The Chubb Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.25.12 | About: The Chubb (CB)

The Chubb (NYSE:CB)

Q3 2012 Earnings Call

October 25, 2012 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

Michael Zaremski - Crédit Suisse AG, Research Division

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

Jay Gelb - Barclays Capital, Research Division

J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

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

Gregory Locraft - Morgan Stanley, Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

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

Brian Meredith - UBS Investment Bank, Research Division

Operator

Good day, everyone, and welcome to the Chubb Corporation's Third 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 their 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 in the financial supplement for the third quarter of 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 November 23, 2012. Those listening after October 25, 2012 should please note that the information and forecast 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. Finnigan.

John D. Finnegan

Thank you for joining us. We are pleased to report that we had record operating income per share of $1.98 for the third quarter and a record $5.04 for the first 9 months. Our outstanding third quarter benefited from strong x cat underwriting results as well unusually low catastrophe losses. At the same time, we continued to achieve rate increases in all of our businesses. These positive factors were more than enough to offset the continuing effects of a challenging global economic environment and the impact of low interest rates.

Third quarter operating income per share of $1.98 resulted in annualized operating ROE of 15.5%. The combined ratio for the quarter was 86.3% compared to 102.6% last year. Excluding cat, the combined ratio for the third quarter was 85.7% in 2012, 2.5 points better than the 88.2% in the last year's third quarter.

Net income per share for the third quarter of 2012 was the same as operating income per share and annualized ROE for the quarter was 13.5%. Capital value per share at September 30 was $60.99, that's a 9% increase since year end 2011 and a 10% increase since September 30 a year ago.

Our capital position is excellent and we continue to make good progress on our share repurchase program. Net written premiums for the third quarter are up 1%, driven by Chubb Personal and Chubb Commercial Insurance, which were up 3% and 2%, respectively. Relative CPI and CCI was partially offset by a 4% decline in Chubb Specialty premiums.

Excluding the impact of currency translation, net written premiums for Chubb overall were up 3%. Given our strong results in the first 9 months and our outlook for the fourth quarter, we have raised our operating income per share guidance for the full year to a range of $6.70 to $6.80, which is an increase of $0.92 at the midpoint.

Let me now turn it over to Paul who will discuss the performance of Chubb's Commercial and Specialty Insurance operations.

Paul J. Krump

Thanks, John. At Chubb Commercial Insurance, net written premiums for the third quarter were up 2% to $1.2 billion. Combined ratio was 87.2% versus 101.1% in the third quarter of 2011.

Excluding the impact of catastrophes, CCI's third quarter combined ratio was 87% compared to 89.9% in the third quarter of 2011. We are pleased that CCI's average U.S. renewal rate in the third quarter increased by 8%, which is the sixth consecutive quarter of rate increases for CCI. This compares to the 9% we obtained in this year's second quarter, with a slight decline primarily attributable to small differences in the mix of business available for renewal in the third quarter. What is especially encouraging is the fact that this year's 8% is solid rate-on-rate as it comes on top of the 4% average rate increase we secured in the third quarter of 2011.

CCI achieved U.S. renewal rate renewal increases in each line of business in the third quarter of 2012. Workers' compensation rates increased the most, with a low double-digit average, followed by Monoline property, general liability, package, excess umbrella, automobile, boiler and marine. Viewed from an account perspective, we continued to achieve broad-based pricing improvement, with some 90% of our renewals receiving rate increases in the third quarter, the same as in the second quarter.

Let me now turn to CCI markets outside of the U.S., where market acceptance of higher rates continues to lag the United States. In Canada, average renewal rates were up by low single digits in the third quarter, which was down slightly from the second quarter. In Europe, average renewal rates were up by low single digits in the third quarter, matching what occurred in the second quarter of the year. CCI continued to obtain rate increases in Australia, along with some of our other markets in Asia. Average renewal rates in Latin America were flat in the third quarter.

CCI's third quarter U.S. renewal retention was 84%, identical to the second quarter of this year. Continued strong renewal rate increases and solid retention aided CCI's quarterly premium growth, while new business was also up slightly. CCI's new-to-lost business ratio in the U.S. remained at 0.9:1 in the third quarter, identical to the second quarter of the year. Midterm endorsement and premium audits were slightly positive but did not have a significant impact on this quarter's growth, while renewal exposure change was slightly negative.

At Chubb Specialty Insurance, net written premiums declined 4% in the third quarter to $640 million and the combined ratio was 91.9% compared to 88.3% in the year earlier third quarter. For the professional liability portion of CSI, net written premiums were down 5% to $567 million and the combined ratio was 97%, slightly improved from the first 6 months when it was 98.2%. In the third quarter of 2011, the combined ratio for professional liability was 92.5%.

We are pleased that average renewal rates for professional liability in the U.S. increased by 8% in the third quarter, continuing the positive momentum that began in the fourth quarter of last year. The 8% increase in the third quarter was the strongest quarterly renewal rate increase since 2003 and compares to a 7% increase in the second quarter of this year and negative 1% in the third quarter of 2011. In each of our professional liability lines of business in the United States, average renewal rates increased in the third quarter. Increases were led by a private company D&O, which experienced average rate increases in the mid teens, followed by EPL, crime, not-for-profit D&O, public D&O, E&O and fiduciary.

In markets outside of the U.S., average renewal rates for professional liability improved modestly in the third quarter, with average increases in the low single digits. Renewal premium retention for professional liability in the third quarter was 82% in the U.S., identical to the second quarter. The new-to-lost business ratio for professional liability in the U.S. was 0.6:1 compared to 0.7:1 in the second quarter of the year.

