CNA Financial's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.10.14 | About: CNA Financial (CNA)

CNA Financial Corporation (NYSE:CNA)

Q4 2013 Earnings Conference Call

February 10, 2014 10:00 ET

Executives

James Anderson - Investor Relations

Tom Motamed - Chairman and Chief Executive Officer

Craig Mense - Chief Financial Officer

Analysts

Jay Cohen - Bank of America Merrill Lynch

Amit Kumar - Macquarie Capital

Bob Glasspiegel - Janney Capital

Josh Shanker - Deutsche Bank

Ron Bobman - Capital Returns

John Thomas - Williams Blair

Operator

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.

James Anderson

Thank you, Tim. Good morning and welcome to the 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 maybe 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 supplement. 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.

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 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 & 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 five 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 to 104.1% for 2012, almost a four point improvement. Rates increased 7% in the quarter and net return premium 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 2012 year of accounts third party capital provider.

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

Craig Mense

Thanks Tom. Good morning, everyone. Our reported financial results were significantly affected by the accounting for the increase in our ultimate loss reserve estimates 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 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 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 loss has 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 of $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 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 seven point improvement over last year’s fourth quarter. The full year loss ratio excluding catastrophes and development of 63.8% was approximately four 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 premium.

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 continued 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 development, 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 reserves 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 results. The fourth quarter 2012 results included $44 million after-tax of payout annuity and long-term care reserve charges. The current quarter result includes a $22 million non-recurring benefit. The favorable effect of rate increases in the quarter was offset by unfavorable morbidity. Our Corporate segment reported a $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 CAN’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 declared the $1 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 $650 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 in 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 the change in the discount rate contributed meaningfully to this growth. These numbers do reflect $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 in 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 pay downs, 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 overall portfolio shift to pretax 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 like liabilities at 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.

Tom Motamed

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 five 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 per share.

With that, we would be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Jay Cohen with Bank of America Merrill Lynch.

Jay Cohen - Bank of America Merrill Lynch

Yes, thank you. I guess a couple of 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’s the first question?

Craig Mense

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 substantial – 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 was $100 million after tax. The normal run rate assuming that we wouldn’t be getting any reserve charges with something in the order of say $20 million there has been $20 million or so after tax.

Jay Cohen - Bank of America Merrill Lynch

Per year?

Craig Mense

Yes.

Jay Cohen - Bank of America Merrill Lynch

Got it. That’s helpful. And then secondly, what is the plan for the proceeds of the sale?

Craig Mense

Well, just keep in mind that the company was overcapitalized and that the statutory capital in that company rolled up to CCC’s capital. So it was used and considered in our overall capital base. So $600 million plus of proceeds shouldn’t be the actual freed up capital, it’s something more in the order of little north of $200 million. So, we don’t have any plan for that now. That is something that we consider when it closes. We consider that along with our current earnings and the outlook for earnings as we move forward.

Jay Cohen - Bank of America Merrill Lynch

Got it. Good problem to have anyway. And then the last, the special dividend, I mean other than just being a nice round number of $1, what went behind the thinking of the size of the special dividend?

Craig Mense

I don’t – nothing particularly matched, but I think what I would want you to takeaway from it is just simply that it’s 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 to 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 to the amount of earnings and did not have any first what would be if we had an opportunity to deploy it into the business, we did not. So we chose to return it to shareholders.

Jay Cohen - Bank of America Merrill Lynch

Got it. Thanks for the answers.

Tom Motamed

You are welcome.

Operator

And we will take our next question from Amit Kumar with Macquarie Capital.

Amit Kumar - Macquarie Capital

Thanks and good morning and congrats on the quarter and disposition and I guess the capital management actions. A lot is 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 sort of outline the next steps for you in 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?

Tom Motamed

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 trend. So we will continue to push to improve the core businesses. So that’s number one. We have said for a long time that if there is something out there that makes sense we maybe 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. And now Craig, you might want to comment about some of the other businesses.

Craig Mense

Yes, Amit, just 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 consistently 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 and what's remaining of the non-core run-off businesses as we have, so nothing to announce or discuss today but expect us to keep working on all three of those fronts.

Amit Kumar - Macquarie Capital

I guess a follow-up to that and this is 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 co-mingled, so anything 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?

