Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from Paul Newsome with Sandler O’Neill. Please state your question.
Paul Newsome – Sandler O’Neill & Partners
Good morning gentlemen.
Bruce Kelley
Good morning.
Mark Reese
Good morning, Paul.
Paul Newsome – Sandler O’Neill & Partners
First question, could you talk specifically about the guidance change? Is it really a change in expectation of catastrophe losses or is there other pieces to that guidance change?
Bruce Kelley
Paul, this is Bruce Kelley. Yes, there are a number of different aspects of that, and I think that both Mark Reese and Steve Peck can speak for that.
Mark Reese
Paul, the basic assumptions that we began the year with have not really changed. The primary reason for the reduction in the projected combined ratio from original projection is, as Bruce said earlier, the first half of the year was somewhat better than expected. And therefore, the new projection since we take what happened in the first half and made projection for the second half, better than expected first half resulted in a decline in the expected combined ratio. Is that what you are looking for?
Paul Newsome – Sandler O’Neill & Partners
Well, when you are looking at the two projections, obviously was it catastrophe losses and ended up being a loss than you anticipated or was it underlying profitability? Was it reserve releases? Was it investment income? What was the major component to it? Was catastrophe guidance had a very conservative second quarter expectation, and I guess is that – is essentially the second quarter is what’s driving the $0.35 increase in your guidance?
Mark Reese
Please note that the drop in the combined ratio is not all that large. It’s about 2.5 points. So it doesn’t take a whole lot to get to that difference. Frequency and severity were a bit lower combined and I would have expected – I’ve assumed about 2.5% of combined frequency/severity change. The actual change was about 1.5%. A second component of that is the LAE ratio dropped about 0.4 point. That is due to an unexpected allocated expense reserve change primarily in the first quarter. So I don’t know if there is any one thing I can point to. Those are two things that are involved. There maybe – there are obviously others. But I don’t have (inaudible) here.
Paul Newsome – Sandler O’Neill & Partners
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