Executives
Mark Cummins - Chief Investment Officer
Michael Browne - President and CEO
Art Chandler - Chief Financial Officer
Kevin Toth - Chief Underwriting Officer
Tom Clark - Head of Field Operations
Allan Becker - Chief Actuary
Analysts
Michael Phillips – Stifel Nicolaus
Beth Malone – Wunderlich
Bob Glasspiegel – Langen McAlenney
Caroline Steers – Macquarie
Scott Heleniak – RBC Capital Markets
Ron Bobman – Capital Returns
Harleysville Group Inc. (HGIC) Q1 2010 Earnings Call April 28, 2010 8:00 AM ET
Operator
(Operator Instructions) Welcome to the Harleysville Group First Quarter 2010 Earnings Conference Call. I would now like to turn the meeting over to Harleysville Group Mr. Mark Cummins, Chief Investment Officer.
Mark Cummins
Welcome everyone today to our first quarter 2010 conference call. Our complete news release and financial supplement are posted in the investor section of our website at www.HarleysvilleGroup.com. A replay of this morning’s presentation will be available on our website later the morning.
During this call Harleysville Group, Inc. may make remarks about future expectations, plans and prospects. These remarks constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those indicated by these forward looking statements and our first quarter earnings release as a result of various important factors including those discussed in the 2009 Form 10-K which have been filed with the Securities & Exchange Commission.
You will hear us talk about operating results. Operating income is a non-GAAP financial measure defined by the company as net income excluding net after tax realized gains and losses on investments. For further definition we’ve included a chart titled reconciliation to operating income on the financial highlights page of our earnings release.
Leading off the call today will be our President and CEO Michael Browne, Art Chandler our Chief Financial Officer will follow with some highlights of our financial results, Kevin Toth, our Chief Underwriting Officer will follow with some comments on line of business results. I’ll return to provide some remarks on investments and Michael will then offer his closing comments. Tom Clark, Head of Field Operations and Allan Becker our Chief Actuary also are here to help answer and address your questions at the end of our planned remarks.
With that I’ll turn it over to Michael Browne.
Michael Browne
As we communicated earlier this month we experienced a significant number of catastrophe related claims during the first quarter from the severe winter weather which affected much of our operating territory. While the cat losses received the most attention during the quarter I think it’s important to note that the underlying fundamentals of our business remain very strong, which I’ll review in a moment.
Based upon preliminary estimates, the industry is expected to pay out upwards of $2 billion for catastrophe related losses in the first quarter. We expected Harleysville Group’s losses from cats in the quarter to be approximately $21 million. All total we experienced six loss events during the quarter that were classified as catastrophes. The most significant include back to back February storms that produced heavy snow, drifts, and hurricane force winds in the Northeast, and a severe March rain and wind storm in the Mid-Atlantic States. Because of our presence in the mid-Atlantic and Northeast regions it’s really no surprise that these 2010 catastrophes produced unusually high losses for us during the first quarter.
For many of our policy holders this extreme winter weather resulted in substantial destruction and financial loss to their families and businesses. Our claims staff has been working tirelessly to help these folks restore their lives and their livelihoods to the place where they were before these storms occurred.
At a time when they are counting on us the most we are delivering on our service commitment to our agents and policyholders because our outstanding financial strength and our excellent claims department. The reality is that helping people in times like the present is why we are in this business. As I said many times, I think our claims department is one aspect of our operations that differentiates us from our competitors and we certainly saw our claims staff perform admirably in addressing our policyholder’s needs following these winter storms.
I am pleased to report that excluding the impact of the catastrophe losses our underlying operating earnings per share improved over last year and our underlying statutory combined ratio was below 100%, both of which indicate that we continue to perform well in the fundamental areas of our business which include maintaining our underwriting discipline in a still competitive market.
Recognizing the significant actions we’ve taken over the last few years to enhance our overall corporate performance, just yesterday AM Best upgraded the financial strength ratings in our property and casualty operations to A. I think this upgrade validates our strategy and the successful execution of our strategy, to focus on the basics of our business which are underwriting, claims, service, and productivity, in order to write our agents best business and to generate long term profitability.
