CNA Financial Corp (CNA) 2002 Q4 法說會逐字稿

Thank you operator and good morning. We'd like to welcome you to CNA's fourth quarter 2002 financial results conference call. My name is Dawn Jaffrey and I have responsibility for investor relations. By now all of you should have received our earnings release financial supplement and assessment review document. If not you may access these documents at our web site at cna.com. This call is being web cast and can be accessed again on our web site after it's concluded.

With us this morning is Steven W Lilienthal, CEO, Robert Deutsch, our CFO, James Lewis, President of P&P Operations and Jonathan Kantor, Executive Vice President and General Counsel. He will address our asbestos position.

Before we discuss our results, I'd like to make the necessary disclosures concerning forward-looking statements. Statements will be made during this conference call using expressions such as intends, anticipates, expects, believes or similar terms and may include financial projections, explanations of the company's plans and objectives, as well as estimates of future performance in 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 describing factors which could cause actual results to differ materially from those in the forward-looking statements are described in the company's various public filings with the SEC. These filings are available on the web or in hard copy. The forward-looking statements speak only as of today, February 13th, 2002. Further, the company expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

There will be times for questions from the investment community following our remarks. Members of the news media may call Charlie Basil for follow-up questions from the investment community may be directed to me. With that I'll turn the call over to Steven W Lilienthal.

Good morning to all of you and thank you for joining us today. Before I get started, I wanted to remove the question of surprises from the table by saying that CNA will not be taking any specially property and casualty or CNA recharges for asbestos or otherwise for the quarter. We did, however, strengthen our reserve position on individual long-term care which had the impact of reducing net operating income to the tune of about $20m.

After a brief overview, Robert Deutsch will provide a more detailed financial discussion. Bob will be followed by James Lewis who will provide a closer look at the property and casualty operations. Bob Patin, head of our group and life operations is here today as Deb McClenahan, head of CNA Re. They will not have formal speaking roles but are available for questions during the course of this conference call. Jonathan D Kantor, General Counsel, will be more or less our featured speaker this morning and will provide a detailed discussion of our asbestos exposures. We have set aside extra time for Jon to cover this important topic and have provided time for questions and answers also. If time runs out we will handle additional questions by phone this afternoon or tomorrow.

Overall financial performance year-over-year improved significantly in 2002. Even if we neutralize the noise of 2001, the $396m of net operating income for 2002 represents a 400% improvement over 2001. We attribute this to underwriting discipline and rigor, as well as aggressive expense management. We also obviously had the help of favorable CAT experience during the course of 2002. On a relative basis the improvement is significant. But we still have a ways to go until we reach a level where we are generating returns of the double digit variety, when measured by traditional methods such as ROE and the like.

From a property and casualty standpoint and I mentioned that James Lewis will talk about this more in detail in a few minutes but property casualty operations made significant progress in 2002. Gross premiums were up by way of very large rate increases, strong but appropriate levels of new business, re-underwriting was completed as was structure took out over $100m of expenses, improved accident year loss ratios by 11 points. Our renewal efficiency report continues to indicate positive trends and spreads in the management of our renewal portfolio. New business pricing remains strong.

Property and casualty has no major distractions for 2003 to limit our participation in a continuing robust market. January 2002 was a very positive month for rate and new business and as I said Jim Louis will provide more detail in a few minutes.

CNA Re likewise performed quite well throughout 2002 and enjoyed a very healthy January 1st. Rates were up, loss ratios and expense ratios were down. CNA Re did experience prior year reserve development in the third quarter in the D&O and E&O lines which was pretty typical for the industry. But generally speaking we were very pleased with CNA Re's performance in a year particularly evaluated on an accident year basis we're pleased with our 2003 outlook. We also concluded the disposition of our UK operations late in 2002. CNA Re contributed $26m of net operating income for the quarter and $65m for the full year.

Our life and group operations contributed operating earnings of 198m for the year and $36m for the quarter, which represents significant improvement year-over-year. Results were driven by strong returns in the group disability area, increased investment income and reduced drag from our unprofitable business sold or disposed of in 2002. As mentioned, long-term care impacted 2002 operating income negatively by approximately $20m . We are completing a total analysis of this product. The economic sensitivities and the rating structures. So all in all, 2002 was a very productive, complex, busy, if not draining year. Much was done, much needs to be done. We've improved. We don't feel it's good enough. We've got a lot of good people working very hard who are very focused and we remain very optimistic regarding our 2003 prospects. I'd like to turn it over to Robert Deutsch.