Craig Mense

I am not sure exactly, I don’t know that I am exactly hearing your question. But I will tell you the way we think of it is and so we are when we haven’t closed the sale of the life company yet, but once we have closed the sale of life company, we are essentially left with the long-term care business because we have sold the Asbestos and Environmental to National Indemnity and then the life business to Wilton Re. That’s a business that’s 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’s 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 other way to demise or defease those liabilities.

Amit Kumar - Macquarie Capital

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 sort of just expand on that just a bit more?

Tom Motamed

I don’t think there isn't a whole lot more, it's just that auto frequency is up slightly again ‘09, ‘10, ‘11, ‘12 years. If you take a look at the slide that if you would that I referenced in 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 improvements over those four year period. It's 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.

Amit Kumar - Macquarie Capital

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

Tom Motamed

No.

Amit Kumar - Macquarie Capital

Awesome, that’s all I have. Thanks and once again congrats on the quarter.

Tom Motamed

Thank you.

Operator

And we will take our next question from Bob Glasspiegel with Janney Capital.

Bob Glasspiegel - Janney Capital

Good morning, CNA.

Tom Motamed

Good morning.

Bob Glasspiegel - Janney Capital

Question on the deferred gain now for the Berkshire transaction, what’s the duration of that?

Tom Motamed

Well, really it would be the duration of the contract Bob, effectively because it gets recognized as ceded paid losses move towards ceded open on liabilities.

Bob Glasspiegel - Janney Capital

So that $189 million is going to feed in over let’s say six to eight years or longer or…?

Tom Motamed

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

Bob Glasspiegel - Janney Capital

Okay and that comes through the combined ratio, that will improve your combined ratio or not?

Tom Motamed

That will, yes, that will come through with a reduction loss and so in the corporate segment.

Bob Glasspiegel - Janney Capital

Right, okay. And pension how much does that contributing into AOCI and what’s the sort of run rate for pension expenses, perspective, I think you get a little bit of a positive?

Craig Mense

We do get a little bit of a positive. So the reevaluation of our pension liabilities I mentioned that it was very meaningful in the stats. So it was really less than $400 million impact on stat surplus positive and with a little less than $300 million after-tax impact on GAAP equity.

Bob Glasspiegel - Janney Capital

That’s for the quarter or for the year?

Craig Mense

Well, that it was recognized this quarter.

Bob Glasspiegel - Janney Capital

In the quarter?

Craig Mense

Right. So it was recognized in the quarter, but 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.

Bob Glasspiegel - Janney Capital

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

Tom Motamed

Yes, not important. It’s really not important and you wouldn’t recognize or noticed it in the model.

Bob Glasspiegel - Janney Capital

Well, it’s been a pressure incrementally, so just alleviating the pressure is a bigger help than that?

Tom Motamed

Yes.

Bob Glasspiegel - Janney Capital

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?

Tom Motamed

I think we are going to keep pushing rates in those lines that needed. I think we’re doing a better job retaining the better accounts. So our credibility is increasing at a customer level and the agent level. Other than that, I think it just continuing to focus in to drive the numbers in the right direction, but we are getting good rat increases in commercial and specialty in the business that we retained. So, I don’t think you have to expect anything different out of us other than we just keep pushing it, we are getting better at it. I think that’s the story here. We are getting better at execution.

Bob Glasspiegel - Janney Capital

Good answer. One last question, do you need more rate in commercial in light of sort of what you pumped up reserves or you think the current rate is adequate to get your equal returns?

Tom Motamed

The more rate the better. That’s always going to impact your margin. I think it’s kind of interesting Bob. We do a lot of – I’d 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’s underlying at least we think it’s a big issue or a bigger issue is we have more rate decreases in the fourth quarter than we did in the third and second quarter. In 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’s good. So, yeah I think we’ll just keep pushing on it and risk selection, more and more of our business is in the focus classes and that’s 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’s probably not that good. That’s what shown 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 why you want to keep.

Bob Glasspiegel - Janney Capital

I appreciate the granularity, Tom. Thanks.

Tom Motamed

You are welcome.

Operator

And we’ll take our next question from Josh Shanker with Deutsche Bank.

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 and that one of there is actual underlying improvement going on in the expense ratio as well seeing you are not forecasting forward?

Craig Mense

Well, I think Josh you ought to think in commercial, there was probably about a 2 point benefit from the insurance assessment on that ratio, but there also is some seasonality in terms of spend on the other side is a little higher. So, I think that expense ratio is approximated by 1 point – in terms of going forward and maybe 1 point or 1.5 point at the most.

