May 1, 2012
Executives
Oksana Lukasheva – Assistant VP Frederick Eppinger – President and CEO David Greenfield – EVP and CFO Marita Zuraitis – President, Property & Casualty Companies
Analysts
Vincent D’Agostino – Stifel Nicolaus Dan Farrell – Sterne Agee Ray Iardella – Macquarie Larry Greenberg – Langen McAlenney Matt Carletti – JMP Securities Ray Iardella – Macquarie
Operator
Good day and welcome to the Hanover Insurance Group First Quarter Conference Call and Webcast. All participants will be in listen-only mode.
(Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva, AVP Investor Relations.
Please go ahead.
Oksana Lukasheva
Thank you, Andrew. Good morning and thank you for joining us on our first quarter conference call.
We’ll 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. Also in the room and available to answer your questions after our prepared remarks are Marita Zuraitis, President, Property and 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 Investors section of our website at www.hanover.com. After the presentation we will answer questions in the Q&A session.
Our prepared remarks and the responses to your questions today, other than statements of historical fact, include forward-looking statements such as our outlook for segment income per share for 2012. 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 statements 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, ex-cat loss and combined ratio and accident share loss of 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 statistical supplements, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Fred.
Frederick Eppinger
Thank you, Oksana, and good morning everyone, and thank you for joining our call today. I’m pleased with our results for the first quarter as we continue to see favorable trends in our business and overall results were in line with the outlook we shared with you earlier in the year.
Net income per share for the quarter was $1.09 and operating EPS was $1.01, which translates into an annualized operating ROE of 8%. Our book value per share increased 3.6% during the quarter and 5.7% over the last 12 months after adjusting for the adoption of the accounting change for deferred acquisition costs.
Before I comment on our results by segment, I would like to touch on our strategic priorities for 2012. They should be helpful as we review our quarterly results and evaluate our progress throughout the year.
As we discussed at Investor Day we have accomplished a lot in the last several years to reposition the company for better long-term performance. We transformed our company from a regional insurance company with a challenging geographic and product mix into a national player with global reach and an attractive business mix and strong and growing position with some of the best distributors in the industry.
While we have improved our performance from the early days of the journey, our goal is to build a company that can deliver 11% to 13% ROE through the cycle. In 2012, we believe we are now well-positioned to both capitalize on the current market opportunities and position our company for improving profitability and sustainable attractive returns.
Each of our businesses is focused on three critical value leverage to improve our performance in 2012 and set up continuing financial improvement in 2013. The three levers are, first, improving the quality and attractiveness of our current mix through targeted underwriting activities and growing higher margin businesses.
Second, further strengthening our position and alignment with winning agents. And third, improving our underwriting and financial performance through a disciplined focus on pricing and operating models efficiencies.
Our first quarter results provide evidence that our focus on these three levers is working. In personal lines, our three main priorities translate into implementing rate and non-rate actions to improve profitability and refining our business mix by managing pockets of property concentration and reducing lower return business.
We continue to achieve rate increases during the quarter. The filed rate increases were well over 4% auto and over 7% in homeowners.
We also achieved strong retention, which at 81% was a two point improvement from prior year quarter. At the same time, our strong market position and our account-focused strategy enables us to successfully adjust our business mix without sacrificing retention or our position with the best partners.
And we expect rate increases to be greater in both lines of business in the second quarter. The relatively mild winter was a welcome change this year.
However, the very early and unusual tornado season which impacted many of the states and territories we do businesses, including Michigan, Tennessee and Indiana offset some of the benefits of the benign winter. Catastrophe losses in personal lines were $23 million, substantially in line with our increased cat assumption this year, but still relatively high compared to our longer-term historical trends.
As we mentioned on previous calls, we continue to actively mitigate properties (inaudible) in certain areas to ultimate improve returns in 2012 and beyond by changing policy terms and not entering certain business. These efforts are ongoing and had a slight negative impact on our personal lines growth.
These activities will continue into the second quarter and the rest of the year. We remain satisfied with our underwriting profitability in personal lines.
Non-catastrophe weather was clearly more favorable in the quarter, but we also saw an improvement in underlining loss trends especially in our homeowners lines, which we attributed to our pricing and non-pricing actions over the last several quarters. Our outlook for auto is also positive, but we are reacting for higher severity trends in auto liability lines.
They’ve recently emerged in our most recent prior accident year performance. We are working on a number of levers, including accelerating rate increases affected areas.
