CNA Financial Corp (CNA) 2007 Q1 法說會逐字稿

Good day, and welcome to the CNA Financial Corporation first quarter 2007 conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Ms. Nancy Bufalino. Ms. Bufalino, please go ahead.

Thank you, Joshua, and good morning. Welcome to CNA's first quarter 2007 financial results conference call. Hopefully everyone has had the opportunity to review the press release and financial supplement which were released earlier this morning and can be found on the CNA website. With us this morning to discuss our financial results are Steve Lilienthal, Chairman and CEO; Craig Mense, CFO; and Jim Lewis, President and CEO of P&C operations.

As a reminder, during this call there may be forward-looking statements made and references to non-GAAP financial measures. Please see the section of the earning release available on CNA's website headed "Forward-looking Statement" with regard to both. Forward-looking statements speak only as of today, April 30th, 2007. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This call is being recorded and webcast. During the next week, the call may be accessed on, again, on CNA's website at www.cna.com. Following the conclusion of today's prepared remarks by CNA senior management, we will be happy to take questions from the investment community. With that, I will turn the call over to CNA's Chairman and CEO, Steve Lilienthal.

Thank you, Nancy. Good morning, everybody, and thank you for joining us today. CNA had a very straight forward first quarter. Earnings were strong and healthy, earnings per share and ROE improved, book value grew, underwriting performance was solid, (inaudible) was lower, investment results were strong, cash flows continued to improve, and we are strictly adhering to our stated strategy in a challenging marketplace. All in all, a nice start to the year and certainly consistent with our decision last week to declare the first dividend on our common stock in more than 30 years.

Before I turn this call over to Craig and Jim for a more detailed discussion of the quarter, I would like to highlight a number of key results. First, net operating income for the quarter was $307 million versus $234 million, a 31% improvement over the first quarter of 2006. Key drivers were solid underwriting performance, strong investment income and lower expenses. Net income was $296 million versus $229 million, a 29% improvement over the same period last year due to the factors I just mentioned. Earnings per share were $1.09 versus $0.82 in the first quarter of '06, and operating ROE and net income ROE improved to 13.1% and 11.9% respectively, continuing our momentum from last year. Book value improved 3.6% to $37.34 from year end 2006, nearly 20% from the prior year period. Craig will discuss all of this with you in more detail in a moment.

Turning to our Core Property Casualty Operations, the first quarter combined ratio came in at just over 95%, included approximately 2 points of catastrophic loss. Premium volume was essentially flat on a gross basis and down slightly on a net basis. This is consistent with our active, but disciplined participation in the current marketplace. Average rates dropped 3 points, pensions made it above 80% and new business was 19% of the total, right where we said it would be, and quite appropriate in these market conditions. We continue to focus on data mining and segmentation to guide our growth to the most profitable and favorable business segments, territory, lines of business and account sizes. We have solid metrics and measures in place that we utilize to navigate intelligently in the increasingly competitive market, l and we have talked about this with you before, and Jim will share more with you in a moment when he takes over.

Our Life and Group and Corporate segments produced first quarter operating income of $11 million, more on this from Craig. I will only add that managing the orderly run-off of these businesses remains a major, major priority.

Turning to expenses, the first quarter PC ops expense ratio of 28.6% is our fourth sub-30% quarter in the past five. Market conditions are definitely turning up the pressure on our expense ratio. But as we said before, our focus is only on bottom line results. One final note is the dividend, which we declared last week. This is part of a very natural, orderly financial evolution of CNA, in our underwriting and claims, expense management, investment results, balance sheet initiatives, and now the dividend, you are seeing the results of a continuously improving level of performance.

