Good morning, welcome to The Hanover Insurance Group third quarter 2011 earnings conference call and webcast. Please also note that today's event is being recorded. I would now like to turn your conference call over to Ms. Oksana Lukasheva. Ms. Lukasheva, please go ahead.
Thank you, Jamie. Good morning, thank you for joining us for our third quarter conference call. Participating in today's call are Fred Eppinger, our President and Chief Executive Officer, and David Greenfield, our Executive Vice President and CFO. Also with us today is Bob Stuchbery, President of Chaucer. Before I turn the call over to Fred, let me note that our earnings press release, statistical 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, such as segment income per share for 2012 and for the fourth quarter of 2011.
There are certain factors that would cause actual results to differ materially from those anticipated by this press release, slide presentation, and conference call. We caution you with respect to reliance on forward-looking statements, 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 total segment income, after-tax earnings per share, segment results excluding net impact of catastrophes and development, ex-cat loss ratio, and accident year loss 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 statistical supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Fred.
Thanks, Oksana, welcome everyone to our third quarter earnings call. For the third quarter of 2011, we reported a net loss of $9.7 million or $0.21 per diluted share. Our book value was $54.98 per share, slightly above our year-end 2010 and last year's results. Obviously, the quarter was disappointing based on the continued adverse weather we have seen, we see positive trends and continued strategic momentum in our business, which I will discuss on this call. As you recall, we completed the acquisition of Chaucer on July 1st, so our results for the quarter include the benefit of Chaucer's earnings. I'll begin the call by providing an overview of our operations and trends and offering thoughts on the outlook of our U.S. and Lloyd's businesses for next year. David will spend some time reviewing our operating results and certain balance sheet items.
Unfortunately, Marita is not able to join us on the call this time because of a death in her family, and our thoughts are with her and her family. David and I will handle any questions about our domestic P&C business and underwriting performance during the Q&A portion of the call. We are pleased to have Bob Stuchbery, the President of Chaucer, with us today. He'll be available to answer questions you might have about our Chaucer operations during the Q&A portion of the call. Before getting into our performance for the quarter, I did want to mention that our first four months or so together with Bob and his team have gone extremely well. We could not be more pleased with the quality of the business and the capabilities that the team brings. Bob, would you like to say a couple of words of introduction?
Yeah. Thank you, Fred. I'm pleased to join you all for our first earnings call together, and I'm very excited about Chaucer's future as part of The Hanover. The first three months have been dominated by efforts to integrate Chaucer into The Hanover, and good progress has been made to date. We've retained our key team members who can see how being part of The Hanover gives a firm base from which to develop our business further. Our brokers have also responded well to the transaction, recognizing the added strength that being part of the larger group brings to them. Looking further ahead, I remain confident that the specialty capabilities that Chaucer makes available will help The Hanover to be even more relevant to their U.S. agencies distribution in the future.
I've always believed that both Chaucer and The Hanover will benefit from the geographic and earnings diversification and increased scale we have together, that this will support our continued growth and success. I look forward to taking any questions you might have later in the call and to meeting you all in person at our investor day.
Thanks, Bob. Let me go forward here. The earnings power of combining Hanover and Chaucer was overshadowed this quarter by unprecedented weather losses in our U.S. business. However, we already have begun to realize the benefits of the acquisition, as evidenced by the contribution of Chaucer to our business mix and earnings. Obviously, our focus over the last five years has been to better diversify our business and create a more attractive and distinctive product portfolio that positions us to get preferred shelf space with the best agents and brokers and achieves higher financial returns through the cycle. While we did not fully anticipate the last three years of more severe weather, we are pleased that we enter this more difficult environment with our new mix that is more focused on higher margin lines and more balanced between property and casualty.
With a current business mix of roughly a third specialty, a third core commercial, and a third personal lines, that is more differentiated and positions us well for more attractive returns over the long term. We continue to make progress on all our strategic priorities. As I said in my opening remarks, our bottom line was disappointing this quarter, driven by continued above normal weather-related losses, as well as an addition to reserves and surety. Before I go further, I'd like to comment on these two areas. The industry has been plagued by unprecedented cat losses across the U.S. this year, and the world for that matter, with our experience being only a bit more favorable than most in our industry.
