CNA Financial Corp (CNA) 2003 Q3 法說會逐字稿

Good day, everyone. Welcome to CNA Financial Corporation's third 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. We'd like to welcome you to CNA's third quarter 2003 financial results conference call. This is a reminder, this call will run through to 9:30 Eastern standard time. My name is Dawn Jaffray and I have responsibility for Investor Relations. By now all of you should have received our earnings release financial supplement and third quarter earnings call presentation slides. If not, you may access these documents at our website at www.cna.com under the investor relations menu. The earnings release is found under the sub menu investor communications/financial news. And the financial supplement is located under the sub menu investor communications financial reports and other SEC filings/supplements. For your reference this call is being webcast and can be accessed again on our website after we have concluded.

With us this morning is Stephen Lilienthal, CEO; Robert Deutsch, our CFO; Michael Fusco, our Chief Actuary; Jon Kantor, Executive Vice President and General Counsel; and Jim Lewis our President of PNC Operations. During this call there may be forward-looking statements made in references to non-GAAP financial measures. Please see the section of the earnings release headed "forward-looking statement" with regard to both. The forward-looking statements speak only as of today, November 12, 2003. Further, the company expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

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

Thank you, Dawn. Good morning, everybody and thank you for joining us. This has been a very busy and complex quarter for CNA, much was undertaken and much was accomplished. Regardless of how you feel about what we will discuss this morning, I would like you to know that how very proud I am of all the CNA people that were involved in this effort and how proud and satisfied I am with the outcome. I also feel that we at CNA have accomplished more in one quarter than many or possibly any company has achieved in years or at least a year of analysis. We did what we said we would do in our second quarter call, we did it well, both from a qualitative and quantitative standpoint. We accept Todd Bault's of Bernstein and Jay Cohen of Merrill Lynch's industry reserve analysis relative to deficiency levels. We accept the analysis done by all four rating agencies on the same topic. We accept the analysis by NCCI setting the year-end 2002 workers' compensation efficiency at $18 billion. And whether you accept the $20, $25 or $30 billion or nor non-asbestos industry deficiency estimates at truth or whether you accept comparable estimates for asbestos efficiencies as truth, we at CNA indeed are taking our share.

Our comments this morning will address three major issues. The charge, which includes core line reserve issues, these are workers' compensation, auto, GO, et cetera, asbestos pollution and mass tort with an emphasis on the asbestos reserve issues, other balance sheet issues and the process of getting there. Secondly, we will address the capital plan driven by issue Number 1, and thirdly, we will talk about the business going forward.

First, the charge. Today, we announced the charge of $1.8 billion after tax, a large and significant charge by any measure. $978 million of that relates to core lines, $517 million relates to APMT, $417 million of that is asbestos-related, and $332 million relates to bad debt reserves for insurance and reinsurance receivables. Virtually all of the loss reserve issues relate to years 2000 and prior and frankly most of it relates to 1999 and prior. Michael Fusco, our Chief Actuary will detail the drivers and process on the core line issues but suffice to say the major issues are workers' compensation, construction defect and excess and surplus lines. Jon Kantor will address the asbestos issue, his slides are on our website as we speak. Robert Deutsch will address the nonreserve and other balance sheet issues in addition to the quarterly results. Bob will also discuss the proposed capital plan which we feel is robust by any measure. By the end of the first quarter of 2004, an additional $1.4 billion of statutory capital will be added to our operation. Jim Lewis will discuss the property casualty operations, Rob McGinnis is here to handle questions you may have with respect to Group and Life Operations and a word about CNA Re. CNA Re, as you know, was sold, if you will, put into runoff and basically what we've done is sold our treaty renewal rights.

Before turning this over to the rest of the team, I would like to make a few points. First, the quality of our reserve analysis. I am not aware of any other company that has attempted or completed as broad and comprehensive an analysis and accomplished it within such tight timeframes as we have. Not to mention the public scrutiny and attention that we received doing it after we announced it on the second quarter call. Our own actuarial teams reviewed 90% of our reserve base during the second and third quarters. We validated that analysis against independent studies being done by a major international actuarial firm working for the states of Illinois and New Hampshire as part of their reviews on our two major pools. We worked further with them to roll these studies forward to 2002. We also looked at analysis being done by our outside auditors on a significant portion of our portfolio.

I am very comfortable saying that our final reserve position correlates quite well with the point estimates and the ranges with the outside independent analysis. This was a very painful, protracted, but necessary and very, very highly collaborative process. This undertaking was not a matter of getting to a predetermined number. I have said from the beginning, that when we saw an issue we would deal with it honestly, accurately and without delay. Our single unwavering focus in our reserve analysis was on doing the right thing. Bottom line, while I'm not happy to be announcing a major reserve strengthening, the scope, rigger and the integrity of our reserve analysis represents a significant accomplishment completed in a very short period of time, and also why while we happened to be running a major business, and quite well I might add.

We have had extensive and very productive discussions with all four rating agencies during this process and while we certainly know the outcomes of their reviews, protocols and courtesy calls for us to wait for the official release of our ratings before discussing them with you. It's my understanding that I think at least two of the rating agencies have released, but in any event, before we get to questions and answers we will have an extensive discussion about our ratings. If we do not receive everybody, I'm sure you'll be reading the detail the of that shortly after this conference call.

The final point I'd like to talk about is the performance of the Property and Casualty Operations. It is the fourth largest commercial insurer in the United States and the main driver of our financial results. This $8.4 billion unit continues to build on the positive momentum from 2002, and performed well again in the third quarter. The gross accident year loss ratio was 65%, continuing the improvement we've seen over the past two years. Rate is up 18% for the third quarter, 20% year-to-date, retention is trending up and we're getting a nice boost from new business in desirable classes. Overall, Property Casualty continues on the track we discussed before. Shifting from a higher volatility book to a more moderate one, focusing on portfolio optimization over growth, and pushing for rate and controlling the flow of new business versus a loaded up approach. We believe CNA has dealt with its legacy issues and that Property Casualty Operations is poised to produce high-quality earnings in 2004 and beyond with combined ratios in the mid to high 90s. Jim Lewis will talk more about Property Casualty operations in a moment.

Life and Group Operations produced $109 million of net income year-to-date versus $70 million last year. For the quarter, Life and Group was up significantly over last year, $73 million versus $51 million. Group Operations has a nice portfolio of employee benefits and institutional investment products and continues to deliver good results.

Expenses. With respect to expenses, we are well into the $200 million expense initiative and the reduction over 700 head count that we announced during the second quarter call. New agency compensations agreements have been executed and are expected to take out approximately $30 million of acquisition costs in 2004, with more expected to come out in 2005. The balance of the initiative, which is aimed at streamlining the corporate center functions, technology and selected business areas, will be fully implemented early next year.