I think it is an especially meaningful achievement for us to be upgraded when you consider the challenging market conditions and economic uncertainty that face the property and casualty insurance industry today.
The outstanding efforts of our employees and the steadfast support of our agency partners we have successfully transformed our company. By executing a sophisticated underwriting approach, which includes predictive modeling, by implementing innovative technology that supports ease of doing business, by providing high quality claims service, and by practicing conservative investment management in a proactive capital management strategy, Harleysville has become one of the top performing super regional insurance companies in the United States.
That said; let’s look at a few of our first quarter numbers. We reported operating income of $0.28 per share which reflects the impact of our previously announced cat losses that reduced operating income by $0.49 a share after tax. Our statutory combined ratio for the quarter at 107.8% which includes 10 points from the catastrophe losses and our operating return on equity for the trailing 12 months was 11.3%. Net written premiums flat for the quarter.
Personal lines continue to generate strong growth in the quarter up 14% over last year’s first quarter following a nearly 9% growth we generated last year. Personal lines combined ratio for the quarter was 119.3% but that includes more than 24 points from catastrophe losses. Over the long term, personal lines have been very profitable for us with a combined ratio under 120% of the last 23 quarters.
Our commercial lines combined ratio also was adversely impacted by the severe winter weather but not as significantly finishing the quarter with a 104.7% combined ratio, that includes 6.2 points of cat loss. Commercial lines net written premiums were down by 3% in the quarter but again that was due in part to our ongoing underwriting discipline and our resulting unwillingness to write business and inadequate price.
We’re pleased to report that our overall policy retention remains strong, price continuing competitive pressures in the after market place and the ongoing difficult economic conditions that continue to result in less available premium due to declining exposures. Once again, I would point out, point to our agent’s ongoing support and our strong relationships with them for our high retention rate as well as the significant opportunities that they continue to make available.
Those relationships continue to benefit from our advanced technology; it enhances the ease with which our agency partners are able to transact business with us. Some of our growth in personal lines and likewise the strong new business growth we’ve seen in small commercial can be linked to the new commercial and personal lines policy administration systems which we’ve rolled out throughout virtually all of our operating territory. Our goal with access Harleysville is to provide our agents with some the industries easiest systems to use for writing business and we believe that we are doing that.
Our balance sheet remains very strong with a book value per share growing 19% to $28.29 from $23.82 a year ago. Our sound financial position also is evidenced by a high quality investment portfolio, a solid reserve position, a debt to capital ratio of 15% and a premium to surplus ratio of 1.2:1. With that solid base we’re well positioned to continue to be a strong and stable market for our agents.
Now I’m going to ask Art Chandler, our Chief Financial Officer to provide some comments on our first quarter financial results and I’ll be back later to offer some closing comments.
Art Chandler
My comments will relate to the four page financial supplement included with the press release. Starting with the first page you will note that we had operating income of $0.28 per share in the first quarter 2010 compared to $0.63 per share in the prior year’s first quarter. Realized investment gains were a modest $0.01 per share in the first quarter 2010 versus $0.02 per share of realized losses in the prior year’s first quarter.
Overall net income was $0.29 per share as compared to $0.61 per share in the first quarter 2009. Catastrophe losses during the first quarter this year had a $0.49 impact on earnings per share which compared to the average of the last eight quarters of $0.11 per share. Last year’s first quarter, catastrophe losses reduced earnings per share by only $0.04.
The statutory combined ratio for the first quarter was 107.8% or about six points higher than the results one year ago. Catastrophe losses accounted for 10 points on the combined ratio this quarter versus 0.8 points in the first quarter 2009. Favorable prior year development of 5.7 points or $0.28 per share was noted in the quarter compared to 4.7 points or $0.23 per share noted in the first quarter 2009. Kevin Toth will comment on business results in more detail in a few minutes.
First quarter statutory expense ratio of 35% was up a half point compared to the same period a year ago. First quarter operating cash flow was $14.8 million, paid losses decreased about 5% compared to the first quarter of last year. Excluding catastrophe loss payments the decline was 7%. Moreover, the ratio of paid losses to incurred losses remained at a solid level of 84% on declining earned premium.
