CNA Financial Corp (CNA) 2010 Q2 法說會逐字稿

Good day everyone. Welcome to the CNA Financial Corporation second-quarter 2010 earnings conference call. Today's program is being recorded. At this time, for opening remarks, I'd like to turn things over to Ms. Nancy Bufalino. Please go ahead, ma'am.

Good morning everyone. Welcome to CNA's discussion of second-quarter 2010 financial results.

Our press release was issued earlier this morning, and 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 Chief Executive Officer, and Craig Mense, our Chief Financial Officer. Tom and Craig will provide their remarks about the quarter and then we will open it up for questions.

Before we get started, I would like to remind everyone that, during this call, there may be forward-looking statements made and 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, August 2, 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 week, the call may be accessed again on CNA's website at www.CNA.com.

With that, I will turn the call over to CNA's Chairman and CEO, Tom Motamed.

Thank you Nancy. Good morning everyone, and thank you for joining us today. We are pleased to report on our second quarter, which was marked by solid operating and financial performance as well as an important agreement to transfer CNA's legacy asbestos and pollution liabilities to National Indemnity Company, a subsidiary of Berkshire Hathaway.

Second-quarter net operating income was $269 million, or $0.91 per common share, as compared to $305 million, or $1.02 per common share, in the second quarter of 2009. Net income was $283 million or $0.96 per common share, compared with $105 million, or $0.27 per common share, in 2009. Our results were driven by favorable prior-year loss development, substantial investment income, and positive realized investment results.

We are also pleased to report improvement in our capital position. Book value per common share increased 13% from year-end 2009 to $40.43, reflecting $10.9 billion of GAAP common shareholders equity.

In our core Property and Casualty operations, the second-quarter combined ratio was 89.4 compared with 98.1 in the second quarter of 2009. The difference is primarily due to 18.4 points of favorable prior-year loss development, compared with 4.9 points in last year's second quarter.

In addition to development, the combined ratio included 3.3 points of catastrophe losses as compared to 2.9 points in the second quarter last year. Before development and catastrophes, the second-quarter combined ratio was 104.5 as compared to 100.1 in 2009.

The accident year ex-cat loss ratio was 70.2 in the second quarter as compared to 68.6 in the prior-year period. The 2010 accident year ex-cat loss ratio was 69.3 as compared to 69.1 in 2009.

Net written premiums decreased 7%, reflecting the ongoing competitive market and weak economy. We continue to execute our underwriting strategy to improve the profitability of our Commercial segment.

The second-quarter Property and Casualty expense ratio increased 2.3 points to 33.8. Approximately 1 point is attributed to reduced earned premium. The other point relates to the investments we are making in our field operations.

D&A Specialty continues to perform very well, delivering a combined ratio of 79 compared with 89.8 in the second quarter of 2009. These ratios benefited from favorable prior-year loss development of 18.6 points and 5.1 points respectively. Catastrophes added 0.5 point compared with 0.3 point in the second quarter last year. Before catastrophes and development, Specialties combined ratio was 97.1 compared with 94.6 in the second quarter of 2009. The increase was driven by higher expenses and the impact of negative earned rate.

Specialty's accident year ex-cat loss ratio was 66.3 in the second quarter as compared to 65.2 in the prior-year period. The 2010 accident year ex-cat loss ratio was 65.9 as compared to 65 in 2009. Specialties net written premiums declined 1% in the quarter and 2% year-to-date.

With respect to renewals, our rates decreased 2%, a slight deterioration from the prior-year period. Retention improved 1 point to 85%. The ratio of new-to-lost business in Specialty was 1.2 to 1. Quarter-over-quarter submissions increased 20% and new policies were up 10%.

Turning to CNA Commercial, the second-quarter combined ratio was 98.2 compared with 104.6 in the prior-year period. These ratios benefited from favorable prior-year loss development of 18 points and 4.5 points, respectively.