Now, I'd like to turn it over to four Chief Financial Officer, Robert Deutsch. Bob?

Good morning everyone. Steve provided you with a good overall discussion of this quarter's major events. Because Mike and Jon will cover large parts of the reserve charge in detail, I'm going to focus my comments on the quarter's other items and our capital plan. For convenience, many of the numbers I cite will be rounded.

Page 26 of the financial supplement shows the pre-tax loss, allocated loss adjustment expense, and dividend development charge of $2.350 billion. This is also depicted on Slide Number 5 in the power point presentation that all of you should have access to. $1.5 billion of that relates to our core businesses which Mike will discuss. $800 million relate to asbestos, pollution and mass tort, which Jon will cover. As you can see, the 2000 and prior accident years constitute the overwhelming problem years. While disappointing, of course, we are not alone in the industry in recognizing just how bad those years were. And I believe you will see other companies report poor results because of those same accident years. And in this environment, it will be sooner rather than later.

Even though it is still early days for the 2002 and 2003 accident years, we are obviously very much encouraged by the pricing achieved for those years. Page 17 of the financial supplement gives you the usual accident year loss ratios, and you can see we are making good progress. Slide Number 6 shows $790 million of other pre-tax charges in the quarter. We reviewed our provision for unallocated loss adjustment expenses and believe it was prudent to increase those reserves by $100 million.

There's been a significant increase in our reinsurance recoverables as a result of the reserve strengthening over the past two quarters. Accordingly, we completed a detailed review of our unsecured reinsurance recoverables in the third quarter. This review included updating the bad-debt factors used in our model which sorts all reinsurance balances by reinsurer rating category. We attempted to recognize that reinsurers must have both the ability to pay and the willingness to pay in order for us to get fully paid on time. We are fortunate to say that we have very few reinsurance disputes with solvent reinsurers. Upon careful review, we increased our reinsurance bad debt provision by $308 million, from $240 million at June 30, to $548 million at September 30. A 128% increase.

While speaking about reinsurance, we commuted all of our property and casualty liabilities with the Garling runoff entities in the third quarter. Reflected in our charge is $120 million associated with this commutation. Prior to utilizing any bad-debt provision. When you look at the Garling commutation on the net present value basis, we believe it was a good transaction for CNA.

The next item on the list is insurance bad debts related to premium, high deductible and retropremium receivables. Unfortunately, we wrote more than our share of professional employer organizations. A bad idea, well-executed. You've heard in gory detail from Steve and Jim about our poor loss experience in this class in prior conference calls. Correspondingly, we have also had a difficult time collecting premiums and deductibles owed by these organizations. In the quarter, we increased our insurance bad-debt provision by $203 million pre-tax. Please note that this provision incorporates the latest changes and ultimate loss estimates from our reserve reviews and anticipates that certain accounts that are current today will not be in the future. Even with the bad-debt provision, we aggressively pursue collection activities where prudent to do so.

The last item shown is $175 million for two topics. It includes catch-up interest expense of $103 million, for having seated more losses this quarter to finite reinsurance coverage purchased in the past. It also includes an estimate for additional guarantee fund assessments related to reliance and other insurance insolvencies.

Now, let's turn to our capital plan which is shown on Slide Number 7 in the presentation. The first piece consists of selling Loews $750 million of convertible preferred stock. We anticipate closing this transaction by the end of November. All of these proceeds will be contributed downstream to Continental Casualty Company, CCC, our flagship property and casualty company. Next, our surplus notes, which would be sold by CCC, to Loews at the end of February, 2004, if CCC's statutory surplus did not increase by certain amounts through various business and asset sales. The maximum amount of the surplus notes is $500 million. These notes have a 20-year term with interest set annually based on LIBOR plus 350 basis points. The notes may be paid off at any time with the permission of the Illinois Insurance Department.

Last, in terms of third-party capital, is the commitment by Loews to provide up to an additional $150 million by March 31, 2004, in the event that CCC's statutory surplus does not increase by $650 million through business and asset sales. In total, we anticipate increasing statutory capital by $1.4 billion over the next five months. Plus, statutory income over that period.

Along with the above capital transactions, we previously announced our intention to cut expenses by $200 million pre-tax. And we have made good progress towards that goal. We have also exited the assumed reinsurance business, and have sold our treaty renewal rights. Our exit from the assumed reinsurance business is expected to provide $190 million of capital relief in 2004, to support our property and casualty business. Lastly, we intend to considerably simplify our organizational structure by reducing the number of insurance companies we have, redomesticating into a fewer number of states and ultimately having CCC be the owner of the other property and casualty companies.

The net loss for the quarter was $1.760 billion. Or $7.94 per share. For the nine-month period of 2003, we reported a net loss of $1.6 billion or $7.39 per share. Shifting briefly to investment gains, this quarter our realized gains were $105 million versus $16 million a year ago. For the nine-month period our realized investment gains were $305 million in 2003, versus a loss of $87 million in 2002. During the third quarter, primarily as a result of the interest rate rally in September, CNA was a net seller of long-term bonds, including high-yield securities and bonds that were previously impaired. We ended the quarter with $6.2 billion in short-term securities, nearly 16% of our investment portfolio. Our portfolio duration is 5.5 years down from six years at June 30. However, it is more bar belled today than in the recent past.

With that, I'll turn it over to Mike to discuss our core reserves.

Thanks, Bob. Picking up on the comments already made by any measure this is a large reserve charge. Let me spend a few minutes covering the rigorous process we went through in determines it. First, the breadth of the review. Combined with what we reviewed in the second quarter, our analysis constitutes a comprehensive review of 90% of our property casualty reserve base. As to depth, a critical look at all prior and current assumptions and methodology was undertaken with an individual claim analysis of specific issues.

One of those specific issues in particular that I'd like to comment on is construction defect. A series of claims that began in California but has now spread to other states. CNA has been a player in the construction industry providing coverage to contractors and subcontractors. This quarter we are taking almost $500 million, that's pre-tax, of reserve development in this area. It's partially attributed to the Presley decision in California which provides that an insurer providing coverage to a subcontractor is responsible for the expense cost of additional insured, regardless of degree of fault. It's also attributed to new claims arising in neighboring states, such as Arizona, Nevada, Washington, Colorado and Texas to name a few.

Now, we have implemented strict underwriting guidelines to wall off this exposure by not providing coverage for contractors or subcontractors involved in residential construction. But we believe the reserve provision we have taken will be adequate to cover potential claims in future years. To determine this, we looked at claim reporting patterns, and severity trends and reviewed relevant statutes of limitations. In fact, to borrow the survival ratio concept from asbestos, our current reserve of $950 million-plus for construction defect is more than six times recent years average paid amounts and significantly higher than that in the new states.