Good morning, everyone. Steve provided you with a good overall discussion of the quarter. I would like to get into a little bit more detail before turning it over to James Lewis who will discuss our P and C results.

Today we reported net operating income from continuing operations of $112m, or 49 cents per share in the fourth quarter compared with a loss of $290m or $1.28 per share in the fourth quarter of 2001.

For the full year, our net operating income from continuing operations was $396m, or $1.77 per share for 2002, compared with a loss of 2.4b in 2001. Obviously 2001 was greatly distorted by World Trade Center, the second quarter reserve charge and a host of other unusual items.

Our fourth quarter results benefited by a $24m after tax reduction in the accrual for restructuring and related charges. Going the other way, though, was lower net investment income, principally due to lower yields on bonds and higher interest expense on funds withheld balances. As mentioned in our last conference call, our investments in limited partnerships has decreased from $1.3b at September 30th to $1b at December 31st.

Net income for the quarter was $82m, or 36 cents per share, compared with a loss of $20m, or 8 cents per share in 2001. This quarter we had an after-tax realized loss of $30m . Included in this figure is $196m of impairment losses. For the full year, net income was $187m, compared with a loss of 1.6b. This year we had total after tax impairment losses of $542m . My last subject deals with VITEX life settlement business which stopped purchasing new policies in the middle of 2001. In a routine comment letter we received from the SEC, they took a position on the accounting for this that, frankly, doesn't reflect the true economics of the business. The restatement only impacted 2002 net operating income by $9m. With an unfavorable impact to equity of $254m, which will be realized in future operating income as the life settlement contracts mature. The accounting literature which the SEC believes is applicable is very much akin to cash accounting. However, we decided that restating was preferable to spending a lot of time to support our past accounting practice.

I'd be happy to get into more details during Q&A. With that I'll turn it over to James Lewis.

Good morning everyone. Today I'll give you a quick summary of our 2002 results and then spend a little time on where we're going in 2003. I'll focus on the 2002 core operating results using the adjusted figures from the financial supplement.

Net written premium standpoint, property and casualty operations ended the year at 6.4b, up 5.8b this 10% growth was driven by strong rate and new business. Also this growth was on top of the non-renewal of $300m of unprofitable business.

Rate achievement was clearly one of the highlights for 2002. Overall rate increased 27% during 2002, standard lines rate increases 27% for the year, specialty lines came in at 26%. In January, we continued to see strong and substantial rate increases 23% across the whole book. 22% in standard lines, and 28% in specialty lines. Our expectations for '03 is that rate achievement is going to continue to be strong.

Retentions continue to hold across the overall P and C book at around 70%. We did see improvement from quarter to quarter as we worked through our underwriting initiatives. Standard lines retention ran in the 60s with the high 60s during 2002 and if you pull out the business that we intentionally non-renewed, standard lines retention would be about four points higher. Retention in the specialty lines within the mid to high 70s, a level that we're comfortable with.

We wrote approximately 1.7m or 7b of new business in 2002, which represents 25% of the book. That's versus 1.5b in 2001, and 1b in 2000. As we've said before, we also monitor renewal efficiency on our middle market books. And that's the spread between renewed and non-renewed business, relative to paid losses and case reserves. During the fourth quarter, this spread was running at a positive 15 points, paid in case on renewal base came in around 30% with 15 months of development. Headcount of renewal efficiency tells us that we're shedding and keeping the right business.

Now let's turn to the loss ratio. [Inaudible] year comparisons include the impact of Enron related losses, the benefit from reinsurance and prior year development, all in 2001. So to get behind these factors and really see the underlying performance of the business in 2002, you have to look at the gross accident year loss ratios. Gross accident year loss ratio for property casualty operations improved 11 points to 72% specialty lines improved 13 points to 68%, and standard lines improved ten points to 74%. These numbers include gross [U L A he] which is running about 5%.

These improvements tell us that we're on the right track. All the work on risk selection, rate achievement and [setting] unprofitable accounts took hold in 2002. Expense initiatives also took hold. Our 2002 [calendar] year expense ratio improved by 5 points to 32%. We were able to take out more than $100m in expenses, largely because of the restructuring that we launched in late 2001.

