CNA Financial Corp (CNA) 2010 Q4 法說會逐字稿

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Good day and welcome to the CNA Financial Corporation fourth-quarter and full-year 2010 earnings conference call. Today's call 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. Good morning. Welcome to CNA's discussion of our fourth-quarter and full-year 2010 financial results. Our press release was issued earlier this morning. Hopefully you all have had an opportunity to review it, along with the financial supplement which can be found on the CNA website at www.CNA.com.

On the call this morning are Tom Motamed, our Chairman and Chief Executive Officer, and Craig Mense, our Chief Financial Officer. After Tom and Craig provide their remarks about the quarter, we will open it up for your 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-K and 10-Q on file with the SEC. In addition, the forward-looking statements speak only as of today, February 7, 2011. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. With respect to the references to non-GAAP measures, reconciliations 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. Thank you for joining us today. We are pleased to report our fourth-quarter and full-year results.

Along with our earnings, we announced today the resumption of our common stock dividend. I trust you have seen the announcement. We are proud of the progress we've made in restoring CNA's financial strength, producing sustained earnings, and delivering value to shareholders.

Turning to our financial results, fourth-quarter net operating income increased 65% to $326 million, or $1.18 per common share in 2010, as compared to $197 million or $0.63 per common share in 2009. Net income in the fourth quarter increased 23% to $302 million, or $1.09 per common share, as compared to $246 million or $0.81 per common share in 2009. CNA's fourth-quarter results reflect increased investment income and continued favorable prior-year development in our Property and Casualty operations.

For the full year, net operating income was $660 million, or $2.17 per common share. Net income was $690 million, or $2.28 per common share. The full-year results include a continuing operations loss of $344 million and a discontinued operation loss of $21 million from the Loss Portfolio Transfer we completed in the third quarter. Excluding the impact of this transaction, 2010 net operating income was $1 billion as compared to $982 million in 2009. On the same basis, net income was $1.1 billion compared with $419 million in 2009.

Our capital position continued to improve. Book value per share increased 13% in 2010 and statutory surplus increased 5%.

In our core Property and Casualty operations, we had an excellent fourth-quarter combined ratio of 89.6%, which included 14.6 points of favorable development. Craig will provide more detail on this in his remarks.

Before development and catastrophes, the fourth-quarter 2010 combined ratio improved from 102.8% -- or to 102.8% from 103.9%. The improvement was driven by the expense ratio which improved to 33.1% from 33.9%, primarily reflecting the favorable impact of recoveries on insurance receivables written off in prior periods.

The accident year loss ratio, excluding catastrophes, in the fourth quarter improved to 69.1% from 69.5% in the fourth quarter of 2009. Excluding the impact of the Argentine workers compensation operation we sold in June, fourth-quarter net written premiums increased 1%, while on the same basis fourth-quarter net written premiums decreased 6% in 2009.

Fourth-quarter renewal rates decreased less than 1 point in 2010 and 2009. Retention was steady at 82% in both periods. Exposures were flat in the fourth quarter versus a decrease of 0.9% in the fourth quarter of 2009.

For the full year, the 2010 Property and Casualty operations combined ratio improved more than 2 points to 94.8%, which equals our best in the past ten years. The 2010 ratio included 10.6 points of favorable prior-year development compared with 6.1 points in 2009. In addition, the 2010 combined ratio included 2 points of catastrophe losses compared with 1.4 points last year.

Before development and catastrophes, the full-year combined ratio was 103.4% in 2010 compared with 102.1% in 2009. The difference is primarily due to an uptick of 0.8 points in the expense ratio due to negative growth in our investment in underwriting and production staff. The 2010 expense ratio was 33.4% compared with 32.6% in 2009.