We believe these actions coupled with our other pricing and underwriting initiatives will drive improved results in personal lines going forward. In commercial lines, the three priorities I mentioned earlier crystallize our focus on balanced rate increases, continued penetration of specialty and higher margin lines and our efforts to drive further efficiency and effectiveness in our operating model.
This quarter, our 12% growth in small, commercial and middle market was driven by price increases of approximately 6%, strong retention in the mid-80s and notable new business growth. Pricing accelerated as the months progressed with middle market pricing standing at 8% for March and we expect to see continuing trend in the second quarter.
New business writings accelerated substantially compared to the first quarter of 2011 as writings in new geographies, the broader acceptance of our more recent product enhancements and our strong momentum with partners drove a higher pace of submissions. We believe the quality of our new business we are putting on the books today is excellent.
It is coming from our targeted industry classes and regions. The growth is also primarily generated by our leading partners, who have aligned incentives and understand – and share our focus on adequate pricing, quality and profitability.
Our partnership strategy allows us to take select-approach to the market and cheap pricing on new business that is in line with what we see on renewals. Thus substantially improving profitability prospects for our book of business.
We believe in 2012 the quality and pricing levels of our new business will lead to continued improvement in our margins. In summary, we are very satisfied with the quality of growth we are seeing, rates are good at both new business and renewals, retention is strong and mix of business continues to shift to more desirable classes.
All of these factors are driving a better quality book. While our growth in commercial lines is strong during the first quarter, it was still lower than the 21% premium increase we achieved in our specialty lines this quarter.
We continue to shift our business to a specialty mix which historically is more profitable and balance (inaudible). Our program business continue to grow during the quarter stemming from strong pricing retentions on our renewal programs as well as from new programs for The Hanover which are well established in the industry.
With about $300 million in the annual gross premiums, a strong technology platform and a solid underwriting talent, AIX has become a market leader in the specialty program market. We also saw quality growth from our Hanover Professional Portfolio as well as newer specialties including financial viability and non-public D&O.
Most of our emerging businesses are now positive contributors to our bottom line. We continue to be satisfied with the quality and pace of growth in our domestic commercial lines.
We remain very optimistic about our expectations for the full year. A couple of thoughts on Chaucer.
Chaucer continued to be accretive to our earnings producing a combined ratio of 94% and a pre-tax segment income of over $25 million. Catastrophes were below plan, although we did see some several large losses slightly above plan, which were reflected in our ex-cat accident year results.
The current underlying trends and prior loss trends in the business continue to be favorable in the quarter. Market conditions are improving in the majority of property lines, especially in areas affected by the last year’s cats.
Additionally, as the market responds to recent losses in the energy and marine sectors, we are seeing prices and terms and conditions in these accounts improve as well. We are confident Chaucer will continue to add to our earnings power and strengthen our market position going forward.
Before I turn the call over to David, I would like to provide some commentary on our capital management. We continue to strive for effective use of our capital, balancing the uses of leverage, driving efficiencies from Chaucer’s assets and capital and eliminating pockets with capital inefficiencies in certain areas of our domestic operations.
I would like to reiterate that in 2012, we continue to focus our efforts on improving profitability and driving higher ROE, using the profitability levers we discussed. We do not think this will be a year of large acquisitions.
Instead, we are centering our attention on executing on our priorities, refining our portfolio and enhancing margins for the capabilities of resources we have. Given the results for the quarter, we continue to be confident in our regional outlook for 2022 we provided to you in February.
While we saw some development activity in a couple of areas, we believe we have reacted quickly and they are offset by many of our other trends that are better than our plan. And more importantly we are confident that our actions around the key levers position us well to improve our earnings power and lead to stronger returns in 2013 as we consider our momentum and our favorable trends around pricing, retention and mix for this quarter.
Given our strong position with agents brokers, the growth we’ve achieved in recent years as well as additions we’ve made for our team, our products and our business portfolios. We will continue to fully capitalize on the change in market and achieve our financial goals.
With that, I’ll turn the call over to David.
David Greenfield
Thank you, Fred and good morning everyone. I’m very pleased with our first quarter results which reflect our diversifying and growing earnings power, the strength of our franchise and how well we’re positioned for the future.
We continue to move forward on our path to 11% to 13%. Net income for the first quarter was $49.7 million or $1.9 per diluted share compared to $29.3 million or $0.64 per diluted share in the prior year quarter.
Our segment income this quarter was $46 million or $1.1 per diluted share compared to $25.9 million or $0.56 per diluted share in the prior year quarter. On a year-over-year basis, the favorable comparison is driven by several factors.
For the third consecutive quarter, Chaucer has provided a strong contribution to earnings. In addition, we continue to achieve meaningful growth in margin expansion resulting in higher earnings in our domestic business.
