CNA Financial Corp (CNA) 2003 Q4 法說會逐字稿

Welcome to CNA Financial Corporation's fourth quarter and full year 2003 earnings conference call. Today's call is being recorded. We'll turn the call over to Ms. Dawn Jaffray. Please go ahead, ma'am.

Thank you. And good morning. We'd like you to welcome you to CNA's fourth quarter 2003 financial results conference call. My name is Dawn Jaffray and I have responsibility for Investor Relations. By now, all of you should have received our earnings release financial supplement, if not you may access the documents at our website at www.CNA.com under the Investor Relations menu. The earnings release is found under the submenu Investor Communications Financial News and the financial supplement is located under the submenu Investor Communications Financial Report and other SEC filings/supplements.

For your reference, this is being webcast and can be accessed again on our website after we've concluded. With us this morning is Steve Lilienthal, CEO, Bob Deutsch, our CFO, Mike Flasco, the Chief Actuary, Jon Kantor our Executive Vice-President and General Council and Jim Lewis, our President of P&Casualty Operations. During this call, there mayl be forward-looking statements made in reference to non-GAAP financial measures. Please see the section of the earnings release available on our website headed forward-looking statements with regards to both. The forward-looking statements speak only as of today, February 12, 2004.

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 Basil at 312-822-2592. And investment analysts may direct their questions to me at 312-822-7757. And with that I'll turn the call over to Steve.

Thanks, Dawn, good morning to you all. And thanks for joining us today. There will be no major announcements during the course of this conference call. CNA enjoyed a rather quiet, nice quarter in addition to a strong showing by the Property Casualty operations on the current accident years. We also got quite a bit of things done in other areas. I will provide an overview of the financial results of the quarter and year, respectively.

I will also provide a summary of the major initiatives of the fourth quarter, particularly as they relate to our capital restoration plan and finally I will talk a bit about the Property Casualty operations, how it has performed and how we feel it is positioned going to going forward. We reported a net income for the fourth quarter of $174 million or 67 cents per share as compared with net income of $50 million or 21 cents a share for the fourth quarter of 2002.

The net loss for the year was $1.4 billion or $6.58 per share compared to net income of $155 million or 68 cents a share last year. As indicated in our press release, the fourth quarter of 2003 results improved over the fourth quarter of 2002 primarily due to strong results in the Property Casualty operations which continues to demonstrate the progress shown in 2002 and early 2003. The year-over-year decrease was principally the results of unfavorable net prior year development which we announced in the second and third quarters of 2003.

As part of our capital restoration plan and reflecting the repositioning of the CNA to primarily a property casualty focus, we agreed to sell the renewal rights to most of our treaty business of CNA Reed to Folks America. This deal closed in October. We sold most of our group benefit business to The Hartford. This deal closed in December and we most recently announced that we agreed to sell our individual life insurance businesses to Swiss Reed with the expectation that the deal will close by end of the first quarter of 2004. Other than specialty medical, the portions of these businesses not included in the sale have been put into runoff. These deals combined with the already infused and committed capital from Loews will complete our capital restoration plan of $1.4 billion.

Bob Deutsch will have more on this in a moment. As I mentioned earlier, I am very pleased with the continuing improving performance of the Property Casualty operations led by Jim Lewis. Rate increases, solid underwriting and a focus on expense management all contributed to a 99.1% combined ratio in the fourth quarter. I am equally pleased with the fact that Property Casualty operations stayed the course during a very distracting and volatile period last year.

We feel quite good about the positioning of this business going forward and Jim will have more on that in a few minutes. Before I turn the call over to Bob and Jim, I would like to offer a few comments and observations. We undertook a huge task during the last two quarters of 2003. We retooled CNA on the fly.

