CNA Financial Corp (CNA) 2010 Q3 法說會逐字稿

Good day and welcome to CNA Financial Corporation third quarter 2010 earnings conference call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Nancy Bufalino. Please go ahead, ma'am.

Thank you, Holly. Good morning and welcome to CNA's discussion of our third quarter 2010 financial results. Our press release was issued earlier this morning. Hopefully everyone has had an opportunity to review it along with the financial supplement which can be found on the CNA website at www.cna.com. With us are Tom Motamed, our Chairman and Chief Executive Office and Craig Mense, our Chief Financial Officer. After Tom and Craig provide their remarks about the quarter, we will open it up for questions. Before we get started, I would like to advise everyone that during this call there may be forward-looking statements made and references to non-GAAP financial measures. Any forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during this call. Information concerning those risks is contained in the earnings release and in CNA's most recent 10-Q and 10-K on file with the SEC.

In addition, the forward-looking statements speak only as of today, November 1, 2010, and CNA expressedly disclaims any obligation to update or revise any forward-looking statements made during this call. With respect to references to non-GAAP measures, reconciliation to the most comparable GAAP measures have also been provided in our most recent 10-K and 10-Q as well as the financial supplement. This call is being recorded and webcast. During the next week, the call may be accessed again on CNA's website. With that, I'll 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. Before I report on our third quarter results, I would like to make a few comments about our announcement regarding CNA Surety. We announced today a proposal to acquire the public minority of CNA Surety for $22 per share and our intention to seek a negotiated transaction with a special committee of the Company's Board of Directors. We believe a buy-in of the surety minority is the natural next step for CNA and one that fits with the strategic objectives that we articulated when I joined the Company. CNA Surety is a business we know extremely well and this deal represents an opportunity to make an additional investment in our specialty franchise while at the same time simplifying our ownership structure.

CNA Surety is a market leader in the surety industry. The Company has the solid capital position and we believe that it will be well positioned to deliver consistent underwriting profitability as a wholly-owned subsidiary of CNA. Following completion of this proposed transaction, we expect that CNA Surety will continue to run its business in a manner that is generally consistent with its current operations. Craig will share some additional color on the transaction later in the call.

Now, onto our third quarter results. Our core Property & Casualty operations delivered a combined ratio of 97.9%. Net written premiums declined 1% and the expense ratio improved slightly to 33%. Our investment portfolio continued to perform very well. Our unrealized position improved by $1.2 billion from the end of the second quarter. Over the same period, CNA's book value increased 6% to $42.76. We completed a major Loss Portfolio Transfer transaction. As announced last quarter, we ceded substantially all of our legacy Asbestos and Environmental Pollution liabilities to National Indemnity Company, a subsidiary of Berkshire Hathaway. We also completed a $500 million debt offering and redeemed senior preferred stock with the proceeds.

Turning to the third quarter financial results, we reported a net operating loss of $158 million or $0.66 per common share and a net loss of $140 million or $0.59 per common share. These results include a $365 million loss from the Loss Portfolio Transfer. We recognized $344 million of this loss in continuing operations and $21 million in discontinued operations. Before the impact of the transaction, third quarter net operating income was $186 million or $0.62 per common share, as compared to $331 million or $1.11 per common share in the third quarter 2009. On the same basis, third quarter net income was $225 million or $0.77 per common share compared with $263 million or $0.86 per common share in 2009.

In our core Property & Casualty operations, the third quarter combined ratio was 97.9%, compared with 101% in the third quarter of 2009. The difference is primarily due to 6.5 points of favorable prior year loss development compared with 3.3 points in last year's third quarter. Consistent with previous quarters, accident years 2004 through 2007, continue to develop favorably. Craig will provide more detail in his remarks. In addition to the favorable development, the combined ratio included 0.8 points of catastrophe losses compared with 1.5 points in the third quarter last year.