Since 2005, along with a significant portfolio change, we've made good progress on managing our concentrations and reducing our coastal exposures, in particular, as we exited the Florida homeowners business and as we reduced property exposures in Louisiana, Rhode Island, and the coastal New England area. As you know, for the last three years, we've thinned out our biggest areas of concentration in Michigan and Massachusetts. Beginning in 2008, however, events of a different nature have been challenging our company and our industry. The most significant, of course, have been the tornadoes, the hailstorms, and the straight-line winds. We've always followed a very strong underwriting practice around property aggregation. In response to these recent weather events, we are executing on a strategy of more aggressive aggregate exposure thinning through pricing and non-renewals of certain properties associated in areas of our greatest concentration.
We have also been consistent in our pricing discipline, as demonstrated by consistent five-plus rate increases in personal lines over the last two years, which we believe gives us a nice head start over the industry in general. Going forward, we have increased loads for cat exposures as well as non-cat weather in our pricing models. Additionally, we are working on reducing potential exposure to weather losses by adjusting coverages and deductibles. We believe a combination of all these measures will help mitigate exposures going forward. The surety line is one of the businesses in our specialty area that we've had for a very long time, and there's a portion of this book that is more sensitive to weakness in the economic environment.
We had some loss activity in the contract line, and we are putting up reserves to reflect a more conservative outlook on a small portion of that book. I believe we have made the necessary underwriting changes to address the issues we are facing, and I'm comfortable with the mix of new business that we are tracking today. In the rest of our portfolio, putting aside weather, we generate balanced financial results and continue to make progress toward our long-term target returns. We continue to execute on our top priorities, which we believe will drive improved profitability. In particular, we have been improving our business mix by growing in the right places, taking rate actions, gaining scale in our specialty businesses, and being thoughtful about capital management.
Our overall property and casualty net premiums surpassed $1 billion this quarter, a growth of 31% as we included a full quarter of premiums from Chaucer in our reported results. Additionally, we had growth of 3.1% in our domestic P&C business, which was driven by 5.6% growth in commercial lines and 0.5% growth in personal lines. In personal lines, premium growth turned positive this quarter and reflected filed rate increases of 5% in auto and 6% in homeowners. Our retentions improved almost two points from last quarter, even though we achieved above-industry rate increases. We believe this is a testament to our strong business mix, our account-focused strategy, and our strong agency partnerships. We continue to gain scale in our domestic specialty businesses in the quarter.
The business grew 12% compared to our prior year quarter. We are very pleased with the growth and quality of our specialty portfolio. Today, our U.S. specialty offering encompasses a broad range of products, including miscellaneous professional liability, private company D&O, and our program business. The businesses are maturing nicely and significantly enhance and diversify our portfolio. In our core commercial lines, we saw a notable improvement in market trends as we achieved pricing gains in all lines for an overall pricing increase of over 3% during the third quarter. Our overall growth was 4%. We remain pleased with the trajectory of our rate increases as we put a fourth consecutive quarter of rate increases behind us. We are seeing increasing momentum in our small commercial offering and our industry niches as well.
Our overall growth, however, was tempered by a combination of still inadequate pricing in some industry segments and our thoughtful approach to property exposures. We believe the long-term benefits of this prudent approach to growth outweigh the short-term impacts on our top line. Our business mix in the U.S. continues to move to a more desirable casualty and specialty-oriented profile, and our specialties now comprise 19% of our U.S. portfolio offering. The acquisition of Chaucer represents a significant step forward towards achieving our overall mix and profitability goals, as was demonstrated by our third quarter results. Chaucer generated significant premium and contributed to our shift towards specialty. Specialty lines in our consolidated operations, including Chaucer, now represents 29% of our total net written premium. More importantly, with pre-tax segment earnings of $20 million, the inclusion of Chaucer's results this quarter has improved our combined ratio by almost four points.
In general, during this first quarter together with Chaucer, we were impressed by both the quality of the team and the high level of the underwriting expertise. With a more promising market environment now in view, we are confident that this will enable Chaucer to make a valuable contribution to Hanover in the future. Finally, a couple of thoughts on our fourth improvement lever, capital management. We continued to make changes to our capital structure during the quarter by repurchasing $30 million of outstanding debt. At the same time, considering the current low equity valuations, we repurchased 574,000 shares or $20 million worth of our stock on the open market. We believe investments in organic market opportunities represent a better use of capital for our investors in the foreseeable future, we will continue to consider share repurchases depending on a variety of factors and timing.