Fred has already provided commentary about our topline performance and the pricing environment. So I’ll focus my remarks on our segment results.
Starting with commercial lines, the combined ratio was 100.3% for the quarter compared to 103.7% last year. The 3.4 point of improvement over last year was primary driven by a better current accident near loss ratio and lower catastrophe losses which were partially offset by a decrease in favorable reserve development.
I’d like to break this down a little further. The current accident near loss ratio improved by two points compared to the prior year quarter.
Clearly, a more mild winter drove some of this improvements. More importantly however, we also see an improvement in underlying loss ratios.
We attribute this to many factors including the continued benefit of a shift in our mix of business as well as diligent underwriting actions that drove better severity trends. Additionally, we noted improved rate activity and retention in commercial lines for several quarters as well as positive pricing in new business.
We believe all of these factors combined to contribute to growth in earnings power this quarter. In terms of reserve development, we saw favorable trends in our CMT and Worker’s Compensation alliance this quarter and we added incrementally to reserves in the commercial auto and surety lines.
In commercial auto, we noted an increase in severity of losses primarily affecting the 2011 accident year. As a result, we just about lost pick up slightly for 2011 and also an effect in modestly higher assumption in our 2012 loss fix.
And currently, we continue to actively implement rate increases and other underwriting actions in this slide, in order to offset any potential for adverse impact going forward. Our pricing in commercial auto is 5% this quarter of shortly from only 1% increase in the first quarter of last year.
In surety, we continue to experience some loss activity in our contract book, given little improvement in the overall economy and continuing pressures on a construction industry. We are continuing to focus on shipping the business mix to commercial surety, while maintaining a focused underwriting process in contract surety.
This should result in improved results in surety going forward. Our expense ratio, commercial lines continue to improve, lowering the combined ratio by almost a point this quarter.
We attribute this to fix cost leverage from continued earned premium expansion and the continued improvement of our operating model. Overall, the level of profitability improvements in commercial lines is in line with our expectation.
Perhaps as importantly better pricing trends and a continued shift to a profitable mix provide us confidence in continued margin expanses going forward. In personal lines, the combine ratio was 98% for the quarter compared to 97.5% to the first quarter of 2011.
Catastrophe losses this quarter primarily from the late February and March tornado, where $23 million compared to $22 million in the prior year quarter. We held about $4 million or one point of adverse reserve development, primarily in auto liability in the current quarter compared to 4 point of favorable reserve development in the prior year quarter.
As we noted in a previous comment, the trend in reserve releases overall has been declining over the past four quarters. In addition, we reacted this quarter to modestly higher severity trends in auto liability that emerge in our most recent prior accident year.
Together, these items resulted in a small amount of adverse reserve development this quarter. The action year combined ratio, which excludes catastrophe losses and the prior year reserve development was 19.7% in the current quarter compared to 95.2% in the first quarter of 2011.
While part of the improvement is attributable to more favorable non-catastrophe weather losses in the current quarter, we are also seeing favorable trends in our underlying margins, especially in the homeowners line. We are pleased to see that recent rate and underwriting actions we’ve taken to improve personal lines probability or translating into better loss ratios.
Moving on to Chaucer, this business delivered its third profitable quarter since the acquisition, generating $25 million of segment income before taxes. The combined ratio of 93.8% included $7 million related to its tax-free losses, approximately 3 points, which is somewhat lower than our normal expiration for the quarter.
The ex-cat accident year loss ratio for the quarter is slightly higher than normal and includes higher-than-expected large loss events which we do not classify as catastrophes such as the cost of Concordia loss. The combined ratio also included nine points of prior-year releases this quarter.
The favorable development came mostly from the 2010 and 2011 accident years related to energy and property businesses as well as favorable adjustments to marine reserves primarily from the 2008 accident year. Process expense ratio was 36.2% this quarter, which is slightly lower than our expected long-term run rate of about 37%.
Chauser’s growth written premiums were $382 million this quarter and net written premiums were $200 million. The quarter’s net to gross ratio is lower than our full-year expectation.
The reason for this is that a large part Chaucer (inaudible) loss reinsurance program is booked in the first quarter, whereas the underlying business will be written throughout the year. This quarter’s net written premium is non-indication of reduced premiums for the year and you should anticipate our higher net to gross ratio for the remaining quarters.
Overall underlying trends in Chaucer’s business are favorable. We continue to be pleased with the disciplined underwriting and more positive market trends.