While professional liability submissions have increased, we remain steadfast in quoting prices to potential new customers that will earn an adequate return. As we discussed in last quarter's call we are willing to accept the decline in new professional liability business and overall growth as we reprofile the book for improved profitability.

Regarding the surety portion of our CSI book, net written premiums in the third quarter were up 3% to $73 million and the combined ratio was 55.8%.

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. Chubb Personal Insurance net written premiums increased 3% in the third quarter to $1.1 billion. CPI produced a combined ratio of 82.8% compared to 115.6% in the corresponding quarter last year. The impacts of catastrophes on CPI's third quarter was 1.5 points in 2012, whereas, last year, we had a third quarter catastrophe total of 28.5 points. On an x cat basis, CPI's combined ratio was 81.3% in the third quarter of this year compared to 87.1% in the third quarter of 2011, reflecting continued strong underwriting performance across all geographies and product lines.

Homeowners premiums grew 3% for the quarter and the combined ratio was 76.2% compared to 126.1% in the corresponding quarter last year. Cat losses accounted for only 2.4 points of the homeowners combined ratio in the third quarter of 2012 compared to 44.7 points in the third quarter of 2011. Excluding tax, the third quarter homeowners combined ratio was a very strong 73.8% in 2012, a 7.6-point improvement over the same period a year ago when it was 81.4%.

Roughly half of the improvement in the x cat combined ratio reflects the fact that we had fewer non-cat weather-related losses than we had in the third quarter a year ago. Non-cat weather-related losses in the U.S. in the third quarter of this year accounted for about 3.5 points of the homeowners combined ratio compared to about 7 points in the year ago third quarter.

Personal auto premiums declined 2% because the negative impact of currency translation more than offset the increase in premiums in local currencies. Personal auto is a relatively small book of business for us, but a large portion outside the U.S., so it can be heavily influenced by currency fluctuation. Excluding the currency impact, premiums outside the U.S. increased as did premiums in the U.S., consistent with the growth rate in recent quarters. The combined ratio for personal auto improved to 92%, more than 7 points better than the third quarter a year ago when it was 99.3%.

In other Personal lines, premiums were up 8%, driven by strong growth in our accident and personal excess liability lines. The combined ratio for other personal improved to 95.5% from 97.6% in the third quarter a year ago. In the U.S., the third quarter of 2012 was the eighth consecutive quarter of growth in policy accounts for both homeowners and personal auto. At the end of the quarter, policy count per homeowners was 1% higher than a year earlier and for auto, it was 3% higher. Policy retention was consistent with the second quarter of this year at 91% for homeowners and 89% for auto. In short, we continue to be very pleased with the performance of Personal lines.

Turning now to claims, corporate-wide. In the third quarter of 2012, the impact of catastrophe losses was $17 million before tax, accounting for 0.6 points of the combined ratio. $17 million reflects $33 million of losses before tax from third quarter cat events in the U.S., primarily Hurricane Isaac, partially offset by downward revisions to our estimated losses from catastrophes in the first half of 2012. Development of catastrophes prior to 2012 had no significant impact.

In the third quarter of 2011, we had cat losses of $420 million before taxes, accounting for 14.4 percentage points of the combined ratio. For the first 9 months of 2012, catastrophe losses were $264 million before tax or 3 points of the combined ratio. This compares with $1 billion or 11.7 points in the first 9 months of 2011.

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

Richard G. Spiro

Thanks, Dino. As you've already heard, we had an excellent third quarter. Looking first at our operating results, we had strong underwriting income of $418 million in the quarter. Property and casualty investment income after tax was down 7% to $297 million in the quarter due primarily to lower reinvestment rates in both our domestic and international fixed maturity portfolios. The impact of foreign currency translation also had a negative impact on our investment results. Going forward, we expect property and casualty investment income after tax to decline in the fourth quarter as well as next year as we continue to reinvest maturing securities at much lower reinvestment rates.

Net income was the same as operating income in the quarter as net realized gains from the sale of securities were offset by net realized losses from our alternative investment. For comparison, in the third quarter of 2011, we had net realized investment gains before tax of $71 million or $0.16 per share after tax. As a reminder, we account for our alternative investments on a quarter lag because the time required to receive updated valuations from the investment managers of limited partnerships. Accordingly, our alternative investment results for the third quarter reflected the negative global equity market performance in the second quarter. Our fourth quarter 2012 results will reflect market performance in the third quarter, which was more favorable.

Unrealized depreciation before tax at September 30, 2012, increased by $352 million in the quarter to $3.2 billion. The total carrying value of our consolidated investment portfolio was $44.1 billion as of September 30, 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 AA2.

We also continue to have excellent liquidity at the holding company. At September 30, our holding company portfolio included $2.2 billion of investments, including approximately $560 million of short-term investments. Book value per share under GAAP at September 30, 2012, was $60.99 compared to $56.15 at year end 2011 and $55.25 a year ago. Adjusted book value per share, which we calculated with available-for-sale fixed maturities at amortized cost, was $53.96 compared to $50.37 at 2011 year end, and $50.13 a year ago.

As for reserves, we estimate that we had favorable development in the third quarter of 2012 on prior year reserves by SBU as follows: In CPI, we had approximately $25 million; CCI had $70 million; CSI had $35 million; and reinsurance assumed had $15 million, bringing the total favorable development to approximately $145 million for the quarter. This represents a favorable impact on the third quarter combined ratio of about 5 points overall. For comparison, in the third quarter of 2011, we had about $155 million of favorable development for the company overall, including $5 million in CPI, $95 million in CCI, $45 million in CSI and $10 million in reinsurance assumed. The favorable impact on the combined ratio in the third quarter of 2011 was also about 5 points. For the third quarter of 2012, our x cat accident year combined ratio was a very strong 90.6% compared to 93.4% in last year's third quarter.