In summary, CNA had a strong first quarter, strong and solid fundamentals, improved financials, a solid operating platform, well positioned for the challenges of the marketplace. And what you can expect from us going forward is the following: patience, intelligence and discipline in an increasingly competitive marketplace, continued optimization of our portfolio by leveraging our very strong advantage of a highly diversified product portfolio. And by the way, this is a CNA strength that we think is very unappreciated and very undervalued. This is a very, very big deal, and for us, particularly in today's marketplace. We will also maintain a constant and very aggressive focus on expenses. And lastly, you will see a Company that is focused on bottom line results, is willing to shrink the top top line to protect it, and has done it before. With that, let me turn it over to Craig.

Thanks, Steve. Good morning, everyone. I am pleased to share our first quarter results, which are reflective of our sustained effort to continuously improve the operating fundamentals and earnings power of CNA. With net operating income of $307 million, we started the year with one of our best quarters in recent memory. At 13.1%, operating return on equity continues to move toward our target range. (inaudible) earnings per share of $1.13 was up nearly 35% year-over-year. Book value at quarter end was up 3.6% from the start of the year, and nearly 20% year-over-year. Positive operating cash flow continues to fuel our growth in invested assets, our level of expense competitiveness shows continued improvement, the performance of core PC operations was healthy, and we continue our orderly management of non-core operations. Finally, we are very proud to have initiated a common stock dividend. We hope you view it as we do, another positive evolutionary step for CNA, representative of continuously improving operating and financial discipline, as well as our confidence in CNA's sustained earnings power. Now I would like to give you a bit more detail on the financials before turning the call over to Jim Lewis.

Today we reported first quarter net operating income from continuing operations of $307 million or $1.13 per share, compared to $234 million or $0.84 per share in the prior year period. You will recall that the per share amounts for the first quarter of 2006 (inaudible) the impact of undeclared preferred stock dividends. These dividends were eliminated with the repurchase of stock from Loews last August. Net income for the quarter, which includes the impact of discontinued operations as well as realized investment gains and losses, was $296 million or $1.09 per share compared to $229 million or $0.82 per share. Our '07 results include income of $2 million from discontinued operations versus a loss of $6 million in the prior year period.

Property and Casualty operations produced first quarter net operating income of $296 million compared with $247 million in the prior year period. Our core business benefited from solid underwriting results and strong investment income. In addition, the prior year period included unfavorable net prior year development of $5 million after tax. We had favorable net prior year development in the current period, primarily driven by premium development. After consideration of the applicable loss ratio and acquisition costs, the earnings impact of the premium development was not significant.

With respect to Life and Group Non-Core, the first quarter net operating income was $2 million. Improvement over the prior year was primarily due to better results in the life settlement contracts business. As mentioned in the past, results in this segment can vary. With respect to the Corporate segment, first quarter net operating income of $9 million was driven by improved investment income. Favorable period over period comparison was also affected by decreased prior year development in the current period and a loss related to a commutation in the prior year.

Pre-tax net investment income in the first quarter was up 7% to $608 million. The increase was driven by the growth of our invested asset base, improved period over period yields, and the elimination of finite interest expense. Our invested assets grew by just over $200 million in the course of the quarter, and they were up $1.9 billion as compared to the first quarter of 2006. Net realized investment losses came in at $13 million versus a gain of $1 million in the prior year period. These losses are mainly the result of interest-related other than temporary impairments of $57 million. We follow a very disciplined impairment process for our available for sale portfolio. Impairment to fair value will continue to be taken for any security not expected to be held until recovery amortized costs. PC ops first quarter expense ratio was 28.6%, and benefited from reduced acquisition expenses, largely due to favorable insurance-related [assessment] activity. Apart from these benefits, we are running in the range of our 2006 full year expense ratio of 29.8%, if not slightly lower. Expense management remains a cornerstone of our cycle management strategy.

Finally, for anyone who did not see the particulars of last week's announcement, CNA will be paying a quarterly cash dividend on our common stock in the amount of $0.10 per share, payable on June 11th to shareholders of record on May 11th. Subject to future Board action, we view this as the beginning of a regular quarterly dividend policy. With that, I will turn it over to Jim.

