Good day, and welcome to the CNA Financial Corporation's Fourth Quarter and Year End 2012 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. James Anderson, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

Thank you, Shannon. Good morning, everyone, and welcome to CNA's discussion of our 2012 fourth quarter financial results. 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 the quarter and annual results, we will open it up for your questions. Before turning it over to Tom, I would like to advise everyone that during this call, there may be forward-looking statements made and references to non-GAAP financial measures. Any forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the call today. 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 11, 2013. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding non-GAAP measures, reconciliations to the most comparable GAAP measures have also been provided in our most recent 10-K and 10-Q, as well as in the financial supplement released today. 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 Chairman and CEO, Tom Motamed.

Thank you, James. Good morning, everyone, and thank you for joining us today. Today, CNA reported a fourth quarter net operating loss of $11 million and a net loss of $9 million, as compared with net operating income of $192 million and net income of $193 million in the fourth quarter of 2011. Storm Sandy had a $190 million after-tax impact on CNA's fourth quarter results, including reinstatement premiums. This compares to $11 million impact from catastrophes in the prior year period. The Sandy loss, while a significant event for us, was not oversized given our market share in that region. For the year, net operating income was $587 million and net income was $628 million, as compared with a net operating income of $610 million and net income of $612 million in 2011. The 2012 full year impact of catastrophes, including reinstatement premiums, was $270 million after tax, as compared with $144 million in 2011. We've been hearing for years that the Northeast was due for a major event, and now we've had one. Loss estimates of as much as $25 billion put storm Sandy among the top 5 U.S. catastrophes on record. Numbers alone do not do justice to the devastation across the region, nor to the courage of first responders and the resilience of those who are putting their lives back together as we speak. I am extremely proud of the CNA claim team. Their tireless efforts on behalf of our policies and producers exemplify CNA at its best. On a positive note, our core Property & Casualty operations produced net written premium growth of 7% in the fourth quarter and 3% for the year. We continue to achieve rate increases across our Property & Casualty portfolio, 6% in the fourth quarter and 6% for the year.…

Thanks, Tom. Good morning, everyone. In the fourth quarter, CNA's results were dominated by the after-tax loss of $190 million from Sandy. The losses produced by the storm, along with the reserve charges in our Life & Group segment, resulted in CNA reporting a net operating loss of $7 million. P&C operations produced fourth quarter net operating income of $60 million. Operating income, excluding the effect of storm Sandy, was $250 million consistent with prior quarters. In the fourth quarter, our core P&C businesses continued to benefit from favorable prior year development, $67 million pretax or 4.1 points on the combined ratio, this compares to $244 million or 16.1 points in the fourth quarter of 2011. In our Non-Core Life & Group segment, we completed our annual fourth quarter review of GAAP reserve adequacy for the runoff Life & Group business lines. The resulting reserve adjustments, while a negative, were significantly less than last year. In our payout annuity business line, which consists of single premium group and structured settlement annuities, we recorded a $24 million after-tax charge related to unlocking actuarial reserve assumptions. The reserve charge and the assumption change were driven by the current low interest rate environment and our expectations about future investment yields. This charge compares to a $115 million reserve charge in the prior year period. In our long-term care business line, we increased claim reserves by $20 million after tax as compared to a $33 million claim reserve increase in the prior year period. The claim reserve increase was driven by an increasing duration and severity claim trend. We, of course, reviewed and updated all of our assumptions to reflect our current views on interest rates, morbidity and persistency. We continue to believe our reserves are modestly redundant, although the amount of redundancy was…

Thanks, Craig. Before we open it up for questions, I would like to summarize our 2012 accomplishments: positive growth in Commercial & Specialty for 2 years in a row; rate increases in Commercial of 7% and in Specialty of 5%; 3.3 points of favorable development in our core Property & Casualty business; a favorable impact from Hardy on growth and the non-cat accident year-loss ratio; improvement in our capital position reflected in a year-over-year increase in book value per share of 7%, and lastly, a 33% increase in our quarterly dividend to $0.20 per common share. Now we would be happy to take your questions.

[Operator Instructions] And we will take our first question from Mr. Jay Cohen with Bank of America Merrill Lynch.

Yes, I just had one quick question. On the -- in the Commercial business, in the press release, you highlight a kind of a one-off large loss. And I'm wondering if you can give us a sense of how big that was.

Well, there were several large losses, Jay. We typically always account for a couple in that particular quarter. But we probably had twice as many as before, a total of 5 large ones. And we consider a large loss, $5 million or more. So the 3 in excess of what we normally look at were probably about $16 million.

That's just in the Commercial segment?

Correct.

And that's overall?

Commercial. In Specialty, we had a large dental malpractice loss as well.

Okay. So I guess the underlying question, of course, is when I look at this underlying loss ratio, you've taken Specialty, it looks like it ticked up in the fourth quarter relative to the first 3 quarters. Can we assume a lot of that has to do with some of this large loss activity? There was nothing underlying in there that we should be addressing, is there?