During the third quarter, our loss reserves increased by $20 million, including an increase of $53 million for the insurance business and a decrease of $33 million for the reinsurance assumed business, which is in runoff. The overall increase in reserves reflects a decrease of about $140 million related to catastrophe and the impact of currency translation in loss reserves during the quarter resulted in an increase in reserves of about $60 million.

Turning to capital management. During the third quarter, we repurchased 4.1 million shares at an aggregate cost of $301 million. The average cost of our repurchases in the quarter was $73.80 per share. For the first 9 months of the year, we repurchased 12.7 million shares for a total of $907 million, with an average cost of $71.23 per share. As of September 30, 2012, we had $357 million available for share repurchases under our current authorization and as we have said previously, we intend to complete this program by the end of January 2013.

Let me conclude with a few comments on the revised guidance we announced in today's press release. Based on the low level of catastrophe losses in the third quarter and our outlook for the fourth quarter, we are revising our 2012 full year operating income per share guidance to a range of $6.70 to $6.80 from the previous guidance range of $5.70 to $5.95. This revised guidance is based on operating income per share of $5.04 in the first 9 months and a range of $1.66 to $1.76 for the fourth quarter.

The revised guidance assumes 2 percentage points of cats for the fourth quarter, which would result in 2.7 points of cats for the calendar year. This compares to the full year cat assumption of 4.3 points included in our previous guidance, the decrease being due to the lower-than-expected cat in the third quarter. The impact on operating income per share of each point of cat is approximately $0.28 for the full year and approximately $0.07 for the fourth quarter. The revised guidance is also based on an assumption of 271 million average diluted shares outstanding for the full year, unchanged from our previous guidance.

And now, I'll turn it back to John.

John D. Finnegan

Thanks, Ricky. Let me summarize a few of the key highlights of the third quarter. We had operating income of $533 million or a record $1.98 per share. Our annualized ROE was 13.5% and annualized operating ROE was 15.5%. We produced an x cat combined ratio of 85.7 and an x cat accident year combined ratio of 90.6%.

Capital value per share at September 30, 2012, was $60.99, up 10% from a year earlier and up 9% from year end 2011. We repurchased $301 million of common shares and paid $110 million in dividends, and we continued to secure rate increases in all 3 business units, maintaining upward momentum on an earned premium basis. For the first 9 months of 2012, operating income totaled $1.4 billion. On a per-share basis, operating income for the first 9 months was $5.04 per share, a 44% increase over last year, and the highest 9-month operating income per share in Chubb history.

Annualized operating ROE for the first 9 months was 13.4%. And for the first 9 months was -- annualized ROE for the first 9 months of 12.3%. The combined ratio for the first 9 months was 90.1% and the x cat combined ratio was 87.1%.

Our strong performance in the first month of the year has enabled us to increase our 2012 operating income per share guidance to a range of $6.70 to $6.80. The midpoint of our revised guidance is $0.92 per share higher than the midpoint of our prior guidance of $5.70 to $5.95.

In summary, we had a great third quarter on top of a very good first half and we continue to be encouraged by marketplace rate trends.

And with that, I'll open the lines to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Mike Zaremski of Credit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

First, CCI insurance pricing appears to have modestly decelerated from 9% to 8%. Should we -- is there a read through there? When you say 2Q, were you talking about the peak for pricing outside of a large industry loss? And switching gears to Professional and Personal lines, if you could also comment on the rate environments and your outlooks there.

Paul J. Krump

Okay. Mike, this is Paul. Yes, I think it's fair to say that in the U.S., CCI renewal rate increase has been in a tight range for the last few quarters, running between 8% and 9%. The slight downtick from the second quarter to the third quarter is really attributable more to business mix differences between the quarters than any change in the marketplace condition. For example, in Q3, we had fewer large commercial real estate property accounts available to be renewed that we had in Q2, and that really is what drove the change. As respect to where rates are going forward, obviously, no one knows for certain. But where we sit the macro factors, which are contributing to the push for rates for the entire P&C industry. The need for rate increases haven't changed, the low reinvestment yields, the years of soft market pricing, we don't see that changing anytime soon. I think that we were fortunate we had a very benign cat quarter as an industry. But no one here, at least in Warren, New Jersey is extrapolating that into the future, and we're going to continue to push for rates very hard. As respect to specialty you asked about, we continue to see a nice momentum there. We continue to work on the book of business, not only from a rate perspective, but also from a re-profiling. Once again, this past quarter, we saw in our 1-star account, which happened to be the tier with the least amount or the most rate need. We had over 35 points of rate in that tier. We only had 65% retention, whereby in the 4- and 5-star accounts, the best accounts, we still took positive rate in the low single digits and had nearly 90% retention. So we're doing a good job of re-profiling that book and it needs to be re-profiled.

John D. Finnegan

I'll just say generally, we don't have final October numbers. We're not going to make any predictions. But what we can say is anecdotal. We have not heard anything in the marketplace that suggest there's a significant change in the credit and the rate environment. And in terms of CPI, we are filing for additional rate increases, so that momentum continues.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay, that's helpful. And lastly, in regards to the increased 4Q guidance, the math I'm doing points to an expectation for improved margins on an x cat to x prior development basis. Would you agree with at that? And if so, could you comment on what's driving that?

John D. Finnegan

No. Well, there will be no way you could interpolate what x cat actually would be because there's no breakout of favorable development versus accident year. I mean, what we can say is we don't split them up. If you looked at our combined ratio guidance for the fourth quarter, you would see that, first of all, we have 2 points of cats, so that's versus 0.6 points in the third quarter. So clearly, that adversely affects us on a quarterly comparison. And then we're basically, on x cat basis, on a combined ratio, looking at a combined ratio in line with our first half experience, which is a couple of points higher than we had in the third quarter.

