Good day, ladies and gentlemen. Welcome to The Hanover Insurance Group 2013 fourth quarter earnings conference call. My name is Celia, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and we'll be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I will now like to turn the conference over to your host for today, Oksana Lukasheva, AVP, Investor Relations. Please proceed.
Thank you, Celia. Good morning, and thank you for joining us for our fourth quarter conference call. We will begin today's call with prepared remarks from Fred Eppinger, our President and Chief Executive Officer, and David Greenfield, our Executive Vice President and CFO. Available to answer your questions after our prepared remarks are Jack Roche, President of Business Insurance, Andrew Robinson, President of Specialist Lines, Marita Zuraitis, President of Personal Lines, and Robert Stuchbery, President of International Operations and Chief Executive Officer of Chaucer. Before I turn the call over to Fred, let me note that our earnings press release, financial supplement, and a complete slide presentation for today's call are available in the investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session.
Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements, including our earnings guidance for 2014. There are certain factors that could cause actual results to differ materially from those anticipated by this press release, slide two of the presentation deck, and our filings with the SEC. We caution you with respect to reliance on forward-looking statements and in this respect refer you to the forward-looking statements section in our press release, slide two of the presentation deck, and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as operating income, operating income per share, operating results excluding the impact of catastrophes and development, accident year loss, and combined ratios, among others.
A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Fred.
Good morning, everyone, and thank you for joining our fourth quarter earnings call. I'm very pleased with our strong performance in the quarter and for the year. Our net income per share of $5.59 was the strongest bottom-line result we have delivered since becoming a public company in 1995. Operating income per share was $5.06 in 2013, yielding an operating ROE of 10%. Results for the fourth quarter were also solid, with an operating income of $1.33 and an ROE of 10%. The underlying earnings momentum in our organization is evident. Our ex-cat earnings before taxes were $533 million, which is 20% higher than 2012 and the highest results we've produced so far. Equally as important, we delivered our expectation of a 94% ex-cat combined ratio for 2013, an improvement of more than two points over 2012.
Our financial progress for the year was strong. We are equally pleased with the progress we made on our strategic priorities that position us for further margin expansion in 2014. We enter 2014 with momentum in the market with our partners and solid pricing trends and a strong, well-diversified, and improving portfolio. I will now turn the call over to David to review our financials. I will come back to discuss our outlook and thoughts on the current market. David?
Thank you, Fred, and good morning, everyone. The fourth quarter results were excellent and cap a record year for us. Net income in the fourth quarter was $70 million, or $1.57 per diluted share, compared to a net loss of $55 million or $1.24 per diluted share in the prior year quarter. Operating income was $60 million in the quarter, or $1.33 per diluted share, compared to an operating loss of $73 million or $1.65 per diluted share in the fourth quarter of last year. The fourth quarter of 2012 was marked by losses from Sandy, which totaled $129 million after taxes. Because Sandy losses and certain other underwriting items impacted the fourth quarter of 2012 results, direct quarter-over-quarter comparisons are less meaningful.
For that reason, I'll put the current quarter and full-year results in context by comparison to our full-year 2012 performance and will reference fourth quarter of 2012 where appropriate. Our 2013 combined ratio of 96.7% compared to 104.4% in 2012. The lower level of catastrophe losses in 2013 contributed more than five points to the improved underwriting results. The remaining two points of improvement are attributable to an increase in the ex-cat underwriting margin in our domestic business while Chaucer continued to deliver very strong results in 2013, in line with the prior year. In our domestic business, the accident year loss ratio, excluding catastrophe losses, improved from 64% to 62%. We also reported an improvement in unfavorable prior year loss reserve development, which was a half a point for the year compared to 1.7 points in 2012.
