CNA Financial Corp (CNA) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin. Welcome to CNA financial corporation's first quarter 2003 earnings conference call. Today's call is being recorded. We will now turn the call over to Ms. Dawn Jaffray. Please go ahead

Thank you, operator, and good morning. I'd like to welcome you to CNA's first quarter 2003 financial results conference call. My name is Dawn Jaffray, and I have responsibility for investor relations. By now, all of you should have received our earnings release and financial supplement. If not, you may access the documents at our web site at CNA.com.

For our reference, this call is being web cast and can be accessed again on the web site after we have concluded. With us this morning is Stephen Lilienthal, chief executive officer, Robert Deutsch, the chief financial officer, and James Lewis, our president of P&C operations.

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 intend, 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 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 files with the SEC. These files are available on the web or in hard copy.

Also, during the call today, we may discuss certain non-GAAP financial measures such as operating earnings. With regard to such financial measures, please refer to our earnings release and the supplemental information posted on our web site for reconciliations to make comparable GAAP measures. This forward looking statement speaks only as of today, May 8, 2003. Further, the company expressly disclaims any obligation to update or revise any forward-looking statements made during the call.

There will be time for questions from the investment community following the conclusion of our remarks. Members of the news media may call Charlie Boesel at 312-822-2592, and investment analyst questions may be directed to myself, at 312-822-7757. With that, I'll turn the call over to Steve Lilienthal.

Thanks, Dawn. Good morning to all of you. Thanks for joining us today. The first quarter of 2003 was a quiet quarter and represented a continuation of the improving trends that we saw in 2002. Net income of $83 million represented a very significant improvement over the first quarter of 2002, net operating income of $132 million for the quarter represented 20% improvement over the same period last year.

A decent start, not spectacular, but we're pretty much where we want to be and expected to be for the first quarter. We attribute what we have achieved here to the same drivers that we discussed in previous call: disciplined underwriting, improved claim practices, stronger distribution management, and an ongoing expense control.

After my brief overview, Bob Deutsch will follow with a more detailed financial discussion, and Bob will be followed by James Lewis who will provide a closer look at the Property & Casualty operations, then we'll open it up for your questions.

Bob Patin, head of our Life and Group Operations, is here today, as is Deb McClenahan, head of CNA Re. Bob and Deb will not have speaking roles but will be available for questions. In addition, Mike Sair (ph) from our legal department and Mike Fusco (ph), our head actuary, are here to answer and address any questions that you might have with respect to asbestos.

Property & Casualty market remains robust with continued strong rate increases available across the portfolio, improved retention levels, a healthy flow of new business, and improvement in the gross accident year and net accident year loss ratios.

James Lewis will talk more about the Property & Casualty operations, but he and his team have delivered a solid quarter. Net written premiums are up almost 9%.

Net accident year loss ratios improved about 5 points over prior. The net calendar year loss ratio improved about three points over the first quarter of '02. Net operating income improved 84% to 81 million versus 44 million for the first quarter of '02. Solid underwriting fundamentals and disciplines are in place. CAN Re led by Deb McClenahan, likewise, delivered a solid quarter.

The apparent drop in net operating income from $40 million in the first quarter of 2002 to 25 million in the first quarter of '03 is distorted by an $18 million after-tax benefit received from a reinsurance treaty in 2002, in addition to a $2 million after-tax benefit from the UK Re (ph) operation.

Apples to apples, the $25 million to '03 result is 25% better than a normalized $20 million result in the first quarter of '02, a net operating income. Premiums are up, rates continue strong. Loss ratios have improved as have expense ratios. Not a bad start. Kudos to Deb and her team.

CNA Re is operating the way it should be in today's marketplace, very disciplined and very focused on pockets of opportunity, closely monitoring the quality of its book of business. It's a work in process and progress, but with good reason to be encouraged. Group operations under leadership of Rob McGinnis also had a solid quarter. Production was down to prior year due to the loss of the mail handler's program in mid-2002.

