CNA Financial Corp (CNA) 2003 Q2 法說會逐字稿

Welcome to CNA Financial Corporation second quarter 2003 earnings conference call. Today's call is being recorded. I will now turn the call over to Dawn Jaffray. Please go ahead.

Thank you, operator. Good morning. We'd like to welcome you to CNA's second quarter 2003 financial results conference call. My name is Dawn Jaffray. 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 this document as at our web site at www.CNA.com under the Investor Relations menu. The earnings release is found under the sub menu under Investor communication/ Financial news and the supplement located under the sub menu financial reports/ supplement. For your reference, this call is being web cast and can be accessed again on our web site after we have concluded. With us this morning is Steve Lilienthal, CEO, Bob Deutsch, our CFO, and Jim Lewis, President of PNC Operation. Before we discuss our results I would like to make the necessary disclosures concerning forward-looking statements. Statements may be made during this conference call using expressions such as intends, anticipating, expects believes or similar terms, and may include financial projections explanation of the company's plans and objective as well as estimates of the 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 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. 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 financial supplement posted on the web site for reconciliations to most comparable GAAP measures. The forward-looking statements speak only as of today, August 7, 2003. Further the company doesn't have 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 the conclusion of the remarks. Members of the news media may call Charlie Boesel at 312-822-2592 and investments analysts questions may be directed to me at 312-822-7757. With that, I'll turn the call over to Steve.

Thank you, Dawn. Good morning, everybody. Thanks for joining us. I have three things that I'd like to discuss this morning before turning this over to Bob and Jim. I would like to give you a brief overview of our three major business segments, I like to give you an overview of the quarter and major initiative we have going on and then I like to open it up for questions and answers. Bob Deutsch will follow me with details review of the financial quarter and Jim Lewis will follow me with the detailed discussion of Property & Casualty operations. Property & Casualty operations is obviously our main driver and remains very very bullish about what is going on in the Property & Casualty operations for the last two years. Our 2003 gross accident year ratio has improved from 65% down from 72% in '02. Britain premiums for the quarter up nearly 20% driven by continued strong rate, which is the third year of strong rate increases across this portfolio, improved retentions and a significantly healthy slug of new business. Significant improvements have been made on the expense front. We took a major part of the expense out in 2001, and we're now going after an additional $200 million in expense reduction company wide. It will be done by combination of infrastructure, staff reduction and acquisition reductions prudently focus on worker compensation commission levels. Claims best practice have been designed and implemented across the organization as well as centralized. We have improved our data quality underwriting management information, and we have made very, very strong progress in rebalancing our portfolio toward a less volatile profile. The insurance CNARE continues to show very strong year fundamental the 03’ [Inaudible] loss ratio have improved six points to 64%. Premiums are down for the quarter and flat to the year due to two major factors. Additional seated premium to our corporate covers and reduced levels of premium from prior years. Our group business continues to deliver modest to steady returns has a very nice portfolio, employee benefit products. We feel very good about our group business. Life continues to struggle. Individual life continues to struggle for a number of reasons. We have discuss these on prior call. Made your drivers to individual Long-term care and higher claims there severance cost there related to staff reductions in the business and second quarter results were impacted by reduced investment income. That's kind of a look at what our major businesses are doing. Solid performance in the PC. Actually very Robust performance in the PC operations and RE, study returns in group and work to do in life. Let's turn now to the second quarter results and some news about some key initiatives. Net income for the quarter, as you can see, was $70 million, and $153 million year-to-date. The positive net income was driven primarily by capital gains. Before realized gains and losses, CNA reported a loss of 179 million for the quarter and a loss of $47 million for the year.