These items drove a meaningful increase in our ex-cat underwriting loss margin of over $100 million compared to 2012, with both personal and commercial lines contributing to this improvement. In commercial lines, virtually all businesses noted improved accident year loss trends, which resulted in an overall loss ratio of 60% compared to 62% in 2012. Strong workers' compensation and commercial multi-peril results this year continue to benefit from our focus on smaller accounts, mixed management initiatives, and rate increases. In auto, we continue to take a more cautious view of loss trends given our recent experience and the developing industry trends. Of note, our commercial auto loss ratio declined for the second consecutive quarter, indicating a moderation of recent trends. Given significant pricing increases in this line, we believe we'll see continued improvement in 2014.
Our accident year loss ratio in other commercial lines, which includes surety and other domestic specialty business, improved by approximately 2 points in 2013, driven by our previous and ongoing mixed management and pricing actions. Additionally, as these businesses become more mature and gain organic growth momentum, we expect to see a compounding effect of better mix and pricing levels flowing to our margins in 2014. In personal lines, we generated a 63% underlying loss ratio for the year compared to nearly 66% in 2012. We continued to earn in strong pricing increases while also taking actions to improve the overall quality mix of the business. The homeowner's ex-cat margin improved by approximately 5 points this year compared to the full year 2012, as a result of the active rate and mix management strategy.
Only about 1 point or so of this margin improvement is attributable to more favorable non-catastrophe weather in the current year. Our personal auto rate and profitability management strategy yielded a 3-point lower accident year loss ratio for the quarter, and 1 point lower for the year. We continue to be diligent in how we approach rate and risk selection. Given our prior experience and the industry trends, in particular in BI severity, we continue to be cautious in our evaluation of this line. Moving on to a discussion of expenses. Our current quarter expenses for both personal lines and commercial lines included a higher level of performance-based compensation and commissions reflecting strong full-year results. The full-year personal lines ratio would've been flat, excluding this increase in employee and agency payouts, while commercial lines would've yielded an improvement of 1 point driven by growth leverage and operating model efficiencies.
All in the 2013 expense ratio was up 0.5 points in personal lines and about flat in commercial lines compared to 2012. We maintain a keen focus on expenses and believe we can gain further expense leverage in our domestic businesses, in particular, in commercial lines. This, however, will be partially offset by continued shift in business mix to commercial lines, which carries a higher expense load than personal lines. Chaucer continued its 2013 trend of positive results with a combined ratio of 90% for the quarter and for the year. The accident year combined ratio of 95% in the current quarter was higher in the prior year quarter due to lower than usual attritional and large losses last year. The results this quarter are in line with our longer-term expectation for this business.
Overall, 2013 was another strong year for Chaucer that included a lower level of catastrophe activity and increased favorable prior year reserve development, partially driven by foreign exchange movements. We entered 2014 expecting results will return to more normal levels with an overall combined ratio of around 95%. Chaucer's expense ratio was 38% for the year, in line with our expectations for this business. Moving on to the top line. Net written premium growth of about 2% in the quarter reflected premium growth in clients of 8%, 1% growth in Chaucer, and a 6% decline in Personal Lines as we continue to execute on our strategy of exposure management and profitability improvement actions. Chaucer growth this quarter was somewhat lower than expected due to further premium reductions in the energy line from lower activities in the sector, as well as lower premium writings in other lines.
Each of our business segments continue to perform well this quarter, and we're pleased with the improving underwriting trends. We will continue to maintain our focus on what we must do to sustain the combined ratio improvement momentum and drive the organization to achieve our target returns. Moving on to investment results. At December 31st, 2013, cash and invested assets were $8.1 billion, with fixed income securities and cash representing 92% of the total. Roughly 94% of our fixed income securities are investment grade, and the average duration of the portfolio is 4.1 years. Our investment portfolio remains high quality and well-laddered. Net investment income this quarter was $68.1 million compared to $70.1 million in the prior year quarter. Our full year net investment income was $269 million, representing a decline of 3% over 2012.
