CNA Financial Corp (CNA) 2013 Q4 法說會逐字稿

Good day and welcome to the CNA fourth-quarter and full-year results 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, Tim. Good morning and welcome to CNA's discussion of our 2013 fourth-quarter financial results.

By now hopefully all of you have seen our earnings release, financial supplement, and presentation slides, which provide additional perspective on our financial and operating trends. 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 and full-year results, we will open it up to 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, February 10, 2014. 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 area. 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. CNA's fourth quarter provided a strong finish to a good year.

Adjusted operating income was $336 million, the highest quarterly operating income in 20 years. Adjusted operating return on equity was 11%.

We are very proud to announce that we have raised our quarterly dividend by 25% to $0.25 per share and also declared a special dividend of $1.00 per share. This is the third year in a row that we have increased our dividend and is a testament to our financial strength and stability.

On a reported basis, CNA produced operating income of $213 million and an operating return on equity of 7%. Results for our Corporate Non-core segment include a $123 million non-economic charge related to the accounting applied to the 2010 loss portfolio transfer of our legacy asbestos and environmental pollution liabilities to National Indemnity Company. Craig will say more about this in his remarks.

For the full year, operating income was $917 million and net income was $937 million. Excluding the loss portfolio transfer accounting impact, both net and operating income were above $1 billion. By either measure, CNA's results were significantly better than in 2012.

As you may have seen, today we announced the sale of our life insurance company to a subsidiary of Wilton Re. This transaction when completed will reduce our Life & Group gross GAAP reserves by $3.4 billion, or 25%, and dispose of the vast majority of CNA's payout annuity business.

Now let me provide you with some details on our core business. Our property casualty calendar-year combined ratio was 95 for the quarter, over a 21-point improvement from the Sandy-impacted fourth quarter of 2012. Our property and casualty underwriting margin for the full year, as defined by the combined ratio excluding catastrophes and development, has improved about 5 points compared with full-year 2012. This includes an approximate 4-point improvement in our loss ratio and just under a 1-point improvement in our expense ratio.

Our Specialty business had another outstanding quarter, with a combined ratio of 77.4. Excluding catastrophes and development, the full-year combined ratio was 94.2, compared with 99.3 for 2012, more than a 5-point improvement.

Net written premium growth for the quarter was 5%. Rates increased 5% for the quarter, and retention was 85% for both the quarter and year.

The Commercial combined ratio for the quarter was 111.8, and included 11.5 points of adverse development. Excluding catastrophes and development, the full-year combined ratio was 100.4, compared with 104.1 for 2012, almost a 4-point improvement. Rates increased 7% in the quarter, and net written premiums declined 3%.

Hardy reported net operating income of $8 million in the fourth quarter, with a combined ratio of 90.1, or 91 excluding catastrophes and development. Full-year combined ratios were 93.4 and 89.8, respectively. Hardy's fourth-quarter net written premium grew 16%, excluding the impact of the commutation with the 2012 year of account third-party capital provider.

I am now going to turn the call over to Craig. Craig?

Thanks, Tom. good morning, everyone. Our reported financial results were significantly affected by the accounting for the increase in our ultimate loss reserve estimate for asbestos and pollution, and the related recovery of those losses through our reinsurance agreement with National Indemnity Company. There is a description on slides 15 and 22 of the earnings presentation that we hope will be helpful to you.

As you may recall, in 2010 we transferred our legacy asbestos and environmental polite relation pollution liabilities to NICO through a retroactive reinsurance transaction. At that time, we ceded approximately $1.6 billion of net liabilities and paid NICO approximately $2.2 billion for a reinsurance contract with a $4 billion aggregate limit.

Over the past four years, the ceded liabilities have developed adversely. In the fourth quarter, the cumulative ceded losses exceeded the consideration paid, putting CNA in a gain position on the contract.

GAAP requires that a portion of gains from retroactive reinsurance must be deferred. These deferred gains will be subsequently recognized in future periods as ceded paid losses increase.

While the accounting negatively affected our reported results during the current period by $123 million after-tax, there is no cash nor economic impact. Excluding the accounting for the retroactive reinsurance contract with NICO, our fourth-quarter 2013 net operating income was $336 million and net income was $344 million.

