CNA Financial Corp (CNA) 2009 Q4 法說會逐字稿

Good day, everyone. Thanks very much for holding. Welcome to CNA Financial Corporation's Fourth Quarter and full year 2009 earnings Conference Call. Today's call is being recorded. At this time I'd like to turn the conference over to Nancy Bufalino.

Thank you, Kevin and welcome to CNA's Fourth Quarter earnings call. Our Press Release was issued earlier this morning so hopefully everyone has had an opportunity to review it along with the financial supplements which can be found on the CNA website. With us this morning are Tom Motamed, our Chairman and CEO and Craig Mense, our CFO. Tom and Craig will provide some prepared remarks before opening up for questions.

Before we get started, I would like to advise everyone during this call there maybe forward-looking statements made in references to non-GAAP financial measures. Please see the sections of the Earnings Release headed Financial Measures and Forward-Looking Statements for further detail. In addition, the forward-looking statements speak only as of today, February 8, 2010. 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 maybe accessed again on CNA's website at www.CNA.com and with that I'll turn the call over to CNA's Chairman and CEO, Thomas Motamed.

Thanks, Nancy. Good morning everyone and thank you for joining us today. We're pleased to report that our Fourth Quarter and full year results improved significantly in 2009. Fourth Quarter net operating income was $197 million or $0.63 per common share in 2009 as compared to $21 million net operating loss or $0.15 per common share in 2008. Net income in the Fourth Quarter was $246 million or $0.81 per common share, compared with a net loss of $336 million or $1.31 per common share in 2008. Key drivers of these improved results were investment income, favorable prior year development and net realized investment results.

For the year, net operating income was $982 million or $3.20 per common share as compared to $533 million or $1.91 per common share in 2008. Net income was $419 million or $1.10 per common share compared with a net loss of $299 million or $1.18 per share in 2008. In addition to the drivers I just mentioned, our full year results benefited from lower catastrophe losses.

Turning to our core property casualty operations, the 2009 combined ratio was 96.9% which included 6.5 points of favorable development compared to 4.4 points in 2008. Catastrophes added 1.4 points to the 2009 combined ratio and 5.7 points in the 2008 ratio. Before development and catastrophes the 2009 combined ratio was 102% as compared to 96.7% in the prior year. The 2009 accident year loss ratio before catastrophes increased approximately two points to 69.1% driven by large loss activity in property lines early in 2009 and higher frequency and severity and certain areas of our Workers Compensation business.

Property and Casualty operations net written premiums decreased 6% in 2009 to $6.1 billion. The decrease reflects the impact of the economy on our exposure base as well as our decision to push for improved pricing and risk selection. The impact of this work is evident in our rate and renewal trends. In 2009, rate decreases averaged less than 1% compared to a 4% decrease in 2008. Our retention came down a point to 82%. The property and casualty operations 2009 expense ratio increased three points to 32.6%. The major drivers were lower earned premium, higher employee related expenses, and industry assessments. I will come back to expenses at the end of my remarks.

CNA Specialty delivered an outstanding Fourth Quarter combined ratio of 78.4% in 2009 compared with 92.6% in 2008. This change was driven by a 10 point increase in favorable development. The other major driver was an improvement in the Fourth Quarter accident year loss ratio which was much less affected by credit crisis related losses than the prior year period. These factors were partially offset by an increase in the expense ratio, once again mainly driven by employee related expenses.

Specialty net written premiums declined 2% in the Fourth Quarter largely due to competitive pressure. Renewal retention was down slightly to 84%, rate decreases of 2% represented a one point improvement from the prior year period. We continued to achieve positive rate in our financial institutions business. In addition to competitive conditions, specialty premiums were pressured by exposure decreases, notably in our architects and engineers and sureity businesses.

Overall we remained very positive about our specialty business, which represents 52% of property casualty operations on a gross written premium basis. Combined ratios are excellent and our competitive position is strong. We have market leading positions in healthcare and professional services, which are industries we believe will do better than the overall economy in upcoming years. While our specialty premium volume was down slightly we continue to see opportunities for growth in profit. We are adding underwriters to drive growth in target segments and the early indications are encouraging. Premium new business and policy count are increasing in these segments. I would also mention that we continue to focus on smaller and mid sized accounts. They have historically been less volatile and more profitable than larger risks for CNA.

