CNA Financial Corp (CNA) 2002 Q2 法說會逐字稿

Welcome to CNA Financial Corp. second quarter earnings conference call. Today's call is being recorded. We will now turn the call over to Mr. Don Lofe, Senior Vice President. Please go ahead, sir.

Thank you, operator, and good morning everyone. We'd like to welcome you to CNA second quarter 2002 financial results conference call. My name is Don Lofe, Senior Vice President of Capital Management which includes responsibility for investors relations. All of you should have received our earnings release. If not, you may go to our web site at cna.com. As a reminder, this call is also being web cast and can be accessed again through our web site. In addition, many of you should have received our financial supplements. If you did not receive one, please call or you may get a copy from our web site. With us this morning is Bernie Hengesbaugh and Steve Lilienthal, as well as Robert Deutsch, CFO. Before we discuss the results, I'd like to make the necessary safe harbor forward-looking statement. Statements will be made during this conference call using expressions such as intend, anticipate, expect, believe or similar terms and may include financial projections, exclamations of the company's plans and objectives, as well as estimates of future performance and similar statements. These types of statements are forward-looking statements. The actual results achieved by the company may differ materially from the projections made in these statements. The information described in factors which could cause actual results to differ materially from those in the forward-looking statements are described in the company's various corporate filings with the SEC. These files are available on hard copy. The forward-looking statements speak only as of today, August 8th, 2002. Further, the company expressly disclaims any obligation to update or revise any forward-looking statements made during this call. There will be time for questions from the investment community following our remarks. Members of the news media may all Charlie Bagel. Follow-up questions from the investment community can also be directed to myself, Bob Deutsche or Dawn Jaffray. With that, I'd like to turn the call over to Bernie Hengesbaugh.

Thank you, and good morning, everyone. We have two pieces of good news for today's call. First, we announced strong second quarter results earlier today and second, as we announced a few weeks ago, Steve Lilienthal will assume the role of Chairman and Chief Executive Officer of CNA Insurance Companies effective August 26th. This leadership change is happening at the right time. CNA is back on track in a simpler organization. We're focused on underwriting and we are bolstered by talent. Steve has the experience and the skills to lead CNA to this very important next level of performance. Next quarter, Steve is going to be leading this call, but today he's going to represent the Property and Casualty business, which he's led since joining CNA just about a year ago, a little over a year ago. Let's start then by turning to the second quarter financials. I'd like to provide a few highlights. Bob and Steve are going to get into more detail but to make the quarter over quarter comparison meaningful, I'm adjusting out the reserve strengthening, the effects of the corporate covers and the restructuring charges from the second quarter of last year. What we want to focus on is how the businesses are performing. What you're going to see is that all three of CNA's operating units are growing and making money. In property and casualty, rate increases averaged 27%. Overall, retention has improved to about 69%, and net premiums was up about 6%, held back somewhat by strategies to exit unprofitable lines of business. Much the property and casualty growth year loss ratio for the first half of '02 improved by a full ten points over '01, driven by improved rates and the higher quality of business that we're writing today. In CNA reinsurance, net written premiums in our continuing US operations increased by over $100 million, driven by higher than expected premiums from prior years as well as strong rate gains and strong growth in new business. The net aggregate year combined ratio in CNA rate this year is 98-9, well below that from last year. In our life business, new sales were strong in both life and long-term care, and on the group side, net operating income was up over 20% in the second quarter. Together, our three major businesses produced an increase in operating earnings of about $94 million. Turning to net income, we took a $190 million after-tax hit related to impairment breakdown on our bond investments in Worldcom, Adelphia and other corporate bonds primarily in the telecommunications industry, and Bob Deutsche is going to get into detail on those in a moment as well. In summary, though, we are encouraged by our progress in the second quarter, but we are not satisfied with these results. Our mission for the rest of this year is very clear, picking up the pace of improvement, and with that, I'll turn it over to Bob Deutsche for more details on the financial side. Bob?