Overall, we made significant progress on many fronts in 2002. Looking ahead there's plenty of opportunity to pick up the pace in 2003. In standard lines we'll continue to focus on property, it's profitable, we're coming off a strong 2002. We had 680m in written premium and strong growth. Small business is another growth area for us. This is already a $750m operation and we're ramping it up with investments in underwriting talent, technology and product development.

As I mentioned last time, workers' compensation is on our watch list. We want to write it but we also want to balance it with growth and less volatile lines. At the start of 2002, workers' compensation was 22% of our total portfolio. Now it's about 18%. And we're going to continue to manage this percentage down through state specific strategy.

To sum it up we've accomplished a lot in 2002 but there's a lot more to do. The operating platforms, the strategies, the best practices and the leadership team are all in place. The markets working in our favor. Now it's up to us to deliver. I'll now turn it over to Jonathan D Kantor who is going to address the asbestos exposure.

Thank you, Jim. I'm going to do a thorough review of our current position on asbestos and in particular focus on three key topics. First, a detailed examination of our asbestos reserves. Second, our non-products exposure and third what we see happening in the overall asbestos environment, and in particular our own book.

Hopefully you've got the slide presentation, which is on our web site. The overview, page 4, gives today's headlines. Our current net reserve position is based on a ground up analysis which was recently examined by an independent actuarial firm. According to that opinion, CNA's valuation process is, and I quote, "a thorough and comprehensive ground up exposure based analysis and constitutes a best practice analysis."

Our survival ratio is 11.2 adjusting to 14.5 under reasonable assumptions that I'll describe later. Our total IB and R represents 59% of asbestos reserves, with unassigned IB and R at 46%. And I'll explain what unassigned IB and R is as well. Before I dig into the numbers though I'd like to make a couple of qualitative points as to where CNA has been on this asbestos issue in the past few years.

If you turn to page five, which is entitled CNA's prior reserving actions, in the past CNA has not hesitated to take up reserves when we saw deterioration in the asbestos environment. When the U.S. Supreme Court struck down the Georgine settlement that touched off an avalanche of asbestos claims and CNA reacted in 1999 with a $562m reserve addition When the wave of asbestos bankruptcy hit in 2000, along with the assertion of non-products theories and new estimates of industry-wide reserve short falls CNA again responded in 2001 by adding 772m to reserves. In the last 18 months, we saw no new negative themes in the asbestos environment. Of the top 12 asbestos bankruptcies, the so-called dirty dozen, ten were filed in 2000 and 2001, and only two were filed in 2002. That was Narco and Harbison Walker which were filed for very specific purposes. The non-products cases we're contending with today were all filed in 2000 and 2001. And the estimates of industry reserve short falls put out by Tillinghast and Millman in 2001 have not been revised since then. We don't think the asbestos environment has taken a turn for the worse. That turn occurred in 2000 and 2001 and that's the turn that we recognized in our reserve edition in 2001.

Although it might be heresy to say so, we think the environment might actually be stabilizing. If you turn to page 6, which is entitled current asbestos environment, you will see some examples. Peripheral defendants are getting sympathy from many quarters. Plural registries, which prevent unimpaired claims from going to trial are proliferating. And there are positive developments from unlikely places like Mississippi, Louisiana and other places as well. Now our reserve estimates do not assume or anticipate that the current environment will improve. The signs of stabilization are nevertheless beginning to appear.

Now, what's happening in CNA's own book. A lot but I guess the most striking thing is that our payments are skewing very heavily towards Mesothelioma claims which are running at 62% of total payments. The epidemiology says we're in the peak years for Mesothelioma so there's reason to believe that claim payments may moderate as Meso claims recede.

Now to the numbers, on page 7 you'll see our current reserve position which has remained stable from '01 to '02. On page 8, we have our reserves broken down into eight categories, together with the net paids in '02 associated with each category. We give information as to the number of policy holders with active and settled asbestos claims. And in the next nine slides we explain this chart in some detail. On page nine we deal with IB and R. Total IB and R as I said was 59% of total reserves. Total IB and R breaks down into two sub categories assigned and unassigned. Assigned IB and R relates to policy holders with settlement agreements which include structured settlements, Wellington obligations and coverage in place agreements. This category represents 13% of total asbestos reserves. Unassigned IB and Rs for potential development on accounts not settled and unidentified future accounts in this category we are at 563m or 46% of total asbestos reserves.