The negative impact of lower new money yields was partially offset by a higher level of assets invested in fixed income from positive operating cash flows and redeployment of operating cash into the portfolio. The earned yield on our fixed maturity portfolio was 3.86% in the quarter and 3.95% for the year, compared to 4.1% in the prior year quarter and 4.26% for 2012. While we continue to counterbalance the pressure from lower interest rates by opportunistically investing in higher yielding classes, we estimate net investment income will decline by approximately 2% in 2014 before it returns to growth in 2015. Before I update you on our balance sheet and capital, I'd like to provide some information on our January reinsurance renewals. The overall market conditions provided us the opportunity during our 1/1 renewal cycle to strengthen our program and reduce volatility in a cost-efficient manner.
For our catastrophe program, we extended the program to an 18-month period, as well as expanded our Northeast only layers to cover countrywide risks, syncing up all of our renewal dates and geographic coverage. Additionally, for certain liability and per risk treaties, we were able to adjust terms to better manage volatility without significantly impacting the overall pricing. Chaucer, being both a buyer and seller of reinsurance, had a modest overall net benefit from this year's renewals. I'll finish up with a few comments on the strength of our balance sheet and capital position. We ended the quarter with a total capital position of $3.5 billion. At December 31st, book value per share was $59.43, up 2% in the quarter and 1% since December 2012.
Excluding net unrealized investment gains, the book value grew 8% in 2013, reflecting strong earnings throughout the year, as well as the impact of capital management actions. For the full year, we repurchased approximately 1.6 million common shares for $78 million, or an average of $48.26 per share, which represents approximately 4% of our shares outstanding at year-end 2012. We did not repurchase any stock in the fourth quarter. However, since year-end, we repurchased $5 million, given recent market fluctuations. We have $132 million remaining in our stock repurchase program. We will continue to actively and opportunistically manage our capital structure. During the quarter, we also realized an opportunity to repurchase $34 million of senior debt, which carried a coupon of 7.5%. Our total outstanding debt was $904 million at year-end, translating to a 26% debt to capital ratio.
We will continue to optimize our capital structure and its efficiency as opportunities arise. Overall, we feel our capital is best deployed in support of our growing business needs and initiatives as we capitalize on our opportunities and the dynamic marketplace we are operating in right now. We are entering 2014 with the strongest balance sheet in several years. Our reserving position is solidified, providing a stronger foundation for business growth opportunities. With that, I'll turn the call back to Fred.
Thanks, David. As we reflect on our progress, we believe we have taken a strong step forward as a company in 2013. Our fourth quarter call last year, we emphasized that taken together, our 2013 priorities were about leveraging a more distinctive and balanced portfolio to achieve higher and more consistent earnings and returns. Today, as we look back on the year, we are pleased with our progress and believe we have built a solid foundation for 2014 and beyond. Every major business in our franchise improved broadly. We achieved expanded margins each quarter throughout the year in virtually all segments, and we substantially improved our portfolio mix.
Although we made significant financial progress in 2013, there is no doubt that further margin expansion is required and available to us, and we believe the actions we took in 2013 and are continuing to take into 2014 will help us capture it. As a reminder, we had three major priorities for this year. First, to continue to improve our portfolio mix and property concentrations. Second, increasing pricing in our domestic businesses. Finally, to continue to realize the benefits of our Chaucer franchise. I would like to briefly update you on the progress of these goals and discuss why we are confident they will continue to improve into 2014.
As far as our portfolio work is concerned, we continue to pursue targeted actions to reduce property concentrations, in particular in the Southeast, Northeast, and Midwest regions, to respond to the more volatile weather patterns experienced recently and to better balance our portfolio. The magnitude of the work we have done over the past two years has been substantial. In aggregate, our various exposure management initiatives reduced domestic premiums by about $40 million, or 5% in the fourth quarter, and approximately $200 million, or 6%, for the full year 2013. These premium reductions come on top of approximately $120 million of policies we exited for strategic reasons in 2012. As we look forward into 2014, we have some remaining work to do. Roughly $80 million primarily focused on Personal Lines property in the first six months of the year. After we complete this work, our remaining reductions will be quite modest.
