Capital Management

“Our cash position remained strong as we ended the year with holding company liquidity of $2.0 billion,” commented Jay S. Benet, Vice Chairman and Chief Financial Officer. “Even with the elevated claim payments related to Storm Sandy and a discretionary contribution of $150 million to our qualified pension plan to maintain our high funding ratio, operating cash flows were over $450 million in the quarter. Further, we repurchased 5.4 million shares for $400 million, and dividends were $178 million during the quarter, bringing the full year total capital returned to shareholders to more than $2.1 billion.”

During full year 2012, the company repurchased 22.4 million common shares under its existing share repurchase authorization at a total cost of $1.450 billion, leaving $2.159 billion of capacity under that authorization for future share repurchases. Shareholders’ equity was $25.405 billion at year-end 2012, a 4 percent increase from the end of the prior year. Included in shareholders’ equity at year-end 2012 were after-tax net unrealized investment gains of $3.103 billion, compared to $2.871 billion at year-end 2011. Statutory surplus was $20.048 billion, a 5 percent increase from the beginning of the year. The company’s debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 22.2 percent, well within its target range.

The Board of Directors declared a quarterly dividend of $0.46 per share. This dividend is payable March 29, 2013, to shareholders of record as of the close of business on March 8, 2013.

Business Insurance Segment Financial Results

“We were pleased with the profitability in Business Insurance, particularly in light of Storm Sandy,” commented Brian MacLean, President and Chief Operating Officer. “We were especially pleased that the underlying combined ratio improved over 4 points from the prior year quarter driven primarily by earned rate increases which exceeded loss cost trends. Written rate gains were between 6% and 10% across all lines, led by Workers’ Compensation and Commercial Auto, with stable retentions and slightly improved new business levels. Going forward we will continue to execute on our targeted pricing strategy to further improve underwriting margins.”
($ in millions) Three Months Ended December 31,
2012 2011 2012 2011
Pre-tax After-tax
Underwriting gain (loss) $ (119 ) $ 106 $ (82 ) $ 63

Underwriting gain (loss) includes :
Net favorable prior year reserve development 120 49 78 32
Catastrophes, net of reinsurance (439 ) (14 ) (285 ) (9 )
Net investment income 498 457 402 379
Other 9 4 6 3
Operating income $ 388   $ 567   $ 326   $ 445  
GAAP combined ratio 103.5 % 95.8 %

Impact on GAAP combined ratio
Net favorable prior year reserve development (4.0 ) pts (1.7 ) pts
Catastrophes, net of reinsurance 14.7 pts 0.5 pts

Operating income of $326 million after-tax decreased $119 million from the prior year quarter due to a $145 million after-tax decrease in the underwriting results, reflecting the after-tax impact of higher catastrophe losses that were partially offset by higher underlying underwriting margins and higher net favorable prior year reserve development.

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