Thanks, Craig, and good morning, everyone. Property and Casualty operation had a solid first quarter, with a 95% combined ratio. Operationally, we focused on disciplined risk selection and pricing of new and renewal business. Cross-sell initiatives provided a nice lift to new business. Our expense structure continues to improve. All of these strategies were tested by competitive pressures in the market. We responded well. Our disciplined fact-based approach continued to produce very solid results.

Now let's review our key operating metrics starting with premium. Property and Casualty operation gross written premium was $2.4 billion for the first quarter, essentially flat with the prior year period. Standard lines was up about 2% for the quarter, offset by a 6% decline in Specialty lines. On a net written basis, premiums were down 2%, Standard Lines was off 3%, while Specialty was flat. The difference between the year-over-year change in net and gross numbers relate primarily to change in volumes in fully seated captive programs in both Standard and Specialty Lines.

Overall, premium volume continues to reflect our bottom line focus. The market may be softening, but our discipline is not. We won't chase business when we can't make money on it. Our primary focus was, is, and will be bottom line results. We have the advantage of a diversified portfolio of business which we grow and shrink (inaudible). In standard lines, for instance, property and small business continue to grow, while we reduce parts of our casualty book. In Specialty, program business for small and mid-size firms is growing, while we ease off portions of our D&O book.

Now let's look at rate and retention. Average rates across our entire portfolio were down approximately 3%. Standard Lines was a little less, and Specialty Lines a little more. While market rates continue to decline each quarter, I would also say that we are in the market, not surrendering to it. Our underwriters are active in the market, targeting attractive risk, selling the value of CNA, pushing for every point of rate that the market will bear. In addition to the cost of initiatives in recent years, micro-segmentation of our book, investing in infrastructure for growth segments, building predictive modeling tools, maintaining strong distribution relationships, and never letting up on expense management, we are well positioned to manage through the cycle.

As for retention, Property and Casualty operations retention for the first quarter was approximately 81%. Standard Lines retention was 79% during the first quarter, with Specialty running at 86%. Overall, we feel good about retention. The 80 plus we have been putting up since fourth quarter '05 is a normal level of turnover for a quality book of business. It also speaks volume about the ability of our underwriters to sell the value of CNA.

Now let's turn to new business. We wrote approximately $339 million of new business in the first quarter, or 19% of total production. This compares with approximately $355 million in the prior year period, or 20% of total production. Overall, the new business volume is approximately for market conditions and consistent with our production during the past few quarters. In addition, we continue to benefit from proven capabilities of optimizing new business quality, regardless of market conditions, the one we continue to focus on cross-sell, looking at every account, whether new or renewal, as an opportunity to sell across the full range of our product portfolio. Cross-sell initiatives were very successful over the past four years, producing approximately $2 billion in new premium. We built on this momentum in the first quarter of '07 with an additional $112 million of cross-sell premium, approximately 33% of total new business written. In addition, we continue to take a very fact-based data-driven approach to new business quality. We monitor the spread between new and renewal business relative to the use of discretionary price and modification. We also have tracked the spread between new and renewal business relative to paid in case loss ratios. Metrics and measures are at the heart of our new business strategy.

Now let's turn to our loss ratio. For the first quarter, Property and Casualty net calendar year loss ratio was approximately 67%, down about 1 point from prior year period. Standard Lines came in at just under 70%, down 2 points from prior year period. On the Specialty side, the net common [year] loss ratio was up 2 points, but still very solid at 62%. Catastrophe losses of $21 million after tax accounted for 1.9 points of the P&C loss ratio, versus $8 million or 0.7 points in the prior year period. Overall, our net common year loss ratios reflect solid underwriting performance. The accident year loss ratios tell the same story. Net accident year loss ratios for 2007 is approximately 66%. This compares with 65% for 2006. 2007 net accident year loss ratio for Standard and Specialty Lines are approximately (inaudible) and 61% respectively. By the way, these accident year loss ratios are evaluated as of the first quarter of '07.