Catastrophes added 5.7 points compared with 4.8 points in the second quarter of last year. Before catastrophes and development, the combined ratio was 110.5 compared with 104.3 in the second quarter of 2009.

A recently discontinued segment in CNA Select, our excess and surplus lines division, had a 3 point impact on the loss ratio this quarter. The 3 point expense ratio increase is primarily related to decreased net earned premium and the important investments we are making to improve Commercial's long-term health by adding to our production and underwriting capabilities. In addition, last year's second quarter benefited from favorable dividend development related to workers compensation coverages.

Commercial accident year ex-cat loss ratio was 73.3 in the second quarter as compared to 71.2 in the prior-year period. The 2010 accident year ex-cat loss ratio was 72 as compared to 72.3 in 2009.

Commercial's net written premiums decreased 11% in the quarter and 10% year-to-date. Four points of the year-to-date decline were for decreased exposures and return premiums. One of the hardest hit areas was our construction business, which accounts for 20% of our Commercial segment. Its net written premium decreased 19% year-to-date.

The decline in Commercial's net written premium also reflects our decision to significantly reduce our large property portfolio, where we believe pricing is inadequate, as well as our ongoing practice of non-renewing accounts if we cannot get the necessary price.

Rate increases were 2% in the second quarter, retention declined 1 point to 79%, and the new to lost business ratio was 0.8-to-1. We believe that achieving rate increases while accepting lower retention is a more favorable long-term approach to improving profitability.

Second-quarter submissions in Commercial were up 10%. However, our written quoted ratio decreased 2 points to 25%, in line with our more selective underwriting and pricing strategy.

Before turning it over to Craig, I would like to comment on two recently announced transactions, starting with the agreement to transfer our legacy asbestos and pollution liabilities to National Indemnity. We believe the benefits of the agreement are compelling. They will effectively eliminate the overhang from these legacy liabilities. The $4 billion in reinsurance cover will give us a survival ratio of more than 20 years, which we feel puts these liabilities behind us. We will free up capital that can be directed to support our ongoing business strategies. Finally, the transaction will simplify our cost structure with national indemnity assuming the claims handling and reinsurance collections. We will eliminate annual costs of approximately $20 million.

In June, we also completed the sale of our workers compensation business in Argentina. The sale is consistent with our desire to focus on the United States, Canada and Europe as our core geographies.

Craig will provide more detail on both transactions, along with his regular review of the quarter. Craig?

Thanks Tom. Good morning everyone.

Highlights of the second quarter include net operating income of $269 million, an operating return on equity of 9.5%. and net income of $283 million. The quarter also marked the 14th consecutive quarter of favorable P&C reserve development.

Book value per common share increased 6% from the end of the first quarter of 2010 to $40.43 per share, reflecting our earnings and a continued meaningful improvement in the market value of our investment portfolio. Book value per share has increased 13% from year-end 2009 and is up 47% compared to June 2009.

We announced two transactions since our last call, the agreement to transfer our legacy asbestos and pollution liability and the sale of our operations in Argentina that will improve our capital efficiency and sharpen our focus on CNA's ongoing business strategies.

Overall, the second quarter reflects CNA's sustained focus and measurable progress on delivering improved levels of both earnings consistency and financial stability.

As you heard from Tom, our net operating income was helped by $264 million of pretax favorable prior-year reserve development in our core Property and Casualty operation. This lowered our calendar year loss ratio by over 18 points.

We recognized favorable development in first party property lines associated with both non-catastrophe and catastrophe losses in the two most recent accident years. We also recognized substantial favorable development in auto and professional liability lines from accident years 2007 and prior. The reserve releases were driven by better-than-expected loss frequency as well as favorable individual claim outcomes. The decisions were based on the analysis completed this quarter, which covered approximately 30% of our reserve base.

Our Specialty business continues to perform very well while we continued our progress towards re-profiling the commercial business and improving its profitability.