Thanks, Bernie, and good morning, everyone. Today we reported net operating income from continuing operations of $140 million or 62 cents per share in the second 00:05:24 quarter compared with a loss of $2.1 million in the second quarter of 2001. For the respective six-month period, net operating income from continuing operations was 251 million this year or $1.12 per share as compared to a loss of $2 billion last year. Investment income was up sharply in the second quarter compared with a year ago. The $100 million pre-tax increase was driven by a $41 million increase in limited partnership income, and a $29 million increase in interest expense. Because of the huge reserve charge taken in the second quarter of last year, along with use of the 2001 corporate coverage and restructuring charges, simple year over year comparisons are not meaningful. Details of these unusual events are shown on Pages 4 and 5 of the press release. Furthermore, I would draw your attention to Pages 20 to 27 of the financial supplement which go to great lengths to adjust for these items. This will allow you to make a more meaningful comparison. Steve is going to cover the results of the property casualty operations in greater detail. Ignoring the unusual 2001 item, the property casualty combined ratio improved from 110.3% in the second quarter of 2001 to 107% this quarter. While this improvement of 3.3% percentage points is small compared to our large rate increases, the underlying details tell a different story. First, the growth accident year loss ratio improved from 83.1% in 2001 to 72.6% in 2002, an improvement of 10.5 percentage points. This reflect earned rate increases of about 16% and lost cost increases net of exposure changes of about 3%. Second, the net 2001 accident year loss ratio was improved by 6.7 percentage points due to finite coverage excluding the corporate coverage as well behind our optimism for the property casualty businesses. Let's switch to CNA rates. While the numbers in the press release and financial supplement include CNA Re US and CNA Re UK, my comments will focus on the ongoing US operations only. As announced July 15th, we have entered into an agreement with Power UK to sell the London operation. Net written premiums increased $105 million in the quarter, increasing from $55 million in the second quarter of 2001 to $160 million this quarter. The increase resulted from $50 million of additional premium on treaties attaching in 2001 and seedus (phonetic) produced more premiums than anticipated. Another $20 million was booked in the second quarter but related to January 1st businesses. The remaining balance of $35 million is attributable to net growth in the treaty and facultative book. Average rate increases were over 30%. The 2002 accident year combined ratio continues at about 99%. In the life and group areas, we are encouraged by the strong sales in many parts of the business. New sales in life and long-term care are up and we've just launched a mortgage term product and have several more new products which we expect will be rolled out later this year. Net operating income was $56 million for the quarter, and $106 million for the first six months. The business is very focused now, having completed the sale of its variable life and annuity business and having announced the sale of the Canadian life business. Although the loss of the federal mail handlers program will not impact the current year net operating income, we are working hard to replace the profits for subsequent years. Before turning it over to Steve, I need to comment on our investment losses in the quarter. Our after-tax realized capital loss was $105 million. This consisted of a write-down on Worldcom bonds of $84 million, a write-down on Adelphia bonds of $48 million, and write-downs on other bonds of $58 million, principally in the telecommunication and cable industry, partially offset by realized gains on other securities of $85 million. All of the figures I've just cited regarding our investments were mentioned on an after-tax basis. With that, I'll turn it over to Steve.