On an adjusted basis, we generated over $1 billion of operating income over the full-year 2013, a 77% increase as compared to 2012. Operating income available to common shareholders was $1.24 per share, excluding the LPT accounting impact, and $0.79 per share on a reported basis.

Our core P&C operations produced net operating income of $340 million in the fourth quarter of 2013, and $1.2 billion for the full year, up significantly as compared with fourth-quarter and full-year 2012. Improved accident year underwriting results and Limited Partnership returns drove the increases.

Our fourth-quarter 2013 loss ratio for P&C operations was 62%, almost 19 points better than last year's fourth quarter. Excluding catastrophes and development, the loss ratio was 61.3%, a 7-point improvement over last year's fourth quarter.

The full-year loss ratio excluding catastrophes and development of 63.8% was approximately 4 points better than 2012.

Our fourth-quarter expense ratio was 32.8%. The full-year 2013 expense ratio was 33.1%, which compares favorably to the 34% expense ratio for the full-year 2012. This decrease reflects real expense reductions, enhanced productivity, and the growth in earned premiums.

Specialty's fourth-quarter 2013 net operating income improved to $232 million from $130 million in last year's fourth quarter, with a combined ratio of 77.4%. Specialty's results benefited from 13 points of favorable development, reflecting improved estimates across a broad range of product lines for the years 2010 and prior. Excluding catastrophes and development, Specialty's loss ratio was 59.8%, 9 points lower than last year's fourth quarter.

The full-year 2013 loss ratio, excluding catastrophes and development of 64%, is almost 4 points better than what we reported in 2012. The improvement was driven by both rate achievement and targeted underwriting actions that continue to refine the portfolio mix.

Commercial's fourth-quarter 2013 net operating income was $100 million. This compares to a $44 million loss reported in the prior-year period. Excluding catastrophes and developments, the Commercial loss ratio was 65.2%, an improvement of 4 points over last year's fourth quarter.

On a full-year basis, the loss ratio excluding catastrophes and development was 66%, an improvement of just under 3 points as compared to 2012.

Tom referenced 11.5 points of unfavorable development in Commercial; this was primarily driven by auto and general liability reserve strengthening in recent accident years. The changes to auto estimates reflects an increase in claim frequency, while the general liability changes reflect an increase in severity for both small and middle markets business. Slide 12 provides detail of our prior and revised loss ratio estimates for Commercial lines.

Our Non-Core Life & Group segment produced $13 million of net operating income in the quarter, which is significantly better than the prior-year result. The fourth-quarter 2012 result included $44 million after-tax of payout annuity and long-term care reserve charges.

The current quarter results includes a $22 million nonrecurring benefit. The favorable effect of rate increases in the quarter was offset by unfavorable morbidity.

Our Corporate segment reported $140 million net operating loss in the fourth quarter of 2013, driven by the $123 million impact of the retroactive reinsurance accounting. Both periods benefited from a modest amount of favorable loss reserve development recognized in our CNA Re and other P&C runoff portfolios.

Our balance sheet continues to reflect CNA's financial strength and stability. This strength and stability, as well as our current earnings outlook, are reflected in our Board's decision to increase the current common shareholder dividend by 25% and declare the $1.00 per share special dividend.

We believe today's announcement of the sale of Continental Assurance Company is a big positive for CNA. It meaningfully reduces risk in our Non-Core Life & Group operations and further simplifies our operations.

It is currently expected that the transaction will result in net proceeds of approximately $615 million inclusive of tax benefits, a portion of which will be received in the form of a dividend from Continental Assurance Company immediately prior to closing. Anticipated net proceeds are slightly higher than the life company's December 31, 2013, statutory capital and surplus of $597 million.

The closing of the transaction remains subject to customary closing conditions and certain regulatory approvals, and is expected to occur in the second quarter of 2014.

Book value per share increased 4% in the fourth quarter to $46.91 per share. Year-over-year, book value per share increased 3%. Excluding accumulated other comprehensive income, book value was $45.26 per share, up 6% from year-end 2012.

Our investment portfolio's pretax net unrealized gain stood at approximately $1.9 billion at quarter-end, a decrease of approximately $225 million from the end of the third quarter of 2013. Our statutory surplus at quarter-end was $11.1 billion, up more than 7% from the end of the third quarter.

A decrease in our pension liabilities, driven by a change in the discount rate, contributed meaningfully to this growth. These numbers do reflect a $100 million dividend paid to the Holding Company during the fourth quarter.