In slide ten we take a slight detour to discuss survival ratios which stands at 11.2 excluding fiber board. We've applied three alternative adjustment methods which operate independently of one another. Each method has been adopted by one or more of our peer companies to adjust their own survival ratios. In the second method, I note the 60 major asbestos defendants referred to there are the 60 generally recognized out there as the tier one and tier two defendants.

The next three pages deal with our structured settlements, Wellington obligations and coverage in place agreements. These pages are fairly self-explanatory and I'll just highlight a couple of points. Page 11 deals with structured settlements, where 118m of our reserves reside. We're fully reserved for these settlements and do not discount our reserves in this area even though we are entitled to do so. On page 12, you'll see we have five Wellington accounts and as to each account we are reserved at 100% of product limits.

On page 13, you'll see we're reserved at 100% of product limits on 15 of our 23 coverage in place agreements. The other eight are low frequency and low severity accounts where we have a very substantial percentage of limits up nevertheless.

With respect to fiber board, page 14, that account is in run off and of course is settled. On page 15, we discuss large accounts. Note that we set the trigger very low on large accounts, $100,000 of cumulative paid loss. We do that to get senior management involved early on in accounts that have any potential to become truly large. And to try and settle them at an early stage. This strategy is reflected in the fact that CNA has been a very aggressive settler from '99 to '01 where our paid share of industry payments was 150% of CNA's historical market share.

The next two pages deal with the final two categories and are self-explanatory, and I don't propose to go into them unless there are questions.

In the interests of time, I'd now like to turn to our non-products exposure, page 18. We recently completed an in depth review of our non-product situation and we believe this review is the most thorough and comprehensive non-products review of any company that has studied this problem. In particular, we reviewed not only our open accounts but 1,450 closed accounts for potential non-products exposure. We believe that it is essential to study closed asbestos accounts because non-products exposures can and do emerge from accounts that were closed many years ago.

Our review identified a small number of accounts which show some potential for non-products exposure. This is consistent with CNA's historical underwriting profile as a diversified writer of primary and excess coverages as opposed to some other carriers who wrote much more primary insurance than CNA did. As you may know, the non-products phenomenon pertains mainly to writers of primary insurance and much less so with respect to excess writers.

Since January 1, 2002, CNA has settled five non-products accounts, the most significant of which was the settlement of AP Green, which we announced earlier today. Remaining in our book are two particular non-products accounts that are the subject of coverage litigation. We detail these at page 19 of our presentations. One of the key issues in these cases will be application of the completed operations clause and whether it limits un-aggregated coverage to the period during which the operation was conducted. In 2002, there was an important decision in a federal case called Wallace and Gail that was favorable to the industry position on this issue.

In the area of direct actions, page 20, CNA has been named in one purported class action in West Virginia arising out of the defense of asbestos claims. CNA provided excess coverage to the policy holders at issue and provided no loss control services to these policy holders. We believe we have numerous meritorious defenses in that case.

In the Texas litigation, CNA is one of scores of defendants, and from what we know we don't think the suits represents any credible threat to CNA at this time.

In the area of 2002 performance, page 21, our net payments were 22m, which is historically low for CNA. Some of this improvement is attributable to collection from another insurer in a contribution action, as well as aggressive pursuit of reinsurance collections. However, a lot of the improvement we believe is sustainable and our staff is highly motivated for continued good performance in 2003.

Our reserving methodology is presented at page 22 and that methodology has been validated as best practices by an external actuarial firm.

One final word about asbestos reform. CNA's name has been associated with the trust fund proposal and it is true that we are exploring an administrative solution to the asbestos problem. We think this solution makes sense because it delivers very tangible benefits for all the stake holders. The claimants, the industrial companies and the insurers alike. It minimizes transaction costs and provides a fair, efficient, predictable and affordable system for compensating sick people. So we think this idea needs to be given an honest look. And with that I'll turn it over to Dawn Jaffrey.

Dawn Jaffrey Thanks. We'll now open it up for questions. Operator.

