Hanover Insurance Group Inc (THG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Hanover Insurance Group 2013 fourth-quarter earnings conference call. My name is Celia and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Oksana Lukasheva, AVP, Investor Relations. Please proceed.

Thank you, Celia. Good morning, and thank you for joining us for our fourth-quarter conference call. We will begin today's call with prepared remarks from Fred Eppinger, our President and Chief Executive Officer; and David Greenfield, our Executive Vice President and CFO. Available to answer your questions after our prepared remarks are Jack Roche, President of Business Insurance; Andrew Robinson, President of Specialist Lines; Mark Desrochers, President of personal 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, financial supplement, and a complete slide presentation for today's call are available in the Investor section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session.

Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements, including our earnings guidance for 2014. There are certain factors that could cause actual results to differ materially from those anticipated by the press release, slide presentation, and conference call.

We caution you with respect to reliance on forward-looking statements, and in this respect, refer you to the forward-looking statement 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 operating income; operating income per share; operating results, excluding the impact of catastrophes and development; accident share loss; and combined 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 financial supplement, which are posted on our website as I mentioned earlier.

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

Good morning, everyone, and thank you for joining our fourth-quarter earnings call. I'm very pleased with our strong performance in the quarter and for the year. Our net income per share of $5.59 was the strongest bottom-line results we have delivered since becoming a public company in 1995.

Operating income per share was $5.06 in 2013, [delivering] an operating ROE of 2%. Results for the fourth quarter were also solid, with an operating income of $1.33 and an ROE of 10%.

The underlying earnings momentum in our organization is evident. Our ex-cat earnings before taxes were $533 million, which is 20% higher than 2012, and the highest results we've produced so far. Equally as important, we delivered our expectation of a 94% ex-cat combined ratio for 2013, an improvement of more than 2 points over 2012.

Our financial progress for the year was strong, but we are equally pleased with the progress we made on our strategic priorities that position us for further margin expansion in 2014. We enter 2014 with momentum in the market with our partners and solid pricing trends, and a strong, well-diversified and improving portfolio.

I will now turn the call over to David to review our financials, but I will come back to discuss our outlook and thoughts on the current market.

David?

Thank you, Fred, and good morning everyone. The fourth quarter results were excellent, and cap a record year for us. Net income in the fourth quarter was $70 million or $1.57 per diluted share, compared to a net loss of $55 million or $1.24 per diluted share in the prior-year quarter. Operating income was $60 million in the quarter or $1.33 per diluted share, compared to an operating loss of $73 million or $1.65 per diluted share in the fourth quarter of last year. The fourth quarter of 2012 was marked by losses from Sandy, which totaled $129 million after taxes.

Because Sandy losses and certain other underwriting items impacted the fourth quarter of 2012 results, direct quarter-over-quarter comparisons are less meaningful. For that reason, I'll put the current quarter and full-year results in context by comparison to our full-year 2012 performance, and will reference fourth quarter of 2012 where appropriate.

Our 2013 combined ratio of 96.7% compared to 104.4% in 2012. The lower level of catastrophe losses in 2013 contributed more than 5 points to the improved underwriting results. The remaining 2 points of improvement are attributable to an increase in the ex-cat underwriting margin in our domestic business, while Chaucer continued to deliver very strong results in 2013, in line with the prior year.

In our domestic business, the accident year loss ratio, excluding catastrophe losses, improved from 64% to 62%. We also reported an improvement in unfavorable prior-year loss reserve development, which was 0.5 point for the year compared to 1.7 points in 2012. These items drove a meaningful increase in our ex-cat underwriting loss margin of over $100 million compared to 2012, with both personal and commercial lines contributing with this improvement.

In commercial lines, virtually all businesses noted improved accident year loss trends, which resulted in an overall loss ratio of 60% compared to 62% in 2012. Strong workers' compensation and commercial multi-peril results this year continue to benefit from our focus on smaller accounts, mix management initiatives, and rate increases.

