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The Chubb (NYSE:CB)

Q4 2012 Earnings Call

January 31, 2013 5:00 pm ET

Executives

John D. Finnegan - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Chairman of Finance Committee

Paul J. Krump - Executive Vice President and President of Commercial & Specialty Lines

Dino E. Robusto - Executive Vice President and President of Personal Lines & Claims

Richard G. Spiro - Chief Financial Officer and Executive Vice President

Analysts

Amit Kumar - Macquarie Research

Joshua D. Shanker - Deutsche Bank AG, Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Gregory Locraft - Morgan Stanley, Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Jay Gelb - Barclays Capital, Research Division

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Ian Gutterman - Adage Capital Management, L.P.

Operator

Good day, everyone and welcome to the Chubb Corporation Fourth Quarter 2012 Earnings Conference Call. Today's call is being recorded.

Before we begin, Chubb has asked me to make the following statements. In order to help you understand Chubb, its industry and its results, members of Chubb's management team will include in today's presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

It is possible that actual results might differ from estimates and forecasts that Chubb's management team makes today. Additional information regarding factors that could cause such differences appears in Chubb's filings with the Securities and Exchange Commission.

In the prepared remarks and responses to questions during today's presentation, Chubb's management may refer to financial measures that are not derived from Generally Accepted Accounting Principles, or GAAP.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information, is provided in the press release and the financial supplement for the fourth quarter 2012, which are available on the Investors section of Chubb's website at www.chubb.com.

Please also note that no portion of this conference call may be reproduced or rebroadcast in any form without the prior written consent of Chubb. Replays of this webcast will be available through February 28, 2013. Those listening after January 31, 2013, should please note that the information and forecasts provided in this recording will not necessarily be updated and it is possible that the information will no longer be current.

Now I will turn the call over to Mr. Finnegan.

John D. Finnegan

Thank you for joining us. For Chubb and the P&C industry, the big story for the fourth quarter of 2012 certainly was storm Sandy, which resulted in tragic loss of life, human suffering and devastating damage to residential and commercial property across a large, densely populated region of the country.

Although Sandy generated, by far, the largest number of claims of any catastrophe in Chubb history, our people rose to the challenge, bringing empathy and moral support, along with tangible help, to thousands of people in distress, at a time when many of our employees were affected by the storm in the same way as our customers.

Sandy had a huge financial impact on Chubb as well, $882 million before tax, the largest net impact of any catastrophe in the history of Chubb. Nevertheless, we were able to produce an operating profit in the quarter. We achieved this by continuing to do the things we've discussed in recent quarters, expanding our margins through the pursuit of renewal rate increases, writing new business only when we believe we are securing adequate rates, and continually refining our risk selection to improve the profitability of our book of business.

So while our combined ratio for the fourth quarter was at 111.2%, including the 29.7 point impact of catastrophes, on an x cat basis the combined ratio was 81.5%. This was an 8 point improvement over the corresponding quarter of 2011 and the second best quarterly x cat combined ratio we've achieved over the past 5 years. It was a clear demonstration of the strong underlying performance of our business units.

Fourth quarter operating income per share was $0.16 and net income per share was $0.38, while the impact of catastrophes for the quarter was $2.13 per share. Premiums worldwide for the quarter were down 2%, although they were up about 1% excluding the effects of reinsurance reinstatement premiums related to Sandy and foreign currency translations.

In the U.S., we continue to secure renewal rate increases in all 3 of our business units, at or above the levels of the last few quarters. Rates were up 8% for Commercial, 9% for Professional Liability and renewal change was up 6% for Personal lines. In countries outside the U.S., which accounted for 27% of our total net written premiums, we secured rate increases in the low single digits.

During the fourth quarter, we also had favorable x cat loss experience reflecting the impact of our underwriting initiatives and we had some good luck in the form of lower non-cat related weather losses. Cat book value per share at year end was $60.45, up 8% compared to year end 2011.

Our capital position is strong, as evidenced by the new share repurchase program we announced today. As you saw in our press release, we provided operating income per share guidance for 2013 of $6.40 to $6.80.

Ricky will provide some more detail in guidance as well as our capital management activities.

And now I'll turn it over to Paul.

Paul J. Krump

Thanks, John. The Chubb Commercial Insurance net written premiums for the fourth quarter declined 2% to $1.2 billion. Excluding the $28 million impact of reinsurance reinstatement premiums related to storm Sandy, CCI's quarterly premium growth was flat.

CCI's quarterly combined ratio was 118.7% versus 93.2% in the fourth quarter of 2011. Excluding the 36.8 point impact of catastrophes, CCI's fourth quarter combined ratio improved 11.7 points to 81.9% from 93.6% in the fourth quarter of 2011, due to the disciplined risk selection and the compounding effect of overall rate increases. We are pleased that CCI's average U.S. renewal rates were up 8% in the quarter. This is identical to the average rate increases we obtained in the third quarter, as well as the average for all of 2012. The 8% increase in the fourth quarter of 2012 is on top of the 6% average renewal rate increase in the fourth quarter of 2011. So we are obtaining rate on rate.

In the fourth quarter, CCI secured average renewal rate increases in the United States in every line of business. Increases by line were in a fairly tight range around the overall average, led by workers compensation, general liability and Monoline property. We received rate increases on 90% of the renewal book compared to 70% in the fourth quarter of 2011.

In CCI markets outside of the U.S., average renewal rate increases were in the low single digits and generally varied little by country. CCI's fourth quarter U.S. renewal retention was 83%, down 1 point from the third quarter. The new-to-lost business ratio in the U.S. was 0.7:1 in the fourth quarter, down from 0.9:1 in the third quarter. New business can be choppy on a quarter-to-quarter basis. That being said, given the extent that new business was under-performing renewals, we implemented underwriting actions in the areas of risk selection and pricing in order to narrow that profitability gap, at the expense of some growth. I believe CCI's outstanding x cat performance demonstrates the success of these actions.

Midterm endorsement volume in the fourth quarter of 2012 was down relative to the fourth quarter of 2011. Audit premiums were flat. In the Northeast, activity in the property market for the quarter was driven by the effects of storm Sandy. Prior to the storm, there was some easing of rate increases in cat-prone areas. While it is too soon to tell the full effect of Sandy on the market, the storm has generally stemmed this dynamic in the Northeast property market, especially for the more cat-exposed locations.

For the full year, CCI's net written premiums increased 2% to $5.2 billion. The combined ratio was 99% in 2012 and 99.3% in 2011. The impact of catastrophes accounted for 11.4 percentage points in 2012 compared to 10.5 points in 2011. Excluding the impact of cats, CCI's combined ratio improved to 87.6% in 2012 from 88.8% in 2011.

Turning to Chubb's Specialty Insurance, net written premiums declined 7% in the fourth quarter to $688 million. The combined ratio improved to 88.5% from 89.8% in the fourth quarter of 2011. For the Professional Liability portion of CSI, net written premiums were down 5% to $613 million and the combined ratio improved to 93.7% from 96.1% in the fourth quarter of 2011.

We are encouraged that average renewal rates for Professional Liability in the U.S. increased by 9% in the fourth quarter of 2012, continuing the positive rate momentum that began in the fourth quarter of 2011. The 9% average renewal rate increase obtained in the fourth quarter compares to 8% in the third quarter and 1% in the fourth quarter of 2011. Like CCI, Professional Liability is now achieving rate increases on top of rate increases.

Each of our Professional Liability lines of business in the United States experienced renewal rate increases in the fourth quarter. Increases were led by private company D&O, EPL, public D&O and not-for-profit D&O. All 4 of these lines achieved low double-digit renewal rate increases. The crime, fiduciary and E&O lines obtained average renewal rate increases in the mid-single digits.

In markets outside of the U.S., renewal rate increases for Professional Liability in the fourth quarter were consistent with the third quarter, rising modestly by low single digits on average. Renewal premium retention for Professional Liability in the fourth quarter was 81% in the U.S., down 1 point from the third quarter. In order to improve the profitability of the book, we continue to differentiate our push for rate based on many factors, including segment, jurisdiction and individual account.