Our second quarter results were primarily driven by a $308 million after tax adverse development in the property casualty operations. The majority of the development relates to large accounts in our risk management business and is driven significantly by worker's compensation. Other major components of the $308 million are $43 million after tax hit for directors and offices coverage related to the review of security related open claim power reserves and a $49 million impact of the single large 1995 property claim from the pool that we were a participant in back in 1995. This was a result of the arbitration that was recently concluded and affected not only ourselves but a number of carrier that is were players in that pool. The majority of the adverse development in the quarter is associated with accident year 2000 and prior, about 80% of it, although a modest amount of the risk management charges attributed to 2001. Bob Deutsch will give you more detail on this in a few minutes. As you may or may not recall, I did mention the worker's comp and the D& O issues at our analyst conference and issued a press release in the 8-K on the large arbitration results the week before that. In the spirit of our normal actuarial process or reviews, we are conducting reserve studies for both the core, asbestos pollution and mass lines areas. We expect our core lines to be -- core line study to be completed in the third quarter. Asbestos pollution and mass lines may take little bit longer, may drift into the fourth quarter. We expect to have all of these studies done in very short order. It is interesting to note that between the second and third quarter of '03 we will have reviewed over 90% of the $15 billion reserve base. We are also conducting these studies in conjunction with the regular try annual reviews done by the state of Illinois and state of New Hampshire which will provide additional and independent perspective on our reserve position, which we think will be helpful and add some credibility to our own analysis. Just a word about this. When I took on this job a little over a year ago, I made a commitment to do everything in my power to deliver a solid, conservative balance sheet. I said if I uncovered an issue, I would deal with it. As bad as I feel about the developments of the second quarter, I feel this is the right thing to do, that I'm living up to my end of the bargain by dealing with it and this is the appropriate path for CNA to follow. Good news here is that we have processes and controls in place. The bad news is [Inaudible] we find it faster than we did in the past. Turning to another major initiative, I did mention the $200 million expense reduction plan. It is note that this plan is already under way. We have implemented a significant part of it. We expect to have it fully implemented and done by sometime within the first quarter of 2004. As I mention, this involved a combination of staff reduction and acquisition cost and the acquisition cost reductions primarily aimed at worker's compensation, which is something we've talked about often in the past. I will have a few more summary comments before we open it up for questions. But now let me turn it over to Bob for a more detailed discussion of the financials.

Good morning, everyone. Steve provided you with a good overall discussion of the quarter. I would like to briefly discuss our financial results before turning it over to Jim Lewis, who will discuss our property and casually results. Today we reported net income of $70 million, or 25 cents per share after reflecting 7 cents per share reduction for accumulated but not declared preferred stock dividends. Net income for six months was $153 million, or 55 cents per share on the same basis. Underlining these numbers were significant adverse development on prior accident years. In order to allow you to understand this in greater detail, we have added pages 18 to 28 to the financial supplement. Please look at page 26. I'll give you a moment to find that. If you look on page 26, lower right-hand corner, second line from the bottom, you see $503 million of pretax net adverse premium and loss developments, which includes $10 million of interest accretion and $7 million in the development in the corporate segment. This table reiterates the point Steve made. Legacy issues associated with accident years 2000 and prior account for 80% of the adverse developments. Of the $503 million, three items account for roughly three-quarters of it. Risk management casualty, which is principally worker's compensation, was $225 million pretax. Director's and officer's liability was $66 million pretax, and the one large property loss from 1995, which we previously disclosed, was $75 million. Now, if you would turn to page 19, I'll walk you through those pages. For the Property & Casualty segment, which includes CNA Re, we had net adverse loss development of $254 million this quarter, which is the sum of the $458 million and the negative $204 million shown on the second line in the two columns on the right. We had net adverse premium development of $231 million this quarter, which is primarily due to additional seeded premiums. Together, both the premium and loss amounts, total $485 million. If you add back the interest accretion that I mentioned that is on a footnote on page 26, along with the corporate segment development, which is not shown on page 19, the $7 million that gets you to the $503 million shown on page 26. Another very important page is page 17. This is a page we've had in the financial supplement for the past several quarters. Here you see growth and net accident year loss ratios for 2002 and 2003. Substantial progress has been made in all segments, and we are very encouraged by the underlying fundamentals. Not only has 2002 improved over 2001, as you know, but 2003 is further improved over 2002. Mike Fusco, Dawn Jaffray and Larry Boysen are available after this call to help guide analyst through the financial supplement. Jim will speak about PNC Operations. Spending a moment on the other businesses, CNA Re generated $13 million of income before realized gains. It is seeing rate increases, which are flat to low single digits for property business, high single digits for standard lines, and, roughly, 20% for professional liability. The current accident year combined ratio is running in the low 90. The group business produced $26 million of income before realized gains this quarter. Areas of growth there include group disability and limited medical. As you've heard over the last several quarters, the life business, which generated $17 million of income before realized gains, has been greatly scaled back in the individual long-term care area. Year-over-year, we saw higher long-term care claims and lower investment income. Realized gains this quarter were $249 million after tax. Our pretax unrealized gapes at June 30 were 2 billion, up from 1.2 billion at March 31. Investment income this quarter was $427 million pretax as compared with $502 million a year ago and $432 million last quarter. The details of this are shown on pages 14 and 15 of the financial supplement. Catch-up interest expense on certain funds withheld reinsurance treaties was $43 million this quarter, which is reflected in the $93 million shown on page 15. With that, I'll turn it over to Jim.