Before I turn the call over to David, given this is our first quarter reporting with Chaucer, I'd like to comment on the market and our company's outlook for 2012 as well as the remainder of 2011. We believe the industry dynamics next year will be all about getting ahead of the more active weather and minimizing the impact of lower investment yields through aggressive pricing actions and solid risk management. Over the past several quarters, the increased level of weather activity has served as a reminder to the industry, calling attention to the need to appropriately price for weather events. We believe there will be an opportunity to continue to achieve additional rate increases in personal lines in 2012. For us, these rate increases, coupled with more targeted exposure management actions, should enable us to fundamentally maintain the current level of net premiums while improving our profitability in 2012.
In commercial lines, persisting and accelerating rate increases and the improved new business flow provided an indication of improving market conditions. However, we will continue to be cautious and take targeted actions to continue to rebalance our book. Given this balanced approach, we expect growth in our specialty lines at a moderate lift in core commercial will drive net written premium growth in the mid-single digits next year with improving profitability. With respect to Chaucer's business, we expect that recent worldwide catastrophes will help push rates in property and marine lines higher and that our international business will benefit from this lift. In UK motor, rates have been improving for some time, and we are planning for more rate increases at a moderate pace next year. With that said, thoughtful adjustments of our risk appetite in certain Chaucer businesses will likely moderate top-line growth next year.
As I mentioned earlier, we are including a higher assumption for catastrophes and weather in our earnings forecast for next year. For catastrophes, we are going from roughly 4% of premiums to slightly over 5% of premiums for the entire portfolio, with the majority of the increase being driven by our domestic business. Although there is a respective increase in catastrophe loads in our pricing models, we believe it will take some time to earn in. We also expect reserve releases from prior years to slightly decline year-over-year. Given this outlook for our business, our early view of segment income in 2012 is in the range of roughly $3.85 a share-$4.15 per share, with an assumption of 45.5 million shares. Consistent with our 2012 outlook, we have also refined our expectations for both catastrophe activity and non-cat weather for the fourth quarter.
As a result of that view of segment income for the fourth quarter is roughly in a range of $0.95 a share-$1.05 a share, assuming catastrophes of approximately 4%-5%. As it relates to the October weather activity, it is too early to reliably estimate the losses. We will go through our outlook in more detail at Investor Day while providing you more insight on the key elements of our strategy. Overall, despite the industry and economic headwinds, we remain very excited about the capabilities we have built at The Hanover and our ability to improve earnings. While we have more work to be done, we now have a more attractive and diversified portfolio that will allow us to deliver distinctive offerings to winning agents and more consistently generate attractive returns throughout the cycle.
I will now turn the call over to David, who will discuss our business segments in greater detail. David?
Thank you, Fred. Good morning, everyone. Before I get into the results, I want to mention a couple of items relating to Chaucer. We closed the acquisition on July 1st, and you'll notice we now have a new reporting segment for Chaucer. Chaucer is included in our results for this quarter, but not for any period or as of any date prior to July 1st, 2011. This makes analysis a bit more challenging when looking at the current quarter and year-to-date figures as compared to prior periods. We have endeavored to provide some help with this in our disclosures and commentary. In particular, we separately posted a pro forma supplement that provides additional Chaucer information for the first half of 2011 and the year ended December 31st, 2010, consistent with the figures we provided in an 8-K in September.
We hope this will be helpful to you as you analyze Chaucer's contributions to our overall results. As Fred mentioned, the third quarter of 2011 was impacted by catastrophe losses, non-cat weather-related losses, and a surety reserve addition. Otherwise, our business continued to show performance gains during the quarter with improving underlying profitability in most businesses. The net result, however, was a loss of $9.7 million, or $0.21 per diluted share for the quarter, compared with net income of $52 million, or $1.15 per share in the prior year quarter. On a segment income basis, the net loss was $18.5 million, or $0.41 per diluted share this quarter, compared to segment income of $44.7 million, or $0.98 per diluted share in the prior year.