Net operating income included pretax net investment income of $521 million, a decrease of 23% from the prior-year period. The unfavorable year-over-year comparison is driven by Limited Partnership investment results. Our LP investments produced a second-quarter pretax loss of $4 million as compared to the rather exceptional $165 million of income during the second quarter of 2009. Our LP investments are performing as expected and continue to produce higher cumulative turns and less volatility in inequities.

Second-quarter and year-to-date rates of return for our LPs were a negative 0.2% and a positive 3.8% respectively. These returns compare to a negative 11.4% and a negative 6.7% for the S&P 500 total return index for the same respective periods.

Pretax income from the remainder of our portfolio, namely fixed maturities, increased 3% from $510 million to $525 million, largely as a result of the year-over-year reduction in our short-term positions.

Second-quarter net income of $283 million included realized capital gains of $13 million. Those results include the impact of $37 million of impairments. Almost all of those impairments reflect intent to sell decisions that are part of our ongoing management of the portfolio. Credit impairments accounted for less than $9 million of the total.

The market value of our investment portfolio increased more than $600 million over the course of the second quarter. The portfolio's pretax net unrealized gain was approximately $1.2 billion at June 30, 2010. This compared to a $25 million net gain position at year-end 2009. The portfolio valuation improvement was driven by investment grade corporates and the continued recovery of our structured portfolio.

We made very little change to our investment portfolio's asset allocation during the quarter. We continue to effectively run off our non-agency RMBS portfolio. This asset class was reduced another $375 million from $3.8 billion to approximately $3.4 billion. We also continue to shift our space and municipal investments from tax exempt to taxable holdings, including approximately $900 million of net purchases in the second quarter.

Our cash and short-term position increased to $3.1 billion at quarter end as compared to $2.6 billion at the end of the first quarter of 2010 as we began to accumulate cash to affect the asbestos and environmental loss portfolio transfer transaction.

Overall, our investment decisions continue to reflect our sustained emphasis on diversification, quality and liquidity, as well as the importance of ensuring our portfolio is aligned with our business objectives.

The average credit quality of the fixed maturity portfolio remained unchanged from the prior quarter. We continue to segment our portfolio to facilitate our asset mix liability management discipline. The effective duration of the assets which support our traditional P&C liabilities was 4.2 years at quarter's end, down slightly from 4.4 years at the end of 2010's first quarter and reflective of the increased short-term position. The effective duration of the assets which support our long duration life-like liabilities had a duration of 11 years, virtually unchanged from the first quarter and in line with portfolio targets.

Our capital position and balance sheet remain very strong. We continue to maintain a very conservative capital structure and do exhibit a strong liquidity profile.

Our operating cash flow has continued to be robust. In the second quarter of 2010, we generated approximately $150 million of operating cash flow, excluding trading activity and after paying preferred dividends. Additionally, during the quarter, we received nearly $900 million of principal cash repayments through pay downs, bond calls and maturities. All of our capital adequacy metrics are well above our target levels and will be further enhanced after the pending loss portfolio transfer transaction is closed.

Our (inaudible) surplus totaled $9.9 billion at the end of the second quarter, up from $9.3 billion at year-end 2009. We have more than $900 million of dividend capacity in our primary insurance subsidiary.

Our capital flexibility is further enhanced by the approximately $300 million of cash and short-term investments held at the holding company level. This holding company cash position is more than two times our annual net corporate obligations. We did pay down another $50 million of our credit facility, and the total outstanding is now $100 million against a $250 million facility.

Our Life and Group non-core segment produced a second-quarter net operating loss of $18 million compared with a net operating loss of $26 million in 2009. The favorable year-over-year comparison reflects a legal accrual in the second quarter of 2009 that dampened those results. There were no significant changes in the fundamental underlying performance of these businesses.

The Corporate segment produced a second-quarter net operating loss of $5 million in 2010 as compared to a net operating income of $13 million in 2009. The change was driven by reduced net investment income, mainly LPs.