The new-to-lost business ratio for professional liability in the U.S. in the fourth quarter was 0.6:1, the same as in the third quarter of 2012.

Regarding the surety portion of our CSI book, net written premiums in the fourth quarter were down 15% to $75 million and the combined ratio was 51.4%. For the full year 2012, CSI net written premiums declined 6% to $2.6 billion and the combined ratio was 91.3% compared to 85.1% in 2011. Professional Liability premiums declined 5% to $2.3 billion and the combined ratio was 96.7%. Surety premiums declined 11% to $295 million and the combined ratio was 51.4%.

And with that, I will turn it over to Dino, who will review our Personal lines results as well as corporate-wide claims.

Dino E. Robusto

Thanks, Paul, and good evening, everyone. Chubb's Personal Insurance net written premiums increased 2% in the fourth quarter to $1 billion. Excluding a $25 million reinstatement premium related to storm Sandy, CPI's premiums grew 5% in the quarter. CPI produced a combined ratio of 117.9% compared to 86.9% in the corresponding quarter last year. The impact of catastrophes for the quarter was 40.1 percentage points in 2012, whereas in the fourth quarter of 2011, the impact of cats was 1.6 points.

CPI's x cat combined ratio for the quarter improved 7.5 points to 77.8% in 2012 from 85.3% in 2011.

Homeowners premiums were up 1% for the quarter and were up to 6%, excluding reinstatement premiums. The homeowners combined ratio was 131.3% compared to 82.3% in the corresponding quarter last year. The impact of cats accounted for 62 points of the homeowners combined ratio in the fourth quarter of 2012 compared to 2.8 points in the fourth quarter of 2011. Excluding the impact of catastrophes, the homeowners combined ratio was 69.3% compared to 79.5% in the corresponding quarter last year. This 10.2 point improvement is largely attributable to lower non-cat weather-related losses in the U.S., as well as higher rates.

In terms of homeowners policy retention, it remained steady in the United States with the third quarter at 91%. Homeowners new business premiums worldwide were up 8% over the fourth quarter of 2011.

Personal auto premiums for the fourth quarter increased 4% and the combined ratio was 97.1% including a 9.3 point impact from Sandy. On an x cat basis, the fourth quarter personal auto combined ratio improved 6.7 points to 87.8% from 94.5% in the same period, 2011, reflecting strong profitability across all jurisdictions.

Personal auto policy retention in the U.S. was also consistent with the third quarter of 2012 at 89%. New business premiums worldwide were up 8% over the fourth quarter of 2011, driven by strong growth in Brazil and Europe.

In other Personal lines, premiums were up 3% and the combined ratio was 97.1%, including a 2.7 point impact of cats, largely from our yacht business.

On an x cat basis, the other personal combined ratio of 94.4% is consistent with the 2012 full year result of 94.9% and the fourth quarter 2011 result of 94.2%.

Turning now to full year results. CPI's net written premiums in 2012 increased 4% to $4.1 billion. CPI produced a combined ratio of 94.4% including a 13.7 point impact of catastrophes, compared to a combined ratio of 98.3% including a 13.1 points of catastrophes in 2011.

Excluding the impact of catastrophes, CPI's combined ratio for the full year improved 4.5 points to 80.7% in 2012 from 85.2% in 2011. For all of 2012, homeowners premiums were up 3%, or 4% excluding reinstatement premiums. The homeowners combined ratio was 94.2% including a 21 point impact from catastrophes, compared to a combined ratio of 100.2% in 2011, including a similar impact from catastrophes of 20.6 points. Thus, the 6 point improvement in the combined ratio for the year was attributable almost entirely to the improvement in the underlying x cat performance.

Personal auto premiums increased 1% in 2012 to $691 million and the combined ratio was 93.4%. Other Personal lines premiums for the full year rose 8% to $880 million and the combined ratio of 95.6%. It's noteworthy that, even with the occurrence of a geographically immense storm that struck a densely populated and highly important area for Chubb, our homeowners business still produced nearly 6 points of underwriting profit for the year.

But as we think about storm Sandy within the context of the last several years of increasing weather-related losses, we recognize the need for additional price increases. Prior to Sandy, we had been implementing mid single-digit rate increases for homeowners in the Northeast. Post Sandy, we plan to file for rate increases up to the low teens in some areas of the Northeast.

Let me turn now to discuss claims for Chubb, overall. The impact of catastrophes accounted for 9.6 percentage points of the combined ratio for the full year 2012 and 29.7 points in the fourth quarter. The impact of catastrophes in the fourth quarter of 2012 was $876 million before tax, reflecting the $882 million net impact of Sandy, less $6 million of favorable reserve development from earlier periods. $4 million of that was from events earlier in 2012 and $2 million was from events prior to 2012.

Sandy was the largest catastrophe in Chubb's history, both in terms of the number of claims and the cost on a net of reinsurance basis. While Sandy affected 16 states and several Canadian provinces, about 90% of our claims originated in New Jersey, New York and Connecticut. Roughly 53% of our loss was attributable to Commercial accounts and 47% to Personal Insurance customers. I'm proud to say that our claim teams, along with hundreds of other Chubb employees who helped out, turned in an outstanding performance, despite the large volume of claims and some unique challenges they faced, such as gasoline shortages, lengthy power outages, the inability to gain access to some affected areas due to flooding and closed roadways and, in some cases, dealing with the impact on their own homes.

Despite these handicaps, our customer survey feedback on closed claims for homeowners and personal auto customers currently indicates nearly a 98% highly satisfied rating, which is the highest rating on the survey form.

Catastrophes like Sandy are terrible events which take lives and cause massive disruption to survivors. But times like this also reinforce for our customers and their neighbors and friends, that there is a Chubb difference, one that is manifested in the speed, empathy and fairness with which we handle claims.

And now, I'll turn it over to Ricky who will review our financial results in more detail.

Richard G. Spiro

Thanks, Dino. Let me begin by pointing out that we have included some additional detailed information about the impact of storm Sandy, including our estimated gross loss, in the supplementary investment information, which can be found on our website.

Now, turning to our fourth quarter operating results. We had an underwriting loss of $332 million in the quarter due to the impact of Sandy. For the full year, underwriting income was $548 million. Property and Casualty investment income after tax was down 6% to $296 million in the quarter due, once again, to lower reinvestment rates in both our domestic and international fixed maturity portfolios.

Net income was higher than operating income in the quarter, due to net realized investment gains before tax of $90 million or $0.22 per share after tax. For comparison, in the fourth quarter of 2011, we had net realized investment losses before tax of $12 million or $0.03 per share after tax.

Unrealized depreciation before tax at December 31, 2012, was $3.1 billion. For comparison, unrealized depreciation before tax was $2.7 billion at year end 2011.

The total carrying value of our consolidated investment portfolio was $44.2 billion as of December 31, 2012. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 3.6 years and the average credit rating is Aa3. This slight change in the average credit rating of our fixed maturity portfolio this quarter from Aa2 is largely due to the fact that, on the margin, we have seen better total rate of return opportunities by purchasing select, high-quality corporate bonds over the past few years, as opposed to government mortgage-backed securities, due to the fed activity in the MBS sector. Our core investment strategy remains the same.

We also continue to have excellent liquidity at the holding company. At December 31, 2012, our holding company portfolio had $2.6 billion of investments, including approximately $940 million of short-term investments. The increase in holding company liquidity from September 30, reflects the payment of a regularly scheduled dividend from the operating company to the holding company in December and the suspension of share repurchases for most of the quarter, which I will discuss in more detail in a few minutes.

Book value per share under GAAP at December 31, 2012, was $60.45 compared to $56.15 at year end 2011, an increase of 8%. Adjusted book value per share, which we calculate with available for sale fixed maturities at amortized cost, was $53.80 compared to $50.37 at 2011 year end.

As for reserves, we estimate that we had favorable development in the fourth quarter of 2012 on prior year reserves by SBU as follows. In CPI, we had approximately $40 million, CCI had $105 million, CSI, $50 million and reinsurance assumed $10 million, bringing the total favorable development to approximately $205 million for the quarter. This represents a favorable impact on the fourth quarter combined ratio of about 7 points over all.