Thanks, Bob. Good morning, everyone. I'm going to take a few minutes and provide more details on the second quarter for the result of the property casualty operation. From a growth written premium perspective, we're seeing the impact of very solid rate achievement, improved retention and strong new business momentum. Gross written premium for property casualty operation was up nearly 19% for the second quarter to $2.3 billion and up nearly 7% to $4.7 billion year-to-date and standard and specialty line second quarter gross written premium was up 19% and 18% respectively. Net written premium is another story reflecting 229 million of premium development, primarily related to prior year loss development in the quarter, including $105 million of premium related to corporate covers. Property & Casualty operation was relatively flat, down about 4% to 1.6 billion for the quarter and up about 3% to 3.3 billion for the year. Overall, we're pleased with our volume of business. It is growing and it's all growing for the right reasons and in the right places. Rate increases across the entire book averaged 19% for the second quarter and 22% year-to-date. So it is a very positive rate picture. In fact, July rate increases ran at 21%. Standard line rate increases averaged 17% in the quarter, with specialty lines coming in at 24%. Today, we are a lot closer to the portfolio mix we're trying to achieve. We are renewing a more moderate business and we're building on the two years of substantial rate increases. Rate increases continue to significantly outpace the loss trends, and there's still plenty of rate momentum to carry us through 2003 and 204. Turning to retention, we continue to build on a record of steady quarter to quarter improvement. During the second quarter, retention for the entire book was 76%, up from 72% in the first quarter and 70% for all of 2002. Again, this speaks to our comfort level with our book of business. We are renewing more business because the portfolio is priced more appropriately and we have shifted into the class of business we want to be in for the long haul. New business continued to shine in the second quarter. We wrote approximately $470 million of new business or 25% of the book versus $420 million or 24% of the book last year. Controls are at the heart of our new business strategy. We monitor the differential between new and renewal pricing very carefully. This is one of our major lines of defense against adverse selections, and it tells us that we growing the book of business at the right price. We put a real focus on cross sell this year, and that's selling products for multiple CNA businesses to the same customers. Through the second quarter, we booked nearly $150 million in additional cross sell premium across CNA, selling more coverage to the existing customers also gives us additional insurance that we're not being selected against. We have a high degree of confidence in our renewal pricing. One of the key indicators we track is renewal efficiency. As we have stated before, renewal efficiency is the spread between renewed and non-renewed business relative to paid losses and case reserves. During the second quarter, freight and standard lines was running 13 points. We've been tracking this since 1999, and it tell us we're renewing a more profitable business and shrinking the less profitable accounts. Now, let's turn to our loss ratio. Here is where we see the impact of the prior year development Steve and Bob discussed.

Property & Casualty had a net calendar year loss rare of 93% in the second quarter, up 18 points from the prior period. Focusing on the business that we're writing in the current year, the gross at year loss ratio continues to present a positive outlook. Property and casually operations improved approximately eight points to 65% over prior year evaluated December 31, '02. Since then, the 2002 ratio has improved an additional point. Standard line 2003 gross accident year loss ratio improved ten points to 64% and specialty lines improved three points to 65%. These numbers include ULAE which is running at about 5 points. The prior year reserve development resulted in a tough calendar quarter for Property & Casualty operations. The focus on the business we're running today, it is easy to see we're on track. Our current year results continue to improve. Rate, retention and new business are all going strong. Accident year losses are improving and we're picking up the pace on expense reductions. We continue to improve our overall portfolio mix. For example, worker's compensation is now 17% of the portfolio, down from 22% in 2000. To help reduce this exposure farther, we announced the drop in commission on worker's compensation. For the rest of the year, our focus remains unchanged, achieve necessary rates, improve retention and write new business in our targeted classes. Now, I'll turn it back to Steve for some comments.