And we believe Chaucer will continue to contribute to our earnings going forward. Moving got a discussion of our investment portfolio, net investment income was $69 million for the first quarter of 2012, up about 14% compared to $60 million earned in the prior-year quarter.
This increase was driven primarily by the increase in invested assets acquired with Chaucer last year. R&D investment income this quarter was also posted in part by dividends on equity securities that will necessarily be repeated in subsequent quarters.
For the first quarter the overall earned yield on our fixed maturity portfolio was 4.38%. The (inaudible) maturities yielded 5.2% and the Chaucer Investments delivered 2.2%.
At March 31, 2012, we held over $7.6 billion in cash and invested assets with fixed income securities representing 85% of the total. Roughly 94% of our fixed income securities are investment grade and the average duration of the portfolio is four years.
In the first quarter of 2012 we deployed a portion of Chaucer’s cash and short-term assets into higher yielding securities primarily in corporate bonds. As a result, the book yield in Chaucer’s portfolio increased by about 15 basis points, the duration grew slightly, while the quality of the portfolio remained very strong at AA-.
As it relates to the overall investment portfolio, we also invested approximately $75 million in stable, primarily large cap equities with attractive dividend yields during the first quarter. With only 4.4% of our total portfolio currently allocated to equity securities, we felt comfortable taking on incremental equity risk while benefiting from the additional diversification and dividend yields.
Our balance sheet remains strong providing excellent financial flexibility. We ended the quarter with $2.6 billion in shareholders’ equity.
Our book value per share at March 31, 2012 was $57.65 up 3.6% from $55.67 at December 31, 2011 and up 5.7% from $54.55 at March 31, 2011. As we previously discussed, we adopted the new accounting guidance related to deferred acquisition costs or DAC which we applied retroactively by restating prior periods.
As a point of reference, the new methodology reduced shareholders equity by approximately 1% or $26 million. The adoption of this guidance does not have a material effect on underwriting income or earnings, nor do we believe it will have a material effect going forward.
Our debt-to-total capital ratio was 26.3% at the end of the first quarter, which is well within rating agency thresholds for our current ratings. This compares to 26.8% at year end.
Holding company cash and investments was $196 million at March 31 which is above our target level and we continue to maintain a $200 million credit facility that provides additional flexibility. Before I open the line for questions, I’d like to provide a couple of comments on our full-year outlook.
Our business trends and the market dynamics we’ve seen this past quarter clearly gives us continued confidence in our 2012 earnings guidance of $3.85 to $4.15 segment income per share. I have a few items related to the outlook that may be helpful to you.
Since hurricane Katrina in 2005 and as a result of our coastal management actions over the last several years our catastrophe loss patterns have changed. Tornado and hurricanes that are usually more active in the second quarter have had a more meaningful impact on our earnings and cat loss in recent years.
Accordingly our 2012 plan have some expectation for the second quarter catastrophe loss ratio to be higher than the rest of the year. We continue to expect less favorable reserve development in 2012 as compared to 2011 on a full-year basis.
Additionally we continue to expect flat just slightly declining net written premiums volumes and personal loans for the full year. Quarterly patterns may be affected as we continue to implement our agency and exposure management actions in certain states.
We believe we will continue to see improved accident year ratios in our domestic businesses in the second half of the year as result of robust retention, improved rates and our continued shift in business mix. We continue to expect only a slight increase in net investment income for the full-year of 2012 as the additional Chaucer’s invested assets are expected to be partially offset by continued lower new money yields.
And finally we continue to assume that weighted average shares outstanding for the year to be 45.5 million shares. Operator we are ready now to open the line for Q&A.
Operator
We will now begin the question-and-answer session. (Operator Instructions).
The first question comes from Vincent D’Agostino of Stifel Nicolaus. Please go ahead.
Vincent D’Agostino – Stifel Nicolaus
Hi good morning thank you. Just one real quick clarification question and two short follow-ups if I may.
First, Chaucer certified investment book what was the loss ratio impact from the abnormal large losses?
Frederick Eppinger
We haven’t disclosed that specifically. It’s not something we put out there as I mentioned one off the Costa Concordia was the largest in there.
What I would say is that overall the slightly higher large loss activity was nothing of significance just the higher volume and fewer frequency of events. But just slightly above what the plan is for the year.
And I think when you look at that in context with the kept, you will benefit your probably looking at the overall loss ratio a lot more than we expected.
Vincent D’Agostino – Stifel Nicolaus
Great. And then just a two follow-ups would be on auto, real quick.
I know you’ve mentioned some of the severity trends popping up. I was just curious if you could give us an update on Michigan or whether or not there was any geographic concentration of where this very trends were popping up at?