Obviously, protecting our loss ratio is imperative, and I have already mentioned a few of our strategies. To those I would add two other items. First, we continue to enhance a very specialized segmented claims operation with the goal of improving outcomes and reducing ULAE. Second, data driven pricing is at the heart of our operation. I have mentioned our new and renewal metrics. We also monitor the quality of our renewal book. On our key renewal metrics, is the spread between paid and case loss ratios for the accounts we renew versus the accounts we let go. We have mentioned this measure before. We call it renewal efficiency. It was a critical metric for us as we were shifting our mix of business in '03 and '04. Today it is critical once again, as we navigate our way through the market cycle change. We also have our [writ] support tool, a predictive model that gives our underwriters a quantitative view of risk (inaudible) a range of comparable accounts. Overall measures and metrics like this enable us to execute a very selective controlled underwriting strategy.

Turning to combined ratios, Property and Casualty operation came in at 95%, (inaudible) points better than the prior year period. Standard Lines came in at 99%, approximately 4 points of improvement over the prior year period. Specialty combined was up 3 points, but still in a very profitable territory at 89%. Overall, our combined ratios speak to solid execution of underwriting and claims strategies. In addition, the first quarter expense ratio in the high 20s contributed approximately 1 point of improvement to combined ratios. With pressure on the top line increasing, squeezing out expenses becomes even more important.

In summary, our strategies are being tested, and we are responding well. Disciplined underwriting, selective growth, strong retention, and continued focus on expense management. There isn't anything here that we haven't told you before. We grind away at it quarter by quarter, plan it smart, relying on the data, shifting our portfolio as opportunities emerge, and willing to shrink the top line for the sake of the bottom line. Not a flashy approach, but overall we feel good about our ability to maneuver our way through the challenges ahead. With that, I will turn it back to the operator for the Q&A.

(OPERATOR INSTRUCTIONS) Jay Cohen, Merrill Lynch.

Yes, several questions. First is, you mentioned an expense benefit. I didn't quite catch what that was, and how much it was during the quarter.

Yes, I said it was -- this is Craig, Jay. I said it was related -- that our expense ratio was helped by some expense returns on insurance-related assessments. I didn't say the number, but it is $20 million.

Okay. There was no other offset in the loss side, then? That was just kind of a net benefit?

Yes.

That's pre-tax, obviously.

Yes.

Okay. Next one, I guess sort of a numbers question. Not a huge number, but in the Life side, you had a pre-tax loss, but an after tax small earnings benefit. And I am wondering why that was?

That's because in the Life portfolio, which is a bit unusual for us, we have a pretty high proportion of municipal tax-free investments.

Okay. That makes sense. Just see what else I had. I guess maybe this is for Jim. And I am wondering, one-way of growing that others have tried to pursue is to grow the agent count. And I am wondering what your agent count looks like now, and where you think it might go?

What was your comment? It was agent -- ?

Growth in agencies.

Yes, growth -- and the number of agencies you deal with. I have seen other companies, Travelers, Hartford, expanding that. I really haven't heard that from you guys. I don't know if that was part of your growth strategy.

Well, it is. But it is very selective. It is very particular to small business. Small business is the place where we have increased our overall points of distribution last year. We're also continuing to do it this year. As we look at the rest of our portfolio, whether it is middle market or our Specialty portfolio, we're doing appointments, but only selectively where we do not have a presence in that territory. I would say the place where we're aggressively appointing is small business.

That's helpful. And then one last, just a clarification. When you talk about rates and what they're doing, is that all in renewal, new business, or is that just renewal rates?

That is renewal rate. And that is rate not price. So it does not include exposure, as some of our competitors do.

Right. Right. That's helpful. Thank you.

Gary Ransom, Fox-Pitt Kelton.