Pre-tax investment income decreased $500,000 or about 2% in the first quarter. Generally reflecting the investment of new money and unis due to our tax position and the lower interest rate environment.
Turning to premium production, first quarter net written premiums were about flat compared to the first quarter 2009. Commercial lines net written premiums were down 3% in the first quarter. Primary drivers of the decrease was a decline in middle market writings which reflects our underwriting discipline, a decline in exposures, and lower involuntary market premiums. Policy retentions remained strong.
Our personalized premium volume was up about 14%, growth was driven by rate increases, higher retention, and strong new business levels. Our balance sheet remains strong; our capitals value was $28.29 per share up from $23.82 per share in the first quarter 2009. Our premium to surplus and debt to capital ratios both remained conservative at 1.2:1 and 15% respectively.
During the quarter we repurchased approximately 288,000 shares at an average price of $31.65 per share. As of today we have completed about 45% of the current 800,000 share buyback authorization.
With that I’ll turn the call over to Kevin Toth.
Kevin Toth
I’ll be discussing line of business results on the last page of the financial supplement; I’ll start with commercial lines. The big story in commercial lines this quarter was the impact of a series of back to back winter storms primarily in the mid-Atlantic and Northeast regions. The commercial lines combined ratio for the quarter was 104.7% versus 102.6% for the first quarter of last year. Cat activity contributed 6.2 points compared to 0.7 points in the first quarter of last year. Favorable development in the quarter was six points for commercial lines versus 5.3 points for the first quarter of last year.
In the quarter, commercial lines pure pricing was down 1.5% and in the first quarter as well we saw continued decline in the exposure base which continues to limit the size of available commercial lines premium. In our bop line of business we do continue to see modest pure price increases. Policy retentions continue to be very strong across the commercial lines book.
Turning to each line of business, commercial auto continues to be profitable at 98.3% combined ratio for the quarter versus an 89.2% for the first quarter of last year. We continue to see favorable frequency trends in this line and severity also continues to be in line with our expectations.
Our commercial multi-peril combined ratio finished the quarter at 110.7% and was heavily impacted by the winter weather catastrophe losses. This compares to a combined ratio of 107.8% for the first quarter of last year.
Turning now to workers compensation, the combined ratio for the quarter was 107.7% compared to the same result 107.7% for the first quarter of last year. We continue to be pleased with declining frequency trends in the workers compensation line and prior accident years continue to run off better than expected.
Turning to personal lines, personal lines net written premium grew by 14% in the quarter and we continue to be very pleased with the way our new personal lines policy administration system is driving increased profitable new business opportunities to us while providing our agents with greatly enhanced ease of doing business capabilities. Personal lines pricing increased by 3.8% in the quarter as we continue to take rate increases over the majority of our personal lines book. Policy retention remains very strong.
The personal lines combined ratio for the quarter was 119.3% compared to 98.9% for the first quarter of last year. Cats contributed 24.2 points in the quarter versus 1.3 points in the first quarter of last year. Favorable development for personal lines was 4.6 points in the quarter compared to 1.8 points for the first quarter of last year.
The personal auto combined ratio was 101.4% in the quarter versus 107% for the first quarter of last year. We continue take rate increases across the majority of our personal auto book. Written premiums in the line were up 19.1% in the quarter.
The homeowners combined ratio for the quarter was 148.7% versus 94.5% for the first quarter of last year. Winter weather losses contributed heavily to the result in the quarter. Homeowner’s premiums grew by 8.3% in the quarter.
With that I’ll turn the call back over to Mark to comment on investments.
Mark Cummins
Our high quality investment portfolio remained extremely well positioned to support our insurance operations. We will continue with our consistent and conservative approach that has served us well over time, particularly during the past few years which were characterized by unprecedented turmoil in the financial markets.
Because of our position of strength we were able to take advantage of the downdraft in the markets a little over a year ago and opportunistically add the equities at a time when many of our competitors were forced to rebalance and de-rift their investment portfolios.
At March 31, 2010, the unrealized gains in our total investment portfolio were $165.8 million. The market value to amortized value on our fixed maturities portfolio was 104.6% compared to 102.5% a year ago. Said another way, we had $107.6 million of unrealized gains from our fixed maturity portfolio at the end of the first quarter this year.