In auto, we continue to take a more cautious view of loss trends, given our recent experience in the developing industry trends. Of note, our commercial auto loss ratio declined for the second consecutive quarter, indicating a moderation of recent trends. Given significant pricing increases in this line, we believe we'll see continued improvement in 2014.

Our accident year loss ratio in other commercial lines, which includes surety and other domestic specialty business, improved by approximately 2 points in 2013, driven by our previous and ongoing mix management and pricing actions. Additionally, as these businesses become more mature and gain organic growth momentum, we expect to see a compounding effect of better mix and [pricing] levels flowing to our margins in 2014.

In personal lines, we generated a 63% underlying loss ratio for the year, compared to nearly 66% in 2012. We continue to earn in strong pricing increases, while also taking actions to improve the overall quality mix of the business. The homeowners ex-cat margin improved by approximately 5 points this year compared to the full-year 2012, as a result of the active rate and mix management strategy. Only about 1 point or so of this margin improvement is attributable to more favorable non-catastrophe weather in the current year.

Our personal auto rate and profitability management strategy yielded a 3-point-lower accident year loss ratio for the quarter, and 1 point lower for the year. We continue to be diligent in how we approach rate and risk selection. Given our prior experience and the industry trends, in particular in BI severity, we continue to be cautious in our evaluation of this line.

Moving on to a discussion of expenses, our current-quarter expenses for both personal lines and commercial lines included a higher level of performance-based compensation and commissions, reflecting strong full-year results. The full-year personal lines ratio would've been flat excluding this increase in employee and agency payouts; while commercial lines would have yielded an improvement of 1 point, driven by growth leverage and operating model efficiencies. All-in, the 2013 expense ratio was up 0.5 point in personal lines, and about flat in commercial lines, compared to 2012.

We maintain a keen focus on expenses, and believe we can gain further expense leverage in our domestic businesses, in particular in commercial lines. This, however, will be partially offset by continued shift in business mix to commercial lines, which carries a higher expense load than personal lines.

Chaucer continued its 2013 trend of positive results, with a combined ratio of 90% for the quarter and for the year. The accident year combined ratio of 95% in the current quarter was higher in the prior-year quarter, due to lower-than-usual attritional and large losses last year. The results this quarter are in line with our longer-term expectation for this business.

Overall, 2013 was another strong year for Chaucer that included a lower level of catastrophe activity and increased favorable prior-year reserve development, partially driven by foreign exchange movements. However, we enter 2014 expecting results will return to more normal levels, with an overall combined ratio of around 95%. Chaucer's expense ratio was 38% for the year, in line with our expectations for this business.

Moving on to the top line, net written premium growth of about 2% in the quarter reflected premium growth in commercial lines of 8%; 1% growth in Chaucer; and a 6% decline in personal lines, as we continue to execute on our strategy of exposure management and profitability improvement actions. Chaucer growth this quarter was somewhat lower than expected, due to further premium reductions the in energy line from lower activities in the sector, as well as lower premium writings in other lines.

Overall, each of our business segments continue to perform well this quarter, and we are pleased with the improving underwriting trends. We will continue to maintain our focus on what we must do to sustain the combined ratio improvement momentum, and drive the organization to achieve our target returns.

Moving on to investment results, at December 31, 2013, cash and invested assets were $8.1 billion, with fixed income securities and cash representing 92% of the total. Roughly 94% of our fixed income securities are investment grade, and the average duration of the portfolio was 4.1 years. Our investment portfolio remains high-quality and well-laddered.

Net investment income this quarter was $68.1 million compared to $70.1 million in the prior-year quarter. Our full-year net investment income was $269 million, representing a decline of 3% over 2012. The negative impact of lower new money yields was partially offset by a higher level of assets invested in fixed income from positive operating cash flows, and redeployment of operating cash into the portfolio. The year-end yield on our fixed maturity portfolio was 3.86% in the quarter and 3.95% for the year, compared to 4.1% in the prior-year quarter and 4.26% for 2012.