Thanks, Jim. Before opening up the questions, I do want to reiterate a few points. First, obviously, the second quarter results are not what we want them to be. The prior year development is a drag on the earnings. We did not have a capital issue as a result of the charge we tool at the end of the day Jim said we feel very positive about the results of the property casually operations particularly for '02 and '03 with respect to the portfolio mix and the act of year improvement. Next, I want to remind you we remain very committed to presenting a very strong and conservative balance sheet. The reserve studies for core and asbestos pollution and mass lines are already underway and we expect these to be completed in a very short time frame. We will have the benefit of external input. Thirdly, we have launched an additional $200 million expense reduction plan. Finally, I do want to echo what Jim said. Our property casualty operations continues to deliver solid performance. All the key metrics are positive. Rates are strong at over 20%. Retentions are up over 75%. New business is strong in the 27% range. Most importantly, that renewal efficiency number has stayed very, very positive and the spread remains very good and the gross accident loss ratio has dropped to 65%. With that, let me turn it back to dawn for questions and answers.

Thanks, Steve. I would like to open the line for questions. Operator, please proceed.

Thank you. If you would like to ask a question, press the star followed by the one on your phone. If you are using the speaker phone please be sure to turn off your mute function in order for us to signal to reach our equipment. If you would like to ask a question, press the star followed by the digit one. We will pause a moment for assemble the question and answer roster. We go first to Jay Cohen with Merrill Lynch.

I guess my first question is a dumb question. You guys are going to say, I can't believe he doesn't know that. What's [APMT] when you look at what's APMT mean?

It is not a dumb question. It is a unique CNA term that drives some of us crazy. Asbestos, pollution and mass tort.

I should have known that.

No, no, no. I just learned it six months ago.

Okay. So what you're saying in this paragraph here is that third quarter for your asbestos stuff, APMT is when you normally review those reserves?

Jay, we do a review of those reserves twice a year. We had done one in the fourth quarter which was extensive and the material we put out on the web site. We normally would have done a review in the second quarter of this year, but the resources that would have been dedicated to that study were tied up in the global settlement negotiations, and so we put it off for the third quarter. It is, obviously, more involved to review our typical core lines. That should be done, if not at the end of the third quarter, early into the fourth quarter. We expect to be able to release the results of that study by the time we release earnings for the third and fourth quarter.

This is part of your regular on going -- nothing special about this other than --

No.

Other than the timing?

No. We wanted to mention the fact we were doing a comprehensive reserve study. It was particularly important to note between the second and third quarter of '03 we will have locked at 90% of the overall reserve base.

Now, you mention -- you specifically highlight construction defect claims. If you could talk about that business, what the exposure is here and what's going on wrong there, basically. What the issues are.

This is older business that we wrote in California and neighboring states. We lob completing a reserve review on that which we do generally on an annual basis in the third quarter of '03. What we have noticed is a spike in the number of reported claims, and we're looking into what those types of claims might be. These are construction defect claims, mostly residential housing in California and neighboring states.

Jay, that was Mike Fusco our chief act wear. This is Steve Lilienthal. These are not claims unique to CNA. These would be claim that is would be part of any carriers operation that was involved in the construction business.

Were you guys a big writer of construction accounts in California? Were you overexposed in this area, would you say?

I think we had a good share of the market in California back in the mid-'90s. We were a major player. We had a lot of company out there.

Yeah.

This is Jim -- I think one thing Jim Lewis commented on was moving to less volatile hazard classes and that's includes a shift to a degree away from the construction trades. In California we have exited all of our construction business. This is Jim Lewis.

Okay. Lastly, this state review that you mention and you have in the press release, independent actuarial firm, historically, do these things result in any changes on your end? What's the typical process here? Is it something that's unique, on going, typical. Are there any changes you would expect coming out of it?

It is pretty typical. The state insurance department routinely hire outside actuarial firms in connection with the exams. We're undergoing one of those from the New Hampshire insurance department for the continental insurance company pool and Illinois for the continental casualty company pool. They have retained a preeminent national firm to do the reserve work on behalf of the state insurance department. As to what may come out of it, we don't know today.

Okay. Last question. Has the rating agents commented at all about the second quarter reserve charge?

No, they have not. We, obviously, have met with the rating agencies. We expect they will be expressing their thoughts on this near term.

Great. Thanks for the answers.

Jay, this is Steve again. I wanted to mention to you, with respect to the construction defect question, CNA exited the residential construction business in California in 1995.

That was a date way back, then?

Yep. As I say, this is not unique to CNA.

Got you.

Thanks, Jay.

We go next to Ron Frank with Smith Barney.