For comparison, in the fourth quarter of 2011, we had about $185 million of favorable development for the company overall, including about $35 million in CPI, $90 million in CCI, $55 million in CSI and $5 million in reinsurance assumed. The favorable impact on the combined ratio in the fourth quarter of 2011 was about 6 points.

For the fourth quarter of 2012, our x cat accident year combined ratio was 88.4% compared to 95.8% in last year's fourth quarter. This was our best quarterly x cat accident year combined ratio since 2007.

Favorable development for the full year 2012 totaled about $615 million and had a favorable impact on a combined ratio of approximately 5 points, compared to $765 million and a favorable impact of the combined ratio 6.5 points for 2011.

For the full year 2012, our x cat accident year combined ratio was 90.6% compared to 93% in 2011, an improvement of almost 2.5 points. During the fourth quarter, our loss reserves increased by $472 million, including an increase of $497 million for the insurance business and a decrease of $25 million for the reinsurance assumed business, which is in runoff.

The impact of catastrophes increased reserves by about $520 million and the impact to currency translation on loss reserves during the quarter resulted in an increase in reserves of about $20 million.

Turning now to capital management. As we announced previously, in light of storm Sandy and the uncertainties surrounding it, after the storm, we temporarily suspended the repurchase of common stock under our share repurchase program, which we had announced in January of 2012 and which provided for the purchase of up to $1.2 billion of our common stock. We resumed repurchases under the program after the December 11, 2012, announcement of our estimated losses from Sandy. In total, during the fourth quarter, we repurchased 369,900 shares at an aggregate cost of $28 million. The average cost of our repurchases was $76.54 per share. And for the full year 2012, we repurchased 13.1 million shares at an aggregate cost of $935 million and an average cost of $71.38 per share.

In January 2013, we repurchased an additional 1.4 million shares at an aggregate cost of $108 million and an average cost of $78.77. That brings the total repurchases under the January 2012 repurchase program to $979 million.

As we had anticipated in our previous disclosure, as a result of the temporary suspension of repurchases related to Sandy, our total repurchases under the January 2012 program are below the $1.2 billion in repurchases we had previously contemplated completing by the end of this month.

As we announced today, our Board of Directors authorized a new $1.3 billion share repurchase program, which replaces our prior program. Our 2013 guidance assumes that our repurchases during the calendar year will be roughly equal to expected operating income for 2013, less shareholder dividends. We intend to complete this new repurchase program by the end of January 2014, subject to market conditions and other factors.

Finally, before I turn it back to John, let me make a few additional comments regarding our guidance. We expect operating income per share for 2013 to be in the range of $6.40 to $6.80, which, at the midpoint, is $1.37 higher than our actual operating income per share for 2012. This guidance is based on our expectation that, for the full year 2013, net written premium growth will be 2% to 4%; we assume a continuation of current exchange rates resulting in no currency impact; we will have a combined ratio of 89 to 91; Property & Casualty investment income after tax will decline 7% to 9%.

As a reminder, unlike some of our competitors, we do not include our share of the change in the net equity of our alternative investments and Property & Casualty investment income. We include it in net realized investment gains and losses. And our guidance assumes 260 million average diluted shares outstanding.

Our guidance also assumes 4 percentage points of catastrophe losses. This has been adjusted upward by 0.5 points from last year's initial guidance, to reflect the higher cat losses that we have experienced recently. The 4 points is also consistent with our median annual catastrophe impact over the last 10 years.

In terms of sensitivity, the impact of each percentage point of catastrophe losses on 2013 operating income per share is approximately $0.30.

And now I'll turn it back to John.

John D. Finnegan

Thanks, Ricky. Chubb performed well in 2012 despite the historic catastrophe losses from Sandy. Here are some of the highlights.

For the fourth quarter, we were profitable despite Sandy. For the full year 2012, net income was $1.5 billion generating an ROE of 9.9%. Operating income per share for the year was $5.23 despite a $2.73 per share impact of catastrophes. Operating ROE for the year was 10.3%. These are strong results given the impact of catastrophes and the continued low interest rate environment.

Our 2012 x cat combined ratio was 85.7%. Our x cat accident year combined ratio was 90.6% for 2012. Renewal rates improved in all 3 SBUs, with the average U.S. rate increases for the full year of 8% for Commercial and 7% for Professional Liability and average U.S. renewal increases of 5% for Personal lines. Book value per share was up 8% for the full year.

We continued to actively manage our capital in 2012 by returning almost $1.4 billion to our shareholders, through a combination of share repurchases and dividends.

From the time our share repurchases began in December 2005 through the end of 2012, we have bought back 47% of our, then, outstanding shares. During that period, we have returned a total of $13.9 billion to our shareholders through $10.6 billion of share repurchases and $3.3 billion of dividends.

Our continued commitment to capital management is demonstrated by the new $1.3 billion share repurchase program we announced today.

To sum up, 2012 was a year in which nominal results were somewhat disappointing due to the impact of storm Sandy. However, these outsized catastrophe losses masked strong underwriting performance, which allowed us to still make a profit in the fourth quarter and generate $1.5 billion of net income for the full calendar year. The strong underlying performance reflects the impact of both higher rates and favorable loss experience, especially in the fourth quarter when we posted our best x cat accident year combined ratio since 2007.

In terms of losses, we had favorable experience throughout 2012, after experiencing an uptick in losses in the second half of 2011. This was due in good part to the myriad of underwriting initiatives we undertook in late 2011, aimed at improving our profitability even at the expense of growth.

However, while I would like to take credit for all the improved loss experience which subsequently occurred in 2012, the fact is that some of it was merely due to good fortune. For example, non-cat related weather losses in homeowners in 2012 were 3 points below our longer-term historical experience. A similar, albeit smaller, positive non-cat related weather impact was experienced in CCI related to our property business.

We believe it will be unduly optimistic to expect a recurrence of these unusually low non-cat related weather losses in 2013.

Looking ahead, we expect to see continued rate increases in 2013, which, on top of 2012 rate increases, should improve our accident year margins. On the other hand, we expect some of this benefit to be offset by what we assume will be a reversion to more normalized levels of non-cat related weather losses in 2013. We also expect headwinds in the form of lower investment income in 2013, due to continued low interest rates.

On balance however, we're optimistic going into 2013, as evidenced by our $6.40 to $6.80 per share operating income guidance. Achievement of earnings at anywhere near the midpoint of this guidance would result in the highest calendar year earnings per share in our history.

While 2012 was a challenging year because of unusually high catastrophe losses, the rate underwriting initiatives we undertook last year have established a foundation for strong performance in 2013.

And with that, we're glad to open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Amit Kumar with Macquarie.

Amit Kumar - Macquarie Research

My first question relates to the guidance and I'm sort of trying to reconcile the guidance for the price increases. Your guidance for 2013 is exactly similar to your initial guidance for 2012. I understand the new-to-loss business numbers and the retentions discussion. Why wouldn't it still be higher than what your guidance was for 2012? What's the additional component?