While we continue to counterbalance the pressure from lower interest rates by opportunistically investing in higher-yielding classes, we estimate net investment income will decline by approximately 2% in 2014 before it returns to growth in 2015.

Before I update you on our balance sheet and capital, I would like to provide some information on our January reinsurance renewals. The overall market conditions provided us the opportunity during our 1/1 renewal cycle to strengthen our program and reduce volatility in a cost-efficient manner. For our catastrophe program, we extended the program to an 18-month period, as well as expanded our Northeast-only layers to cover countrywide risks, syncing up all of our renewal dates and geographic coverage. Additionally, for certain liability in per-risk treaties, we were able to adjust terms to better manage volatility without significantly impacting the overall pricing. Chaucer being a both a buyer and seller of reinsurance had a modest overall net benefit from this year's renewals.

I'll finish up with a few comments on the strength of our balance sheet and capital position. We ended the quarter with a total capital position of $3.5 billion. At December 31, book value per share was $59.43, up 2% in the quarter, and 1% since December 2012. Excluding net unrealized investment gains, the book value grew 8% in 2013, reflecting strong earnings throughout the year as well as the impact of capital management actions. For the full year, we repurchased approximately 1.6 million common shares for $78 million, or an average of $48.26 per share, which represents approximately 4% of our shares outstanding at year-end 2012.

We did not repurchased any stock in the fourth quarter; however, since year-end, we repurchased $5 million, given recent market fluctuations. We have $132 million remaining in our stock repurchase program. We will continually -- continue to actively and opportunistically manage our capital structure.

During the quarter, we also realized an opportunity to repurchased $34 million of senior debt, which carried a coupon of 7.5%. Our total outstanding debt was $904 million at year-end, translating to a 26% debt-to-capital ratio. We will continue to optimize our capital structure and its efficiency as opportunities arise.

Overall, we feel our capital is best deployed in support of our growing business needs and initiatives, as we capitalize on our opportunities and the dynamic marketplace we are operating in right now. We are entering 2014 with the strongest balance sheet in several years. Our reserving position is solidified, providing a stronger foundation for business growth opportunities.

And with that, I'll turn the call back to Fred.

Thanks, David. As we reflect on our progress, we believe we have taken a strong step forward as a company in 2013. Our fourth-quarter call last year, we emphasized that, taken together, our 2013 priorities were about leveraging a more distinctive and balanced portfolio to achieve higher and more consistent earnings and returns. Today, as we look back on the year, we are pleased with our progress, and believe we have built a solid foundation for 2014 and beyond.

Every major business in our franchise improved broadly. We achieved expanded margins each quarter throughout the year in virtually all segments, and we substantially improved our portfolio mix. Although we made significant financial progress in 2013, there is no doubt that further margin expansion is required and available to us. And we believe the actions we took in 2013, and are continuing to take into 2014, will help us capture it.

As a reminder, we have three major priorities for this year: first, continue to improve our portfolio mix in the property concentrations; second, increasing pricing in our domestic businesses; and, finally, to continue to realize the benefits of our Chaucer franchise.

I would like to briefly update you on the progress of these goals, and discuss why we are confident they will continue to improve into 2014. As far as our portfolio work is concerned, we continue to pursue targeted actions to reduce property concentration; in particular, in the Southeast, Northeast, and Midwest regions, to respond to more volatile weather patterns experienced recently, and to better balance our portfolio.

The magnitude of the work we have done over the past two years has been substantial. In aggregate, our various exposure management initiatives reduced domestic premiums by about $40 million, or 5% in the fourth quarter, and approximately $200 million or 6% for the full year 2013. These premium reductions come on top of approximately $120 million of policies we exited for strategic reasons in 2012.

As we look forward into 2014, we have some remaining work to do; roughly $80 million, primarily focused on personal lines property in the first six months of the year. After we complete this work, our remaining reductions will be quite modest.