Josh Shanker - Deutsche Bank

Okay. And then on Hardy, the expense ratio improved year-over-year, but there might have also been seasonality in that. I realize it’s all coming off of a small base you plan to grow that business. Was the 49ish 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?

Craig Mense

No. This quarter, the report expense ratio was 49 at Hardy, but that was inflated by some one-time cost to close the Bermuda operation and also some severance expenses, so quite inflated by 2 points, 2.5 points from the run rate. And 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 will tell you we expect to get most of the way there over the course of 2014.

Josh Shanker - Deutsche Bank

Okay. And I don’t mean to be labor expenses, but it’s always easy to look at improvements there. So there wasn’t really much improvement on the Specialty side, are we at run rate operational efficiencies at CNA Specialty from an underwriting expense ratio?

Craig Mense

Well, I think when you say not much improvement, there was – the expense ratio on a full year basis is 1.5 points lower than it was. And I would say, right, so it’s running around 30 that’s about the right – that’s about the right number and I wouldn’t want you to think that it’s going to get much lower from there. But we are always looking for ways for improving productivity without expenses flat. I would tell you that our overall this total spend was down about 1% year-over-year this year if you included the impact of Hardy having been into the full year, our actual spend was about 4% less on underwriting and other expenses. So, it’s something that we are mindful of, but it’s – so we will continue to make – we are going to hopefully continue to make some progress there. It’s a focus for us, but the real focus right now is improving the loss ratio and that’s where we would point you as we out to look for more improvement in ‘14.

Josh Shanker - Deutsche Bank

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?

Tom Motamed

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

Josh Shanker - Deutsche Bank

Alright, great. Thank you very much and good luck in the future.

Tom Motamed

Thank you.

Operator

(Operator Instructions) We take our next question from Ron Bobman with Capital Returns.

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’s always the case, but great report. So I had a question about the loss portfolio transfer and in essence the increase in losses. And I am just curious that the staff responsible for reviewing the claims, making the claims payments, the actuaries that set these reserves, are these now all in essence Berkshire employees and they are providing you this number for ultimate ceded losses? I assume there is some level of review you then sort of opine and book a number or does it come about a different way?

Tom Motamed

Ron, good morning. So, it’s – 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 adjustors and the staff doing the claim administration. Now, what’s 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.

Ron Bobman - Capital Returns

Okay. Thanks, I appreciate that. And I had a question about Hardy, Tom, if you comment on sort of the underwriting results in the fourth quarter, whether they should have 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, sort of reconfigured or structured at the one-one reinsurance renewal, any sort of changes there or color you can provide? And that’s it for me. Thanks again.

Tom Motamed

I will start and Craig will finish with 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’s a very competitive market at Lloyd’s, and we like the strength that we are saying relative to new business they are not following the pack, so we like that. So I could say we are satisfied with where they are, but we want more and they know that they are going to work on improving the margins. And as Craig mentioned expenses ratio we expect that that’s going to come down. So I think there is from our perspective optimism that they can perform at a higher level just like CNA can. So yes, we are petty pleased, but it is a tough environment over there and we like the fact that they are showing restraint.

Ron Bobman - Capital Returns

Thanks.

Craig Mense

Yes, there is nothing really changed in the portfolio there Ron, so it’s we did have a small property treaty reinsurance function and obviously the prospects for 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 got excellent cadre of underwriters over there managing their business.

Ron Bobman - Capital Returns

Thanks gentlemen. Best of luck.

Craig Mense

Thank you.

Operator

Now, I will take our next question from John Thomas with Williams Blair

John Thomas - Williams 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 had actually increased, could you comment on the differences there?

Tom Motamed

Small business needs more rate than middle market. I mean that’s 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 petty 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. And that’s probably where it is reflective of the fact that these are better accounts that we are retaining and to retain them or given back a little bit on the rate side, but overall we are petty pleased with that. And if you look at loss trends the fact is we still have a pretty good return or margin and if you want to, you can look at Page 13 of the handout, that will kind of tell you the story there.

John Thomas - Williams Blair

Alright, thanks. And then professional liability, what are you seeing with the loss trends in 2013 compared to 2012?

Tom Motamed

It’s kind of flat with those prior years.

John Thomas - Williams Blair

Alright, thanks.

Tom Motamed

Yes.

Operator

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

Tom Motamed

Thank you very much. See you next quarter.

Operator

And that concludes today’s conference call. We appreciate your participation.

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CNA Financial Corporation (CNA): Q4 EPS of $0.79 misses by $0.08.