Thanks, Bob. Well, it's been just about a year since I took part in my first CNA conference call, which was much more exciting and complex than this one. It's been quite a ride for the last year. Today, I'm going to talk about the PC operations and I will review our second quarter results in a moment, but first I'd like to make a few personal remarks. Under Bernie's leadership, CNA is obviously in a much, much stronger position than it was when he launched the turnaround plan three years ago, and I'd like to say just personally in a public forum, I truly appreciate the fact that Bernie brought me here. It was quite apparent that when Bernie and I first talked that we shared, we had a lot in common in terms of what we thought should be done and how we thought it would have to take place. I also would like to mention that all of the leadership changes that were necessitated as a result of my personal change have been taken care of. A fellow by the name of Jim Lewis, whom many of you know, has moved up with US operations and now filling the job as the heading, the President and CEO of PC operations, has gotten the ground running. All of the other positions that followed that have been filled and announced, so we're all done. There are no more announcements. Our people are back to work, and now I'm working with Bob Patin and Debra McClenahan in our life group insurance operations to get more closely lined up with what's going on in there. More on this to follow, but suffice it to say much has been done but we still have a lot more to do. Let's talk about the second quarter property casualty results. I'll talk mostly on a consolidated basis but will provide key indicators of the various business units where it makes sense. Unless noted otherwise I will be using the adjusted figures for the second quarter of '01 for comparative purposes that will be excluding the impact of the reserve strengthening for recovering and restructuring from last year. Premiums, overall, net written premiums grew by 6% in the second quarter and is up 13% year-to-date. Year-to-date figures we've gone from 2.9 billion to 3.3 billion, and it's been pretty steady but US especially operations showed the most bullish growth with standard coming in at 5 for the quarter and 10 for the year, US specialty at 11 and 20 respectively. Growth is fueled very, very heavily by the rate that we put on the book, which continues to run about 28%. I do want to pick up on something Bob Deutsche mentioned in his remarks, that he talked about the earned rate of 16. We are getting 28 points on this portfolio, and the earned effect is in the 16 range. So we don't want to have you think that our rate profile or strategy has changed. The growth is basically fueled by the heavy rate, a very nicely developing new business portfolio, and we've also gotten a bit of an artificial boost because we've accelerated the processing of our business, which brings a little bit more premium in for the year and also has a nice effect of enhancing our ability to collect our money, so affecting a very positively statutory over 90. Standard lines, our continued reunderwriting initiatives have tended to restrain our growth as we continue to exit certain classes such as PEOs. We have some program businesses we're taking out and also balancing our comp. writing and we're down now from, our overall comp. work portfolio is down from 27, I think sometime in the fourth quarter of the year, beginning of '02, I think we're down about 24, 23 right now. So making a lot of progress there. Obviously the persistence of our rate levels throughout 2002 and our July numbers are in, and I guess I can say they've held up very steadily with our first six months. So we had a 26.7, sorry, actually 29 in July. We're averaging 26.7 for the year. This is held up quite nicely and it bodes well for 2003, as we'll earn roughly half of that rate next year. That's baked in and should give us a good running start for '03. Overall, rate levels for the first two quarters, about 27. Standard lines, which we include small, middle, excess and surplus lines of risk management business at 28. US specialty, which excludes the global is 29, and D and O and medical segments are generating almost astronomical rates. As I mentioned, the numbers for July are very much in line with the first six months of the year. Retention levels have generally hovered around 70, driven heavily by the middle market, E and S underwriting initiatives. The middle market has now moved from the early part of the year where it was 65ish and now running up close to 70. Our expectations is that this will improve throughout the year as our reunderwriting initiatives come to a conclusion and should run in the mid 70s or better than that in '03. By the way, our specialty book where we had placed the significant bet ran 76 year-to-date, and if you exclude the health medical book, it would probably be over 80, so that bodes well also. New business, lifeline continues on a positive path after a sluggish start for the first two months through our reorganizational activities. Our new business represents about 24% of the overall premium for the quarter, with standard at 23 and US specialty at 28, both very acceptable levels, and pricing, by the way, of new business is measured as a percent of discount to manual is basically at the same percentage as our renewal book, which means that we're getting the same 27, implicit 27% price increase on the new business as renewal book, class and segment restrained. So we can't put back anything that we're taking out. All in all, we think we've got this right. Bob mentioned the difficulty of doing year to year, year over year comparison due to some of the noise that took place last year. Obviously, we had significant reinsurance benefit last year, and then this year we had the double dip of not having that benefit in this year and a cost increase in '02. Secondly, we have about a $44 million pre-tax or 2.5 points of development in the second quarter, so we wanted to make sure you knew about that, but the more interesting and accurate picture, as Bob mentioned, is told by the gross accident year loss ratio, loss in L and E comparison, which shows the effective rate in underwriting, a ten point improvement to be 3 to 73 across compared PC operations, with an eight point improvement in standard, US specialty at ten and our goal operations at 15. I just want to mention these do include the yearly number, which is running about six points. So the results, this is simply the result of strong underwriting, continuing to color our overall portfolio and pounding the rate on the books, as well as getting and selling down on the rates that we put onto the book in '01. The expense story is likewise positive. We've taken out the $100 million we committed to when we began the restructuring activities. That's all done and we're a little even over the top with respect to our expense ratio because of the improvement in our top line. So we're looking at overall six point improvement from last year's 38 to a 32, still not an acceptable number but huge improvement, and we think we have some more work we can get done there within a relatively short period of time. Doing the math, to come back to Bob's original number, the net calendar year combined ratio came in at 107, not acceptable, but at the end of the day, a big improvement over prior year. 110 obviously when you kind of normalize that for the level of the reinsurance benefit and other stuff, it's much higher than the 110 than we're looking at for comparative purposes, but the operating combined ratio, when you use the gross accident loss ratio and the net calendar expense ratio is a 104, and that's really what we look at as how we're doing and how we're running this business. We expect that this will improve throughout the year and into 2003 as the rate increases continue to come through as well as the impact of our renewal efficiencies measure. A couple other points and then I'll turn it back to Don. We've got a couple other things going on. Obviously, we're a big player in work comp. at about a billion-seven and there are some scary trends going on. I just saw a Fitch report that indicates they validate that, and we've added very significantly at the leadership and underneath that level to people running our work comp. lines and putting in place some very specific state by state and class of business strategies. We're also a very big construction player, about $1 billion with comp. being a big part of that. We've also hired somebody with a tremendous amount of experience and focus to run the business, build out the specialized claims, risk control and underwriting expertise to do this better and be a stronger player in that market segment going forward. I mentioned technology. We have a practice leader in place who has hit the ground running, and you'll hear more from us on this in the future. The message I'm trying to play here is that we're done with the rebuild and we're actually looking at things to grow out into and expand our overall portfolio. Generally speaking, all in all, this was a quiet second quarter on a relative and an absolute basis, got a lot of positive indicators, much more to do. We feel we're on a good track and feeling pretty good about what's going on right now. So back to John.