I know you're interested in hearing more about our thinking around the decisions to transfer our A&E liabilities to National Indemnity, as well as the decision to sell our Argentine operation to QBE. Let me offer a few comments before I turn the call back to Tom. Both decisions were guided by the strategic operational and financial priorities that we established soon after Tom arrived in January 2009. Our overarching objective has been and still is to deliver improved levels of operating earnings on a consistent basis and to continuously improve our financial stability.

You heard us say after the strategic review that we completed in early 2009 that we saw opportunities for meaningful growth in North America and Europe. Our Argentine operation, while profitable, was not seen as core. We did not see the opportunity for scale, nor did we see an attractive opportunity for growth in Latin America. The sale, which we think was negotiated at an attractive valuation, slightly over $66 million or 2.2 times book value, allows us to redeploy that capital to support growth in our core businesses and eliminate the sovereign and currency risk that came along with that operation.

Let me briefly recap the agreement with National Indemnity. It will have an inception date of January 1, 2010, and will provide protection against legacy asbestos and pollution claims. CNA will pay a premium of $2 billion and transfer pre-inception date reinsurance recoverables with a net book value of approximately $200 million. National Indemnity will provide reinsurance cover up to a $4 billion limit, net of collectible third-party reinsurance. Both net losses and any of the $1.2 billion of related third-party reinsurance that may prove to be uncollectible will be covered within the limit. National Indemnity will establish a $2.2 billion collateral trust for the benefit of CNA at closing, and Berkshire Hathaway will guarantee National Indemnity's payment obligations under the agreement.

In addition, National Indemnity will take over claim handling and reinsurance collections. These claim handling costs will not be charged against the $4 billion reinsurance cover limit.

We anticipate closing the transaction during the third quarter. At closing, we expect to recognize an after-tax loss of approximately $375 million.

As you heard from Tom, we believe the benefits from the agreement to transfer our A&E liabilities to National Indemnity are compelling. Our transaction objectives were to enhance our earnings consistency and financial stability and to differentiate CNA from the majority of our competitors through the effective elimination of CNA's asbestos and pollution reserve risk as well as the related reinsurer dispute and credit risk.

It was also critically important to us not to trade reserve risk for credit risk, given the expected length of this agreement. Our ability to successfully negotiate the collateral trust and the Berkshire Hathaway guaranty allowed us to meet that objective and significantly improve the transaction's capital efficiency. As a result, we will be able to reallocate the approximately $500 million of capital that we hold to support these reserve risks to support the growth of our ongoing business.

Looking forward, while the transaction will reduce future net investment income, we will benefit from the annual direct claim expense saving. This expense has been running a little over $20 million a year. We will also eliminate the prospect of future adverse reserve development which accounts for more than $250 million in reserve charges over the past two years. While we have no reason to believe our current reserves are inadequate, these liabilities have a history of volatility and we saw little prospect for these claim outcomes to improve.

You should be aware that the reinsurance agreement with National Indemnity will be considered retroactive reinsurance, which receives special accounting under current GAAP. If future adverse asbestos and pollution reserve development exceeds the $2.2 billion of premium paid, you'll have a timing difference impact on CNA's reported income because retroactive accounting requires that a portion of the reinsurance credit will be deferred and recognized over the settlement period of the asbestos and pollution reserves.

Overall, the transaction fully meet our objectives, effectively eliminating asbestos and pollution reserve risks, effectively eliminating the legacy reinsurer dispute and credit risk, enhancing our capital flexibility and enhancing management focused on ongoing businesses and strategy.

With that, I will turn it back to Tom.

Thanks Craig.

All in all, we had another good quarter. Net operating income of $269 million or $0.91 per common share; net income of $283 million or $0.96 per common share; strong investment results with $521 million of pretax net investment income; $13 million in after-tax capital gains; and approximately $600 million improvement in our unrealized position. Improvement in our capital position reflected an 13% increase in book value per common share to $40.43 from year-end 2009 with GAAP common shareholders equity increasing to $10.9 billion.