For this coverage, and for all others, we had the benefit of an independent actuarial review by a major international firm conducted in connection with regulatory exams. These independent analyses were used to corroborate our internal conclusions by line and in the aggregate. Further, we looked at analysis being done by our external auditors as additional corroboration. I won't go into any detail on any of the other lines, sub lines or products, but the materials displayed in our supplement, on page 26, and also displayed on Exhibit 5 of the power point presentation, outlines the strengthening by segment and by statutory line in accident year detail.

Let me summarize a bit. On a pre-tax basis, we strengthened prior year reserves by $2.35 billion. This includes the effects of the corporate aggregate treaties as well as all other available insurance. In round numbers the segment impact is as follows: Standard lines, $1.1 billion, primarily construction defect, which I've already spoken about, and workers' compensation, including excess comp. And we have reduced a percentage of our portfolio that workers' comp represents. The specialty lines, $200 million of development, primarily medical malpractice and surety, and both of those areas we have obtained significant rate increases. CNA Re, $100 million, driven by a treaty by treaty review on all assumed financial reinsurance contracts, and corporate, $800 million, almost entirely APMT, asbestos, pollution and mass tort. The strengthening of the APMT reserves is outlined separately in the presentation and Jon Kantor will provide some specific comments here.

Thanks, Mike. Today we're announcing a $642 million net addition to asbestos reserves, bringing our net asbestos reserves to $1.787 billion. On a gross basis our asbestos reserves are now $3.43 billion. This brings our three-year survival ratio to 18 years. If you exclude the 60 so-called Tier 1 and 2 asbestos defendants, the survival ratio adjusts to 25 years. Compare that to the estimated industry average survival ratio of 11.6 years. Our unassigned IBNR is now $742 million on a net basis, which in absolute dollars is one of the largest IBNR asbestos provisions in the industry. On a net basis, CNA now holds approximately 8% of U.S. direct asbestos reserves. That compares favorably to our historical 5.9% market share.

In the last few months, as you know, we not only did our own ground-up study but also had an international actuarial firm do an independent study of our asbestos reserves. We used their analysis to inform our analysis and to help arrive at our own best estimate for our asbestos liability. We have a slide presentation on the website this morning and hopefully you have found it by now. If you go to the slide entitled "summary by policyholder category" which is at page 12, this shows that the asbestos reserves fall into four main categories. Settlement agreements, which is 19% of the reserve; active accounts, 30% of the reserve; assumed reinsurance, 9% of the reserve; and unassigned IBNR at 42% of the reserve. Reserve levels in all four categories have been increased with a large increase in our unassigned IBNR category. The unassigned IBNR provision at 42% of reserves is as a percentage of reserves, one of the largest in the industry today.

In the next slide, which is entitled, "Drivers of the reserve action" which is found at page 13, you can see that we took action primarily to position ourselves better for the growing likelihood that due to sheer claims volumes, high excess coverages might be eroded, or in some cases, consumed all together. These high excess coverages could be tapped many years from now and perhaps not at all. But if it happens we will be much better reserved for it than we were before.

The next seven slides simply provide further detail on each category of our asbestos reserves and I will not take you through them now. At page 21, we have a slide entitled, "Survival ratio" which shows our net three-year survival ratio at 18. This adjusts to 25 and even higher under several methods that our peer companies use.

In terms of nonproduct exposure and direct actions, which is discussed at pages 22 and 23, there isn't a lot new to report since the last time I spoke with you on these two areas, except to note some positive developments on the direct action front in Texas where judges are dismissing cases. If you turn to the slide entitled, "Seated reinsurance" you can see our seated asbestos reserves increased to $1.6 billion as a result of our reserve adjustment. As part of our reserving exercise, we evaluated seated reinsurance on an account-by-account basis. And have boosted our provision for bad and doubtful reinsurance. We booked this at the corporate level and believe we are appropriately reserved for actual and potential seated reinsurance collection problems.

A few words on the political situation. Whatever happens to the federal reform effort, the fact is that 2003 was a very significant year for asbestos reform at the state level. We have tried to summarize this in a slide entitled, "State asbestos reform," page 26 in the presentation, where you can see that in the last 12 months, tort reform was seen in some very important places like West Virginia, Texas, Mississippi, Arkansas, New York, Pennsylvania, and Ohio. In these states, judges and legislators have seen the abuses in the asbestos system, and are imposing limits on joint and several liability, punitive and noneconomic damages and forum shopping abuses, and deferred dockets continued to proliferate side lining unimpaired claimants.

While, none of this optimism is part of our reserve analysis, it deserves to be noted because asbestos tort reform in the state and local arena is a very real phenomenon which is happening as we speak. If this trend continues for two to three more years, we will find ourselves in a measurably more benign environment than the one we were in the last few years.

One final point on asbestos which concerns new and future accounts. If you look at the next slide, which is at page 27, and that's entitled, "Asbestos accounts with first notice since 2000," you can see that 735 such accounts have emerged in the past three years. The net paid on these accounts has been a grand total of $4.7 million. This statistic tells us that newly emerging accounts simply do not represent anything like the kind of exposure associated with long-identified policyholders. Most legitimate defendants with serious asbestos liabilities have already been identified and policy holders tendering asbestos claims to CNA for the first time in recent years present to date relatively insignificant asbestos exposure. If this trend holds, this will have quite positive implications for our overall asbestos exposure. I should note that in our reserves we assume far higher losses in future accounts than experience has borne out to date.

Turning to the final page, we're also increasing somewhat our pollution and mass tort reserves, $72 million and $81 million respectively. Although claim numbers in the pollution area continue to trend favorably, we have noticed scattered negative developments in the courts, and a renewed potential for the emergence of natural resource damages claims. With this reserve action, we now have $182 million of unassigned IBNR in the pollution area, representing 45% of our pollution reserves.

In the mass tort area, we have looked carefully at silica and although we are not overly disturbed by what we see, we have decided to adopt a conservative posture here by boosting reserves somewhat and also adopting a conservative underwriting stance by requiring that our policies contain a silica exclusion from this point forward.

And now I'd like to turn it over to Jim Lewis.

Thanks, Jon and good morning, everyone. Rather than talking about history I'm going to focus on the business going forward. Dealing with the past has not distracted us from doing the right things to produce profitable business. In the third quarter, rate retention and new business continued to shine. And I'd like to give you a few of the details.

Starting with premium volume, gross written premium for the quarter up to 12%, to $2.4 billion, and up nearly 8% to $7.1 billion year-to-date. In standard and specialty lines, third quarter gross written premium was up 16%, and 6% respectively. In terms of premium volumes, we had a good quarter. We continued to grow for all of the right reasons.

Let's look at rate. Rate increases across our entire book averaged 18% for the quarter, and 20% year-to-date. In standard lines, rate increases averaged 16% in the quarter with specialty lines coming in at 21%. Overall, we remain very upbeat on the rate environment. It continues to present us with good opportunities to balance our portfolio, and to build a less volatile book of business.

