CNA Financial Corp (CNA) 2004 Q2 法說會逐字稿

Welcome to the CNA Financial Corporation's second quarter 2004 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 to you to CNA's second quarter 2004 financial results conference call. My name is Dawn Jaffray and I have responsibility for Investors' Relations. By now all of you should have received our earnings release and financial supplement. If not, you may access these documents at our website at www.cna.com, under the Investors' 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 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 Steve Lilienthal, our CEO; Bob Deutsch, our CFO; and Jim Lewis, our President of Property and Casualty 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 available on our website headed Forward-looking Statements with regard to both. The forward-looking statements speak only as of today, July 29, 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 Boesel at 312-822-2592, and investment analyst questions may be directed to me at 312-822-7757. And with that I'll turn the call over to Steve.

Thanks, Dawn, and good morning to you all. Thanks for joining us. We had a rather quiet, solid second quarter. Operationally and financially, it's pretty much steady as she goes. We've put fundamentals in place over the past few years and now executing and will continue to do so. This will be our third consecutive quarter where we have nothing major to announce. Net income for the second quarter was 289 million over 107, $1.07 per share, versus 70 million or 25 cents a share in the second quarter of '03. Obviously the quarter over quarter and year over year comparisons will become very difficult at this point, and throughout the rest of the year, due to the charges taken in the second and third quarters of 2003. Year to date net income was 164 million or 52 cents a share, versus 153 million or 55 cents a share last year.

As a reminder, net income this year was heavily impacted by a GAAP loss due to the sale of our life business in the amount of $389 million. And is net year to date 2004 net income improvement over year to date 2003. Behind this rather quiet second quarter is a continuing focus on the fundamentals. Underwriting quality and underwriting results have improved dramatically. The second quarter and the year to date combined ratios were both 97. We are now in our third consecutive quarter with a combined ratio under 100%. This is a result of much hard work and discipline, plain and simple. And Lewis and his team have done a very solid job in managing our underwriting portfolio, and Jim will expand on the property and casualty operations in a moment.

The unsold portions of life, group, marine insurance businesses are now organized into a very cohesive run-off unit. We are watching these businesses very closely and we will continue to analyze alternatives for managing these businesses going forward. Following me, Bob Deutsch will provide a more detailed financial discussion. And as I mentioned, Bob will be followed by Jim, who will take a closer look at PC operations and then open it up for questions. With respect to the property casualty operations, the PC team under Jim's leadership, delivered a solid second quarter. Net operating income was 179 million versus a loss of 141 in the same period last year. The second quarter PC combined ratio was 97, standard lines again come in at 99, specialty lines come in at a very solid, excellent, 90%.

We put 6 more points of rate on the book in the quarter. And we continue to reduce the risk of and volatility of our business portfolio through targeted underwriting actions. It is important to note that while available rate levels continue to drift downward, we do remain positive, relative to lost positive inflation. As I have mentioned to you in the past, our strategy has been to reduce the volatility, the reduce units of risk and get more money for what we keep. And although our expense ratio remains heavier than I would like, our decision to let it run a bit heavy to invest in underwriting and claims initiatives, we think, was well grounded. We feel that the trade of approximately 2 points of expense, combined with rate and other underwriting actions to reduce our loss ratio by 18 points, or approximately 18 points was a very good strategy. All in all, our core PC businesses continue to execute the fundamentals we've put in place over the past few years.

Let's talk a bit about expenses. As I mentioned to you on prior calls, we took out more than a $100 million in expenses in '01 and '02. In 2003 we put in place a $200 million expense reduction plan that is now virtually done and will earn out this year. I do remind you that part of that reduction involves Workers' Compensation commission reductions. We are also now going forward with additional initiatives to take out in excess of another $100 million over the remainder of this year and 2005. The actions to support this initiative are now in place and being executed as we speak. Further analysis is underway to remove additional costs from our structure through process improvement, consolidation and organizational streamlining. Before I turn it over to Bob and Jim, I would like to comment briefly on the market. The tide is in effect going out. Rates are slowly but persistently dropping. Terms and conditions are easing, and we expect these conditions to continue throughout '04 and into '05. Certain parts of the market, large property, large casualty, large P&O, continue to loosen up more than others.

And there are players that are writing construction business without the residential exclusions. There are markets paying excess commissions on Workers' Compensation, and in the excess of surplus lines there, we are seeing risks moving back into the standard market that should have stayed in the E&S world. Be that as it may, it is what it is, and these trends underscore the importance of our focus on underwriting discipline and claims best practices. I believe, and we believe, it comes down to the fundamentals. Our ability to optimize and balance our portfolio, develop and implement underwriting strategies quickly and effectively. To focus on the bottom line without it being overly distracted by the top, to manage our expenses as premiums go up and down.

