Good day and welcome to CNA Financial Corporation's Fourth Quarter and Full Year 2007 Earnings Conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Nancy Bufalino. Please go ahead.

Thank you, Dana and good morning. Welcome to CNA's fourth quarter and year-end 2007 financial results conference call. Hopefully, everyone has had an opportunity to review the press release and financial supplement, which we released earlier this morning and can be found on the CNA website. We will be referring to the specific information found in this supplement during the call. With us this morning to discuss our financial results is Steve Lilienthal, Chairman and CEO; Craig Mense, CFO; Jim Lewis, President and CEO of P&C Operations, as well as other members of our senior management team. Before we get started, I'd like to advice everyone that during this call there maybe forward-looking statements made in references to non-GAAP financial measures. Please see the section of the earnings release headed Forward-Looking Statements in regard to both. In addition, the forward-looking statements speak only as of today, February 11th, 2008. 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 maybe accessed again on CNA's website at www.cna.com. Following the conclusion of today's prepared remark by CNA's senior management, we will open the discussion to question from investment community. And with that, I'll turn the call over CNA's Chairman and CEO, Steve Lilienthal.

Thank you, Nancy and good morning everybody. Thanks for joining us today. 2007, was a very strong for CNA from both a financial and on an operational standpoint. Our balance sheet is in excellent condition and CNA's strategic position in the commercial insurance marketplace is quite strong and sustainable. And without minimizing the challenges ahead, I would submit the following. CNA is delivering solid financial results that reflect our sustained focus on the bottom line. CNA's delivery of repeated years of profitability validates our assertion that we have skilled technical people, quality data and the requisite tools to sustain our profitable course. Our core P&C portfolio is highly diversified and is very well balanced, and we feel this is a significant advantage in navigating through the market cycle. And lastly, operationally, CNA is efficient and effective. And before I turn this call over to Craig and to Jim, for more detailed discussion of the year and the quarter and what we see going forward, I would like to highlight a number of key results. Our 2007, non-operating income of $1.60 billion was a virtual match to last year's record operating earnings, even after $108 million after tax impact of the Hancock IGI settlement, run-off operations and in spite of a rapidly accelerating softening market. Net operating ROE of 11% was consistent with 2006, and much improved from the previous five years. Net income of $851 million was down to prior year and was obviously impacted by the issues related to the subprime crisis and credit spread widening during the year. Based on your past model of interest and questions, you'll notice that we expanded the disclosures in our financial supplement regarding our structured securities and the related underlying collateral. Craig will provide more color and detail on this in his…

Thanks Steve. Good morning everyone. I am pleased to share our fourth quarter and year-end results, which I would describe as solid and reflective of our discipline in response to pressures from both the insurance cycle and financial markets. Fourth quarter net operating income was $223 million and continue to reflect solid performance of our core Property & Casualty Operations business, in spite of the increasing market pressure. Operating return on equity at 9% for the quarter and 11% for the year was respectable, but on the lower end of our targeted range. We continue to increase book value, which is up slightly from the third quarter and up 4% for the year, which is a continuation of the positive trend over the last few years. We are also pleased to continue return on capital to our shareholders via the quarterly dividend, which we first initiated in the second quarter of '07 at $0.10 a share and which is now at $0.15 per share. Finally, we remain firmly focused on continuously improving the operating and financial fundamentals of the business, which really is the key to our ability to successfully navigate the market cycle. Now I would like to give you a bit more detail on financials. For the fourth quarter, net operating income from continuing operations was $223 million or $0.82 per diluted share, compared with $248 million or $0.91 per diluted share in the prior year period. Net operating income from core Property & Casualty Operations were down $6 million and our Non-Core segments were down $19 million. Net income for the quarter, which includes the impact of discontinued operations as well as realized investment gains and losses was $164 million or $0.60 per diluted share compared with $329 million or $1.22 per diluted share last year. The…

[Operator Instructions]. We'll go first to Bob Glasspiegel with Langen McAlenney.

Good morning. I was wondering if you guys could give us a little bit more color on the mass tort reserve increase in the fourth quarter and also just on the life year-over-year deltas?