We certainly refocused it. We replatformed it and we recapitalized it in addition to the underwriting we had previously done. Everything we said we would do, we did. We did it on time and we did it with quality. In a world where very often more is said than done, I believe that we've done at least what we've said and more. Over and above the sales of the three operations mentioned earlier and the concurrent runoff plans that deal with the part of the operation not included in the sales, we concluded a very high quality and validated reserve review, for both claim and non-claim related issues, we received approval of the first steps of our redomesincation plans and the streamlining of our legal entity structure.

We developed an appropriate and flexible capital plan and we maintained ratings in the 'A" categories from all major rating agencies, initiated at $200 million expense reduction plan over the summer and will undertake an additional expense reduction initiative to reduce the so-called "stranded corporate expense" previously absorbed by the Reed, Life and Group operations. I am very proud of what was done, the speed in which it was done, and the quality of the work product. Now let me turn it over to Bob.

Good morning, everyone. Steve provided you with a good overall discussion of this quarter's major events. I'd like to give you a bit more detail on the financial results and then discuss the two major transactions in the capital plan. Today we reported income from continuing operations of $174 million or 67 cents per share, up dramatically from the fourth quarter of 2002 which was $50 million or 21 cents per share.

Income before realized gains and losses was $194 million this quarter versus $112 million a year ago. This 73% improvement was driven by 148% improvement in P&C operations. We're pleased to report a P&C fourth quarter combined ratio of 99.1% which, of course, drove these good results. Our full year financial results were awful because of the very large reserve charges and other balance sheet items dealt with in the second and third quarters. These charges relate principally to the 2000 and prior accident years.

Last quarter, we stated that 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. Fourth quarter reported results have borne out that statement and undoubtedly more will follow. Of course, this industry bad news may help sustain the hard market. CNA's ability to come through this difficult period where the P&C ratings unchanged from all four rating agencies is a testimony to the thoroughness of our analysis and the quality of our $1.4 billion capital plans. As it relate to the capital plan, I want to provide you an update.

On November 24th, CNA sold Loews Corporation $750 million of convertible preferred stock. Based on a conversion price of $23.20 per common share, this will convert into 32.3 million shares of common stock. We expect the conversion to occur in April. On December 31, we closed the sale of group benefits to The Hartford.

This transaction resulted in a GAAP realized loss of is $130 million and increase in statutory surplus of $155 million. At the end of February, Continental Casualty Company, our principal P&C operating company, will sell $345 million of surplus notes to Loews, yielding one-year LIBOR plus 350 basis points which today would be an all end cost of just under 5%. The surplus notes are considered surplus, of course, for statutory reporting but debt for GAAP reporting.

We also just announced the sale of our life insurance business to Swiss Reed for $690 million. While there are several regulatory approvals needed, we believe we can close this deal on March 31. This deal is expected to generate a GAAP loss of about $300 million and an increase in statutory surplus in excess of $400 million.

Subject to regulatory approval, within two to three months after the closing, we expect Continental Casualty Company to repurchase $300 million of the surplus notes that we are selling to Loews. As you know, The Hartford did not buy the group long-term care business nor specialty medical. We are still very much in the specialty medical business However, we're running off the group long-term care business.

Furthermore, we'll be running off the institutional markets business and continue to run off the individual long-term care business. In order to assist you in your projections, we have added pages 28 and 29 to the financial supplement which show the historical results for these runoff businesses. As a general matter, we don't make forecasts.

However, we also recognize the confusion you have in trying to estimate 2004 earnings for the runoff businesses of CNA Reed, life and group. Because of stranded overhead associated with these operations, we estimate that these three areas will lose $50 million after tax in 2004. One last item to mention is our debt situation. In November, we paid off maturing senior notes of $248 million. We will also pay off our bank debt of $250 million, which comes due April 30. Excluding this bank debt, our debt to equity ratio at year-end was 18%. With that I'll turn it over to Jim Lewis.

Thanks, Bob and good morning, everyone. In the fourth quarter, Property and Casualty operations reached a milestone. Our combined ratio came in under a hundred percent. Steve mentioned this earlier but it bears repeating. We're underwriters and this tells us we're on the right track. And it all goes back to the kind of work we did in 2003.