Good morning. A couple things. One is relating to Jay's agency rating question. Were the large realized gains in the quarter in any part aimed at stabilizing your capital position given the operating loss or vis-à-vis the rating agencies and, second, what should we be thinking about in terms of the effect of the gains on future investment income assumptions? I also just want to make sure I understand the flow of events here. You've completed a review of some of our reserves as of second quarter. Is the jury still out on construction defect and other volatile area, as you put it in the press release and we'll hear about those in the third quarter. Then we'll hear from the independent act wears in the third and fourth quarter. Have I got that sequence right?

Let's start on the investment part. The answer is now to that. The realize the capital gains and losses occur as we think it is prudent to realize them in light of the interest environment. It is pretty independent from existing operations. In terms of -- Ron, you asked the question about did you did you ask the question about new money rates?

Yeah. That's what it amounts to

New money rates are about -- pretax are about 4 ¾ to 5%. Was there more on the investment side?

I guess only before we shift to the other question, should we think in terms of the 300 some odd million in gains, did those securities roll off at particularly high rates? What should we think of in terms of the yield trade down on those realizations?

No. It didn't relate to that. In fact, a third of it was related to equity. We've been lengthening the portfolio with higher interest rates. In terms of book yield, the book yield to fixed income on the PNC side is roughly 5 3/4%. On the light side it is 6 3/4% on a pre-tax basis.

Where are you on duration of the fixed income portfolio versus year end Bob?

Duration for CNA Financial overall is six years. That's up a little bit from March 31. On the PNC side and the long-term bonds, the duration is just under seven years. Roughly, the same number on the life portfolio.

Okay. On the flow of events question.

On the flow events -- this is Mike Fusco. You accurately stated second quarter is done and announced. Third quarter reviews are under way for both our core and asbestos pollution and mass tort. Hope to get those done in the third quarter. The external review as noted in the press release is being done through 12/31/01. We will be asking the firm to be extrapolate their analysis through 12/31/02 and use those results as a factor in our internal reviews. We hope it to be con current with out internal reviews study, not moving into the fourth quarter.

The try annual that is.

The try annual.

We'll be done by the third quarter.

With the possible exception of asbestos pollution and mass tort.

Finally, how do you distinguish between the reserve review of core operations that led to this charge and that which remains to be done in third quarter? Did we do sort of our regular review in second and a special issues review in third? How do I distinguish those?

You probably are aware we do all our reviews of reserves on a quarterly basis with every product being reviewed once a year, many being reviewed more than once a year. The second quarter we had 35% of our reserve base reviewed. In the third quarter, we are going to accelerate some things scheduled in the fourth quarter into the third so it will be a bit more comprehensive than our general third quarter reserve study would have been.

So sense you'll be 90% done between second and third quarter, that means you will reserve twice as much at the end of the third quarter as you did at the end of second.

I think that is correct.

Thank you very much.

Ron, this is Steve Lilienthal. Let me add one thing to Mike's comments. The casualty study was a study that's been on going for several months. That's the first thing. That was a very specific study we were after. These involved large -- these were large loss sensitive accounts heavily driven by workers compensation, this are retro, deductibles and SIRs [Inaudible] difficult to analyze on a typical more comp line. The second area was D&O. This are security related D&O claims. This was not a normal actuarial reviews. I was not satisfied with out position in this areas where I was questioning our position on this cases due to the noise in the press and news and all sorts of stuff. We actually did an open claim file review using a combination of legal claim and actuarial people to make sure we had all of this cases positioned in a right way. This was a very very specific study [Inaudible], myself and Bob Deutsch asked for with Mike Fusco. The pool property loss was very well documented. That's an industry loss. It is the most bizarre loss anyone has experienced. It was well documented. We took a computation on a reinsurance cover during the quarter and had to recognize a piece of surety loss that same that also came through. That's the big stuff. That's what was in there and what drove most of it. It was not just a routine actuarial reviews that drove this. This were fairly specific things that hit it many had a couple other things like the CIC discount and other things. At the end of the day, the risk management analysis was specific. The D&O was an open claim file review. The arbitration ruling drove the big property loss, computation on the reinsurance loss. If you add that up that is going to get most of that up, it will get most testify.

Okay. Thank you.

We go next to David McGown from Citi Group.

Good morning one for Steve and one for Bob. Steve, If I hurd you correctly I think you said that you don't have a capital problem as a result of the charge you took this quarter. Looking ahead, do you feel like that might be something you will run into in the third or fourth quarter?