We do not underestimate the challenges of the specialty marketplace. Despite some favorable movement on rates, competition has been consistently intense across almost all lines. With new entrants coming in and reinsurance capacity in abundance, we anticipate a continuation of these conditions in 2010 and beyond. That being said, there are opportunities out there and we are well positioned to compete very effectively for profitable specialty business.

Turning to our other major segment, CNA Commercial. The Fourth Quarter combined ratio was 99.9% in 2009 compared with 86.5% in 2008. Approximately four points of this change is related to the impact of development and CATS and another four points is related to an increase in the 2009 accident year loss ratio. This was mainly driven by higher frequency and severity in our Workers Compensation business. The remaining five points was from the expense ratio. Approximately half of this related to industry related assessments. The other half was from the factors I mentioned before, lower earned premium and higher employee related costs. Commercial net written premiums decreased 9% in the Fourth Quarter. Two-thirds of the premium decline is related to the impact of the economy on exposures, especially in our construction and manufacturing segments. In fact on auditable policies, such as Workers Compensation and general liability, we returned premiums to policyholders when their exposure base drops off during the term of the policy.

Also, when we renew the policy, the renewal premium reflects the lower exposure base. Therefore, exposure declines have a compounding effect. The other major driver of our premium volume is our decision to increase pricing and improve risk selection. Commercial achieved a 1% rate increase in the Fourth Quarter, up four points from the prior year period. Small business which represents 14% of our commercial premiums has had five consecutive quarters of positive rate.

These pricing initiatives have put pressure on new business and retention. Retention was down three points to 81%. Our Fourth Quarter new to loss business ratio was 0.8 to 1 versus 1.2 to 1 in 2008. We are prepared to write less new business and accept lower retention to improve profitability over time.

Overall, we believe our commercial segment has the potential to be a much stronger performer over time. We have positive brand awareness and a strong franchise with our agents. We continue to reprofile our commercial book to improve its profitability and position it for growth going forward. As I mentioned, we are pushing rate and writing less new business. We are walking away from inadequately priced accounts. We continue to exit lines and segments that have been problematic.

With respect to growth, we are being increasingly clear with our producers on our underwriting appetite which we have focused on classes where we have superior customer insight and where we can offer distinctive value at competitive prices. The response from producers has been encouraging. In the Fourth Quarter the majority of the submissions and new business was in these preferred classes. We also had higher retention in the preferred versus non-preferred classes.

We are also encouraged by our progress in the excess and surplus lines arena. This was our first growth initiative out of the box. We brought in new leadership last April and finalized an opportunistic growth strategy. The results are evident in the Fourth Quarter premium growth of 18% in this area.

With respect to market conditions, the commercial market remains very competitive. New business pricing continues to be very aggressive and carriers are fighting to hold on to their renewals. Again we don't underestimate the challenges but we believe that our strategies will produce meaningful improvement in our commercial results and will position us well as the market begins to recover.

Before turning it over to Craig, I would like to spend a few moments on expense. Last quarter I told you we were conducting a cost benchmarking project to help us identify potential cost saving opportunities and process improvements to drive efficiencies across the entire organization. Based on this review we will be focusing on several areas within our support functions to improve overall efficiency and effectiveness. In fact, actions have already been taken as evidenced by the roughly 7% reduction in support function headcount in 2009. Our intention is to reinvest these in future savings to help fund our strategies which will enable us to grow both the top and bottom line. With that I'll turn it over to Craig.

Thanks, Tom, and good morning, everyone. As has been the pattern from past calls, I would like to review our financial results both for the Fourth Quarter and full year with particular attention to our performance against the financial priorities that we established at the beginning of 2009.

We reported operating earnings of $197 million for the quarter and $982 million for the year. These earnings represent operating ROEs of 7% and 9% for the same respective periods. While these results are below our longer term targets and the performance of some of our leading peers, they're still at respectable levels and mark our sixth straight year of operating profits. Our Balance Sheet and capital position remain very strong and showed consistent improvement this quarter. We continue to maintain a very conservative capital structure and to exhibit a strong cash flow and liquidity profile.