Our duration of 4.5 years at the end of the first quarter was up from 3.7 a year ago. Pre-tax yield excluding short term investments was 4.38% compared to 4.82% a year ago. The decline was primarily due to our shift to a heavier weighting and tax exempt securities. Our after tax yield at the end of the first quarter was 3.41% compared to 3.58% a year ago due to lower reinvestment rates.
After tax investment income was up 2.4% in the first quarter due to our shift in allocation to tax exempt fixed maturities securities. We expect pre-tax investment income to be down slightly in 2010 and based on the shift to tax exempts we expect after tax investment income to be up slightly in 2010.
Our fixed maturity portfolio remains very high quality with 99% of our fixed maturities rated A or better and 86% rated AA or better. Our average credit ratings are AA1 by Moody’s and AA+ by S&P. Our liquidity position remains very strong with a ladder on our fixed maturity portfolio including investment income and short term investments, totaling approximately $350 to $400 million over each of the next five years providing predictable cash flow and liquidity no matter what the environment.
Our equity portfolio performed well in the quarter and continues to benefit from the $50 million we invested between December 2008 and March 2009 with the equity markets were slightly more significantly lower. At March 31, 2010, our equity portfolio had an unrealized gain of $58.2 million with a market value increasing nearly 55% from a year ago.
Our equity surplus ratio was 28.1% at March 31, 2010. As I noted on the last call, we want a quarterly sensitivity analysis on our equity portfolio to stimulate a 50% correction in the equity markets. We are very comfortable with our equity exposure and continue to use broad based equity index products.
In summary, we positioned our investment portfolios to provide liquidity, asset quality, and capital in support of our insurance operations.
Now I’ll turn it back over to Michael.
Michael Browne
Before opening the call to your questions let me provide just a brief summary.
As I noted earlier in the call, responding to catastrophes is a very important part of our business. I want to reiterate how proud I am of our company’s response to the needs of our policyholders. We remain committed through our profession claims staff that is helping our policyholders as they seek to restore their lives.
As I’ve said on many occasions, claims are a key differentiator for Harleysville and our agents agree. They routinely tell us that our claims service sets us apart from our competitors and that it is am important factor in the reason they select a company like Harleysville to their customers.
Excluding the unusually high level of cat losses during the first quarter, the underlying fundamentals of our business remain very strong and our underlying statutory combined ratio remains below 100. Personal lines continued to generate solid growth in the quarter, absent the unusually high level of cat losses both for personal and commercial line statutory combined ratio would have been sub 100 levels.
In both personal and commercial lines our policy retention levels have continued to remain high, again reflecting our agent’s ongoing support. That close connection with our agency partners is tied directly to the solid relationships we have established with them over the years, and the myriad ways we continue to strengthen those relationships, such as putting more resources and decision making closer to the point of sale, and developing technologies and making it easier to do business with us.
We continue to maintain our solid capital base with a strong balance sheet and reserve position, a modest debt to capital ratio of 15%, a premium to surplus ratio of 1.1:1 and a high quality investment portfolio, all of which provide the sound financial position for us to write our agents business.
As you know, over the last several years our operating performance has improved considerably and it also has been very consistent. This has led AM Best Company just yesterday to upgrade the financial strength rating of our property and casualty operations today, affirming our position as a leader among the super regional insurance carriers.
I am confident that we are very well positioned as we manage through these difficult economic times. While the insurance marketplace continues to be challenging we remain committed to retaining our best business as well as generating profitable responsible growth. Though we are not going to compromise underwriting quality to chase a near term growth goal. Instead we will continue to work closely with our agency partners to remain disciplined despite the current market conditions as we seek to generate a long term return on equity of 12% or better and produce results that will continue to differentiate us favorably from the competition.
With that let’s open the call to your questions. We’re ready to take questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Michael Phillips – Stifel Nicolaus
Michael Phillips – Stifel Nicolaus
At this point what percentage of those claims that they closed?
Michael Browne
About 75%.
Michael Phillips – Stifel Nicolaus
What are your thoughts on the risk of development adversely either from those claims or just the claim department distraction on other claims?