No, think about the large loss impact.

Jay, this is Craig. If I could just add on, take a look at the full year Specialty loss ratio, which was 67.7%, and you can see that's roughly equivalent to what it was at the end of last year's full year.

Right. I guess related to that, would you suggest that in that business -- and I would also think in the Commercial business, that the kind of earned price increases you should see in 2013, is it fair to say they are above what you would expect for normal claims inflation?

We're certainly seeing that now in Commercial. It's favorable. When you look at written rate, earned rate, loss trend, yes, we have a positive margin in Commercial. We don't have that yet in Specialty, it's slightly negative. But as you know, we have been raising Specialty rates. The market is a little slower in that regard versus Commercial. But we expect Specialty rates to continue their upward swing.

So at 6% rate increase, that you don't think materially exceeds your claims inflation?

I think what Tom was referring to, Jay, is just the earned -- at the moment, the earned rate increase is more in the 3%, slightly over 3% range in Specialty.

Yes, the 6% that we said in the conversation was written rate, right? So of course, earned rate lags.

Right. I -- actually, the question was more in '13. So I guess, assuming this price increases continue even at this levels, in '13, your earnings increases, I would assume, certainly by the second half of the year, your earned rate would be exceeding your expected claims inflation?

Yes.

Our next question comes from Amit Kumar with Macquarie Capital.

Just a few quick questions. First of all, you mentioned the uptick in non-cat AYLR for Specialty and you referenced some trends in Professional & Management Liability. You had talked about this trends even in the third quarter. Is this the same trends we're talking about? Or was there something new this quarter?

No. If you look at the Specialty business, what we would call large lawyers, program lawyers and employment practices are 3 hotspots for us, and we continue to push on the pricing. And there's a falloff in retention as we push for pricing. But we like that tradeoff. So we'll continue to push on that. But the claims don't go away after 1 quarter, so we're on top of it. But we'll continue to push rate and we are getting good rate in that business.

Okay. The second question relates to Hardy. We've talked about how CNA will be providing 100% capital support for 2013. We talked about the expense ratio even last quarter, and my question is, does that sort of normalize immediately for Q1 2013? Or is there a lag where the expense ratio will fall over the next few quarters?

The answer, Amit, is it will fall over the course of the year. So we're still -- remember, we said earlier that we expected marginal to any positive negative out of Hardy this year. We'd expect a small positive in '13. We still have some purchase accounting adjustments, unusual ones running through operating expenses. You'll see that in the K when you get it, but it's about $5 million of unusual. We still -- most of the money we'll spend on the financial systems integration, which will be spent this year, so that should start -- that expense there should trend down by more than 10 points over the course of 2013.

That's helpful. And similar to that, how should we think about the retentions for 2013 for Hardy?

Well, Hardy is -- I'm not sure exactly how to answer. Remember Hardy is a little bit lumpier business, because it's specialization and one-off coming, as well as the -- just how the business really is conducted there. So I think it's a little less -- a little less meaningful in terms of looking at retention, honestly.

Okay. The other question I had -- this is the final question, it's sort of a big-picture question, and this goes back to the prior discussion. Just based on, I guess, the margins on rate you're getting, what do you think -- and again, I'm not looking for a specific guidance, what do you think is now an achievable ROE goal for 2013?

Well, I think you're going to -- maybe the right way to answer -- right now, we're probably running at about somewhere around 6% on a run rate basis. If you kind of look back at P&C ops improvements over the course of '12, that might be a reasonable thing to think about as you think of '13. So -- and it's also important when you think of '12 that you kind of look back -- and it's in the financial supplement, by the way, the way we look at '11 today. So the way we look at '11 today in terms of non-cat accident-loss ratio is probably 1 point higher, recall that we increased comp medical severity and auto frequency was up. So if you looked at that, you'd see that P&C probably got close to 2 points better in combined over the course of the year. Maybe that's a reasonable way to look at it. We do have some headwinds, naturally, out of investment income because of lower yield rates, which will slow -- to a certain extent, slow the progress.

[Operator Instructions] And there are no further questions in the queue at this time. Oh, I’m sorry. We have a question. It comes from Ryan Butkus with Citi.

Could you talk a little bit about your upcoming debt maturities? I know it's 2014. But just curious to see how you're thinking about that as we head into 2013.

Right. We don't have any debt maturities as you've suggested, Ryan, until fourth quarter of '14. It's like $550 million. And we'll take a look at that over the course of '13, likely, in terms of where interest rates are. And we looked at refinancing, but it's really on -- and has been uneconomic as we've looked at it. It would help the future income, but it's not really helping the overall book value of the place. And remember, we've got a $46 billion investment portfolio that also benefits from any rise of interest rates. So we'll be paying attention to the direction of rates over the course of '13, but no real anxiety here about when we might act.

[Operator Instructions] And there are no further questions in the queue at this time.

Okay. Thank you very much.