In addition to the exposure management initiatives, we also continue to improve the quality and earnings potential of the portfolio we've built over the last several years. We continued to shift our mix to higher-margin segments and businesses, and continued to target surgical underwriting actions, reducing some of the lower-margin business. We believe the benefits of all our mix management initiatives are only starting to earn in, and we should see a positive impact on profitability and earnings resiliency in 2014 and further into the future.

We believe that these actions -- when these actions run their course, our momentum in the marketplace, driven by our breadth and distinctiveness of products, our local delivery, and alignment with agents, will translate into above-industry growth rates. Our franchise value with our partner agents is excellent as we enter 2014 and will create a significant number of opportunities.

We see confirmation of our underlying growth momentum in the numbers. Excluding the target underwriting actions, we grew our domestic business by 7% in the fourth quarter and the full year. Additionally, retentions remains strong, at 80% personal lines and 85% in core commercial, when adjusted for our mix management initiatives.

Finally, new business premium is showing positive momentum, growing at an accelerated pace for the third consecutive quarter, in particular in core commercial. In personal lines, as expected, growth was impacted more significantly by our exposure management actions in 2013, resulting in a premium decline of 3% for the year. However, we achieved the portfolio improvement we set out in terms of geographic exposure, quality of mix, and a continued shift to the account business. Given our stable voluntary retention metrics and new business dynamics, we are confident that this line will return to growth starting in the middle of 2014.

As you know, we rolled out the new value-added account-focused product, Platinum, in eight states. Our agents are very enthusiastic about this new value-added offering, which helps us drive account business growth.

The second area we remain intently focused on is improving pricing across our domestic business. We continue to be focused on the rate dynamics of our business. Overall, the impact of pricing remained positive in the quarter across all domestic businesses. In core commercial lines, pricing increases were in line with recent periods, at 9%, while retention ticked up favorably by 1.5 points to 84%. The rate increases continue to be broad-based, but led by middle-market commercial auto and workers' comp. We believe our relatively small-sized policy book and our focus on selling value has good momentum, and we have not seen any significant rate deceleration or any meaningful shift in market trends.

In our specialty businesses, pricing remained strong in high-single-digits in the quarter, and we are confident we will continue to see meaningful rate going forward. In personal lines, we are beginning to clearly see the cumulative benefit of past pricing actions on loss ratio trends. Our rates have moderated to 8%, from a high mark of 10% last quarter, and in line with our expectations as we stated in the third-quarter call.

Turning now to Chaucer -- this year, we delivered pretax operating income of $150 million and premium growth of 13%, which is primarily from the nonrenewal of the Flagstone quota share. We have built on a very strong franchise, and continue to enhance the breadth of our specialty capabilities. Specifically in 2013, we added some additional capabilities around our casualty treaty team and in our marine and property line.

We feel good about the distinctiveness of our position at Lloyd's. And our broad-based portfolio is enabling us to manage our response to a somewhat challenging market conditions very effectively. We continue to focus our efforts on areas of the business where we have strong underwriting capabilities and known leadership positions, including specialist areas within marine, where we are still seeing attractive opportunities; and casualty, which is beginning to benefit from the strong rate increases in the US.

Overall, we are pleased with Chaucer's strong performance and the opportunities we are capturing together. Given the current market environment, we expect more limited growth in 2014 and returns more in line with historical levels.

In conclusion, 2013 was a very successful year for our Company, as we made substantial progress on all our strategic priorities and delivered on our financial commitments. We recognize we still have work to do to deliver target returns; however, the progress is obvious and ongoing. We put a great deal of effort into properly balancing our portfolio, and believe that work is substantially behind us.

Today, we have the products and operating models to help our agents and partners grow profitably and win. And we have the capital strength and infrastructure to support above-average industry growth. More importantly, we have the talent and the commitment of our people delivering for our agent partners and their customers, thereby enabling us to grow shareholder value. As a result, we are in the strongest position we have ever been in, and are poised to deliver increasingly improved returns in 2014.