Steve, thanks a lot. Operator, we'd like to open the questions up to the 00:20:37 investment community now, please.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone. Once again, it is star one if you would like to ask a question. We will pause a moment to assemble our roster. We'll take our first question from Ron Frank, Salomon Smith Barney.

Hey, Steve, congratulations and you're not getting the job until you learn to talk slower.

I'm one of you guys. I'm just lost out here in the midwest.

You don't want to be one of us guys now. A few questions. First of all, I understand you're reunderwriting the book, but I'm just trying to put together the apparent deceleration in growth from first or second quarter, which was significant with your comments that you made a few times that you're pretty much done with the underwriting and now going out and looking to grow.

Actually Rob, what happened, we identified some very specific classes of business late in the year. We got some better data to pull out things, particularly on the PEO business, and some larger accounts that were a little tough to measure. I've got some solid measure around these things and a lot of that business did not trip out. Particularly, the PEO and some of the larger business did not come out until April. We got some of it in the first quarter but we also put the hammer down on the PEO business in the second quarter and you'll even see more of that in the third quarter. We had provided a lot of notice on this. This is a $100 million book of business and a lot of these people, we had a lot of these people we 00:22:21 solicited the business so we felt we had to give them sufficient notice in order to make other arrangements for the insurance. We were the last guys writing this stuff, and we wanted to at least handle this in at proper way. A lot of the bigger business came out in the second quarter.

And on the specialty side, you're showing very good growth notwithstanding still keeping the lid on the medical, as you mentioned. Could you give us a feel for where some of the big growth is coming, what you're going out there and writing a lot of right now?

I would say you're seeing a growth in a lot of our professional liability programs. You're seeing some of the middle market or lower mark in the D and O business coming through. It's the non-fortune whatevers in terms of E and O and D and O, and we're selective on the medical business, more interested in price there. So it's been a program and then some very specific D and O, E and O architects, some of the architects and engineer business is likewise growing.

Okay and two quick financial questions for Bob. Bob, the pay to incurred ratio improved from first quarter, but you're still taking down reserves and it's still over 100. When might we expect to see the lines cross in terms of a pay to incurred of 100 or less, and also, how do you manage such a nice swing in limited partnership income when everyone else seems to be complaining about how the market's impacted their limited partnership income?