Without this program, group operations production was positive, $26 million to prior year. Year-over-year sales in our group benefits business grew 33% to 108 million with our disability sales up 21%, cross-sale by our property casualty agency plant is well ahead of last year, and we continue to make this a priority.

We also had a nice bump in the institutional markets for the first quarter with more than $500 million in new deposits. Net operating income was up slightly the prior year at $19 million.

Our individual life operations struggled in the quarter, primarily due to higher individual long term care claims in the quarter, higher mortality and term life and a write-off of capitalized software costs. These topics were addressed in the last conference call with the exception of the software write-off.

In the quarter, we completed an analysis of the individual long term care product, the economic sensitivities, and the product pricing structure, and our conclusion was we would reduce our presence by curtailing new business until the market pricing for the product was more in line with the risks being assumed.

We will continue to promote the group long term care sales as the product design and market conditions are much more favorable. We also recently announced the layoff of approximately 250 people in the Nashville and Chicago offices associated with this decision. Overall, net operating income for the life segment declined to $10 million for the quarter, down from $31 million in the first quarter of '02.

Finally, a comment about the market outlook. We continue to feel that this is a good time to be in the business, to be open for business, and to be open for business with no internal distractions. The market is robust. Rate increases continue to outpace loss trends, and we see this continuing throughout the rest of '03 and into '04.

This is a market that we feel plays to CNA's strength, our broad product set and geographic presence allows us to focus on the best opportunities while taking cautious approaches in other lines and other regions. All in all, CNA is off to a decent start. Improvement in all key measurables, solid fundamental in place, good market conditions, and organizational stability. Now I'd like to turn it over to Bob Deutsch.

Good morning, everyone. Steve provided you with a good overall discussion of the quarter. I'd like to briefly discuss our financial results before turning it over to James Lewis who will discuss our property and casualty results. Steve mentioned this was a relatively quiet quarter.

This, too, is reflected in our financial results. The financial supplement is thinner than in past quarters because there are no 2001 results adjusted for WTC and other items. By the way, our original WTC net loss estimate of $468 million is still holding strong.

Furthermore, regulation G is now effective and makes it more difficult to discuss non-GAAP financial measures. Also, we did not buy a corporate cover for 2003, and as you know, we commuted the one we had in place for 2002. Today we report a net operating income from continuing operations, a non-GAAP financial measure of $132 million, or 52 cents per share in the first quarter, compared to $110 million, or 50 cents per share in the first quarter of 2002.

Please note that as outlined in our form 8K filed on April 21, operating EPS has been reduced by 7 cents per share, reflecting $15 million of accumulated but undeclared preferred stock dividends. Other than Ron Ronald Frank and Brian Wilhelm (ph), the quarterly EPS estimate out on first call do not reflect this important adjustment.

We would be happy to answer any questions about this during Q & A. Net operating income was up 84% in the primary property and casualty operations, increasing from $44 million last year to $81 million this year. Standard lines increased from $10 million to $35 million of NOI (ph), while specialty increased from $34 million to $46 million. CNA Re had NOI (ph) of $25 million for the quarter, down from last year for the reasons Steve cited. Group operations realized net operating income of $19 million, basically flat with last year.

Life operations had disappointing net operating income of $10 million, due to higher claims primarily in individual long term care, along with a $5 million after-tax write-off of a computer system. Net income for the quarter was $83 million, or 30 cents per share compared to $20 million, or 9 cents per share in 2002.

This quarter we had after-tax realized losses of $49 million. Included in this figure is $156 million of impairment losses. In terms of net prior year development for Property & Casualty, we recorded very modest strengthening of $32 million pretax. This primarily relates to one environmental claim for $12 million, unwinding the discount on some old continental insurance company business of $10 million and some miscellaneous changes of another $10 million. With that, I'll turn it over to James Lewis.