If you would like to ask a question press star one on your touchtone telephone. If you're on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again it's star 1 to signal for a question. We'll take our first question from David [McGaugh] with Salomon Smith Barney

Good morning. Very thorough presentation on asbestos, I appreciate that. I had a question about reserves overall. S&P yesterday took an action on I think the life insurance companies and another one of the underwriting subsidiaries which they indicated their review based on 2001 statutory data of the P and C companies' reserves were that the reserves were understated by as much as 5% to 8%. Can you comment on that overall, where you stand on reserves at this point? Obviously you said you're not taking anything this quarter. Maybe give us a little bit more comfort.

Sure. First of all, from our perspective, our reserves are in management's best estimate. Second, the S&P analysis used the 2001 schedule P which we really do not believe is the most appropriate database to be analyzing a company as complex as CNA. That would apply to other companies like AIG as well. Third, as to 5% to 8%, everyone is entitled to their opinion.

We'll take our next question from Charles Gates with Credit Suisse First Boston.

This is Charlie Gates. Can you hear me?

Yes.

Here's the question. What way to the settlement of the AT green that you made reference to in your news release this morning?

Could you repeat that? What led to the settlement?

Yes. What specific thing happened recently that caused you to sign up on that? Could you elaborate on what occurred? That's what I'm trying to ask.

A lot of that relates to litigation dynamics that are still in play because the settlement still needs to be approved by the bankruptcy court. So I think I'm going to pass on that one.

When would that be expected? Can you make comment on that?

We would hope sometime this year.

Thanks.

We'll take our next question from Robert Glasspiegel with Langen McAlenney.

Could you -- first of all the asbestos discussion was very helpful and so helpful I don't have any follow-up questions on what you had to say. On the investment income, the core investment income sort of ticked up sequentially and the costs of the cover went up, those two items sort of cancel each other versus my model. Wonder if you could flush through what's going on there and are we at a new run rate for the cost of the cover at a higher level? The second question is whether you could expand on the long-term care outlook and is that going to depress future life earnings or are we sort of caught up and okay and was that number an after-tax charge or pretax charge?

First, on investment income. I had seen in your note earlier this morning about, talking about the P and C segments. Let's talk about the total operation. For the year, we had investment income of $2b for core investment income. We're comfortable with that number where it goes next year in light of lower interest rates and all that it's a challenging environment. I'd leave it to you to determine your estimate of that. But it's 2b was -- we're pleased with that and we wouldn't read too much into any one quarter. On the corporate cover, the $71m for this quarter does reflect some form of really cash up interest on a particular treaty given the nature of that treaty. The better number to look at there, Bob, is the run rate of 240m , which is consistent with the guidance we offered in June. You'll recall that the funds withheld balance is about 2.8b. You put about an 8% interest rate on that. You get about 230m to 240m as a run rate basis going forward. So I would -- I'd stick with that kind of guidance there.

Remind me how that phases down per year going forward.

It's going to be quite a while. I think for 2003 a good number to use is 240. And then over time it works its way down. But short of commuting them in a significant fashion, that's not a bad number to use. So I would encourage you to use that number rather than 70m times 4.

Your last question was long-term care. What happened there was, frankly, we were seeing claims coming in that were taking longer to report to CNA and once they came in they were staying open longer than expected. We increased reserves as Steve said, it was about a $22m after tax item. It was about a $35m pretax increase, which is about 10% of the long-term care reserves that does in fact, Bob, you projected precisely right in your write-up this morning because that was about an exact offset to the restructuring charge.

Does the sort of bump there depress the sort of run rate going forward or is this a --

We're certainly watching the long-term care we're doing a detailed analysis of the business where we need appropriate rate increases. There will still be a fair amount of that business in 2003, certainly. There are many contracts in force. They keep paying us. My sense is the premium volume is still apartment to continue to go up but we're certainly watching it from carefully from an actuarial perspective.

Thank you.

Once again if you would like to ask a question you may do so by pressing star 1 on your touchtone telephone. We'll take our next question from [Gail Golightly] with Wachovia securities.

If I look at your asbestos presentation, page eight, can you give me some context for these number of policy holders to the extent of how many have you had, sort of over time and what percentage of those enclosed at this point, with settlement, without settlement.

Well, the numbers you see here are open accounts. You're asking how many accounts have we closed over time?

Yes.

I'd say a very substantial majority of accounts that get opened close without payment or minimal payment. That's the best I can do.

Thank you.

