Good day, and welcome to the CNA Financial Corporation's First Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Nancy Bufalino. Please go ahead.

Thank you, Joseph. Good morning, and welcome to CNA's Discussion of First Quarter 2010 Financial Results. Our press release was issued earlier this morning. Hopefully, everyone has had an opportunity to review it along with the financial supplement, which can be found on the CNA website. With us this morning are Tom Motamed, our Chairman and Chief Executive Officer; and Craig Mense, our Chief Financial Officer. After Tom and Craig provide their remarks about the quarter, we will open it up for question. Before we get started, I would like to advise everyone that during this call, there may be forward-looking statements made and references to non-GAAP financial measures. Please see the sections of the earnings release headed Financial Measures and Forward-Looking Statements for further detail. In addition, the forward-looking statements speak only as of today, May 3, 2010. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This call is being recorded and webcast. During the next week, the call may be accessed again on CNA's website at www.cna.com. And with that, I'll turn the call over to CNA's Chairman and Chief Executive Officer, Tom Motamed.

Thank you, Nancy. Good morning, everyone, and thank you for joining us today. We are pleased to report significantly improved first quarter results. Net operating income was $223 million or $0.74 per common share, as compared to $149 million or $0.44 per common share in the first quarter of 2009. First quarter net income was $245 million or $0.82 per common share, compared with a net loss of $195 million or $0.84 per common share in 2009. These results were driven by investment, common and realized gains. We're also pleased to report improvement in our capital position. Book value per common share increased 6% from year-end 2009 to $47.97, reflecting a $10.2 billion of GAAP common shareholders equity. In our core Property Casualty Operations [Property & Casualty Operations], the first quarter combined ratio was 102, compared with 98.2 in the first quarter of 2009. The difference is attributable to 2.7 points of catastrophe losses this year, as compared to 0.9 points in the first quarter of 2009. Despite the increase, we view our catastrophe losses as reasonable in a quarter that saw heavy catastrophe losses across the industry. Also this quarter, we took 2.7 points of favorable development, compared with 3.7 points in last year's first quarter. Before development in catastrophes, the first quarter combined ratio was 102 as compared to 101 in 2009. The first quarter 2010 accident year loss ratio was 71.1%, as compared to 70.0% in 2009. Before catastrophes, this quarter's ratio was 68.4% as compared to 69.1% in the first quarter of last year. On a full year basis, the 2009 accident year loss ratio before catastrophes was 69.1% as well. Net written premiums decreased 7%. Now as described in some detail later, a large portion of this decline-related exposure decreases and return premiums in our…

Thanks, Tom. Good morning, everyone. The first quarter's highlight include net operating income of $223 million, an 8% operating return on equity, net income of $245 million, continued improvement in the value of our investment portfolio, our 13th straight quarter of favorable P&C reserve development and an increase of over $2 in book value per share. I would characterize the quarter as very respectable and reflective of our focused efforts and measurable progress. As you heard from Tom, our Specialty business continues to deliver superior results and our Commercial business results reflect improving discipline. The modest level of cat losses and favorable prior-year reserve development were approximately the same this quarter. Both results reflect our disciplined underwriting and reserving practices. Our balance sheet and capital position remain very strong and showed consistent improvement again this quarter. We continue to maintain a very conservative capital structure and to exhibit a strong cash flow and liquidity profile. Earnings and the increased valuations of our investments continue to drive capital growth. Book value per common share increased 6% from year end 2009 to $37.97. Regulatory capital increased 3% to $9.6 billion. Improved levels of net investment income, primarily from limited partnerships, were significant contributors to operating income. First quarter net investment income totaled $590 million, up from $420 million in the prior-year period, an increase of 40%. The improvement was driven by our LP investment, which produced first quarter pretax income of $72 million, compared with a $70 million loss in 2009. The first quarter rate of return on LPs was approximately 4%. Income from the remainder of our portfolio, mainly fixed maturities, also improved, increasing approximately 5% from the prior-year period, reflecting our continued growth in investable assets and a reduced cash and short-term investment position. Net income for the quarter of…

Thank you, Craig. All in all, we had a good quarter. Net operating income was $223 million or $0.74 per common share, net income of $245 million or $0.82 per common share, continued strong performance by our Specialty business and incremental progress on improving the profitability of Commercial, favorable results from a catastrophe perspective, 2.7 points of catastrophe losses in a quarter marked by heavy losses industry-wide, strong investment results with $22 million in after-tax capital gains and a $535 million improvement in our unrealized position. Improvement in our capital position reflected in a 6% increase in book value per common share to $37.97, with GAAP common share holders equity increasing to $10.2 billion. I would like to close with a few comments on our outlook. At the end of 2009, we anticipated that market conditions might begin to improve in light of low investment returns, the depletion of reserve redundancy and the generally weak economy. Instead, we are seeing competition intensifying across most of the lines. The weak economy continues to pressure premium volume but the impact appears to be moderating. As I mentioned, return premiums and exposure decreases, reduced our commercial premium by approximately 5% this quarter, up two points from first quarter '09, but down a point from the fourth quarter of '09. In this environment, we believe we are well served by our steady and consistent focus on improving the profitability of our commercial book and continuing to build on the strengths of our specialty book. As discussed previously, we have a three-part strategy. First, developing and deepening expertise in an expanded set of industries. Across these industries, we continue to build underwriting and pricing discipline, which is evident in our Commercial segment, accident year results have improved. We are encouraged to have moved into positive…

[Operator Instructions] And we'll take our first question from Jay Cohen of Bank of America Merrill Lynch.