The dramatic recovery of our investment portfolio was a major highlight of the year. Earnings and the sustained recovery of our investment portfolio continued to drive capital growth this quarter. Book value per share has now increased 72% from year-end 2008 to $35.91 a share.

With respect to our capital position, we ended the year with GAAP common shareholders equity of $9.7 billion, up 72% from $5.6 billion at the end of 2008. Our debt to total capital ratio is now 17.8% as compared to 23% at the beginning of 2009. Our earnings coverage ratio was a healthy six times the interest on our public debt and preferred stock dividends.

Our regulatory capital showed similar improvement. Statutory Surplus increased 19% from $7.8 billion to $9.3 billion over the course of 2009. Importantly, we've also generated significant dividend capacity in our primary insurance subsidiary.

In addition, the Holding Company has approximately $400 million in cash and short-term investments which is more than two times our annual net corporate obligations. We continue to evaluate our capital adequacy against regulatory, internal and rating agency metrics. Against all these measures we believe our capital is more than sufficient to support our current ratings.

In other items of note, I wanted to mention that as a result of the recent regulatory modeling of non-agency RMBS holdings and the related NAIC ratings, the statutory value of our investment portfolio increased by approximately $150 million. We believe this outcome validates our views of the sector and our disciplined impairment process.

We're also pleased to report that as a result of our recent actions our financial strength ratings have been affirmed at their already strong levels and our outlook is now stable across all three major rating agencies.

Finally, we completed a $350 million debt offering in the Fourth Quarter that provided a modest increase to the efficiency of our capital structure. Our operating income continues to reflect improved investment income, primarily from limited partnerships, with continued favorable reserve development from property and casualty operations. We have now reported 12 straight quarters of favorable development. Fourth Quarter net investment income totaled $565 million, up from $170 million in the prior year period. The improvement was driven by our LP investments which produced Fourth Quarter pre-tax income of $75 million, compared with the $309 million loss in 2008. Our fixed income results decreased 6% from the prior year period reflecting low short-term rates as well as a high level of our holdings in short-term investments.

With respect to LP investments our Fourth Quarter rate of return was approximately 4%. For the year the rate of return was 18%. While LPs represent less than 5% of our total invested assets they remain an important part of our ongoing investment strategy. Over the last 10 years, these assets have outperformed equities with less volatility, with an average annualized return of 10% over that period. You will recall that a distinctive characteristic of our LP investment are the timeliness of their reporting over 89% are on a one month or less lag. They overwhelmingly represent investments in marketable securities with valuations driven by the fair value of the LPs underlying security holdings. There is little private equity or Real Estate.

Net income for the quarter was $246 million, included $49 million of realized investment gain. A key driver of our realized investment results was an after-tax gain of $240 million from the sale of Verisk Holdings as we discussed with you last quarter. The quarters results also included after-tax other than temporary impairments, recognizing earnings of $127 million. The impairments went across several asset classes with almost half in structured securities. Our impairment decisions were driven both by our assessment of likely future performance of these securities as well as intent to sell decisions consistent with our ongoing management of risk and volatility in our ongoing portfolio. We are also pleased to report our continued progress to reposition our investment portfolio to manage risk and volatility and to drive more consistent performance in the future.

At year-end 2009 our investment portfolio had a pretax net unrealized gain of $25 million. This compared to $176 million gain at the end of the Third Quarter and $5.4 billion loss at year-end 2008. The recovery in our investment portfolio was driven by the recovery of the broader financial market and the repositioning of the portfolio while the recovery took place across virtually all asset classes, corporate bonds lead the way as credit spreads narrows.

In 2009 we reduced our exposures by $4.2 billion in certain higher risk asset classes, through net sales and principal repayments. As measured by amortized cost, non-agency residential and commercial mortgage backed securities were reduced by $2.5 billion or 33%. Below investment grade corporate bonds were reduced by $1.5 billion or 45%. Non-redeemable preferred stock was reduced by $250 million or 29%.

I do want to point out that when you receive our 10K, you will note that despite the changes I've just noted, the fair value of all securities rated less than investment grade in the portfolio is higher at year-end 2009 than at year-end 2008 with an amortized cost base that is substantially the same. Actually it's slightly lower. This was the result of significant price appreciation as well as down grades of security the during the year we continued to hold. The down grades centered around structured securities that you could see reflected in the financial supplement you received this morning.

