CNA Financial Corp (CNA) 2013 Q3 法說會逐字稿

Good day and welcome to the CNA Financial Corporation third quarter-2013 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to James Anderson. Please go ahead.

Thank you, Jessica. Good morning and welcome to CNA's discussion of our 2013 third-quarter financial results. By now, hopefully all of you have seen our earnings release, financial supplement, and presentation slides. If not, you may access these documents on our website, www.CNA.com, under the Investor Relations menu.

With us on this morning's call are Tom Motamed, our Chairman and Chief Executive Officer, and Craig Mense, our Chief Financial Officer. Following Tom's and Craig's remarks about our quarterly results, we will open it up for your questions.

Before turning it over to Tom, 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, Monday, October 28, 2013. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

Regarding 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 in the financial supplements.

This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website.

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

Thank you James. Good morning, everyone, and thank you for joining us. I am pleased to report that the trend of consistently improving financial performance continued through the third quarter.

Last quarter, I talked about our margin improvement, our disciplined underwriting, pricing and expense management actions, and our meaningful rate attainment. Each of these trends has continued in the third quarter, and the impact is evident in our bottom-line results.

CNA produced operating income of $269 million, an increase of 25% compared with the third quarter of 2012. Operating ROE was 9% for the quarter and 8% year to date. Our property and casualty calendar year combined ratio was 94% for the quarter, a 5.7 point improvement from the third quarter of 2012. We believe our concerted efforts to actively manage our property and casualty portfolio are clearly having a positive impact. Our underlying underwriting margin, as defined by the combined ratio excluding catastrophes and development, has now improved 3.8 points on a year-to-date basis as compared with full year 2012, reflecting material improvement in our loss ratios.

Our specialty business had an outstanding third quarter with a combined ratio of 85.3%. Excluding catastrophes and development, the combined ratio was 93.5%. Net written premium growth was 8%. Rate was 6% and retention remains constant at 85%. The commercial combined ratio was 103%, which included 2.9 points of catastrophes. Excluding catastrophes and development, the combined ratio was 99.3%. Third-quarter rate at 8% a strong. Revenue and retention is in line with our expectations as we continue to build and manage a profitable book of business with attractive growth prospects. Hardy reported net operating income of $12 million in the third quarter with a combined ratio of 85.1% and excluding catastrophes and development, it was 84.6%. Net written premiums grew 45% to $81 million.

I'm now going to turn the call over to Craig.

Thanks Tom. Good morning everyone. Before I get into the results, let me again remind you that presentation slides have been posted on our website to provide additional perspective on our financial and operating trends.

Third-quarter net operating income improved to $269 million, a 25% increase over the prior-year period, which produced an operating return on equity of 9%. Operating income available to common shareholders was $1 per share, up from $0.80 per share in the third quarter of 2012. Net income was $272 million, or $1.01 per share, which also compares favorably to the prior-year period.

We are encouraged by the improved underwriting margin generated across our core P&C businesses, reflecting targeted underwriting actions and continued strong rate increases. Our core P&C operations produced net operating income of $330 million in the third quarter, up 25% as compared with the prior-year period. Improved non-cat accident year underwriting results drove the increase.

Our third-quarter loss ratio for P&C operations was 60.9%, 4.5 points better than last year's third quarter. Excluding catastrophes and development, the loss ratio was 62.8%, a more than 3.5 point improvement over last year's third quarter. However, we believe that comparing year-to-date loss ratio performance with results for the full prior year is a better measure of our progress than a quarter-over-quarter comparison. On that basis, our 2013 year-to-date loss ratio, excluding cats and development of 64.7%, is now 3 points better than full year 2012.

Our third-quarter expense ratio was 32.9%, consistent with our second-quarter reported results and more than 1 point better than full year 2012. This reflects expense reductions, enhanced productivity, and the growth in earned premium. Improving our expense competitiveness continues to be a major focus for us.

