor and marine business. Chaucer's expense ratio for the fourth quarter was 33%, somewhat lower than a normal run rate of about 37%. The variance here is mostly explained by a couple of items.

First, the timing of certain expenses between the third and fourth quarters resulted in a 2 point improvement. As we previously mentioned, we expect the integration process and timing of certain expenses could cause some modest variability quarter-to-quarter. Secondly, there will be some impact from foreign currency movements in this line, which will be mostly offset by movements in other income statement items such as incurred losses. In this quarter, we saw a positive 1 point impact, compared to our run rate expectations. As Fred mentioned, the outlook for Chaucer's business is very positive, with rates now increasing for both the North American and international property exposed risks in response to heavy 2011 losses. The forecast for the property division is encouraging. In fact, pricing levels are rising in most of Chaucer's businesses, which will be helpful to growth going forward. That said, we are taking the opportunity of market improvement to re-balance our portfolio and manage our risk profile. While this would provide for less volatility and more sustainable earnings, it will result in only modest growth in 2012.

We continue to be pleased with the disciplined underwriting and more favorable market trends evident in the Chaucer segment, especially in an overall challenging underwriting environment. Finally, the bulk of our integration activities is nearly complete. Chaucer's risk governance, evaluation, and monitoring structure is now integrated with our corporate ERM program. Shared services have been successfully aligned to achieve expected synergies amongst business areas including IT, finance, and sourcing, among others. So, we are beginning 2012 business as usual.

Moving on to a discussion of our investment portfolio. At December 31, 2011 we held over $7.5 billion in cash and invested assets. Fixed income securities represented 83% of our total cash and invested assets. Roughly 94% of our fixed income securities are investment-grade, and the average duration in our portfolio is 3.9 years. The remaining parts of the portfolio are cash of approximately 11%, which we are carefully deploying into the investment portfolio to improve returns, and 6% of other assets, including an allocation of 3% to equity security. As we mentioned last quarter, we have negligible exposure to European sovereign debt. Our exposure to European banks, excluding the UK, is only $124 million, or 1.6% of our total portfolio, while exposure to corporate credit in non-bank sectors is 3.9% of the portfolio. These securities are high-quality and diversified by issuer, sector, and country.

Net investment income was $69 million for the fourth quarter, up nearly 10% compared to the $63 million earned in the fourth quarter of 2010. This increase was driven primarily by the increase in cash and invested assets associated with the acquisition of Chaucer. For the fourth quarter, the overall earned yield on our fixed maturity portfolio was 4.48%. The Hanover's fixed maturities yielded 5.28%, and the Chaucer assets delivered 2.19%. The fixed income earned yield for the full year 2011 was 4.84% compared to 5.46% for 2010. The majority of the declining yields reflects the addition of Chaucer's shorter duration portfolio at mid-year, and to a lesser extent, lower new-money yields on reinvested assets.

To mitigate historically low new-money yields, our current strategy for the portfolio is to continue to emphasize corporate debt and other credit spread sectors while maintaining a high-quality, well-lettered portfolio. We also invested approximately $45 million in stable large-cap equities with attractive dividend yields during the fourth quarter and an additional $55 million in January of this year. Our balance sheet remains strong, providing excellent financial flexibility. We ended the quarter with over $2.5 billion in shareholder's equity, our book value per share at December 31, 2011 was $56.24, up almost 3% from $54.74 at December 31, 2010.

During the quarter, we repurchased 51,000 shares of common stock. We also increase our quarterly dividend by 9% to $0.30 per share. In 2011, we repurchased 625,000 shares of common stock for $22 million, and we have $135 million remaining in our share repurchase program. Whether through share repurchases or debt management, we've been disciplined about identifying and acting on capital management opportunities, and we will continue to be diligent going forward. Our debt-to-capital ratio was 26.6% at year-end, which continues to be well within rating agency thresholds for our current ratings. Holding company cash and investments were $207 million at December 31, which is moderately above our target level. We also have in place a $200 million credit facility that provides additional flexibility to meet liquidity and capital needs.

I'd just like to give a few comments on our reinsurance program. On January 1, we renewed our main US property catastrophe treaty, with modest changes to the overall structure, and a cost we found to be reasonable. The majority of our reinsurance treaties at Chaucer also renewed on January 1. Our 2012 reinsurance program was placed according to plan with the pricing coming close to our budget.