Before development and catastrophes, the third quarter combined ratio was 103.6%, compare with 102.8% in 2009. The accident year loss ratio before catastrophies was 70.3% in the third quarter as compared to 69.2% in the prior year period. Net written premiums decreased 1% as compared to an 8% decrease in the third quarter of 2009. Rates declined 1%, a slight deterioration from the prior year period. Renewal retention improved 1 point to 83%. The third quarter Property Casualty expense ratio improved slightly to 33% CNA Specialty continues to perform well, delivering a combined ratio of 88.5%, compared with 88.8% in the third quarter of 2009. These ratios benefited from favorable prior year loss development of 9.8 points and 5.5 points, respectively.

Catastrophe losses had a modest impact on the third quarter combined ratio this year and last year. Before catastrophes and development, specialties combined ratio was 98.2% compared with 94% in the third quarter of 2009. We have seen an increase in the frequency of employment practices, liability claims, which we believe is related to the weak economy. We also have seen an increase in severity in our Medical Technology business. Specialties accident year ex cat loss ratio was 67.5% in the third quarter as compared to 65% in the prior year period for the reasons I just stated. Specialty's net written premiums increased 2% in the quarter as compared to a 1% increase in the third quarter of 2009. Decreased exposures continue to pressure our professional and management liability book, particularly architects and engineers and realtors, which continue to be challenged by the weak economy.

We are pleased with our growth in private Company D&O, professional liability program business and community banks. In addition, our renewal retention increased 1.86%. As for renewal rates, our rates decreased approximately 2% as compared to a 1% decrease in the prior year period. Virtually all segments in the specialty market are extremely competitive, particularly healthcare and public company D&O. Specialty continues to generate a healthy flow of business. The ratio of new-to-loss business was 1.3 to 1. Quarter-over-quarter submissions increased 30%, driven primarily by growth in our private company management liability and professional liability businesses. New business across the segment increased 5%.

Turning to CNA Commercial, the third quarter combined ratio was 105.7% compared with 110.6% in the prior year period. These ratios benefited from favorable prior year loss development of 3.9 points and 1.5 points, respectively. Catastrophe losses had a relatively light impact on our third quarter combined ratio, 1.4 points this year, compared to 2.4 points last year. Before catastrophes and development, the combined ratio was 108.2% compared with 109.7% in the third quarter of 2009. The difference was largely driven by expenses for industry assessments we recognized in last year's third quarter. Commercial's accident year ex cap loss ratio was 72.7% in the third quarter as compared to 72.5% in the prior year period.

Commercial's net written premiums decreased 3% in the quarter as compared to a 14% decrease in the third quarter of last year. Excluding the Argentina operation, which we sold in June of this year, third quarter net written premiums were essentially flat. Across the commercial segment, renewal rates were generally flat. However, we continue to get rate in our small and middle-market business. We are seeing improved retention and increased new business in small. We are also seeing a shift in our middle market new business to those segments we view as more desirable including manufacturing and technology. Renewal retention is improving as well, up 1 point to 81%.

On the other hand, we continue to feel the impact of decreased exposures and return premiums, which reduced our third quarter net written premium by 4% in 2010 and 5% in 2009. Third quarter submissions in commercial were up 9%, which we believe is a reflection of our broadened underwriting appetite. We continue to exercise underwriting discipline as evidenced by a 2 point reduction to 24% in our written to quoted ratio. With that, I will turn it over to Craig. Craig?

Thanks, Tom. Good morning, everyone. The third quarter highlights include a net operating loss of $158 million and a net loss of $140 million. Both were driven by the impact of the Loss Portfolio Transfer transaction with National Indemnity Company. Excluding the Loss Portfolio Transfer transaction impact, net operating income was $186 million and operating return on equity of just under 7%. On a year-to-date basis, our operating return on equity is approximately 8%. Again, excluding the impact of the NICO transaction. Our Property & Casualty business contribution to operating earnings remained at a steady respectable level given the weak economy, competitive insurance market, and low interest rate investment environment. Net operating income from our P&C operations was $252 million this quarter and $769 million year-to-date. Net income was $225 million in the third quarter, reflecting another quarter of modest realized investment gains and a relatively low level of impairment losses.