Operator

And we will take our next question from Josh Stirling of Sanford Bernstein.

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

So on professional liabilities, it sounds like you're making a pretty substantial progress. One, I wonder if you could just talk -- I'll pose my question in this, but I wonder if you give us some color as to what you're seeing in terms of new claims reports and severities on the open claims, and basically give us an update on the issues you identified last year that led you to raise your loss picks and sort of sound the alarm bell. And then also, would love to more broadly get your sense of what kind of guidance you're giving to your brokers, and ultimately through the broader community around 1-1 renewals on D&O. And how much rate, maybe not so much you think, that the market will bear, because that's speculative, but how much rate would Chubb like to take?

Dino E. Robusto

Okay. I'll start with a little bit of insight on the claim activity, on the professional liability, give you a little general overview. In terms of professional liability, newer [ph] count increased about 6% in the quarter, and about 3% for the 9 months of 2012 and these increases are largely attributable to EPL, which was up about 23% for the quarter and 18% for the 9 months. Now the increase in EPL claim counts has been a multi-year trend, principally reflecting the ongoing employment practices and administrative charges. Other than EPL, professional liability renewal [ph] counts are actually down 11%, both for the quarter and for the first 9 months. And then -- and just in terms of severity for professional liability, we obviously look at severity a little bit differently than we do, say auto or homeowners, where you have a large number of existing claims. Here, what we're looking at, our leading indicators, such as security class action filings. And on that front, based on new filings for the industry in the first 9 months, it appears that traditional security class actions activity on an annualized basis is at a comparable level to last year, which is up from the historical lows we saw a couple of years ago. And given that the security class action activity has historically been the driver of our public and financial institution D&O loss, this is clearly a trend we watch carefully. On the EPL that I referenced that was up on account, when you look at it from a severity standpoint at the length of time to find a job that has increased, the damage is asserted primarily back pay and defense costs have increased. However, it's important to note that the majority of the filings we are seeing that is driving the increased claim count are lower severity cases. So that's just a little bit of detail on the personal liability trend. Paul?

Paul J. Krump

Yes. Josh, this is Paul. I'll try to add some color then about -- I guess it was really -- what we're thinking about as respect to 1-1 renewals and what are we talking to our field people about. I think we have alluded to this in the past that we think first about a product line and the dynamics that we talked about before. Some of the issues around D&O and EPL and crime are certainly still with us as we go into 1-1. But then what we really do, Josh, is we make it very granular. We look at it by geography, by SIC type, we put it through our tiering proprietary models, and we take it down to an individual policy level. We look at that account and we ask ourselves, what is the starting point for the rate? How does that compare to like kind and quality within our book? How well has that individual account been running? And we set a target rate increase or maybe it might even be flat, depending on how well it's performing, as we go into the season. So while we do have overall targets, it's really very granular when we take it out to talk to our field staff and with the agents. And then when we talk to the agents, we make certain that we talk to them about a lot of their accounts that are coming up so that they don't misread any signal on a particular accounts as -- meaning, as it impacts their entire book of business. So I hope that gives you some flavor of what we're doing.

John D. Finnegan

Generally, we're booking 100 too, so we need a good deal of in increases going into 2012.

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

Right. The final question I ask would be on workers comp. It's just you've had a couple of quarters in a row now of pretty substantial growth. I think there's been some explanations before that. But I would love to just get a sense of are you guys expanding your appetite here or it's not so historically been a place you've been focused?

Paul J. Krump

No, I can definitely tell you, we're not expanding our appetite for workers comp. A big part of the growth is driven by rate. Another piece of the growth came in workers compensation from audit premiums and exposure growth. The overall books are a little bit of a decline in exposure. But workers comp had a bit of an exposure in audit growth in it. And I told you, when we -- in my prepared remarks, about the rate increases, workers compensation was in the low double digits, so that gives you a sense of it. As far as new business goes, it was up slightly but our in force count, Josh, is only up 1% in workers compensation. So we're sticking to our knitting. We're trying to see some opportunities there. But really, it's being rate driven, which is exactly what we want to see.

Operator

And we will take our next question from Jay Gelb of Barclays.

Jay Gelb - Barclays Capital, Research Division

First one for Ricky. Given the continued impact of low interest rates on investment income, what do you think the after-tax annualized yield on the portfolio could be a year from now, if rates stay at current levels, with it being 3.08% in the third quarter of '12?

Richard G. Spiro

Yes, Jay. I don't know that I can give you an exact number. I guess what I can tell you, as we sit here today, as we think about reinvestment rates and where we're putting money to work today, it obviously varies by asset class. On average, we're reinvesting our maturing securities at about 175 basis points lower than the maturing book yields. And in our 10-K, you have a maturity schedule of our fixed income securities, so that would give you some sense of what would happen to yield over time.

Jay Gelb - Barclays Capital, Research Division

And that -- is that 175 below -- you're talking about the after-tax yield or is that pre-tax?

Richard G. Spiro

Pre-tax, I believe. It's pre-tax.

Jay Gelb - Barclays Capital, Research Division

All right. And then the second one, and I know we've discussed this before, is the pace of the buybacks. You chose on buying $300 million of stock back a quarter, which is on track to be well below the buyback pace in 2011 or 2010, despite the level of operating earnings being at least as high as those prior 2 years. So I'm just trying to understand what Chubb is doing with the excess capital it's retaining if not buying back stock.