Frederick Eppinger
It was a cause of four states essentially that we saw. There was nothing that made Michigan stand out in any of the tends.
It was really just the core areas – or do you guys have anything?
Marita Zuraitis
No the only thing I would say is the BI severity was clearly coming from New York, New Jersey, Connecticut, we saw in 2011 year and reacted to it and we have been and will continue to price accordingly.
Vincent D’Agostino – Stifel Nicolaus
Great. And then this is a kind of a forward-looking question, but we’ve heard a lot about other auto players that are implementing usage based insurance programs namely progressive, and to my knowledge most of them are doing it in-house or mostly in-house with some outside help.
So my question is how long if at all do you think it is before some of the middle sized players like yourself would need to implement EBI program, so I mean, how much longer do you have before you have to do that? And when it comes time to get that done, does partnering with some sort turnkey third party provider that provides sensors and analytics, is that the route that you might go.
I was just kind of curious of your thoughts looking out and maybe how you’ve been looking at, how you’d go about doing such at thing?
Frederick Eppinger
We obviously are assessing that. We actually have a pilot going on right now in that and we’re trying to assess what the benefit would be and how it fits with our target customer group which is more of a full account based customer group.
Because obviously some of the experiments today are really as a service, if you will, to the clients, because they – to the quality of driving as well as you know some people doing it. So we are in a middle of a pilot.
My view is we’ll be ready if we think that the market acceptance fits our customer segment. It is something that we’re paying attention to, we don’t see the broad benefits yet from it, but we are monitoring it or as I said we’re actually filing it.
Vincent D’Agostino – Stifel Nicolaus
Okay. Would you say we’re a few years or are we still five, 10 years away from broad –?
Frederick Eppinger
It’s hard – it really is hard to tell. I mean, again, if it’s surely for rate making it obviously is a zero sum gain at some level.
And depending on how it’s used and where it’s used, again, it gives you obviously some insights, but for me it’s one of those things that because of privacy issues and a number of issues surrounding it, it’s not crystal clear how broad adoption it’s going to get. And again, for us what we think about, is it appropriate for a hard target segment and how it will be used by our target segment.
That’s part of what we’re trying to make sure, we understand that the value for our target clients – but to your point this is something that every – if it happens, a lot of people have read about equipment cost and all that, if it happens, right, all that will get taken out of play, because now will there be third parties if the cost of all that equipment will go way down, right. So it’s one of those things a lot of people as you know are paying attention to.
But right now, I’d still say it’s quite uncertain.
Vincent D’Agostino – Stifel Nicolaus
Great. Thank you so much.
Operator
The next question comes from Dan Farrell of Sterne Agee. Please go ahead.
Dan Farrell – Sterne Agee
Hi, Good evening and good morning.
David Greenfield
Good morning, Dan.
Dan Farrell – Sterne Agee
Could you talk about the pricing increases that you’re getting maybe relative to the loss cost trends that you’re observing? And then in the specific localized lines that you’re seeing some adverse development trends, what’s your confidence level that you’re addressing it through rate and (inaudible) does seem like the recent quarters in those specific areas have seen a lot higher loss pick than you have been.
So I just like to get your view on what kind of cushion or confidence level you have on that?
David Greenfield
Yeah, again what’s interesting about our pattern, right, you know this. Our patterns are little unique, we weren’t – a lot of pattern in our industry, there has been a lot of reserve release from ‘03, ‘04 particularly in the cash, the long tail line, because of where we were in ‘03, ‘04, because our mix is short tailed, most of our patterns is very mechanical around our recent years.
We obviously agree this point, we’ve been watching some of severity in some of the borderlines in particular, that’s really what we’re talking about here and we have adjusted along the way. So again we don’t see anything that significant.
I mean, the numbers aren’t great, but because we don’t have outsize reserve releases it does change the percentages to some extent. And so I feel very good about it.
I mean we’re all over it, we’re tracking it, we know where it’s from. Again, these are little bit more controlled, if you will, than say, excess comp or something like that.
I mean, these really are the auto lines and we believe that we’ve adjusted it appropriately. That’s really the only place we’re seeing things.
Marita Zuraitis
And even within the quarter that increased pattern continued with January pricing being at five, February being at six and March being at seven, so we even saw the increase in the pattern within the quarter.
Dan Farrell – Sterne Agee
That’s helpful. And then just on Chaucer, on the expense ratio, that bounced around, I think you’ve indicated it would in the early quarters as you work through some stuff.