Disciplined underwriting and reserving practices has reflected in 14 consecutive quarters of favorable prior-year development. The agreement to transfer our legacy asbestos and pollution liabilities to National Indemnity -- a very significant accomplishment for us.

Before we take your questions, I'd like to say a few words about the market and our strategy going forward. The market continues to be very competitive in both Commercial and Specialty lines. The industry has now endured a declining rate environment for approximately seven years. We are currently seeing erosion in terms and conditions, signaling the final move in this current soft market cycle.

From where we sit, we do not see any letup in the aggressive competition for new business. New entrants, lots of capacity, appetite expansion among established players and a fear of losing existing business on renewal will continue to put pressure on rates and ultimately accelerate the deterioration of accident year loss ratios.

At the same time, there appears to be some optimism surrounding the stabilization of exposure levels, which will buoy premium but do little, if anything, on the loss side. The recent flurry of catastrophes also signals the industry's and our need to focus on loss ratio. As the economy stabilizes and ultimately improves, as evidenced by flat-to-positive exposure growth, we believe customers will be able to absorb rate increases, since exposure growth is an indicator of the viability of a business.

We must be cognizant of the fact that the longer the current recession lasts, the greater the price sensitivity on the part of buyers. Therefore, at CNA, we will continue to focus on risk selection, pricing to exposure, and adequate rates to maintain our margins in Specialty and improve our Commercial results.

We will now take your questions.

(Operator Instructions). Amit Kumar, Macquarie.

Good morning and congrats on a very strong quarter. Just listening to sort of you sort of going through this list of things which needed to be done. It seems a lot have been done or are close to be getting done. Just trying to understand a bit better what are your thoughts on the lowest preferreds? Do you think that is something you might revisit in 2010?

This is Craig. I guess first I would say, as you know, we don't comment on any capital plans that we may have. But I would go on to say that certainly completing this transaction with National Indemnity enhances our ability to act on that score.

That's helpful. Just moving on to the discussion on your submissions, I think the numbers were up 20% in Specialty and up 10% in Commercial. Just trying to understand that a bit better. Is that a function of your expanded platform, or what exactly is going on?

The numbers you quoted were submission activity, is that correct?

Yes, that's right.

We expanded our appetite. Back in 2009, we had been a company that was really known for healthcare and construction. We have now expanded that. We have 11 industry verticals or nine more than what we had. So we have a broader appetite. So when you have a broader appetite, when producers know that, they will send you business. So we are getting more submissions because of our expanded appetite. Also, we had built out our field presence in an aggressive way. We've opened up four new offices this year; we will add another office in the fourth quarter. So we are becoming much more externally focused and in the face of our producers with a broadened appetite and asking for the business. So the submission activity is a reflection of all of those points.

That's helpful. Just one final question then I'll re-queue. You talked about rates, rate declines in different segments. Can you also touch upon the rate adequacy in your new business? I know you talked about the renewal business. Maybe talk to us how that has been coming along.

Yes, we actually, in our Specialty business, believe that our new business is better priced than our renewal book. We have developed tools that we think can measure reserve adequacy. We are building tools on the Commercial side but anecdotally I would tell you that, when I hear the stories on particular accounts and the rate online that we are charging for new business, I would tell you that we are pricing the business to make a profit in Commercial.

That is also reflected on the fact that our hit ratio is down a few points in Commercial. We are being much more selective on new business, even with submissions up. So we have confidence that the business we are putting on the books today fits our appetite, as indicated by industry verticals, as well as we are pricing it better in some cases, and at least as good in others. So we don't think we are giving anything away on the future.

That's helpful. I'll requeue. Thanks.

Jay Cohen, Bank of America.