The 2010 accident year loss ratio before catastrophes was 69.6% as compared to 69.2% in 2009. Excluding the Argentine operation, net written premiums decreased 3% in 2010 as compared to a 6% decrease in 2009. Rates were essentially flat in 2010 versus a 1 point decrease in 2009. Overall, renewal retention remains steady at 82%; exposures decreased 0.3% compared with a 0.4% decrease in 2009.

CNA Specialty continues to perform well, delivering a fourth-quarter combined ratio of 80.2% in 2010 compared with 78.4% in 2009. These ratios include favorable prior-year loss development of 18.6 points and 17.1 points respectively. Before development in catastrophe losses, Specialty's fourth-quarter combined ratio was 98.5% compared with 95.4% last year.

Specialty's fourth-quarter accident year ex-cat loss ratio was 67.1% as compared to 64.8% in the prior-year period. For the year, the accident year ex-cat loss ratio was 66.6% versus 65% in 2009. Both the quarter and the year were affected by increased frequency in our employment practices liability portfolio and increased severity in our medical technology business.

Specialty's net written premiums increased 2% in the quarter as compared to a 2% decrease in the fourth quarter of 2009. Our renewal retention was 84% in the fourth quarter and 86% for the year. Renewal rates decreased approximately 2% in the fourth quarter. At the same time, exposures increased 1.6% in the fourth quarter and were flat for the year. Policy count was essentially flat for the quarter and the year.

The fourth-quarter ratio of new to lost business was 1.2-to-1. Quarter-over-quarter, submissions increased 21% and the hit ratio improved 1 point to 30%. New business increased 15% over last year's fourth quarter.

Turning to CNA Commercial, the fourth-quarter combined ratio was 97.4% compared to 103% in the prior-year period. These ratios included favorable prior-year loss development of 11.3 points and 8.6 points respectively.

Catastrophe losses added 2.3 points to the fourth-quarter combined ratio versus 1.1 point in the prior-year period. Before catastrophes and development, the commercial combined ratio improved to 106.4% from 110.5% in the fourth quarter of 2009.

Commercial's fourth-quarter accident year ex-cat loss ratio improved to 70.8% from 73.2% in 2009. The improvement includes a favorable re-estimation of the current accident year loss ratio in the first three quarters of 2010.

On a full-year basis, the 2010 accident year ex-cat loss ratio improved to 72.1% from 72.5% in 2009.

Excluding the Argentine operation, fourth-quarter net written premiums in Commercial were flat. This compares to a 9% decrease in the fourth quarter of 2009 on the same basis.

Renewal rates in Commercial increased 1 point in the fourth quarter and the year. This marks our fifth consecutive quarter of rate increases. Renewal retention was 80% in the fourth quarter, a decrease of 1 point from the prior year's fourth quarter. For the full year, retention was 79% versus 81% in 2009. Exposures declined 1.4% in the fourth quarter and 0.7% for the full year.

The return premium audits that reduced our premium volume in prior quarters appears to be moderating for most of our industry segments. Policy count increased 2.1% in the quarter and the year. Fourth-quarter submissions in Commercial were up 3% and the hit ratio remained constant at 25%. The new-to-lost business ratio was 0.9-to-1, reflecting our continued focus on achieving adequate rates on new business.

With that, I will turn it over to Craig.

Thanks Tom. Good morning everyone.

Fourth-quarter highlights include net operating income of $326 million and operating return on equity of 12.2%. As Tom referenced in his remarks, if you exclude the impact of the Loss Portfolio Transfer transaction with National Indemnity Company, which closed in the third quarter, on a full-year basis, our operating earnings in 2010 were $1 billion for an operating return on equity of 9.1%. Both the operating earnings and operating ROE in 2010 were relatively consistent with full-year 2009 results.

Our Property and Casualty business continued to make a steady, meaningful contribution to operating earnings -- $363 million for the quarter and $1.1 billion for the year. Fourth-quarter net income was $302 million, reflecting after-tax realized capital losses of $24 million. Modest gains on portfolio sales were more than offset by $46 million of after-tax impairment losses. As in previous periods, the impairments largely reflect intent-to-sell decisions that are part of our ongoing portfolio management.