Michael Browne
We think we have a pretty good handle on it. I’m not concerned about them developing. We’re pretty confident we have a pretty good handle on what those claims are and we closed about 75% of them and one of the things that I am really proud of is that we have not had a single complaint from anyone, agent or policyholder about the claims we’ve had in the first quarter. This is a very important part of our business. I think in this business sometimes claims is overlooked in terms of how important it is.
If you think about it, you’re a policyholder, when you have a claim, the experience that you have is the experience you remember the longest about your insurance company. It overwhelms anything else you have in terms of your experiences or carrier. Settling these claims promptly and fairly is a really important part of our business and I think it drives policyholder loyalty and it drives agent loyalty. I’m very pleased with how we performed in handling these claims. The fact is that it gives us an opportunity to shine where I think we’re really good which is our claims department.
Michael Phillips – Stifel Nicolaus
On comp, you’ve done a lot of effort to revamp that book and re-underwrite it. Where are you with those efforts to do that? Can you say what years is most of that stuff that you had to re-underwrite or non-renew, what years were most of that stuff written?
Michael Browne
Let me as our Chief Underwriting Officer, Kevin Toth, to comment on this issue. The workers comp combined ratio has been steadily improving for us over the long term, it’s a multi-faceted strategy, and it’s a long tail line.
Kevin Toth
We have been working for several years on a multi-faceted strategy to improve the workers comp line. I would not characterize it as a book re-underwriting effort. I wouldn’t say that we went back and looked at it and said that there were any year or any years in particular that we were concerned about. We looked at the results and we said this is a line that we want to be profitable and we need to manage this line for profitability for the long term.
We really started to take a number of actions across our book, not with regard to any year, not necessarily with regard to any type of account but it really focused primarily on the basics. Just a couple of the highlights is I think the way that we’re using predictive modeling has made a big difference in terms of the workers comp results that we’ve seen.
As you may know, we’ve been predictive modeling here at Harleysville for the better part of five years so we are now building second and third generation models which are developed here in house. I think each time we’ve learned something different about our book. We learned some way that we can make our models better. I think that’s really kind of been the lynch pin of how we’ve been approaching workers comp because predictive modeling has made it much easier for us to match price to risk which I think is really what you need to do in workers compensation, it’s really not a secret, you need to get an adequate price for the risk that you’re taking on.
There are a couple things that we’ve been doing, we’re doing a lot with our safety programs, and we’ve been doing a lot of policyholder and agent training. One of the other things I would say is that the work, Michael had mentioned our claims department; our claims department is doing some very innovative things with regards to workers compensation. We’ve got very strong preferred vendor networks, we’ve got very good programs for treatment and prompt reporting and return to work, and doing a very good job of closing out claims and eliminating some of that volatility which tends to linger in the work comp line of business.
I would say I think probably being careful with new mid-market workers comp has been an important part of that strategy. Small workers comp tends to perform better than middle market workers comp. We are, of course, a market for both but in this market we’ve had to be very careful on new mid-market business because at this point its business that tends to be fairly under priced.
Michael Phillips – Stifel Nicolaus
Can you say how much of your commercial line account, how many of your commercial line accounts do you offer some type of group life product?
Michael Browne
With regard to our commercial line, offer group life?
Michael Phillips – Stifel Nicolaus
Yes, what percent of those accounts?
Michael Browne
Did we actually write it or that we offer it? In terms of where it’s actually written it’s probably, we offer it everywhere but where we actually write it is about 10%.
Michael Phillips – Stifel Nicolaus
I would think that getting out of the B range on the life side might give some boost to the PC side.
Michael Browne
That’s a good point. Obviously as you know, our life company is not part of our public company and that’s why we don’t talk about it. Having the life company rating go from BB+ to A- will certainly help our life company, no question about that.
Operator
Your next question comes from Beth Malone – Wunderlich
Beth Malone – Wunderlich
A couple of general questions, on the reserve development, what line was that in?
Kevin Toth
In commercial lines we had six points of favorable development in the quarter and I’ll give it to you, it was really in almost every line. We had 5.5 points in commercial auto, 7.7 points in workers comp, 6.2 points in commercial multi-peril, and other commercial 4.8 points. For personal lines we took 5.7 points of favorable development in the quarter, we had 6.7 points in auto, 1.5 points in homeowners, and 10 points in other personal, total personal I should correct that was 4.6 points and we took 5.7 across the entire book.