I think it would be premature for me to comment on anything like that. Any issues that we have we feel capable and comfortable with dealing with.

Do you feel comfortable talking about options to the extent that becomes an issue?

I'm not sure what the point of your question is.

What options you have for capital to the extent it becomes an issue as you go through this preserves.

I don't think it would be appropriate to discuss capital issues when we haven't identified one.

Okay. For Bob, Bob, going back to your presentation in New York a little bit back -- for forgive me if I don't have the numbers exactly right. I think you showed something on the order of under 300 million of remaining maturities and your company liquidity was below that, a little over 250 million. Can you give us an update on where you stand on holding company liquidity and where you are on sources and uses for the rest of the year?

Sure. I have to find the details. I'll find that. I have so many pages. I'm trying to find that. We have the debt maturity, $417 million due in 2000-- I stand corrected. On November 15 we've got about $250 million coming due where our cash is today. Steve, rather than take everybody's time, I'm going to have to get back to you on that.

That's fine. Thank you.

We go next to Bob Glasspiegel with Langen and McAlenney.

Good morning. I know you don't want to super seed the external asbestos analysis being done. Jonathon Canter on the last several calls and analyst meeting made me feel quiet comfortable that the underlying trends you've been seeing in '03 on asbestos have been quite encouraging. Has there been anything that's happened -- would he want to amend any of his prior comments or has there been anything that's happened since then that we should be aware of?

Hi. This is John. Two things I think I would look at in particular as we move into our semiannual review of our position on APMT. One is the question -- I asked them to look at the following question. If we wrote a policy, let's say, between 1980 and '83 and it attaches at $150 million, let's say 25 X of $150 million where we may have previously assumed it would never be reached, would it be reached now just do to the sheer pressure of claims volume. So that's something we're going to take another look at. The other thing, we're going to lock at very carefully is Silica. We have seen quite a bit of activity in the area of Silica. It is, obviously, not asbestos. It is considered part of our mass tort book. So stay tuned for developments there

The overall paid claims have been negligible. You've been winning the cases, new incidents are non asbestos victims. All those trends are as you've been articulating?

Yeah. There hasn't been a deterioration in the level environment except for sheer pressure of claims volume. The question is whether --

I thought new claims reporting was going down. To CNA

New claims are not going down to CNA. The calendar year paid claims are going down, but the new claims coming in the door are rising here as they are everywhere else just due to the amount of filings being made, some of which are in anticipation of possible federal legislation and state legislation. Later, it is something we need to consider in our reviews particularly as it affects our asbestos closure.

Bob Deutsch is probably anticipating this question. The interest on funds withheld run rate which spiked up -- which you highlighted because of the session to the cover, if I understood you correctly. Is that a good new run rate or nonrecurring element to that?

No. There are some new. The catch-up interest expense was $43 million in the quarter. So of the $93 million, you back out the 43, and that would give you 50-million on a run rate basis. I think that's a decent number going forward. The funs withheld balance upon which we're paying interest expense is $2.5 billion at June 30 at an interest rate after roughly 7 3/4% equates to about $200 million pre-tax per year. We did commute one transaction this quarter. It was the deal with [Gurling] which we have talked about in previous 10-Qs. We have computed that. The net cost of that was $36 million in the quarter. That's going to save us interest expense of roughly $8 million in the balance of '03 of about 12 million next year, and then it works its way down from there.

Where was that computation in the P&L?

In incurred losses.

It was in the combined ratio?

Yes, absolutely.

And that wasn't part of prior year development? That's current, your run rate?

That was part of prior accident development because it was '99, 2000 and 2001. So it is reflected in there.

Okay. And just current run rate business, you continue to think you can grow premiums at the same sort of gross premium rate going into the third quarter, or is there some factors that will change that?

No. We think we will because when you look at where rate is through the first six months, we have 22 points to read across the total portfolio. July was 21%. New business has continued at around 25-27%. Retention is improving, and we expect to sew retention continue to improve, especially under the standard lines portfolio. If you look at gross written premium for the month of July, gross written premium for that month was up 16%. So we had 19% for the quarter, we're up 16% for the largest month going into the third quarter. My expectation is we should still continue into the high teens.

Any nervousness on your part that we got the reserves wrong, that the pricing may not have been correct?

No, not at all.

Bob, on the current business?

Right.

We feel very good about the current business.