In addition to the exposure management initiatives, we also continue to improve the quality and earnings potential of the portfolio we've built over the last several years. We continue to shift our mix to higher margin segments and businesses and continue to target surgical underwriting actions, reducing some of the lower margin business. We believe the benefits of all our mix management initiatives are only starting to earn in. We should see a positive impact on profitability and earnings resiliency in 2014 and further into the future. We believe that when these actions run their course, our momentum in the marketplace, driven by our breadth and distinctiveness of products, our local delivery and alignment with agents will translate into above-industry growth rates. Our franchise value with our partner agents is excellent as we enter 2014 and will create a significant number of opportunities.
We see confirmation of our underlying growth momentum in the numbers. Excluding the target underwriting actions, we grew our domestic business by 7% in the fourth quarter and the full year. Additionally, retentions remain strong, at 80% in Personal Lines and 85% in Core Commercial when adjusted for our mixed management initiatives. Finally, new business premium is showing positive momentum, growing at an accelerated pace for the third consecutive quarter, in particular in Core Commercial Lines. In Personal Lines, as expected, growth was impacted more significantly by our exposure management actions in 2013, resulting in a premium decline of 3% for the year. However, we achieved the portfolio improvement we set out in terms of geographic exposure, quality of mix, and a continued shift to the account business.
Given our stable voluntary retention metrics and new business dynamics, we are confident that this line will return to growth starting in the middle of 2014. As you know, we rolled out the new value-added account focus product, Platinum, in eight states. Our agents are very enthusiastic about this new value-added offering, which helps us drive account business growth. The second area we remain intently focused on is improving pricing across our domestic business. We continue to be focused on the rate dynamics of our business. Overall, the impact of pricing remained positive in the quarter across all domestic businesses. In Core Commercial Lines, pricing increases were in line with recent periods at 9%, while retention ticked up favorably by 1.5 points to 84%. The rate increases continue to be broad-based but led by middle market commercial auto and workers' comp.
We believe our relatively small size policy book and our focus on selling value has good momentum. We have not seen any significant rate deceleration or any meaningful shift in market trends. In our specialty businesses, pricing remained strong in high single digits in the quarter. We are confident we will continue to see meaningful rate going forward. In personal lines, our rates have moderated to 8% from a high mark of 10% last quarter and in line with our expectations as we stated in the third quarter call. Turning now to Chaucer. This year, we delivered pre-tax operating income of $150 million and premium growth of 13%, which was primarily from the non-renewal of the Flagstone quota share.
We have built a very strong franchise. We continue to enhance the breadth of our specialty capabilities. Specifically, in 2013, we added some additional capabilities around our casualty treaty team and in our marine and property lines. We feel good about the distinctiveness of our position at Lloyd's. Our broad-based portfolio is enabling us to manage our response to somewhat challenging market conditions very effectively. We continue to focus our efforts on areas of the business where we have strong underwriting capabilities and known leadership positions, including specialist areas within marine, where we are still seeing attractive opportunities, and casualty, which is beginning to benefit from the strong rate increases in the U.S. Overall, we are pleased with Chaucer's strong performance and the opportunities we are capturing together. Given the current market environment, we expect more limited growth in 2014 and returns more in line with historical levels.
In conclusion, 2013 was a very successful year for our company as we made substantial progress on all our strategic priorities and delivered on our financial commitments. We recognize we still have work to do to deliver target returns. However, the progress is obvious and ongoing. We put a great deal of effort into properly balancing our portfolio and believe that work is substantially behind us. Today, we have the products and the operating model to help our agent partners grow profitably and win. We have the capital strength and infrastructure to support above-average industry growth. More importantly, we have the talent and the commitment of our people delivering for our agent partners and their customers, thereby enabling us to grow shareholder value. As a result, we are in the strongest position we have ever been in and are poised to deliver increasingly improved returns in 2014.
Before we open the line for questions, I would like to provide some financial information relating to our 2014 outlook. Our operating earnings expectations for 2014 is in the range of $4.80 to $5.20 per share. As a basis of this outlook, we anticipate written premium growth in the mid-single digits, a decrease in the net investment income of approximately 2% compared to 2013. An overall combined ratio between 96% and 97%. This includes catastrophe losses of approximately 5% of earned premium. Our preliminary estimate for January losses from two declared cat events is approximately $30 million-$35 million. These losses reflect severe winter weather and unusually low temperatures over a wide geographic area. With two months still remaining in the quarter, it is likely our first quarter catastrophe loss ratio will be higher than recent years.