Specialty's third-quarter net operating income improved to $187 million from $136 million in last year's third quarter with a combined ratio of 85.3%. Specialty's results benefited from just under 10 points of favorable development. Excluding catastrophes and development, specialty's loss ratio was 63.8%, more than 3.5 points lower than last year's third quarter. The year-to-date loss ratio, excluding catastrophes and development of 65.5%, is more than 2 points better than full year 2012. The improvement has been driven by both rate achievement and targeted underwriting actions that continue to refine the portfolio mix. The specialty expense ratio improved more than 1.5 points year-over-year to 29.4%.

Commercial's third-quarter net operating income increased to $131 million, up 5% from the prior-year period. Excluding catastrophes and development, the commercial loss ratio was 64.2%, an improvement of more than 3 points over last year's third quarter. On a year-to-date basis, the loss ratio, excluding catastrophes and development, was 66.3%, an improvement of over 2 points versus full-year 2012.

Rate of retention trends, as shown in the presentation slides on Page 9, reflect our disciplined risk selection and strong rate achievement. Commercial has attained 8% written rate this quarter following 9% in each of the first two quarters of 2013. Retention of 71% in the third quarter is reflective of targeted underwriting actions on portions of the portfolio. As shown in the slides on Page 10, these underwriting actions had a 4 point impact on retention in the quarter and a 3 point impact year-to-date.

Hardy made a meaningful contribution to earnings this quarter with a calendar year combined ratio of 85.1%. Hardy's combined ratio, excluding catastrophes and development, was just under 85%, reflecting superior loss ratios and an improving expense ratio.

Our non-core life and group segment produced a $35 million operating loss in the quarter primarily due to higher long-term care morbidity, modestly offset by the effect of rate increase actions and a favorable persistency in that business.

Our corporate segment reported a $26 million third-quarter net operating loss, unchanged from the prior-year period.

Our balance sheet continues to reflect CNA's financial strength and stability. Our capital adequacy metrics remain at or above our target levels and our liquidity profile remains very strong.

Book value per common share increased to $45.06 per share. Excluding accumulated other comprehensive income, book value was $44.64 per common share. Both measures are up just under 2% from the end of the second quarter.

Our investment portfolio's pretax net unrealized gain stood at approximately $2.2 billion at quarter end, a decrease of approximately $350 million from the end of the second quarter of 2013. Approximately $250 million of the decline's impact on book value was offset by a decrease in shadow reserves related to our life and group run-off business.

In addition, as I've noted before, while the increase in interest rates had an adverse impact on our unrealized gain position during the quarter, at current reinvestment rate levels, it should have a favorable effect on earnings going forward.

Our statutory surplus at quarter end was $10.4 billion, up nearly 2% from the end of the second quarter. This was after a $100 million dividend paid to the holding company during the third quarter. We continue to maintain significant dividend capacity at the insurance operating company level.

Cash and short-term investments at the holding company level were approximately $500 million at quarter end, well above our one-year annual net corporate obligations target. Our liquidity profile also includes a $250 million revolving credit facility as well as access to over $325 million of additional liquidity from Continental Casualty's recently completed membership with the Federal Home Loan Bank of Chicago.

In the third quarter, operating cash flow, excluding trading activity, was approximately $340 million. Cash principal repayments through pay downs, bond calls, and maturities were approximately $680 million.

Net investment income was $597 million pretax in the third quarter. Income from our fixed maturity securities was $504 million pretax, essentially unchanged from the prior-year period.

Income from Limited Partnership investments was $93 million, up 18% from this year's second quarter and 4% from the prior-year period. The third-quarter 2013 rate of return for our limited partnerships was 3.5%.

While our overall portfolio allocation did not change significantly in the third quarter, we did continue to take advantage of attractive yield opportunities in the tax-exempt municipal bond market. The investment grade corporate bond sector continues to represent the largest component of our invested assets.

The average credit quality of our fixed maturity portfolio remained at A. Fixed income assets, which support our long-duration lifelike liabilities, had an effective duration of 11.4 years at quarter end, a slight increase from the prior year -- for the prior-quarter end, and in line with portfolio targets. The effective duration of the fixed income assets which support our traditional P&C liabilities was 4.4 years at quarter end, up from 4.3 years at the end of the second quarter. Overall, our investment portfolio remains well diversified, liquid, high-quality, and aligned with our business objectives.