Star 1 if you would like to ask a question. We'll take our next question from Rob [Matin with Snyder] Capital

You had a pretty sizable statutory surplus jump in the quarter. I was wondering if you could comment on that. And the second one was you talked about, I think, being pretty happy with the specialty retention rate in the mid 70s, but the standard was in the upper 60s. I was wondering where you would like to see that going into '03.

Sure. The statutory increase, if you recall, we sold to low $750m of preferred stock. 500m of that was used to retire debt and 250m was contributed downstream to Continental casualty company, the main property casualty pool. As to the specialty retention, I'll ask James Lewis to comment.

On the retentions itself you're referring to the standard lines that was in the 60s. And I say within the high 60s. That was a result of the re-underwriting initiative that we had in place. The $300m of premium that we non-renewed was all in standard lines. It was either in our large account area. It was in PEO business, or some other classes that we were exiting in construction. And as we go into '03, we see that retention improving to 74.

The other thing, with the retention, is that even if you look at it being in the high 60s in '02, if we had not renewed or non-renewed that $300m of business, we would have had a four point improvement on the overall standard lines. As far as the specialty lines that I'm comfortable with, is that we've got a volatile bulk of business there. We're doing D and O. We're writing med mal and as we manage that overall portfolio, manage our overall exposures down, we wouldn't expect that retention would be in the 80s

Thanks.

Once again it's star 1 to ask a question. We'll take our next question from [Maroon Kumar] with JP Morgan

I missed the early part of the call. You may have addressed this. The first one is the outlook for the rate environment for the rest of '03. There were several reports out there saying that the rate environment is softening and might not be as robust as 2002. And the second question is in terms of statutory capital, the amount of dividendable, the capacity for dividends from the operating company to the holding company in terms of last year you had to get regulatory approval to send money up. I wanted to check what the status of that is and what the outlook is for dividends for this year.

On your question on the rate side, we really see the rates continuing to be strong in '03. And as I indicated for January we had 23 points of rate across the total portfolio. We actually saw increases in our specialty lines portfolio from where we ended the year, which was also strong in '02. The only place that we've seen any softening is in the property line. And that's on the heels of getting 50% plus increases for rates two years in a row. And that's also our most profitable line of business. We're seeing double digit rate increases still as we look at January, but we do not expect to see the same increases we've gotten two years in a row. So the softness right now is on the property line, the most profitable line we have. The other lines of business that we're seeing, the overall rate is actually continuing to maintain and be very strong.

Softness is certainly a relative term. I think all the announcements you've seen, I think AIG's news, I think all of that bodes well for this industry maintaining discipline for quite some time. On the question of dividend capacity, several things, I would say that the upstream capabilities are measured in the hundreds of millions as a practical matter we really do not need to upstream much money. The debt service requirement is roughly 120m a year. So while earned surplus is a big number, I don't think anybody should be expecting us to take sizable statutory capital out of the operating entities. We contributed 250 in December. We're not looking to pull that out any time soon. And in addition some of the statutory capital went up as well, because of a reduction in schedule penalties and not admitted assets. Next question.

Once again it's star 1 to signal for a question. We'll take our next question from Steve Shapiro with SF Investments.

I wanted to follow up on a question that was already asked. If I understand correctly, you expect the cost of the financial reinsurance contracts to equate to about $240m a year on an ongoing basis for the foreseeable future?

Certainly in 2003 that is a good number, and it will probably be close to that number in 2004, short of a commutation.

Follow up would be have you considered a commutation considering the discount to book that the stock is trading at right now?

We certainly have considered it. We regularly consider it. It's not as simple as saying your money is better served keeping that 8% to yourself. It gets very tied in with the capital of the company. It gets tied in with our continual discussion with the rating agencies but it's something that we regularly look at. Now, bear in mind on some of these finite deals, finite deals does not mean no risk. And there's a lot of re-insurers who have learned that the hard way. I will tell you that a fair number of our finite deals, CNA is absolutely the beneficiary of those deals. So while there may not be unlimited risks to the re-insurer, the fact is the present value of the benefits to us will absolutely exceed the present value of the premiums and future interest income for a certain number of those deals. So you have to be very careful which ones you choose to commute.

Thank you very much.

We'll take our next question from [Luka Apolito with Chesapeake] Partners.

I have a very silly question I'm unable to pull up the slides on your web site.