Before we open the lines for questions, I'd like to mention a couple of items related to our 2012 guidance that we provided at our last quarterly call and Investor Day meeting in November. Our business trends and the market dynamics we've seen this past quarter provide additional confidence in our 2012 earnings guidance of $3.85 to $4.15 segment income per share. I'd like to comment on a few assumptions that support our outlook. We believe the combination of great increases, strong momentum in our newer states, and continued exposure-thinning actions in Personal Lines will result in relatively flat growth in 2012, with some notable downward pressure in the second and third quarters. Although we were encouraged top-line Commercial Lines growth of 12% in the fourth quarter, we are still maintaining our outlook of overall mid single-digit growth in 2012, as we remain diligent in our underwriting and achieve the right balance between rate and retention. We assume a full-year interest expense on debt to be approximately $63 million. That said, a portion of our debt has variable rates; therefore, some fluctuations of our interest expense are possible. Finally, we assume weighted average shares outstanding for the year to be approximately 45.5 million shares.

Mike, I think we are now ready to open the call for questions.

Yes, sir. We will now begin the question-and-answer session. (Operator Instructions) At this time, we will pause momentarily to assemble our roster. (Operator Instructions) Ray Iardella, Macquarie

I guess the first question relating to catastrophe losses in Chaucer and some re-estimation downward of losses in the first three quarters. How comfortable are you guys with that estimate, and maybe another good time to revisit Chaucer's reserving philosophy and how that might have differed from yours?

Again, given the mix of business, and I'll ask Bob to comment on this and the type of business they have in the [access] world. Their philosophy -- and we talked about it at the close, I talked about it a little bit at the Investor Day, they have been very conservative -- they always are very conservative, the way they make their initial estimates. So, what you see historically is they don't have the kind of creep that you get from some of the other folks that you saw, particularly this year.

What we have seen this year, as you see, is not -- we are counter to the industry a little bit. We haven't had creep; we've had the net, we had a little bit the opposite. But, it is really a philosophy that they've consistently had. It's typical with what we try to do as well. We try to take a little bit longer to come up with our estimates, and then be as thoughtful as we can, versus getting out very quickly with the first indications. So, Bob, I don't know if there is anything else you want to --?

Just commenting on the Thai loss, in particular, it's a difficult loss to assess. But, we have taken and feel secure about that. As you said, our past experience at releasing and being prudent on reserves demonstrates that approach.

We are actually quite comfortable about where we are, and what we've done in the past. I think it helps us.

Okay; that's helpful. Does the Thailand loss estimate assume any industry loss, or is that ground up, or based on a number of different factors?

A number of factors. We've gone through the portfolio, looked at where we've got exposure, broken that down by sector and put a number on it. There is a wide range out in the marketplace. I would say that we are being realistic about we think the outcome of that loss is. Having said that, it's a very complicated loss to put a number on. We have still yet to receive many of the notifications of losses, so this is just us doing a portfolio assessment.

Okay. That's helpful. Then, Fred, you had mentioned a big part of the thesis with Hanover is the changing mix of business and how that's going to drive improvement in the accidental loss ratio. I'm just curious why workers compensation within Commercial Lines has stayed pretty consistent as an overall percentage of the business. Is that audit premiums, is it rate, is it a combination? Where would you think that is going forward?

I will let Maria answer some of it. Let me just go back on our comp because we've actually -- our comp results have improved when others are going the opposite way. Historically, when we first started the journey, we were a (inaudible) company, and we had some high hazards, some contracts. We took our percent of comp, as a percentage of our business, we were the lowest in the top 20 companies because our philosophy was that that is a line, particularly in middle-market and mono-line comp, is a dangerous line, and was dangerous over the last four or five years.

We have focused our attention on -- building our competency, which we did; and focusing on small comp, which we like quite well; and rounding out our small account business and really having a much more attractive portfolio of comp. So, we feel very good about it. We feel very good where we are. We are now growing a little bit in it, but it's, frankly, as much in price and exposure as it is -- there isn't that much, there's some in units, but it's as much about exposure and price as units. I don't know, Marita, if it is something else that we should make sure we comment on.