I guess on the first question, Ron, it's really hard to give you an estimate of that. We're still running off some of the old ones that were affected by the pay said by CNA Re 2K. I guess it's difficult to project that right now because we're still in the stage of running off some of that business.

In terms of limited you know, we are going to be challenged to match the second quarter limited partnership income, and in fact, you're going to see that in the 10-K just as a warning, because this stuff does move around.

Remember, these are on a month lag generally, so as Bob pointed out, third quarter will slow net results from June and going forward.

Thanks very much, everyone.

We'll take our next question from Tom Cholnoky, Goldman Sachs.

Thank you. Ron had one of my questions, but the 29 million decrease in interest expense, what does that relate to, Bob, and then also I noticed your corporate line is starting to move down as well, at least certainly sequentially. What are you doing there, and what kind of numbers should we kind of be thinking there for the year?

Sure. First on the interest expense, if you look at Page 16 in the supplement, that's where I moved down from 86 million down to 58 million - to 57 million and at the analyst meeting in June, we suggested to you that you use about 57, 58 a year, per quarter, and you multiply that times four and that gives you about 225 million pre-tax. The reason it was so high in the second quarter is the way these finite covers work, it's the way these finite covers work is there's a catchup interest charge when you first trigger them because what happens is the additional seated premium that you know is deemed to be owed as of the beginning of the accident year for the finite cover in effect. So the fact that you trigger it in the second quarter of '01 means you could still be paying interest back to, say January 1st of '00, if it was the '00 accident year or '99, you know, and then you had the catchup one time interest expense catchup, and that's why it jumps so much going from the first quarter of '01 to the second quarter of '01, and then in the third quarter of '01, you'll see it's a big number as well because that's when it was triggered from the World Trade Center. I think in terms of corporate, we're at, let's see, net expense is pro-CNA is a $60 million loss. Is that the number you were referred to?

I was looking at the $34 million dollar versus $40 million in the first quarter.

Are there other writing expenses.

Maybe I'll come back to you offline on this.

Okay. Thanks. Next question.

We'll go next to Jay Cohen, Merrill Lynch.

Yes, couple things. Steve, you mentioned the workers comp. trends and obviously we hear some still disturbing things. How do your reserves work in that line? Specifically, I recall you adding to reserves, at some point last year, seemed to be sort of a proactive move. I'm wondering how those reserves are holding up and then secondly, the combined ratio from the first quarter to the second quarter seemed to actually deteriorate a bit, and I'm wondering what on a consecutive quarter basis, what would account for that?

With respect to workers comp., Jay, this is an area that you know, I look at, we look at it on a regular basis. They've done a tremendous amount, (inaudible) it's about that bit because of the volatility in line also with respect to the size of CNA's overall portfolio. So there's pressure. We look back into the '99 and '00 years with particular concern because those seem to be the years that would probably be of the greatest concern from an industry standpoint. Face it, we have not done a recent review of all of this stuff of the comp. line, but I would say to you in the aggregate, we feel we look fine, we're well within the parameters that BMT has provided with us on a corporate basis and we'll be looking at comp. going forward throughout the year. That's probably scheduled for sometime later this year again, but we did take a hit, not a hit but we strengthened our reserves in the third quarter of last year, kind of lost it in the World Trade Center but it's an area that I look at with a lot of cynicism and a lot of worry, so net income how, does that cover it for you.

Yeah, that's fine.

Jay, what explains really the movement, there was basically no development in the first quarter and as Steve mentioned, there was about 2.5 points of development, roughly $44 million developed in the second quarter, a good chunk of that, you know, about that number sore so comes from workers comp., where we saw issues in the second quarter were in workers comp., which Steve mentioned, as well as in some E and S classes offset by some redundancies in certain other areas, but workers comp. is an area that's getting a lot of attention. California is a messy situation. Others out there, you know, our friend Joe Toronto likes California comp. at this point, but I will tell you, we're looking at it with a very cautious eye.