Turning to retention, the numbers are trending up. Retention was 74% in the third quarter, versus 71% in the same period last year, and 70% for all of 2002. Standard lines is running in the low 70s while specialty lines is up around 80%. In short, we're getting more rate and retaining more of our business. In October, we saw the same thing. Rate increases averaged 15% with retention at 76%.

New business is another good story. During the third quarter we wrote approximately $495 million of new business versus $475 million in the third quarter last year. In both periods, new business represented approximately 25% of the book. Controls are at the heart of our new business strategy. We're growing our target classes and we're feeling good about the controls on adverse selection. As I mentioned before, we monitor the differential between new and renewal pricing very, very carefully.

In addition, we're getting a nice boost from cross sales. Cross sell is selling products from multiple CNA businesses to the same customers. Through the third quarter, we booked more than $255 million in new cross-sell premiums. The adverse selection risk is way down because we already know these customers. Controls are equally important on our renewal pricing. One of our key indicators is renewal efficiency. As we've stated before, renewal efficiency is the spread between renewed and nonrenewed business relative to paid losses and case reserves. Last quarter the spread was 13 points with 12 months of development. With 15 months of development that spread is 20 points. In other words, the business we renewed was 20 points better than the business we walked away from relative to paid losses in case reserves.

In addition, we like the trend on our renewal book. Our renewal efficiency data goes back to 1999. At that time, paid losses and case reserves on renewal business were in the mid 40% range. Today, we're in the mid to upper 20s with 15 months of development. Which is exactly where we want to be.

Now, let's turn to our loss ratios. To see the impact of the strong rate and the disciplined underwriting, you had to look at the accident year numbers. Property and Casualty 2003 gross accident year loss ratio improved approximately 7 points to 65, versus 2002 evaluated at year-end 2002. The 2002 gross accident year has also developed very favorably, and has developed a five point drop to 67 as of September 2003. We expect the '03 gross accident year loss ratio to also have very favorable development. The loss ratios include ULAE which is running at about five points.

In summary, there's plenty of evidence that we've moved beyond the past. Rate, retention, and new business are growing strong. Cross-sell has given us a nice boost. Accident year losses continue to improve. We continue to improve our portfolio mix, for example, workers' compensation is now 17% of our portfolio, down from 22% in 2000. Overall, we're running hard and we're looking forward to carrying that momentum into 2004.

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

Thanks, Jim. Before we commence with the Q&A, I'd like to take this opportunity to direct you to the four rating agency press releases that have been issued concurrent with CNA's earnings announcement this morning. I will focus on the insurance financial strength ratings and I'll start by saying all the PNC company ratings remain in the A categories across the four agencies. I will give you a brief update. AM Best has indicated all insurance ratings have been affirmed with a negative outlook. Standard & Poor's have left the ratings unchanged and the ratings remain on credit watch with negative implications. Moody's has confirmed the P&C company ratings A3, and lowered the Life Company rating two notches. The ratings remain on negative outlook as well. Fitch as affirmed all of CNA's ratings with a negative outlook on P&C and a rating watch developing on the Life Companies.

With that, I'd like to now take this opportunity to open the line for questions. Operator, please proceed.

Thank you very much. The question-and-answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing star 1 on your telephone keypad. Once again, that is star 1. We will take as many questions as time allows. Also, if you're using a speakerphone, please ensure your mute function is off so our equipment can receive your signal. We will pause a moment to assemble our roster. Our first question today will come from Jay Cohen with Merrill Lynch.

Hi. I just wanted to reconcile a couple of things, make sure I understand really the capital plan. You said that between now and I guess the next four months you expect surplus to go up by $1.4 million; is that right?

Yes, five months, the end of March 31.

Okay. With about half that have coming from the convertible deal. Is it expected that the surplus notes deal get done?

The way it works, Jay, the 750 is the convertible preferred and we actually expect it to convert to common pretty quickly.

Right.

Subject to some regulatory approvals. The surplus notes are contingent upon certain asset sales and business transactions. If those occur, then it's possible there may not be a need for the surplus notes. If they don't occur, by the end of February, then the surplus notes would be sold to Loews and could be subsequently repaid when such business sales and asset sales might occur. So that's the $500 million backstop. Then there's an additional $150 million backstop in case the statutory surplus from these transactions does not increase by $650 million, the first $500 million being used as an offset against the surplus notes and the next $150 million is the last component.

Okay. You guys have not outlined what types of assets you're trying to sell at this point?

That is correct.

And then one last question: The life insurance company, I assume that's part of the property casualty surplus already?

Yes. CAC Continental Assurance Company and VFL, Valley Forge Life Insurance are owned by Continental Casualty Company.

Let's just say that was part of the potential asset sale, if it was, you'd have to essentially recognize a gain on it to add to the surplus of that business? Meaning you if sell it, if it's already in there, you sell it for book value or statutory book, it wouldn't help out the surplus?

Correct.

Okay. That's it for now, I'll turn it over to others to ask questions. Thanks.

Thanks, Jay.

Next we'll hear from Dan Johnson with U.S. Global Asset.

Thanks a lot, Dan Johnson with UBS. Two questions, if you would. One quick numerical question. The $2.35 billion in terms of additional reserves, could you just clarify whether or not that is net or gross?

That is net.

Okay. Do you have a gross number?

Dan, let's find one and do you have another question?

Yeah, if you would, since it looks like a fair bit of the non-asbestos and pollution reserves were driven by a couple years in workers' comp, kind of interested in going into a little more detail in terms of what you've done with your medical loss trend assumption changes, specifically what were you using potentially back then, what have you updated now, and what are you using, most importantly, given the duration of the business, what are you using as medical trend assumptions going forward? Thank you very much.

Sure thing. Dan, on the gross reserves it's about $3.9 billion, and on the medical trend, I think Mike can address that.

The medical trend, actually, I was looking up the gross number, what was your question specifically on the medical trend?

Since it's a fairly important assumption about the quality of the reserves going forward, kind of interested as to where they were before, where they're at now, meaning what are you using for these compensation claims going forward?

We looked at our medical trend, I don't have the specific factor with me, but we certainly had double-digit medical trend numbers built into our analysis.

Historically or now?

Even now, going forward.

Did you have double digits assumed before?

Oh, before in our prior review? I don't remember that specifically, but we did take a critical look at all of our current and prior assumptions, so it is possible that we changed that assumption.

Okay. I can circle back later. Thank you very much.

Our next question will come from Charles Gates with Credit Suisse First Boston.

I only have one question. Given the insurance is a promise, to what extent do you foresee the possibility of some adverse selection, as companies elect to buy their insurance programs elsewhere?