Turning to the top line, for the quarter, net premiums written surpassed $1 billion as we achieved growth in commercial lines of 5.6% and added $222 million related to Chaucer. This compares with $804 million in net premiums written in the third quarter of 2010. Our combined ratio of 107% included 10 points of catastrophe losses and approximately three points related to non-catastrophe weather-related losses in the U.S. Favorable reserve development in the third quarter was $29 million, reducing our combined ratio by approximately three points. I'll now run through the quarter underwriting highlights for each of our business segments. Starting with commercial lines, the combined ratio for the commercial insurance operations was 114% in the third quarter compared to 99% in 2010. The current quarter included 10 points of catastrophe losses, compared with 2.3 points in 2010.
Our ex-cat results were impacted by two items, non-catastrophe weather-related losses, which added over two points to the combined ratio, and approximately $15 million of reserve increases in our surety book of business, which accounted for nearly four points to the combined ratio. Additionally, the third quarter of last year reflected unusually benign large loss results in the commercial multi-peril lines. Aside from these items, our accident year results were generally in line with prior trends and our expectations. Favorable development on prior year loss reserves reduced the combined ratio by 0.9 points this quarter, which reflects the favorable impact of reserve development in our workers' compensation and commercial multi-peril lines, and compares to 4.6 points of favorable development in the prior year quarter. During the quarter, we took note of increased loss activity in our surety line, particularly in the construction sector.
Overlaying the persistent challenging economic conditions to the increased loss activity, we felt it was prudent to add approximately $15 million of additional reserves to this line in the quarter, approximately $9 million of which impacted the current accident year and $6 million which was prior year development. By way of background, a few years ago, we made changes in our strategy for this line, emphasizing more stable and profitable commercial surety business versus economy-sensitive contract business. We adjusted underwriting standards, such as establishing a more sophisticated risk scoring system. At the same time, we identified a portion of the book that we put in runoff, which continues to drive our loss experience. We are confident that over time, our surety business will be an important and profitable part of our specialty business. Our expense ratio in commercial lines improved three points this quarter compared to the prior year quarter.
The improvement is coming from earning in last year's growth, combined with changes in our operating model. The ratio was flat compared to the second quarter this year, and this was in line with our expectations. In personal lines, catastrophes and non-catastrophe weather drove lower results in the quarter. Catastrophe losses represented 13 points of the combined ratio, while non-cat weather-related losses added four and a half points. We continue to see positive rate increases. Our expense ratio in personal lines is approximately 27%, which is in line with our expectations and comparable to the prior year quarter. Our new Chaucer business segment delivered segment income before taxes of almost $20 million in the quarter. The combined ratio was 95.1%, reflecting good underlying performance.
Catastrophe losses in the segment, primarily related to the July floods in Copenhagen, Denmark, and Hurricane Irene, were $14 million this quarter or 5.6 points on the combined ratio. This is slightly below our expectations for cat activity in the quarter. Chaucer also had 6.8 points of favorable development on loss reserves, primarily coming from the energy line of business. Chaucer's expense ratio for the quarter was 39.1%. This ratio is slightly elevated from a normal run rate given certain integration and related costs, which we expect will continue for the next several quarters. With rates now increasing for North American and international property exposed risks in response to heavy first-half losses, the outlook for Chaucer's property account is encouraging. In fact, most of Chaucer's businesses are experiencing improved pricing levels, which you can see on page seven of the slide presentation.
Overall, in a challenging underwriting environment, we are pleased with the disciplined underwriting and more favorable market trends appearing in the Chaucer segment. Moving on to a discussion of net investment income. Net investment income was $68 million for the current quarter, a 10.6% increase when compared to the $61 million earned in the third quarter of 2010. This increase is primarily driven by an increase in cash and invested assets associated with the Chaucer acquisition. At the time of the acquisition, Chaucer's cash and invested assets totaled $2.4 billion, which included approximately 30% in cash. During the quarter, we redeployed a portion of this into fixed maturity securities that resulted in a lift of about 40 basis points in Chaucer's stand-alone portfolio. For the third quarter, the overall earned yield on our fixed maturity portfolio was 4.49%. The Hanover's fixed maturities yielded 5.31%, and the Chaucer assets delivered 2%.