We continue to maintain significant dividend capacity at the insurance operating company level. Cash and short-term investments at the Holding Company were approximately $500 million at quarter-end.

In the fourth quarter, operating cash flow excluding trading activity was approximately $300 million. Cash principal repayments through paydowns, bond calls, and maturities were approximately $800 million.

Net investment income was an especially strong $642 million pretax in the fourth quarter. Income from Limited Partnership investments was $148 million, up more than 120% from the prior-year period. The full-year 2013 rate of return from our Limited Partnerships was 18%.

Income from our fixed maturity securities in the fourth quarter was $497 million pretax, essentially unchanged from the prior-year period. Slide 18 provides a further description of our net investment income.

You will note that our after-tax income from our fixed maturity securities actually increased quarter-over-quarter, reflective of our portfolio shift to tax-exempt investments. While our overall portfolio allocations did not change significantly in the fourth quarter, we did continue to take advantage of 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 that support our long-duration life liabilities had an effective duration of 11.3 years at quarter-end, a slight decrease from 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, equal to the third quarter.

Overall, our investment portfolio remains well diversified, liquid, high quality, and aligned with our business objectives. With that, I will turn it back to Tom.

Thank you, Craig. Before we open it up for questions, I would like to close with some highlights.

Our 2013 net and operating income were both above $1 billion, excluding the loss portfolio transfer accounting impact. Our 2013 combined ratio excluding tax and development improved almost 5 points compared with the 2012 results.

Rates on our portfolio increased approximately 7% for the year. We are pleased that the Commercial rate increases were over 8% and that Specialty rates were up 6%.

Net written premiums were up 6% for the year. We have solid investment results; and our book value per share excluding AOCI has increased 6.2% since the beginning of the year.

We raised our quarterly dividend for the third consecutive year and declared a special dividend of $1.00 per share. With that, we would be glad to take your questions.

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

Yes, thank you. I guess a couple questions on the sale of the life company. Can you talk about the earnings impact of the sale of that business? We don't really see what that business had been earning or losing; and that is the first question.

This is Craig, Jay. Good morning. The life business returns have been pretty uneven and I would say relatively low. You recall that last year we took a charge -- actually each of the last two years -- took a pretty substantial charge to unlock our assumptions payout annuity business. Last year that amount was in the $20-some-million-plus after-tax; year before it was $100-million-plus after-tax.

The normal run rate, assuming that we wouldn't be getting any reserve charges, is something in the order of, say, $20 million. Or has been $20 million or so after-tax.

Per year?

Yes.

Got it. That's helpful. Then secondly, what is the plan for the proceeds of the sale?

Just keep in mind that the Company was overcapitalized, and that the statutory capital in the Company rolled up to CCC's capital. So it was used and considered in our overall capital base.

So the $600-million-plus of proceeds shouldn't be -- the actual freed-up capital is something more on the order of a little north of $200 million. So we don't have any plan for that now. That is something that we'd consider when it closes, when and if it closes. We'd consider that along with our current earnings and the outlook for earnings as we move forward.

Got it. Good problem to have, anyway. Then the last question, the special dividend. Other than just being a nice round number of $1.00, what went behind the thinking of the size of the special dividend?

I don't -- nothing particularly matched. I think what I would want you to take away from it is just simply that it is a testament to the financial strength and stability of the Company, that we have more than adequate capital to support the business, to absorb the risks in the business and support the growth of it forward. That we had an excellent earnings year this year, and quarter this quarter.

That we looked around at each other and talked to the Board and looked at the amount of earnings and did not have any -- first order would be if we had an opportunity to deploy it into the business; we did not. So we chose to return it to shareholders.

Got it. Thanks for the answers.

Amit Kumar, Macquarie Capital.

Thanks. Good morning and congrats on the quarter, and the disposition, and I guess the capital management actions. A lot going on there; so it's pretty good.

The first question I have is a follow-up to the last question. Now that you have I guess achieved several of the milestones you had set out to achieve in terms of capital management, in terms of the disposition of the payout book, how would you outline the next steps for you and this franchise?

Is it more so a focus on the core book? Is it using the capital to grow via acquisitions? Or is it something in terms of focusing on what else could be done, I guess on the long-term care book?

Why don't I start, Amit? Good morning. I think number one, we continue to proceed with improving our core business. We are focused on that.