The majority of our investment purchases were centered in investment grade corporate bonds and agency collateralized structure security. This is true for both the Fourth Quarter and full year. During the quarter we made net purchases of $2.1 billion in investment grade corporates, which increased this asset class to 42% of invest the assets at fair value as compared to 24% at year-end 2008. Over the full year, we made net purchases of $7.4 billion in this asset class. We also added approximately $1.7 billion of agency collateralized pass throughs of CMOs to our portfolio for the full year including $1 billion in the Fourth Quarter.

Overall, our investment decisions reflect our emphasis on diversification, quality, and liquidity. We continue to manage the portfolio to align with the needs of our insurance businesses. The effective duration of the overall portfolio was 5.8 years at year-end compared with 6.2 years at the end of the Third Quarter and similar 5.8 at the end of 2008. The effective duration of the assets backing our P&C liabilities was 4.0 years at year-end 2009, at the low end of our target range.

About a quarter of our total fixed income investments are held in a separately segmented portfolio to match our long duration, life-like liabilities associated with the businesses in run-off. These assets had an effective duration of 11.2 years which is in line with portfolio targets. Our overall portfolio liquidity and substantial positive cash flow continued to be major advantages.

Our operating Company cash flow remained strong. In 2009, we had $2.8 billion of principal cash payments and we generated another $1.3 billion of operating cash flow. Between the Holding Company and the operating companies, our cash and short-term holdings totaled $4.1 billion at year-end 2009. I would add that our holdings of cash and short-term exceed our liquidity needs. We will continue to make prudent purchases of longer term investments as our confidence in the market improves.

Now, I would like to report briefly on our non-core businesses. Corporate segment recorded a Fourth Quarter net operating loss of $112 million. The loss relates to our annual ground up review of our asbestos, environmental and mass torque exposures. We increased reserves $175 million pre-tax to reflect increased defense and coverage council costs as well as higher costs for pollution and clean up. On the whole, our view of the underlying asbestos, environmental and mass torque landscape has not changed in any meaningful way from recent periods.

Our Life and Group Non-Core segment had a Fourth Quarter net operating loss of $19 million in 2009 compared with a net operating loss of $39 million in 2008. The improvement was primarily the result of improved investment performance in our pension deposit business.

One last comment before I turn it over to Tom. I'm sure that you have noted that our P&C business segments were realigned. We revised our segments due to a realignment of management responsibilities. Previously international operations were treated as a separate business unit within CNA Specialty. The products sold through international operations are now reflected within CNA Specialty and CNA Commercial in a manner that aligns with the products within each segment. Additionally, the companies excess and surplus lines, which were previously included in CNA Specialty, are now included in CNA Commercial, which we referred to as CNA Select Risk. With that I will turn it back to Tom.

Thanks, Craig. Before we open it up for questions, I would like to close with some summary observations. Last May, we announced a three part strategy to drive top and bottom line growth. First, developing and deepening our expertise to serve our chosen industry segments while also maintaining an appetite for broad range of good risks; second, manage our mix of business to improve profitability; third, extend our geographic reach and improve our capabilities at the point-of-sale. We have put our strategy into action on many fronts. We have developed and implemented 11 industry segment strategies aimed at delivering differentiated products and services. We upgraded leadership talent and commercial and small business and we upgraded field operations, leadership at the home office zone and branch levels. These leaders are fully aligned with our strategy and have a track record of delivering results.

We've put a structure in place to support our strategy of enterprise segmentation and cross-selling within specialty and commercial. This structure includes new underwriting in Business Development positions to extend our underwriting outreach and drive sales across CNA. To better align our field structure with our agency plant, we opened a new branch office in Chicago. This year we're planning to open offices in Washington DC, Los Angeles, Birmingham, Alabama, and Westchester County, New York.

