The underwriting gain in the current quarter reflected a GAAP combined ratio of 80.2 percent, as compared to 76.2 percent in the prior year quarter. This increase of 4.0 points in the combined ratio was due to lower net favorable prior year reserve development (7.8 points), partially offset by higher underlying underwriting margins (3.5 points). Net favorable prior year reserve development in the current quarter primarily resulted from better than expected loss experience in the surety business within Bond & Financial Products for accident years 2006-2007 as well as in several lines of business within International, partially offset by a $6 million after tax ($8 million pre tax) increase to asbestos reserves.

The current quarter underlying underwriting gain, which excludes net favorable prior year reserve development and catastrophe losses, reflected a GAAP combined ratio of 91.4 percent, as compared to 94.9 percent in the prior year quarter. This improvement of 3.5 points primarily resulted from a lower level of large losses within International as well as earned rate increases exceeding loss cost trends, partially offset by an increase in the expense ratio primarily as a result of lower earned premiums.

Financial, Professional & International Insurance net written premiums of $729 million decreased 10 percent from the prior year quarter primarily driven by International due to a number of factors described below.

Retention rates, renewal premium changes and new business volumes, as discussed below, exclude the surety line of business as surety products are generally sold on a non-recurring, project-specific basis.

Bond & Financial Products
  • Net written premiums of $529 million decreased 2 percent from the prior year quarter primarily due to lower business volumes in construction surety reflecting the continued slowdown in construction spending, partially offset by growth in Management Liability business volume.
  • Renewal premium change remained positive and continued to increase from recent quarters due to positive renewal rate change, partially offset by slightly lower insured exposures.
  • Retention rates remained strong and generally consistent with recent quarters.
  • New business volumes decreased from the prior year quarter.

International
  • Net written premiums of $200 million decreased 26 percent from the prior year quarter primarily driven by policies written in the third quarter of 2011 that, because their terms were generally 18 months, were not up for renewal in the third quarter of 2012, lower surety volumes in Canada and the impact of the company’s withdrawal from the personal insurance business in Ireland.
  • Renewal premium change was slightly negative as the impact of continued positive renewal rate change was offset by lower insured exposures.
  • Retention rates decreased from recent quarters but were improved from the prior year quarter.
  • New business volumes decreased from the prior year quarter.

Personal Insurance Segment Financial Results

“In Personal Insurance, our improved underwriting performance this quarter resulted from lower weather-related losses,” commented MacLean. “Given our goal of improving profitability over time, we are particularly pleased with the significant acceleration of pricing gains that we achieved this quarter in both Auto and Homeowners. Although this strategy has resulted in lower new business volumes, retention rates remain high and we will continue to seek improved pricing, terms and conditions.”
 
             
($ in millions) Three Months Ended September 30,  
2012   2011   2012   2011  
Pre-tax After-tax  
 
Underwriting gain (loss) $ 178 $ (309 ) $ 113 $ (201 )

Underwriting gain (loss) includes:
Net favorable prior year reserve development 65 5 42 3
Catastrophes, net of reinsurance (40 ) (408 ) (26 ) (265 )
 
Net investment income 101 102 81 82
 
Other 17 17 12 11
               
Operating income (loss) $ 296   $ (190 ) $ 206   $ (108 )
                               
 
GAAP combined ratio 89.7 % 115.0 %
 

GAAP combined ratio excluding incremental impact of direct to consumer initiative
86.8 % 112.5 %
 

Impact on GAAP combined ratio
Net favorable prior year reserve development (3.4 ) pts (0.3 ) pts
Catastrophes, net of reinsurance 2.1 pts 21.3 pts
                                   
 

Operating income of $206 million after tax increased $314 million from the prior year quarter due to improved underwriting results, reflecting lower catastrophe losses and higher net favorable prior year reserve development.

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