Our balance sheet and financial flexibility continue to improve. Book value per common share increased 6% from the end of the second quarter to $42.76, driven by further improvement in the market value of our investment portfolio. Our investment portfolio's pre-tax net unrealized gain was approximately $2.3 billion at September 30, 2010, reflecting a market value improvement of $1.2 billion during the third quarter. This portfolio valuation improvement was driven by lower risk-free rates and continued credit spread tightening. We all recognize that this interest rate environment will inevitably change and that we are unlikely to harvest a meaningful amount of these unrealized gains, given current reinvestment prospects. Just as we did not get overly excited about the portfolio's unrealized loss position during 2008 and 2009, neither are we overly excited about today's unrealized gain position.

I would point you to our book value per share excluding AOCI, which is largely made up of our net unrealized gains. Our common share will be equity excluding other comprehensive income at quarter-end was $10.3 billion or $38.38 per share. This number represents an increase of 6% year-over-year and this is the number that we anchor on in all our capital planning discussions. Of course, we are also very attentive to our regulatory capital. Our statutory surplus at quarter-end was $9.6 billion, an increase of 7% year-over-year. We were pleased to close the Loss Portfolio Transfer transaction with National Indemnity during the third quarter, which we discussed with you in our second quarter call.

As we said during that call, we believe that this transaction marked a significant milestone for CNA and our ongoing effort to enhance our earnings consistency and financial stability. And that it also truly differentiated CNA from most of our competitors. We successfully completed a $500 million debt offering in August at attractive terms and used the proceeds to redeem $500 million of outstanding 2008 senior preferred stock held by Loews. These transactions enhanced our annualized earnings available to common shareholders by approximately $30 million. Last week, we filed for approval with the State of Illinois for Continental Casualty Company, our primary operating Company, to pay down $500 million of the $1 billion surplus note purchased by CNA Financial from Continental Casualty in 2008.

We intend to use the proceeds of the surplus note repayment to redeem the remaining $500 million of preferred stock still held by Loews. We would hope to complete this transaction by the end of 2010. After this anticipated final repayment of the senior preferred stock, which follows a series of refinancings and repayments over the last year, we will have added $90 million of annualized earnings to CNA's income available to common shareholders. In addition, during the third quarter, we repaid the final $100 million that had been drawn down under our bank credit facility. This $250 credit facility is now fully replenished and is available to us for any potential future need.

As you heard from Tom, our net operating income this quarter was helped by $95 million of pre-tax favorable prior year reserve development in our core Property & Casualty operations, which lowered our calender year loss ratio by over 6 points. This was our 15th consecutive quarter of favorable prior year reserve development. We recognized favorable development in our European book driven by first party property lines and accident year 2009. We also recognized continued favorable development in our professional liability and our surety line, both from accident years 2007 and prior. The reserve releases were driven by better than expected frequency as well as settlements on large claims. These releases were partially offset by unfavorable development in our medical technology liability and employment practices liability coverages in accident years 2008 and 2009. All of these reserving decisions were based on the analyses completed in the third quarter.

Net operating income in the third quarter included pre-tax and net investment income of $581 million, a decrease of 12% from the prior year period. The unfavorable year-over-year comparison was driven by the exceptional returns from limited partnership investments during the third quarter of 2009. Investment income other than from limited partnerships was flat at $513 million pre-tax. Our LP investments produced third quarter pre-tax income of $68 million, as compared to $145 million of income during the third quarter of 2009. Our LP investments are performing well and continue to produce higher cumulative returns with less volatility than equities.

Third quarter and year-to-date rates of returns for our LPs were 3.2% and 7.1%, respectively. These returns compared to 11.3% and 3.9% for the S&P 500 Total Return Index for the same periods. Third quarter results included after-tax realized gains of $40 million. Those results include $29 million of after-tax impairment losses. Almost all of the impairment losses reflect intent to sell decisions that are part of our ongoing portfolio management. We made very few changes to our investment portfolio of asset allocation during the quarter. We continue to be a buyer of investment-grade corporate and taxable municipal securities. During the quarter, we purchased approximately $1.1 billion in these asset classes. Our cash and short-term position stood at $2.2 billion at quarter-end as compared to $3.1 billion at the end of the second quarter of 2010. This change reflects the approximate $2 billion premium pay to NICO in a Loss Portfolio Transfer transaction and our continued healthy operating and investment cash flow.