We provided front line underwriters with improved pricing metrics and made the branches fully responsible for profit and loss in their territories. We have launched a range of initiatives to manage the mix by shifting towards focus industries and commercial, exiting poorly performing accounts and segments and launching growth initiatives in Specialty. We are strengthening producer relationships by improving our organizational sales capability. I am pleased with the progress we have made so far. However, looking ahead the market will remain very challenging. We expect the competition in 2010 will be a continuation of 2009 with the fiercest battles being fought over good new business. We expect that the economy will continue to struggle but we don't see it getting worse. Exposure to clients should start to bottom out. We also expect rates will continue to creep up.

Finally, we expect premium growth to be a mixed bag varying by territory, industry segment and account size. There is opportunity out there for carriers staying close to their producers and differentiating themselves through service and expertise. Against this back drop, you should expect CNA to stay focused on the fundamentals in 2010 and beyond.

Continuing to build underwriting and pricing discipline, growing specialty as measured by premium in force policy count and new customers and fixing and growing commercial, making CNA a producer-friendly Company with the sales and service orientation as measured by submission activity, hit ratio and retention. Continuing to manage our expenses wisely and also continuing to build human capital. We continue to believe that CNA's people, strategy and financial strength will enable us to manage through this cycle and emerge as a top performing underwriter.

With that we'll take your questions.

Ladies and Gentlemen, (Operator Instructions). First up we have Jay Cohen at Banc of America, Merrill Lynch.

Thank you. Good morning.

Good morning.

A couple of questions. First, is the expense ratio ticked up and, you mentioned some of the issues behind that, but some of it sounds -- I guess, somewhat not permanent, but it's not just all obviously one-time in nature and I'm wondering if you have a target for next year? Obviously you're taking a closer look at expenses. Do you think you can get it back down to where it was in 2008 given the environment?

Yeah, I think, Jay, number one, we're cognizant that it ticked up, as we said, you know, if you look at the quarter the decrease in net earned premium was equivalent to about 0.7 of a point, employee related expenses 1.7 points, and the increase in industry assessments 1.3 points. Overall for the year the headcount was off 2%. As I mentioned in the areas that we focus on relative to our expense focus in the staff areas, the one area we looked at headcount was down 7%. So, we are, we're looking at headcount but we're looking at it in a controlled way based on what expertise we need to execute the strategy, but, we will continue to work on pushing it down. But, obviously premium has a lot to do with it. If we can stabilize our premium, get growth up to flat, that's going to help quite a bit. And then, I think the employee related expenses, you know, we should be able to manage that over time.

We did invest in a quite, quite a few number of new jobs in the field in 2009, particularly in the specialty area and excess surplus lines which we both see as areas we want to grow. They are profitable, so part of it is shifting headcount around and looking for greater efficiency and effectiveness. We have not picked a target. That was your question, but rather we're going to manage the pieces and eventually get it to a lower number over time.

I guess part of the question was you had suggested that these cost savings we are focusing on for, I guess, more of the support areas, you were going to "reinvest in the business", which I guess would suggest maybe you don't see a drop in the expense ratio.

Yeah, good question, but the fact is we've already invested in the business by putting these jobs on the ground, creating different jobs such as Business Development, more senior underwriting jobs in the field. That's already in place, so we have kind of spent the money first and now we're taking some of the costs out.

Got it. The ENS business, I seem to recall this was in what had been called Standard Commercial was moved to Specialty, now you're moving it back to CNA Commercial. It sounds like a specialty type business. I'm wondering what's the reason you're putting it back in the commercial business?

We look at it as a line of business issue, so if they're selling general liability policies or they're selling property policies, that aligns with Commercial, not Specialty. The definition of Specialty around the industry bounces around quite a bit, but we are really taking kind of a line of business approach as to how we put businesses within Commercial or Specialty.

Great, and if you -- if it's possible, if you could get us some prior quarters restated so our models don't get too screwed up? Is that possible?

Jay, those should be, those should all be out there. We filed an 8-K in -- looking now at Nancy.

In January.

January 21.

Great.

We stated '07 and '08 and all of the quarters of '09, Jay.

Perfect, perfect, thank you. And then just last question. The debt offering, it didn't look like you had any additional debt coming due until August 11 and I was wondering what the rationale was for issuing debt here?

Well, we use the proceeds to repay a portion of the preferred. So, the reason we did it was capital efficiency, so we eliminate 10% non-tax deductible preferred and in its place put a 735 tax deductible debt.