And to stay ahead of claims issues. In a stagnant economy a strong supply and steady perhaps diminishing demand, the game becomes one of displacement or price competition. I do not wish to play this game. I would rather manage an expense issue and deal with the persistency of an embedded loss ratio problem. We have spent the last few years rebuilding this Company on the fundamentals upon which it operates. They are evidenced in the last 3 quarters results, they will serve us well in the markets that are beginning to emerge and it will be very interesting to see who sticks to their guns after all the rhetoric of the past 2 years.

In summary, CNA had a nice second quarter. Solid operating performance in our core PC businesses, continued underwriting disciplines, and a very clear focus on the business fundamentals. Before I turn it over to Bob, I would like to give you a brief update on our CFO search. We are currently down to a short list. And we are trying to wrap this up by the end of August. I would also mention that Bob has agreed to stay on as the - - contractually agreed to stay on a defined consulting capacity for a year, ensuring maximum continuity and an ease of transition. Bob.

Good morning everyone. Steve provided you with a good overall discussion of this quarter's major events. I would like to give you a bit more detail on the financial results before turning it over to Jim. He's described this quarter as rather quiet, just as he did the first quarter. Our financial results this quarter continue the positive trends of the past 2 quarters. Today we reported income before realized losses of $171 million, or 61 cents per share for the quarter and $379 million, or $1.36 per share for the 6 month period. Comparisons with 2003 are not particularly meaningful due to the very large reserve charges we took a year ago. Property and casualty net operating income was $179 million.

Our P&C operations again produced a combined ratio south of 100, coming in at 97%. Standard lines was about 99, while specialty lines had a 90% combined ratio. Jim will give you more detail on the P&C results. In terms of the combined ratio component, there is some noise caused by premium development, policy holder dividends, loss development and reinsurance bad debt. However, net-net, there was favorable development in property and casualty operations of just a few million dollars. In our opinion, we continue to set the 2004 accident year loss ratio conservatively.

On the life side, we closed our transaction with Swiss Re on April 30. You may recall that our first quarter results included the estimated loss on the sale. This quarter the life and group segment reported a net operating loss of $26 million, driven primarily by stranded overhead. Last quarter we mentioned our desire to repay the $300 million surplus note that we had previously issued to load. After the life deal closed we received regulatory approval to repay the note and did so at the end of June. Another item of note: During the second quarter we commuted all of our business with Trenwick. In light of their deteriorating financial condition, we are satisfied with the economic terms and had anticipated such a settlement in our reinsurance bad debt reserve.

I do expect that this earnings call will be my last one as CFO of CNA. On April 29 I gave a few personal comments and stated that, "the last 2 quarters demonstrate CNA's achievements far better than my words can express". I also commented that the strategic direction was set and it was simply execution going forward. Concluding our second quarter earnings we now show solid results, both in terms of underwriting profits and net operating income for 3 straight quarters. While the competitive environment has created more challenges for CNA, I have every confidence that Steve and the many talented people at CNA are up to the task and will continue to deliver solid bottom-line results. I look forward to watching CNA extend its trend of successful quarters. With that I'll turn it over to Jim.

Thanks, Bob, and good morning everyone. In the second quarter property and casualty operations delivered against our most important metric, our combined ratio was 97%. In a softening market P&C operations is holding a steady course. We're in our third consecutive quarter with a combined ratio under 100. As we've said all along. Our focus is on profitability, and you can see that in our key indicators. Starting with gross written premiums, we were down 4% to 2.2 billion in the second quarter, and down 2% at 4.5 billion year-to-date. This change was largely due to intentional underwriting actions, which I will get to in a minute. In standard lines, second quarter gross written premium was down 9%. And specialty lines were pricing remains more attractive, gross written premium was up 10%.

These figures are completely consistent with our strategy of portfolio optimization. The priority isn't growth. It's building a diversified portfolio and profitable classes of business. Now let's look at rates. Rate achievement averaged 6% for the second quarter, down slightly from the first quarter and down from 19% in the second quarter of last year. In standard lines, rate improvement was approximately 5%, while specialty lines ran at about 10%. For July, early indications on rates are 5% across P&C operations. The rate trend is unfolding pretty much as we expected. No precipitous drops, rates continue to outpace the loss trends and they're still some opportunities to diversify our books in the more attractive classes. Turning to retention.