Overall, our investment decisions continue to reflect our sustained emphasis on diversification, quality, and liquidity as well as the importance of ensuring that our portfolio is in line with our business objectives. The average credit quality of the fixed maturity portfolio remained, A, unchanged from the prior quarter. We continue to segment our portfolio to facilitate our asset liability management discipline. The assets we support are long duration, life-like liabilities at an effective duration of 11.2 years at quarter-end, very similar to the second quarter and in line with portfolio targets. The effective duration of the assets which support our traditional P&C liabilities was extended to 4.6 years at quarter's end, up from 4.2 years at the end of 2010 second quarter. This lengthening was driven by the NICO transaction premium payment and resulting reduction in our short-term position.

While this is above our portfolio target and estimated liability durations, we have chosen not to immediately rebalance this segment of the portfolio, given the operating earnings impact. You should expect to see us shorten this portfolio duration gradually over the next year to year-and-a-half towards its longer-term target. As I said earlier, our capital position and balance sheet remain very strong. We continue to maintain a very conservative capital structure and to exhibit a strong liquidity profile. The negative operating cash flow in the third quarter reflects the use of cash for the premium pay for the Loss Portfolio Transfer. On a normalized basis, net cash generated by our business operations was approximately $300 million this quarter. This number also excludes the effects of trading portfolio activity and a large tax refund.

Additionally, during the quarter, we received nearly $900 million of principal cash repayments through paydowns, bond calls, and maturities. All of our capital adequacy metrics remain well above our target levels, even after taking into account the Loss Portfolio Transfer and the anticipated paydown of the surplus note and preferred stock redemption. We have more than $900 million of dividend capacity in our primary insurance subsidiary. Our financial flexibility is further enhanced by the approximately $224 million of cash and short-term investments held at the holding Company level, which remains at 2 times our net corporate obligations. As previously mentioned, the full $250 million of our credit facility is also available to us.

Our Life & Group Non-Core segment produced a third quarter net operating loss of $55 million, compared with net operating income of $51 million in 2009. The period-over-period comparison was affected by a $61 million after-tax gain in 2009 arising from a litigation settlement. The 2010 results include a $39 million increase to pay at annuity benefit reserves. The corporate segment produced a third quarter net operating loss of $355 million in 2010, that's compared to net operating income of $9 million in 2009. The change was driven by the after-tax net loss from the Loss Portfolio Transfer.

Before turning it back to Tom, I would like to provide some additional information about our proposal to acquire the public minority of CNA Surety. We view this deal as the natural next step for CNA and one that offers compelling benefits for the shareholders of both Companies. Our proposal of $22 per share provides CNA Surety's minority shareholders the opportunity to monetize their investment at a substantial premium to the current and historical stock price. Our proposal represents a 14% premium to CNA Surety's last closing price and a 13% premium to its recent 52-week high. Our proposal also represents a 24% premium over Surety's closing stock price one month ago and a 31% premium over its closing stock price three months ago. $22 per share is 1.17 times multiple to CNA Surety's September 30, tangible book value per share excluding net unrealized gains.

We are moving forward with this proposal transaction -- with this proposed transaction at this time, recognizing that CNA Surety hit a new 52-week high last week because we believe this is the right strategic move for both CNA and CNA Surety. CNA has the balance sheet strength and financial flexibility to do this deal and repay the final $500 million of Loews preferred stock, all with internally available funds. The proposed transaction allows us to invest in a business that we know well and at our $22 proposed price, is expected to be modestly accretive to earnings and have only a slight impact on our capital position. We believe that CNA Surety will be better positioned to deliver a consistent underwriting profitability and compete with the large diversified commercial alliance companies that it faces in the surety market over the long-term as a wholly-owned subsidiary of CNA.