Richard G. Spiro

Sure. Well, look. I'd just say we're on course to complete our buyback by the end of January. Let me give you a brief word of explanation, because when put this program in place back in January, we gave some idea that when we thought about our buyback, we we're looking at our operating income less shareholder dividends as a general guideline for us as we make our buyback decision, not a precise level at which we buyback shares in a given year. So when we set the initial buyback target of $1.2 billion back in January, at that point, we were projecting 2012 operating income in the amount of about $1.5 billion and shareholder dividends of about $400 million. So still at that time, we said that we'd be buying back about $100 million more than our forecasted operating income less shareholder dividend. Obviously, as you point out, our forecast has gone up. We're now expecting about $1.8 billion in operating income for the year. And when you take out our shareholder dividends, we're now going to have about $200 million more than our buyback program. So we have no intention of increasing our 2012 buyback program at this time beyond what we said originally. This excess $200 million in net retained earnings will going into our year end capital position and it will be one of the factors going into the consideration of our buyback program for 2013. You might recall that our year end capital position will also be affected by the impact of interest rates on our investment portfolio, the change on our pension position due to returns and lower interest rates and the impact of the currency on the carrying [ph] value of our balance sheet among other things. So the resulting excess capital position will be our starting point in the development of our 2013 share buyback program. We'll then factor in, among other things, overall market conditions, our expected earnings in dividend, part of our stock price valuation, alternative investment opportunities and potential opportunities for profitable growth, coupled with the final level of any stock buyback program. So bottom line is we continue to think we're in a very strong excess capital position and we'll take all that into consideration as we head into 2013.

Dino E. Robusto

Basically, our baseline position is that the buybacks should be in about the amount of income less shareholder dividends. A couple of years ago, we're opportunistic and bought back more shares than that. You had a very attractive price valuation. We continue to like the value of our stock, but that was an opportunistic plight. And it doesn't -- it's obvious that you cannot buy back a lot more shares than your increase in return earnings from net incomes over a long period of time. I mean, that can only be an opportunistic plight.

Jay Gelb - Barclays Capital, Research Division

I see. You have a lot of high-class problems here. With the stock trading at 135% of book, does that give you any pause on the valuations side?

John D. Finnegan

We think it's still an attractive valuation. But of course, when we look at it in 2010 at 110% of book, it looks like a more attractive valuation and we did have a significant excess capital position and took advantage of that opportunity. 135% is about our historical average over the last 10 years. So it's high compared to where it's been in the last few years. But over time, it's not particularly high.

Operator

And we will take our next question from Paul Newsome of Sandler O'Neill.

J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division

I want to play devil's advocate a little bit here and talk about some of the lines that look like they're at [indiscernible] like surety and some of the commercial lines of business, multi-tier and casualty. Should we be thinking of lower rate increases and faster growth, given that your cat rate adequacy? Or is this something [indiscernible] that should be more complicated than that?

John D. Finnegan

How are you deriving your conclusions as to the rate adequate based upon current period combined ratio?

J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division

Could you just give me -- yes, I mean, this year, as the combined ratio so far through those lines are really quite good, knock on wood. And you put through a fairly substantial rate this year. As we think of next year, not necessarily this quarter, how do you think -- maybe I'll ask it another way, how do you think of that trade-off of trying to get through rate in an environment where you can get rates versus trying to grow?

John D. Finnegan

I think I'm going to let Paul answer this. I don't think you can necessarily -- beyond analysis by just looking at the current combined ratio will get you there. I mean, we have to look at what favorable development there, what's the cat rate is there, what's the related impact to their -- but -- and the new money impact that will lower investment income which is coming in. So Paul, why don't you talk about it a little?

Paul J. Krump

Yes, sure, John. I'll try to frame it out here a little bit. But Paul, things for the question. And I surely appreciate you playing devil's advocate on it. Maybe just taking a step back. When we think about rate adequacy, we start by a product line, we will modify it by geography, industry segment, a lot of subsets of those. And the analyses are constantly revised as new data becomes available. We look at stuff like loss projections, claim costs, payout patterns, frequency trends, as well as what the pricing direction and what our field might be telling us about, terms and conditions, et cetera. And while I greatly appreciate that you've noticed we made a solid progress towards our goals, as evidenced by the excellent third quarter results, I caution you just to remember that in the third quarter in particular, the results include significant favorable development. You got investment income there that still reflects a higher embedded yield, as well as obviously unusually low cap. And then when you think about it on an accident year basis, the overall book is not currently at adequate rate levels to achieve what we consider our long-run normalized cat load combined ratio target. So we're looking at a lot of stuff. One of the other factors we have to think about all the time is the pressure for loss costs, where the trend is at by line and if you should just think about commercial in general, pick a number, we could debate it. But we tend to think around maybe 4% is a loss cost trend on the book of business. That means we, as underwriters, have to step up every year and get at least 4% on average just to tread water. So that's a force that you're out with swimming again, so to speak. So hopefully that gave you some sense. We've made good progress, but bottom line, we think we've got a ways to go.

J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division

So could -- focus this a little bit in my mind. It sounds like you believe that you still need to take your current book and make it more profitable overall. And so the focus is going to continue to be on trying to get rate as opposed to growth.