Well, there's always the possibility of adverse selection but as we looked at our book of business, one of the things I indicated as we looked at our renewal book, we do look at renewal efficiency and we look at the paid and case reserves on our book of business. The business we're keeping has a 20 point better loss ratio than the business we're getting off of. We also monitor our business by SIC code, we know that we're moving our mix from a more high hazard mix to more low to moderate mix. We also monitor our new business pricing very, very carefully. We know that our new business actual to manual pricing is very close to our renewal pricing. As I indicated, year-to-date we're getting 20 points of rate on our renewal book. That's on top of 27 points last year and 17 points the previous year.

The other things that we do, is we look at the overall book, is we do have management controls in place, where we do do audits of the overall quality of our underwriting, and we do audits on every one of our underwriting operations. We do monitor the business that's being put on new business-wise plus the renewal book through this audit. We think we've got the appropriate checks and balances in place to really monitor the quality.

I guess my question, though, was more to what extent you think that might occur tomorrow given that presumably an Exxon or Ford Motor Company wouldn't have known about the magnitude of the loss until today.

This is Stephen Lilienthal. That's certainly of concern and interest to us but we do not believe, particularly with the affirmation of our ratings in the A categories, that this will have any effect on us with respect to our inability to participate in the marketplace. We have taken a portfolio optimization strategy as our route as opposed to trying to grow aggressively, and the fact that we're able to monitor that so-called renewal efficiency which we've been doing now for almost, I think, eight or nine quarters gives us a great deal of confidence that adverse selection will not be an issue. Quite frankly, the issue of adverse selection has been raised on almost every conference call and it was not an issue eight quarters ago and it was not an issue one quarter ago. The fact of the matter is if we cannot procure type of business that we would like, we simply won't write it. We don't mind being smaller, if we can deliver better profits.

Thank you.

Charlie, one more thing to add, there's a particular quote in the AM Best press release that's worth bringing it to your attention, it says AM Best believes CNA has been one of the more proactive USA's property and casualty insurers in addressing its prior year loss reserve deficiencies. So what we're seeing is really not unique to us, many of these things are industry issues, as you know, we happen to think we're ahead of the curve in recognizing it.

I would just like to come back on one point that got quietly lost in the noise of our discussions here, our ratings are such, an A from AM Best, an A minus from S&P, an A minus from Fitch, an A3 from Moody's, even with the negative outlooks we were not surprised about, based on the uncertainty that was created and the track record, this is an A, A minus, A minus, A3, we are not precluded from any segment of the commercial lines business, participating, active participation in any of the commercial lines business, we do not run afoul of any security or governance with respect to any of the brokers that have any restrictions as to the level, the ratings of the companies that they have to do business with. From our perspective, the affirmation of the ratings which is very gratifying, allows us to continue on with the strategies that we've had in place yesterday.

Frankly, with respect to what we've announced today, we've announced the charge and a capital plan, which we feel was essential to one of the five objectives that we had put in place here, which was the delivery and the maintenance of a very strong balance sheet and a well-capitalized company.

Thank you.

Ira Zuckerman with Nutmeg Securities has a question.

One comment and several questions. First of all, it would have been better, easier for us if you had gotten the information to us a little earlier than you did. We have, most of us probably have not even had a good chance to look over the whole supplement, much less get some good questions in. But first of all, on the reserve charge, given the size of the charge, how were you able to tax-effect it? Given the fact that, I would imagine, that a lot of it is based on recoverability in the future?

We used a 35% tax rate, we don't see any issue there. Also, please remember that Loews owns 90-plus% of us so we're consolidated in their tax return.

Okay. The other question is: Given the development that we're looking at that you provided for us, how confident are you that 2001, 2002 is developing so much better than the prior years? You're looking at loss ratios in the 60s versus loss ratios in the 90s. And I can't imagine that the business got that much rate increase or got that much better over a one-year period.

This is Stephen Lilienthal. That might not be quite accurate. The fact of the matter is, we shed a significant amount of the commercial portfolio in both the small, middle and large account segments and some of our specialty lines and some programs, we did that in 2001 and 2002. And secondly, we pounded rate on this portfolio three years in a row, 17, 27 and now running around 20 and that is well in excess of any loss cost assumption you could make even in the most extreme of circumstances. The renewal efficiency report, which I think is a little bit more quantitatively addresses this issue, would give you a very solid and good feeling about the fact that this portfolio has, in fact, moved from where it was to where it is today and with rates going way in excess of loss cost, that just bodes well not only for 2000, 2003, but 2004 based on the fact that essentially half of what we laid into the book this year will earn itself out next year.

Okay.

Actually what's going to earn out next year, if we did nothing is in excess of assumed loss cost inflation.

Also assuming we can get that rate again next year. When we're looking at that loss ratio, it's improved from 88 to 65, over a two-year time frame, looking at the gross accident year numbers. And we've also seen improvement in the '02 year, as I indicated. That improved from 72 to 67. We do have a casualty book of business with long tails , we do look at '03 cautiously as we're booking the loss ratio, and we want to make sure we see the development before we drop anything to the bottom line. But our expectation is is that '03 would also develop very favorably.

Okay. And a couple of detailed questions. Can you give us any more information on the reinsurance sale as to how much you're getting as a commission and for how long?

The transaction that we get a percentage of the renewal premium, he premium that's renewed on Folksamerica paper, it's a two-year transaction, we've not disclosed the terms but there is a minimum guarantee. Bear in mind that the renewal rights by itself does not generate huge amounts of net operating income. But the fact is, exiting the reinsurance business will provide capital relief, expected capital relief in 2004 of $190 million, that comes from investment income on the reserves which is about $1.2 billion of net loss reserves held by CNA Re, it includes underwriting profits on the in-force business that will be earned in 2004, bear in mind we did not sell in-force business. And third, you avoid risk-based capital charges by not assuming premiums, by not having assumed premiums written and as the reserves runoff as well.

That I understand. And the last question I've got is Canary Wharf, you guys were a seed investor in the project. The announcement it's been sold, is there going to be any significant gain or loss for the portfolio?

On Canary Wharf -- I'm sorry, Ira, your specific question on this?

Is the transaction going to result in any significant gain or loss for the portfolio?

As a general matter, we just don't speak about any particular security that we hold.

Yeah, well you guys were very vocal with Global Crossing, but maybe that's a different story.

You know what, we were vocal about Global Crossing when we sold it, it's public, we own Canary Wharf shares.

Yes. I'm aware of that.

Okay. Thanks. Next question?

Our next question will come from Ron Frank with Salomon Smith Barney.

Yes, good morning. S&P has you on credit watch, more severe obviously than negative outlook. And I was wondering, does that imply that they're looking for something more than the capital plan to preserve the rating? Or rather should we just infer that they're holding your feet a little closer to the fire to get the capital plan done? And then I have a follow-up.

S&P, I think, this credit watch, Ron, really relates to just making sure there's execution of the capital plan.