Assuming this transaction is completed, we expect that CNA Surety will continue to run its business in a manner that is generally consistent with its current operations. Continuity is very important to us, and we will work hard to make sure this proposal does not interrupt the business operations of CNA Surety. We intend to pursue the proposed transaction and seek to negotiate an agreement with the special committee of CNA Surety's Board of Directors. We have just initiated this transaction and we will not be able to share any information beyond what Tom and I have already outlined on this call. Overall, we have had an active quarter and year. We are confident that the actions we have taken will help to make CNA a better Company over the long term and remain excited about our future prospects. With that, I'll turn it back to Tom.

Thanks, Craig. All in all, the third quarter was marked by respectable operating results and further improvement in our capital position. The highlights were -- before the Loss Portfolio Transfer transaction, net operating income was $186 million or $0.62 per share, and net income was $225 million or $0.77 per share, a combined ratio of 97.9% in our core property and casualty operations. Positive growth in specialty and improving growth in commercial. Solid investment results with $581 million of pre-tax net investment income and approximately $1.2 billion improvement in our unrealized position. Improvement in our capital position reflected in a 19% increase in book value per common share to $42.76 from year-end 2009. Completion of the Loss Portfolio Transfer transaction that substantially eliminates our exposure to Legacy Asbestos and Pollution risks.

A $500 million debt issuance and redemption of senior preferred stock that enhances our annualized earnings by approximately $30 million. We intend to regain the balance of the preferred stock in the fourth quarter. In addition to these third quarter highlights, we announced today a proposal to acquire the public minority of CNA Surety. Before we take your questions, I'd like to say a few words about the market and our strategy going forward. We continue to believe that the competitive environment will persist into 2011. At the same time, we believe that growth rate and exposure and retention will stabilize and that calendar year loss ratios for the industry will deteriorate due to less favorable releases from older accident years. For us at CNA, we will continue to focus on improving our commercial results, protecting our margins in specialty and focusing on opportunistic growth. With that, we will take your questions.

Thank you. (Operator Instructions) We'll take our first question from Jay Cohen with Bank of America Merrill Lynch.

Thank you. A couple of questions. First is, I noticed that the statutory surplus was down in the quarter, I assume there was some sort of dividend to the holding Company. Can you clarify that?

That was the impact of the Loss Portfolio transaction, Jay, and the loss from that transaction.

Okay. I see, okay. That came out of the surplus. Second thing, the cash and short-term position in the -- looking specifically at the P&C portfolio, came down and as you alluded to, that also was due to the LPT deal. Would you still characterize your cash in short-term position as sizable, above average, or is it more normal now?

Well, it's about 5% of the portfolio. I don't know what I would say normal but that's still -- pretty sizable.

Yes. This is Richard Scott. I would note that given our desire to bring our P&C portfolio duration into line with our longer-term goals, I personally believe that a barbelled approach to hitting that duration target makes a lot of sense, given the steepness of the curve today.

So that cash position is unlikely to change too much in the nearer term?

That's correct, Jay.

Okay. Could you -- and last question, could you talk about this -- I guess DAC-related charge and the run-up, is exactly what gave rise to that?

Well, it's -- really more -- driven by poor mortality and this really was a book of business that we had in the -- was written out of our Bermuda subsidiary. Relatively small but it's just a -- looking at mortality. And looking at what we thought is a more reasonable expectation mortality for the book, we unlocked those reserves and increased them. Also driven by the interest rate environment going forward.

Okay. That's helpful. Thank you.

Our next question comes from Bob Glasspiegel with Langen McAlenney.

Good morning, everyone. Expense ratio showed an improvement over several quarter trends. Is anything driving it or were there some one-timers in there?

The only thing really driving it over the quarter when you look at last year was -- as Tom said in the call, we had a--.

Looking at sequentially. I'm sorry.

Well, sequentially, it's really our spending is pretty flat. Sequentially, if you look at it -- and we've had some stabilizing of the earned premium and we've also had some -- so we've had really help on the top line. And controlling on the expenses on the bottom and you're starting to see the impact of some of the other actions we have taken to reduce and realign expenses from staff areas.