John D. Finnegan

Yes. Well, let's look at it this way. I think if you did an analysis -- now, let's talk about the macro and then you can move to the individual lines. It's a little different, but if you did an analysis, a rigorous analysis of what our overall book has generated on an accident year basis with normalized cats, our overall business, you'd still be lucky to get the double digits. I mean, we obviously are benefiting from very low cats this quarter and still a good deal of favorable development. Now so with all of the industry, and the industries if we're at the high single digits, the industry is well below that. So from an overall perspective, we're not rate adequate. Now are some lines that are better than others? Of course, and we undertake continuously analyses of each of the lines, of what kind of rates we need in each of the lines and the profitability versus their growth trade-off. And that's sort of at a granular level that we do here and in the field, so each line is different. And then as you -- but as Paul mentioned, that even if you got the rate adequacy, the day you stop and don't get any more rate, your 4% is inadequate the following year. So you need rate over the time. We don't have a lot of lines that are excessively profitable. We have a few that may be rate adequate, but overall, you'd have to say that an accident year basis with a full cat load and normal weather-related activity, we're not at target ROEs for the book as a whole.

Operator

And we will take our next question from Vinay Misquith with Evercore Partners.

Vinay Misquith - Evercore Partners Inc., Research Division

The first question is on the accident year margins. You mentioned that there was some benefit from lower than average non-cat weather. So was this quarter's non-cat weather margin kind of normal? And the reason I asked is, historically, the accident year loss ratio x cat is worse than the second half of the year versus the first half, and this year, we actually saw the reversal.

John D. Finnegan

Let me talk -- what I say is this, Vinay. We had a good quarter. Margin expansion is usually defined as the amount at which rate increase would exceed longer-term loss trends. It's kind of a hypothetical calculation at any given quarter. You never have a longer-term loss trends or something else. But if you look at where our third quarter result came from -- if you talk about earned premium, which is what gets into income, we were close to margin neutral in the third quarter in CPI and CSI and had about 2 points of margin expansion in CCI hypothetically. So by itself, it's a positive development, but not sufficient not to own [ph] to explain the third quarter accident results, so the 3-point overall improvement from the third quarter 2011. Where did it come from? A little bit from that, the margin expansion CCI perhaps, but more of that the actual losses in the quarter were below the regression line, between the -- below the long-term trend line. We'd like to think that, that's a largely attributable excellent underwriting on our part and maybe in part it is, but we also recognize there is some good fortune involved. And one of the pieces of good fortune, what we use as an example, there are other pieces that is non-cat related weather. That's primarily a Personal lines thing with a little bit of rollup to commercial property and multiple parallel lines. But for example, to give you an idea, in our homeowners business, non-cat U.S. related losses ran about 3.5 points in the third quarter versus 7 points in the third quarter of 2011 and about 6 points in the third quarters over the last 5 years. As you look forward, and I know all you will try to do this, you'd look at -- we might, at the continued rate levels, we might have theoretically 3 points of margin expansion in 2013 over all our businesses. But you have to remember, we're starting with a very favorable loss period. So it'd be kind of simplistic just to extrapolate that expansion. It would assume that extra loss experienced in the quarter will continue below longer-term cost trends for the next year, a possible but not probable assumption. And a more realistic assumption might include -- while setting the margin expansion, it's a little bit -- by some reversion to the mid and higher losses from a variety of areas. So margin analysis is a good forecasting tool. But you got to look at where the base period is, you got to look at the actual versus the theoretical. And then finally, when you look at income forecast, you got to recognize the margin expansion, it generally applies only to accident year results, it doesn't affect favorable development. And that's another major component of counting their results in order to take into account changes in investment income, of course.

Vinay Misquith - Evercore Partners Inc., Research Division

Okay, that's helpful. Could you help us understand what rate increases you're looking for on the homeowners line?

Richard G. Spiro

Yes. We're in the process now of filing homeowner rate increases that vary by state, of course. In the mid single-digit and above level, with targeted effective dates in the next 2 quarters. And I use the word targeted just because they're still subject to regulatory approval. But that's the range we're looking at.

Vinay Misquith - Evercore Partners Inc., Research Division

Okay, that's great. And just one last thing, if I may. On the net investment income, I believe, last quarter, it was said that the new yields on the tax-exempt securities are between 125 to 150 basis points lower. And on the taxable securities, it's about 250 basis points lower. So just wondering if it still holds or if it's -- I mean, or the new money is even worse now than it was last quarter.

Richard G. Spiro

The new money rates are a little bit worse than they were last quarter. So as we sit here now on the muni side, we're probably looking at roughly 160 basis points lower. On the domestic taxable side, we're looking at about 300 basis points lower, and then on our non-U.S. fixed income investments, we're are looking at about 150 basis points lower. And as I mentioned in a prior comment, if you're look at it on average, it's probably around 175 basis points across the portfolio.

John D. Finnegan

And then you can see that contraction in spreads and the mirror image of it is the improvement in the position of unrealized position, which increased substantially over the quarter, due [ph] in part to equities and part due to the fact that spreads came in.

Operator

And we will take our next question from Mike Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Yes. Just a couple of questions. One, in CCI, it looked like the underlying loss ratio was a lot lower. And specifically CMP, the underlying combined was pretty low and marine, it looked pretty low. Is there some lumpiness that kind of -- I think someone made a comment before about -- in CPI that there was a lack of lumpiness. Is that part of the reason for that? Or is there something else and just one follow-up.

Paul J. Krump

This is Paul, Mike. I think it's really -- when you look at it, it's probably the impact of cat.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So it's just cat. So there's nothing even on an underlying basis that really had an impact there?

John D. Finnegan

Yes, I mean, obviously, there's some improvement, yes. But our accident year, x cat results and CCI, were improvement, definitely, I mean, in all of our lines of business. Remember last year, it was a huge quarter for cats, so you can't -- the third quarter, so you -- but the published results, that is so misleading that you really can't draw much from those.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Yes, but even if -- yes, I mean, I guess even if you compare going back, I mean, it's a unique result. So I was just curious if there was -- non-cat weather was a driver as well.