Thanks, Bob. Good morning, everyone. Now that you have the enterprise view, I'll provide a closer look of fundamentals of CNA's property and casualty business. My focus is going to be on consolidated results for the first quarter, and I will also provide information at a business unit level where it makes good business sense. Net written premiums grew by 9% to $1.8 billion.

There were three drivers of our overall premium growth: continued strong rates, improved renewal retention, and good new business momentum across the entire book. Overall rate increases averaged 24% in the first quarter, versus 27% for all of last year.

Standard lines rate increases averaged 21% in the first quarter, with specialty lines coming in at 31%. In April, we continued to achieve strong rate, 20% across the whole book, 19% in standard lines, 22% in specialty lines. As we analyze and look at the overall rate achievements on a line by line basis and also on a territory by territory basis, the only pocket where we have seen any moderation is in the risk management property area. All of the other areas are as firm as they have ever been.

The good news is the overall rate environment continues to be strong. We expect the robust conditions to continue through '03 and into '04. Our retention improved to 72% from $68% across the total P & C operations. This improvement continues to set a trend that we saw quarter by quarter last year.

Standard lines retention was 70% in the first quarter, a 4-point improvement from the first quarter of '02. This tells you that we are getting more comfortable with our portfolio of our standard lines business. Do we feel great about it yet? No, not yet.

We are getting there but driving for rate in the right new business. This is a multi-year effort, and the marketplace is continuing to support us on this initiative. Specialty lines retention was 77% for the first quarter. We're continuing to fine tune it, but we like our position in this business.

New business was one of the highlights for us for the quarter. We wrote approximately 540 million of new business, or 28% of the book, versus 390 million, or 23% of the book in the first quarter of '02. We're looking at this new business in classes that we want to write and also achieving our target pricing goals.

The cost of the disruption we're seeing in the market, there's a lot of new business opportunities out there. The trick for us is to distinguish the real opportunities from the other guys' mistakes. We watch the differential between new and renewal pricing carefully and look at it by territory and industry class, and this gives us confidence that we're getting it right.

We have also had similar success on our renewal side. As we have talked about this before, we do monitor renewal efficiency, that's the spread between renewed and non-renewed business relative to paid losses and case reserves. During the first quarter for the standard lines book, this came in at a positive 18 points.

For us, this is encouraging news because it tells us that our front line underwriters have eagle eyes for the accounts that we need to keep, versus the accounts that we need to let go. Now let's turn to our loss ratio. On a calendar year basis, property and casualty operations improved 3 points to 72%. On a net accident year, which reflects the quality of the business that we're writing day to day, the numbers are even more encouraging.

The net accident year loss ratio for property and casualty improved approximately 5 points to 69%. Specialty lines improved three points at 68%, standard lines improved five points to 70%. These numbers include ULAE which is running five or six points.

Turning to combined ratio, property and casualty operations improved 3 points to 105 quarter over quarter, standard lines improved 3 points to 108, specialty lines improved 3 points to 101.

You can rest assured we're not satisfied with these combined ratios. Overall, we still have a lot of work to do, but the first quarter gets us off to a good start: Strong rate, better retention, and improved fundamentals, and plenty of opportunity in the marketplace for growth.

We look forward to keeping it going.

Now I'll turn it over to Dawn for the Q & A.

Thanks, Jim. Before we open the line for questions, I'd like to remind you that CNA senior leaders will be participating with Loews (ph) and its various subsidiaries in a analyst conference to be held on Monday June 2nd at the Plaza Hotel in New York City. I would like to now open the line for questions.

Operator.

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. We will proceed in the order that you signal. If you are using a speakerphone, make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, if would you like to ask a question, press star-one. We'll pause momentarily to give everyone an opportunity to signal. We will take the first question from Ron Ronald Frank with Salomon Smith Barney.