Book value for common share decreased 5% from the end of the third quarter to $40.70 per share at year-end 2010, reflecting a decline in the market value of our investment portfolio, driven by higher risk-free interest rates. Our investment portfolio's pretax net unrealized gain was approximately $1.2 billion at December 31, 2010, a decline from $2.3 billion at September 30, 2010.

As I said during last quarter's call, we are not concerned by quarter-over-quarter changes in our investment portfolio's unrealized gain or loss position driven by changes in the interest rate environment.

I would point you instead to two other metrics that are better indications of our capital strength. Our common shareholders equity, excluding other comprehensive income, was $10.6 billion, or $39.49 per common share, at December 31, 2010, up 3% from the end of this year's third quarter and 6% from year-end 2009.

Our statutory surplus increased to $9.8 billion at December 31, 2010, a 5% increase over the prior year and even after repaying $500 million of the original $1 billion surplus note. We also now have approximately $1 billion of dividend capacity in our primary insurance operating subsidiary. Our capital adequacy metrics remain well above our target levels and reflected consistent improvement over the course of 2010. Both the strength of the balance sheet and our financial flexibility continue to improve.

2010 was a year during which we made significant strides to optimize our capital structure and improve our financials stability and earnings outlook. During 2010, we sold our Argentine work comp subsidiary at an attractive value, transferred our legacy asbestos and environmental pollution liability to National Indemnity, and fully redeemed the outstanding shares of senior preferred stock purchased by Loews in 2008. The final repayment of $500 million was completed in the fourth quarter. This redemption of the preferred and related refinancings over the past five quarters improved our annualized earnings available to common shareholders by $90 million and also eliminated the restriction on paying common shareholder dividends. All of these transactions were made with an eye towards simplifying and strengthening our company. We were very pleased to announce the resumption of our quarterly common shareholder dividend this morning at $0.10 per share.

As you heard from Tom, our fourth-quarter net operating income was helped by $222 million of pretax favorable prior-year reserve development in our core Property and Casualty operations, which lowered our calendar-year loss ratio for the quarter by more than 14 points. We now have had four consecutive years of favorable prior-year reserve development.

The major drivers of favorable development in the fourth quarter were as follows. We recognized favorable development in our Commercial segment property line from accident years 2008 and 2009, primarily related to an improvement in claim severity. We also recognized favorable development in our Commercial segment general liability and umbrella line for accident years 2006 and prior, due to improved claim outcomes. Specialty segment recognized favorable medical professional liability development in accident years 2006 and prior due to lower claims frequency. Also in Specialty, we took favorable development in Surety in accident years 2006 through 2008. All of these reserving decisions were based on the analyses completed in the fourth quarter.

Net operating income during the fourth quarter included pretax net investment income of $624 million, an increase of 10% from the prior-year period. The increase was driven by our Limited Partnership investments, which had a very strong quarter. Our LP investments produced fourth-quarter pretax income of $113 million as compared to $75 million of income during the fourth quarter 2009. Our LP investments continue to perform well. Fourth-quarter and full-year rates of return for our LPs were 5.2% and 12.7% respectively.

Investment income other than from Limited Partnerships increased 4% to $511 million pretax in 2010, reflecting our shift from lower-yielding short-term and tax-exempt investments to higher-yielding taxable fixed-maturity securities over the course of 2010.

Our purchases in the fourth quarter were centered in taxable municipal and agency mortgage-backed securities. We had net purchases of approximately $1.5 billion in these asset classes.

During the quarter, we reduced our holdings of tax--exempt municipals and corporate obligations. Our overall position in municipal bonds, both taxable and tax-exempt, continues to be modest and represents 19% of the investment portfolio.

Our Muni portfolio is well-diversified. These securities were in a net unrealized loss position of about 3% at year-end.