We think there is more upside relative to improving margins. We continue to be encouraged by what we are doing on the rate side as compared to loss trends. So we will continue to push to improve the core businesses.

So that is number one. We have said for a long time that if there is something out there that makes sense, we may be interested.

We did that by buying the remainder of CNA Surety. We did that with Hardy. But we are going to be very judicious in what we look at, because it has to be something that contributes to better margins over time.

So, those are our immediate focus today, and I don't think we have changed our message. It has been very consistent for the last five years. We are just seeing the fruits of our labor starting to show up, and we are pleased with that.

But this is not over. We have more work to do. Craig, you might want to comment about some of the other businesses.

Yes, Amit, so it's all the things you said. You know we have been deliberate in our actions. And as Tom said, I think we have behaved consistently with what we have told you or the messages we have given you.

So we need to do all of those things you have said. First and foremost, we need to continue to improve the operating earnings power and consistency of the P&C business. And then we will continuously look at and do acquisitions; and we will continuously evaluate prospects for disposing and mitigating the results in what is remaining of the Non-Core runoff businesses, as we have.

So nothing to announce or discuss today. But expect us to keep working on all three of those fronts.

I guess a follow-up to that, and this is a question we get often, is the discussion on the other pieces of Life & Group Non-Core and the discussion on how the entities are, I guess commingled. Certainly I think near-term would be difficult.

Is that something which would take much longer than perhaps what the perception might be out there, just in terms of separating the entities and perhaps doing something down the road? Can you just talk a bit about that?

I am not sure exactly -- I don't know that I'm exactly hearing your question. But I would tell you the way we think of it is -- so we are -- and we haven't closed the sale of the life company yet. But once we have closed the sale of the life company we are essentially left with the long-term care business, because we have sold the asbestos environmental, international indemnity, and then the life business to Wilton Re.

That is a business that is going to be -- we are going to be in at the moment. We are looking at that as if we are going to be in that business for a very long period of time; and we don't see any viable prospects or opportunities to separate it.

So we continuously look at it and evaluate it. But that is -- I think you should -- at the moment our focus is how do we operationally improve that business and operationally improve those results, while we keep our eyes open and evaluate any possibility to -- the way to demise or defease those liabilities.

Got it. No, you actually did answer my question with that. The only other question I had was the discussion on the auto NGL. I think you mentioned claims frequency was higher, I guess on the auto side; and the loss cost severity was higher on the GL side. Can you just expand on that, just a bit more?

Well, I don't think -- there isn't a whole lot more. It is just that the auto frequency is up slightly; again, 2009, 2010, 2011, 2012 years.

If you take a look at the slide, if you would, that I referenced in the earnings, and you can see that I think the way NGL severity was up slightly over those same year periods. So I wouldn't consider this increase to be that substantial.

The way I would suggest you look at it and the way we look at it is that, if you look at those years, we have made significant improvement over those four year periods. It is just that the starting point was just a little bit worse than we thought the starting point was when we got -- when we started on this journey.

Got it. So net-net, nothing unusual in terms of what you saw this quarter versus the past?

No.

Awesome. That's all I have. Thanks and once again congrats on the quarter.

Bob Glasspiegel, Janney Capital.

Good morning, CNA. A question on the deferred gain now for the Berkshire transaction. What is the duration of that?

Really it would be the duration of the contract, Bob, effectively, because it gets recognized as ceded paid losses, move towards ceded ultimate liabilities.

But that $189 million is going to feed in over, let's say, six to eight years or longer?

It should be longer than that. I would think the duration of these liabilities are 20-years plus.

Okay. And that comes through the combined ratio? That will improve your combined ratio or not?

Yes, that will come through with a reduction in loss. So in the Corporate segment.

Okay. And pension, how much -- did that contribute anything to AOCI? And what is the run rate for pension expenses prospectively? I think you get a little bit of a positive.

We do get a little bit of a positive. So the re-evaluation of our pension liabilities, I mentioned that it was very meaningful in the stats; so it was a little less than $400 million impact on stat surplus, positive. And it was a little less than $300 million after-tax impact on GAAP equity.

That's in the quarter or for the year?

It was recognized this quarter.

In the quarter?

Right. So it was recognized in the quarter. So that is part of the reason for the increase in GAAP equity.