We see no reason to change our overall catastrophe loss assumption for the year at this time. In closing, I would like to iterate how good we feel about our current strategic position and our prospects for 2014. We look forward to continuing to execute on our strategy to position ourselves as a top quartile competitor. Operator, could you please open the lines for questions? Thank you.
Thank you. Ladies and gentlemen, if you have a question, please press star, followed by one on your phone. If your question has been answered or you'd like to withdraw your question, press star, followed by two. Questions will be taken in the order received. Please press star one to begin. The first question comes from the line of Vincent DiGiustino, KBW. Please proceed.
Morning, Vincent.
Good morning. How are you guys doing?
Good.
Good. Fred, the conversation around some of the portfolio mix changes and then the exposure management actions was really helpful. Just to, I guess, kind of frame that, both looking forward and looking kind of backwards, if I'm looking at the 4 Q 2013 year-over-year domestic personal and commercial lines core loss ratio improvement, I was hoping that you guys might be able to call out how much of that improvement roughly would've come from some of those non-rate oriented initiatives, like some of the things you had run through.
Yeah, I think it's a little bit tricky to identify exactly how much is rate versus non-rate, because one of the interesting things is that there was some good improvement from underwriting actions, but a lot of the stuff that we're getting off of for concentration and volatility purposes actually has a drag for a couple of quarters because of the marginal contribution that you get from that to expenses. What I would tell you is that the mix improvement to me is something that's going to linger and continue to help in 2014, actually more than 2013. It's meaningful. I would also say that the volatility aspects of that, while it's hard to pinpoint, to me, is why you saw some improvement like in the second quarter of this year from the tornadoes, et cetera.
We're going to have less volatility in the book because of that as well. I think it's going to be meaningful, but I think it's more in the future than it was this year.
Okay. Then, you had mentioned it as far as just seeing pricing resiliency, and it's been kind of interesting this quarter because we have some insurers having a similar message, and then we also have some insurers telling us that there's a deceleration-
Yeah
in their rates or increase in competition. Do you have any thoughts on what kind of might be the defining characteristics on why insurers are calling one thing?
Yeah, it's a great question. Obviously, if you look at some of the national accounts and the large accounts, particularly in the property area and comp, my guess is you're seeing some moderation in price increases. What's happening in our book, because of our small average policy size and how we play the game with accounts and personal lines, et cetera, we haven't seen any really dramatic shift yet. My guess is you'll have pockets where you're going to see some change, but we have not seen any kind of, what I would say, material change. The smaller accounts go up less and come down less. We also don't get the spikes as much. For us, both the fourth quarter and January have performed pretty nicely as far as getting rate increases.
I fully expect that there will be pockets that will moderate through the year, but we feel very good about our assumptions and being able to achieve rate this year.
Okay, good. One for David, just the last one. You had mentioned just some of the repurchase activity year to date, and I'm just kind of curious with 2014 and 2015 looking to be more on track, I'm just kind of curious with the kind of repurchases this year and kind of just looking forward, if we should maybe start to think about Hanover returning to a more normal capital management environment here in 2014 and 2015.
Well, you'd have to define normal for me to be able to answer it that way, Vincent. What I would tell you is we're very conscious of capital management as part of our strategy. I think I've been fairly clear over the course of last year, our first effort is to put our capital to work in our growth opportunities, which Fred talked to, and we've been talking about. Where it makes sense for us and where pricing in the market, for example, is attractive, we'll put more money towards share repurchase or other things like a debt repurchase. Just to maybe give a little more color, we didn't do any repurchasing in the fourth quarter because the share price was at a pretty nice level, and we felt that it was more valuable to put our capital to work in the growth opportunities we see.