Before turning the call back to Tom, I did want encourage you to get involved in the current debate about insurance accounting standards and the changes proposed by both the Financial Accounting Standards Board and the International Accounting Standards Board. While there is some theoretical merit in several individual aspects of the proposed update, the practical effect, if adopted, would significantly increase complexity, reduce transparency, provide less meaningful financial reporting results, and make comparability between periods and peers exceedingly difficult, if not impossible. The proposed models would require significant changes in operational and actuarial processes that would be extremely costly to implement, difficult to maintain, and are not consistent with how we manage the business.

While comment letters were due last Friday, October 25, the FASB has indicated an openness to consider comments beyond that date. Your opinion as investors and analysts carries considerable weight with the members of these boards. If you don't take the time to express your opinion, others will decide for you. Tom?

Thank you Craig. Before we open it up for questions, I would like to close with some highlights. We are especially encouraged by our continued progress in our property-casualty portfolio, specifically growth in customer segments and products, reduced exposure in classes outside our appetite, and strong targeted rate achievement. Our 2013 year-to-date loss ratio, excluding cats and development of 64.7% is 3 points better than full-year 2012. Our expense ratio remained just under 33% in the third quarter, down from 34% at year-end 2012. We have solid investment results, an improved capital position, and our book value per share excluding AOCI has increased 4.7% since the beginning of the year. Lastly, we declared a quarterly dividend of $0.20.

With that, we'd be glad to take your questions.

(Operator Instructions). Amit Kumar, Macquarie Capital.

Thanks and good morning and congrats on another strong quarter. Just two quick questions. The first is on Hardy. Looking at Slide 11 of the slide deck, the loss ratio, excluding cats and development, is there a reason why that number moves around quite a bit from one quarter to another?

Just remember that it's -- they are property -- first part of property related, predominant I should say, company and underwriter, so those results are going to be affected by outcomes within the quarter, could be affected by changes in attritional results, could be affected by changes in some variability in large results, also obviously could be affected by a change in our stake in terms of the outcome. So, all those things are intertwined with the decisions made about the quarter.

I guess what I was trying to ask is it jumped from I think 36.5% to 40%, and I understand you said don't look at quarters, look at the year-to-date. But was there a reason for that increase to 40% in this quarter?

You look at the quarter before, it was 47.3% so it's down 7 points. And the quarter before that was 51% --

Yes.

-- so it's down 11.5 from that. So I wouldn't get hung up on changes in the quarter. It just means there was a slightly higher level of large losses in this quarter than there was in the third quarter of 2013. I still think that's a very attractive loss ratio to be producing.

Got it. And what sort of normalized number would you think ex-ing out all the noise?

I don't think you should be looking for a normalized number there, given that there's going to be some noise in those results.

Okay. That's fair enough. The only other question, and I'll stop and re-queue, is going back to the discussion I guess on the non-core assets. And can you talk a bit about the profitability metrics on the payout annuity business, and maybe also address there was recently a story which talked about that business, can you just expand on that a bit?

There's really no profitability metrics specifically that we have disclosed on pay-out annuity. You can see it was in the life group segment. You know that it's about -- that business has about $2.7 billion of reserves.

Yes.

You know the stat surplus that's associated with that is disclosed. But beyond that, we don't have any comment about the press reports.

Okay. I will stop here. Thanks.

Jay Cohen, Bank of America.

A couple of questions. This first one is the Federal Home Loan Bank news. What is the rationale behind that action?

Just simply gives us additional flexibility, capital management flexibility. So it's a relatively inexpensive source of liquidity.

And I assume it doesn't bring on any other regulatory burden?

No.

Okay. Second question, I guess if I look at commercial lines and specialty, the underlying accident year loss ratio improved quite nicely from the first three quarters of the year, and clearly you've been taking appropriate action to drive that. Is there anything that you can see unusual in the quarter, a low level of property losses, a low level of non-cat weather losses, that may have helped that number more than we would expect?

I think maybe it's just the math probably more than anything, so that's why we were pointing everybody to the year-to-date numbers, because as we have been -- as we said before, as we earn the rate in excess of trend, we have been recognizing that as we are kind of marching forward. So right now, overall, the loss ratio, P&C total is 3 points on a year-to-date basis better. But as we would then readjust that for the quarter, there's a three-quarter catch up. So essentially those loss ratios have just -- looked at for the quarter are about 2 points lower than the run rate is. So I think that's probably what's surprising you.