P&C operations ran at 70% in the second quarter versus the 75% we averaged all of 2003. The decrease was mainly in standard lines where we took a number of deliberate underwriting actions. Our habitational construction defects strategy, which we mentioned in our last call, is impacting our volume of construction business. We continue to shift our portfolio away from Workers' Compensation business. More on this in a moment. In addition we want ahead with a strategy to minimize any further exposure to silica related risks. And we also exited some unprofitable programs in our E&S business. Put it all together, and these intentional underwriting actions had an 8 point impact on the second quarter retention in standard lines. On the specialty line side it's a different story. Our second quarter retention was approximately 79%, a level we are very comfortable with.

Turning to new business. We wrote approximately 395 million in the second quarter or 22% of total premiums. This compares to a 462 million or 25% of total premiums in the same period last year. This is not the time to load up on new business. And we're not. But we are open to possible underwriting opportunities. The strategies and tools that we put in place to avoid adverse selections have become more important than ever. I've mentioned our focus on cross sell. This is selling additional products to existing customers. New cross sell premiums amounted to $184 million year to date or approximately 22% of total new business. This is a kind of new business we can write without losing sleep. Since we already know and like these customers. In addition to our cross sell strategy, we're constantly tracking the quality of our books. Based on the spread between paid and case loss reserve ratios for new business and renewal business.

The spread between new and renewal business is very small. This tells us that our underwriters are not sacrificing risk quality to grow new business. The spread between renewed and non-renewed business is equally encouraging. We talked about this measure before. We call it renewal efficiency. We have tracked this back to 1999, and we like what we're seeing. Paid in case loss reserves on both renewed and non-renewed business have been trending down for several years. With the renewed business coming in consistently lower than the non-renewed business. Now the ratios are holding steady. A key indicator of the overall improved quality of our book of business.

Now let's turn to our loss ratio. Our second quarter net total loss ratio was 69%, standard lines was 71%, and specialty lines was 64%. Comparisons to prior periods are not especially meaningful because of the reserve development last year. The main thing is that our loss ratios are more in line with levels commiserate with profitable underwriting. Turning to the net accident year, we see a continuation of a positive trend going back to 2002. P&C 2004 net accident year loss ratio was 65, down a point from 2003. In standard lines, the 2004 net accident year loss ratio was also down a point to 66%. Specialty lines improved 3 points to 63%.

By the way, thee accident year loss ratios are all evaluated as of the second quarter of '04. The lower loss ratios reflect several years of aggressive book management. As Steve has said, we're getting more money for less risk. Workers' Compensation is a good example. Between 2000 and 2003 we reduced Workers' Compensation exposure 32%, while our premiums remained flat because of significant rate achievements. At the same time we improved the hazard mix of our Workers' Compensation book. Policies we classified as high hazard, for instance construction are down 58%. These riskier policies represented about 20% of our over all Workers' Compensation policies in 2003 versus 30% in 2000. As I said at the beginning, it's all about portfolio optimization. Building a diversified portfolio of profitable business.

Turning to our second quarter combined ratio. Property and casualty operations was just under 97%. Standard lines came in at about 99, specialty lines was an excellent 90%. As with loss ratios, the comparison with prior year periods is not especially meaning. The real news here is that both of our major P&C business segments are running combined ratios under 100. Not that we're satisfied, standard lines still needs to be in the mid-90s. But it all starts with delivering an underwriting profit quarter after quarter. In summary, the second quarter continues our drive to really improve our underwriting profitability. Decent combined ratios, more selective on new business, and close attention to rates retention and adverse selections. We've worked hard to sharpen our underwriting discipline. The challenge now is to stay the course in a soft market. With that, I'll turn it back to Dawn.

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

[Operator instructions] Our first question for today comes from Gary Ransom at Fox-Pitt Kelton.

Good morning. I was wondering if you could give a little more detail on the specialty lines where you're seeing the most growth? And you mentioned about the new business and professional liability lines. What type of professional liabilities you're growing into at this point?