Yes, I'll take that this is Jon, Jon Kantor. Really good news, bad news story I'd say on mass tort. Our frequency is decidedly down, pendings down by 30%, newly reported down by over 40%, severity is down. The bad news is defense costs really are rising much more than indemnity cost, as indemnity costs come down, defense cost are rising, but there's actually a good story embedded in that. Because what that's telling us is corporate defendants are defending more of these cases. They're trying more cases; it is expensive in the short-term. But I believe much less expensive in the long-term when you look at excessive where many of the corporate defendants rolled over, the result was a 30-year claimed debacle and I don't think the corporate America intends to repeat that mistake. So I think... I'd say that's really what it's coming from. In general, we've had a number of small adjustments in the context of our annual account-by-account review, but that would be the one theme I would pick out of it.

Is this the pay as you go on, on this just a report you will have to upset that?

I don't think so, our gross reserves are now up to a pretty nice level, $293 million. We have pretty good re-insurance on that. Our growth survival ratio, I'll take one year as 4.4, I'm doing that because there are a couple of large --.

John, just to cut you, I was asking on legal defense not on the overall reserve?

What's the question then?

Is LAE, on legal defense is that sort of pay as you go or is that you got to reserve it up for the future, defense cost booked in the reserve?

It's booked in the reserve.

Okay, so it's not paid as you go on the defense LAE component?

That is correct.

Okay, I guess I'll follow up on that later than. Now go ahead, give me your survival ratio story too, I'm interest in it.

Its 4.4 on a gross basis, we have $293 million growth reserve on net basis, the net reserve is $205 million, survival ratio is 3.7. Now I'm picking a one-year survival ratio because we've had some large settlements which would distort the three year, loss in three-year survival ratio goes 3.3 and 3.0 gross net respectively. But as I said, I mean I think what we are... we are pretty well into our carried reserve is pretty well into our actual range and we're not... we're encouraged by the fact that the frequency and the severity are down, frequency particularly.

Okay. Then on the life side?

This is Craig, Bob. You wanted some more color on the Life side?

Yes.

Relative to the $17 million loss?

Right.

You'll recall, in the Life Group run-off we had a biotical settlement business.

Right.

And, just, it was a debt benefit revenue for this quarter was the lowest it's been for seven years, only $2 million, normally it averages $10 million to $15 million of debt benefit revenue. And then the pension deposit business that I referred to there is, we do have a product that we sell to large institutional pension funds that guarantees the return on this S&P 500 plus 25 basis points and our operating income there is derived from the net investment earnings in excess of the hedge cost. Our investment strategy there is to hedge the index performance. As well as, again, it's... so our earnings are, whatever we earn in excess of the hedge cost and the 25 basis points guarantee. So and just the market conditions in the fourth quarter led to operating loss on the product, which is really on a second one we've had in the history of product, it was like $3 million loss which compares in the prior quarter to $9 million earnings impact.

So if all stays high, that will be a ongoing pressure, perhaps a little mass --.

No, I think is a small amount, I mean, me remember it's an Index 500 products that were gaining the investors, the return on the Index 500, is that, if there is pressure on the 500, that goes to the contract holders.

No, still about volatility, the hedging cost would be higher if the market is more volatile, no?

No, not really.

Okay. Last question, it looks like if I map up your page 6 last quarter from page 7, just to see where you pumped your subprime up, it seems likes it's in the 06 year and I just want to make sure, confirm that, that's sort of purchases rather than downgrades to fill into that bucket?

They were purchases.

Okay.So the 224, to 473 or 508 I am going to show whether that was fair value or market a year ago... quarter ago but that would be mainly purchases.

They are mainly purchases and as I said, those would be... we saw attractive opportunities in very short duration securities to get a very attractive yield and very high quality.

Thank you very much.

[Operator Instructions]. We will go next to Chris Neczypor with Goldman Sachs.

Hi, good morning. Apologies if you have already addressed this, as I had to jump off the call for a minute. But could you just discuss how you are thinking about CNA's exposure to the fall off in the mortgage crisis from a D&O and an E&O perspective? What types of business you guys typically ensure for in that market and then what sort of claims you've seen to date? Thank you.