No, Fred, I think you said that extremely well. Although the percentage has remained about the same, there is a fair amount of mix movement under that. In the quarter, with growth that you saw in the quarter, all of that growth is coming from small commercial, and it's coming from the risk grade and the size that we are very comfortable with. Although the overall percentages stayed the same, there's been a fair amount of mix to the mix that we feel much better about.

Okay, thanks. I'll re-queue.

Dan Farrell, Sterne Agee.

You're still carrying a fair amount of cash on the balance sheet. I'm just wondering if you could talk about how much of that, given that we're still seem to be in a prolonged low-rate environment, how much of that you would be considering deploying into other investments, the sort of pace of deployment into other fixed income securities? Also, if you could just talk about the difference between your current yields and new money yields?

Sure. Just in terms of the cash balance, and we have said this now for the last quarter and at the Investor Day, we are going to deploy more of the cash into the fixed income portfolio. We are about 11% at this point in time. We are certainly going to take that down, I would expect, during the course of the first quarter. We are also being very careful about doing it. Obviously, the rates are moving around a fair amount, particularly the underlying Treasury rates. So, we are being thoughtful about when we deploy it and how we deploy it.

As I mentioned in the script, we are also looking to put beyond just the fixed income investments, we are putting some money away into equity securities, which will help from a diversifying standpoint. In terms of the new money yields and our overall rate, we've talked about the fact that rates are going to come down and new money is being invested at lower rates given market conditions. But, if you think about our overall portfolio and the asset position we have, The Hanover, traditionally, has had a very high rate and a longer duration. We added the Chaucer assets at a shorter duration, and as we extend the Chaucer asset duration to be more comparable to Hanover, you will see somewhat of an offsetting impact there. But we still project, if you will, that new money rates will come down. We are currently at around 3% on the blended basis overall.

Thank you. Could you just go into a little more detail about your strategies to manage the catastrophe risk on the Personal Lines side? You've talked about some of the premium impact that's going to have in the second and third quarter, but all the leverage rate, how you are managing geographic exposure, policy design, and things like that?

Good question. As you know, we were -- our biggest Achilles heel as a company, and when I first got here in '03, '04, was our geographic concentration. Now, we've gone through a decade of calm weather, but the reality is that we were a very concentrated and very property-centric company. We have worked really hard in the last five years to both spread that risk appropriately, but also to get adequate price for property but to diversify into a more balanced portfolio. If you look at property specifically, we've done a number of transactions where we have actually sold books of business in areas that we were uncomfortable with from a cat exposure point of view. We did it if Florida. We did it in Louisiana. We did it in Rhode Island. We've done a number of times.

So, one category we always look for, is we look at geographies that we think are overly concentrated, and the way I talk about it is that our marginal cost of capacity, particularly in cat areas, is higher than everybody else's. So, your ability to get that rate, and get that 12%, 13% return is reduced because other people you are competing with have a different cost of capital. And, we constantly do that. What happened with [our mass] and, I think, some of this volatility, what we said at the Investor Day is that I believe that we've done a lot of good things and I really like where we are. But what I see, if it's true in what's happening with the volatility, we took our cat estimates up, but it also changes our perspective. So, you will see additional thinning in areas and in, particularly, in micro-geographies where we believe that we need to -- we can't get to the returns we want. That's what we are talking about.

I mentioned about $150 million of underwriting business in both Personal and Commercial. Now, that is both cat-oriented and also just, in my view, some places where the volatility is a little bit greater. So, it's a little bit less than that. So, one lever is this, what I call, re-underwriting, [shinking], thinning; and I feel very good about it. We do it; we continually do it. We'll do a little bit more here. I call it -- it's going to be surgical, but it's going to be real.

The second thing is pricing. We have been very aggressive and very thoughtful about pricing. Again, where we are now, and what I like about it, is the vast majority -- Marita showed you the statistics over the last few quarters, the percentage of our business that's with partners and it is full account is huge. So, our ability to get rate and retain retention and pick the stuff we want is the best it's ever been. We have been able to get this 6%, 7% rate increase. We feel really good at where we are. What I believe is that we are going to continue to see the improvement. Now, it's masked a little bit, in my view, because of this non-cat weather that we have experienced in the last two or three years, and what we need to do is continue to get rate to overcome that. But, I think the combination of those two things are really important.