Got it. Thank you.

Josh Shanker, Deutsche Bank.

Good morning, everyone. I want to talk about normalized run rates for the expense ratio of the company, excluding Hardy, and then a normalized run rate expense ratio for Hardy, and how much time it will take you to get to those levels, in your mind?

I think the Hardy adds only about 0.5 points to the total company's expense ratio. So --

But it skews things. It's easier to talk about ex-Hardy I guess. That's my thinking. But go ahead.

So it's 0.5 point lower, ex-Hardy. Hardy is 44% you say is come down considerably over the course of the year. And that is the normalized today. Although I would tell you Hardy management has adjusted over time the target would be something closer to 40%, which would be in line with Lloyd's peers. But that will take us some time to get there.

A year, two years?

That sounds reasonable enough.

Okay. And for the rest of the company, I guess on a trailing 12-months basis, you're around 32.6%. The quarter was a 31.9%. This is excluding Hardy. Was that near-normal or do you think it will be going lower?

I think for the quarter it was 32.9%, so take 0.5 point off. It's, say, 32.5%. I wouldn't expect -- given the actions we have taken and also the actions we are taking on the underwriting side in commercial, don't expect any real change in that through the rest of this year. What we mentioned on last quarter's call was that we did have actions that we've already taken or are in the process of being taken to improve that further in 2014.

Do you guys have an internal target that you would share with us, or it's not really a target number?

No, we don't have an internal target. But we did -- I think we had said before the run rate today is about it used to be 2 or 3 points higher than peers, it's now 1 to 2 points higher than peers. And certainly we need to get it to be equal to peers to eliminate that disadvantage, at least (multiple speakers).

Okay. Thank you for the answers.

You're welcome. Thank you for joining the call.

Adam Klauber, William Blair.

Good morning. A couple of different questions. It's great to see the loss ratio, quarter loss ratio coming down. Could you talk about some of the underlying trends in the key markets, professional liability, workers comp, excess liability? I mean what's the I guess general loss trend just from a numbers standpoint? But even underlying it, are we just continuing to see not a lot of core cases, or any way you can illuminate would be helpful?

I think you ought to -- maybe Tom ought to add some color here, but just the loss trend that we assume long-term in commercial lines is around 4%. And the loss trend we expect longer-term in specialty professional management liability is more like 3%. Obviously, there are differences inside of that.

Maybe you can -- let's go line by line, pick a line and we can talk about it.

What about workers comp?

Okay. So, if you look at workers comp, we have a couple of key strategies. The first is, number one, we are looking by geography so that we tend to avoid those states that really have adverse results.

Number two, we are moving much more into what we would call white-collar workers comp, which runs at much better loss ratios than what we would call the blue-collar kind of business. We continue to get strong rate increases in workers comp, just under 10%. So the fact is we are pushing rate, we are re-profiling the book. All of that is going to impact the loss ratio over time. So we are pretty pleased with the direction on that. And clearly the written rate is turning into earned rate increases which exceed, as Craig mentioned, the loss trend, so margin improvement.

Okay. How about professional liability?

Professional liability, we continue to get significant rate increases on our D&O business, just under 10%. And as Craig said, the loss trends are more in the 3% to 4% range, so once again margin improvement there. E&O we would find that rate increases exceed the loss trends there as well. And those are a big part of the book.

So, once again, I think we can point to almost any line and see that we continue to earn very good written rate increases. And that's turning into earned rate increases in excess of loss trends. So all of them are improving.

Okay. Thanks. On a different topic, as far as growth, you have some core targeted areas. Do you think you'll be able to have growth next year given the market environment?

Yes. We think we can grow. We think we have some differentiated product and strategies in the seven segments as we call them, and they are all doing very well. In fact, new business today is 74% of the total coming from those areas. On an overall basis, it's 72% of the book. Those numbers continue to climb, so we continue to push those. So yes, we like the segments. We think they are performing pretty well. We expect to get growth and we are getting really good rate increases in those areas. So if you look at something like package, we're doing very well in the package business. So I'd say yes, we expect it to continue.