This is Steve. By any of the metric that is we have, we consolidated our management information systems and were able to slice and dice the property casualty business thoroughly. We identify what we would call known offender such as PEOs we had some program business that we didn’t like. We had other segments in our construction book that were clearly causing us problems. That was more difficult to see without the information we had available now. The renewal efficiency report really answers the question as to whether we're keeping business that is better than the business that we're not renewing. Our pricing reports are considerably and consistently over lost cost indications. We have shrunk our work comp portfolio from 27% to 17% this year. Our new business pricing is very, very tight with the renewal books. So we feel very positive, very bullish about what took place particularly in '02, and we feel very good with respect to what's going on in '03 from a selection on a portfolio stand point.

The other they think on that renewal efficiency is that aside from a 13 point spread is our paid in case loss ratios on the business that we are keeping is 25%. As you're looking at balancing that portfolio and getting comfortable, we should be in the mid-20s with the paid and case loss ratio. So the loss ratio is getting in line where expected. The other thing is, when you look at the balance in the portfolio and get away from construction in to nonconstruction and do the manufacturing retail services wholesale services, in '00, 60% of our non-construction book was in low to moderate hazards as we look at '03, it is up to 70% in low to moderate hazards. We are shifting the portfolio also.

Do you have a rough range for the restructuring charge?

It is not a restructuring charge. It is not a one-time item at all. It will be incurred -- reported as just operating expense in the period in which it occurs. We expect to notify the vast majority of these employees before the end of the year so that we expect the severance costs to be largely born in the 2003 financial statements.

So you don't see any pressure in expense ratio with severance running through the numbers. Is that what you saying?

The severance number and the scheme of this is not going to be that significant a number, nothing compared to the 200-million of savings we expect to realize.

Thank you.

For Dave Mcgowen, we have roughly $250 million in cash at the holding company. We've got about $250 million of debt payments due in the middle of November. There's going to be a small amount of additional cash coming in and out, but with respect to 2003 cash flow, there is absolutely nothing that concerns us in terms of meeting those obligations.

We go next to Charles Gates with Credit Suisse First Boston. Mr. Gates, your line is open. We go next to Dan Johnson with UBS Global Asset Management.

Great. Thank you very much. A couple quick ones, please. A what were the asbestos paid in the quarter?

We wrote you a check on that Dan.

The next, you touched on more [bidty] trends on the long-term care book. Can you maybe add a little more color to that? Is this also something that you're considering doing a broader reserve study on?

On more bidty -- the comment relates particularly to the long individual long-term care business where we were seeing higher claims. That's associated with people receiving the benefits longer and laps ratios not being as high as we originally planned. We're not doing an additional study on that in terms of the third quarter reviews.

Can you remind me, since this issue, I guess, isn't new for the industry, the lower lapses and the higher utilization versus assumed pricing. Could you take a charge or was there similar kind of catch-up adjustments in the prior year?

Yes. We have taken additional charges for individual long-term care in several quarters.

Okay.

In fact, in four different quarters. Dan, on asbestos, we have paid $70 million in payments in the first six months. We paid $31 million in payment in the second quarter and $39 million in asbestos payments in the first quarter.

Is that a net or gross number?

Those are net numbers.

Okay. Last two. The reinsurance recoverable charge you took. I'm sorry. I had to pop off for a couple minutes. Did you mention the size or maybe you can add a little color to that?

Sure. We didn't mention the size. It was $40 million in the quarter. That brings our bad debt allowance up to roughly $240 million.

Is this related to a specific case reserve you have, or is this just additional conservatism across-the-board?

No. There are some names we have publicly disclosed that are trouble credits, names like Gurling and Trenwick and commercial [inaudible] those are companies that have exposures to. We looked at those and continue to look at those. We did commute the one Gurling transaction and we continue to have discussions with Gurling on another commutation where it makes good business sense to do so.

My last question is I appreciate the additional disclosure, specifically you're looking at page 26 at the breakdown of the 503 million. My question pertains to the other liability line which in aggregate is not much. The first three most recent accident years, '00 through '02 show about $124 million of development cross those three years combined. Can you give a little color as to what has driven that? Specifically, it looks like there is a large number out of last year's accident year.