Hi, this is Jon Kantor again, I'll be happy to address that. The exposure is going to be concentrated in the financial institutions book, where CNA was really not a very big player at all. Last year CNA wrote $72 million of premium for financial institution, which was 2% of our specialty book. And as a result, at 12.31, we had only 16 claims in financial institutions. The other point would be within financial institutions, we underwrote pretty carefully. Post-Enron, we made conscious decision not to write E&O on investment banks, or money centered banks and that the only D&O on them we would write would be A side. And we've reviewed that again in light of recent events and the exceptions to that rule are extremely rare. So at 12.31, half the claims that I mentioned are actually A side D&O policies, which as you know seldom pay anything. Also in general, we wrote high excess and for low limits so that on the open claims that I mentioned, the average attachment point that is the underlying insurance with the retentions is over $120 million. In addition, the limits are on non-A side claims average about $8 million. So that's the financial institutions book. There are three other potentially exposed areas, none of which we think are going to be material, but I'll mention them. The first is the non-financial institutions D&O and E&O, where we have just a couple of claims. And significantly, here we avoided homebuilders. There is a very minor amount of premium that are, that very few exceptions to that rule. The second area is mortgage broker E&O, but there we stopped writing mortgage brokers in April 2007 and I think the gross premium in 2007 for mortgage brokers was about $1 million. The subprime…

Great thanks for the color.

[Operator Instructions]. We'll go next to follow-up with Bob Glasspiegel with Langen McAlenney.

So. Sort of where the expense ratio may drift up into '08 and clearly the message from Wall Street is to know rate bad business to keep the expense ratio down and let that go up, but how much tolerance do you have on that, on that ratio?

Bob, this is Craig. And I'll let... I am sure, Jim's team might want to have something to say on that too. We don't have a particular tolerance or we haven't set some floor or ceiling that we'd like to go up. I think that... that we should take from our comments are that we're... we're mindful of the pressure from top line on the ratio itself, we are also mindful of making sure that we are making long-term decisions about long-term health of the business. So we're going to continue to make investments in technology and people and not of... we don't want mortgage in the future, no pun intended and so we'll be... but have given all that, we're going to aggressively manage expenses to keep it in a reasonable range, but I don't have a number to give you necessarily, I think you can expect us to be as stock pullers we are, and have been in the past and we'll continue to be thoughtful about it. Jim talked about how he had acted in the third quarter that try to get ahead of the curve on that and you can expect us to keep doing that, but it's going to be tough with the market pressure and with our desire to not write improper business. We'll be less focused on the ratio than we are with the bottom line NOI numbers, I guess may be is a shorter way of answering that question. James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: And I think that's an excellent way to answer it. This is Jim Lewis, Craig is that we do not have a set number but we know that, with what we understand from a top line pressure, whether that be…

Thoughtfully answered. One other quick follow up. Craig, where are you on capital going into '08 and the top line is going to be contracting more, I suspect it will be generating more excess capital. The dividend has been sort of primary use of excess capital as buyback at all the consideration under played for '08. I recognize the float issues and liquidity but --?

I think that's important to consider, in terms of float issues, which... and liquidity, which we think a buy back would be certainly... if they would hurt the stock. So we don't think that's really necessarily at this point in time not something that's high on the list of option for us. We do think that we have a fair amount and a significant amount of excess capital. We don't have any particular and specific plan for that right now to share with you. One thing we have done with it given our improved flexibility is then to get some debt that matured in January, $150 million which we paid off, there is more debt that comes due in... not until December. So we are going to pick the right spot, the right opportunity spot in the market to refinance or to not. So we do have significantly enhanced flexibility in the capital side from this year. Then we have been focused more in the immediate term with just improving the cash at the holding company level; so we can improve the number of options we can consider going forward.

Today's sharp correction wouldn't change the dynamics of the decision materially. The stock's down $4.30. I mean at some price, maybe buyback becomes quite economically satisfying?

It is, I mean, you are right, it is. Really at the price it was before that is economically satisfying. I think we're just mindful and a little concerned about the impact... the negative impact that will have on float.