Good morning, everyone. Thanks for the plug, Bob. A few things. Number one, I was wondering if you could contrast the adverse development even though it was small in standard lines with the positive development that I think I remember your having had in standard lines in fourth quarter. Number two, could you talk a little bit about the underlying rate of net investment income. There seems to have been a significant consecutive quarter decline. I'm wondering, given the clash flow's about neutral now, if there's anything else at work there? Did you cut back duration during the quarter significantly. Finally, I was wondering if the asbestos experts could give us an early reaction to the Fuller-Austin decision in California?

Sure. Why don't we start on the -

Asbestos

On asbestos.

This is Mike Sair. I'd be happy to comment on the Fuller-Austin case. This case is a current permutation of what has been called the U & R (ph) case of ten years ago. It relates to a number of issues that are important with respect to the treatment of asbestos liabilities and a bankruptcy situation.

We resolved and settled and have a final approved settlement with Fuller-Austin which calls for payment -- a payment stream over, I believe, ten years. Our obligations are heavily reinsured, so the outcome that was reported recently will not have an impact on us. It's included in the statistics and discussion we had in our asbestos discussion earlier this year.

The outcome, however, for the industry was negative, and we believe that many of the insurers who remained in the case, and about which the stories have been published, have good arguments on appeal, and we will be watching that closely. We have similar issues in some of our other cases.

Am I correct in inferring that this primarily is not an issue of applicability or limits of coverage, but rather of timing of payments?

One of the major issues in the Fuller-Austin case, as it had been in the U & R (ph) case, is whether the resolution of the asbestos liabilities in the context of a bankruptcy trust could trigger an acceleration of timing of payment by the insurance industry. That is a key issue. The impact of prior rulings in the bankruptcy court is likewise a key issue in that case. However, four of the other carriers who remained in the case, there are a number of other coverage issues that are also important to the outcome.

Ron, on the investment income question, bear in mind a couple of things. One is in the fourth quarter of 2002, there was a one-time big dividend from Canary Wharf of $34 million. So you need to adjust for that. In addition, at this point, a larger proportion of our portfolio, in fact about 15%, is in short term securities with the expectation of interest rates moving up.

And, Bob, was there a significant move-up in the cash position in recent months?

Certainly since December 31.

Okay. Can you give us a number for duration of the fixed income portfolio March 31 versus December 31?

About five.

It's about five years.

And at the end of the year, it was -

5.5 years.

Ok.

You asked a question about reserve movement. Was that relative to the fourth quarter of '02?

Well, as I recall, although I don't think you specified it, you referenced positive development in standard lines in the fourth quarter, partially offsetting some negative development in other segments. So, I was just trying to position that vis-a-vis the negative development in standard lines this quarter. Are they just sort of unrelated, random?

Yeah. I think there is probably some property - favorable property experience at the end of the fourth quarter. Obviously, this was the low CAT quarter for us. We booked $15 million in CAT losses as you saw in the supplement, but the fact is until the third quarter, you don't know where the year will end. By the fourth quarter of '02, we obviously had a better feel for 2002 CAT experience than we do for where 2003 will come out.

A quick follow-up on the Fuller-Austin, are you concerned significantly for implications for you and/or other insurers outside of Fuller-Austin, resulting from the decision?

We were involved in the Fuller-Austin case, and we felt that the insurance industry parties had a pretty good record in Fuller-Austin, and we'll have to see what happens on appeal. The issues involved in Fuller-Austin are involved in other cases, and we -- that's a legal battle that is being fought in other contexts. So we're concerned about it, tracking it, we have a strategic legal plan to deal with it over time.

Okay. Thanks a lot.

Thanks, Ron.

We will take the next question from Jay Cohen with Merrill Lynch. Go ahead.

Thanks. I guess to follow up on Ron's questions on Fuller-Austin. Let's assume for a second that you saw this type of action in other states and this kind of jury award in other cases. Obviously, it would suggest your payment pattern would speed up a bit. Would it have implications for your estimated liabilities, for your estimated reserves at this point?