Obviously, in January, we've seen a little bit of disruption in the marketplace, which created an opportunity for us. I would tell you in our planning, we have a modest amount of repurchases each year that we execute, which I usually refer to as maintenance level type repurchasing. We're going to continue to do that throughout the year. If we have opportunities like we saw last year where we had a capital markets transaction that allowed us to free up some of our capital to put more towards share repurchase, we'll continue to do things like that as well. You should expect we'll have modest amounts of share repurchase in line with kind of the last number of years that we've been executing this strategy.
Okay, great. Thank you for the color.
Thanks.
Next question comes from the line of Matthew Carletti, JMP Securities. Please proceed.
Good morning, Matt.
Thanks. Good morning. Vincent covered actually two of my questions. I only have one left, and that was just, could you provide a little more color on the January losses you mentioned, just kind of which states, if it was more southern than northern, and whether it was a bigger impact on auto or home?
Yeah. It's actually commercial for us. It's broad-based. It's the weather, the cold, and freezes. It's mostly commercial, frankly, for us.
Okay.
What I would also say, in January, we didn't see non-cat weather act. It wasn't spiked. It was really those events that created the losses. The rest of the month is more normal except for those events, the two. The second one was obviously bigger than the first event.
Right. Okay. That's really helpful. Good luck on the quarter and the year, and good luck in 2014.
Yeah. Thanks. Let me just mention quickly on the cat estimates for our company, too, because I think it's important. In the last couple of years, the first quarter has been lower. Given our company profile, typically, our first three quarters are pretty similar around our estimate. It's only the fourth quarter that's a little less on a cat basis. We think about cats at this 5% level as being pretty stable in the first, second, and third. I know it's more than, on a relative basis, the last couple of years that we're down, but to me, having this kind of weather in the first quarter is not unusual at all, particularly for people that have a mix like we do that is Northeast and in the Midwest.
Yeah. No, that makes sense. Thank you.
Thanks.
The next question comes from the line of Dan Farrell, Sterne Agee. Please proceed.
Hi. Good morning.
Hey, Dan.
Good morning, Dan.
Just another question around the cats. I think you said your sort of full-year target or guidance for cat load is five points, but I think you also said that the first quarter you thought could be higher. Does that imply that incrementally you think that maybe normalized cat load could be coming down slightly given all of the exposure management stuff you've done or some of the improvements in turn?
Yeah. Obviously, Dan, we've done a lot on our mix over the last few years. We have balanced the commercial. I think to our casualty is much different than it was three or four years ago. Our geographic spread is much better. In the same vein, though, the last five years, the cat, the volatility of weather's gone up in the world, at least domestically. So we feel very good about the 5% as the right number. We think it's a thoughtful number. We think we're conservative as appropriate, but it's the right number given what we've seen activity over the last few years. My only point on the first quarter is that the last two years have been very low. We've had kind of no winter. Even last year, what was weird about last year, we didn't have really a winter.
What we had is tornadoes in March. What in my view is this is a little bit of a return. Obviously, these are big events, but this is a return to more normal kind of winter profile of storms, albeit it's just one month. That's why I don't think it's the 5% to us for the year is right, and there's no reason to adjust it at this point, given we're one month into the year.
Great. A question in the other commercial segment. Your loss ratio the last few quarters has trended on a core basis between 58 and 59. You've also continued to have some adverse development there. I was curious, is some of that being driven still by any surety? I was just kind of curious what the trends are there. Maybe an update on that and just is there any leverage for improvement going forward there as well?
Sure. Dan, it's David. It is surety. The development you're seeing there is primarily the surety account. I think I've talked in the past, it's sometimes allocating losses between current and prior accident years is more an art than a science. As we're continuing to close down cases and claims, we'll typically pick up, in some cases, some prior year development as a result of that. Those numbers are steadily declining, and our exposures at the end of 2013 are very low going forward. We don't really anticipate much activity in the going forward periods there. Clearly nowhere near like we had in 2012 and 2013 performed pretty much in line with.
Yeah. Just in general to your question, when I look at the 2014 improvement we're planning for domestic, it's broad-based.
Yeah.