Given the dividend capacity, given the liquidity at the holding company, it seems as if CNA is in a great position now to pay back the lows preferred. I'm wondering what your thoughts are on that.

Jay, it's Craig. I'd say, we agree. Well, the capital position -- I guess it's a terrible thought. One, the capital position is very strong, and we think, the market is beginning to appreciate just how strong the credit is, that it's improving. But we do think, it's still somewhat underappreciated, and we expect that to change over time. So we don't -- I guess, the other thought is we don't have any particular external constraint. Admittedly, we're moving a bit cautiously or have moved a bit cautiously here, because of what we have lived through. But the payback is also economically compelling. But beyond that, I can't really comment on any specific capital plan.

And you would have to pay back that security before you pay a common dividend, correct?

That's correct.

Secondly, the accident year loss ratio, excluding catastrophes in the Commercial business being better, I'm wondering, given the rate trend, I guess, our overall expectation is generally, to see that number deteriorate for just about everyone. Obviously, you guys are restructuring that business where you're underwriting it and that clearly is having some impact. Is there anything else going on with the non-cat losses somewhat light this quarter? And I guess would you expect that number for the full year to be lower than where it was in 2009?

I think, the first thing, Jay, if you look at some of the first party coverages, we've been able to, I'll say, improve our losses in those areas. If you look at the first quarter of 2009, the property booked took a lot of large hits. As you have described, we are reprofiling, repositioning the book. And what you find is first party business is the first thing you can have an impact on. You live with casualty, because of the tail for a longer period of time. But we're clearly seeing improvement by what we're doing on the first party side. The second thing is, frequency is down in the commercial lines arena for us. So that gives us some hope that we are getting out some of the gunk as well. So we're getting rid of some of the large losses, and we're cutting down on the frequency. So all of that's favorable. As to how it plays out, the business is lumpy. First quarter, most people don't think it's a big cat quarter, everybody thinks it's the third. But clearly from our perspective, we believe that a lot of the actions we have been taking are going to pay off. And whether they pay off second quarter, third quarter or fourth quarter, you know how written premium turns to earned. It's going to take sometime to earn this stuff through. But we are optimistic, and we believe we are, as I said, pulling on the right levers.

That's the deep water rig in the Gulf, can you talk about your potential exposure? And if you have any views on the industry exposure that would be interesting as well.

On the P&C side, we don't have any exposure to that. So clearly from a claims standpoint, we're not in the energy business. We're not in that type of oil and gas. That's something that's not in our portfolio today, nor is it planned for the future.

And moving on, we'll take our next question from Bob Glasspiegel of Langen McAlenney.

Just to follow-up, a couple of them that I do need relative to Jay's line of questions, did you say that $300 million at the holding company a loss of excess?

Over $350 million, Bob.

And you have $900 million of dividend capacity?

That's correct.

So if you wanted to pay down the preferred, you said, it would sound like you would have about $1 billion available to do it? Or is there some other number that just could cap the upside of how much you possibly could do?

You got to just take into account what it does to coverage ratios and what it does to leverage ratios.

I'm just saying you couldn't do more than $1 billion or you could do about the $1 billion, that would tap all your cash at the holding company without increased borrowing.

Right.

On Commercial lines, I mean, I applaud you for taking the stand. I heard you try to raise rates and lose business. How much tolerance for the top line declining do you have, Tom? And when does that strategy start to stress?

I think, the short answer, Bob, is we have more tolerance to push the retention number down if we can get rate. Clearly, a point of rate is worth a lot more to us than a point of retention. So we're going to push rates. And right now, what I would tell you is month-to-month, it's a little lumpy. But some months are better than ever, and we are maintaining our discipline, pushing rates. And so far we're pretty confident that we can still keep pushing that number up.

Someone's willing to write this business at lower rate than you're willing to write it, to take it from you. Is there any characterization of whether it's regionals, nationals, subs of Bermudas trying to grow U.S.? Is there any sign of whose got the appetite to write these stuff you don't?

We don't keep track of the fools. The reality is if they want to price it less, be our guest. We've lived with these accounts. We know what the performance is, and we know what we have to do to make them profitable. So clearly, in this business, everybody thinks they're smarter than the other guy, well, that's okay. But from our perspective, we will shed Commercial business. We don't believe we can make money on it. We have said on earlier calls, our objective is to make a profit in every line of business, every geography, and we're committed to that. And we are pleased with the returns to date. But as to who's writing it, I'd say it's a little bit of everybody.