Property Casualty operations stuck to the basics in the midst of reserves strengthening and disposition of major CNA businesses, we stayed focused on the major drivers of current year profitability; rate, retention, new businesses and accident loss ratio. I'd like to take a few minutes to summarize the key indicators and then comment briefly on the year ahead. Starting with premium volume. Gross written premium was up 20% to $2.3 billion for the fourth quarter.

For the year, Property and Casualty operation was up 11% to $9.3 billion, with standard lines up 12% and specialty lines up 10%. Professional lines led the way, but overall business volume grew nicely. The drivers are rate achievement, retention and new business. Let's look at rate. Rate achievement averaged 15% for the fourth quarter and 19% for 2003. Our third consecutive year of strong rate increases.

In standard lines, rates improved 16% for the year with specialty lines coming in at 24%. In January, we averaged rate increases of 10% with standard lines at 9% and specialty lines at 11%. We see the '04 rate environment as moderating, not collapsing and there's still good opportunities to get the rate terms and conditions we need for consistent quality earnings and even though we expect rate increases to be lower in 2004 than 2003, we're confident that the rate increases will continue to exceed loss cost trends.

Turning to retention. We ran in the mid-70s across Property and Casualty operations. That was an improvement of approximately five points from 2002. Standard lines retention improved approximately four points to 72% plus specialty lines was in the 80% range, about even with the prior year. All and all, we retained more accounts at higher average rates in '03 than the year before. In '04 our focus isn't changing.

It's a never-ending, data driven, day-in, day-out process of upgrading the profitability of the business on our books. Turning to new business. We wrote approximately $1.9 billion in 2003, or 25% of the book versus $1.7 billion in 2002 and $1.5 billion in 2001. The steady growth reflects the change in mentality of our front line underwriters. Instead of taking the business we get from our agents and brokers, we're asking for the business we want.

Cross sale is a good example. We targeted five lines of business for cross-selling. When a submission came in the door from say manufacturers, our underwriters asked for the opportunity to quote the umbrella or international coverage. As a result, we've book more than $415 million in new cross-sale premium in 2003. This is focused growth, not aggressive growth. We're very serious about controls on as per selections.

For instance, we monitor the differential between new and renewal price and very carefully. We're equally vigilant with our renewal pricing. As said before, we monitor renewal efficiency. The spread between renewed and nonrenewed business relative to paid losses and case reserves. These spreads have been closing as the quality of our renewal book has improved.

But we're right about where we want to be. The numbers tell us that our underwriters are in touch and are making the right decisions to replace marginal accounts with more desirable business. Now let's turn to our loss ratio. Our fourth quarter calendar year loss ratio of 68% shows the impact of disciplined underwriting in a strong rate environment. You see the same impact in our gross accident year loss ratios.

Property and casualty operations 2003 gross accident year loss ratio improved approximately seven points to 65% versus 2002 evaluated at the end of 2002. The specialty lines gross accident year loss ratio improved four points to 64% and standard lines improved 9 points to 66%. Overall, we ended 2002 -- or 2003 in a good place. But it's just the beginning.

Claims process improvement, distribution management, and aggressive expense management are all on our priority list, and I'd like to provide additional particulars during the Q&A if you have any questions. More than anything else, 2004 is about profitability and rational growth. In summary, in 2003 we stayed focus and we worked the fundamentals. Now it's up to us to translate those gains into bottom line results. With that I'll now turn it back to Dawn.

Thanks, Jim. I would now like to open the line for questions. Operator?

Our question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touchtone telephone. If you're using a speaker phone, please make your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 if you'd like to ask a question. Our first question comes from Bob Glasspiegel with Langen McAlleny.