John D. Finnegan

This has been a subject -- this question of margin expansion and impact on earnings. It's been a subject of discussion in prior quarters, also the subject of discussion, I think, this quarter, with a number of our competitors. So let me talk a little bit about it. It might be a little lengthy, but it seems to be an issue on everyone's mind. First of all, when you're talking about rate increases, I assume you're talking about prospective margin expansion, which is the impact on 2013 combined ratios from earned rate increases in excess of long-term loss trends. And then I guess, the follow-up question is, how do we reconcile this projected improvement in margins with our combined ratio guidance of 2013. So let's start with some facts. For 2013, we're estimating that earned rate increases will be about 3 points above long-term loss trends for the business as a whole, assuming renewal rates continue to increase at about 2012 levels. This compares the guidance for 2013, which implies an 85% to 87% x cat combined ratio, similar to the x cat ratio we ran in 2012. So, thus I suspect you're asking why our projected x cat combined ratio is an improvement by 3 points, in line with our pro forma margin expansion. So we got the question. The first thing I would say, that this isn't an apples-to-apples comparison. Margin expansion only applies to the business that is currently being earned, and which is reflected in current accident year results. In contrast, our combined ratio guidance is provided on a calendar year basis, which means that it's based on a variety of scenarios that includes both accident year results and potential prior period development. Such development, which could have a significant impact on year-over-year changes in combined ratios, is not affected by current rate increases. So as such, the appropriate comparison is how pro forma margin expansion compares with the projected year-over-year change in x cat accident year results. Since we do not provide expected development in our guidance, you have to make your own judgment on the x cat accident year combined ratio difference between 2012 and 2013. But it is this change in accident year x cat combined ratio, from 2012 to 2013, which should be -- form the basis of our comparison with our 3 point projected margin expansion, not the calendar year combined ratio given in our guidance. So, that's the starting point. You'd have to come up with an accident year and compare it there. But even in making the comparison on accident year, you should note that the 3 points by which earned rate increases are expected to exceed longer-term loss trends, they only translate into a similar improvement in x cat accident year combined ratios to the extent that actual, actual losses in 2013 track longer-term trends, both directionally [ph] in 2013 and 2012. The practical matter, actual losses in a given year, frequently are a good deal above or below longer-term loss trends. So let me give you a clear illustration, fourth quarter 2012 results. We were at an x cat accident year combined ratio 7 points better than the fourth quarter of 2011. Over the same period, earned rate increases only exceeded longer-term loss trends by about 1 point. The remaining improvement for the fourth quarter of 2011 to the fourth quarter of 2012 reflected the difference in actual loss experience in each quarter, not longer-term trends. In the fourth quarter of 2011, you may recall, actual losses ran well above trend lines. In fact, they were highest in recent memory, while actual loss experience reverted to below trend line levels in the fourth quarter of 2012. So to sum up, well, it's the actual experience not longer-term trend lines embedded in margin expansion calculations which accounted for most of the year-over-year improvement in the fourth quarter of 2012. So for this recent [ph] and developing of 2013 projections, start by looking at the loss experience in 2012, the base year from which these projections are developed and the base year to which you're making the comparison. In this case, we enjoyed very benign x cat loss experience in 2012, well below longer-term trend lines. For example, in 2012, we benefited from a low to normal non-cat U.S. weather impact on homeowners of about 3.5 points versus a roughly 6 point average in the previous 5 years. So in developing our 2013 outlook, we assume some reversion to the mean in loss trends, especially related to a potential increase in losses from non-cat related weather to more historical experience levels. If this occurs, and there's no way of knowing with any degree of certainty whether it will, such higher non-cat related weather losses would be a partial offset to the positive impact of margin expansion on homeowners and commercial property classes of business. So the bottom line is that earned rate increase should exceed longer-term loss trends in 2013 and that's kind of the basis of your question. But you got to back out favorable development to make an apples-to-apples comparison. And even in the accident year, you cannot assume that margin expansion will convert into a dollar-for-dollar improvement in earnings from 2012, since actual loss levels last year were well below trend lines. Any actual accident year improvement will be a function of not only rate increases, but of changes in actual losses from 2012 to 2013, not longer-term trend lines.

Amit Kumar - Macquarie Research

Got it. That's very helpful. I guess, the only other question I have and I don't want to take up too much time is the discussion on capital management. If I look at your buyback for 2013 and if I back out the carried over number, the $221 million which was left from the last buyback, in some sense, your adjusted buyback for 2013 is $1.079 billion which is lower than the 2012 initial number of $1.2 billion? Am I sort of overdoing this math or is this a function of the stock price, why your adjusted buyback would be, in some senses, lower than the 2012 buyback?

John D. Finnegan

I don't think it's lower. I think our projected buyback for 2013 is precisely on the level of expected income, operating income, less dividends. The reason you're having the $200 million jump is, while we had original buyback intentions in 2012 along the lines you suggested, we only bought back a little bit less than $1 billion in buybacks, which was by the way, ended up to be in line with operating income less dividends in 2012 too. So in both years, the expectation is we're buying back shares in the amount of operating income less dividends.

Operator

And we'll take our next question from Josh Shanker with Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

You mentioned 2 numbers in your semi-prepared remarks you just gave. The 3.5 versus the 6, is that a non-cat weather loss '12 versus '11, what was that exactly?

John D. Finnegan

It was non-cat weather loss '12 versus the 5-year -- versus the average of the prior 5 years. And I think in '11, it was a little bit higher, it's maybe 7 or something.

Richard G. Spiro

Yes. It was about 8.5.

John D. Finnegan

8.5, it's that high. But no, it's the prior 5 years.

Joshua D. Shanker - Deutsche Bank AG, Research Division

And not to sound cheeky, but what is non-cat weather as sort of thinking about those kind of losses versus the normal going of things kind of losses?

John D. Finnegan

Non-cat related weather, it's like this time of year when your pipes freeze. It's not part of a catastrophe.

Dino E. Robusto

Not modeled.

John D. Finnegan

Like, remember 2011, we had all those storms. It wasn't a modeled catastrophe, but they had a tremendous amount of freezes, that kind of stuff.

Joshua D. Shanker - Deutsche Bank AG, Research Division

So I guess there's like burglary and fires and, I guess, damage.

John D. Finnegan

Fire would be the other example of something that's not in that category.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Okay. So you have cat weather, you have non-cat weather and then everything else is generally not weather-related.

Richard G. Spiro

Right. that's right.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Okay. That's excellent. And so just trying to understand if I'm -- and I don't think you're going to guide me completely on it. But of course, it's very impressive that you guys are back at 2007 margins for the quarter. In terms of -- can we go back to the 4Q '11 and talk about the impact of non-cat weather there, the impact of non-cat weather this quarter, margin improvements between the 2? I mean it's an amazing quarter, it's hard to digest the numbers.

John D. Finnegan

Listen, the improvement from fourth quarter 2011 was significant. It was 8 points. But 2011 was a miserable quarter and it was the worst x cat accident year quarter we can find in recent history. So we can't brag about improvement from 2011, that was awful. But on the other hand, 2012 was the second best x cat accident year -- it was the best x cat accident we've seen in 5 years. I mean, as I talked about, 8 points, 1 was favorable development, 7 points were accident year. It was the difference in actual losses from very bad to very good. I mean, yes, non-cat related weather was a difference, but not in anywhere near, I mean, explaining 7 points from the overall business. I mean, it could amount to 1 point or 2. Because remember we're comparing -- when we're talking 3.5 to 6 and 7, we're talking in the homeowners line. The impact at the corporate level, the overall x cat accident year is diluted to more like 1 point, if you average that out. So it's more important when you relate it to 2012 to 2011 calendar year and when we look at 2013 versus 2012. Fourth quarter versus fourth quarter was a great quarter versus a lousy quarter. Non-cat related weather was not a big player in that.

Operator

We'll take next question from Vinay Misquith with Evercore Partners.

Vinay Misquith - Evercore Partners Inc., Research Division

The first question was on the non-cat weather benefit. You provided information on the homeowners. If you could also provide information on the CCI. You said on the commercial property business last year was a good year. So what's the benefit for that?

Paul J. Krump

This is Paul, Vinnie. Non-cat weather in Commercial is a little bit different. There, were really talking like a big fire. Occasionally, you'll get like a tornado that will come and land on a commercial facility. But what we're really talking about are things that are not modeled cats and get a cat designation. So we have had experiences before where Chubb might get hit by a tornado that doesn't really affect other people. But we just didn't have any of that in the last quarter.

John D. Finnegan

The impact is far less in Commercial, of course, than it is in homeowners. It's higher.

Vinay Misquith - Evercore Partners Inc., Research Division

All right. For the year -- how much of a benefit do you think that actually gave to Chubb for the year within that line?

John D. Finnegan

I mean, it depends what you want to revert it to, versus 2000 and -- if you take -- let's make it simple, if you took 3.5 points versus 8.5 points, you'll be comparing 2012 to 2011. That's 5 points on a business that's maybe 30% of our business, right? So you're talking 1.5 points or something like that. If you compare it to historical 5-year average, is you're talking 3 points, I think 30% of our business, it's worth a point.