Okay. And then finally, you're generating a nice level of cash flow. You've got some expanded cash capability. How are you thinking about uses of cash as we go into 2014?

That's something that we will reconsider, going to step back as we come to the fourth quarter here more likely. And that's more than normal time to kind of reassess the accumulation of cash in capital and reset expectations for going forward.

Okay. Sounds fair. Thanks a lot.

You're welcome. Thank you.

Bob Glasspiegel, Janney Capital Markets.

Good morning. Just following up on Adam's question on capital, you've traditionally been a quarterly dividend payor. Would a special dividend at all be a possibility of something you would consider, or would consider?

I think we get asked that question every quarter and we say we would prefer to do something with the quarterly dividend. That's our strategy.

Okay. So, you're saying the fourth quarter is when you will review where your annual dividend is, is that what Craig's comment suggested? Or you want to get through the fourth quarter?

That's when we look at it. You're correct. And we will look at it again.

Okay. Could you quantify what that adverse morbidity and long-term care in the quarter was, and what drove that?

It's both individual and just increased claim frequency in the long-term care business, both group and individual, mainly individual. So that's just increased frequency of claims. We saw it both this quarter and in the second. If you recall, in the first quarter, morbidity was way down, driven by really improved mortality across all the businesses. So we've seen an increased level each of the last two quarters, and that's what's kind of pushed cat losses up from the $20s million range to the mid-$30s million range.

So a $15 million after-tax sort of swing from that? Because you said there were some positive things that offset that . So could it be more than that?

No, that's reasonable. There's also so much other lumpiness in that business. Remember we had this viatical settlements business. It kind of depends on individual deaths in the quarter that drive a little variability there. but that's -- the math that you just did is a reasonable quantification of the impact.

Okay. And maybe walk us through what pricing you're getting on that book. You mentioned that as an offsetting positive consideration.

We have file for price increases of about 40% of the book that came off the rate guarantee over the last year. And we filed for rate increases ranging from 0% to 80%. We're probably about halfway through the states and we've been working with state regulators on that. We are certainly not achieving or getting all of that, but we are getting a good portion of that. But it does -- I'll just caution you it takes a considerable amount of time. I guess take that 40% against about $550 million of net written premium that we would generate on an annual basis. But that 40% takes a long -- or that percentage takes a long time to be approved, and then implemented, authorized, and then implemented. It's about an 18 months I'd say transition period before you see it.

Any rough guesstimate on how much is being earned today, 5% to 10%, or --?

That's actually very reasonable. Good guess.

Okay. Appreciate it. Thank you.

Ron Bobman, Capital Returns.

Good morning, Craig and Tom. I had a couple of questions. I'm taking a look at the CNA Commercial production metrics, the rate and retention chart. And the retention in the small business, obviously it's slid fairly significantly in the last few quarters as rates that you've gotten have steepened. Are you going to sort of modify your approach to small business? I'm sort of really sort of getting at what do you think of the 73% retention on small business commercial? And I know it obviously has to be looked at in the context of 11%, which is quite good.

I think, Ron, our objective here is to make this a profitable book. We are pushing rate very hard. We are I would say becoming more selective on the types of business we want to write, whether that be by geography or whether it be by line of business. So clearly there's underwriting action, as we like to describe it, going on in small, but we think that's necessary to get to a more profitable book. And that's the plan. So, I don't think the retention is that far out of line with what we're doing on the underwriting side.

And Tom or Craig, is the slide from 80% to 73%, is that really all you are doing -- the company is doing or is there some element of competition contributing to that slide?

I would say it's all us.

Okay, thanks. And then should I assume by virtue of the steepness of the rate increases and the slide in retention for small business, of those four buckets, small, middle, international and other, small has been sort of the biggest unfavorable contributor to the -- basically you're running about 100% combined in the segment commercial? Is small business sort of the biggest problem of the four buckets?