Before we open the line for questions, I would like to provide some financial information relating to our 2014 outlook. Our operating earnings expectations for 2014 is in the range of $4.80 to $5.20 per share. As a basis of this outlook, we anticipate written premium growth in the mid-single-digits; a decrease in the net investment income of approximately 2% compared to 2013; and an overall combined ratio between 96% and 97%. This includes catastrophe losses of approximately 5% of earned premium.

Our preliminary estimate for January losses from two declared cat debts is approximately $30 million to $35 million. These losses reflect severe winter weather and unusually low temperatures over a wide geographic area. With two months still remaining in the quarter, it is likely our first-quarter catastrophe loss ratio will be higher than recent years. However, we see no reason to change our overall catastrophe loss assumptions for the year at this time.

In closing, I would like to iterate how good we feel about our current strategic position and our prospects for 2014. We look forward to continuing to execute on our strategy to position ourselves as a top quartile competitor.

Operator, could you please open the lines for questions? Thank you.

(Operator Instructions). Vincent DeAugustino, KBW.

Fred, the conversation around some of the portfolio mix changes, and then the exposure management actions was really helpful. And just to frame that, both looking forward and looking kind of backwards, if I'm looking at the 4Q 2013 year-over-year domestic personal and commercial lines core loss ratio improvement, I was hoping that you guys might be able to call out how much of that improvement, roughly, would have come from some of those non-rate-oriented initiatives like some of the things you had run through?

Yes, I think it's a little bit tricky to identify exactly how much is rate versus non-rate, because one of the interesting things is that there was some good improvement from underwriting actions. But a lot of the stuff that we're getting off of, for concentration and volatility purposes, actually has a drag for a couple of quarters because of the marginal contribution that you get from that for -- to expenses.

So what I would tell you is that the mix improvement, to me, is something that's going to linger and continue to help in 2014, actually more than 2013, but it's meaningful. And I would also say that the volatility aspects of that, while it's hard to pinpoint, to me is why you saw some improvement like in the second quarter of this year from the tornadoes, et cetera. We're going to have less volatility in the book because of that, as well. So I think it's going to be meaningful, but I think it's more kind of in the future than it was this year.

Okay. And then, you had mentioned it, as far as just seeing pricing resiliency. And it's kind of interesting this quarter because we have some insurers having a similar message, and then we also have some insurers telling us that there is the deceleration in the rates or increasing competition. Do you have any thoughts on what might be the defining characteristics (multiple speakers)?

It's a great question. Obviously, if you look at some of the national accounts and the large accounts, particularly in the property area and comp, my guess is you're seeing some moderation in price increases. What's happening in our book, because of our small average policy size and how we play the game or the accounts and personal line, et cetera -- we haven't seen any really dramatic shift yet. My guess is you'll have pockets where you are going to see some change, but we have not seen any kind of -- what I would say material change.

Now, the small accounts go up less and come down less. So you don't -- we also don't get the spikes as much. But, for us, both the fourth quarter and January have performed pretty nicely, as far as getting rate increases. But I fully expect that there will be pockets that will moderate through the year. But we feel very good about our assumptions, and being able to get -- achieve rate this year.

Okay, good. And one for David -- just a last one -- and you had mentioned just some of the repurchase activity year-to-date. And I'm just kind of curious what 2014 and 2015, looking at the more on track. I'm just curious, with the repurchases this year, and just looking forward, if we should maybe start to think about Hanover returning to a more normal capital management environment here in 2014 and 2015?

Well, you'd have to define normal for me to be able to answer it that way, Vince. But what I would tell you is we're very conscious of capital management as part of our strategy. I think I've been fairly clear over the course of last year. Our first effort is to put our capital to work in our growth opportunities, which Fred talked to, and we've been talking about. Where it makes sense for us and where pricing in the market, for example, is attractive, we'll put more money towards share repurchase or other things like a debt repurchase.