Just one quick follow-up unrelated. World Trade Center payments. Do you know what they were in the quarter and in general, how were the payment patterns looking relative to what you expected?

Sure, the World Trade Center, I guess basically like you're seeing in the industry, they're taking longer to pay up than we would have thought to date, and remember, we're projecting 468 as our net, workers comp. incurred loss and we're sticking with that number. We think it's a damned good number. So far to date, and that's roughly a billion plus on a gross basis to date we've paid $340 million gross. That's data through August 6th. We paid 340 million gross. We've built reinsured 187 million dollars so far and we have no collection issues to 00:31:18 date. We've collected most of that 187 and the rest is just in the pipeline. So we're feeling quite comfortable with the WTC number. We're not prepared to deliver a victory on it but we're certainly watching and feel good about it.

Thanks for those numbers. That was helpful.

We'll take our next question from Jason Moment, Fairlawn Capital.

Hi guys, I had two questions. Could you clarify for me the adverse development you talked about, 44 million, were you referring to this quarter?

Correct.

Could you breakdown what that is as far as a loss ratio impact on the worker's comp. and the E and S?

For each line of business, I can't do that now on the phone because I don't have our premiums separated by that but we can follow up with you on that, but it was $44 million, 2.5 points.

This is Steve. The net on this whole thing, we've been in and out on the worker's comp. and the E and S impact and other stragglers, netted out to the 44 pre-tax was 2.5 points.

Which half of the year was it corresponding to?

99 and '00, the years that were driving were predominantly '00 and '99.

Could you also talk about the reinsurance, because I remember last year, you had a lot of reinsurance on your worker as comp., it We've reduced seated premiums by a massive number. We estimate, you know, perhaps $100 million. That does not flow into the bottom line because obviously, we have incurred losses on that 100 million and we also have greater volatility associated with the $10 million net, but all in, we think it was economically the right decision for us to step up to a $10 million net occurrence limit in comp. for the 2002 year.

Could you talk about the trend that's causing the adverse development? Is it severity or frequency driven and do these reinsurance protections, are they going to continue to help us or are they got because it's a matter of a large loss?

Jason, the issue is it's the overall comp. profile country wide is declining frequency and increased severity, so the net effect of this whole thing is really driven almost entirely by severity trends, and frankly what, it came down to, that the economics of the decision to buy the reinsurance or to keep the risk net were compelling. It made absolutely no sense to continue to buydown for protection that was essentially costing us more than what the lost cost pickup would be. We did a lot of modeling. We have a lot of internal discussion and felt it made a lot more sense to take the risk pay than to pay the reinsurance money.

Bear in mind, reinsurance these days doesn't give you terrorism coverage, so you had that out there as well. We do have some protection in the corporate but that's the only replacement.

I'm all in favor of increasing that line. My question was, are the trends you're seeing as far as what's causing the industry to have serious problems with workers comp., are those hitting severe levels where the reinsurance layers would be to our benefit, those $100,000 layers?

For CNA we're seeing some severity that is less than what the industry projections are and perhaps in frequency that might be a little bit higher, because a lot of these losses are occurring in the older years are in more of what you'd consider the working layers of workers comp., but I don't want to project that as an industry item because I'm not sure what our competitors are doing in their experience. Remember, we have a different book of business as well than others. Thanks, Jason.

We'll go next to Charles Gates, Credit Suisse First Boston.

Good morning. I only had one question. I believe one of you opined and maybe I misheard it in your prepared remarks that trends in workers compensation were scary. Could you elaborate on what that mend?

Charlie, what we're seeing are significantly increased lost cost trends, particularly on the medical side and rate levels are just not sufficient to keep up with those trends, and we see a lot of, you know, the conditions in a lot of the states, such as California, not to pick on California, but California, Florida, New York, Texas, some of the bigger states, you know, with benefit level changes and things like that, and again, you're seeing just not enough rate left to carry it along and we've got the issue of the domestic downturn, where work comp. becomes a supplement for unemployment. You've got a whole bunch of things going on right now.

Why do you relate the medical care to?