Good morning. Obviously, it's an encouraging report. With the ROE, I calculate somewhere around 9% in the quarter. Don't know whether that's a run rate to go forward into '04 but question one is, are you willing to articulate an ROE goal given that you're maybe closer to respectability as a starting point? And question two, it seems like you got to get the combined ratio down to decent bid even from an impressive 99% level given that you're going to have a drag from discontinued life burdening results. So is that a fair characterization of where you have to get to?

Bob, on the first one, no, I think if we gave you a forecast of ROE we were in effect giving you a forecast of earnings. And you know we don't do that. That's, we'll leave that to you. Second, on the combined ratio, we certainly accept the fact that 99% is not at all the finishing point here. That's just the beginning. It's got to go south of that.

We know our peers are operating at levels below that, and we're aggressively pursuing improving that including on the expense side and there's huge leverage here on the expense side. As best as we can determine, every 1% on the expense ratio is probably worth 18 cents per share so there's terrific leverage here. You put any kind of multiplier on that, there should be some good stockholder appreciation based on the leverage from improving the combined ratio.

Is 99 just a good clean run rate going into '04 or is there one way or another in that--

The 99 is a pretty clean number. Really no adverse prior period development of any material nature, and it's pretty straightforward.

And this is Jim Lewis. I'd echo that comment. When you look at our 99 and look at the rate that we pounded on this book of business for three consecutive years of 17, 27 and 19%, we've also taken our book of business and moved it away from high hazard to more light to moderate business. At the same time, we've shifted our mix of workers' comp from 22% to 17%. We've done reunderwriting -- major reunderwriting on this book of business.

We've now completed that reunderwriting and I feel comfortable that we should see a improvement in the overall loss ratio based on the actions that we've taken. I'm also encouraged that when I took look at the '02 year, which when we look booked our loss ratio at the end of '02 it had a 72% loss ratio. As we value that at the end of '03 it was 68.5 so we had a 3.5 improvement on the '02 years so that gives us confidence to say there's some legs still in the '03 year so we feel very confident that there's opportunity still for additional improvement in the loss ratio.

On the last question. On the life runoff which you said was $50 million drain next year if I heard you correctly for '04.

Correct.

How long is the Legacy overhead going to be running at that rate or can you whittle that down to break-even in a couple years?

The $50 million, Bob, was after tax and represented life, group and CNA Reed, not just life.

Right.

And our goal is certainly to whittle that away. We've got aggressive plans in place to eliminate that stranded overhead that Steve referred to and that's a big challenge for in us 2004.

Okay, thank you.

Thank you, Bob.

Our next question comes from Jay Cohen with Merrill Lynch.

I just want to say this is the most boring CNA conference call I have heard in years.

Jay, thanks a lot. We really appreciate that.

Just what I was looking for. Two questions. One just kind of number, I guess both numbers questions. The tax rate in the Property Casualty business seemed kind of low. You made money on the underwriting side, obviously the investment income, it looks like it was about a 20% tax rate or something and I'm wondering if there's anything behind that.

Nothing it comes our mind. Can we research that a little further and follow up with you afterwards?

Yeah, sure, no problem. And the other question is, it was good that you identified the runoff business and what you expected to lose in '04. The businesses you're staying in, just if you could just -- a lot going on, so if you could identify the businesses that you're staying in from the either life or group side and if you can identify roughly how much money they would have made in '03.

In the supplement we gave you, pages 28 and 29 show the businesses, on page 28 showed the group business excluding what's in the sale and 29 shows the life business as a footnote at the bottom of that that shows you which businesses we are keeping.

So, in the group area, for example, it's largely institutional markets and specialty medical. In the life business, it's individual long-term care, structured settlements and some life settlement contracts. But do we know what those businesses made?

Yes. For example in the quarter, those businesses made in the life area made pretax $1 million, and in the group business pretax made $14 million.

So the business that's in that category, does that include -- that excludes runoff business as well so that excludes businesses you've sold and are going to run off?

It excludes businesses that went to The Hartford in the case of group, and it excludes businesses anticipated to go to Swiss Reed upon closing. There's some other businesses you're simply running off.