Thank you, good morning. A couple of just quick ones first -- the level of premiums in your Argentinean business, do you have that?

It was about $100 million annual.

That was in your Specialty segment?

No, it actually would've been reflected in the Commercial segment.

In commercial, okay. The business you highlighted that had some losses. The CNA Select business that was in run up, that contributed quite a bit to the loss ratio. Can you give us more information on that?

Yes, the segment was habitational real estate, apartment buildings. It was 3 points in commercial. We have basically gotten out of that. It was underpriced. The losses -- this was a book that we started writing in 2008. The losses seem to come in a lot slower at the beginning, then all of a sudden they showed up in bushel baskets. So, we made a decision to get off them. As you noted, the excess surplus lines market is under tremendous pressure on pricing. A lot of that business is moving back into the Retail segment. The good news is we could get off of that quickly, so we are getting off of that and get that behind us.

Okay. That's helpful. Again, another quick one. The $20 million of expense related to the runoff business, I assume that's in the runoff operation, or is that in the Commercial? Where does that reside?

That would be reflected in the Corporate segment. The corporate nonaccrual (multiple speakers)

Got it. Now, I guess I have two more. The next one is pretty quick. The Lowe's preferred -- your desire, if you wanted to pay that back -- does Lowe's have any input as to whether or not you pay that back?

Yes, that has to be mutually agreed to.

Okay. Because I would presume that, frankly, they wouldn't want it to be paid back so quickly, given a 10% yield in this current environment.

We can't speak for them.

Okay. Then the last question, maybe the bigger picture, I look at the 2Q results, and if I normalize for cash, I mean you reduce the cat load, give you back some for Limited Partnership income, so normalize the investment income, if I take out the favorable developments, I'm kind of looking, trying to get to an accident year ROE normalized. I come up with about 5% or 6%. Again, I didn't normalize for the CNA Select business, the habitational business, but that stuff always happens. But I'm coming up with sort of a mid-single digit number. Is that -- do you think that's in the ballpark as far as where the business is being written today?

That number is reflective of what we are reporting today. It's not necessarily reflective of that -- that's reflective of CNA today. So, if you're trying to get at what's in the Property Casualty business itself, it may be a little bit more than that. But your numbers are pretty close.

Okay. I guess I would have to, if I wanted to adjust further, I could adjust for what I believe is excess capital. But I guess that would be another adjustment. Anyway, thanks for the answers. I appreciate it.

Ron Bobman, Capital Returns.

Thanks a lot, congrats on great results. I had two questions. One, Tom, since you've joined, the Company's put out over 30 press releases where you have announced either new hires or appointments to positions. Nearly that number of press releases are actually new hires largely I guess in the field force. I guess you've been here about 18 months. I think in the 18 months before you, there was a whopping four press releases announcing a couple of new hires. Could you talk about that? And maybe whether that case of appointment in hiring is going to continue, but maybe really in a broader sense, could you talk about the personnel additions? I guess you would refer to it as the investment in the field. That's my first question, thanks.

I can't speak to before I got here, so I'll just talk about since I have been here. I am a strong proponent that if you have the best players you can win. I felt that, in some of our key roles, whether they were here in Chicago or in the field, we could get some new players that could help us improve our results, whether that be on the loss ratio side or the growth side.

So clearly when you look at talent management, human capital, I am a believer that you're always trying to bring in the best talent to make the organization better. So that's kind of my philosophy.

Yes, we have opened some new offices, so we had to hire some new people. But I think, when you really get down to it, all of our hires have been either upgrades in talent or strategic moves. By strategic, I mean we have hired probably 15 heavy duty commercial underwriters to sit in the branch offices; we have hired field marketing people. Those two positions, underwriting officers and field marketing we did not have at CNA. So the underwriting people will certainly help us improve our loss ratio and write good business. The marketing people will help drive submission activity up, so we get a look at all the business we need to look at.