Our portfolio is not immune to current lower new money yields. Our Hanover fixed maturity investments have a strong persistency of yields, as only about 10% of the portfolio turns over each year. We expect we'll continue to pick up yield in Chaucer's portfolio as we continue to reposition their assets. At September 30th, we held nearly $7.6 billion in cash and invested assets. As you may expect, a portion of Chaucer's investment portfolio is denominated in foreign currencies in line with the international nature of their insurance liabilities. This said, Chaucer has negligible exposure to peripheral European sovereign debt. The exposure to European banks, excluding the U.K., is only about $137 million, or 1.8% of our total portfolio. While exposure to corporate credit in other sectors is 2.7% of the portfolio. These securities are high quality and diversified by sector, country, and issuer.
Our balance sheet remains strong, giving us financial flexibility. We ended the quarter with nearly $2.5 billion in shareholders' equity. Book value per diluted share at September 30th was $54.98 compared to $54.74 at December 31st, 2010. Looking forward, the change in accounting rules related to deferred acquisition costs, which will become effective on January 1st, 2012, will have an after-tax impact of approximately $25 million-$30 million, or about 1% of our opening shareholders' equity. We do not expect the adoption of this change to have a material impact on our earnings. On the capital management front, we continue to actively manage our capital position. During the quarter, we took advantages of opportunities to deploy excess cash into share repurchases through open market transactions. Since July 1st, we repurchased 595,000 shares at an average price of $34.78 for a total spend of $20.7 million.
This includes a small amount of repurchases that were made in October. We now have $136 million remaining in our share repurchase program. We continue to take advantage of opportunities to reduce debt. We retired $30 million during the quarter. Our debt to total capital ratio was 26.9% at quarter end, which continues to be well within rating agency thresholds for our current ratings. Holding company cash and investments were $239 million at September 30th, which is moderately above our target level. We also now have in place a $200 million credit facility that provides additional flexibility to meet liquidity and capital needs. Before we open the line for questions, I would like to remind you that we will hold our investor day meeting on Thursday, November 17th in New York City at the Affinia Manhattan Hotel, right across from Penn Station.
At the meeting, we will discuss our business strategy and product capabilities. Additionally, we will give you an overview of Chaucer's business, and we'll talk about the progress we are making with our agency value proposition. We will start the presentations at 8:30 A.M. and will be followed by Q&A and an informal lunch where the presenters and several of our senior executives will be present. Operator, we're ready to open the line for Q&A.
Our first question comes from Cliff Gallant from KBW.
Hey, Cliff.
Hey, good morning.
Good morning, Cliff.
A couple of number questions, I wanted to ask Bob a couple of questions. The numbers were, one, in terms of the tax rate, what you would be thinking going forward. Two, I wanted to ask about the growth in commercial lines and the 5%-6%, and how much of that was PIF versus price.
On the tax rate, Cliff, this year with the size of losses and some of the international impacts, we have a rate that's roughly around 30%. We use a slightly higher rate in our planning on a go-forward basis. We tend to use 34%. Obviously, that's going to be refined as we get into planning for next year, and factor in some of the intricacies of the international tax code. I think for purposes, we're using 34% at this point.
Okay.
Yeah.
On the business, and especially business, Cliff, that growth is both PIF and we're getting some rate as well, but it's more of a PIF oriented. In BI or the core lines, if you will, business insurance, we grew about 4%, and we had rates of about 3.3%-3.5%. Okay? We had a good rate. What you see is it's a tale of two cities. We have tremendous momentum with our partner agents. We did some thinning. As I've mentioned, what I've been trying to do, the marginal cost of capacity, given the change in yields, I think in some of our concentrated areas around property is such that we started being relatively aggressive about thinning some of the non-partner agent business in some geographies in the property stuff. I feel really good about what we are seeing.
You're seeing really nice both unit growth and rate growth with our partner agents. That's kind of the story there. Okay. Mark Welzenbach.
Yeah, hi.
I wanted to ask you one quick question. What do you expect exposure to the Thai floods will be? Just more as a larger question, could you just comment on what you're seeing in terms of the benefits to the Chaucer operations to be with Hanover and its distribution here in the U.S.?