Now, there's a third point that you've heard others talk about, that we did a lot of and we are doing more of, which is actually changing limits, deductible, features within the products. Because of the non-cat and the cat weather and the volatility, the market is receiving much better than it ever has, limits. So, you're seeing things like homeowners and roofs; there's all kinds of features. We are aggressively implementing that in every place that it makes sense, which again, essentially gets your pricing more aligned with the risk, if you believe that the volatility is up.

So I feel actually very good about it. I'm actually not worried about our property portfolio because of all the work we've done. We have a nice geographic mix now. We have a nice quality of business now. The retention balance and price increasing has been very good. Personal Lines, by the way, has been ahead of Commercial, as you know, a little bit.

Again, this was a tough year for us, as it was for other people, and it was a broad-based tough year. But, remember for us, this was particularly tough year because we had three major events in New England/Massachusetts. We had a snowstorm. We had a tornado that we haven't had since the '50s, and we had Irene. So, we are pricing for this; we think it's broad-based. We think it's a real issue, but we also think this year was a little bit extraordinary in a lot of cases. We feel very good about where we are in product portfolio. But, we've got to get through this year to get the rate we need to get where we want to be. Marita, is there anything else?

No, I think you said it well. I think we have excellent property DNA as a company. I think we have very good tools to analyze all the things that you talked about. And, whether it's the appropriate rate, whether it's the restructure of terms and conditions, if we can't get the rate and we can't restructure, there are limited places where we will need to exit. I think we have the tools necessary to manage those components well.

That was helpful detail, thank you.

Larry Greenberg, Langen McAlenney.

Can you just remind us what kind of cat load is embedded in the 2012 guidance?

Sure, I think at the Investor Day I actually said a number, so I will say a number. We said roughly -- we took it up quite a bit on both. For Chaucer, I took it up and for us, and in total it's $225 million. I think it's $150 million domestically and the rest being at Chaucer. Both of which are significant up-ticks because I think it's over 0.5 point -- almost 1 point, domestically. But remember, our mix is much more casualty than it was before, too. So, it's a meaningful take-up.

Again, the reason I did it, is I just -- I look at the last two or three years and -- one of you guys did a really nice piece on median and mean. Obviously, it's a ballpark median and mean, but I think it's prudent given what we saw in the last couple three years. Again, we haven't sat on our hands on that. We've worked hard in the Northeast for thinning, and we try to do a good job managing our exposures as well. But, I thought it was just a prudent thing to do.

The other thing is like the quarter-to-quarter perspective. With Chaucer, it is a little bit more evenly spread than it would have been just for us, those numbers. Obviously, the third quarter tends to be a little higher. Because we're a Northeast kind of company, the first quarter kind of goes back and forth based on drive-time storms. Again, it's a little bit more balanced than it has been historically, as you think about it quarter-to-quarter as well. Because of -- so we took it up, and we kind of balanced it a little bit as well, in our minds.

Great, thank you very much.

Cliff Gallant, KBW.

Good quarter. Just a couple clarity questions from David. The mid-single-digit growth, that is excluding Chaucer, I assume.

Yes. That's when Chaucer normalizes.

Then, Dave, when you were talking about -- I think you mentioned severity trends being favorable [in addition to] workers comp. Was that a one-off thing in the quarter, or was that more of a trend that you are seeing?

This is Marita. One of the things you have to keep in mind when you are comparing year-over-year in the comp results is -- we have a favorable comparison this year because of the shock loss we had last year from Connecticut distributors that we disclosed. So, there really are no underlying severity trends that we are seeing either on a quarter-over-quarter basis or year-over-year in the comp line.

Okay. Fred, in the past you have talked a bit about the marketplace and how it's evolving in regards to larger competitors versus small. I'm curious as you grow and take share, where do you see it coming?

That's a great question. What is fascinating right now, obviously, between the model changes and the volatility, clearly the small companies are under a tremendous amount of pressure. I mean, there's a big percentage of them that have to grow to protect -- have the strength to protect their surplus.

So, what you are seeing from them is a lot of across-the-board actions because they are not as sophisticated on how to do it, or just basically withdrawing from agents, et cetera. So, there is some places where we are -- I don't want to say cherry picking -- but we are taking the better business from those actions because of the way they are having to act and do what they need to do. But in addition, again, because of our portfolio and the attractiveness of our business model, our view is that we have a very unique -- I will give you an example, small commercial.