Just to maybe give a little more color, we didn't do any repurchasing in the fourth quarter, because the share price was at a pretty nice level. And we felt that it was more valuable to put our capital to work in the growth opportunities we see. Obviously, in January, we've seen a little bit of disruption in the marketplace, which created an opportunity for us. I would tell you, in our planning, we have a modest amount of repurchases each year that we execute, which I usually refer to as maintenance-level type repurchasing. And we're going to continue to do that throughout the year.

And if we have opportunities like we saw last year, where we had a capital markets transaction that allowed us to free up some of our capital to put more towards the share repurchase, we'll continue to do things like that, as well. But you should expect we'll have modest amounts of share repurchase, in line with the last number of years that we've been executing the strategy.

Okay, that's great. Thank you for the color.

Matt Carletti, JMP Securities.

Vincent covered, actually, two of my questions. So I only have one left, and that was just -- could you provide a little more color on the January losses you mentioned -- which states it was more Southern than Northern, and whether there was a bigger impact on auto or home?

Yes, it's actually commercial for us. It's broad-based. It's the weather, the cold, and it freezes; and it's mostly commercial, frankly, for us. And what I would also say, in January, we didn't see non-cat whether act any -- it wasn't spiked. It was really those events that created the losses. So the rest of the month is more normal, except for those events. The two -- you know the two. And the second one was obviously bigger than the first event.

Right. Okay, that's really helpful. And congrats on the quarter and the year, and good luck in 2014.

Let me just mention quickly on the cat estimates for our Company, too, because I think it's important. In the last couple of years, the first quarter has been lower. But given our Company profile, typically our first three quarters are pretty similar around our estimate, and it's only the fourth quarter that's a little less on a cat basis. So we think about cats at this 5% level as being pretty stable in first, second, and third. So I know it's more than -- on a relative basis, the last couple of years that were down; but it's -- to me, having this kind of weather in first quarter is not unusual at all, particularly for people that have a mix like we do, that is Northeast and the Midwestern.

Well, that makes sense. Thank you.

Dan Farrell, Sterne Agee.

Just another question around the cats. I think you said your full-year target or guidance for cat load is 5 points. But I think you also said that the first quarter, you thought could be higher. Does that imply that incrementally, you think that maybe cat load -- normalized cat load could be coming down slightly, given all of the exposure management stuff you've done, or some of the improvements in (multiple speakers)

Obviously, Dan, we've done a lot on our mix over the last few years. We have balanced the commercial putting to -- our casualty is much different than it was three or four years ago. Our geographic spread is much better.

In the same vein, though, the last five years, the cat -- the volatility in weather has gone up in the world, so -- recent, domestically -- and so we feel very good about the 5% as the right number. We think it's a thoughtful number. We think we're conservative as appropriate, but it's the right number, given what we've seen activity over the last few years.

And my only point on the first quarter is that the last two years have been very low. We've had kind of no winter, even last year. What was weird about last year, we didn't have really a winter; what we had was tornadoes in March. And what, in my view, is this is a little bit of a return -- obviously there's a big event -- but this is a return to more normal kind of winter profile of storms, albeit it's just one month. So that's why I don't think it's -- the 5% to us for the year is right, and there's no reason to adjust it at this point, given we're one month into the year.

Great. And then, a question in the other commercial segment. Your loss ratio the last few quarters has trended on a core basis between 58, 59. You've also continued to have some adverse development there. I was curious, is some of that being driven still by any surety? I was just kind of curious what the trends are there, or maybe an update on that. And just is there any leverage for improvement going forward there, as well?

Sure. Dan, this is David. It is surety. The development you're seeing there is primarily the surety account. And I think I've talked in the past, it's sometimes allocating losses between current and prior accident years is more an art than a science. So as we are continuing to close down cases and claims, we'll typically pick up, in some cases, some prior-year development as a result of that. But those numbers are steadily declining, and our exposures at the end of 2013 are very, very low going forward. So we don't really anticipate much activity in the going-forward periods there. Clearly nowhere near like we had in 2012, and 2013 performed pretty much in line with (multiple speakers).