Is the 36% expense ratio maybe something more of a trend now or how should we think of that going forward?
Frederick Eppinger
Yes, Dan. I think – again as I said in my remarks.
I like the number of 37 as a long-term run up for us. Yeah there is some timing of auto coming through there which bounced around a little bit and also sometimes a little bit of apex that are going to come into it, but I think you should really can’t think about it number 37 on a long-term basis.
Dan Farrell – Sterne Agee
Okay, thank you.
Frederick Eppinger
Thanks.
Operator
Next question comes from Ray Iardella of Macquarie please go ahead.
Ray Iardella – Macquarie
Thanks and good morning everyone.
Frederick Eppinger
Good morning
Ray Iardella – Macquarie
Good morning. First question I guess maybe for David on Chaucer what is the threshold as far as you guys breaking out capacity losses in that segment is there a dollar threshold or is it vary by amount of business can you may be give us some color on that?
David Greenfield
Yeah, couple of things there, we have a corporate tax policy threshold which you find in our annual report in typically it’s about $5 million event if you will Cap, I mean when we look at a Cap definition for us is the difference between man-made or natural disaster. Certainly natural disasters tend to always show up in the Cap we are in.
Man-made disasters are going to be more about how widespread they are and Chaucer’s business is just different as the domestic businesses so because of the types of risk they ensure in the programs they write. We could see a $5 million, $6 million, $7 million loss which is what they consider large losses, but they are more attritional in the sense.
And only thing what happened in this quarter was there was a just few extras that showed up in here. And it’s hard to predict when rig is going to require a control or both going to sink in so you might see a little bit of moment here.
But you really can’t over anticipate that I will now just sort of inauguration this quarter.
Ray Iardella – Macquarie
Okay that’s helpful. And then maybe a just sort of more broader question.
For a minute can you talk about some of the smaller acquisitions you guys have done over you know the past two or three years and how they are performing. I think we spend a lot of time looking at Chaucer because it’s broken out as a different segment but maybe you touched on AIX in your prepared remarks but may be touch on some of the other acquisitions you guys have done having been performing?
Frederick Eppinger
We have been very fortunate. Essentially they’ve all worked very, very well.
Our professional lines business are LPL business has created a nice score to a professionalized. It was the platform if you will that we’ve used not just for LPL let’s become the platform for the other professional lines as well.
So that business now is nice contributed to us. Our business are HSI which is our HPR business which was Hanover main acquisition.
It’s the wonderful business for us has been a very good contributor in a high business so that’s worked out as well. Our ANE business which is a small-business with architect and engineers that is now within our professional lines has worked out, again another one contributing to the bottom line right out of the get go has been a very good positive thing for us.
Obviously, the (inaudible) allowed us to use all the data we showed on the renewal rates on – we were able to beat all our assumptions as far as both profitability and on retention for that, we retained over $300 million. And on the healthcare side, companion, it’s a little bit earlier days, but also is a contributor now, we had some investments we’ve been making in that platform but it is now a positive contributor.
What you’ve seen in all of these businesses, we’ve had a quick accretion to the company because they were small obviously, they’re all small and it allowed us to acquire a team and in many cases a platform that we were able to grow off of. But we really haven’t had any yet that have been disappointing to us in any of those small specialty businesses.
And as I commented, they really are now contributing. We believe in ‘13, they’re all going to be very significant contributors to the company.
Ray Iardella – Macquarie
Okay. That helpful.
And then I guess last question, going back to sort of the surety book and maybe some of the adverse there – you guys had some adverse in the third quarter and I think the commentary was a couple of years ago you started making that switch towards more commercial surety in a way from the contract business. Just curious how big is the surety business for you guys and kind of can you give us an idea of where the level of commercial surety was in the past and kind of what percentage it represents of your book –?
Frederick Eppinger
Let me just – on the contract what we said and I’ll back away. We’ve (inaudible) that pretty aggressively in the last two or three years.
It was the one specialty business that the company was in when we started all this eight years ago, and because of our downgrade it was a – it was what I would say is a mix bag as far as the book of business highly concentrated between Michigan and Manhattan. So that business now is down to 50, I like it quite well what we have, what we’re active with.
We got a great team on the ground. But we’ve had some development, particularly on what I call the run off business, the stuff that we really are no longer on and we’ve had some activity because we – but this is a small business now.
The commercial surety, we started really focusing on that probably three, four years ago and in earnest when we got the upgrade went to full A, because that’s a business where I didn’t want to really do a lot of investment until we have the ratings. And we feel very good about that business now.
I think the – the magnitude of that business (inaudible).