The director's and officer's liability is in other liability for the stat purposes. That line of business corresponds to statutory statements and D&O is in there. That is, far and away, the driver in there. The D&O liability increase across-the-board was $66 million for CNA, $50 million in the primary operations and 16 million in the reinsurance operations. That relates to the specific review that Steve talked about. A lot of that is securities related with the IPO cases. I'm sure you've followed the settlements going on there. Frankly, there's been some good news on some of that out there. If you listened to Chuck's conference call, there was some talk about that. There was a positive verdict in the [CSFB] Chubb case. We won't comment on it. We did take $66 million in adverse development in D&O

Is it entirely clear what happens with those cases in terms of insurer liability?

No, it's not clear. The great thing about the CSFB case which was outrageous that CSFB tried to stick Chubb with the loss in the first place, the judge told them to pound sand. It is not insurable. I think it was outrageous for the investment bank to try to stick with it in the first place. That's not predicated in our numbers. We did a ground-up review of the security cases, and we've tried to take what we think is a conservative posture on some of these cases.

And the last piece of that, then, is the -- I guess I was surprised to see the size of the component out of the 2002 accident year, a year in which we'd been willing to renewals, for some reason, this wouldn't have gotten -- these wouldn't have gotten high rate renewals. We are hearing about material D&O rate increases to which I thought these were starting to become sufficient. It would look like possibly not all of them.

Dan, we are getting very large rate increases in D&O. Make no mistake about that. We think it is a good class. Pete Wilson is putting profitable D&O business on the books. This relates to some of these specific security claims and so between rate increases and much tighter terms and conditions, we actually feel good about the D&O and E&O business and we're continuing to pound rate increases in there.

To give you additional info, on the rate increases if you look at the corporate D&O for the fortune 500, we go a 164% increase and 262% rate increase this year. We reduced our limit profile. The average limit profile on that book was 18.8 million. We have reduce td to 10.8. At the same time, if we look at gross accident year combined ratio, not loss ratio, combined, we are at 104% for our '02. '03 is at 90%. The other thing we've done is we've shifted that book away from three-year policies. And a lot of those accounts we're looking at were three-year policies when rates were locked in. Nothing is on a three year policy. It is reduced to annual. We have changed this book significantly. Last thing, just for your info, if you look at our total limits exposed for the fortune 500 book, we have reduced that total limit from 3.8 billion to 2.2 billion.

Thank you for the additional color there.

Thanks.

We Return to Jay Cohen.

Yeah. Most of my follow-ups were answered. A couple quick ones. The first is, I want to make sure I did the math right. Operating income, if you exclude the $308 million hit, about 51 cents a share?

I think the better -- we can get back in EPS. It is a loss of -- you're saying what is it excluding the charge?

Yeah.

Okay. So you would take the loss of 179 million and back out the 308. We've got that in the supplement. You know, those are the additional pages in the supplement. Maybe offline we can talk you through some of those.

That's fine. Next question, since quarter end, the backup in interest rates, any guess what that has cost you from an unrealized gain stand point?

As you know, Jay, it's been substantial in the month of July. While we don't have exact numbers, we think it is pretty substantial. You know, roughly in the 800 to a billion dollar category.

Thanks a lot.

We go to Tom Cholnoky with Goldman Sachs

As far as the asbestos bill in Congress, let's talk away the fact that the industry doesn't like it. Let's assume it actually goes through. What would that have implied as the bill stands today about your asbestos reserves and what you would have had to contribute to the fund based on market share and whatnot?

Tom, we really don't know because, remember, the way the allocation was working in that bill was some blue ribbon commission was going to determine what's the appropriate allocation level. The formulas involved market share, recent payments. It was very complicated, and the blue ribbon pannel had a lot of latitude how to determine it. It would be speculation to see what it's cost to CNA would have been.

Well, let me frame it a different way. Would it be fair to say -- let's simplify it further. With the reserving you have up on your balance sheet, had the bill gone through as it stands today, would your reserves in your balance sheet been enough?

Well, this is John. I think 108 billion implies somewhere between 105 and 110 reserves for the worldwide asbestos reserve, including the re-insurers reserves overseas. It exceeds carriage reserves. Ifs 45 billion norths of that, it would be up to 150%. That's why the insurance industry doesn't like the bill as it stands

Thanks, Tom. With that, we do have to close our call. Thank you for joining us this morning. Once again, I call your attention to the forward-looking statements in the earnings release and previously read at the start of today's call. Lastly, not a taped replay will be available immediately following the call until August 14. You can access it by dialing 888-203-1112 or 719-457-0820 for international callers utilizing pass code 160543. It will be archived later in the day for replay on the investor relations page on our web site. Once again, thank you for your participation.

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