I was wondering if you could expand on what's going on in the run-off business and the asbestos reserves, and other mass tort issues, whether you've seen any activity that makes you think at all differently from what you might have thought last quarter?

Sorry, I have a little bit of a cold. This is Jon Kantor, General Counsel. I have spoken about asbestos mass torts and pollution in the past, and there are no changes. I believe Steve may have been referring to our Life and Group run-off.

Yes.

And so I would throw it back to Steve if what you want is a (inaudible) of what Steve was talking about in his opening comments.

Yes, I thought maybe I misheard what was being talked about there.

All I had talked about was just the continued run-off of CNA Re and our Life and Group operations. And what Jon was alluding to was the discussion that we've had relative to asbestos, pollution and the other mass torts, which we have discussed. I think, in previous conference calls. I wasn't sure where you were going with this.

Yes. All I am wondering is if things have been fairly stable in the run-off operations, and is it fair to characterize it the same way at this point?

The run-off operations, while requiring a lot of attention and a lot of diligence, are pretty steady state.

Okay. Just one other question. On the things that you've talked about also in the past, on the -- more metrics and pricing and predictive modeling, can you talk about that a little bit, about what -- how much you're actually using at this point versus -- or experimenting with, and if you're seeing benefits from all of that effort?

Yes. On the predictive modeling side, we have been using predictive modeling in our small business arena for the past five (inaudible). On our middle market , it has really been for the last year-and-a-half. And obviously, our data is we're using that on our whole book of business and running it through, getting more and more refined. And we expect that that's going to be a significant tool, not only help us today, but in the future as we continue through -- managing through the overall cycle. It allows us to get a lot more consistency from underwriter to underwriter, territory to territory, on the same type of risk. And this is a -- both of those tools are tools that we have built ourselves. A lot of it based on our own data, but a lot of external data that really speaks to not only the loss ratio, financial information, et cetera. And we're feeling very good about what we're seeing with it. We're still refining it in middle market, and we think it is going to be a great tool for us, and it is a very good aid for our

Thank you. And just one last question on the dividend, and I realize the Board just declares one dividend at a time. But would you expect this to be a start of dividends every quarter?

Well I think we had said that, Gary, that we would expect that, subject to future Board action, to be the start of a regular quarterly dividend policy, yes.

Okay. Thank you.

Gary, this is Steve. There is a couple points that I wanted to kind of build upon on both Jim and Craig's comments. First off, with respect to what Jim said, virtually in every conference call for the last four or five years, you have heard us talking about measures and metrics that we've used, as we said, to navigate our way through the challenging market places. And we have had rate tracking systems in place, we have had renewal efficiency reports in place for the five years, which measures the spreads between what we keep and what we let go. We have tracked new business levels as a percentage of total for four to five years. We have tracked new business pricing spreads for four to five years, and we've got new business loss ratio trends and spreads renewals also. So these are not new things. I don't want anybody thinking that we didn't have these things in place before, that these are not mature measures and metrics or systems for that. The RST product -- tool, that Jim has mentioned, is new, but emerging, and we think will be a key part of our underwriting strategies going forward. So that's the first point I would like to build on.

And the second point I would like to make with respect to the dividend, and I kind of think your question was kind of hovering around this, but where are we going with this. And our feeling is first and foremost that we would like to -- our dividend -- declaration of a dividend was a very natural and orderly part of our financial evolution here. It represents continued steady and incremental progress that we've made. Everything we've done at this Company, we've done in a very measured, orderly fashion. And frankly, whatever we have said we would do, we did it, and we did it on time. And with respect to this, we would like to establish a platform, stand on it, and step forward from that, and not thinking about moving backwards. So that's been our pattern of behavior with respect to our underwriting and other issues, and it will be our pattern going forward with respect to the dividend.

Thank you very much.

Bob Glasspiegel, Langen McAlenney.