Okay. First of all, on the Thai floods. Yes, we do have exposure to the floods in Thailand. We'd expect to get a loss from these events. It is very early days to put any number on that loss. As you'd expect, we have a budget for cats in the quarter, and we'll just monitor as we go through. It's an event that's happening at this moment. Very difficult to put numbers on it.
Fair enough. The benefits turning to that, obviously we see benefits longer term. The thrust of this first quarter has been really about us integrating into the group. We were already quite advanced on our 2012 planning, and The Hanover have had input to that. What we would see now over a period of time is that extending into some of the benefits we can get group wide, and that's really a 2012 issue for us, leading probably more into the 2013 business plan. There will definitely be benefits.
Okay. All right. Thank you.
Thanks. Thanks, Cliff.
Our next question comes from Dan Farrell from Sterne Agee.
Hey, Dan.
Hi, good morning.
Good morning.
Morning, Dan.
Just I was wondering if you could comment on your view of accident year ex-cat loss ratio trends for the various segments within the scope of your overall guidance. In particular, there's a lot of things that I think mix changes and others that could be having a benefit, but there's also the issue of non-cat weather that creeps in there as well.
Yes. Yeah. I would tell you the non-cat weather quarter-over-quarter for us is probably a three-point impact this quarter. It's very significant Midwest, Northeast actions. Our accident years, I actually feel very good across the board on accident. We've been getting rate almost in all our businesses now, including Bob's and ours. The vast majority of all our businesses, we're now getting rate in excess of what I would see as loss cost. Little bit of healthcare obviously trends, which is why I'm so cautious about comp and being a little tougher on comp, particularly anything that's outside of the small category. The one exception to that has been what I said, which is on property. What we see is I feel very good about the rate we're achieving right now, but we have to do some re-underwriting and thinning in some areas.
The reason I believe that is that our marginal cost of capacity in some of the places where we have high concentration, given the model changes and our perspective on the weather, that our marginal cost of that capacity is higher than our competitors. We're not going to get that adequate rate to get to the 12% that we want until we're shedding some of that. Again, it's a little easier for us because of our partner strategy. I can take some of the legacy partners and eliminate them, or legacy agents. I feel pretty darn good about our accidents. One of the differences between us and almost the vast majority of our competitors, a lot of people had a lot of their earnings based on 2003, 2004, 2005 releases.
The fact of the matter, we weren't very good back then, so we haven't had much releases. Almost all our releases are more current and what I call mechanical, coming from more current accident years because we are a little conservative in our picks, and then they get released through the next 18 months. I feel very good about where we are in almost everywhere about our assets. Again, I think we got to chase the yields a little bit as I mentioned. With these yields, we are assuming as we look forward, our assumption is that these yields will stay at a lower level and therefore we need to get more rate to get to the kind of returns I want.
That's something that we are, that's what I'm saying, we're baking into our rates and we're really being quite a bit more aggressive in some of the lines. Our advantage is we have short tail lines, so it's less leverage than others that have longer. Again, I'll tell you our accidents, I feel stable across all the businesses. The new businesses are developing just the way we expected, and as I said, I feel very good about the breadth of the rate increases we're getting now.
Thank you. That was helpful detail. Then just a quick one on Chaucer. You've obviously had some growth in the marine and aviation lines, then also in other casualty and other line. Particularly that casualty and other, could you talk about what lines are driving that growth and the opportunities you're seeing there?
Looking at the casualty and other, we took on a new team of people writing international casualty business less than a year ago now. Really what we're seeing in the numbers, particularly in 2011, and we'll see this continue into 2012, is that that business actually migrates with them. In effect, the first few months of their operation we were just getting that business on board. During the course of this year, we've seen that grow just as they've moved over some of those opportunities. It's a new team. It's a complementary team to the other casualty lines that we wrote. We expect to see that develop, albeit not too strong development in 2013. That market still isn't good. We're really just taking advantage of known relationships that these guys have and bringing them to us. The marine and aviation, the marine was patchy.