John D. Finnegan

No. I mean, I don't think that much. I think that cats were unusually low. And we also had very favorable x cat results in our commercial lines. It's -- we've had good loss trends this year. And now you go back a few years and we had better results, but these are very good.

Paul J. Krump

Mike, it's that the property model prop, package prop, has been leading the rate parade for us for the last 5 quarters, so you're seeing that start to earn and sway a little bit, too.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Got it. And then could you give a little bit more breakdown in terms of the development by -- either by accident year or maybe just within CCI, by product type or just maybe some general notion of where the development came from?

Richard G. Spiro

Sure. I would happy to do that. So I'll go through each of this SPUs and then I'll give you as much color as I can. I'll start with CPI, where we had about $25 million of favorable development. In CPI, all 3 of the lines of business, homeowners, auto and other personal, were slightly favorable in the quarter. When you look at CCI, where we had the $70 million, it was driven largely by our casualty book and our commercial multi tier [ph] book was also favorable. Workers comp was close to flat, and property, marine actually was slightly adverse. And then in CSI, with $35 million of favorable development, the vast majority of the favorable was in the professional liability lines driven by D&O and fiduciary and it was partially offset by some small adverse development in crime, fidelity, E&O and EPO, reflecting the some of the trends that we've already talked about.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And accident years, is it recent years or older years, just generally or...

Paul J. Krump

Primarily 2008 and prior.

Operator

And we will take our next question from Matthew Heimermann of JPMorgan.

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

First question I had was just, if I think about guidance at the start of the year and adjusting for cat and then all these other changes I have kind of a midpoint of about $0.70 higher than where you started. My question is relative to the base cases you had at the beginning of the year, where were you -- what areas were you positively surprised in? And I guess I was thinking kind of -- how much of it was better development, how much of it was perhaps better lost trend which you alluded to earlier? How much of it was maybe a little bit better rate and therefore a little bit better accident year priced margin and maybe a thought...

John D. Finnegan

I'll answer that. The answer is that it was better than anticipated loss trends but loss trends, unlike rate impact both accident year and prior period development, so there's no breakup of that. It was just -- we had better loss trends. Now a couple of factors. First, when we came into 2012, we were developing this guidance based on what were pretty -- what were tougher third and fourth quarters of 2011. We were concerned that the benign loss trends of the prior 5 years had turned. And while we didn't extrapolate those worse loss trends, we certainly adjusted and increased them over the first half of 2011. Now it's turned out is that this year, it's looked a lot like the first half of 2011, loss trends have been better than that. So I think and that's been reflected in better -- in good development and in better accident year results. I don't know versus rate. I think the rates are -- they may be a little bit better than we thought we had. Again, at that time, we weren't getting these type of rate increases, so we thought to build in. We were trying to achieve higher rate increases, but we didn't have them yet, so obviously, you have to blend in the realistic with the desired. So net-net, I just think the loss trends were the -- had been the answer. And in part, that's -- maybe third and fourth quarter last year was an anomaly. In part, that's due to things that are explainable but like non-cat-related weather.

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

Okay, that's helpful. And then, I guess that leads to another question. This is a little bit of a crystal ball question, but the theme of the last 10 years since we've been -- well, maybe not 10, let's say 8, has been we've been surprised by how good loss trend has been. How much credibility do you put in a scenario where you're able to get rate the next couple of years and you do that to reflect loss trend, low rates, but also maybe there's, built into that, an expectation that the development we've seen can't last. But how much credibility would you give to a scenario where perhaps we continue to be surprised by the loss trend side and the development and what it means for priced ROEs?

John D. Finnegan

I don't think I can answer that. I mean, the loss trends are developed by the actuaries, to take into account, historical experience, recent experience, but they're longer term in nature. I don't know. I hope you're right. I hope that scenario plays out. But we just use the historical data and go from there. I mean, we're not willing to say that loss trends have gone from 4% to 2% or anything like that.

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

Okay. And then just one quick one on property. Is that probably the line you'd point to where you might expect to see some moderation in pricing now that it looks like some of the reinsurance cost pushes has been collected?

John D. Finnegan

Talk to us after next week's storm. No, the answer is I don't know. So far, it's holding up, but we'll see.

Operator

And we will take our next question from Greg Locraft of Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Dino, we've talked a lot about margins. And well, I guess I'm looking at the consensus number and my level is pretty close to consensus, and the only way we can get to the fourth quarter is, I think, by basically all bringing up our margin assumptions by 200 to 300 basis points. So my question is how sustainable are the current trends because obviously, if you good on that line item into the fourth quarter and the year-over-year improvement should probably just hold all through next year as well. Is that a reasonable assumption?

Dino E. Robusto

Well. All I could say about the fourth quarter in terms of what you could read into it is the fact that we're assuming a combined ratio of about 2 points higher than the third quarter but about in line with the first half of this year. So I mean, that's where we are on an x cat basis. On an x cat basis, of course, and then we have cats about 1.5 point better. So that's the answer to one. I don't know -- what was your other?

Gregory Locraft - Morgan Stanley, Research Division

More -- because again, where consensus is versus what you're guiding to, it's all pointing to better margin, as you just said, better than what we're expecting. And so what I'm wondering is, is how this plays into next year's numbers as well? I'm trying to think about the improvement, because you've now got way on top of rate, the loss trend is more benign, you seem a little more confident -- well, you seem very much more confident in some of the problem areas that you were highlighting a year ago. So it just seems like the trend on core margins is going to be better.