And the run rate expenses, it's a slight positive. It's not really meaningful going forward.

Okay. Nickel, dime type order of magnitude, or is it going to be bigger?

Not important. Certainly not important, and you wouldn't recognize or notice it in the model.

Well, it has been a pressure incrementally; so just alleviating the pressure is a bigger help than that.

Yes.

And congrats -- you warned me to be patient on the improvement in underlying, that the rates would work their way through. And your recommendations for patience was certainly justified with what we saw this quarter and to a lesser extent the last quarter.

So you, Tom, I think in your remarks you said there is expectations for improvement in underlying prospectively. Is there anything that we should think of different than rates less loss cost growth that could mitigate the improvement prospectively?

Well, I think we are going to keep pushing rates in those lines that need it. I think we are doing a better job retaining the better accounts, so our credibility is increasing at the customer level and the agent level.

Other than that, I think it is just continuing to focus and drive the numbers in the right direction. But we are getting good rate increases in Commercial and Specialty in the business that we retain.

So I don't think that you're going to expect anything different out of us, other than we just keep pushing it and we're getting better at it. I think that's the story here. We are getting better at execution.

Good answer. One last question. Do you need more rate in Commercial in light of what you bumped up reserves? Or you think that the current rate is adequate to get your required returns?

The more rate the better. That is always going to impact your margin.

I think it's kind of interesting, Bob; we do a lot of, I will say, granularity when it comes to rate increases. But if you look at our Commercial business, we are getting rate increases between 6% to 13% on business.

What really the story is that is underlying, at least we think it is a bigger issue, is we have more rate decreases in the fourth quarter than we did in the third and second quarter. And that I think translates into the book is getting better; and as the book gets better you have some customers that actually deserve a little bit of a rate decrease.

So the number of policies that got rate decreases went up in the fourth quarter whether it was Commercial or Specialty. But we are still getting rate increases, so that is good.

So, yes, I think we will just keep pushing on it. And risk selection; more and more of our business is in the focus classes, and that is what we are doing.

And when it comes to new business we are writing less new business because we think there is a bunch of business out there that is probably not that good. That is what is showing up in the marketplace, as people try to retain their best accounts.

So I think we are just becoming better at execution and recognizing what you go after and what you want to keep.

Appreciate the granularity, Tom. Thanks.

Josh Shanker, Deutsche Bank.

Yes, hi there. Good morning, everyone. I want to just walk through the Commercial expense ratio. You had the benefit from the favorable development in that. I want to know if there is actual underlying improvement going on in the expense ratio as well, seeing you're not forecasting forward.

Josh, you ought to think in Commercial it was probably about a 2-point benefit from the insurance assessment on that ratio. But there also was some seasonality in terms of spend on the other side; it was a little higher.

So I think that expense ratio was depressed maybe by a point in terms of going forward; maybe 1 point or 1.5 at the most.

Okay. Then on Hardy, the expense ratio improved year-over-year, but there might have also been seasonality in that. I realize it is all coming off of a small base; you plan to grow that business.

Was the 49%-ish above budget? Below budget? Or maybe it was 47%; I have to go check the number again. I am trying to think about how to think about that going forward.

No, it was -- this quarter, the reported expense ratio was 49% at Hardy. But that was inflated by some one-time costs to close the Bermuda operation and also some severance expenses. So it is probably inflated by 2, 2.5 points from the run rate.

I think what we have said in the past is that the long-term objective is to get the expense ratio at Hardy to 40% or better. And I would tell you we expect to get most of the way there over the course of 2014.

Okay. I don't mean to belabor expenses, but it is always easy to look at improvements there. So there really wasn't much improvement on the Specialty side. Are we at run rate operational efficiencies at CNA Specialty from an underwriting expense ratio?

Well, I think when you say not much improvement, it was -- the expense ratio on a full-year basis, it's 1.5 points lower than it was.

True, yes (multiple speakers)

Right? So it's running around 30%. That is about the right number, and I wouldn't want you to think that it is going to get much lower from there.

But we are always looking for ways of improving productivity. We've held expenses flat. I would tell you that our overall just total spend was down about 1% year-over-year this year.

If you included the impact of Hardy having been in for the full year, our actual spend was about 4% less on underwriting and other expenses. So it is something that we are mindful of, but it is -- we will continue to make -- we are going to hopefully continue to make some progress there.