Our cash and short-term position stood at $2.3 billion at year-end, up slightly from the end of the third quarter. Overall, our investment decisions reflect our sustained emphasis on diversification, quality and liquidity, as well as the importance of alignment between our portfolio and our business objectives. The average credit quality of the fixed maturity portfolio remained at A.

We continue to segment our portfolio to facilitate our asset liability management discipline. The assets which support our long-duration lifelike liabilities had an effective duration of 10.9 years at year-end, very similar to the third quarter and in line with portfolio targets. The effective duration of the assets which support our traditional P&C liabilities was 4.6 years at year-end, unchanged from the end of 2010's third quarter. We continue to maintain a very conservative capital structure and to exhibit a strong liquidity profile.

Our operating cash flow has continued to be robust. In the fourth quarter of 2010, we generated approximately $550 million of operating cash flow, excluding trading activity and after paying preferred dividends. Additionally during the quarter, we received approximately $825 million of cash principal repayments through paydowns, bond calls and maturities.

Our financial flexibility is further enhanced by the approximately $215 million of cash and short-term investments held at the holding company level, which at year-end amounted to 1.5 times our net annual corporate obligations. The full $250 million of our credit facility is also available to us.

Our Life and Group non-core segment produced a fourth-quarter net operating loss of $15 million, compared with a loss of $19 million in 2009. Corporate segment produced a fourth-quarter net operating loss of $22 million in 2010 as compared to a loss of $97 million in 2009. The favorable comparison is driven largely by the $155 million pretax reserve charge for asbestos and environmental pollution taken in last year's fourth quarter, as well as lower operating and claim expenses in this year's fourth quarter. Partially offsetting these favorable items were decreased net investment income and higher interest expense.

On a separate topic, as all of you have now seen, the special committee of CNA Surety's Board of Directors responded last Friday to our proposal to acquire the surety shares that we do not currently own. We are disappointed that the specialty committee has informed us that it does not support our proposal. At this time, we are evaluating the surety response and considering our options. We will ultimately be guided by what we believe is in the best interest of our shareholders. We will not be able to share any additional information beyond what I just outlined on this call.

With that, I'll turn it back to Tom.

Thank you Craig.

All in all, the fourth quarter and full year were marked by continued progress on improving our operational and financial results. The highlights were a 65% increase in fourth-quarter net operating income to $326 million, or an operating return on equity of 12.2%; full-year net operating income and net income of $1 billion and $1.1 billion respectively, before the impact of the loss portfolio transfer; a fourth-quarter combined ratio of 89.6% in our corporate and casualty operations. At 94.8%, our full-year combined ratio equaled our best in ten years; favorable prior-year development for the fourth straight year; positive growth in Specialty, and improving growth trends in Commercial; accident year improvement in the Commercial segment driven by re-underwriting and five consecutive quarters of rate increases; improvement in our capital position reflected in a 13% increase in book value per common share from year-end 2009; sale of our Argentine operation and redeployment of capital to our core businesses; completion of the Loss Portfolio Transfer transaction that effectively eliminated our exposure to legacy asbestos and pollution liability risks; redemption of senior preferred stock over the past five quarters, which increased annualized earnings available to common shareholders by approximately $90 million; following this redemption, the resumption of the common stock dividend to our common stockholders.

In 2011, we will continue to focus on underwriting and pricing discipline while continuing to build a balance sheet.

Now we will take your questions.

(Operator Instructions). Jay Cohen, Bank of America Merrill Lynch.

Thank you. Maybe I'll start with two questions. First is this is more of a numbers question. You mentioned I think it in the Commercial business that there was some favorable development from the prior three quarters in 2010 in the fourth-quarter number. If you could give some quantification of that, that would be helpful.

It's Craig. That -- there's a little -- when you are comparing quarter-over-quarter like fourth quarter last year, we had a little bit of a -- you might remember we had a bit of an increase in the full year last year. So this year's impact is worth about 0.5 point.