It's not just prescription drugs. The entire medical situation I think is pretty well-known in the country right now, not just comp., the entire medical situation. The cost structure has gone way out of sight.

I thought the cost structure for medical care costs according to the CPI had abated some.

We're not seeing that come through on the workers comp. I got to tell you that.

Charlie, what kind of trends are you seeing for medical that your using?

Medical care costs in the CPI, they were much reduced versus where they were, from like 6% to 4.5.

We're not seeing that. we often use on the medical side, we might be using 8% loss inflation.

Thank you very much.

We'll go next to Bob Glasspiegel, Langen McAlleney.

My question's been asked Tom's questions, and Jay asked mine, but I got a couple more. Can you expand on whether there was any reserve development for A and E in the quarter? You didn't mention that.

No, there was not.

On your fixed income side, what is your mix of high yields and triple B's as a percentage of total investments now, have you made any adjustments there, have you increased it and done anything on the during side in it looks like short term investments have gone down.

The duration basically since 12/31, is roughly the same. Since 12/31 it's approximately, if you just look at bonds only, it's about 50 basis points if you will difference and from a perspective -

From what to what?

Six years than it had been more than about five and-a-half years.

You've lengthened it a little bit?

Right, and from the perspective of high yield, principally we report four, and the majority of our portfolio is in investment rate security so the impairment Bob spoke of is where the areas that we've been watching, obviously we 00:39:21 saw there were other areas we were going to have to watch and from a high yield perspective, a relatively small portion of the portfolio.

The triple Bs or double A's, do you have that number?

Not here.

8% I think in that category.

It's very small, low.

Thank you.

We'll take our next question from Matthew Yunyo, Omega Advisors.

Hi, it's Mark Brennan. Three quick things. Could you explain to me how compensation for top management is tied to ROE and profitability?

Management, the incentive comp. plans for the section 16 officers are all formula driven and it's tied to net operating income. With that, let me ask Steve to talk about what he uses on the PC side.

Below that level, we have a combination of just profitability metrics and then a couple of measures, there are five and driven off a combined ratio and operating income metrics, and the last would be flavors of the month, expense management or other things like that that we would put in there for targets.

Does ROE factor into any of those?

We don't use ROE for a measure. We use operating measure as an equivalent of that.

How are we on our schedule to reach 12% ROE, when might that happen? of these hurdles difficult to meet so we've got plenty of challenges but think we're up to the test.

Lastly, could you make some qualitative comments about how either proper or strong the book value is?

How strong the book value is?

Yeah, properly stated.

Why do you think it's not properly stated?

Let me ask you another question. Book value is 69 and we're to add in the income by the next couple of quarters. What might it be by the end of the year?

I might suggest take the street estimates and add that in.

So no additional charges are in view?

I know you really don't expect us to answer that question.

I think in a public forum -

We won't disappoint you. We sit in here feeling, we're looking apt the reserves. There are certainly issues that continue. Steve mentioned some of them. You can never sleep well in this business. There are industry events, Ohio uninsured motorists, crazy Supreme Court decision in Indiana that just came out. You know, more than that, we're not going to say.

To round out what Bob just said, we believe that our restructuring efforts, although some unusual things are really behind us and we are subject to all the aberrations that occur in this business, but in fact we're in a position now where we can focus on growing the business properly.

I hope that covers it. We've got more questions we can take offline. Bear in mind also the interest expense component going forward that is something that we will be burdened with and I've talked about openly, so we're looking at that as well.

We'll take our next question from Ira Zuckerman, Nutmeg Securities.

A couple of questions. First of all, on your latest comment on reserves, given what's happened in the asbestos in your previous experience with fiber board, how much are your asbestos reserves currently and how confident do you feel that those reserves are adequate?