Vinay Misquith - Evercore Partners Inc., Research Division

So it's roughly about 3 points better than the historical average? Okay, that's helpful.

John D. Finnegan

But again, in the homeowners line, it gets diluted when you roll it over the whole corporate consolidated numbers.

Vinay Misquith - Evercore Partners Inc., Research Division

Right. Fair enough. The second question was on the retentions and new business. Now, you guys have done a great job of sort of pulling back on new business. But your retentions awards [ph] have fallen. Just curious about management's willingness to let the retention remain low and to let the new business remain low, and to continue rate increases this year versus last year.

John D. Finnegan

Those are 2 different questions. I mean retention, that's not that low. I mean, I think that Personal Lines at 90 is as good as you're going to get, better than anybody in the industry. Commercial and Professional Liability in the low 80s is right up there with any of our competitors. I mean they all report it different ways, it depends if you want to put renewal price increases in the retention base, we don't. So we think it's as good as any. We haven't -- this quarter, the Commercial business in the U.S. was 83%. That's down 1 point from the third quarter and the same as the first quarter of this year. So not a significant decline, especially since we've undertaken -- we, earlier this year undertook some triage in some areas of the business. Professional Liability of 81, 82, was down at 1 point again. Now, this is a barrier where we've had more loss in market share and retention and this is over a course of 2 years. But that was the focus of our attention, we're running over 100 combined ratio. We focused on either getting substantial -- Medicaid is just culling weaker performing accounts, and I think we've given you statistics on that in the last call. And then others, just needing rate increases that we don't get, get it off the accounts. I mean, when you're earning 102, 103 on average, you must be running 110 and 120 in certain sectors in certain customers. So there's no reason to be in that business. So it comes down to, there's no bright lines across the board. We're okay with retention as it is. We look at the economics of the business by segment and account in order to determine the price. And in certain areas of Professional Liability, we just have to get off if we don't get rate. Commercial now is becoming more profitable, sometimes the trade off is a little more difficult in there. But we focus more on retention in the case of our highest ranked accounts, reflecting the superior economics of this business.

Vinay Misquith - Evercore Partners Inc., Research Division

That's helpful. Just one last question. Your premium to surpluses are really low. Just wondering if you have any desire to take out the excess capital from the subsidiary level.

Richard G. Spiro

Our premium surplus ratio, I think, is at 0.84:1. I think it's the same as it was last year and up a little bit from where it was the prior years. I think we're comfortable with where we are.

Operator

And we'll take our next question from Greg Locraft with Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Just wanted to look at the top line. It's the same guidance as last year, excellent trends on the pricing side, high single digits in many lines. Are you just assuming kind of -- sort of what are the embedded assumptions to get to the top line guidance that's the same year-over-year? I'm curious why it's not up.

Richard G. Spiro

Sure, Greg, it's Ricky. I'll take a shot at trying to put that in perspective. There are a lot of interrelated parts. Let me start, by the way, and say that for the full year 2012, forget about guidance from last year. But for the full year, actual growth in 2012, just to level set, net premiums were increased 1% and they were up 2% if you exclude the effect of foreign currency translations. So our 2% to 4% premium growth in 2013 is higher than last year. And we think that's pretty attractive growth rate given the continued global economic headwinds that we in the industry are facing. Having said that, though, why aren't we expecting to see more growth in 2013, given the higher rate environment? I think there are a number of interrelated factors here that need to be understood. And then I'll go through those relatively quickly and then maybe even give you a quick mathematical example to show you how it works. But first off, as we've mentioned in our earlier remarks, while we're seeing positive rate trends in most of our business lines and geographies, the amount of these rate increases vary significantly. And in particular, we're getting higher rate increases in the U.S. than we are outside the U.S. So bear in mind, 27% of our business comes from outside the U.S. and there, we're not getting the same high single-digit rate increases that we're getting here. So on a blended basis, the actual rate increase is a little bit lower. Second is, as John just talked about, as we continue to push for rate, we expect some trade-offs between retention and new business levels in 2013 and we've taken this into consideration in our guidance. And the reality is, it's this new-to-loss concept that has the biggest impact on why, if you're thinking about a high single-digit rate increase, it doesn't boil down to the bottom line of a similar number in terms of net premiums written and growth. And then last point I'll make, before I try to give you a quick example, given some of the economic headwinds that I just talked about, we're being realistic about some of the 2013 growth components, such as exposure, increases on items such as commercial properties, midterm endorsement activity in premium audits. So we believe that these trade-offs make sense in getting the right price terms and conditions for the risk we're writing and for our value proposition, is sort of in our DNA. Now for the example, and this isn't necessarily the numbers that will tie to our guidance, but just to give you some numbers that you can think about. So just for illustrative purposes, let's assume for a second that you get rate increases of 7%. And then let's assume that your retention is in the low 80s. I'll pick 83% for purposes of this example. So the impact, as I said earlier, our price on growth, only applies to the retained premium. So in this example, you're getting 7 points. It's applied to the 83% retention, which gives you about a 6-point improvement in growth. Then you've got to look to the new-to-loss business ratio. And for this purpose, let's assume it's 0.8:1. So on that basis, our lost business would exceed our new business by 3 to 4 points. And then, when you add the numbers up, you end up with growth somewhere in the 2 to 3 points of growth before any other adjustments. So even though we started at 7 points of rate increases, you don't get there when you get down to net premiums written.

Gregory Locraft - Morgan Stanley, Research Division

Okay, great. Very thorough. And so, I guess, embedded in the answer and the illustration, is that you're going to continue to, at the margin, choose pricing over new business and retention. That's just better for the economics of The Chubb Corporation based on what you see in the market.

John D. Finnegan

We don't expect any significant deterioration in retention and we expect new business to rise from fourth quarter levels. But we certainly don't expect to see it get back to one-to-one yet. Now if the pricing environment continues to improve, new business becomes more attractive. First, in Commercial, then eventually, in Professional Liability. But, I mean, it was 0.6 and 0.7 this quarter, we are not assuming it's going to be back for the full calendar year, next year, one-to-one.

Gregory Locraft - Morgan Stanley, Research Division

Okay, perfect. And then last one, just the topline is, you're not the only carrier to report that the international pricing environment is sort of lackluster compared to the U.S. pricing environment. I mean, Ace and Travelers cited the same. Why do you guys think that is? Why is it so difficult to push price outside the U.S., in the P&C markets, versus what's happening in our country?

Paul J. Krump

You want me to try take a stab at that -- Greg, I think, again it's kind of broad, the whole globe outside of the United States. Obviously, it's been much easier in a place like Chile and Australia and Japan that have experienced some terrible catastrophes. But there are parts of the world that are less cat prone than the East Coast of the United States. I think that it really just comes down to all the laws of supply and demand, there's still some excess capital out there. And I think some of the underwriters are just less disciplined, from my experiences, than in the United States.

John D. Finnegan

But that being said, the combined ratios overseas over the last few years have run pretty well in line with the U.S. So it hasn't proved to be a less profitable area.

Paul J. Krump

Not for us.

Operator

We'll take our next question from Adam Klauber with William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

Favorable development of roughly $500 million for 2012. If you had to ballpark, how much of that is pre-2007 and how much of that is post 2007?

John D. Finnegan

All right, well, let's see. I'll give you -- we'll give you -- we have a breakdown. We won't break it out by dollars, but give you an idea. The answer is, most of it came from the years 2006 through 2009.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay, okay. And then reserved -- favorable development, still at a good level, but it's come down from 2010, 2011 levels. Trying to predict is very tough. But if you could just give us your gut feeling right now, for 2013, are we around the same? Do you think potentially for more or less?

John D. Finnegan

I said for years that our level of favorable development, which was 6 to 7 points, would be unsustainable. I wasn't right for most of those years, and it stayed at 6, which by the way wasn't -- if you're going to make an error, it's good when it works in your favor. Now in 2012, we sort of declined for the first time, with development falling a little over 1 point to 5 points. But it's difficult to predict and it's lumpy because, while it's settled to 5 points for the year, it jumped up to 7 points for the quarter. So it's a function of loss cost trends. I mean, I believe, over time, if someone predicts that development should be -- it can't be 5 points on a going-forward basis, indefinitely. I'd probably have to agree to them. But I don't know where it's going to be in 2013 and we run the guidance at a variety of scenarios, different mixes for accident year and development. So I can't tell, I think over the longer term you'd expect to get less. But we haven't seen much of that and we got a surprise from the fourth quarter of 2012.