Okay. That's helpful. The other question -- for the full year in the Commercial segment, your underlying accident-year loss ratio improved. Granted you've had some favorable development -- excuse me, some price increases which would've helped a bit. But I guess the bigger-picture question is what exactly is driving that? As you speak to that, can you talk to the claims environment that you're seeing?

It's Tom. Good morning. I think, number one, we have spent the last two years re-underwriting the book, re-profiling the book, going after segments which we think have better loss ratios. So, I think, from an underwriting strategy standpoint, we are trying to change our book of business in Commercial. So I would say that would be one.

The second thing would be new arising activity in the Commercial lines are down in every line of business with the exception of Marine. Average paid would also be going down in every line of business with the exception of Property, where we have had several large losses in 2010, so less frequency, lower claim payments on paid claims as well as a re-profiling filing of the book, as well as improvement on the rate side. The other thing would be we are seeing exposure improving as well, not equally in every line of business, but some are doing better than others.

Does the exposure change help you from a margin standpoint? I assume exposure change means more risk as well.

Yes, that's exactly right. But when you get more exposure, you also get more money. So as the exposure goes up or improves, you're getting more dollars for that. As long as the quality of the risk is good, that's a good deal. If the quality of the risk is bad, it's a bad deal.

Got it. Then I'm going to sneak in one more question.

Just let me add, rate is what improves your margin.

Then the last question on the dividend, can you talk about the Board's decision to come up with the $0.10 a quarter? What was behind that?

It's Craig. It's just the thinking really was that was appropriate at this time, given the earnings outlook. We look at the yield and we look at the payout ratio of the earnings. Obviously, we are encouraged by the strength of the balance sheet.

In fact, it was -- happened quicker than I expected, so I don't mean to criticize. I want to see what the thinking was. The last time you initiated the dividend, I think it was '07. Within a couple of quarters, you were able to raise that dividend by I think it was 50%, to my recollection. What would have to happen for the Board to consider raising the dividend in a similar fashion to what they did last time? Not necessarily the amount, but just in general a raise. What would have to happen?

I appreciate the question but we really can't comment on future actions like that.

Fair enough. Thank you.

Amit Kumar, Macquarie.

Congrats on the quarter. I guess, staying on that line of discussion, if you go back to the discussion on float, obviously Loews has had a meaningful portion since 1974. When you sort of look forward, is this something which you plan to revisit with Loews, or is this something which is completely at their discretion? Can you bring it up, saying that we've done A, B, C, our stock price has recovered but obviously the ownership is a challenge? How would those discussions sort of -- what needs to happen for those discussions to take place?

Well, I think the first thing is we can't comment on what Loews feels about CNA. But I would say, from our standpoint, we are focused on improving the operating results and our capital position. So that's our objective, that's what we are going to do, and that will be to the benefit of shareholders over time, whoever they may be.

Is this something which can you bring up, or is there some sort of -- some kind of a document which says that only they can bring up this discussion point?

Yes, we are not going to comment about that.

Okay. Moving on to the Life book, and we haven't discussed this in detail for some time, can you just refresh us what your view is on the run-off portion? I think you mentioned the duration is 10.1 years. Looking at the returns of book, are there other options available to you on this book which could perhaps get it off sooner than later?

We are always continuously looking at options for all of the run-off portions, Amit.

I think you can see that we've taken considerable actions to improve our capital position and operating results, and that's the responsibility of management. We will continue to look at that for all aspects of our business.

Okay. Just finally, going back to sort of the bigger discussion on capital management, you're writing it 0.6 times net premium to surplus. Assuming that the markets improve, the economy improves meaningfully, how high do you think you can go if things improve from here?