When you look at our overall specialty lines operation, we kind of segment it into 3 large buckets, open brokerage, which includes our D&O, E&O. We've also got our commercial accounts, which are our professional operations, our professional lines coverage, which includes quite a few of our programs, such as architects and engineers, such as accountants, such as lawyers' programs, and then we've got our health pro side of our business. The places that we're growing the most are in our programs side of our operations. As we look at our architect and engineers as we look at our accountant programs our lawyers' programs, these are programs that are long-term programs for us. They have consistently been profitable. We are the leading writer in these business segments and we've had that historical possibility, along with the technical expertise to do this business well. The health pro side of our business, within that business we do nursing homes. We also will do professional malpractice coverage, we're not doing the physicians. We do do excess institutions or hospitals. And those are opportunities for us to grow. We've counted significant rates in our health pro side of our business over the last few years. The coverages that we're writing in this segment are all on a claims made basis. We've got very attractive loss ratios from an accident year standpoint. So that's been the growth side. Where we've had an issue - - the place where we've had an issue has really been on the D&O, and it's really been the public companies Fortune 500. That's the place right now where we've really seen a significant reduction in rates. We've also seen a significant reduction in terms and conditions within that part of the overall sector. To the extent that we are now backing away from that sector, we see it more opportunistically, if we can get rate terms and conditions, we're willing to stay in that particular sector. When you look at private D&O, rates have not dropped to that level, we're actually still getting very good rates on that side of the business and that's a very attractive for us. And we're looking to grow that. So it's really the one piece and it's really the large, the public company D&O.

If you look at the rates overall you have that -- the 10% rate across specialty lines. Is it - - if you look in the professional liabilities lines, is it significantly above that?

Yes, it is. But it varies within the individual programs. Hold on just one second and I'll answer your question specifically on the rates side. You kind of kind of look at the open brokerage where we've had our D&O and this is the place where we've gotten well in excess of 100% rate increases over the last 3 years. First quarter for that segment the rates were running around 15%. Second quarter is running 3%. Now, when you look in our program business where we - - this is the place where I said we've got nurses, we've got the lawyers, we've got the accountants, we've got the architects and engineers, we are actually still seeing steady rates. We've had a significant rate over the last 3 years, we're still getting 12 points of rate in the first quarter and also 12 points in the second quarter. When you look at the health pro side of our business, we're still seeing significant rates. We've had significant rates well in excess of 30% or 40% over the last few years. Now, not getting to 30 to 40 but we're still getting the high double digits.

Okay. Thank you.

Thank you Gary.

We'll take our next question from Donna [Haverstan] with Goldman Sachs.

My main question was just asked. But one thing I did want to ask about Moody's, they had said that with stabilized performance that if you completed the capital plan and were in line with their expectations for your key financial metric, that they could change your negative rating outlook to stable. You've obviously completed a capital plan. So could you just detail for us how your results compared to the expectations that Moody's had for your financial metrics?

Sure. They were certainly on track with the plans we have provided. So all the rating agencies we're in continual dialog with them and we would like nothing better than to have that negative outlook removed. And we'll continue to talk with them. We've had our annual review with Moody's, we thought it went well and we continue our dialog with them.

Thanks.

The next is [Rhum Khamar] with J.P. Morgan.

Good morning. I just wanted to follow up on the comments you made on your Workers' Compensation business being down 32%. Could you let us know what percentage of your overall business Workers' Comp is today? And where you would like to see that line of business down the road, in terms of the percentage of your over all business?

Yeah. If you look at workers' comp, what I indicated is overall exposures are down 32%, while over all premiums stayed less over the last 3 years because we got such significant rates. At the same time we were reduced the policies in force by 33%, and reduced our high hazard books. When you look back several years ago, workers' comp was about 27% of our overall portfolio, it's now running 17%. We'd like to get it under 17%.

Great. Thank you.

We'll move next to David Chamberlain at Trafalay.

Hi, yes just as a follow up on the Workers' Comp what do you seeing in that line that discourages you from writing more business?

Well when you kind of look at Workers' Comp and if you listen to what the NCCI is saying in regards to the reserving positions, initially they were saying that we were under reserved in the comp line by $18 billion. They're now saying that's 15 billion. You're also starting to see in quite a few states that rate reductions are coming into play. As a matter of fact last year 16 states took rate reductions there was also a quasi benefit changes that went into place. The rate reductions obviously go in even before you see the benefit changes. I've never seen the benefit changes equate to exactly what the rate changes turn out to be. And so this is a line that we have been concerned about, when you look amount the residual market loads you're starting to see more residual market loads really come into this segment. And we kind of look at this now and say this is as good as it's going to get and it starts to head in the other direction. And when you're now getting rates that are less than loss cost, medical costs went up 10%, you're seeing rates a lot less than that, that's why we're very concerned with this line.

Okay. Just on the partnership income, can you give me further detail on why that was a little bit light this quarter?