Can you call us, call Dawn afterwards and we'll make that work for you or fax you a hard copy. She's at (312) 822-7757.

Thank you.

It's star 1 to signal for a question. Follow up from Robert Glasspiegel.

I was wondering if you could expand on why the premium growth in standard slowed to flat in the quarter. I mean your commentary seemed like rates are up and along. Retention rates are going up. New business is strong. Was there something funny in the year ago quarter or I guess I'm just wondering what the run rate for going into '03 might be for that loan.

You're right the overall rate when you call it softening, there was some reduction in rate that we saw in the fourth quarter on the property side. We still ended up with 27% for the whole year. But that quarter was lower than what we had seen in the first three-quarters of the overall year itself. As we looked at growth, new business was still strong for us. Retention, because of the re-underwriting, had not improved in the fourth quarter and we really didn't see that improvement really start to happen until January, because we did not complete the re-underwriting until the November, December time frame. So that's what you're seeing the impact of is, the property overall rates and you're also seeing that the re-underwriting was still occurring in the fourth quarter.

When you look in '03 are standard lines going to be a bigger book of business or smaller or the same?

Actually, it will be a bigger book of business for us, because as we look at the re-underwriting being behind us, and the fact that we're still seeing overall strong rate across that portfolio, and the new business opportunities are still there for us as we even looked at January, new business was still the same that we had seen for every quarter of last year being 25 percent of the portfolio. Plus retention improved in January from the 60s to actually into the low 70s.

This is Steven W Lilienthal. I think if you recall, we had a couple of things that went on last year. One is at the end of '01 we had announced the major rift, which kind of took the wind out of the sails of the place for a couple of months. Took a couple of months to get it back. Momentum occurred again later in the quarter and carried throughout the year. I also mentioned to you on more than one conference call we had identified some significantly large classes of business or significantly -- some significant classes that had loss ratio such as PEOs which represented $100m in and of itself. So we were carving out some of the bigger classes like that and that carried on throughout the year. So we were not either surprised or disappointed with the retention ratios that we saw running through the standard book throughout the year. With respect to growth in '03, my own opinion is that one limiter that you'll see for us is the fact that we want to balance our worker's compensation portfolio, because we just don't like the volatility of it and the trends that we've been observing in this line for the last couple of years. So to the extent that we shrink that portfolio we will put a little bit of a damper on the growth of the overall standard lines portfolio. Also, we would seek to maintain a balanced participation of new business in the overall standard and specialty line portfolio for that matter so that we don't wind up loading up with some very undesirable business after having spent the past year or so cleaning it out. So I think we would expect to see growth by way of rate, the continuation of some very positive rates. And by the way a point that should not be missed here is the fact that we unloaded a lot of business during the last year and a half. And that business we tracked that renewal efficiency track that we had, shows that the spreads were really good on this and then we put the at a rate on top of that. Also our new business pricing that was coming in on that was close to what the renewal book was so embedded in the new book is an implicit very strong rate level and we doubled on it. We expect to push on it again this year. Any how that's a couple things you might want to chew on and why we feel very good about the overall PC portfolio going forward.

Once again if you would like to ask a question on today's call you may do so by pressing star 1 on your touchtone telephone. Star 1 to ask a question. We'll take a follow-up from Luka Apolito.

In light of the stock buybacks you had in the first nine months you did not pursue that in Q4, which I guess was logical given everything else that was going on. What are the prospects going forward?

Robert Deutsch I wouldn't bank on stock buybacks we obviously think the stock price is very attractive. But with the balance of the right statutory capital levels to support strong ratings and to allow us to grow the business the way Steve and Jim just alluded to, my suggestion would be not to factor in a stock buyback immediately.

Thank you.

Once again that's star 1 to ask a question. There appears to be no further questions at this time. I'd like to turn the call back over to you.

Thank you, operator. With that, we'd like to thank everybody for joining us this morning. Once again I 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 the call until 12 midnight eastern standard time on February 20th, 2003. By dialing 1-888-203-1112. Or for international callers 7194570 eight 20 and utilizing pass code six seven one five two two. The call will also be archived later in the day for replay on the investor relations pages of our web site. Once again, we appreciate and thank you for your participation in today's call.

This does conclude today's conference call. At this time you may disconnect. Call concluded at 1048 a.m.. . . .