Okay. And help me a little bit with interest -- you gave a sort of savings year-over-year with the preferred coming down on the 10%. I can figure out what's going away. Give me a little help on interest expense in 2011 pro forma versus 2010?

Well, I think if you -- you know what we have done relative to refinancings, right? In the third quarter that coupon was 5.875% so -- and I think you can see in the other expenses in the corporate segment about what our interest expense is on a quarterly basis, which is a little over $40 million a quarter.

How much of 5.875%? What was the size of that one?

$500 million.

Okay. And surplus transaction, is there any interest included in that? How does that work?

Well, obviously there is an opportunity cost of that $500 million on investment. So what we'd use is about 2.5% after tax.

Okay. Unfortunately, I've got enough experience to remember your recent unsuccessful bid on CNA Surety before, which was March 2010. Can you remind me what the relationship to book that that rejected offer was?

I don't recall exactly what that was, Bob. And as I said we've -- given we just initiated this transaction, we're really not in a place to take question about it.

Okay, I thought that was a historical number, but I can understand--?

I'm sure we can find it for you later and help you if you call back, but--.

Okay. Appreciate it. Thank you very much.

You're welcome.

(Operator Instructions) Next we'll hear from Amit Kumar with Macquarie.

Thanks and good morning. I guess just going back to the charge in the life and the non-core book, just so that I understand this clearly, I thought this was an increase in the reserves. It was not a DAC-unlocking -- this was a charge on the liability side. Can you just walk us through those numbers one more time and if that -- is this just an increase in the future policy benefits?

Yes.

Okay, so there was no adjustment on DAC, right?

Correct, no. It was loss reserves.

Yes, that's what I thought. Maybe just staying on that topic, can you just tell us -- you sort of broadly touched that it was a change in interest rate and change in mortality rates. Maybe just expand on that a bit more, i.e., what is the sensitivity analysis you have done and if rates change 100 basis points, then what happens going forward?

This -- excuse me, Amit. We're going to have to maybe do a little bit of work on that as we sit here and think about it. But we looked at lower yield rates going forward. And this is a relatively small book of business. This is a $200 million of reserve so it's not going to be all that sensitive to changes.

Okay, maybe I can follow offline on this. Just moving on -- in terms of the CNA Surety deal, have you had any discussions with the ratings agencies on the deal as well as the paydown of the remainder of the preferreds?

No. We have had -- we have not had discussions with the rating agencies about the deal, and our expectation is about -- I don't think they would be surprised about our decisions around the preferred.

Okay, that's helpful. This is the final question, and I'll requeue. In your opening comments, you talked about the return premiums, rates are still flat. Previously, I think in Q2, rates were up 2%. They were up 1% in Q1, 2010, and in commercial segment. I'm listening to your commentary and then I'm sort of comparing it with another specialty player. They recently said, that in fact, for them, the trends had reversed and, in fact, all the premiums had become positive and I'm trying to reconcile the differences here. What exactly are you seeing what they may not be seeing?

Well, first of all, for us, when we speak of the return premiums, audit premiums, we're speaking about commercial lines. We're not talking about our specialty business. All right? I don't know who you're referring to, but when we talk about it, we're talking about it for our commercial lines business. If we look at exposure in the quarter, it was off about 0.7 of a point and the return premiums were in the area of 2 points, maybe a little bit slightly higher. So that's the composition of that number. But we're seeing exposure getting a little bit better and we continue to see RPs -- we believe we will continue to see RPs because the way this works, is you have to look at the particular policy year, the policy year has to end. You then go out and do the audit. You reconcile the numbers and then you return the premiums. So depending on the particular policy year we would believe we have two or three more quarters of potential RPs out there.

Got it. Very helpful. I have two more questions and I will requeue. Thanks.

(Operator Instructions)

Thank you very much.

And at this time, we will take a follow-up from Amit Kumar.

Good morning. Thanks.

Go ahead.

Very quickly, maybe I should have stayed connected -- in terms of your comments on growth in the community banks, I'm just curious what's the thought process behind that growth. All of us have recently seen news reports about FDIC going after these smaller banks to recover $1 billion. Maybe just give some more color as to what the thought process behind that growth in community banks is.