No, we really can't. That's a pretty volatile class in terms of quarter to quarter numbers. We had been running at you know 60 million a quarter or so. This is 24. We really do not provide guidance on what that's going to be. It is about 1.2 billion in limited partnerships.

Okay. And then finally just on the expense lines and, you know, the 100 million that you guys are projecting over the next year and a half. How much of that will kind of go into the expense ratio if, you know, where can we see - - I know you guys said last time you wanted 30 basis points as your goal. Any change to that outlook?

This is Steve. It's a little early for us to forecast how that's going to affect the ultimate expense ratio for 2005 and beyond. Right now we're in the middle of some very intense detailed planning. And obviously the 100 million that will come out over the next year or so is part of the numerator, we just don't know what the denominator is going to be exactly. So it's kind of tough to forecast a expense ratio. What we do know is that we have $100 million plus opportunity that we're going to deal with because it just makes business sense. And that we also know that we're looking for additional expense take out through analysis of all of our processes through consolidation and streamlining of the organization. So what the ultimate expense ratio winds up for in 2005 based on these take outs is you know a little bit iffy at this point. And as we get a little further down the line we will a be able to talk about it a little more concretely.

Okay. Thanks.

We'll go next to Angelo [Grassi] at Merrill Lynch.

Good morning. I have a couple of questions. One of them is if you can provide more detail on page 14 and the difference in the accident year and calendar year loss ratios? I'm assuming some of that is Trenwick?

Okay. If you -- the difference between the accident year and the calendar year for specialty was pretty insignificant. For [Standright] it was only 1/2 point. For standard lines it was about 2 points. And no that really was not Trenwick related in standard lines. That, you know really the difference between - - as I mentioned early on, we had some loss development, net net, it turned out to be plus 7 million. So this was some adverse loss development and you will see this in our 10-Q which we're filing tomorrow - - I'm sorry? We're filing Monday. So there was some loss adverse development. It's smattered in different places include Workers' Comp and D&O. But it was typically 1/2 of it or so was associated with favorable premium development that we received - - you know audit premiums on Workers' Comp policies against which you establish loss reserves. There is also some retrospective premiums that are triggered by some of the loss development. So net net you've got to look at the premium offset with losses, policyholder dividends and the reinsurance bad debt and it ends up being a slightly positive favorable development for the quarter.

Okay. It seems rather small, I'm assuming you're not seeing any changes or trends from the reserve, the loss reserve like you did last year, this overall development of 7 million?

Correct.

With respect to D&O?

That's right. And we continue to believe that 2004 is being initially set at what will prove to be conservative loss ratios.

Okay. My second question is on asbestos. What are you seeing through the first half of the year as far as claims activities in frequency and severity?

Frequency cancer [from asbestos] frequency is down somewhat from last year. Just trying to figure out what the hike was in '03. In terms of trends, we expect our - - we're pretty much where we were at this point last year, we're at 66 billion net asbestos payments. Our 3 year net survival ratio is currently at about 15.1.

And my last question is on D&O what type of loss ratio are you seeing in that business line?

We really don't give that information out at that level. But you know, needless to say it's included in the specialty lines. We've not suffered from, you know, some of the problems you saw that quarter that we talked about in terms of the ladder in cases of the investment banks losses we haven't seen that in our books.

Great, thank you.

We'll take other next question from Scott [Frost] at HCBC securities.

Thanks. Dawn already answered my question, I appreciate it.

Just as reminder ladies and gentlemen it's star 1 if you did have a question at this time. Well move now to Robert [Medway] with Royal Capital.

Hi. I had a question about the environment you mentioned that the acceleration on rates is negative, things are softening, the terms are getting worse. It has to do with kind of a prognosis of is this going to accelerate to the negative or do you think it's going to be a slow degradation over the next 24 months? And the reason I ask it it is your expense structure is somewhat high, I know you're working on it and I'm wondering how flexible your cost structure is if it gets worse more rapidly?