John D. Finnegan

Greg, I see where you're going. I mean, what we've seen is that the loss trend, the margins in the third quarter were much better than were embedded in the analyst forecast. The margin implicit -- and margin's a loose term. Margin used to refer to accident year. I mean, we're predicting results in the fourth quarter, and they aren't quite as good as the third quarter but are better than the first half. So are they sustainable? I think what I said before was we expect some margin expansion next year. But on the other hand, we're starting from a very benign base in a variety of areas. In some areas, we're hoping to improve our loss experience like some of the professional liability areas where with the crime areas, for example, where we've had some problems. But we shall see. But in then some other areas, our experience in personal and commercial has been so good especially in non cat-related weather. That one more thing some [ph] version mean we do there. So I -- And finally, when you look at the results next year, rate doesn't impact favorable development so that's a wildcard, and we don't how much prior period development we'll have. So that's the context. You have some things working for you in terms of what we expect better rates that are earned premium. You have somethings may be working against you, some reversion to the mean in the loss trends even if it's slightly. And then you have the uncertainty of prior period development and you have lower interest rates.

Gregory Locraft - Morgan Stanley, Research Division

Yes. It's just trying to get to kind of what we were thinking versus what you guys are now -- again, it's the guidance that we're getting. It's a lot more bullish than what I think some of us at least were thinking. So if I could just back up in your commentary, I think during the call and I want to make sure I got this correct, did you say that there's 350 basis points of non cat benefit in the quarter? Was that the correct number? I know we've been talking about this in the Q&A, but I just want to kind of nail them, that number. Was it 350 basis points in this particular quarter?

John D. Finnegan

Greg, it's -- 350 basis points versus last year, about 250 basis points for the average of the last 5 years in the homeowners business, so on our total results, that obviously is closer to 100 basis points. I mean, it's not the deal so just to give you a feel. And again to your comment, Greg, that what we're guiding to the fourth quarter is better than you're carrying, well, we have the advantage of knowing the third quarter results when we develop that guidance. If you -- if we hadn't given you any guidance and you'd seen our third quarter results, you probably would've improved your expected combined ratio based on those results too.

Gregory Locraft - Morgan Stanley, Research Division

Right. Okay, okay, And then John, again, just so -- is it 150 basis points then? That's the figure -- I totally, so I did -- I'm glad I clarified it. It's 350 for the homeowners line, it's 150 benefit this particular quarter for the overall corporation?

John D. Finnegan

That's about 2.5. That 2.5 over 12 and then that's -- is that worldwide, Dino?

Dino E. Robusto

Yes.

John D. Finnegan

That's worldwide. So it's 2.50 [ph] to us, probably 178 [ph] To take homeowners and divide homeowners into total premium and then multiply that by the 350, that will give you the idea or versus last year 250 versus normal maybe.

Gregory Locraft - Morgan Stanley, Research Division

Okay. And really what I'm doing is I'm going to add that back in, look at the year-over-year. It's going to show some margin improvement. I'm still going to end up with a lot of margin improvement next quarter and sort of then I have to decide what to do next year. But okay, I'll keep settling with it, but it looks like you guys have had a pretty good inflection.

John D. Finnegan

Yes. And remember that non cat-related weather is one good example to use it again. We had just very good favorable loss experience in all of our lines this year.

Operator

And we will take our next question from Jay Cohen with Bank of America.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Just 2 questions. The first is given that the claims trends had been better than you had expected earlier in the year, in the third quarter, was there any favorable development from the first half of the year that flowed into the 3Q?

John D. Finnegan

No. Not that we've -- we've said in the past, we don't really -- I mean, cats aside, we don't really show -- we don't really break it up that way. I don't know. Nothing material as far as we can tell, no.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Okay. And then secondly, given the very strong capital position going into next year, and given that the fact that the stock is -- has moved up on a price-to-book basis, you look at the dividend and it's been gradually moving up relatively slowly. Would it make sense at this point to speed up that acceleration from a dividend standpoint?

John D. Finnegan

Let me caveat before Ricky says anything. That decision might depend upon where the taxes come out. [indiscernible] It's 20% or 40% but go ahead, Ricky.

Richard G. Spiro

Jay, all I can say at this point obviously, we'll re-look at our dividend with our board in the normal course. As you know, we've increased our dividend in each of the past 30 years. We'll take a number of factors into consideration including our capital position, as John said, the tax environment. And hopefully, we've shown you over the years we're committed to return our excess capital to our shareholders, and dividends are an important part of that strategy. Having said that, I'm not going to make any comment about what our future dividend plans may or may not be.

Operator

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

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

When we look at claims specifically relating to medical care, is there any change in the trend there?

Paul J. Krump

No. Not really. It's been pretty well stable, and it clearly runs higher than the typical consumer price index, and so we see at it as the same.

Operator

And we will take our final question from Brian Meredith of UBS.

Brian Meredith - UBS Investment Bank, Research Division

Just a quick one here. Going back to the whole share repurchase. Rick and John, do you ever think about share buyback with respect to kind of a payback period? Because obviously, you're buying back your stock at $1.35 [ph] of book value, 1 3 [ph]. It takes a while to earn that dilution book value per share back, particularly given this low interest rate environment.

Richard G. Spiro

Brian, it's Ricky. We look at it a bunch of different ways. We do look at payback. We do look at different return analyses. And as John said fairly on, even at today's stock price and our current price-to-book value valuation, we still see attractive economic opportunities in repurchasing our shares at our current price. So we do look at all those things. We do take them into consideration. But again, we still think that at today's price, it's still relatively attractive. And don't forget with the low interest rate environment, you also don't have as many other opportunities to invest your money elsewhere and make better return.

John D. Finnegan

Thank you very much for joining us.

Operator

And that does conclude today's conference call. Once again, we would like to thank everyone for your participation, and have a wonderful day.

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