Adam Klauber - William Blair & Company L.L.C., Research Division

And one last question, casualty loss trend, I'm guessing is still pretty benign. What do you think is driving that and what could change that? Or what are you worried about as you look over the next couple of years?

Paul J. Krump

Well, we worry about emerging hazards. We try to track those as best as we possibly can. We worry about changes in laws. We track those very carefully. We -- obviously, medical inflation is something that we worry about on both a GL and a work comp perspective. So those are the 3 broad categories that we keep a very close eye on.

Operator

Our next question comes from Mike Zaremski with Crédit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

A follow-up on capital managements. Can you comment on the plans for other items, such as the debt coming due in April, pension and capital for growth initiatives? And then I have one follow-up.

Richard G. Spiro

Sure. Let me start with a debt. We have $275 million of senior notes that mature in April. We have not made any decision yet regarding whether or not to refinance our maturing debt. I'll point out that we believe we have a lot of financial flexibility to deal with the maturity. And particularly, we have lots of liquidity at the holding company, should we decide to simply pay it down as we did with our last maturity in 2011. And at the same time, we're very comfortable with our current leverage ratios and believe we have open access to the capital markets if we want to refinance at today's attractive levels. However, at this time, it would be premature to comment on our specific intentions. So lots of flexibility, it's only a $275 million maturity. We have plenty of options. I'll also point out, our next maturity after this isn't until 2018. So we've got a long way in between. In terms of the pension, we've been making our normal contributions to the pension and we made normal contributions during the year. We did have a negative hit in terms of equity in the fourth quarter, given where interest rates were at the end of the year. And I think it was about $70 million or so in terms of the hit in the fourth quarter. But other than that, nothing that I'd particularly highlight, as it relates to the pension. And then in terms of capital for growth initiatives, we continue to believe that we are in a strong excess capital position, based on both our internal assessment and rating agency models. And we believe that we have plenty of capital to support any growth that we see coming down the pike, as well as to support our share buyback and other initiatives. So we feel very good about our capital position.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay, got it. And then lastly, so double-digit homeowners price increases were cited in the Northeast. Any changes to terms and conditions? And what about the same items on the Commercial side in the Northeast?

Dino E. Robusto

Whenever you get an event as large as Sandy, it's always going to bring some adjustments to our underwriting, clearly to the pricing, as was just indicated. We always do an after-action review with our claims, look at what we found. I think we'll see some narrowing of our underwriting appetite in some coastal areas, based on the state of beaches and the infrastructure available to access certain towns. We'll probably avoid certain construction characteristics that we thought were compromising the ability for these structures to withstand the effects of Sandy. We -- the FEMA recently released a new flood map through New Jersey and Long Island, and that will probably continue to contract some of our appetite. We're going to continue to encourage our customers to select higher all-peril deductibles. We're fortunate we have -- about 40% of our book has got deductibles of 5,000 or higher. We'd love to see that in more than half of our book. And I think, in addition to Sandy, the weather events, really throughout 2011, generated some significant home repair and rebuilding. So, we, in turn, increase our construction cost adjustment factors to reflect these new alterations and this is going to result in some higher exposure changes at renewal that offset some underlying loss cost trends. And then of course, with all of the elevated cap activity and non-weather activity, we just have to continue to push those prices. And clearly, we're going to do that in some places in the Northeast, as I indicated earlier.

Paul J. Krump

On the Commercial side, similar to what Dino just articulated, we push ourselves very hard to continually improve. Dino touched on this after-action review. We do the exact same thing commercially after every big loss, every cat. And I would say that, from Sandy, we have learned a handful of things and we'll be implementing lessons. For the team at CCI, those range from everything from non-renewing a few commercial customers who were hit with flood claims in both Irene and Sandy, and that we just don't believe -- and after speaking with them, they can't, or won't implement some loss control measures to make us more comfortable moving forward. We're altering some of our flood aggregations down to a neighborhood level, business districts. And we've tightened some of the underwriting referrals for those specific locations as well.

Michael Zaremski - Crédit Suisse AG, Research Division

What about pricing on the Commercial side? Is Sandy having a big impact on those areas?

Paul J. Krump

I would tell you that one of the things, I guess, just to point out, is that, you may not know this, but New York State has a moratorium in place in and around much of greater New York City. That's a restriction for all insurance companies, not just Chubb. So our ability to non-renew customers, change terms and conditions, or charge a renewal rate increase greater than 9.9%, right now, is hampered. And for all intents and purposes, that will be throughout the first quarter. So I think we're getting kind of a cloudy view of what will exactly happen to rates post Sandy, just because we're primarily a big writer in and around New York City, commercially.

Operator

We'll go next to Jay Gelb of Barclays.

Jay Gelb - Barclays Capital, Research Division

I had just a few quick ones. What was the gross losses for Sandy?

Richard G. Spiro

The gross loss, which as I mentioned, by the way, in my comments, you can find that in our supplemental information, I think it's Page 6. It was $1.1 billion.

Jay Gelb - Barclays Capital, Research Division

Okay. And then next, on the outlook for after-tax net investment income being down 7% to 9% in 2013. It was down 6% in 2012. So I'm just trying to get a sense of why you feel that decline could accelerate this year.

Richard G. Spiro

Well, it's a combination of things related to maturities, investable cash flows. There's been further declines in interest rates and it's just a combination of all those factors. So we think 7% and 9% is the number for 2013. I would point out though, assuming rates stay where they are, we also would expect to see declines in investment income in the years following, at least, the next couple of years following 2013, although we'd expect the rate of decline, or the percentage decline, to be a little bit narrow or smaller, given that the portfolio would've had a few years to run and we would've had a lower overall book yield on the portfolio by that time.

John D. Finnegan

It's driven by maturities. I think Ricky's pointed out in the past that we have about $15 billion in maturities over the 2012, '14 period.

Richard G. Spiro

Yes and we have about $13.5 billion in maturities, '13, '14, '15.

Jay Gelb - Barclays Capital, Research Division

In total?

Richard G. Spiro

In total.

John D. Finnegan

In total, yes. It's pretty comparable by year. Obviously, the maturities -- the rates can go as low as you want, as long as the assets don't roll off. When they roll off, it hurts you more.

Jay Gelb - Barclays Capital, Research Division

We all understand that. On the -- for the yield, there was a 25 basis point decline in overall portfolio yield in 2012 versus 2011. Are you looking for a consistent decline in '13?

Richard G. Spiro

Yes. I don't know that I can give you a number that would be comparable to that. What I can tell you is, from where we sit today, I mean obviously, as I've said on prior calls, the reinvestment rates that we're getting today vary by asset class. But on average, across the portfolio today, we are reinvesting at about 200 basis points below our maturing book yields.

John D. Finnegan

I guess, Jay, at 25 points I'm talking $40 billion portfolio and your investment income is coming down $100 million. That's 25 points is probably -- somewhere -- in performance [ph] math, somewhere close.

Jay Gelb - Barclays Capital, Research Division

$100 million after tax. Okay.

Operator

Next, we'll go to Josh Stirling at Sanford Bernstein.

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

So if I could ask you a big picture question. So we're clearly seeing a cycle turn and companies are responding differently and you guys are obviously being disciplined, driving profitability, not chasing your business. So presumably that's a strategic choice. If we're trying to look at the market broadly, and Chubb specifically, how much more rate in re-underwriting do you think you're going to have to do before you'd seek to bring your new-to-loss business ratio back to 1:1? And just sort of more broadly, try to keep your shares stable?