Rod this is Steve. I think I addressed that in my opening remarks. It has been a slow, persistent pace in terms of what the rate levels are that are available in the marketplace. It varies very, very much by business segment. The the quantitatives that we have show that on this thing show that it's just going to go slow. We have in way of forecasting whether it's going to move dramatically than as it has in the past. But at the end of the day our expectation is that we will see a slow steady drift through the rest of '04 and '05. And at some point right now - - I think I also mentioned that we're positive with respect loss cost inflation. And that takes a little pressure off. So we still have some opportunities to grow. But our - - we do expect that those lines will cross and that we'll be negative at least to loss cost trends by year end or at least by the time we go into '05. And, you know what '05 does is anybody's guess. We anticipate conservatively and then we build our expense strategy based on a very conservative estimation as to what we think it will be: With respect to our operating costs when we have constantly taken out expenses, in some ways we have not emphasized that in these calls because we felt the main event was the reduction of the loss ratio. Which, as I said, if you assume we're maybe 2 points heavier than we should be, we took out like 18 to 20, an excess of 20 points in the loss ratio. And we think that was a really good trade because we were able to upgrade our claims and underwriting operations. So I can deal with expenses. I really don't want to deal with embedded loss ratio problems. Some of the longer bill businesses that you know that you're looking around at. You can call them almost viral in terms of what they do to your reserve position. So our expense - - our infrastructure is flexible, it can be more flexible. Our processes are pretty decent but can be a lot better. So we understand what we're going to be looking at going forward in '05 and '06.

Why do you think the environment is changing at kind of a slow rate rather than other cycles that have been a little bit more rapid in their falling apart? Is that because of capacity?

I have think that's cyclitive. I think everybody is a little leery to after being blasted to knock around, having taken 2 reserve charges over the last couple of years, that if you tote up those numbers, it's staggering, staggering numbers of the charges that have been taken from '01 to the current time. And I think everybody's is kind of reluctant to break out of the gate and put the pedal down and start, you know, loading up on new business or really significantly increasing retention levels on their renewal books. I think there is also some very significant concern about some of the issues that are - - you know, continue to run around out there, you know, out in the Workers' Comp area in particular in the construction industry. You know and then you've got to look at a few other little things running around that makes everybody very, very leery. So you can either argue that the optics wouldn't be so terrific if you went out and did something dramatic. Or the ultimate financial results wouldn't be so terrific if you did it. It's a guess any way you want to put it, but the fact is it's moving slowly.

I'd also like to think that managements are a little smarter this time around. And hopefully I won't be proven wrong on that. But if you listen to the commentary from a wide range of industry leaders, maybe we're finally smarter this time around. And people still need to repair their balance sheet, let's not forget that. You know, Travelers' news 1.7 billion, it's sort of a signal to others and covariant news of 400 million and rest assured they were writing that stuff in a syndicated broker market. And there were other reinsurers that have issues as well. So we've got an opportunity here, they're still as far as best we can tell, there's been $3 billion taken in reserve charges this year alone. You know, huge numbers. So there were still balance sheets that need to be strengthened, there are reinsurance recoverables that people are wishfully thinking that they'll collect that they won't. And so I generally like to think that there's a smarter group of people leading the industry today.

One last question, who would you characterize as more aggressive on pricing that are kind of changing the cycle, is it the new entrants?

No comment.

Okay. Thanks.

Once again ladies and gentlemen, star 1 for any questions. We'll return now to a follow-up from Angelo [Grassi] and Merrill Lynch.

Hi, just one more quick follow-up on reinsurance recoverables. Can you provide a little more color on what you're seeing there? And perhaps I missed it in the release, what were the changes in provisions?

Sure. Our reinsurance recoverable are - - at June 30 we've got $503 million up as reinsurance bad debt. That's about 9% of our unsecured reinsurance balances. That's down from 590 million at December 31. And that's because the vast majority of that was associated with the Trenwick commutation. We did strengthen the reinsurance bad debt by $21 million this quarter. So you start with 591, you take out some uses of it, the vast majority of which was for Trenwick, you add back 21 million and you end up with 503 and that's the number you'll see in the 10Q.

So at 21 million would you characterize the -- I guess the behavior or development in the second quarter as relatively unchanged, down modestly?

You know we do a pretty detailed review quarter by quarter of all of our reinsurance for credit. I would tell you we anticipate putting additional money aside for reinsurance recoverable bad debt. Whether 21 million a quarter, I wouldn't want to speculate about that. But we certainly look at opportunities where appropriate to strengthen that bad debt provision in light of the evolving reinsurance credits we have.

Great, thank you.

With no other questions standing by, at this time I would like to turn the conference back to Ms. Jaffray for any additional or closing 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 taped replay of today's conference call will be available for 1 week immediately following this call until August 5th. You can access the replay by dialing 888-203-1112 or 719-457-0820 for international callers, utilizing passcode 552526. The call will also be archived later in the day for replay on the Investor Relations pages of our website. We thank you for joining us this morning and appreciate your participation in today's call.

Once again ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation and you may disconnect at this time.