And we'll take our next question from Amit Kumar of Macquarie.

I'm just staying on the topic in terms of competition. It does seem to be a bit of variance from what others are saying. Can you just expand on that a bit more? Is it some specific lines and accounts? Or is it terms and conditions where you're seeing a new competition emerge at this stage of the cycle?

Your question is Commercial?

Yes.

I would say a couple of things. Clearly, I think, others were pushing rates up earlier than we were. We're a little late to the party there. So as you have described, and I think, what you were saying is, their wait profile is not necessarily going up. It might be stable or slumping a bit. So I think, we got to the party a little late. So we are pushing now. So that would be one of my categorizations. The other thing is, when you look at our growth or lack thereof in Commercial, we are looking at a good amount that will return premiums, because this business is retrospectively rated. And after return premiums, the fact is the economy is not great and exposures are down. We have a construction book of business and that's taken a pretty good hit from the economy. So I think, clearly, while we look at our numbers, we have pretty good confidence in why the rates are going up, and why we are losing business and obviously, returned premiums are an economic issue.

Maybe just moving on to the IT transformation cost. Just trying to understand this a bit better, is it all on sort of back-office kind of things? Or does this improve the claims and distribution side of the business too?

This is primarily what we would call home office expense, it's in the world of applications and mainframe. Somebody mentioned they may not have heard the numbers. The outsourcing initiative, the one-time cost is $41 million. We incurred $25 million of that in the first quarter. The remainder we'll incur through the rest of the year. But clearly, one of the things that we have done is simplify how we do business internally at CNA. And a lot of these costs are coming out, because we are simplifying how we do things, eliminating systems that don't make a lot of sense and trying to build things that work across the enterprise as opposed to building things to satisfy every constituency in the company.

On the catastrophe losses, can I just get some more color on that? What sort of policies were impacted and what kind of losses did you see in the first quarter?

Well, you know it's a property event. Whether you talk about Northeast storms, Chilean earthquake, these are all property losses in the first quarter. I would say in general, they were smaller losses. It did not trigger any reinsurance. But we're pretty pleased with an overall 2.7 points of cat. It was $40 million all up. $27 million was in the Northeast, where the winter storms were frequent. And we had about $13 million in Chile.

Just on the reserve releases, could you give -- and maybe I missed this in the comments, could you just talk about what time periods did these reserve releases come from?

On the Commercial side, it would have been accident years 2007 and prior. And in the Specialty business, 80% of their releases would have been 2006 and prior. The remaining 20% in the 2007 accident year.

[Operator Instructions] And moving on, we'll take our next question from Ron Bobman of Capital Returns.

The premium numbers year-over-year in CNA Commercial obviously, declined. And you touched on -- I think, you used the words sort of more selective or selective approach. And I think, the ratio you talked about sort of the win-to-renewal ratio obviously dropped, I think, from 1.1 to 0.7. And so I'm curious to know, how do you actually implement that selective approach? How does it sort of get distributed into the underwriting offices and underwriter's desks to sort of implement that selective approach?

I would say, first of all, it starts with a coherent, clear and convincing strategy at the home office level, which we have done in Commercial. We already had that in Specialty, so we started with that last year. First thing we did, was we said we want to focus on approximately 10 industry verticals, where we believe the opportunity for growth and profit were best. And to minimize the amount of business, we wrote in other industries, that did not fall within those cat. And if you look at that a year later, what I would tell you is that's turned out pretty well. We are writing more business in the areas we want, less in the other areas. So clearly, that's part of it from a new-business standpoint. So the message is clear with our people in the field. It's becoming clearer and clearer with our producers, as we see more submissions in those areas we are interested in. When it comes to rate, we are building more tools within CNA that allow underwriters to look more frequently at their portfolios to determine what they are doing and what we would call scheduled credits and debits on accounts. In other words, how much price elasticity are we willing to take in certain lines of business and certain industry segments, then we have tightened that up quite a bit. And when we have done that, that has impacted retention as well. So as we go to the market, and say, on our existing portfolio, we need more rate. Well guess what, some of the buyers aren't willing to pay for a higher price and the business moves. But we are not going to sacrifice our objectives on getting more rate for the exposure. And clearly every branch has metrics for rate, for exposure, for a price change, for new business, for lost business, for retention, and we now watch that stuff very much more closely than we did in the past. And we have also made our field offices responsible for most of the lines of business that CNA writes. We do have certain lines of business that are controlled from a central location. But we believe that we have created much more accountability at the point-of-sale or not only overall performance, but line of business performance and segment performance.

And it looks like there are no further questions at this time. Thus, that will conclude today's question-and-answer session. We'll turn it back over to our presenter, Tom Motamed for any additional or closing remarks.

Thank you very much. Have a great day.