We've also hired quite a few underwriters in our Specialty business, in the branch operations. The reason for that, once again, it's strategic. We believe there are lots of opportunities in the Specialty business that can be gathered in the local branch environment, and the early returns on that are very successful. That's why we are seeing an increase in our policy count in Specialty. Now, these are smaller policies, but this is really the type of business that requires hunters and gatherers.

So I would say, strategically, we are building upon what we said we would build, which is we are going to grow Specialty in a tough market. Today, we believe we are getting ourselves well positioned. In the Commercial business, we have to fix the loss ratio before we grow it. We don't want to grow it unless we know we are moving into profitable territory. So I didn't know there were 30 press. Releases, thanks for telling me. But we are going to do our best to keep bringing talent into CNA where ever it will help us improve our loss ratio and our profitability ultimately, as well as grow.

Thanks. My second question relates to the ever-popular topic of the preferreds. I don't remember the Company previously describing the preferreds as requiring mutual agreement. But except for CNA's -- I'm sorry, Lowe's agreement, is the Company CNA in a position to pay back or redeem the preferred sort of all other factors incorporated, whether it be excess capital in the eyes of the rating agency, excess capital in the eyes of management, financial flexibility, etc.? Sort of on all other accounts, do you feel you're in a position and have the wherewithal to pay it back and just lack a mutual agreement, or are there other items that need to be lined up prior there to? Thanks, that's it for me. Best of luck.

This is Craig. First, let me say, even though it's a requirement, let's not -- please don't interpret that as a gating item. We didn't say that was a constraint at the moment. It was just answering a question that does require mutual consent.

So as far as -- and as I said, also to the first question, we don't comment on any specific capital plans we have. I think I have said before on these calls that our capital flexibility continues to improve. I gave you the numbers on [stat] surplus. This loss portfolio transaction with Berkshire Hathaway, this further enhances our ability, so the only really negating items are our own, is the market, and as well as some of our own caution about retiring equity.

Craig, market meaning capital markets?

Yes.

Bob Glasspiegel, Langen McAlenney.

Good morning everyone. The couple small questions on the NICO transaction. How much capital do you think it frees up by itself?

I said $500 million.

Okay. And on our models, I follow the $20 million reduction in expenses in corporate. What's the offsetting investment income loss?

It depends on how you want to look at it. I would say the way we looked at it was that we are paying for it, mainly with cash and short-term securities that we hold, so it's really the opportunity cost, the investment opportunity cost we have, with right now the general count new money rate is about 4%. So we're talking about a declining value of maybe $80 million pretax, [some] opportunity costs given us.

So what's the dollar amount of assets? There are several numbers thrown out there. I just want to make sure I got the right --

We are paying $2 billion of premium.

Okay, so there's no offset on that, on vested assets or -- okay, I got it. Let's see. Tom, a question for you. It sounds like, in your market commentary, you are closer to Mr. Finnegan and Mr. Fishman from Chubb and Travelers who say the second quarter was so delta down and would argue with Bill Berkeley's commentary that the second quarter was sort of an inflection point for getting better. Or would you characterize the second quarter as more of the same?

I think it is much of the same. This is a competitive marketplace. We -- our issues are probably different than the companies that you mentioned, so we are worried about ourselves and what we need to do. We need to improve our profitability in Commercial, and that's why we are pushing rate. You have to push rate, you've got to get price adequacy, and you've got to get rid of business that is unprofitable or hurting you.

I think the other companies probably feel that their portfolios are pretty solid, and if I look at their numbers, their numbers are pretty solid when we look at Commercial compared to ours. So we know we have work to do in Commercial; we are not hiding anything here.

I think you look at our Specialty business, I am pleased as punch. It's a great business; it very competitive today. As I said in my remarks, Bob, new entrants, existing markets being really tough retaining their business so you're not getting a lot out there. So I think it's a competitive market. As I said on one other conference call, I don't know when it's not been competitive. And the fact is, in this economic malaise, the fact is it's even tougher to get overall price increases in the Commercial sector.