Our small Commercial operating model value proposition with our franchise agents is very attractive under 50,000 because we have now distributed local underwriters on top of our automation and our point of sale. So, if anybody does across-the-board pricing or they re-underwrite in a broad-based way, our ability to cherry pick, or get good house accounts, and get preferred shelf space is real. I tell people, in the turn, yes, it is a lot about pricing; but it's just a much about re-underwriting because what ends up happening is people have to shrink to protect capital, or they look at some things and exposures and they basically can't take the risk. That's why the E&S market takes off because a lot of these smaller companies don't know they have certain types of risks until they have a problem.

What we are seeing right now is our ability to take business from a lot of people, as people have chosen to make us a more preferred partner and give us chunks of business. So, most of our growth right now is coming in chunks as people are shifting share. On the specialty side, again, just like you've seen some of the commentary of people talk about how the E&S market is coming, we have also seen in the industry solutions and in the specialty areas that as these companies get burned or they have stress, these exposures that they are covering that they don't know they are covering -- I'll give you an example, our Hanover Industrial, which is our HPR business. A lot of that business is with regional companies that either don't know they have that kind of volatile exposure, or they don't price for it. So, we are seeing a lot of that business now being more appropriately repriced and the coverage being recognized. So, there's opportunities there, as well.

In my view, we are going through a classic turn where people are re-underwriting. The difference between this turn, and it's not dramatic and I guess a lot of people would say it's gradual, but it is a combination of balance sheet driven because of the yields and because of all of the pressure they have on comp and on weather. I don't think, besides weather, that those other two features have been fully capitalized on or realized. So, what we see is a momentum in rate increases and a momentum in disruption that we think is going to get worse before it gets better. We think there is going to be more opportunity in the coming months, not less. Again, for me, I feel like we are going to get really good business from the right agents from a lot of sources. Again, we just have to be patient; we have to be conservative, and we've got to make sure that we are enhancing our margins along the way.

Thank you very much.

Meyer Shields, Stifel Nicolaus.

One big picture question and one detail question, if I can. Let me start with the smaller question. Can you quantify the change in reserve releases at Chaucer on a year-over-year basis?

Well, as I said in my comments, we had about a 7 point benefit to the combined ratio for their releases. That was consistent with where we were -- where we had in the third quarter, as well. I think maybe to try to put it in perspective for you, on a longer-term basis, as I look at their history, roughly 7% is below their average annual release level.

Yes, that's right. It's not --

Slightly lower.

Okay. Fred, you talked recently about the changing environment for small, I'm going to assume, Mid-Western insurers that have been under significant weather pressure. Is there any uptick in companies looking to be acquired, relating to that?

Yes, again, what you're seeing is in mutuals, in particular, there's a significant trend of mutuals talking to each other and getting together. Obviously, the big -- Harleysville is the obvious one that you guys think about. If you look underneath it, the amount of discussions among small mutuals, and actually, the merging among mutuals is probably at the highest I've ever seen. It's quieter, it doesn't get as noticed, but it's real.

What it does is, obviously, when you take two stressed companies together and you put them together, that often doesn't make a great company. So, there is a lot of turmoil that comes from that. There's a lot of disruption that comes from that. But it is a significant, in my view, it's a significant thing to think about.

Now, it takes longer because one of these things -- what's common among a lot of mutuals and smalls is that they are not rated by debt, they are rated by Best. So, it's quieter. You can't see it. You don't know what the private conversations were, whereas the debt rating agencies, everything is very much more visible. You can feel it, you can see it. The public companies, in particular, you can see it. It's hard to get underneath it, but there's no question what we are seeing is more of those conversations, and we know it because of the personnel that we hire and people interviewing with us because of the ramifications of that. And we can also see it in the blanks.

In my view, that is a real trend; and I think the more important trend, even, is share shift. I talk about this a lot. If you go back over the last 40 or 50 years in our industry, what you typically see, one of the biggest trends you see during a cycle like this is share shifts from the weaker people to the stronger people. So in the next two or three years, there will be share shift to the folks that have the flexibility, and the capital, and the capabilities; it just always happens.