Beth Malone – Wunderlich
The involuntary business that you have to participate in, what causes that to change, is that a result of more competition in regular carriers being willing to take risk that would have ordinarily been in the involuntary pool or not?
Art Chandler
It really is a result of two things, one is the pools are de-populating and so that business is reentering the traditional market. Secondly, the assessments are based upon our market share of voluntary writing in the state. We’ve been conscious of involuntary market assessments when we write this in certain states and we’ve made a conscious effort to control our market share in those states that have adverse involuntary market assessment. It’s really a function of two things; our own actions to minimize our assessments and the de-population of the pools.
Beth Malone – Wunderlich
In pricing in the personal lines, which appears to be positive especially related to commercial. Any sense of what’s really driving that and will the weather related losses experience by the industry have an impact on pricing?
Michael Browne
Are you talking about personal lines?
Beth Malone – Wunderlich
Yes
Michael Browne
As you know, we are getting some pretty healthy price increases. I think in the first quarter and last year’s first quarter in auto there was about a 4% swing. We have very healthy increases in homeowners because of insurance to value where our plan is to get between 4% and 5% additional increases on our personal auto book, over 94% of our auto book this year.
I think a lot of it is the environment. I think the market is allowing companies to take a price increase and we’re doing that and we expect to do that throughout this year.
Beth Malone – Wunderlich
On the upgrade, do you think it will have a bearing on your ability to market product at a favorable price in commercial and personal, as well as will have it have any impact on your ability to make acquisitions?
Michael Browne
I think the upgrade is really a confirmation that we’re doing the right things. I’ve always said it was just a question of when not whether we would get upgraded. I certainly think it is going to create some excitement about Harleysville out in the marketplace. I regularly tell our agents that anytime they have any time they have something they want to talk to me about they should either email me or call me. Two o’clock yesterday afternoon when we announced this I’ve had 57 emails from agency principals. These are agents who believed in us all along, they are very excited about our upgrade.
I think it’s going to give us an opportunity to write more business, more good business. I also think that it’s going to probably give us an opportunity to write some business with some new agents. We’ve always been careful in a soft market about not wanting to burn our way into new agencies in this kind of a market. If you think about our new platform for commercial and personal lines business which I think is very good technology, you combine that with our upgrade I think it’s going to give us some opportunities with new agents. I think this will give us some opportunities, it’s too early to quantify it but I think it’s going to be good for us.
Beth Malone – Wunderlich
On the acquisition front, does it change your positioning with?
Michael Browne
That’s a very interesting question. I think it might, quite frankly. If we’re talking to a company that’s A rated and we were A- there might be a little bit of a psychological factor there, somebody we’re talking to about acquiring them and they’re A and we’re A- and they might think why should you be acquiring us. I think that issue goes away now and I think it could provide us some positive momentum for us there.
Operator
Your next question comes from Bob Glasspiegel – Langen McAlenney
Bob Glasspiegel – Langen McAlenney
We’ve gone understandably from quantitative goal for the year of 12% ROE to it’s a long term goal but we’re not going to get there this year, which seems prudent if you’re not going to chase growth to get to the number this year. I think you threw in your want to outperform your peers. What are the benchmarks that you’re evaluating, how you’re doing versus your peers on 2010 numbers?
Michael Browne
I don’t think we changed any of our metrics in terms of our measurement, and 12% is still the goal. Obviously it’s a long term goal but that’s our goal every quarter is to get to 12%. If you think about end of 2009 our trailing 12 months ROE was 12.9%. I can’t think of any other of the super regionals who were anywhere near that. Actually I think even this quarter we’re at what 11.3%, I don’t think too many of the super regionals are near that. The ROE has always been our primary measure here in terms of returning value to our shareholders and our goal is still 12% we’re not backing away from it.
Bob Glasspiegel – Langen McAlenney
Do you think it’s attainable in 2010 trailing 12 months, that’s where I lost you?
Michael Browne
We don’t give specific guidance and we’re not going to do that but it’s still our goal.