Right and that is included in our first column because those are our businesses that we're keeping.

Okay.

They generated money, but bear in mind the revenue streams are coming way down on those businesses. There is a stranded overhead issue. We still have to run off group long-term care and individual long-term care. We've got institutional markets business that we have to continue to run off as well. That would generate some fees but there's a lot of overhead associated with these operations which is why you really can't take a fourth quarter number, you can't take those two numbers, multiply it times four and say, well, how come you're not making that in 2004 because there is all of this stranded overhead that we need to focus on as we get to a core P&C operation.

So the runoff business is $50 million will be offset to some extent by earnings that you make and businesses you're actually still staying in.

No. The $50 million is in all-in number. It includes positive income, for example, on the $1.3 billion of net reserves that CNA Reed U.S. has offset by expenses associated with that plus it includes, you know, revenues we'll make on running off institutional market business, gix, S&P 500 contracts reduced though, by the expenses associated with technology, severence, conversion costs, stranded overhead, the list going on. So rather than get into a lot of minutia for all of you we gave you one global number of a $50 million after-tax loss.

The business like specialty medical, you're staying in that business?

We're staying in that business, that's correct, and that's also included in that $50 million number.

It is, okay. That's what I needed. All right, perfect. Thanks for the answers.

Thanks, Jay.

Our next question comes from Dave McGowan with Citigroup.

Morning, guys. Several questions. First, you alluded to keeping your "A" category ratings which you obviously should be able to do, given that you've pretty much taken care of the capital program here. Have you been with the agencies and dotted the i's and crossed the t's and expect them to be out soon with affirmations?

The rating agencies are very aware of where we are. We spoke to them before the Swiss Re deal, before The Hartford deal. We'll be seeing them later this month to share with them our 2004 plan, but we've had enough conversations with them that we feel comfortable with these "A" ratings.

Okay. Bob, something we've touched on from time to time. You mentioned paying down some debt and related to that, '04 as lighter year for you. Where do you end on capital pro forma for getting everything done here on a RBC basis and could you tie that what the holding company's liquidity picture looks like in '04?

First RBC perspective, rather than we give you a specific number, we very much expect to end '04 in a strong RBC and capital adequacy position, one that certainly supports the four "A" ratings that we have from the rating agencies.

S&P after we meet with them, at the moment we're on a credit watch from them, but upon execution of the capital plan, which again will think will be fully executed by the end of March we would have that credit watch. We expect that credit watch to be removed so we'll end the year in a strong position from RBC and the capital adequacy perspective. I'd rather not give you a particular number.

And the liquidity?

The liquidity, in terms of being able to meet debt service coming up?

Yes.

We certainly expect it to be high. We've got 400 -- after we pay off the bank debt of $250 million at the end this year, the next traunch comes due our senior note of $492 million in April of 2005. We don't imagine there's any issue at all from a liquidity perspective in servicing that debt.

And is that a function of taking some dividends out this year, Bob, or do you actually end the year up with cash?

Both. There'll be upstream dividends this year and we expect the holding company to maintain some cash as well.

Excellent.

To end the year, we'll end, -- what you'll see in the 10(K) is total debt including the bank debt of $1.9 billion so knock off the 250, that will be paid in April 30 and you're down to a billion 650 of debt beyond April 30 with the next big traunch being the $492 that comes due in '05.

Excellent.

You're next question comes from Dan Johnson of UBS.

Thank you very much. A couple questions if you would. In terms of accident year 2002 development, can you talk about what you are what your thinking was in the quarter? It would look like like both on a net and gross basis you made some changes to the medical malpractice line.

It would look like the '02 and '01 years were bumped up 10 or 15 points on a loss ratio basis and the more historical years were actually bumped down. Can you just kind of walk through what you're seeing and what the thinking was by kicking the longer years out, taking those down?

Dan, are you suggesting those were changes in the quarter?