Why don't we ask Jonathan Kantor, our general counsel, and also the other hat of managing our large claims operations for asbestos and comment on that. JONATHAN KANTOR: I don't know if you were at the investor conference in June when a dressed this in some length. We were about 1.2 billion net. We see payments fairly flat, continuing fairly flat for the last few years, perhaps even down this year from last year due to the ongoing bankruptcies, disease mix continuing to moderate away from the more serious disease for the less serious to the unimpaired. The continuing strong exposure rate in our book, 70% of the counts backed in 1995 are closed and significantly the older accounts and the more serious accounts. You know, having said that, there's still volatility to non-product cases in which we have just a few on our cases that need to be thawed out and resolved over the next few years. There's also the decision in California which I do believe is going to be reversed but these elements of volatility which we and our peer companies are subject to are things that we do have to grapple with and add an element of uncertainty to the reserve situation. Having said that, you know about 9.8% our reserved share of the industry is about 9.8%, and our historical market share is 5.8% and I think that that ratio facts up pretty favorably compared to the peer set and that's about as much comfort I can give you.

The second question, I assume you guys are not necessarily required but are you going to certify the financial statements?

We're not certifying them to the SEC. Loews is going to do that but both Bernie and I are in effect going to more or less certify them to Loews to give them additional comfort as part of their due diligence.

Why not just do it voluntarily?

We are going to file the 906 certification under and that will be filed I believe Tuesday of next week. That will carry the CEO and CFO certification of the quarterly filings.

Okay, good. Thank you.

Operator, we have time for a couple more questions.

We do have a follow-up question from Jay Cohen.

I was wondering on the bond portfolio, you still have remaining carrying amounts for Worldcom and Adelphia. Would you consider just writing them off totally and getting it behind you given the environment?

We wrote them down to market value June 30th, which was about I think 15 cents on the Worldcom bonds and today in trading more or less around that, 14 to 16 cents. So we took them down to a carrying value of $33 million. These are bond values with a par of 199 million. So we took them down very far. On Adelphia, again, we wrote them down to fair market value at June 30th that brought these par value bonds of 105 million, the remaining book value on that is 29 million, and then on a handful of other issues, we brought them down to net realizable values. Could we have gone lower? I suppose, but we certainly feel that the fair market value June 30th was a reasonable position to take.

Well, from an accounting standpoint, could you have, from again, just pure accounting standpoint, could you have written them down more? Do you have to go to market value?

You don't have to go to market value, if you think that ultimate value might be less but based on the information available at the time we thought bringing it down to market value was appropriate.

Remember the scandal they proposed, they hadn't filed bankruptcy. It was the most appropriate based upon the information we did have.

That's fair. Are you changing your credit appetite following these issues? Are you changing your investment strategy related to kind of single credit issues?

Let me tell you where we are on the telecom industry. Right now we have about $1.2 billion of invested assets in the telecom industry. That's out of an investment portfolio of $35 billion, so it's only 3% of the portfolio. The cable industry is about $400 million of that 35 billion, and that's about 1%. In terms of the US bond issuance, we actually think we have less than market weight in these two securities. We watch it carefully. We work closely with our friends at Loews to determine where the value is on the credit spread.

Jay, we could sell Worldcom into the marketplace if we wanted to at this point in time. As Bob said, we're going to evaluate this from a strategy perspective. It's an ongoing endeavor, as you know.

Good answers, thanks. because I don't have my notes in front of me, but subject to some caveats, expressed the level of comfort with CNA's overall reserve position I believe as well as the asbestos reserve. Given that some time has elapsed since then and you've discussed some of the things that you're seeing now, would you say that you are less comfortable overall given these developments with your reserve position equally as comfortable or more comfortable?

Very simple answer, more equally as comfortable I am equally as comfortable.

Thank you very much.

Mr. Lofe, I'd like to turn the call over back to you for any additional or closing remarks.

Thank you, operator. We'd like to thank everybody for joining us this morning. Once again, I would like to call your attention to the forward-looking statements in the earnings release as well as my previously read statements at the beginning of this call. As a reminder, a taped replay of this call will be available immediately after this call and running until August 17th, 2002 to 11:59 Eastern Standard Time. You can obtain that call by dialing 1-888-203-1112 or for international callers, 719-457-0820 and utilizing pass code 451938. It will also be archived later today for replay on your investor relations pages of our web site. Once again, thank you for your participation this morning.

This concludes today's conference call. Thank you for your participation. You may now disconnect.