What is unique about this one, in my view, is that typically a lot of the small regional companies sit out this kind of share shift because they don't -- the returns variability effects them a little bit, not a lot. The difference on this one is this comp combined strain, I believe, that is created by their cost of capital going up because of the reinsurance costs that they are faced with because of the volatility we are seeing and the cost of capital issues that come from yields being so low. And, their availability of capital is as low as it's ever been. The access to surplus notes and all that stuff that we had for the last couple decades that was quite easy to get at, is not as easy. Again, my view is we are going through a very interesting period. Again, because we focus -- our business is mostly mid-to small, we tend to live in it more than some of the big guys that don't talk about it as much. But, it is prevalent among a lot of our players.

The other thing you are seeing, which we talked about a little bit at Investor Day, is also the consolidation of agents, which also has an implication. You are seeing, again, the volume of the better agents consolidating other agents has increased. Why is that important? Well, they also want fewer, stronger carriers as partners. The bigger they get, the more sophisticated they get, which lends themselves to the bigger guys having preferred shelf space because, again, the bigger, more sophisticated agents that want value and want fewer markets, is also a trend that we believe will continue for some period of time. Both of those helps us if we stay focused; those trends help us.

Okay. I think that makes perfect sense. I'm just wondering, when you shift gears and look at the Personal Lines side then, are you big enough now to be considered one of the big guys?

Yes, I believe so. You've heard me talk about this. There is a whole value-added segment in Personal Lines that people don't really quite understand. That's 65% of the business that have a lot more of an account focus, the umbrella matters, and a lot of the direct guys don't get access to it. A lot of that good business is in the captive control, right? The problem with all this volatility, again, is you need spread of risk. So, what you're seeing is some share shift from the captives to the independent agency channel around this account orientation. The other good thing that has occurred in the last three or four years is the pricing levels for property in the Midwest has gone way up. Why? Because the regional companies haven't suppressed it. They can't suppress it because of their issues.

So, we look at our geographic spread; you've seen what we've done. We've worked from the four states that were a lot of our business to-- we have a nice portfolio of 20 states. We believe that both our scale locally and our scale generally is very, very competitive. There is very few people bigger than us in the independent agency channel right now; there's a handful. Again, we would argue that our momentum is good. Now, what masks our information is that we -- as Marita has said every quarter -- we have a lot of concentration in three or four states. We manage that, as we talked about in earlier questions, slowly down. In total, I feel very good about our ability to maintain good margins in Personal Lines.

I would argue that as the consolidation occurs with the more sophisticated agents and brokers, they need a lead player that is more geographically spread that adds value. So, the Wells of the world and some of these other companies that we match up well with lends us as being a lead player for them as they get more consolidated as they build their businesses well. So, I feel good about it. Again, it is what it is as far as it's been part of our history, but I like the business right now quite well to get to the returns we need to.

Okay. Thank you very much.

Christine Worley, JMP Securities.

I noticed that your accident year ex-cat loss ratio in the Multi-peril Line came down significantly in the fourth quarter from the nine month run rate. I know you said you are seeing some favorable trends in the C&P books. I'm just wondering if this is more of a go-forward number, or sort of a just true-up for the year.

Yes. On a quarter-over-quarter basis, it's hard to draw any trend conclusion from that. We feel good about the rate that we are getting. We feel good about the mix. I wouldn't overestimate any trend in a quarter. It is everything that Fred and David said in their script. We feel good about the rate; we feel good about the mix. We are confident in the type of business that we are writing.

One of the interesting things about that Line for us is some of that, or a lot of that, is in our niche businesses, too. And, what we've seen is really nice growth in our industry solutions where we have a little bit higher margins, in our view, and more retention. To Marita's point, we don't over -- we are very happy. We have been -- we have good rate levels, have had for a number of quarters, and we've got that mix toward the niches. It's just helping us in so many ways. And, again, I think it's going to continue.

And to your point, nice retention because of the type of business that it is.

Okay, great. Thank you.

Sarah DeWitt, Barclays Capital.

What are your assumptions in 2012 for the earnings contribution from Chaucer?

We didn't explicitly give a breakout of the earnings contributions by business. I talked about how I felt about Chaucer at the Investor Day, and I think you've seen two quarters that kind of range. You know, the first quarter we had them, the cats were a little light; the second quarter, the cats were a little heavy. But, I think that they are going to be a very good, consistent contributor to our returns.