I've got three, but I'll ask them one at a time. Just expanding on the dividend answer, Steve, what was the [forged] thought process on dividend versus buyback? And I think your answer to Gary, in trying to build it suggests that at 0.8, you tried to pick a rate that was something you can build upon. But how did you arrive at sort of 0.8% yield as sort of the target initial dividend rate?

This is Craig, and then Steve can expand on it, Bob. But I think the important thought process is not to get hung up on some of those details. Just do exactly -- look at us the way Steve suggests, that everything we've done here, we've taken a very measured approach to everything we've done. We've been very mindful of improving shareholder value throughout the time we've all been together. So you see improving book value, improving ROEs, and now you see a dividend layered on. So every step we've taken, we've been very mindful of making sure that we don't take a step back. So you can argue with the pace, but I don't think you can argue with the direction.

Dividend versus buyback?

Talking about everything in general.

But I didn't hear the answer on why dividend versus buyback. I am sorry.

Well, I didn't answer it. I said this just -- this is why we've taken the approach -- we've taken this approach. We think this is more appropriate, and we think it is more valuable to all the shareholders.

Okay. Your cash position went up a decent bit. Is that seasonality or an investment driven -- cash as a percentage of invested assets?

That's just -- we have shortened the portfolio slightly this quarter, just in reaction to what moves we see in the marketplace.

To what from what?

Looking at what's going in the market -- .

No, no. I mean, from what -- you shortened the portfolio to what duration, or average maturity?

We haven't -- we don't disclose average. But I would tell you that it is under -- it hasn't changed -- the effective duration has not changed very much. It remains a little under five years.

Okay. And finally, the press release says that you released Standard -- there was favorable development in Standard. And looking at page four of the press release, it looks like your overall loss ratio, your calendar year loss ratio was a hair higher than your accident year, and there was some adverse development Specialty. I assume it relates to that premium development. But maybe you could walk through the respective numbers of what development there was in the quarter and what the premium item was?

I think, Bob, that you're -- I think you're maybe confusing the difference between year-over-year. The loss ratios in '07 -- the accident year loss ratios that we're booking in '07 are higher than the accident year loss ratios we booked -- .

I understand that. I am totally with you there. I was comparing the calendar year loss ratio of 66.5% total operations on page four to the accident year [2000] at 66.4% for total PC?

Right, so -- and the difference is just what you said, that's just premium development. So the loss ration on the late process premiums is slightly higher than the loss ratio, given the mix of business on stuff in the current year.

Totally don't follow. I will follow-up and not burn the call then.

Tom Cholnoky, Goldman Sachs.

Yes, I just want to go back to the expense question, real quickly. So that 16.9% acquisition expense ratio that we see for P&C ops is not a sustainable number because of that $20 million, I assume. Right?

That's correct.

Okay. So your improvement in expenses was really basically this one-time shot, as opposed to anything underlying because you're underwriting expense ratio is actually up?

I think if you look at the overall expense ratio which is -- .

Yes, but if it included a $20 million benefit, it is probably flat to up modestly, right?

I would say that it is flat to the full year. In terms of where we are run rate-wise, we're flat to year end.

Right, right. Okay. And then in terms of, Jim, I don't know if you can give us in the market a little bit more color, especially in specifically the Specialty Lines on where you're seeing the most amount of competition and where you're seeing opportunities?

The good thing for us in Specialty Lines is we have a very broad portfolio, even within Specialty Lines itself, and so we have a lot of businesses within that Specialty portfolio. I will remind you that within Specialty Lines, [defined] ratio has been in the 80s for an extended period of time. We do model the trade off between rate and retention. We also model the ROE for each of these businesses. And we've got some businesses that are performing very well. But what we're seeing is rates really starting to take a significant drop, and we get concerned about writing new business at those levels. If you look within our Health Pro side of our business, there is an area that we have which is Advanced Medical Technology, which is clinical labs, and our rates are down about 13%. When you look at our hospital book, excess institution or excess coverage on those institutions, and a double-digit rate decline. And when we look at small hospitals, we're actually seeing a rate reduction of around 7 points. Those are driving the reductions in our Health Pro. When you look at the nurses, the dentists, those particular rate levels are really holding steady.