I don't think so. There are a lot of issues, I should go back and say. As I said before, there are a lot of issues in Fuller-Austin. If you just look at the timing issue, that's an important issue. But we think we're appropriately reserved. For those of our -- those accounts that we have in bankruptcy. We don't think actually long-term that the idea that bankruptcies will accelerate expenses will have an impact. We don't think that will be successful.

Okay. Separate question: loss reserves declining in the quarter, net loss reserves going down within the property casualty business. Is this just some old runoff business being paid out? Why are loss reserves going down if you have been growing a little bit?

You're right. It's the runoff of older business that we have been exiting and the paid losses associated with it.

Okay.

That's nothing - from our perspective, it's not an unexpected event.

Okay. Then two other questions. The 7 cent preferred expense in the quarter, should that be consistent going forward at that level?

Yes. In fact, in the 8K, we gave it to you for each quarter of the year.

Okay. Very good.

7 cents is about right. At some point it increases a little. But it's 7 cents a quarter.

Okay. Then last question, the interest on funds withheld was 46 million in the quarter for the PC segments. As I recall, it's a little bit -- maybe I'm wrong, but is that below kind of the annual run rate that you guys had talked about?

You're right, it is. What's happened there is the funds withheld balance upon which you paid this interest expense dropped from about 2.8 billion, which was in the 10K to about 2.6 billion, which you will see in the 10Q. So there was lower interest expense associated with it. That's a pretty volatile number. It moves. It can move 100 million. In fact, it moved from the third quarter, it's moved over 100 million in each of those last two quarters. It's a pretty volatile number. I wouldn't use a 47 million run rate at this point. Similarly, I wouldn't use the 70 million that you saw in the fourth quarter of '02. I think our previous guidance has been in the 220 area, plus or minus, on an annualized basis. That's not a bad number.

Why would that balance go up?

If you're cede more losses to the finite programs, it increases, and then as a catch-up premium that gets added to the funds withheld balance because the losses are deemed to have been reported to the reinsurer as of the effective date of the treaty, so if you - if it's a 1998 treaty, and you cede more losses to it, you are deemed to owe additional premium back to 1/1/98, you pay that with an accumulated interest catch-up at the time that you report it to the reinsurer.

It would be if you had development in the 98 accident here, basically?

Correct.

Okay.

Right. This would all be prior period development because right now we don't have a 2003 cover, so then (ph) we commuted the 2002 cover. If that balance goes up, it is due to prior period changes.

Great. Thanks for the answers.

Thanks, Jay.

We'll take the next question from Robert Glasspiegel with Langen McAlenney. Please go ahead.

On the long-term care, the fourth quarter press release, as I read it and remember it, characterize the 21 million of long-term care experience as sort of one-time in nature. This quarter, I couldn't read whether you thought the long-term care experience was sort of where the run rate is going to be for the extended future or one-time, maybe if you give us more clarification on that, I have a few more follow-ups.

This is Bob Patin. As you may recall in the fourth quarter, we did increase reserves for long-term care, and that was for prior year claim reserves. We thought they were a bit low compared to what was actually needed. In the first quarter, we did see unfavorable individual long term care morbidity both incidence and severity over the previous year's first quarter. Because of the claimants that we have seen, but more importantly than that, the behavior of the marketplace, the competitive nature of the individual marketplace, both in rate and in benefit offers, we concluded was not sufficiently priced for us to continue to be a major player. We do have product in the market, but it's priced anywhere from 30% to 50% higher than the other individual players. Until the individual market increases price and confirms its benefit offerings more to what we think is reasonable for the prices that are out there, we'll take a much smaller footprint there. We are, however, continuing to aggressively pursue the group long term market, different structure, different offerings.

I understand the strategy. I was just trying to pierce it out, this sort of - what the near term earnings, you know, impact. You say you had some layoffs. Are those charges in the numbers to come?