Just in general to your question, when I look at the 2014 improvement, we are planning for domestic. It is broad-based. So it's really -- you're going to see, because reactions are pretty much across the businesses, that we are going to improve in each of the business segments nicely. So we'll get some of that category as well this year.

That's helpful. Thank you very much.

Vincent DeAugustino, KBW.

Just one quick one. I was curious if you guys happened to -- are you seeing any changes in personal auto frequency in the last quarter or two that might be net worthy?

Vincent, this is Mark. We haven't really seen anything from a frequency standpoint that's out of what we've been seeing over the last couple of years. It's pretty flat.

Okay. Perfect. That's what I was looking for. Thank you.

Larry Greenberg, Janney Capital.

Just a few, looking out to 2014. The expected normalization for Chaucer to a 95% combined -- is that a combination of attritional cats and reserve development? Or how would you weight those pieces in the normalization process? And then when you think about underlying margin improvement domestically, can you just compare personal versus commercial?

Sure. Bob, do you want to take that?

When you're looking at that normalization, it's really to reflect the market conditions that we're seeing. And that's on top of a couple of good years where we've seen excellent results. So I wouldn't expect the makeup of that to necessarily change that much. It's more driven by underlying market conditions that we're seeing, and trends particularly that we've seen around 1/1 that we expect to continue into 2014.

So that would suggest to me more just attritional losses.

Yes, exactly.

Okay, thanks.

Don't forget, we do have -- within our portfolio, there is an exposure to what we would call large losses and attritional. So we've got the larger line size; we'll pull down on some of those specialty lines of business. As opposed to just pure attritional, we'd break it down into three territories. So there is a bit of volatility also around the large losses. But you're right, the underlying trend would just be driven by market conditions in 2014 versus 2013.

Larry, I'd just jump in on that too, because there's a lot of moving pieces in there. And what Bob said is obviously correct. But I would also tell you, cats have been lower than expected over the last few years, and prior-year development has been higher. Those two probably kind of offset for the most part. But as you're looking at the components, there's a lot of moving parts that get you to the 95%.

Fred Eppinger: And on domestically, we -- you asked about personal versus commercial. Again, what we believe is that we will see both improve. Personal got a little bit ahead in the improvement because of the way the rate earned in quickly for them. But I think they will both kind of -- you'll kind of see significant improvement in all the different lines this year. There really isn't any one that spikes out above the others this year.

So if you're thinking of getting -- you've been getting price 8%, 9%. So roughly to think about it, loss trend in both are maybe pretty close. And your margin -- your pricing above loss trend is relatively similar. Is it fair?

Yes.

Okay.

In some of the places, like homes in particular, we were catching up to this (technical difficulty) weather phenomena we talked about as a higher percent. So we had a spike in personal lines that we talked about moderating a little bit, so we had spiked all the way up to 10% across auto and home. And that will moderate a little bit quicker because of that spike. But our margins against those two factors will be pretty similar in the two businesses.

Okay. And then anything different on the tax rate for 2014?

No, it should remain relatively consistent going forward.

Okay, thank you.

Sarah DeWitt, Barclays.

In your -- providing us your guidance of $96 million to $97 million for 2014, does that include any reserve development?

It includes a little bit of positive development in Chaucer, in the $95 million that we talked about has some -- much more moderate than where we've been over the last few years. But in terms of domestic, we don't estimate any development in our guidance there.

Okay. So I guess that would imply that excluding cats and prior-year development, the underlying combined ratio could improve to say 92, 92.5 from 95.5 in 2013? What gives you confidence that you can improve it that significantly? I know you've taken exposure actions, but that's a pretty big improvement.

It's a combination of all the things we've talked about: the exposure actions we are taking, the pricing that we've been getting in the book, the underwriting that we're putting in place in the various lines of business, and the waning of some of the issues we talked about in 2012, early part of 2013.