Okay. Okay. And that's what I thought. And then the second question is: This sale of businesses, unless I missed it, there wasn't much specified during the prepared remarks. I was wondering specifically, should we infer from this that the life ops are back on the table?

We're not commenting on any businesses or assets that are for sale. You're right, it was pretty generic and we're leaving it that way.

Okay. Thank you.

Sure thing.

Our next question will come from Tom Cholnoky with Goldman Sachs.

Good morning, sorry I'm in an airport, I apologize for the background noise, I don't know if I missed this or not, I was looking at page -- I believe it's Page 7 of 11 of your release, not the supplement but the release where you have footnote A, talking about additional after-tax income that's not included in the $1.9 billion after-tax charge. I'm just wondering, for those who are trying to understand the true underlying earnings power that you believe you had in the third quarter, how should we think about these items and what might be recurring and nonrecurring? If you could give us a little bit more color on that just to get some more clarity. Thank you.

Sure thing. Thanks, Tom. We added Footnote A because we think it's important to bring that to your attention. Operating under reg G constrains us in certain ways. In the financial supplement, additionally we've given you some pro forma pages in the back. I think it's up to you to make your own judgment as to what's recurring and nonrecurring. We try to point these things out. Some of them, for example, the guarantee fund assessments were about $75 million, that we strengthened the pre-tax that we strengthened the balance sheet by this quarter. It's a fine line, you know, leave it to you to determine that. But it was an unusual event so we wanted to put it in Footnote A. The $67 million, of a after-tax interest, that's a catch-up interest expense, that's $103 million for the quarter. Clearly we think that is a very unusual event because we have to relate it to this reserve charge.

And then the $30 million of dividend reserve development is $46 million on a pre-tax basis, we footnote that in the supplement on, I think it's page 26 there, again, we sort of leave it to you to make some judgment calls on. The interest expense, Tom, in 2004, we're looking at about $200 million pre-tax of interest expense from the corporate covers. We have about $2.9 billion in funds withheld balances that accrue interest at roughly 7.5 to 8%. That number will come down in 2005 and beyond. We think the underlying earnings power of this company is very strong and we are carrying that burden with us and we'll be paying it off over time.

Could you just give a little more color on the dividend reserve development? I'm not sure I understand that.

It's $46 million pre-tax. Is the question what does it relate to?

Exactly, just color, I don't understand how you get a dividend reserve development of $30 million. What is that all about?

Can we follow up with you on that? Because it gets pretty detailed and it might put a fair number of these people --

It's simply more dividends on large-account business.

Okay, I'll follow-up. Thank you.

Rob Medway with Royal Capital has our next question. Mr. Medway, your line is open, please go ahead with your question.

Yes, hi, sorry about that. Question for you about the asset sales. Obviously any asset that is in the surplus, like the life insurance, you have to have book of gain to have something to reach the $500 million. What assets do you own outside of the statutory capital like the building that you're in now, or things like that? Could you just give us an idea of what assets are held outside of it?

Who owns the building? I think the insurance company owns the building and it's not for sale. But unless someone comes in with a very high price. But, Rob, the principal assets frankly are held by the insurance companies. The holding company today has cash available at the holding company level of about $380 million. That's obviously outside of the insurance companies. We're going to use that to service $250 million of debt that comes due November 15. We'll still end the year with roughly $70 million of positive cash. That's obviously outside of the company. And then next year we would expect some modest upstream dividends.

Okay. On the reinsurance runoff, the capital relief, will that continue for the next three years after '04? Are you going to continue to get capital from that?

Absolutely. As those reserves run down, the capital relief will continue. Obviously, the biggest benefit year-over-year is '04 over '03 because you avoid the capital charges on roughly $600 million of assumed premiums written.

Okay. And then from your retention and adverse selection, many questions you've gotten today, could you specifically address anything you've done for agent management? In other words, any programs that you've initiated or things that you're doing to make sure the agents are calm and not panicking? And then finally, my last question has to do with your expense ratios and how the cost savings has impacted so far and what your goals are on expense ratios?

I think from our agency plan, we have been very visible into the overall branch territory, meeting with our agents as we've gone through these announcement we made in the second quarter, into the third quarter. We're seeing that we're obviously getting very good receptivity on our agency plan doing business with us when 25% of our book of business is new business. Our new business on the nine-month year-to-date basis is $300 million ahead of where we were at nine months last year. So I think we've got strong receptivity, we've got strong relationships with our overall agency plants. They are just as concerned that we end up with a very strong balance sheet, and they're also very supportive of us at this point.

And the expense ratios?

On the expense ratio side itself, we talked about that we've got initiatives already in place to reduce our expenses. We reduced our expenses in the P&C company by five points, in the latter part of '01 into '02 they took us from 37 to 32. We've now got an initiative to take another $200 million out, we're well along the way on that as far as internal head count reductions. We've already communicated the change in agency compensation. Those changes really had to do with a problem line of business we have which is workers' comp. And in that case, we did reduce the overall commission rate by three points in every place except for California. Which was even more expensive. And so that fits in with our overall portfolio management of what we're doing with the comp line. We're still going to be a major player in comp, 17% of our overall portfolio, we still have close to a billion dollars in comp premium. So we're a major player, but we're just managing that portfolio.

Jim mentioned earlier and that kind of got lost in the shuffle, first off we did not put any special commission or retention or financial plans in place for our agents. We enjoy a very strong relationship with our agents and brokers. We had a very nice third quarter. And Jim mentioned, with respect to premium, that gross written premium for the quarter was up 12%, and nearly 8% year to date. I mean this would speak to a very strongly performing property casualty segment. We did not suffer at all even though we had made an announcement at the end of the second quarter that we were going through this analysis. We had tremendous amounts of conversation with our key brokers and producers, and the only thing that I would tell you, that all of our major distributors, agents and brokers said was as long as your ratings hold up, there's absolutely no problem. The ratings have held up so there's no problem.

The fact of the matter is, as I mentioned earlier, we will do business the same today as yesterday, we will do business the same tomorrow as today, we will do business better this quarter than last quarter because of the fact that we're going to remove a cloud of uncertainty that has surrounded us for the quarter. The fact of the matter is, our numbers speak to a very strongly performing property casualty operation even with a cloud of uncertainty in the third quarter, and even with a fair amount of abuse from our competitors, and even with a fair amount of recruiting that went on with respect to our people that was very unsuccessful. We feel bullish about the property casualty business this quarter, we feel very bullish about the property casualty business going into '04 and beyond.

Okay. Thank you.

Thanks, Rob.

Our next question will come from Larry Greenberg with Langen McAlenney.

Good morning. Hey, Bob, I'm just trying to reconcile the funds held numbers. Which cost you $148 million in the quarter. You said $67 million was catch-up. That would get you to, if you excluded at $80 million, $81 million number.