I think clearly that's a business that's over 100% today. We have to get that down. But you could find other things that affect the result. Obviously, the areas that we have exited were all commercial-related, and we have addressed those. We are addressing small in a different way. We want to be in the small business. But that's more of a fix. And then you can look at a particular line like automobile and workers comp, which are not a specific plague to CNA but really the industry, and we are getting kind of double-digit auto rates. And workers comp is a little less than double-digit. So those are businesses we want to be in, and we're going to fix them. And I think you are seeing that around the industry. I don't think anybody else has said they're delighted with their auto results.

I'm sorry, but is small business currently running at the highest combined ratio of those four categories?

No, it's not of the highest. It's probably -- but it's of the ongoing core segments, it's at the moment at least producing the least profitable results and needs some improvement, as Tom said.

Okay. Moving on, one other question. I think, if my memory serves me right, ROI -- I want to say it was last week -- you made mention of the increasing number of competitors in the surety line. And I was just wondering whether you are seeing that similarly as ROI commented?

Yes, we are not seeing that here. We've got a great surety business, highly profitable. It's got a unique position in the marketplace. I think the surety business for the industry is down a little bit just because of the lack of construction in the US.

So, the fact of the matter is we've done pretty well on the growth side in surety while others had negative growth. We are now slightly under zero. But I think we've weathered the storm pretty well. And it's a great business, and we are definitely committed to making it grow when it's the right time.

Okay. Thanks a lot, and best of luck. Hope it continues.

(Operator Instructions). Scott Frost, Bank of America Merrill Lynch.

I have a couple of questions on the accounting that you mentioned. It seems like FASB is pretty adamant on trying to get something done here and despite protests from both preparers and consumers of the statements. What do you think it would take for FASB to say maybe this is just a bad idea? What do you think would have to happen for them to reevaluate this, and from where do think that pressure would come?

I think they are certainly hearing from preparers. I think -- which is the reason I mentioned it, I think if more users of the financial statements, both analysts and investors, weighed in, I think that carries more weight than a user. Or it might sound like we are complaining about it.

Now, we've been active with industry groups. We've been active with planned kind of meetings with FASB. We have regular communications with them. I think you'd be surprised at how, if you pick up the phone and asked to drive up to Stanford to meet with them, they don't have that many people come actually talk to them. And you'd be surprised how influential you could be if you decided to weigh in and have a conversation certainly -- and that would be a follow-up by writing your own letter to them. So I think all those things have an impact.

Right. We've seen that and we understand they say that you complain. They typically -- at least in the past what's happened is when the debates turn pretty acrimonious, they accuse investors of having an agenda as well and without a trace of irony say that we are conflicted. But it seems that this debate has been going on for a long time, so it sounds like what you're saying is that keep at it and it will register. Is that fair to say?

I'd say ratchet it up and we will register.

One other thing on that on a related note, at least on the fixed income side, the sentiment I have sensed is pretty much overwhelmingly negative. But some investors are reluctant to register opinions because they don't want to be seen as speaking for their institution on accounting matters. How have you advised your investment professionals on the fixed income side, for example, to register their opinions on this issue?

You mean as investors?

Yes.

I would advise them on the same basis, that it's just difficult, that if the changes were implemented, it would be very difficult for you to assess cash flows. It would be difficult for you to assess when real impairments, credit impairments, happen and differentiate them from some averaging that's being done by some model that you're going to have to peek through about umpteen layers of assumptions to figure out what's really happening. So I would say absolutely the same arguments.

Got it, got it. And last question, do you have any kind of estimate as to how much the new rules would cost you in terms of preparation, and also, more importantly, what do you think the effect would be on your cost of capital? Is there any way to quantify that? That's it.

It's tough to quantify cost of capital, and we haven't really assessed implementation. But it would be meaningful. It would be a meaningful reordering of all of our calculations and internal systems. We don't capture, as they're suggesting, like when you "start generating exposure and earning premium and registering -- well, we don't have anything set up to do those kind of things. And nor do we -- have we -- we have systems that go to what seems to be suggested at portfolio level, how they might define a portfolio level, or defining how we would reserve and how we would assess, and it would require a bunch of different models and things here. But it would be a considerable number, and definitely have an effect. And on cost of capital, it's difficult to say.

Thank you for addressing the issues. Much appreciated.

Amit Kumar, Macquarie Capital.