No. Those are second quarter events. The costs of that is about $5 million.

Ok. But it sounds like you're saying that we could have this sort of 20 million morbidity for a few more quarters? Is that an incorrect assessment?

No, actually, we'll watch those patterns closely, but we have actually seen lately even a bit of moderation in that, so we'll watch it closely, but I wouldn't make that prediction.

We believed at the time at March 31, our reserves are accurate. It certainly represents management's best estimate. If we have - if the succeeding quarters have higher than expected long-term care claims, then we'll just have to book that accordingly.

I'm still unclear why you are saying the reserves are wrong, and you have underpriced book. Those are two different issues.

We're saying that the reserves at March 31 represent management's best estimates.

The reserves are fine. It's the book of business may not be priced where you want it?

Well, we believe that in new business, as we write new business, it has to be significantly higher priced than where we were and what's in the market with competitors.

Right. I'll push this further with you later. Just on the investment income, 20 million on partnership. That sort of annualizes to an 8% return, which is sort of par for the business. But I think a little bit of both where you went into the year for the quarter, is that a fair assessment, or are you a little bit more optimistic about what partnership can kick in for '03?

No. I wouldn't make any more new predictions on partnership income. We were certainly thinking, I think, the guidance we have given in the past has been roughly 15 million a quarter, this quarter it came in at 23. Previous quarters, it's been losses. It's pretty volatile stuff. I wouldn't go and trend off of one point.

Okay. Final question for Mr. Lewis. What combined ratio would you be happy with in the current environment?

Well, ideally when you look at the marketplace that we're in, and this is the most robust conditions that we have seen in quite a while, I would be happy with combined ratios in the 90s, into the mid 90s.

And that's doable, you think?

Yes, it is.

We want you to be happy. Thank you.

(LAUGHS)

If you would like to ask a question at this time, please press star one. We'll go to Ira Zuckerman with Nutmeg Securities. Please go ahead.

In terms of the overall outlook, your expense ratio is still significantly higher than a lot of your peers. Where do you think you have to get it down to in order to be competitive and to get a competitive return?

Ira, this is Steve Lilienthal. We're thinking that we may have to carve anywhere from two to three points out of the overall cost structure. That will come out of a combination of what acquisition costs are as well as our own internal carrying costs. So, at the end of the day, we still have a lot of work to do on that. We took obviously a first pass at that when we did our reduction in force in late 2001. As we speak, we have management teams in place, but they're doing a complete study of the entire infrastructure costs, and we'll probably make additional reductions during the course of 2003 and for 2004, but we're looking anywhere - the first number in our expense ratio needs to have a 2 in it, and that will be the target for us going forward.

The other thing, in terms of your new business, could you characterize the type of new business and where you're getting it from in terms of competitive?

Yes, when you look at our overall new business, we're seeing growth in every one of our business segments, whether it's small business or middle markets. We're seeing significant growth in our specialty lines operations, whether it is in the E&O, D&O, we're seeing in our contractor segment, our middle market segment, and geographically, we are seeing growth from all of those areas. In this marketplace, when you can get price, terms, and conditions for new business very close (ph) to what you see on renewal business, this is exactly what you would expect for a healthy company.

Excuse me, Jim. This is Steve Lilienthal again. We have gone through discussions as to what level of retention we would want to have and, you know, how that relates to the rate levels we're able to achieve. At the end of the day, what Jim and his team have put in place is a decent strategy from a portfolio strategy that says we have less risk for more money with less volatility, and the new businesses that's coming in represents more of a mid to lower range in terms of the hazard degree that it presents or a severity degree it presents. We feel that's a very intelligent strategy to get - we would like and prefer more rate which is embedded in the book and are willing to give up the portfolio in order to get that.

Okay. Thank you.