John D. Finnegan

It depends on line of business. I mean, I would say that we're not -- in terms of rate adequacy, if you factor in, as one should, as we do here when we price, fully load cat loads in, and I mean it's -- we're not rate adequate in our cat exposed business areas. And we're certainly not rate adequate in Professional Liability. So we need rate increases to get rate adequate now. To the extent eventually, the market won't give it to us, we'll have to make a judgment on what we're willing to trade off. But we're happy with our retention levels as it is. We're happy -- we're very happy with our book. We had to get it fixed from 2011. I think it's -- generally, if you're going to get 1:1 in new business, you're going to have to write new business at higher combined ratios than you write retained business, renewed business. But if you're combined ratio on your renewed business is pretty good, like it's now becoming in Commercial and as it used to be, for a number of years, in a number of our businesses, that's okay. You don't mind having a few points higher in combined ratio on new business. But if you're running 100 to 105 in Professional Liability, you can't afford to be writing new business at 5 and 10 points higher. So, at each business line, it depends on the economics and we do the trade all the time and we do expect new-to-loss to be up from the fourth quarter levels, especially in Commercial, as the market improves in 2013.

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

That's helpful. The final question I'd ask would be on the Professional Liability business. You guys commented last quarter, you saw improving trends broadly in some of the things that had surprised you. Has that led -- has that continued and led to you guys taking down like prior accident year quarters? And was that something that's going to continue to work for you in 2013?

John D. Finnegan

Well, we didn't -- I don't remember commenting on improving trends. We commented on the -- all the initiatives we had to undertake to try to get improving trends. Professional Liability is not the instant feedback loop you see in Commercial. I mean, you get such a small loss base for the -- the actions we started taking were as a result of year-end 2011. So most of these actions weren't even in place until halfway through 2012. Plus, one of the big actions was rate, and rates lagged in Professional Liability. And we're sure happy as heck that they came out at 9% in the fourth quarter. But for the year, earned premium was only -- was up less than 2%. So if anything, we had negative margin expansion during the year. We think that these actions will -- the fourth quarter this year was better than the rest of the year, but that's mostly expense ratio, seasonal stuff, and it's not really better than the fourth quarter -- it's better than the fourth quarter of last year, but the calendar year isn't better. We think it's going to take hold and if we get the kind of rate increases we're seeing in the marketplace now, it will start to improve. We think the -- culling our accounts will result in improvement. But the feedback loop is long for most of the lines. And unfortunately, in the lines where it's short, like crime, we've had an unfavorable experience and we're still bothered by EPL. But overall, I think these actions will get us back to where we used to write this on an accident year basis.

Operator

We'll take our next question from Mike Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Just trying to square a couple of comments. John, I think you mentioned about 3 points better x cat underlying like non-cat weather in 2012 versus trend. And then it looks like in Personal and Commercial lines, you're about 3 to 4, 2 to 3 points better year-over-year. But both have seen rate gains in mid- to high-single digits. So how much of the rate gains you've taken in '12 are in -- are already earned through, versus how much are not? And then just one follow-up.

John D. Finnegan

I could give you that, that's easy. In 2012, when you look at margin expansion, you're looking at earned rate increases versus long-term loss trends. And in CPI and CSI, we didn't have any margin expansion. And in CCI, we had a couple of points of margin expansion. And next year, we expect about 3 points of margin expansion, overall, from a corporate perspective. But again, I mean, margin expansion doesn't get through to the bottom line, it's actual loss experience that gets through in the bottom line. So we're starting off a benign 2012. So I'm not sure we're going to enjoy all of that expansion. Or stated another way, I'm not sure that the year-over-year losses will track the longer-term loss trends.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So that margin expansion will come through with long-term trends, if next year kind of matches up with your long-term trends?

John D. Finnegan

Absolutely. But it starts from a good base, I mean, so that's good. The fourth quarter -- in the fourth quarter, it was like flat in the 2 businesses and we had longer-term rate increases -- rate year [ph] increases exceeded longer-term trend lines by about 2 points in CCI.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And then when you look at, kind of, whether it's CCI or CSI, through the quarter and into January, was the trend kind of continuing upward, kind of flattish across the board?

John D. Finnegan

I think the market tone was pretty much the same throughout the quarter and it's remained about the same in January. Now rate increases, they change based on mix of business and longtime big accounts. So nominal rates aren't always the same, but within a point, either way. No, I see a couple of people commented that market improved in January from the fourth quarter and it may be true for them. But I note that they were -- those carriers were generating 4% rate increases in the fourth quarter versus our 8%. So if they started pushing -- we were leaders, they were lagging. If they started pushing for rate more, it's very possible they could have seen an improvement in January from the 4%. I doubt they're up to the 8%. And so we're both starting from a different environment. In the area we're in, I think that January looked -- December looked like the rest of the year. Fourth quarter in January looked like the fourth quarter.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

All right. And then just last quick one, if you look at your peer group, I mean, you have others calling from high-single digit rate, mid- to high-single in commercial. But very few people are showing the same level of rate improvement you are on the Professional Liability side. Do you find that you're kind of leading the charge more on CPI and that's why new business is down and premiums are down? Or what's your competitive position versus peers on the rate side?

John D. Finnegan

I think that -- listen, if you look at the numbers, I'd think you'd have to say that the market's tougher -- has been tougher in Professional Liability. I think -- because of the catastrophe losses, I think the foundation was there for improvements in Commercial. We saw significant improvement in rates in Commercial take place earlier. And Professional Liability was tough, and as we started pushing for rate early, we lost -- that's when we lost a good deal of business. Over the last 3 quarters, we haven't lost too much. I think, now, we believe the market has improved. We seen it in our numbers. And we see it in -- we see that in competitive numbers, that the ones that have come out show that there are some rate increases there too. And our people tell us that the market's more amenable to rate increases now in Professional Liability. I'm sure you're seeing people -- carriers suffering losses in areas like EPL, similar to what we are, and probably running a higher combined ratio. So, yes, I think Professional Liability has been tough. We've been saying that all along. But all of a sudden, it's picked up.

Operator

Our next question comes from Matthew Heimermann at JPMorgan.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

First question is just on the expense ratio this quarter. I was just curious if there was any reversal of incentive comp in the first 9 months.

John D. Finnegan

Good question. I'd say that -- I'll let these guys correct me. I think the answer is this, I think incentive comp probably improved the expense ratio by close to 1 point, but that was partially offset by about 0.5 point negative impact from reinstatement premiums in the quarter. So net-net, it was probably a -- it's probably 0.5 points -- really, you'd have to adjust it about 0.5 point to get the run rate, I think.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Okay. That's fair. The other question I had was just with respect to the agent feedback you're getting. I mean, my own conversations with agents and other surveys have done whatnot. There doesn't -- it doesn't seem like agents are having much time pushing prices through. I would assume you're seeing the same thing. But I guess, my question would be, when you think about why price increases might slow down at some point, do you think it's more likely to be because agents have a hard time pushing price increases to clients, or because companies will be more driven, let's say, algebraically by what they feel like the new business returns are. I guess I'm just curious, who will kind of blink first? Would a company like Chubb just try to push rates as far as they can push them, even if it means exceeding what you would think would kind of be a reasonable ROE? Or do you just kind of start to pull back the range yourself?

John D. Finnegan

Like you said, we're not price adequate in our overall business. We're price adequate in some lines, not price adequate in many, especially cat exposed area and Professional Liability. I'd just point out though too, when you get the price adequacy -- sometimes when a question comes, it sounds like price adequacy is a permanent state of mind. In truth, you get the price adequacy and we're not there yet. But when you get there, you got to get 4 or 5 points of rate to stay there. I mean, we've been talking a lot here about margin expansion and loss trends, and annual loss trends are about 4 points. And when you take into account the other thing we're talking about, with lower investment returns on rolled over money, maybe you need 5 points. So if I'm price adequate on January 1, 2014, I need 5 points the next year to remain price adequate, or I'm back to being price inadequate.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

That's fair. And then, just in terms of how you think about rates, because I've struggled with -- when you think about rates do you think about what the -- or versus kind of what the returns of the business are in rate adequacy, relative to where your reinvestment rate is, or relative to your portfolio yield?

John D. Finnegan

Reinvestment rate.

Richard G. Spiro

We measure the current reinvestment rates.