David Greenfield
It’s about a third of our total surety business, which – if you somewhere thought between $90 million-$95 million into our participation for the year and instead of that its commercial surety. And I think it also worth noting for 200 points one is we systematically going out and really operated our challenge so we feel very good about team we have commercial surety leader that was brought in last year.
We have this fella from Zürich, who we feel very strong about continue to build our team and we recently brought a person to drive the contract business for us. From March on the underwriting side and feel very good about the scene behind him and I think that the last step here over last 6 months as we did talked about interview of our portfolio and that is sort of measure additional confidence for us in terms of understanding where we are with the contract business.
So all weekend we are pleased with the position, we’re at in terms of mix and making sure that we’re confident with the existing account portfolio that we have.
Ray Iardella – Macquarie
Okay. Thanks I’ll requeue.
Frederick Eppinger
Thanks.
Operator
Next question comes from Larry Greenberg of Langen McAlenney. Please go ahead.
Larry Greenberg – Langen McAlenney
Hi good morning.
Frederick Eppinger
Good morning.
Larry Greenberg – Langen McAlenney
You talked about with Chaucer pricing changes and it sound us like when you’re not alone on this asset, property loss exposed area is probably the most robust right now. I’m just wondering how your thinking about the opportunities there versus managing your aggregates and are you putting limits for just how your managing that trade off.
Frederick Eppinger
It’s close suffering, we might switch off some sub-property account of January particularly around some risk factors obstinately once is through, but this time that is the options if your sure in Japan – it is right, little bit more accurate fact, rights were high when we expected and getting on those contracts which have been effective. So beside to this it was adjustments some tweaks in the portfolio that we got in order to save the cost as you say we’re seeing some good healthy price increases particularly in those areas but that has been affected by losses.
David Greenfield
Yeah I guess in total we got very good portfolio as we put little package of little bit of an overview where we feel like most of the businesses we’re getting good rate increases we’re taking advantage of some areas that are better than that. But I would go back to Rob said, which is in purposely have taken some of the volatility out and some of the aggregation we reduced their position in US that for instance when right out of the gate had effect currently before we closed, we really started working the portfolio well.
So we’re very excited about the potential here because a lot of the synergy we’re seeing is in the – is going to be in the specialty lines that we go after together in some of the skill sets they have. But we feel very good about the choices we’ve made to date and we like the outlook this year for the returns out of the business.
Larry Greenberg – Langen McAlenney
Great. Thank you.
Frederick Eppinger
Thanks you, Larry.
Operator
(Operator Instructions). The next question comes from Vincent D’Agostino of Stifel Nicolaus.
Please go ahead.
Vincent D’Agostino – Stifel Nicolaus
Hi. Thanks for taking the follow-up, just wanted…
Frederick Eppinger
Sure.
Vincent D’Agostino – Stifel Nicolaus
Considering the strong commercial lines’ new business growth especially on some of the longer tail lines, I’m just curious if you might be able to talk about some of the controls there, I guess early indicators that you might be looking at just to see if the new accounts that you’re picking up are performing as you would expect – just – because maybe you’re not as familiar with them sort of thing?
Marita Zuraitis
No, I mean we feel good about the new business that we’re writing in the core commercial lines. We have robust pricing tools.
We’re seeing increases in premium audit. When you take premium audit and rate out of the growth, it is not substantial, but we’re comfortable with it, we like the underwriting tools, we like the pricing tools that we have and we feel good about the new business that we’re writing, not only what it is and the mix it is but who it’s coming from.
Frederick Eppinger
I’d say similarly on the specialty side, the longer tail, the longer tail – they’re very long tail, pension liability, professionals, some of the areas in healthcare. We are very diligent about looking at effectively a deviation to our manual pricing renewal versus new business.
So really you can see how we feel about all the pricing from the new business. Obviously mix is something that we’re very diligent about, whether it’d be area of practice to sort of gauge severity or state or any of the many (inaudible) that we use.
Those are the things that we’re watching. And then in terms of real emergence, we’re just – we’re measuring effectively our incurred numbers against premium in any of the younger business and we’re looking at that year-on-year and make sure that we’re improving, for example, in our MPL business we’re in our third year.
So we’re able to measure how we’re doing in our first quarter against where we were at our first quarter of ‘11 and ‘10 and we’re looking at those metrics for improvement. And so it is a combination of things.
And I think you all know this as you follow us. One of the things we’ve done very, very diligently is we don’t left (inaudible) face value polices, we are really focused on the smaller policies, we also are – partner agents we don’t typically do the large growth is with the large panel.