Thanks, Ira. We'll take the next question from Charles Gates with Credit Suisse First Boston. Please go ahead.

I have two questions. My first question, could one of you speak to what extent you see any emergence of pricing pressure in commercial property?

Yeah. On commercial property, as I indicated, that's the only place we are seeing any moderation as far as pricing. That should be expected, because for us for the last two year, we have gotten property rate increases in excess of 50%. It's also our most profitable line. Even with us getting moderation or seeing moderation in prices, we got 15 points of rate on the property book still in the fourth quarter. We're still seeing double digit (ph) price increases, so there's moderation, but that's to be expected, and it's also a very profitable line for us now.

This is Steve. Just to follow up on that. I think what we have been seeing is the pressure is predominantly largely on the risk property management segment as opposed to the middle to small.

Thank you. Here's my second question. You have the Federal Reserve basically raising the specter of deflation. From a generic standpoint, what do you think that would do to the property casualty business?

Rates with respect to deflation?

Yes. For 50 years, we have had inflation, and now possibly it's going the other way.

It's only on the insurance side you have seen that in the past on loss costs in the 90s when they actually came down. Hard to predict what that would mean for us. It, obviously, from an investment income perspective, it would be -- from an investment income perspective, it would hurt, but it's basically good for the property and casualty industry. It probably might be bad for the life business, you know, on businesses where the margin comes from the spread.

I didn't understand your life insurance comments, sir.

I think a lot of the life products were oriented towards the spread in the returns between what we credit the policyholders and what we achieve ourselves. I think it would be a difficult environment in life insurance, but it would be a favorable environment for the property casualty business.

Wouldn't you have a situation potentially, and this is my last question, where at the end of the day, some companies - I'm not talking CNA - had historically been deficient in reserves, would then be in a situation where perhaps reserves would be more adequate, or they could be over reserved?

On a present value basis, yes. But I think - you know, deflation, we're basically - may be good news for the property casualty industry. If implicitly (ph) your reserving is historical inflation of x-percent, and it turns out it's half of that, only on an economic basis, you think your reserves are adequate or more than adequate.

Thank you.

Once again, ladies and gentlemen, if would you like to ask a question, please press star-one at this time. We'll take the next question from Thomas Kahn with Kahn Brothers & Company. Please go ahead.

There's talk in Congress about some legislation with respect to asbestos. Could you comment on it and also tell us what you feel might be the impact on CNA?

We are working actively with other industry groups and also with other folks from not just the insurance industry, but other industries and with plaintiffs and with the labor union movement to work on a structure that could assure that asbestos claimants who have suffered disease will be compensated promptly and fully, but will provide - kind of take most of the asbestos problem out of the courts and provide some certainty of financing for both the insurance industry and in industry in particular. We're encouraged by the results of our attempts to get this legislation through so far, but we'll have to see how it goes this year. If it goes through, I think it will be good for everybody.

Will this have an effect on the reserves that you have set aside for asbestos claims? Will you have redundancy in those reserves or release reserves?

Obviously, the devil is in the details on this, and we're certainly not prepared to speculate on what this would mean for any individual insurer and certainly not for us. What I can comment on, though, is that our reserves are set without taking this into account, it's on a prior to any legislation being passed, and that's our scenario right now.

Thank you.

At this time, we have no additional questions. Ms. Jaffray, I'll turn the call back over you to.

Thank you, operator. Once again, we'd like to thank you for joining us this morning. I call your attention to the forward-looking statements in the earnings release and as previously read at the beginning of the call. Lastly, please note that a taped replay of this call will be available immediately following the call until 12 midnight on May 15. You can access the replay by dialing 888-203-1112, or for international callers, 719-457-0820, utilizing passcode 614808. It will also be archived later in the day for replay on the investor relations webpage of CNA.com. Thank you for your participation.

This does conclude the CNA financial Corporation's first quarter 2003 conference call. We thank you for your participation, and you may disconnect at this time.