When we look at our small -- our program business, our rates are actually flat in our program business. And this includes our accountants, architects, engineers, program lawyers, our realtors book. So that whole book of business is really flat. Open brokerage is a place where we are seeing pricing pressure, and that's in the D&O and the commercial governance. We've already said on the D&O, we've started to shed the Fortune 500 business a couple of years ago in that book. Also now, really starting to see more pricing pressure on rest of that book of business. We're seeing double-digit rate reductions there, so obviously we're shrinking our write-ins in that particular segment. We're seeing it in financial institutions. And those are the key drivers that I would say within the whole portfolio. But there is a lot of other pieces of that portfolio where we're not seeing the shrinkage. And those are the places that we're really looking to grow and really optimize the portfolio. This is one time when we look at the portfolio, and the fact that we've got a lot of businesses within Specialty Lines that we can shrink and grow based on what we're really seeing in the marketplace and shift our resources accordingly, and that's what we're doing.

Okay. And then I have a question just on reserves. Are you still seeing, as you look at the development, I mean last year you still had some, I believe some unfavorable development. And is that shifting at all in terms of where you are in the older accident years versus newer ones? And how are the newer accident years developing?

I'd say -- this is Craig. The newer accident years have developed favorably, and seem to continue to. So I don't think -- I don't know if I can really answer whether there is shifting offer or not. We continue to see some very older accident years show slight negative bias, particularly in comp, which we've talked about before. But the more recent accident years have continued to develop favorably.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Charlie Gates, Credit Suisse.

I might have gotten this wrong, but I thought that one of you opined that the difference between the pricing data that you had shared and that shared by others, was that you distinguish between rate and exposure?

That's correct. In our case -- .

Can you elaborate on that, please? I am sorry?

Ours is only rate, where some competitors also do include exposure, what they really define as price [and] rate. Ours is just the rate.

And by exposure, you mean that they -- General Motors has one plant this year and has a much stronger or a much larger plant the following year?

Yes, that could be that payrolls go up as sales are up. It could be the fact that they've actually increased as far as locations, et cetera.

The other question that I had was if you were to look back through history, what period of time do you think is similar from a competitive standpoint to what we see today in the market?

Well, I guess if you look at this marketplace, there has not been many times where we really haven't had rates moderating in the marketplace. As I look back in the 30 plus years I have been in the business, there has only been seven to nine years where you really had opportunities to really get rate. Most cases, it has been places where rates have moderated. I would say this cycle compared to what we were seeing in the 90s, at least now you're really starting to see rates are only gradually moderating. Our rates were down roughly 2 points in the fourth quarter. The first quarter this year, it only changed a point. So you're kind of seeing a drop of a point or so each quarter. In the 90s, that was more dramatic and you would actually see rates drop to the tune of 5%, 10%, 15%, 20% drops in a very short period of time. So there does seem to be more discipline from the rate standpoint, even though the competitors are getting more aggressive.

Other than the low level of interest rate, what else would you attribute this moderation to?

I think it is just companies now looking and saying what's happened to them in the past? The underwriting discipline that it took to get to the loss ratios that are there, they realize that they can't just count on investment income to really drive the overall bottom line, and it still means that you have got to protect the loss ratio. And I think what you're seeing is a lot more discipline to protect the loss ratio versus really burning up (inaudible) for the sake of growing the top line.

Thank you.

Ron Bobman, Capital Returns.

Good morning and congrats. I had a question about rate adequacy on new business, and, Jim and Steve, you mentioned metrics a couple of times. I was wondering if you could talk in just a little bit more detail about how the underwriters use whatever particular metrics they do in trying to evaluate the rate adequacy on new business? And then, Jim, you mentioned one particular set of data, discretionary -- I guess, the use of discretionary credits and debits, I guess. Could you elaborate on what that means a little bit more, please? Thank you very much.

