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Guidance for Price Increases
Amit Kumar – Macquarie: 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 the exactly similar to your initial guidance for 2012. I understand the new to lost business numbers and the retentions discussion, why wouldn’t it still be higher than what your guidance loss for 2012? What’s the additional component?
John D. Finnegan – Chairman, President and CEO: This has been subject, as question of margin expansion and impact on earnings has been a subject of discussion in prior quarters, also a 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 in everyone’s mind. First of all when you are talking about rate increases I assume you are talking about prospective margin expansion which is the impact on 2013 combined ratios from earned rate increases in excess of long term loss trends. Then I guess the follow-up question is how do we reconcile those projected improvement in margins with our combined ratio guidance for 2013. So let’s start with some facts for 2013 we are estimating the earned rate increases will be 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 to guidance for 2013 which implies an 85 to 87 ex-cat combined ratio. Similar to the ex-cat ratio we ran in 2012. So thus I suspect you are asking why our projected ex-cat combined ratio is improving by three points in line with our pro forma margin expansion. The first thing I would say that this isn’t 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 mean that its based in a variety of scenarios that includes both accident year results and potential prior period development. Such development which can have an 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 ex-cat accident year results. Since we do not provide expected development in our guidance you have to make your own judgment on the ex-cat accident year combined ratio difference between 2012 and 2013. But it is this change in accident year ex-cat combined ratio from 2012 to 2013, which should 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 making an comparison in accident year, you should note that the 3.5 by which earned rate increases are expected to exceed longer-term loss trends, they only translate into a similar improvement in ex-cat accident year combined ratios to the extent that actual losses in 2013 track longer-term trends both of accident year 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 ran an ex-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 experienced in each quarter, not longer-term trends. In the fourth quarter 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, it was the actual experience not the 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 reason we’re developing our 2013 projections. Thought by looking at the loss experienced in 2012, the base year from which these projects are development and the base year at which you are making the comparison. In this case we enjoyed very benign ex-cat loss experience in 2012, well below longer-term trend lines. For example, in 2012 we benefited from a lower to normal non-cat U.S. weather impact in homeowners of about 3.5 points versus a roughly 6 point average in the previous five years. So, in developing our 2013 outlook, we assume some reversion to the mean and 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 is 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, bottom line is that earned rate increases should exceed longer term loss trends of 2013 and that’s probably the basis of your question. But, you got to back out favorable development to make an apples-and-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 function of not only rate increases but of changes in actual losses from 2012 to 2013, not longer-term trends lines.
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