So I don't know how I line up with the other guys, but our issues or the issues we're going to grapple with -- and we are here in Chicago, the weather changes every 20 minutes. I think everybody's opinion as to what's happening out there could change every quarter. So I haven't seen any trends that tell me happy days are here again.

That's a thoughtful response. Your shift away from tax exemption taxable, is that driven by a portfolio call or was there a change in your sort of tax position that drove that?

No, that's really again search for tax efficiency and remember, we are a consolidated taxpayer with Lowe's.

Okay. Last question -- the other revenues, other expense line within Property Casualty has been running at a pretty good net profit, $6 million, $7 million a quarter for the last three quarters. Is that sort of representative of a breakout towards getting your other operations in a profitable level, or is that just random quarterly noise?

No, those represent really the results of our warranty business in the main.

The outlook, does that continue to be profitable you think in the current environment? Okay, thank you very much.

(Operator Instructions). Amit Kumar.

Two quick follow-ups. First of all, just going back to the discussion on reserve releases, I think you gave us a 30% reserve base number. Was that like an internal study which looked at 30% of the reserves? Maybe just expand on that a bit. What about the remaining 70%? Is that sort of split up in the next two quarters, or when is the next big results study?

First of all, this is internal work; we do this ourselves. It was 30% of the reserves in the second quarter. We look at reserves every quarter. The fact of the matter is, as a philosophy, we believe you don't reserve any -- you don't release a reserve until it's got it's time, right? The fact is we're a bit cautious. This was a lumpy quarter for reserve releases. But if you look at the 14 consecutive quarters of reserve releases, on average, it is about 5.1 points, including the 18 points in this quarter, so a little bit lumpy. It just so happens what we looked at produced greater redundancy, which we thought should be released. But the fact is, if you look out over time, it's averaging about 5 points a quarter.

Okay. Can you sort of break up that number, that $264 million, between different buckets? You mentioned -- I couldn't write that down fast enough.

That's why we talk fast.

The first thing I mentioned was property, which is mostly cat and non-cat, that came from both 2008 and 2009. So, that's about a little less than $100 million. You will see, these will be described in the 10-Q, which we expect to file in the next day or so as well. So (multiple speakers) property about $100 million, about 50% cat and 50% non. We also had very favorable auto development, which is about $60 million, and those are '07 and prior years. Then Specialty, the professional liability again '07 and prior, and mainly like '03 to '07 for Specialty and auto. Those are the years.

'03 to '07. That's very helpful. I guess finally, going back to the sale of your Argentinean sub, you mentioned that you'll keep on looking at sort of non-core entities. Without giving a bit too much, are there any other companies or entities like that, which could be on the radar screen going forward? Or do you think you are done as of now?

Well, I think you always look at your businesses and see which ones are performing at a high level, which ones don't have great prospects for the future. We are trying to simplify our business and really get focused on what I will call core P&C and Commercial and Specialty in the United States, Canada and Europe. But everything is always up for grabs; that's what happens when you manage a business, you look at everything. But we are not going to signal anything in particular, but as Craig mentioned, Argentina was a $100 million workers compensation operation. We did not feel it was in our best interest to invest a lot of capital in Latin America to build a large business. We thought that would be very difficult, take a lot of time, cost a lot of money. Quite honestly, we think the opportunities are better in the US, Canada and Europe. So that was a strategic move. As Craig said, we outlined some things, and one is we look at businesses that don't have a lot of upside, or things that have been a drag, such as asbestos and pollution. So, we will continue to look at everything but we are not going to signal anything to you, anything in particular.

Well, I tried. Thanks so much.

Good try.

We appear to have no further questions. I'll turn the conference back to you all for closing remarks.

Thank you very much. See you next quarter.

That concludes today's conference. Thank you all for joining us.