You're going to see because the actions are pretty much across the businesses, that we're going to improve in each of the business segments nicely. You will get some in that category as well this year.
That's helpful. Thank you very much.
Question from the line of Vincent D'Agostino, KBW. Please proceed.
Hi, Dan. Thanks for taking the follow-up. Just one quick one. I was curious if you guys happen to be seeing any changes in personal auto frequency in the last quarter or two that might be noteworthy.
No. Vincent, this is Marita. We haven't really seen anything from a frequency standpoint that's out of what we've been seeing over the last couple of years. It's pretty flat.
Okay, perfect. That's what I was looking for. Thank you.
Thanks.
Question from the line of Larry Greenberg, Janney Capital. Please proceed.
Morning, Larry.
Thank you. Good morning. Just a few, looking out to 2014. The expected normalization for Chaucer to a 95 combined, is that a combination of attritional cats and reserve development, or how would you weight those pieces in the normalization process? When you think about underlying margin improvement domestically, can you just compare personal versus commercial?
Sure. Bob, do you want to take that?
Yeah. Hi, Larry. When you're looking at that normalization, it's really to reflect the market conditions that we're seeing. That's on top of a couple of good years where we've seen excellent results. I wouldn't expect the makeup of that to necessarily change that much. It's more driven by underlying market conditions that we're seeing, and trends particularly that we've seen around 1/1 that we expect to continue into 2014.
Don.
Okay. That would suggest to me more just attritional losses.
Yeah, exactly.
Okay, thanks.
Don't forget, we do have within our portfolio, there is an exposure to what we would call large losses and attritional. We've got the larger line size that we put down on some of those specialty lines of business as opposed to just pure attritional. We break it down into three territories. There is a bit of volatility also around the large losses. You're right, that the underlying trend would just be driven by market conditions in 2014 versus 2013.
Great, thanks.
Larry, I'll just jump in on that too, because there's a lot of moving pieces in there. What Bob said is obviously correct, but I would also tell you cats have been lower than expected over the last few years, and prior year development has been higher. Those two probably kind of offset for the most part, but as you're looking at the components, there's a lot of moving parts that get you to the 95.
Yeah.
Don, domestically, you asked about personal versus commercial.
Yes.
What we believe is that we'll see both improve. Personal got a little bit ahead in the improvement because of the way the rate earned in quickly for them.
Yes.
I think you're going to see significant improvement in all the different lines this year. There really isn't any one that spikes out above the others this year.
If you're thinking of you've been getting price eight, nine %. Roughly to think about it, loss trend in both are maybe pretty close and your pricing above loss trend is relatively similar. Is that fair?
Yeah.
Okay.
Now we have been in some of the places like Home in particular, we were catching up to this non-weather phenomenon we talked about as a higher %. We had a spike in Personal Lines that we talked about moderating a little bit. We spiked all the way up to 10 across Auto and Home, and that'll moderate a little bit quicker because of that spike. Our margins against those two factors will be pretty similar in the two businesses.
Okay. Anything different on the tax rate for 2014?
No, it should remain relatively consistent going forward.
Okay. Thank you.
The next question is from the line of Sarah DeWitt, Barclays. Please proceed.
Morning, Sarah.
Hi guys. Morning. In your combined ratio guidance of 96-97 for 2014, does that include any reserve development?
It includes a little bit of positive development in Chaucer in the 95 that we talked about as much more moderate than where we've been over the last few years. In terms of domestic, we don't estimate any development in our guidance there.
Okay. I guess that would imply that excluding cat and prior year development, the underlying combined ratio could improve to, say, 92-92 and a half from 95 and a half in 2013. What gives you confidence that you can improve it that significantly? I know you've taken exposure actions, that's a pretty big improvement.
Yeah, I think it's a combination of all the things we've talked about, the exposure actions that we're taking, the pricing that we've been getting in the book, the underwriting that we're putting in place in the various lines of business, and the waning of some of the issues we talked about in 2012, early part of 2013.
Yeah. Again, for example, we recognized the auto issue really early.