Operator

We'll take our next question from Meyer Shields with Stifel, Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

When we look at the -- all lines, full year combined, x cat, combined ratio outside the United States, it's up by 300 basis points. Can you talk about whether that's mix or a loss trend issue?

John D. Finnegan

I think, overseas had performed extremely well for a number of years. I think we've got -- we've heard [ph] some more losses. And over the last year, we've had to cut back in a few areas overseas because we picked up some new business that didn't perform well. We had several large losses, so some of it was maybe one-time. But also I think that -- I think, a couple -- I'll cut it down, so let's say 3 things. One, we're coming off a pretty good base over the last few years. Second, there were several large losses. Hopefully, it's not indicative of anything. And third, as we talked about, we haven't been getting any rate overseas. We're getting 2 or 3 points of rates. Ultimately, even in a benign loss environment, you disguise it for a while. But ultimately, as we found out in Professional Liability, if you don't get rate for a long period of time, you can eventually have margin contraction. And we've seen that, but less development. If you're measuring too -- points out that when you look at -- as we talked about before, between calendar year and accident year, when you look at the business you're writing, you're looking at accident year. In this case, a good deal under 300 points is less favorable development too. So it doesn't necessarily go to the business you're writing.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

No, that makes perfect sense. Are you planning on changing reinsurance buying at all? I know you ticked up the cat provision on what you're retaining.

Richard G. Spiro

We renew our major cat treaties in April and we'll update you on the impact of those renewals on the next call. But at this point, it's way too early to know just how we might be impacted by Sandy and what the market really looks like and how our weather, if at all, will modify our program. But if we make any changes, we'll certainly let you guys know on the next call.

Operator

Our next question comes from Jay Cohen at Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Just a couple other questions. The first is, the workers comp underwriting result was really quite good in the quarter and I'm wondering if there's anything unusual there or have claims eased up a bit in that line of business.

Paul J. Krump

It's a combination of a couple of things. A, we had a good quarter on a calendar year basis and we had a little bit of a prior period of favorable development. And we've been growing the line pretty well. It's basically been growing off of rate. As we've talked about, it's been a high rate class of business. So that's helped our expense ratio a little bit in the fourth quarter. So we're real pleased.

John D. Finnegan

Yes, expense ratio was probably a couple of points better than one would expect on a normalized basis. It's -- as Paul would call it, it's inside baseball, I mean, I don't know, it has something to do with all these adjustments of incentive compensation or reinstatement premiums, affect each line of business a little bit differently on the expense ratio side. And I'd say that it's probably 2 to 3 points inflated in terms of our performance there due to expense ratio. But even with that, it's a pretty darn good quarter and rate, rate, rate. It's counted a lot.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Yes -- no, that's helpful. And then the other topic, you don't really break it out too much, but the A&H business is not an insignificant line of business for you. The profitability of that line has been kind of up and down over the past 3 years. I'm wondering if you can give us an update there. What in 2012 would the profitability look like in any sense of what the premium contributions was.

Paul J. Krump

Yes, this is Paul, Jay. I mentioned in the past, the last couple of years we brought on an A&H team, and they've been revamping our book of business. They took out a couple of very unprofitable programs. So one of the things, if you're looking at the U.S. A&H numbers that are published, I would just point out, that's the bulk of where the culling so far has taken -- that took place. But those numbers haven't been that good. All up though, we've got a lot of plans for it to continue to grow and get more profitable. Right at this point in time, it is profitable, but not quite where we need it to be. But again we're growing it and changing the mix. About 75% of the business is overseas. So we don't give a specific number on it. It's in Personal lines other right now. But as it grows, we'll probably give you more on it over time.

Operator

And our final question today comes from Ian Gutterman at Adage Capital.

Ian Gutterman - Adage Capital Management, L.P.

I guess, 2 questions if I can. First, I think it was Paul who talked about new business in CCI being a little bit more conservative due to some, maybe negative performance on some of the new business you had. Can you expand on that? Because what's surprising about it is, I think over the last year, many of your competitors have said, very strongly, that the quality of new business is closer to renewal than it's ever been, and that frankly, new business have been very favorable. So you're kind of the first ones to say something a little different. I was wondering if you can provide some more color.

Paul J. Krump

Sure, Ian. I'll give it a go here. I agree with you. First off, there's been a lot of noise around new business. It seems to be kind of all over the map. We listened to some calls. One of our major competitors is attributing some of their low premium growth to less new business, similar to kind of the tone that we're trying to pass on to you. I think the renewal business just tends to be quite a bit more profitable than new business. So they're probably being very careful about what they're picking up. I know that we're being very careful in all of our ranking of our renewal business and trying to make certain that we don't lose our best accounts. And I can tell you, we're not doing that. We're losing the accounts that we think we should be losing because we're not getting enough rate on them. But new business just has not been as attractive. If I go back in CCI's history a little bit, the new business in 2011 began to pull away from where the renewal book was at. We look at that on an accident year basis, break out the new lines from the renewals. And we had to take some decisive underwriting and pricing actions to bring that back in line. We culled a couple of troublesome segments. We funneled some of those classes of business to the most experienced underwriters, and then we increased our rate targets on those segments and lowered our new business goals. And the combination has made a marked improvement on our results in CCI, as you can see. We're doing similar things in the CSI. As John pointed out, though, the feedback loop is longer, but we're confident that they'll ultimately flow through as well.

John D. Finnegan

We track 12 months, 24 months on new business, first renewals and we expected, as I talked about before, some higher combined ratios on new. You're willing to pay that price for it. But it got out of hand about 2 years ago, when we aggressively attacked it. Now our new business -- 2012 accident year 12 months, our new business looks our renewals. I mean it's priced at a much lower volume. Now I hear some of the people talking about the great new business in the marketplace. I'll leave it to you. I mean, do you suspect that -- does it sound logical? Does it sound logical that -- the reason business goes to marketplace, most of the time, is because the customer doesn't like the rate and terms on the renewal and wants better. So the broker comes in -- I'm saying I'm going to get you better. He goes out to the marketplace, puts it out to a competitive bid. I mean, do you believe for a moment it comes in 10% higher in rate? I mean, that sounds ridiculous. It's just counterintuitive. The brokers wouldn't be on the business very long if that's how the [indiscernible] came about. So I just -- I don't get it. Unless you're comparing new business growth in the marketplace for another reason, which is the incumbent carrier doesn't want the business and then it probably goes at a higher nominal price, but I hope you're not comparing the nominal price on a much higher risk profile business to the rate you're getting on your nice renewal business. I mean, if you're doing that, maybe you're getting a higher rate, but that's certainly not a risk-adjusted rate comparison.

Ian Gutterman - Adage Capital Management, L.P.

To be honest, I agree 100% with you, John, I've just been very confused about those comments from others over the last year. My last one, real quick, is just a follow-up on risk management and Sandy. I was just wondering, specifically, if you could talk about Commercial business in Manhattan. And I don't want to get too dramatic about it. But your loss on this event was double Katrina, it was worse than similar size events -- close to similar sized events like Ike, or Wilma, or Japan. It seems like the 2 big cat events in, at least, reasonably recent history for you guys are both in Manhattan, which is this event and 9/11. And I know it's an important part of your business and you can't necessarily abandon it or anything, but do you need -- I just wonder, long term, is that really as good a business as you thought it was? Or is it, maybe, a tougher business than you hoped, when you look at sort of 10-, 20-year track record, but with these 2 huge cats.

John D. Finnegan

Well, I think if you looked at it before Sandy, even when you had World Trade Center, it looks like a highly, highly profitable business in New York, more profitable than our business in the rest of the country, on average. But that's still a good question. Now just like any of this area, depends when you take the snapshot. After Irene and Sandy, it doesn't look quite as more highly profitable as it once did. So you're right, we have to focus on it. And that's what we're doing. You need rate, but you'll also need to focus your underwriting on it. And decide, if a place has gotten wiped out 2 storms in a row, it may be a difficult risk to underwrite. So, no, we do have to take a hard look at it and we're doing that, Ian.

Okay. Thank you, all, for joining us tonight.

Operator

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.

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