It would look like it because I'm looking at page 27 of the supplement for the net losses and just comparing it to what was reported in the third quarter supplement so, for example, it says 85% loss ratio in 2002. In last quarter supplement it said 69 so I'm assuming that that just meant you revised accident year loss assumptions up 16 points for accident year 2002 for medical malpractice.

Yeah, that's principally the gerling commutation that we talk about last quarter. We commuted all of our business where gerling and that's largely what you're seeing there.

So but that was in the fourth quarter?

No, the gerling commutation was actually until the third quarter. This was more a cleanup getting ready for Schedule P.

So I guess then my question still applies that what do you think you guys were seeing that would cause to you bump up fairly meaningfully the most recent couple years and yet actually take down medical malpractice for years '99 through '96.

I think you may have just been seeing some movement across accident years so 2002, 2001 as a result of the commutation made moving some things from one accident year to another.

Dan, that was Mike Flasco and we can follow up with more detail, I think you're reading more than was met.

Sure. In terms of paid to incurred was over one or almost 1.1. Anything stand out in terms of tabs in the quarter that you'd want to spike out?

Not particularly. If you look at cash flow, we give you cash flow on an annual you basis and paid losses were actually down -- let me find that page for you.

I was using your page 5 and certainly on a year basis --

I don't have the 2002 here but paid losses were down I think year-over-year okay.

So nothing really in the quarter. Then last question, couple questions pertains to the group long-term care business. Can you roughly size up the reserves you're carrying on that business?

Sure. Group long-term care on a GAAP basis is about $400 million.

Okay. And in terms of the sort of loss ratios you've seen for, I guess -- what sort of thinking of this in terms of P&C terms here. What sort of years have caused most of the development?

We don't have that information here. We don't have that information here.

Let's circle back on that one too and I appreciate your time. Thank you.

Thank you.

Our next question comes from Larry Vitel with KBW?

Hi, can you hear me okay?

Yes.

Thanks. You went through the loss ratio for '02 and how it developed in '03. Can you do that for, I don't know, the previous two or three years and tell us also where you pick losses I guess all in and you can go into much detail as you like for the business you wrote in '03?

I don't know that we can do that here on the phone. If you look at -- what you really need is a Schedule P.

Right.

And you'll have that by March 1. So -- we don't have a draft of it here yet, but we'll have it out in a couple of weeks.

But you went through '02 you just happened to have that at your fingertips?

For analysts purposes, we have a special page in the supplement on page 17 that we try to do from a transparency perspective to help all of you see the recent movement. Most companies don't do that. So we try to put out page 17 early. What you're asking for is version of page 17 that goes back in time, and we don't have that prepared yet. But that would certainly be something that will be public soon enough.

That's great. Thank you so much.

Thank you.

And as a reminder, if you would like to ask a question please press the star key followed by the digit 1 and our next question comes from Aaron Glar with J.P. Morgan.

I jumped on the call a little bit late. Just a couple of questions for you. One is --

Can you speak up please?

Sure. In terms of the rate environment for commercial P&C business, if you listen to some of your competitors, they seem to say, echo, some of your comments that the rates for certain lines are flat and maybe even decreasing like commercial property. Can you just give an overview of where you see rates headed.

I know you mentioned rates are coming down or rate increases could be lower in '04. If you can elaborate on that. And the second question is in terms of workers' comp you mentioned in the opening remarks that the workers' comp line is down to over 17%. Would you like any target that you'd like to take that line down to? Just those two questions thanks.

On the rate side as I indicated for the fourth quarter, we got 15 point to rate, 19% for the whole year and as we looked at January, we got 10 points of rate across all of P&C. We're starting to see some moderation clearly in the large property, and our large property at this point is actually heading negative. Middle market property is still very strong. We're also seeing moderation in the large risk management casualty accounts as more of the Fortune 500 accounts. As we look across the rest of the portfolio, we're still seeing very strong rates, and we see overall loss cost trends as being six points, we're getting 10 points in the first quarter which is in excess of a loss cost trend. As we got our 19 points of rate last year, we earned 9 1/2 points of that into the '04 year which is still well ahead of loss cost. So we see that we will be able to exceed our loss cost as we continue through the year on the whole portfolio.