This is really mature business, for the most part this has moved over to us in chunks from partners as we’ve introduced these products whilst we help them bypass wholesales in some cases to give us their mature business. So we’ve had very good luck.
I mean if you look at all the specialty businesses we’re in, we feel very good about the quality in the portfolio. The only place at specialty we’ve had really any noise at all been the surety which ironically is the one that we are in (inaudible) on the project site.
Because – on everything else we feel it’s developed beautifully for us and frankly the pricing we’re getting right now is excellent as well so.
Marita Zuraitis
You also mentioned small face value. That also is true about our workers comp book where the majority of that growth is coming from, small commercial, virtually all of it, low risk grade and small commercial workers comp business in coordination with our total account strategy and small business, so we’re seeing that on the comp side as well.
Vincent D’Agostino – Stifel Nicolaus
Perfect. Thank you so much.
Frederick Eppinger
Thank you.
Operator
Your next question comes from Matt Carletti of JMP Securities. Please go ahead.
Frederick Eppinger
Good morning, Matt.
Matt Carletti – JMP Securities
Hi. It’s actually Christine.
Frederick Eppinger
Good morning Christine.
Unidentified Analyst
Good morning. I’ve got a quick numbers question if you have it available.
I was wondering if you had the both net and gross written premiums for Chaucer in the first quarter of 2011.
Frederick Eppinger
We don’t have that disclosed because we won’t have it on the same basis of accounting. So – we can talk about it blind and I can see what we have out in the public domain that may be helpful to you.
Unidentified Analyst
Okay. Thank you.
Operator
The next question comes from Ray Iardella of Macquarie. Please go ahead.
Ray Iardella – Macquarie
Couple of follow-ups and thanks again for taking these extra questions. I guess, first, workers comp, just to touch on the commentary before growth on the small side.
I mean, is that basically what’s driving retention down a little bit? I’m assuming pricing is moving higher, but PIF growth is certainly moving much higher.
Is that kind of the right way to think about that business and the dynamics of it?
Marita Zuraitis
You just answered your own question. I think you nailed it.
Workers comp side we are seeing some increase in premium audit, we’re getting a decent amount of real rate. When you look at the pricing in small, the pricing in middle market, the shift in the risk rates, we’re – you just nailed the answer to your own question.
We did see some sequential quarter-over-quarter PIF growth but if you remember some of that is coming from the one beacon policy is now being counted as our policies so there is some shift in the numbers as we took on one (inaudible) premium as our own premium. You remember in the first year we did a reinsurance arrangement and that eventually that PIF counted is ours, so you’ll see that PIF increases well.
When you cut through all the numbers at the end of the day, there is relatively smaller amount of real growth, and that real growth is all coming from small commercials.
Ray Iardella – Macquarie
Okay. That’s helpful.
And then maybe on the expense ratio in the commercial business nice year-over-year improvement. Just curious to know, if David, I don’t believe you mentioned any change in the guidance in mid single digit growth on the commercial side, but it’s – if you know growth were reverted back to that level.
I mean how much expense ratio leverage do you guys have in that business?
Frederick Eppinger
Well, I think, I’m going to stick with really with really kind of where our guidance is for the current year, and I wouldn’t anticipate a lot more leverage in in the expense ratio we had quite bit of improvement over the last year or so. We saw some this over, but overall through the year.
We don’t anticipate that ratio is going to move much based on our growth expectations, but in all of these leverage your question is good about 13 right. So if you look at I will gain has been for this acquisition will be these agents able to shift better business and get pricing.
We believe we have the portfolio in place and it does set up 13. So if you look to ramp up the ramp up of burnrate we look at retention which stand accrual goes to growth.
It does create leverage and expense in ‘13 for these businesses obviously because, we grew as you know we expanded for instance in small commercial last year into 12, 13 initial stage and can set up the national network on the back end of some of them we can start. And so lot of these stuff well as not huge impact for ‘12 is something that make us feel good about those continued improvements.
So you’re right you’ve seen what we’ve tucked in, we said what would happen that has happened it will pause for a minute here probably the rest of the year. It’s right what’s going to happen because of the growth this additional growth from our plan is likely to help again in ‘13.
So I think it’s the right observation of what we’re trying to do on these. And all our economic leverage we believe that are coming implace nicely for us.
Ray Iardella – Macquarie
Great, thanks for taking my all follow-up.
Frederick Eppinger
Thank you, Rick
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Frederick Eppinger
Thanks to all of you for our participation today and I will look forward to speaking to you next quarter.
David Greenfield
Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.