It is a focus for us. But the real focus right now is improving a loss ratio, and that is where we would point you as where you ought to look for more improvements in 2014.

And the team is the right team. You have the right people in place now. This is like -- anything about your organization? This is the CNA team going forward?

Yes, this team has been in place for quite a few years with relatively few exceptions. Yes, it is the team.

Great. Thank you very much and good luck in the future.

(Operator Instructions) Ron Bobman, Capital Returns.

Hi. Thanks a lot. I just had a couple questions; but first, congrats. You are obviously busy beavers. Well, I assume that is always the case. But great report.

So I had a question about the loss portfolio transfer and in essence the increase in losses. I am just curious. The staff responsible for reviewing the claims, making the claims payments, the actuaries that set these reserves, are these now all now in essence Berkshire employees and they're providing you this number for ultimate ceded losses?

I assume there is some level of review; you then opine and book a number. Or does it come about a different way?

Ron, good morning. No, these estimates are our estimates, so our actuarial staff does a complete review as they would have in the past of all of the case reserve estimates; and they interview the claim adjusters and the staff doing the claim administration.

Now, what has changed is the staff doing the claim administration are Resolute/National Indemnity employees. We do have also a group under Jon Kantor, our General Counsel, Legal, who in the past had managed ours, who also has an oversight function in claim and claim settlement related to National Indemnity.

So we do pay attention to what they are doing. We haven't outsourced it and then just forgotten about it. But I would emphasize that the estimates are our estimates.

Okay, thanks. I appreciate that. I had a question about Hardy, Tom, if you could comment on the underwriting results in the fourth quarter, whether they met your expectations, fell short, whether they exceeded your expectations.

And then if you could talk about the Hardy book of business and how it was, if at all, reconfigured or structured at the 1/1 reinsurance renewal; any sort of changes there or color you can provide.

That's it for me. Thanks again.

I will start and Craig will finish with the reinsurance comment. I think number one, when we bought Hardy we were optimistic that it would be a contributor, and it is contributing. They have reprofiled their treaty reinsurance business; but we continue to like the businesses they are in.

As Craig mentioned, we have closed down the Bermuda operation because we don't think we can get enough volume and margin out of there. So we are making adjustments as we go.

But we are pleased. It is a very competitive market at Lloyd's, and we like the restraint that we are seeing relative to new business. They are not following the pack, so we like that.

So I would say we are satisfied with where they are, but we want more. And they know that, and they are going to work on improving their margins and, as Craig mentioned, expense ratio; we expect that that is going to come down.

So I think that there is from our perspective optimism that they can perform at a higher level, just like CNA can. So yes, we are pretty pleased; but it is a tough environment over there, and we like the fact that they are showing restraint.

Thanks.

Yes, there is nothing really changed in the portfolio there, Ron. So they did have a small property treaty reinsurance function; and obviously the prospects of that are less optimistic than they would have been. But you will recall that we never really counted and thought that much of that in the get-go.

So they, like we, are focused on underwriting profit and being disciplined underwriting managers. And we think we have got an excellent cadre of underwriters over there managing their business.

Thanks, gentlemen. Best of luck.

John Thomas, William Blair.

Hi. The middle market in Commercial has seen a decrease in rate over the past three quarters, while the small business in Commercial has -- the rate increases have actually increased. Could you comment on the differences there?

Small business needs more rate then middle market. That is the short answer. So we expect that they will continue to get significant rate increases to improve their profitability.

I think if you look at the middle market, we are pretty pleased with the level of rate increases. As I said earlier, we are getting overall rate increases on the renewal book at the same time there are accounts in that renewal book that are getting rate decreases; and we saw more of them in the fourth quarter than we did the second and the third.

That is probably -- or it is reflective of the fact that these are better accounts that we are retaining. And to retain them we are giving back a little bit on the rate side.

But overall, we are pretty pleased with that. And if you look at loss trends, the fact is we still have a pretty good return on our margin.

If you want to you can look at page 13 of the handout. That will tell you the story there.

All right, thanks. Then professional liability, what are you seeing with the loss trends in 2013 compared to 2012?

It is flat with those prior years.

All right. Thanks.

At this time there are no other questions in queue. I will turn it back to our speakers for any closing remarks.

Thank you very much. See you next quarter.

That concludes today's conference call. We appreciate your participation.