This is Steve Lilienthal. Let me add to that. When we started our reunderwriting program we made it very clear that our strategy was one of portfolio optimization that we would take rate over retention, that we would moderate our new business growth to make sure that we were embedding profitability in the portfolio as we grew it out and we were satisfied with ratio rational growth rather than rampant growth. I think it's very clear from go with respect to how we were handling the overall Property Casualty portfolio.

Your other question on the worker's comp. We've taken that overall mix down from 22 to 17%. We'd like to get that down to 15%.

Is there a time horizon for that or --

As we just work the overall book of business itself. We're having good success already as you can see with what's happened with that comp line. We'll continue to reinforce and look at the opportunities for reducing that line again in the '04 time frame. I would think by the time we get to the '05 we should definitely be there.

Thank you.

Let me add to that. The work comp strategy that began basically in 2001, we were actually higher than 22% in '01, it was closer to 25 or 26%. What we've done is by enhancing our database or making it easier to get at information to understand the portfolio, we've been able to implement some state-specific strategies. Some very class-of-business specific strategies and put in place a commission reduction program on the work comp line that will continue to drive some of that business off where we want it out.

Great, thank you both.

Thank you.

Well, one point from my perspective, I've been reminded that the $14 million and $1 million numbers I cited on pages 28 and 29, I said those were pretax. In fact, those are after-tax numbers. The pretax numbers are $18 million and a loss of $3 million so just to clarify. Our next question --

As a reminder, if you would like to ask a question, please press a star key followed by the digit one on your touchtone telephone. And we'll take the next question from Bob Glasspiegel from Langen McAlenney.

For investment income ex-partnerships and the cost of the covert, it was down $16 million sequentially even though the Indian assets at book value for PC went up to 26.7 to 30.6. I notice you're lugging along a significant short-term investment position of $6.7 billion up from $5.3. So that could be part of it. But was there anything else funny that caused pretty sharp decline in embedded yields this quarter? And is the short-term investment position sort of a tactical bet on rates to go up or you haven't gotten all the money working?

Bob, on all those points, our book yield at the end of December is 4.85% down from about -- down about 25 basis points in the quarter.

That's the fourth quarter versus fourth quarter?

That's fourth quarter versus third quarter, year end '02 it was five point, in round numbers, it was about 5.4% book yield at 12/31/02 it's 4.5% book yield at 12/31/03. In terms of what we've been doing, your comment about the short-term portfolio being a bet on rates is correct. We've been having a bar bell strategy with our investments. Our duration is about six years. We've purchased some mortgage backs on the one hand and then short-term on the other hand. Also some municipals.

I just don't know any company around that's got 20% of their investment in short-term. Figure you're really out there on a loom sore of with -- I guess the bar bell is a partial explanation. So is there anything funny just distorting the yields in the quarter?

No, but I think your comment that our portfolio may be a-typical may be right in the bar bell sense but the duration of 6.0 years, I suspect is reasonably comparable to peers.

Okay. So 458 is not a bad run rate to use respectively.

Right, you tell us where interest rates are going.

Okay. Thank you.

This does conclude today's Q&A session. I would like to turn the conference back over to Dawn Jaffray for any additional remarks.

Thank you, operator. Once again, I call your attention to our disclosures concerning forward-looking statements in the earnings release and as previously stated at the start of today's call. Please note that a replay of today's conference call will be available for one week immediately following this call until February 19. You can access the replay by dialing 888-203-1112 or 719-457-0820. For international callers both utilizing password 254941. The call will be archived later in the day for replay on the Investor Relation pages of our website. Thank you for joining us this morning. We appreciate your participation in today's call.

This does conclude today's teleconference. We'd like to thank you for your participation. You may now disconnect.