Got you

Again that may not be the right way to get money to shareholders.

Okay, thank you.

Hey Bob, this is Steve Lilienthal. I didn't want to let you go without maybe just picking up another comment on this expense question. One of the things I just wanted to remind you is that we at CNA, have truly demonstrated a willingness and an ability to deal with expense issues over the past couple of years, not just the recent restructuring and resizing that Jim did in the third quarter. I mean, this has been a regular part of our culture, and we are added all the times. That's the first thing. The second thing, we look at the expense initiatives, an expense issue is not something that you can expense your way to success. I mean you can certainly find yourself expense into a competitive disadvantage. But we don't look at that as to be on and end all, we look at as very important part of our business strategies. But as Craig mentioned and Jim mentioned, we are in a... we, we look to and our... we really need to make strategic investments going forward, particularly in the predictive modeling area and some of our claims infrastructure. Yes and the last point I would want to... and frankly, we would prefer to be dealing with what we look to be a short term issue on the expense side than a longer term issue on the loss side. So to rebuild or to build up a book of business that we would feel but not meet the hurdle rates or deliver the sustained profitability that we have delivered over the past several years, we think would be... would be a long-term problem and something that would be extremely difficult for us to work out of, and undoing all the work that we have done till last couple of year. And the very last point I would make is that, if you look at all of our peers, the people you compare us to, you'll find out that we stack up really, really fine based on outside data that serves that we are right at and right in the neighborhood of all of our major competitors, so.

Fair answers. Thanks Steve.

We'll go next to Richard Greenberg with Donald Smith and Company. Richard L. Greenberg - Donald, Smith & Company: Bob just answered... asked my question on the stock buy back, but we would be, just to say, we would be very supportive of that. I don't see what you possibly can invest in it, your stock is currently at 75% of book value, I don't know what could provide a better return and flow, there is no real academic evidence that flow matters in pricing a stock and kind of, who cares, if you're buying something that is so cheap and under the underlying value, that's what's really important. You're building long-term book value and long term shareholder value. So that would just be the point there. Secondly, just, I think I need a little bit more clarity on your evaluation of your securities because it does appear that, for example, on your subprime portfolio, you're not really relying on the ABX index or into pick one specific example on your Alt-A or if you look at page 7, in 2007, for example, on the AAA, you're evaluating your, the book value is basically equivalent to the fair value, actually you're showing a higher fair value and when you look at some people that have done some really thoughtful analysis on this; somebody like Bill Acquin at [indiscernible] and his recent work show that, 2007 vintage would have at least an 11% hit is that valuation, it could as high as 40%. So I think if you just clarify little bit, how you do or value your various securities; that would be helpful.

Alright Rich, I appreciate your comments about the stock as well and understand that we hadn't really thought about the buy back at the level... the level we've seen this morning, so, to make one comment. But as far as our pricing, you should know that all of our pricing is third party. It's a majority of it is from IDC and not a bit is in internal pricing. So these are market prices and market pricing and we are very mindful of making sure that we have both accurate and of going to sources that are very historical choices that we found to be very credible. Richard L. Greenberg - Donald, Smith & Company: So, you can't get market pricing on all of these Alt-A securities, for example?

Yes. Richard L. Greenberg - Donald, Smith & Company: Okay.

And you got to look really at the collateral that we're holding relative to ABX. Richard L. Greenberg - Donald, Smith & Company: Right, okay, that's great. And then we really do appreciate this... the breakdown you guys have done and all this increased disclosure. Thanks a lot

Welcome.

And we have no further questions. I would now like to turn the call back over to Nancy Bufalino for any additional closing remarks.

Thank you, Dana and thank you all for joining us today.Once again, I call your attention to the disclosure containing forward-looking statements and non-GAAP measures in the earnings release. Taped replay of today's conference call will be available for one week immediately following until February 18th. Please see the earnings release for replay details. We appreciate your participation today and thank you again. Operator: That does conclude today's conference. And the replay of this call will be available to you by dialing 888-203-1112 or 719-457-0820 and entering replay passcode 3629040 followed by the # sign. We thank you for your participation and you may now disconnect.