First of all, I think it's 0.57, not 0.6. Well, we think we have a lot of room, and we have spent the last two years re-profiling our business, improving our business, putting a lot of resources together, improving systems, metrics, and those types of things that you need to run a business. But as we said when I first arrived, the first objective is to improve our Commercial underwriting results and get back to be profitable year-over-year. We also said that we think we have a great Specialty business. The first thing we would see would be growing the Specialty business. You saw that happen in the fourth quarter. A quarter does not make a year, but we are optimistic that what we outlined two years ago will continue to move forward.

As far as how much, you can do the comparisons, but we have plenty of room to grow the business. I think, from our perspective, we believe we are putting everything in place to help us grow the business if the pricing is right in the future, but we are not going to write business just because we have a good premium-to-surplus ratio, or a low one. It will be about what are the good risks out there at the right price, in the right segments that we are interested in doing our business.

Then just one quick thing on investment income -- if I understand this correctly, the move, was that more of an asset sort of liability matching play, or are you seeing obviously great opportunities in the marketplace. I guess is that going to continue going forward, or do you think whatever opportunities you saw, you've already capitalized on that?

I'm sorry Amit. I think you're trying -- you're talking about the increase in the fixed maturity portfolio income?

Yes.

It's just, if you took a look back at the fourth quarter of '09, you might recall that we have almost $4 billion in cash and short-term, so we put a good amount of that to work. Our cash now stands a little over $2 billion, cash and short-term a little over $2 billion, and we shifted from tax exempt municipals where we sold about $2.7 billion of tax exempt and we have bought taxable munis of about $3.5 billion. So it's really the shift over the course of the year in those asset classes that have resulted in the increased income.

Got it. Thanks for the answers.

Dan Johnson, Citadel.

Great, thank you very much. Good morning. A question on Page 16 of the supplement, where you go through your sort of current accident year views. I just want to make sure I am reading this correctly. If we look in the Specialty box up top, is it saying that the gross accident-year loss ratio estimate for the 2009 year went from call it 65.6% up to 67.3%? First of all, is that the right way to read that?

That's correct.

And then can we talk a little bit about why that is the case?

Really the same reason that the accident year in '10 increased. It was a medical liability, large losses in Medical Liability segment, and a loss increase in the employment practices liability.

Just given where the --

Also I guess the other thing to add to that is obviously the impact of rate decreases over time.

I'm sorry. So I get why maybe that would move from year to year, but I thought this was what it looks like to me is we are re-estimating the --

Right, which is what I said at the beginning. It's Medical Liability losses ended up being worse than we thought, and the frequency of loss and employment practice liability increased.

On the Medical Liability, what sort of duration business is that typically?

It's fairly longer-term; I'd say medium to longer-term business.

Well, that leads nicely into the second question, which was maybe if you want to talk about, in your longer-tail businesses -- and I'm sorry if you touched on workers comp; I did not hear it -- what sort of trends you're seeing there and how you are picking those trends now versus, say, a year or two ago, please.

Could you restate the question?

Sure. What do you think about Medical Liability trends in workers comp now versus the way you've look at it over the prior couple of years?

Let's talk about workers comp. The pure premium trend is still fairly benign. However, we have seen a slight increase in medical paid loss severity. As I said earlier, new writings are down, which means frequency is down. So, we are seeing less claims and there is a slight increase in medical paid loss severity, but nothing out of the usual in workers comp.

Any other lines, longer-tail lines that have had notable moves beyond the Medical Liability line we just talked about?

Not in an adverse sense, only favorable sense.

Those are good too. Thank you very much.

Ron Bobman, Capital Returns.

Good morning. Thanks a lot. Tom, what additional areas of the Company I guess in the most material sense need improvement? What are you in the midst of initiating change and improvement, or what around the corner are you focused on sort of prospectively?

Do you have a particular area you want to talk about?

No, it's you're the expert and you're inside the tent. I'm just sort of -- you've made a lot of changes. You've hired a lot of people. You've made a lot of improvements. I'm just sort of wondering what lies ahead as far as change that you're either currently or will be focusing on to sort of continue the trend line?