Bob Glasspiegel – Langen McAlenney
This may get too complicated; I’ll do it offline, if you’ve got a quick answer. It seems like your tax rate despite going into more tax exempts as Mark said, went up by credit your underwriting losses of 35% I derive a tax rate on investment income of 28% which makes me think that maybe you didn’t fully credit all your underwriting losses at 35%. Is there something obvious that jumps out, if not I approach this with you guys offline?
Art Chandler
The GAAP rules basically stipulate that your effective tax rate in one quarter in particular we’re talking about the first quarter here, have to reflect what you anticipate for the full year. We don’t automatically credit our underwriting losses at the 35%, particularly when those underwriting losses were driven by an extraordinary set of events like the first quarter catastrophe losses. The effective tax rate that we use or did use in the first quarter reflects what we anticipate for the full year. Hopefully that answers your question.
Bob Glasspiegel – Langen McAlenney
You didn’t credit the underwriting losses at 35% it sounds like because I think you’re going to be in a taxable position for underwriting for the year?
Art Chandler
I can’t speculate on that.
Bob Glasspiegel – Langen McAlenney
You have to make a guess on what the combined ratio is for the year. I’m not trying to trap you into a goal.
Art Chandler
The effective tax rate we’re using is not reflective of what you would purely calculate from the first quarter. It reflects our anticipation of what the effective tax rate will be for the full year.
Bob Glasspiegel – Langen McAlenney
The tax rate on investment income for the year, go down a point or two or do you have any guidance on that?
Mark Cummins
If you look at it, we disclosed in the supplement what it was for the quarter, 22.5% and that’s been coming down steadily over the past three years as we shifted to muni. You can expect it to continue to move down as we increase, our munis are like 50% of the fixed income portfolio at this juncture and we expect to still move that up a tad.
Bob Glasspiegel – Langen McAlenney
How sensitive is it to another state of cat losses. If we had another quarter like this, say wow we overshot.
Mark Cummins
It depends on the magnitude of what we had but that would temper our appetite for munis and we’d probably slow down the shifting and not increase that as heavily as we had been.
Bob Glasspiegel – Langen McAlenney
You’ve been growing personal lines on the margin in an environment where cats have been very mild. Now we have a quarter of bad cats and not unexpectedly have exposure. Is there any thoughts while we may have overshot the market let’s temper our appetite for growing personal lines?
Michael Browne
We feel confident about our strategy. Our history is about 2% cat losses over the last five to 10 years. We’ve been pretty good at managing our cat exposure. In this business every once in a while you’re going to get hit by storms or a series of storms and you’re going to have losses and I don’t think we should feel defensive about that. I think we feel pretty good about our personal line strategy and we expect it to continue to grow.
Operator
Your next question comes from Caroline Steers – Macquarie
Caroline Steers – Macquarie
Some larger commercial line companies have been a bit more positive recently on renewal rate increases, more cautious optimism. Do you have a similar view and how does new business right now in commercial lines differ from renewal?
Michael Browne
We have diverging views depending on whether you’re talking about small commercial or whether you’re talking about mid market. We are getting some price increases on small commercial business but in the mid market we’re not seeing any improvement. We’re being very cautious, the volume of our mid market business continues to decline. On the other hand, we’re seeing great results in small commercial. Our new small commercial business was up 32% in the quarter. We feel good about small commercial but I’m not going to tell you that I’ve seen improvement in the mid market commercial lines business because we just don’t see it.
Caroline Steers – Macquarie
Can you comment on the frequency and severity trends in personal auto right now?
Allan Becker
Personal auto frequency has been about -2 and severity has been about +3 to +5.
Operator
Your next question comes from Scott Heleniak – RBC Capital Markets
Scott Heleniak – RBC Capital Markets
On personal lines you had strong growth for many quarters now and wondering if you might be able to quantify how much of that is new business and where you’re taking the share from you think and how you’re doing that?
Michael Browne
In terms of where we’re taking it, it’s really coming from everywhere. I wouldn’t say that it’s, some of it’s from regional carriers, and some of it is from the national carriers. I would say it’s probably equally from new business and from renewal business we’re seeing. As you know, we’re seeing nice price increases on our book and we’re seeing healthy new business. We are also going to go into the space.