Yes.
Have attacked it pretty aggressively, built up the balance sheet around it. A lot of that stuff is the impact of that is reducing relatively dramatically. There is a combination here.
Okay, great. Thank you.
Thank you, Sarah.
The next question comes from the line of Robert Pond, Dowling & Partners. Please proceed.
Good morning.
Good morning, Robert.
Morning. I wanted to follow up on the personal lines business. Fred, I believe you said that growth in the top line should start in the second half of this year. Can we expect to see premiums tail off in the first half, similar to what we saw in 4Q, about 5%-6% decline?
Let me comment, then Mark should add. What happened in the fourth quarter, we had been fortunate. I've been working these extendings and getting rid of the concentration. Part of our focus has been on some monoline, some legacy monoline property. We have an arrangement with a couple of companies where it's not literally of no rights, but it very much acts like that, where we are transferring business. That accelerated at the tail end of this year and will continue into the first and a little bit less in the second quarter. The actions we're taking around that is about $80 million between personal and commercial. It was a little bit in commercial too, but they're mostly into the first half of the year.
You're going to see first quarter similar to the fourth quarter because those transactions are occurring and are efficiently moving forward, and then they come back after that. Mark, is there anything we should clarify?
No, I think that's about right. It will temper, I think, a little bit in the second quarter.
Yeah
from where we'll be in the first quarter, then we should turn the corner again the second half of the year.
Yeah. We're very pleased about the transactions. As you know, our legacy books are in regulatory environments where it's very hard to get out of some legacy business, and we've created some really nice win-win situations with some partners so that we can move this monoline business. Our strategy around really going after the account business has really taken off now. Most of our business is with full accounts, and it really makes it look terrific as we look forward for our business. We're glad to get this behind us.
Okay, thank you. That was helpful. Just a final question. As far as the Chaucer business, you spoke about reducing premiums in the energy lines. On the other side of that, where are you seeing opportunities to grow in that business? Are there any segments that are showing more favorable conditions?
Yeah. Bob, you want to go?
Yeah. To be quite honest, they're far and few between them. The opportunities we are seeing around some of the areas that we've got within our marine portfolio, there's good opportunities there where we're a leader in certain of the classes around political risk, political violence. Across the board, and energy is a classic example of where you've had a good couple of years now, excellent results. People who write Gulf of Mexico windstorm exposure within their energy portfolio have had a couple of benign years. It is very difficult to get rates, and that's where we're seeing those reductions. Few opportunities, but the opportunities where we've got specific lines of expertise, good quality underwriting teams here that can just work their way around that marketplace.
Yeah. What's good is on one-to-one, we had a really solid one-to-one, and what we have is a nice broad portfolio. As we said, we're very comfortable maintaining the profitability and the margin of that business. We just think it's prudent to think about that as flat to low single-digit growth this year because what we need to do is make sure we maintain our positions and maintain our margins. It's very good. We're demonstrating the strength of the franchise right now, it's good, we feel good about the overall results, but you won't see a lot of growth out of that business this year.
Okay, great. Thank you for the answers.
Thanks, Robert.
The next question comes from the line of Ron Bobman, Capital Returns. Please proceed.
Hi. Thanks. I just had a question about the guidance. I was wondering how much favorable development from Chaucer is embedded in the guidance.
We normally plan for them to be in the low end of the single digits, probably in the three or four-point range. I don't want to be too precise about it.
Yeah, the range is fine enough. I'm sorry, did you say two or three, or three or four?
Probably closer to 3%-4%.
Okay. That is against a combined ratio, right?
Yeah.
Oh, I'm sorry. On their combined ratio or the company? No, on their combined ratio, right?
On their separate business.
Got you. Thanks.
Thanks, Ron.
Once again, ladies and gentlemen, if you have a question, please press star followed by one. With no further questions at this time, I'll turn the call back over to Oksana Lukasheva for closing comments.
Thank you to all of you for your participation today, and we're looking forward to speaking to you next quarter.
Ladies and gentlemen, this concludes our conference. Thank you for your participation.