Again, I think those -- you have some indications when you look at that and what we've got in for cat on what we see coming out of there. But, we haven't specifically identified every business, what the contribution is. We believe, by the way, that their target -- we believe that Chaucer is in the range of target returns today. We look forward -- we believe that with the market environment, their portfolio, we believe that Chaucer can return target returns for us based on our investment right out of the gate. So, that's another way to think about it.

Again, I can't emphasize -- we worked for two years to really make this happen. This is a fantastic, world-class team. It fits us well. The portfolio we are going forward with is very good. It helps us as a portfolio in a number of ways, and there's nothing -- you just think about, we just went through both in the negotiation for the close and the close, the worst year in history in international cats, and what it's proven to me is how darn good they are. To go through this kind of year and have this kind of certainty about our outlook, tells me that what we did was good and the advantages that it brings to us. Again, I'm very, very pleased with where we are.

Okay. And, should we expect any share buybacks in 2012?

Yes. Again, what we said, we guided on the share numbers. Right now, my view is we took a little -- we did a little opportunistic stuff in the third and fourth quarter because our stock price was so low. But our belief right now from, I think what I've said today, is what we see is real opportunity for us. We've got to be thoughtful, we've got to be targeted.

But, if we can continue to increase our rate increases -- because again, if you look at our retentions, what it tells me is we have more momentum in rate increases. We can do a little more, so we have really good momentum there. It's virtually in all our businesses. The mix is good. We are getting momentum, with underlying growth in pretty much -- in most of our businesses. So, what I want to do is a very thoughtful about capital right now and making sure that we are using our capital to places that have the kinds of returns that can get us to our target returns through the cycle. I believe right now it's prudent to maintain that capital and think about deploying it at the places where we have the greatest opportunity.

Again, we're always thinking about it and looking at it. If the market backed up, or if we felt that there wasn't opportunities, could we change our perspective because we do have some excess capital? Sure, absolutely. But, right now my view is that it's better deployed in a targeted way to watch this market, see where the opportunity is, and make sure we capture every opportunity we can to enhance our margins. And, that's where I'd use my capital right now.

Great, thanks for the answers.

Ray Iardella, Macquarie.

Fred, when you spoke about Personal Lines, and the importance it plays in a lot of the agencies that you guys partner with. How is the reaction from their point of view with you guys, maybe, thinning out some of your concentration risk? Is there any pushback from your agents?

That's a great question, Ray. This is the beauty of our strategy. When you go through a turn like this, the issue always is when you put price increase, are you losing the better business? What we do, which is a little bit different, is that because we have a partner-agent strategy, when we thin out, we eliminate agents. What we do is -- remember, where we have concentration is we have legacy agents from when we were just a personal-oriented (inaudible). We have a lot of agents that are not at the level of partnership. They're fine agents, but when we thin out, we essentially give our capacity to our partners. So, not only do we have a better chance of getting rate increases with partners because you have more with them in your line incentives, it is easier for us to thin because, literally, we will get rid of -- we will shed partners. Our partners will react positively to that because their franchise value is greater. And, regulatory-wise, it's the reason why, by the way, we've been able to do renewal rights in targeted pockets because what we do is we identify agents, dedicated business, and do a renewal rights deal, and find people to give us something for that business.

Again, one of my views is that it's harder to get started with fewer agents and better agents, but it's beautiful at the turn because the ability to get rate increases, the ability to grow, the ability to shed is so much easier when you're talking about a strategy like we have. Remember, where we have concentration issues that I worry about, we did have some legacy agents that they are fine, it's just that they don't have a lot of upside, they are not -- have the broad product portfolio that we now matchup with. So, we try to find them another market.

So I'm not worried at all about the surgical actions we have taken. In Commercial, most of the actions we have taken are very surgical. It's really the Personal Lines, to your point, where we have had more volume. And remember, the legacy agents tend to be 80% Personal -- it's our history. So, again, it's a little bit easier than others to do what we're trying to do without affecting the quality or nature of our business.

Thanks, that's very helpful.

This concludes our question-and-answer session. I would now like to turn the conference back over to Oksana Lukasheva for any closing remarks. Ms. Lukasheva?

I thank you all for your participation today. We are looking forward to speaking with you next quarter.

And, we thank you, ma'am and to the rest of Management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you.