Thanks. I guess two quick follow-up questions going back to I guess Ron's question on pricing. If you sort of broadly look at pricing in the commercial and specialty line, what do you think about pricing sustainability for 2014, especially based on the meaningful rates which you have gotten in the past?

You never know what's going to happen that far out, but I would say this. Number one, I think, in general, the property business, you'll probably see rates fall a little bit because it is short-tail business and it's been pretty quiet from a catastrophe standpoint. So I would expect property will become a little bit more competitive.

Now, how you interpret that, is that on the renewal book or is that on new business? But clearly I think you might see a change there.

I think casualty pricing needs to go up, so whether you're looking at the specialty lines, which are volatile, you can have an event and, quite honestly, you've got to put some money in the bank for those types of events.

And I think, if you look at the casualty lines in the commercial space, whether it be general liability umbrella, auto, you're seeing pretty significant auto increases, at least we are too. So that would be kind of directionally the way I'd see it.

What's kind of interesting is we tend to look at things a lot more micro than you do. So if I look at commercial month-to-month, September was the best month in commercial in the quarter. It was higher than July and August. And if you look at specialty, it was right on. Every month was kind of the same number. So the fact is specialty continues to be very consistent, and I think there's probably some upside there. And I think, on commercial, we went from 9% to 8%. That's not a poor result, and I think September looked pretty good. So we believe there is still rate taking to be out there, and we are seeing it in lines like package, which is a big part of the commercial space. That pricing is very strong. So we're optimistic, but it's a long way out, year-end 2014.

Got it. That's helpful. And secondly, just going back to the discussion on capital, and thanks, Bob, for asking the question. Maybe we are looking at this wrong perhaps. Is building out the franchise more important for you right now than I guess looking at means to return capital? Are we not on the same page there when we ask the same question every quarter?

No, I don't think that's the case. So everything is on. We are quite aware of and sensitive to ROEs and improving operating ROEs. So, we're looking at all the components of the business.

I think what we've said to you in the past is just that we consider all the options. We just told you what our bias is, and that's our thinking. So, you've got to understand our bias, understand the deliberateness of the pace at which we have done things, and then I hope you would appreciate that of course we are sensitive to everything and we are considering everything.

Got it. I do appreciate that clarification. And finally on -- I guess going back to my question on the payout annuity book, what's the tail on that, on the reserves? Can you just talk a bit about that?

Sort of mid-teens duration, maybe a little longer than that.

Got it. And I guess if you look at that book, can you talk about the impact I guess on policyholder behavior based on the improvement in rates? Just that book separately? How --

No, that book is in run-off. Those prices and those premiums have been paid. There is zero impact on income coming out of that book. So all the rate increases we've talked about are the health business, the individual long-term care. None of that relates to the payout annuity business.

I guess I was asking about the impact of interest rate on the payout annuity book.

It's relatively -- well, it does have an effect, but it's extremely well matched in terms of asset and liability duration. So any effect is very much on the margin.

Okay. That's helpful. If there's a spike in the rates, do policyholders take their money out? How does that happen?

No, they're paid. These are annuities, so they paid their -- they pay a premium. And we are matching an income stream to the premiums paid. So there's really no optionality in that business.

Got it, that's what I was looking for. That's very helpful. That's all I have. Thanks for the answers.

Adam Klauber, William Blair.

Thanks. Just one quick follow-up. Could you give us an idea on the favorable development in specialty, just a general ballpark? What proportion of the reserve releases came from, say, maybe the 2003 through 2017 versus the 2008 through 2012?

That was actually all a surety and it's [tended prior].

Okay. That's really helpful. Thank you.

Ron Bobman, Capital Returns.

I guess the problem with the quarterly question on the capital is more about Bob Glasspiegel's memory and not us being on the wrong page. I just had a follow-up question on surety. I just wanted to sort of confirm something. I understand there's some problems in the Spanish surety market, and I want to sort of confirm that you do not write there. Your surety book is all US or substantially all US. Is that right?

That's correct. Our surety book is all North America.

Okay, great. Thanks a lot.

That was our last question. This does conclude our question-and-answer session for today. At this time, I will turn the call back to Tom Motamed with any closing or additional remarks.

Thank you. See you next quarter.

This does conclude today's conference. Thank you for your participation.