And how much of the preferred is left at this point?

A billion is left.

Got it. Very good. Thank you.

You're welcome.

Next up in the roster is Bob Glasspiegel at Langen Mc Alenney.

Good morning.

Good morning.

(inaudible) on a couple of strategy questions. Assessments you said was 1.3 points. Do you have a dollar amount ? And was that sort of incremental or

That was incremental increases, Bob. This is Craig, and I don't have an exact dollar amount for you, but it -- you know, it's across a bunch of different -- (inaudible) fund in New York, Department of Labor and stuff in a few other states.

So that's overall expense ratio on PC if I want to do the calculation?

Yes.

Yes, Bob, what you have to think is that the expense ratio is up about three points from the prior year, and you know what we've given you is where that three points is allocated. It doesn't come up exactly, there's some miscellaneous in there.

Okay, do you, do you view that's going to be an incremental pressure perspectively at this rate? Or do you just try to get ahead of the curve?

Well I would say, number one, we don't believe that it's going to tic up. I think we've got our finger on all of the components, including the controllable expenses, so we did a much tighter job when we did our planning for 2010 on where our expenses are and what they actually are. So yes, I don't expect that getting worse. Our hope is over time it will get better. I don't think we're going to see the real benefits until 2011 as we work through this efficiency and effectiveness piece of the expense strategy.

Okay. You didn't do your Investor Day. I was wondering is John Kantor on the line to be able to talk about asbestos and environmental, or if you could just give us a couple paragraphs on what wiggled this quarter? I'd appreciate that.

Yeah, John is here. Go ahead, John.

Sure. I think as Craig says that there are no secular changes in asbestos or pollution. And you may want to take a look at the A.M. Best report that came out at the beginning of December which confirms that. Just around the edges, more defendants deciding to try cases in the asbestos arena. Trial activity is up in some key jurisdictions like New York and California. So that would be the key take-away in asbestos for this quarter.

In pollution, it's just a matter of -- you have remediation costs developing over quite a bit of time in some of the larger spikes and you do get, you tend to get an increase in remediation costs over time at some of these (inaudible). And what A.M. Best correctly notes is that (inaudible) in the pollution area have remained stubbornly high, higher than expected and -- but they are coming down. And that is very much our experience as well.

So just concluded would it be fair to say, minor wiggle in what's been sort of a secular improving segment? Or am I over-simplifying?

What I'm saying is that there are many trends, but the overall trend is downward over time in terms of paid losses and incurred losses for the industry. But, you know, it's a bumpy ride and there will be lumpy years and lumpy quarters along the way.

Okay, last question, Tom or Craig. Where are you on these investment portfolio being where you want to be from a de-risk basis? You talked about what you've done, but where is the end zone timing?

I guess -- Richard Scott here as well but I'd ask him to comment after I comment, but I'd say repositioning portfolio is never really done, right as you're thinking about reacting to the market. But, we're, I think what you ought to expect from us going forward is likely continued reduction in the non-agency structured run-off and obviously we would like to, as our confidence in market improves, put more of the cash to work. I think that's generally what you should expect to see from us. (inaudible)

Yeah, I would comment on it a couple of things. One, if you think about what has happened to the market over the last several years, you have two of the major asset classes that had historically been triple A asset classes, namely municipal bonds and non-agency structured securities, are fundamentally no longer triple A asset classes. So, we for a variety of reasons have been reducing both of those asset classes and would expect to continue to do so. Not so much because of rating but because of just uncertainties on the structured side as to the amount of cash flow that's going to come off. No matter where they're rated and no matter where you own them, that, that is an area that is,that is yet to crystallize in terms of ultimate results, and I think that so long as the structured market is more or less closed to new issuance it will continue to struggle a little bit in the market. We're also in a tax position where we don't get the full current benefit of tax exempt interest income, so you should expect to see our tax exempt municipal portfolio continue to shrink. To some degree that will be offset by increases in the holdings of taxable municipals, particularly BAPS. But, from a perspective of de-risking per se, I think most of what I would view is circumstances where we were in a position of wanting to reduce the volatility, most of that is already done.

Thank you.