Number one, we like the segment. We think it's a good segment over time. And we appear to be doing pretty well in it. I would tell you relative to your question on the claims front, we do not currently appear to have any material exposure associated with the defective documentation of these real estate transactions. We have not received any notifications, so for us, at this point, it's benign at best. So we continue to underwrite these exposures closely but we like community banks and we think it's a good place to be over time.

Okay, that's helpful. This is the final question. In terms of your limited partnerships, can you remind very quickly what those buckets were -- I think half that was in a one-month lag and there was a meaningful hedge fund component. Can you just quickly remind us what those buckets and the limited partnerships are?

I'm sorry -- ask that one more time?

The segment hedge funds, then you have public fixed income, equity markets and limited partnerships. I'm just trying to recall -- how much of it is reported on a lag basis and then what is current?

87% is on one month or current basis so 13% is lagged. And about 8% is of the total is private equity and there is varied other real estate and other in there.

Okay. That's very helpful. Those are all my questions. Thanks.

You're welcome.

Next we'll hear from Michael Bunyaner with TLF Capital.

Yes, good morning.

Good morning.

One question to you, Tom -- last quarter you shared your thoughts about the cycle and the fact that we are in our seventh year. And that we should -- the terms and conditions were changing and therefore we should see at some point a change, especially as the losses were to develop. Can you be a little bit -- can you share a little bit more with us as you think about over the next two or three years as to what needs to happen for the pricing to begin to improve?

I think a couple of things. First of all, I'm not going to give you an exact date and time when the market will turn, but -- clearly, I think what we believe is that if you look at current accident year results for us and our competitors, we're well over 100 for the current accident year. If you look at the calendar year results, everybody is still releasing from older accident years and the ultimate effect is calendar year numbers are pretty good. I think what we're seeing is exposure, declines are improving which suggests to me that from an economic perspective, the economy is bottoming out so as we look at 2011 -- and I can't really say much beyond that, I think 2011 is kind of flat.

The real issue becomes how much companies have from a reserve redundancy perspective that they can release and as the calendar numbers inch up, and accident year numbers are over 100, you're going to get some firming of the market. A lot of people refer to the fact that it's a low investment environment but I don't think until you get the economy to improve, that people are going to be willing to pay more price for the product. There's still a lot of competition out there whether it be in specialty or commercial and I think what you have to do is see companies really start to show declines in underwriting income and when that happens, then you might see some hardening but I don't think it will take off like a rocket ship.

And if I heard you correctly -- in terms of the excess capital, it sounded like the insurance company level, you had about $900 million and the holding company had over $200 million. As you think about the cycle improvement, how much of that do you actually need to retain or think of as needed versus excess capital for the total business?

First, let's say -- we didn't characterize it as excess. That was just $900 million of dividend capacity available to us to upstream the holding company from the operating company. If we chose to and there was another $224 million of cash in holding company so we didn't give you -- and we haven't -- discussed before what we calculate as our excess capital position. All we've said -- and which we'd say again is that all the capital metrics that we look at, whether it's that surplus, GAAP capital, our own economic capital, the rating agency metrics, are all well above the current rating at the levels anticipating all these transactions we have taken.

Well, I guess what I'm trying to ask is, especially in light of the transaction with Berkshire Hathaway, you are clearly in a terrific position and what are you thinking in terms of what is required in terms of your mind for to write the new business when the cycle improves versus what you may not or may not need in terms of recapital as we go through the next three to five years, I guess?

Well, I think what we said the last time -- in the last second quarter call was the Berkshire transaction freed up $500 million.

Right.

And you can see we have acted on repaying that $500 million. And we haven't commented on disclosed any amount beyond that, that we intend to reduce the capital. So I understand what you're asking, but we haven't disclosed that and I'm not prepared to comment on it.

Thank you very much. Best of luck.

Thank you.

At this time, we have no further questions in the queue. I'll turn the conference back over to our speakers for any additional or closing remarks.

Okay, thank you very much. Have a good day.

Thank you, this does conclude our conference. We thank you all for your participation.