I think the first thing is we can't lose sight of the need to execute the existing strategies and to improve the metrics in all of our businesses. So whether that's the accident-year loss ratio, whether that's growth, whether it's expense, we are focused on executing the strategies that we announced two years ago. So -- and that's a big part of the business. We're going to stay pretty close to the areas we've identified.

When I talk about underwriting segments, we are not going to stray from where we are. We probably have a few adjacencies that we will look at, but this is not about getting unfocused and getting big. This is getting focused and getting more profitable, then over time increasing the scale of the organization. So I think that would be my general comment.

We will continue to look at some of the other areas that are not in the P&C core area. We'll continue to look at those and see if we can improve our performance, but most of this bus is driven by core P&C. So, it's a question of improving that. We will continue to look for good people, and we are still able to attract people, so we are pretty optimistic on building a high-caliber team.

Thanks a lot, hope it continues. Best of luck.

Robert Glasspiegel, Langen McAlenney.

Good morning. I was wondering where buyback stands in the sort of capital management thought process. Do you have an authorization? If so, how much is it, and is that at all in your thought process today?

First -- and you'll see this in the K -- we do have a broad authorization from the Board to buy back. We don't -- but there's no numbers associated with it, so there is no program that we have. I think, more importantly, I think just be guided by the fact that, at this time, given the flow, we think returning money to all shareholders is more appropriate than reducing the float. So that's our current thinking.

Okay. So you thought dividend was better than buyback (inaudible) discount to book value.

Given the flow, we thought it was more appropriate to give money cash back to all shareholders.

Okay, because the last time around, you were buying back stock despite the float. The float is now a bigger consideration than it was then?

I don't think so. It's very marginally different.

Okay. I'm not sure I follow the answer, but I'll hit you off-line on that.

The second question -- Tom, I'm going to rephrase the [job] discussion I had with management. You're consistent with their thought process that exposure growth and rate decline in combination gives a favorable factor on the margin -- for margins, i.e. (inaudible) like exposure gross to --

Let me stop you right now. That's not what I said. What I said was improvement in rates improves margins, and the quality of the portfolio is the same. Right?

Right, I got that.

(multiple speakers) quality of the portfolio is the same or unchanged, and you get more rate, excluding some unusual activity, that will improve your margin.

If you get exposure growth, you will get more premium, but the premium is growing because the exposure is growing. So, the way we look at that is it is neutral. Yes, it will affect your premium number. Your premium number will go up if you have more -- if you have exposure growth, because you're collecting more premium, but that doesn't mean that improves your margin.

I agree. Let me rephrase the question.

I'm glad you agree.

Yes. Let me rephrase the question. In a world of rate declines, you would rather have exposure growth than flat exposures or you're neutral to it?

I am neutral.

Okay, because I thought now -- I'll have to reread the transcript -- I thought you said you were encouraged to see some exposure growth, but maybe I misunderstood that.

I never said I -- what was your word? -- happy to see.

Encouraged.

-- encouraged -- I would say this. I don't know that I said that, but what I would say is what exposure growth signals is that there is some economic improvement happening out there. Payrolls are up. Maybe they are buying more buildings, or improving their real estate holdings. Their sales may be up. So what that suggests is -- and I will refer you back to older conference calls that we've had where I said, until the economy improves, it will be harder -- it's hard to get rate.

So what I would tell you now, just so we're all clear, is if exposure improves, it's signaling the economy is getting better, which then gives us the opportunity to hopefully get more rate because companies are doing better; their sales are up; hopefully their profits are up, etc., etc. So exposure for us is just an indicator of what's happening.

The point is we are getting rate in Commercial. We have been getting rate for the past few quarters, and that's what we are pushing; we are pushing rate. We cannot control exposure. That's a question of what the sales are; that's a question of what payrolls are; that's a question of they buy more buildings. But what we can control is rate. Rate ultimately affects margin, and if exposure improves, that tells me the economy is improving, which is a good harbinger for the industry going forward.