Will do. As we look at monitoring pricing, and we monitor the pricing on the renewal in addition to our new business. And we monitor discretionary price, and this is where you're using package modifications, where you're using schedule credits based on the individual risk itself and the qualities of that risk, and you also have experience modifications that go into that. We also monitor our paid and case loss ratios evaluated nine months for new business versus renewal. When we look at the paid in case, and we've been monitoring this now going back to '01, for new business, our paid in case evaluated at nine months, the loss ratio is 20%, renewals is 18%. So there is only about a 2 point spread between the new and renewal, which says that our underwriters are doing a very good job in pricing that book, and also making sure they're keeping the pricing very close to where the renewal.

When you look at the new business pricing on a mod basis or a discretionary basis, we are seeing a gap, but you would expect to see a gap for new business. That gap is more like 5 points, which is why from a new business standpoint, you saw that our new business is actually down compared to prior years. What we're seeing in the marketplace and how aggressive competitors are being, it is not like there is a lot of new business in the market. This is a displacement gain. And in order to write the new, you have got to take it from someone else. And so that new becomes someone else's renewals, which they're very aggressively trying to retain, same as we are. So that's why we're backing off on the new business side, and I think there will be more pressure as the year continues, new business-wise. We also monitor what's happening on our renewals, as far as the quality of the decisions that our underwriters are making. We look at renewal efficiency. Our renewal efficiency shows that if we look at loss and [ALE] at 15 months development, for business that's not renewed our loss ratio is running 27. For the business that we're keeping, it's running 21. So we are keeping the better loss ratio business, which is another quality measure for us.

Just sort of two. Focusing again on new business, you mentioned in your answer a 5 point gap looking at rates on a mod basis. So is my takeaway from that, that basically new business that you're writing is generally being written at no more than a -- it's an average, I guess, 5 points lower than what the like renewal risk we're running at?

That's an average. Because, obviously individual risks, like within that portfolio there could be a difference, could be also a difference in the line of business. But when you look at the overall, that's what we're seeing.

Got you. Got you. And then does the actual underwriting process -- some of the things you said are sort of on a look-back basis, where things are running having put new business on the books. Does the underwriting process itself have certain safeguards in it where the underwriters have certain processes that they need to sort of satisfy before a new piece of business comes on?

Yes, they do. From an overall quality standpoint, whether it is also checking the financials, whether it is also using our risk control (inaudible), you've also got authority measures in place on -- from an underwriting standpoint on what level and an underwriter can actually price a piece of business before it actually goes to the next level of management for referral. We also then use our predictive modeling tools as a means to provide guidance to the underwriter, based on that individual risk for the pricing should be for that particular risk.

Okay. Thanks a lot, and good luck.

-- and they've got to then go to their managers.

Thanks again.

We have no further questions at this time. Like to turn the call back over to Nancy Bufalino for any additional or closing remarks.

One other thing. This is Craig, and just before we turn it to Nancy, that, Bob, that you had asked a question about the thought process and the debate at the Board between why a dividend versus a share buyback. I don't think I adequately addressed your question. And really that thought process and debate was really around we thought it was more appropriate to return cash to shareholders at this point, rather than shrinking the float. So hope that better and more adequately addresses your question.

Thanks, Craig, and thanks, Joshua, and thank you all for joining us today. Once again, I call your attention to the disclosures concerning forward-looking statements and non-GAAP measures in the earnings release. A taped replay of today's call will be available for one week immediately following this call until May 7th. Please see the earnings release for replay details. Thank you, again, for joining us, and we appreciate your participation in today's call.

An immediate replay of this call will be available to you by dialing 888-203-1112 or 719-457-0820. The replay passcode will be 3604225, followed by the pound sign. That does conclude today's conference. You may now disconnect your lines, and thank you for participating.