(Operator Instructions) With that we'll move on to Matt Carletti at Macquarie.

Hi, good morning. Just want to ask a question on capital. Capital has rebounded very nicely, both stat and GAAP from, from a year ago. You've paid down a little of the preferred, but I was hoping you could comment on your appetite, or willingness to pay that down further and what, I guess, given the terms of it, Loews appetite might be to allow you to pay it down.

Matt, it's Craig. I'd just really repeat and reference you back to what we said last quarter, that we certainly would like to pay it down as soon as it's practical, but neither anybody here nor anybody at Loews is anxious about getting it done. So, we're trying to balance our really longer-term objective, or really short-term objective, to get an upgrade from the rating agencies. But, as I said last quarter is the natural next move was move to stable, which is now happened with the A.M. Best announcement this morning, so we're going to balance that objective of getting the upgrade, a position (inaudible) upgrade with the payback. So, I think you should expect us to be cautious in terms of our movement and likely we'll move incrementally like we did last quarter and as our confidence in the earnings and then the investment market improves, we expect it to act over time.

Okay. Great. Thanks a lot.

We have a question now from Adam Starr at Gulfside Asset Management.

Hello. Could you just give a little more color on the adverse development in the Fourth Quarter and the commercial lines and whether there's any indication as to whether that our future underwriting will reflect different assumptions?

Could you repeat it? You're not coming across very clearly on the mic.

Oh, I'm sorry. Could you just discuss the adverse reserve development in the commercial lines during the Fourth Quarter and whether that has any implication for future results in those lines?

Well, maybe. This is Craig. There was the reserve development in commercial lines was positive, it was favorable, for the quarter and for the year, over 100 million pre-tax this quarter. So, the unfavorable development was in our asbestos and pollution and mass torque reserves.

Okay, and will there be future reserving patterns reflecting that? Or do you think you've got it pretty much behind you?

Well, it's in the current accident year, so the deterioration is already in the number. The other thing is we had workers comp deteriorated in the quarter.

Okay, because the Press Release indicates that it's in the Commercial, but I guess your in-- in the Press Release you're including the yield toxic source within that? Maybe it's the current accident year in the Press Release.

So maybe there is favorable prior year development in general in Commercial. There was some -- some deterioration in prior year comp in Commercial, but it was more than offset by the favorable stuff. And then there was strengthening of the current accident year in Commercial and workers comp. And separate discussion, you'll see in the Press Release related to the corporate segment which is where the asbestos solution and mass torque is centered.

I get that. Okay, that I saw. I just misunderstood you. But the current accident year, that was largely workers comp or was it new business, or -- and new accounts or was it just old business where patterns have changed?

The workers comp piece both the prior year adverse development which was more than offset by favorable development in property lines and the current accident year increase was related to one area of our workers comp book and it's a smaller segment but noticeable, we think we've dealt with it and got it behind us.

Okay, thank you very much.

Next up we have Dan Johnson at Citadel.

Great, thanks and good morning. Would you guys maybe provide a little more color around the support function changes that you maybe A) have already completed, B) you plan to complete, maybe trying to scope out sizing in terms of potential savings so we get a sense of the magnitude of the reinvestment dollars that are going back into the business? And are we pretty much assuming that that's a one-for-one initiative in terms of reinvesting the savings?

Complicated question, complicated answer. What I would say is that what we are focused on is most of the staff functions within the organization, so this would be non-production related so think of that as the field is production related, the staff positions would be for the most part focused in the home office as well as various processing areas around the Company. So that's what we're focusing on, we're kind of going one area at a time.

We have not, I'll say, finalized the number as to potential total spend, but we think it's pretty significant. But, we're clearly doing this from the standpoint of making us more efficient and more effective. This is not an attempt, or I should say a draconian attempt to just say we're going to cut out 5 or 10%. It's really going area by area and doing a pretty keep dive as to work flow process function. So we're encouraged. As we said one area that we've looked at already, the headcount is off about 7% in that area. We expect over time that will be less, but we're not prepared to put anything out there that says this is exactly what the cuts are going to be, by when, and et cetera. It will show up as we move forward and, as I said earlier, a lot of this will not show up until 2011.

In terms of the savings or in terms of the impact of the reinvestments?