Larry, let me help you. You're mixing pretax and post tax. The $67 million is an after-tax interest expense, it's $103 million for the quarter. The normal, the non-catch-up number is about $45 million for the quarter, which is basically a consistent run rate with what you've seen in the past.

Great. Thanks very much. And also, can you split out the seated reinsurance on the reserve increase between the cover and other reinsurers?

Let me tell you on the cover, and as to outside of that, I might need to do that off-line, under the corporate covers, we seated in round numbers, $440 million to the corporate covers. We seated premium of $240 million. That's a net benefit of $200 million. You reduce that by $100 million in round numbers, of the catch-up interest expense and the net benefits that is reflected in these numbers is $100 million.

Great. Thank you.

Thank you, Larry.

And next will be Lewis Sapier [ph] with Oppenheimer & Company.

Will you kindly let me know what the adjusted book value is after all these adjustments that you've made?

Sure thing. Hang in one second here. I'll get you a number. I've got to find the right page. Here we go. After the book value per common share is $33.11.

Thank you very much.

Thank you.

Steve Shapiro with SF Investments has the next question.

Thank you, my questions have largely been answered, but I want to understand something about the funds withheld balance. What was the increase in that balance because of the charge?

It increased from $2.5 billion at June 30 to $2.9 billion at September 30, and it's on that amount that we pay roughly 7.75% which is how you come up with your projections of interest expense.

So is the run rate $45 million a quarter or a fourth of $225 million? Because 7.75% on 2.9 is -- has the run rate gone up as a result of this?

Yes, because of this, because we increased that balance by $400 million this quarter, $400 million times 8% is another $30 million a year.

Okay. When can we as investors, begin to see this balance decline and then ultimately go away?

Well, certainly we absolutely expect that the interest expense will come down in 2004 relative to 2003, no question about that because the 2003 includes this huge amount of catch-up interest.

Right.

Then we expect it to go down in 2005 relative to 2004 and then continue after that. Call it $200 million next year, it might be $160 million in 2005, and it trails off from there. We are buying much less of this, in fact we do not have any new purchases of this at the corporate cover, we did not buy it in 2003. We do not anticipate buying it for 2004. And for 2002, we commuted the cover we had in place at the end of 2002.

So the losses that you seated today or because of this review are related to corporate covers that you had purchased in the past?

Correct. Corporate covers, that's finite covers purchased in the past.

And can you just, last question, do you guys have a new philosophy about your use of these covers as opposed to the way you used them previously?

Yes. We don't use them.

Okay. Great. Thank you very much.

Thank you.

Next we'll turn to Ron Bobman [ph] with Capital Returns.

Hi, I've just got a couple of questions. Is there a coupon contemplated for the surplus notes, and if so, what is it?

I think I mentioned this, the interest on the surplus notes is LIBOR plus 350, it's a one-year LIBOR plus 350 and it's reset annually.

Okay. I think, I'm not sure if it was Bob or Steven, but you made mention referring to the reinsurance recoverable and the increase sort of reserve taken there. Are you experiencing a greater degree of an unwillingness to pay on the reinsurers behalf or an inability? If so, do you believe it's unique to you or it's solely a function of the dire challenges that the reinsurer is facing or reinsurers are facing?

I think my comment was we're fortunate in having very few reinsurance disputes with solvent reinsurers. The ones that we have are really modest in nature and we do not believe it's a unique situation at all to CNA. Colleagues of mine on the primary side were all hearing the same sort of thing. And again, it's a modest sort of situation, frankly.

Okay. Does the capital plan or a related capital plan contemplate any capital being invested in the CNA surety insurance companies?

No, it does not.

Okay. And my last question, I think Bob made mention of the fact, referring to sort of competitor, I guess, bad-mouthing and challenges. There was some litigation that was mentioned during the quarter regarding, I think his name was Taylor, an ex-CNA and people going to Quanta. Is there any ongoing litigation with Quanta or the staff people below Taylor that supposedly went with them?

There is no litigation with Quanta. There is nominal litigation with staff people but I can tell you we're in discussions with those people to try to come to a amicable resolution.

Thanks a lot and good luck.

Thank you.

Christine Ly [ph] with Carlston Capital is next.

Hi. I was wondering on page 26 of the supplement, is there any way you could give us an idea of the '98 and prior development? Particularly on workers' comp. Because it's not -- I mean, it could be 1997, it could be 1960, it's kind of hard to tell.

Hi Christine.

Hi, Bob.

We would suggest that our actuaries get back to you with that off-line.

Okay.

So you're looking for more years than are shown on page 26?

Yeah.

Let's do that off-line.

Okay. Thanks.

Thank you, Christine.

Next we hear from Ken Zuckerberg with JJ Capital [ph].

Bob, it's funny, I had the same question on the prior year, so if that's possible to share with the community, that would be great. Since that question's answered, maybe just a follow-up on Dan Johnson's wondering if we have a sense as to gross reserve additions, including and excluding or at least factoring in the corporate stop loss?

Sure. Ken, we'll get to this, in fact, we'll make a determination what has to be put out on the website. We need to be careful here, but we'll look at modifying that after this call. Regarding the gross number, I think, Ken, we mentioned that it was $3.9 billion relative to this $2.35 billion net basis, were you looking for a different split than that?

I'm sorry, Bob, I phased out of the call for a minute. So $3.9 billion is basically the gross reserves, gross loss and loss expense reserve addition related to the $2.3 billion, and that factors in, basically that's not distorted by the corporate stop loss, I guess, point of clarification?

Well, the $3.9 billion is comparable to page 26, loss and allocated adjustment expenses and dividend development. The distortion caused by corporate cover is not that much relative to the $3.9 billion. We can give you the details again, but it was $440 million went to the corporate covers, so that would be included in there. But then there's also the premium that went as well, $240 million.

Okay. Bob, I'll follow-up with you off-line on that. Thanks very much.

Okay.

And next is Jay Cohen with Merrill Lynch.

A couple of follow-ups. What's your reinsurance receivable balance now on your balance sheet?

Let me get you that number. It's roughly $15 billion on a GAAP basis. But you need to be careful here, Jay, because that includes a lot of secured recoverables. And so when we did our analysis, we looked at it specifically related to unsecured balances which are about $6.8 billion. So you'll see in the 10-Q a reinsurance receivable of, if I'm reading this right, $15.1 billion, but again $6.8 billion is the unsecured amount.

Okay. That's helpful. And just so I can reconcile something you said and something that's in the release, you said that the corporate cover net-net helped you in the quarter by about $100 million. On page 19 in the property casualty segments, on page 19, it looks like that number was $83 million, is that the number you were getting at?

Let's see. Page 19. No, that P&C segment, let's see, it's about $100 million. I'm wondering, some may be in the corporate.

Okay.

Because remember, that P&C segment doesn't include corporate. Okay. But in round numbers I think about a $97 million benefit and we'll reconcile for you the difference between the $83 million on page 19.