And again, for example, we recognized the auto issue really early, and have attacked it pretty aggressively; built up the balance sheet around it. And a lot of that stuff is -- the impact of that is reducing relatively dramatically, so there is a combination here.

Okay, great. Thank you.

Robert Paun, Sidoti and Company.

I wanted to follow up on the personal lines business. Fred, I believe you said that growth in the top line should start in the second half of this year. So can we expect to see premiums tail off in the first half, similar to what we saw in 4Q? About 5% to 6% decline?

Yes, let me come in, and Mark should add. What happened in the fourth quarter, we had been fortunate in working these thinnings and getting rid of the concentration. Part of our focus has been on some mono-lines -- some legacy mono-line property. And we were able to -- we have an arrangement with a couple of companies where we are -- we literally have no rights. But it very much acts like that, where we are transferring business. And that accelerated at the tail end of this year, and will continue into the first and a little bit less in the second quarter.

The actions we're taking around that is about $80 million between first line commercial -- there's a little bit and commercial, too. But they're mostly into the first half of the year. So you're going to see first quarter similar to the fourth quarter, because those transactions are occurring and are efficiently moving forward, and then they come back after that market.

Is there anything that we should --

No, I think that's about right. It will temper, I think, a little bit in the second quarter from where we'll be in the first quarter. And then we should turn the corner again in the second half of the year.

We're very pleased about these transactions. As you know, our legacy books are in regulatory environments where it's very hard to get out of some legacy business. And we've created some really nice win-win situations with some partners so that we can move this mono-line business. And our strategy around really going after the account business has really taken off now. So most of our business is with a full account, and it really is -- it makes it look terrific as we look forward for our business. So we're glad to get this behind us.

Okay, thank you. That was helpful. And final question is -- as far as the Chaucer business, you spoke about reducing premiums in the energy lines. On the other side of that, where are you seeing opportunities to grow in that business? Are there any segments that are showing more favorable conditions?

Yes, Bob, you want to go?

Yes, (inaudible) few and far between them. But the opportunity that we are seeing around some of the areas that we've got within our Marine portfolio -- there's good opportunities there, where we are a leader in certain of the classes around political risk, political violence. But across the board -- and energy is a classic example of where you've had a good couple of years now, excellent results. People who riot, Gulf of Mexico windstorm exposure within our energy portfolio have had a couple of benign years. So it is very, very difficult to get rates. And that's where we're seeing those reductions. But few opportunities -- there the opportunities were we've got specific lines of expertise, good quality underwriting fees here, that can just work their way around that marketplace.

On 1/1, we had a really solid 1/1, and what we have is a nice, broad portfolio. So as we said, we are very comfortable maintaining the profitability in the margin in that business. We just think it's prudent to think about that as flat to low-single-digit growth this year. Because what we need to do is make sure we maintain our position and maintain our margins, and it's very good. We're demonstrating the strength of the franchise right now. So we feel good about the overall results. But you won't see a lot of growth out of that business this year.

Okay, great. Thank you for the answers.

Ron Bobman, Capital Returns.

I just had a question about the guidance. I was wondering how much favorable development from Chaucer is embedded in the guidance.

We normally plan for them to be a few points -- in the low end of the single digits. Probably in the 3 or 4 point range. I don't want to be too precise about it at this point.

Yes, but the range is fine enough. So, I'm sorry, did you say 2 or 3, or 3 or 4?

Probably closer to 3% to 4%.

Okay. And that's against a combined ratio, right? Or, I'm sorry, on their combined ratio or the Company -- no, on their combined ratio, right?

On their separate business.

Got you. Thanks.

(Operator Instructions). With no further questions at this time, I'll turn the call back over to Oksana Lukasheva for closing comments.

Thank you to all of you for your participation today. And we're looking forward to speaking to you next quarter.

Ladies and gentlemen, this concludes our conference. Thank you for your participation. You may now disconnect. Have a great day.