The savings.

And, and the reinvestments, maybe just -- I know you said you're opening up some new branches. Anything else you'd want to highlight?

As we said earlier, we already have put more people on the ground in the field. Whether those are specialty underwriters, excess surplus lines, underwriters, Business Development Marketing people, and also commercial underwriters at a pretty high level of expertise. So we have already done that. That's kind of baked in, and over time, we expect that we'll become more effective, more efficient and we'll get some other costs out of the place. So we've kind of done the investment first and now we're going to start harvesting some costs.

Okay, so there -- okay. So, there has been some spend up front so that we may see some benefits, but as you said, not exactly super near term?

What we're trying to do is number one, we want to get the loss ratio down and we want to grow in those segments where we think there are profitable margins and we have kind of put that piece into motion. We're pretty pleased with that. The next thing is identifying cost savings whether that's redundancy, inefficiencies, et cetera, and most of that will come out of what we would call the staff areas, many of which are support areas.

Thank you very much.

You're welcome.

We will return to Jay Cohen for our next question.

Yes, two questions. First is, on the investment side, I guess you suggested you have still a fair amount of short-term and cash in the portfolio and I guess you suggested that you're looking to redeploy it when the market looks better, and I'm wondering when do you think that's going to be? Just -- are you looking to do this relatively soon, or over the course of the next two years?

You know, Jay, it's Craig, so no, we're not looking to do it relatively soon. We'll do it as just Richard said as our outlook in the market and depending on the direction of interest rates and our general confidence of stability in the market improves. So it's not something you should look for us to do. We're not anxious to go do it immediately. Expect us to do it over time.

Jay, one way I'd phrase it to you is from a target duration including cash on the general account we're not that far off from where we want to be. So I would characterize our long term intent there as to be more to do with where we want to be positioned on the curve than necessarily much of anything else.

Got it. Got it. That's helpful.

It's more of a duration targeting than a amount of cash targeting exercise.

Okay, and then the next question is on the favorable reserve development, which looks like both in the Specialty business and in the Commercial business jumped up quite a bit from the pace we had been seeing and I'm wondering was there any change in the methodology at all, or was this simply the claims trends that looked a little bit better than you'd been seeing?

Well, I think first of all, in the Fourth Quarter we looked at much of our global affiliate book and surety and so therefore, we looked at Europe, we looked at Canada, we looked at the Surety business. And clearly these were areas that had significant favorable developments, so just a question of what we looked at. On the property side, we were able to release some reserves related to Hurricane Gustav and Ike, so this was kind of a convergence of a lot of things just happening in the Fourth Quarter.

Got it. And I guess in general on the reserves, have you made any changes in the reserving methodology in general, Tom, since you've gotten there? Given that Chubb has sort of a defined way of looking at reserves, have you changed the way CNA approaches reserves at all?

I would say no but we are doing I think a much better job getting reserves up on a case basis which is very helpful. As you know, most of the reserves in a given year start with IBNR and as the claims people put up case reserves, the two kind of balance. Ultimately, it all goes into case. But clearly, I think we're doing a much better job on the claims side getting the reserves up in a timely fashion and a more accurate fashion, so I wouldn't say it's a new process, I would say it's better execution at the claim level. And we are also investing resources in our actuarial area, which we believe will also have a benefit, too.

Great. Thank you.

You're welcome.

We'll go back now to Matt Carletti.

Thanks. Just wanted to ask a question on relating to insider trading activity. Can you just generally remind me when Management is able to buy or not buy, just when the blackout periods are generally around the quarter for CNA and when you might be able to be in the market?

I don't know. John, do you want to answer that?

Our rule of thumb is 30 days. But that can be extended if there's really -- if everything is quiet, there's not -- no material information at the time. But the general rule of thumb at the Company is 30 days.

So you're saying the go quiet 30 days before the end of the quarter?

No, no, I'm saying the window is 30 days from earnings.

Oh, from Earnings Release, okay.

Right.

Thanks very much.

With that, there are no other questions holding. I'll turn things back over to our speakers for any additional or closing comments today.

Thank you very much. See you next quarter.

With that, Ladies and Gentlemen, we'll conclude today's call. Again, thank you for joining us and once more have a good day.