All right.

I think it's in the corporate center.

All right. That's cool. Thank you.

Thanks, Jay.

Next is Larry Vitel with KBW Brokerage.

Thanks. Can you just go over one more time the cash balance at the holding company? I want to make sure I heard you correctly.

Sure thing. As of October 31, the cash balance is $380 million.

Okay. And $250 million is going to go to pay the debt that's maturing in a few days?

Correct.

Okay. And then you said you'll have $70 million in cash at year-end?

Right. Because there's different ins and outs. There's some interest on the CNAF financial notes, there's some anticipated small movements through the rest of the year.

Okay. All right. Thank you.

Sure thing.

Our next question will come from Josh Welsch with Lectro [ph] Advisors.

A quick question. Bob, could you spell out the terms of the Loews preferred, and how the price is determined for that conversion?

Sure thing. The Loews, the conversion price is based on the five trading days, I believe, after today. So anyway, five trading days in the very near term, and that becomes the conversion price. The dividend on it is basically treated as common. So to the extent that the common stock was to receive a dividend, the preferred would receive a dividend. And again, we expect it to convert pretty quickly because it's just subject to some regulatory [Inaudible].

Terrific. Thank you.

I've been corrected, the five trading days are after we file the 10-Q.

Okay.

And with that, I'm going to take one more question.

And our final question will come from Brian Montellione [ph] with Citigroup.

Actually, Dave McGowan here at Citigroup. Two questions, I think probably both for Steve. One on ratings, S&P has kept you on credit watch negative, as you say, it's related to executing the capital plan. But it looks like a component of it, Steve, is how your parent raises some of the capital that they may be putting in to you down the road. I guess the question is, how sensitive could your business be to loss of just one those A ratings on the S&P side? I would assume it's the best rating that matters the most, but is there any impact if S&P doesn't like the way that Loews raises the capital? And I have a follow up.

Well, with respect to, all of the ratings are very important to us, and all of the ratings being maintained in the A category is extremely important to us. In order for us to continue to participate in the entire spectrum of the commercial lines marketplace. And to do business with the broad array of distributors, agents and brokers that we do business with. So really, we're sensitive to all the ratings. And I think it would be unfair to characterize one or more as more important than the other.

Okay.

That's the first thing I'd tell you. The negative outlooks and so on, that has to do with two things: Number 1, they wanted to make sure that we did, in fact, deliver on the capital plan. And that was sort of their way of indicating that until all of this is done, there's a little bit of uncertainty. But even more to the point going forward, all four of the rating agencies have said that you guys need to deliver consistent, sustainable high-quality earnings going forward. And that is that's another factor in terms of these outlooks. And lastly, I think they're saying, hey, you got to avoid giving us surprises, and that comes back to consistency of the earnings. So I think we're obviously very sensitive to any and all of the ratings that we have, and that's why having them reaffirmed in the A categories across the board was terribly gratifying and great. But at the end of the day, we need to deliver high quality earnings and need to avoid surprises.

That's good [Inaudible], Steve. On that front you talked about over the past year or so one of the biggest changes you had to make since you came in was to improve your ability, the company's ability to collect and analyze data as it comes in.

Yes.

And I think you sort of mentioned that you're not where you need to be in some of your past conversations. How close are you and do you feel like that if something starts to go wrong again, that you're in a position to recognize it a lot quicker than used to be the case?

I think when I got here, I was very concerned about the quality of the data and the ease of -- and the ability to access it on a very rapid basis. That has changed dramatically. We have in place a system right now in the property casualty operations, affectionately called Merlin that allows us to look at the businesses, in the aggregate we can look at it by region, state, by line of business, by office, by distributor. I mean, we can cut it, slice it and dice it in any way you want. It shows current levels of production, it shows 12-month rolling, 12-month rolling production, year-to-date numbers, comparison, commission rates, ultimate accident year loss ratios for four years with averages and things like that.

So I feel very, very comfortable that Jim and his team are very capable of delivering or being able to manage the property casualty business on, I won't say realtime, but certainly close to realtime basis as we sit right now. Will that system get better? Absolutely. But I would not look at data quality on the property casualty business as a weakness. We feel very good about where that is right now. It was very, very weak, very fragmented and very difficult to get previously. But running a business based on facts and data is much more fun. I guess I would leave it at that. I don't know if you want to add anything to that, Jim?

No, that's fine.

Okay, I think with that, that will have been our final question. We will turn it over to Steve to wrap up with some closing remarks.

I've got couple of things to say just to kind of wrap up what has been a very exhausting and difficult quarter. During the two years that I've been at CNA, I focused on five major priorities. Number 1 was excellence in the core functions of underwriting, claims and actuarial analysis. Secondly operational excellence both on a quantitative and qualitative standpoint, upgrading talent at the leadership and technical levels, getting back to profitability and balancing the portfolio. And lastly, and what we will talk a little bit about now is establishing a very solid and conservative balance sheet.

I believe we've made tremendous progress on all five fronts. What we announced today, reserve strengthening, based on a broad comprehensive and very collaborative actuarial review, and a solid robust capital plan was critical to delivering on Number 5. A conservative balance sheet. I think this is essentially a new CNA. We have reunderwritten it, we have replatformed it, we have restaffed it, we have repositioned the portfolio and it is being recapitalized. We have demonstrated a willingness to deal with our issues and deliver on our promises that we've made. We have demonstrated the ability to move quickly as evidenced by the enormity of the undertakings of this summer.

We feel that CNA has been very diligent and has worked very hard to do the right thing and is positioned to deliver strong results going toward through intelligent claims and underwriting practices. We are very, very pleased, and I just said this, with the outcome of our ratings reviews. All four property casualty ratings in the A category allows us to continue very active participation in all segments of the commercial lines market, and with all of our agents brokers with whom we were doing business with yesterday. We will operate the same today as yesterday, we will operate the same this quarter as last, and maybe even better now that this cloud of uncertainty has finally been removed. And we can get back to the insurance business. I mentioned to you the negative outlooks were not unexpected. We need though deliver on the capital plan, the earnings and avoid surprises going forward.

So in conclusion, all I have to say is we did everything we said we would do, while there is always more work to do in this business, our path is clear and we're capable of delivering on our commitments. Thanks a bunch for joining us and we'll probably get a lot of questions going on today.

Thanks, Steve. Once again I call your attention to the disclosures we made at the start of this call regarding forward-looking statements, and as posted in the press releases. Please note that a tape replay of this call will be available immediately following the call until November 19. You can access the replay by dialing (888)203-1112. Or for international callers, (719)457-0820. Utilizing pass code 235538. The call will also we archived later in the day for replay on the investor relations pages of our website. We appreciate your participation in today's call.

That concludes today's conference call. Thank you very much for joining us, you may now disconnect.