Scott Heleniak – RBC Capital Markets
Do you feel like your pricing, I think you said personal lines was up about 3.8%? Do you feel like your pricing is pretty comparable or are they pushing through bigger price increases which is causing some of the people to leave or do you think it’s pretty much comparable?
Michael Browne
I think it’s pretty comparable. I don’t think the fact that we’re writing more personal lines of business is because our prices are lower. I think it’s a combination of strong relationships with our agents and a great new platform for writing personal line business, and our retentions are very strong. Our retentions now on our personal lines of business are close to 90%.
Scott Heleniak – RBC Capital Markets
Wondering if you’re seeing any changes on terms and conditions, there was a specialty insurer a couple days ago who you probably heard about, talked about some loosening in terms and conditions. Just wondering if you’re seeing that in the mid market because people are seeing it more in Texas and so forth, your thoughts on that.
Michael Browne
We’re certainly not seeing it. We’re not involved in it, we’re not loosening our terms and conditions. I think what you’re seeing with us is we’re walking away from business if it requires us to loosen our terms or conditions we’re going to walk away and that’s why you’re seeing our mid market commercial lines business continue to go down
Scott Heleniak – RBC Capital Markets
I wasn’t referring to you I was referring just to the market in general, are you seeing that in general from your competitors?
Michael Browne
Sometimes you do and sometimes you see very aggressive pricing, kind of anecdotal. I think there are some people out there who are irresponsible but that’s what happens in this kind of a marketplace. I wouldn’t say that I see it as a big trend.
Scott Heleniak – RBC Capital Markets
With the upgrade I was wondering if that changes any type of new programs or reductions you might have, I know it’s a tough market but does that change anything compared to where you were a few days ago?
Michael Browne
In terms of the products we market?
Scott Heleniak – RBC Capital Markets
Right.
Michael Browne
No I don’t think so. I wouldn’t think so. I think we’re going to continue to execute our strategy and I think this upgrade is a confirmation that we’ve had the right strategy. As I said earlier, I think it does create some excitement and some buzz with our agents and maybe potential new agents. In terms of our strategy we’re not going to change that.
Operator
Your next question comes from Ron Bobman – Capital Returns
Ron Bobman – Capital Returns
I want to follow up on the questions about rates. I think you said that most recently in the auto book you got about a 4% increase year over year. Then did you also say you’re hoping to get an incremental 4% on 94% of your auto book?
Michael Browne
What I was trying to say was that of the swing between this year’s first quarter and last year’s first quarter was about a 4% swing. Last year in the first quarter our personal auto prices were down about 2% this year they’re up by about 2% and we expect to take 4% to 5% increases this year on 94% of our book in personal.
Ron Bobman – Capital Returns
It’s interesting how you communicate that way. Is there any read in to what the other 6% of the book is going to be doing. Is the movement in the other 6% material so as to take the overall average meaningful departure from the 4% target on the 94%.
Michael Browne
Not at all. There are some places we don’t need rate, we need it on 94% of our book but it’s not going to have a meaningful impact on the overall impact to increase.
Ron Bobman – Capital Returns
How about homeowners, can you provide some like level of indications on homeowners where they are year over year, where you hope to get them going forward.
Michael Browne
As I mentioned, homeowners is up about 6.5% in the first quarter. That’s pretty healthy. We expect that kind of increase to continue.
Operator
Your next question comes from Bob Glasspiegel – Langen McAlenney
Bob Glasspiegel – Langen McAlenney
There was some mini breakout in other income revenues this quarter, 7% growth. Is that sustainable; is there new fee stuff that’s been consolidated, what’s driving that?
Art Chandler
That’s just and additional management fee income from the mutual, it’s not terribly material.
Bob Glasspiegel – Langen McAlenney
It’s a good run rate for future quarters or was it something non-recurring in the quarter.
Art Chandler
I think it’s probably a good run rate.
Operator
There are no further questions at this time.
Michael Browne
Thank you everybody. We appreciate you calling in and we look forward to talking to you at the end of next quarter.
Operator
Thank you for your participation. Today’s call has concluded. Please disconnect at this time.
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