It was where areas where we've seen some of the losses, particularly on our Marine XL account, we saw some increases this year. Aviation is just really taking opportunities where we see it. We're not in the airline business, it tends to be more general aviation where we're seeing a little bit more of a better marketplace. One of the things, Dan, I mentioned, what we've done is Bob had talked about their strategy, and we'll talk more about it in the next couple of weeks about the areas of distinctiveness. What we've done is looked through the whole portfolio and say, where should we be more focused? Where should we back off a little bit? We did. Our expectation is in energy, we changed a little bit and we took a little less.
We expect a little less growth there, we've made some marginal changes in the portfolio. We feel very good where we are. We put in the package for you where we saw rates. In casualty, as Bob said, we're very cautious there and very thoughtful because while casualty in the U.S. is starting to turn
Mostly comp, et cetera. It hasn't turned as other parts of the world it hasn't. We believe that's an area that we're very thoughtful and cautious and will be going forward.
Okay. Thank you very much.
Our next question comes from Meyer Shields from Stifel Nicolaus.
Hi. Good morning.
Good morning.
Good morning, Meyer.
Actually, all my questions are for Chaucer.
Okay.
My first question is about the creep from New Zealand and Japan. I think if I remember correctly, New Zealand was about $30 million and Japan was about $45 million back then. Should we expect any creep up from there given all the increase in estimates that are coming out from those regions?
Meyer, this is David. Just to talk a little bit about this and how this runs through our numbers. We anticipated a lot of things in our purchase accounting exercise that we had a view on those events as late as August as we were going through the actuarial analysis. Much of the impact of the creep, as you refer to it, I would say was built into kind of our opening balance sheet. There was some pluses and minuses that ran through this quarter. I chose not to really get into it because it's actually around $1 million, maybe less than $1 million, across a number of different pre-acquisition events like New Zealand, Japan, et cetera.
I think going forward, obviously, any impact of changes in estimates and things like that will affect us on those. I think we're very well reserved for them. It's really a practice that Chaucer has. When you look at their estimates historically, you will find that they very rarely have negative movement on reserving, most likely have positive movement. Although some of these storms were difficult storms to estimate. I think what you should take away from that is we're very well reserved for those events. To the extent that there are things that come up will affect our results going forward, but we think that they will be pretty minor or mitigated by the reserving practices we have.
Also mitigated by reinsurance versus. A number of these major events are now into reinsurance recoverable position. The impact on us will be negligible because it's really just the reinstatement premiums that we pay when we make recoveries.
Okay.
Those major events that you mentioned, they should be marginal.
Okay. Plugging in the numbers that you guys gave us last night, it looks like expense ratio in 2010 for Chaucer was about 33%, and this quarter was about 39%. How should we think about it going forward?
Yeah, I think, as I said in my comments, Maritza, we're at 39.1 this quarter with Chaucer. There are some differences in the years. There are integration type costs and other things that are kind of coming through now.
What I tried to say was we think the 39 is a good number to use for the next several quarters. I would expect over a longer period of time, that rate will start to come down. 33 might be too far down. There may be some things in those numbers last year that offset some of their expenses, which we didn't obviously put in there for disclosure. I think on a longer term basis, I think you'd see that ratio down a couple points at least.
You did say, I'm sorry, I missed that. You did say for a couple of quarters at least keep the 39 and then some improvement.
Yeah.
Okay.
I would stick with the 39 for now. I think in a few quarters out, I don't want to give you a number of quarters
Right
Quarters out, some of the integration things will roll off. Some of the project related things that are ongoing will start to roll off, we'll start to see that ratio come down a little bit.
Okay. My last question. On the FX side, obviously now you have that impact too. It looks like it's being kept out of operating. Is that correct? Should we just not?
Yeah, there are some impacts of FX and obviously we're going through that. It's not that significant in the quarter.
The way in which we're looking at the underlying business and the currencies, we're fairly well matched. There wasn't enough to come out and talk about it in detail. We'll try to look at that in terms of disclosure going forward to help you with that for understanding. Obviously we want to make sure that that doesn't cause wild swings in operating results.
Right. Okay.
This quarter, I don't think you should pay too much attention to that.
Okay. Thank you.
In showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
Thank you very much for participating on the call with us, and we are looking forward to meeting with you again at our Investor Day on November 17th.
Ladies and gentlemen, that concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.