Some very important clarifications, and now I understand better what your message was, so I appreciate that. One last follow-up -- inflation, worried about it? Not worried about it? Does that change -- if it did happen, would that change -- if you thought inflation was going to happen, would you be more aggressive cutting back exposures in units?

I think you've got two questions. You've got the investment side. I'll let Craig handle that. But you know, on the underwriting side, the actuaries are always projecting forward, looking forward. So when they look at inflation or potential inflation, they are building that into the accident-year picks. So from that standpoint, they are always looking at it.

As to as respect to CNA, the good news for us is new arising activity other than in Marine is down, so less frequency. Typically, when you have more frequency or increasing frequency, you ultimately get more severity. So, we like the fact that frequency is tailing down. That means we have less claims. Therefore, inflation has less of an impact on those claims relative to the total.

Maybe, Craig, you want to comment on inflation relative to the portfolio, etc.

Yes, as far as the investment portfolio, a bit of a tick-up in rates would be something that would be welcome. But we are in still pretty significant unrealized gain position, but as I've said (inaudible) last call we don't expect to harvest much of those gains. So an ability to invest at a little higher rate would be a welcome thing.

Thank you very much. I got a bonus answer to a question I wasn't asking, but wanted as well. Thank you very much.

Jay Cohen.

Two questions, I'll just state them and let you guys answer. The first is can you talk about your outlook for pricing for 2011?

Secondly, I guess for Craig, on the Life and Group run-off business, can you talk about a generic transaction that you could potentially do that would eliminate that run-off business? Obviously, no numbers, but just generically what kind of transaction could you engage in to address that business? Thank you.

It's Tom. I'll go first and then turn it to Craig. Let's be clear. When you talk of pricing, pricing is rate and exposure. So, I'm going to break it in pieces. As I said on the call, we are seeing some improvement in the exposure area, and I think many of the other companies have commented on that. AS I just said, I believe that there are signs out there that exposure is improving. I kind of put that in the bucket of, okay, the economy is stabilizing first, and it needs to stabilize before it grows. So that's my answer on exposure.

On rate, we continue to push rate. We have, in Commercial, gotten some rate, and we will continue to do that. What I would tell you is, depending on the area of Commercial, we've gotten low single-digit rates. In some areas it's still negative, but overall we have been positive on rate in Commercial. We believe, in Specialty, we can push rates in certain areas as well, but we are not going to erode margins by cutting rates. So exposure, you've heard that answer. Rate, you've heard that answer. Then you can figure out, if you put them both together, that's good, relative to pricing.

It was really the rate I was concerned about -- I was asking about. Thank you.

As far as generic, really I don't have any easy answer for you to that. There isn't any kind of simple generic transaction. I think just be mindful of that business is -- it's about $11 billion of reserves; about $2.7 billion of those reserves are in the Life company. Those mainly benefit settlement payout annuities, and the remainder of those reserves are long-term care reserves. Those are in the Casualty company, were written in the Casualty company. So -- but beyond that, I don't have any particular ideas or anything I could share with you.

Is it fair to say that the existence of these run-off businesses hurts your ROE?

Yes, absolutely fair to say.

Okay, thanks.

Drew Figdor, TIG Advisors.

Thank you for taking my question. I had a question related to your CNA Surety. I wanted to understand why you didn't allow them to pay their excess capital in forms of dividend or letting them do some acquisitions since they paid out some huge amount of excess capital.

As I said in my remarks on the call, we are not prepared to share any information beyond the remarks I'd said in the call about CNA Surety.

All right. What can we expect in the resolution on this deal?

We have no comment.

Thank you very much.

There are no further questions.

Thank you very much. Thank you all for joining the call today.

That does conclude our conference for today. We thank you for your participation. You may now disconnect.