CNA Financial Corp (CNA) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the CNA Financial Corporation's Third Quarter 2004 Earnings Conference Call. Today's conference is being recorded.

We will now turn the conference over to Dawn Jaffray. Please go ahead, ma'am.

Thank you, operator, and good morning. We'd like to welcome you to CNA's Third Quarter 2004 Financial Results Conference Call. My name is Dawn Jaffray and I have responsibility for Investor Relations.

By now, all of you should have received our earnings release and financial supplement. If not, you may access these documents at our website, 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 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; Larry Boisen (ph), our Acting CFO; and Jim Lewis, our President of Property and Casualty operations.

During this call, there may be forward-looking statements made and 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, October 28th, 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, or Katrina Parker at 312-822-5167. And investment analysts questions may be directed to Ken De Vries at 312-822-1111, or myself 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 today. And at the outset, I'd just like to say that we have no major announcements to make during the course of this call. During the call, we'll be discussing the following items; first, the financial results for the quarter and YTD; secondly, the impact of the hurricanes in September; performance of the core PC businesses; our run-off operations; and the CFO search.

Let's start with the last item first. Last Friday, Larry Boisen was named Acting CFO for CNA. Larry's a long-time CNA employee and is currently our SVP and Controller. He is highly qualified and experienced in all financial and accounting matters of CNA. Larry is under contract to CNA, as is Bob Deutsch, whose official last day was last Friday. Larry and Bob will provide expertise and continuity to our existing staff, our auditors, the Board, and the new CFO when hired.

The search for the new CFO has gone a bit longer than expected. But quite frankly, given the importance of the position, I felt it was important to get the right person, rather than just "a" person. I think other companies seeking to fill a CFO position have gone through the same exercise and experience the same degree of difficulty. I do expect to fill the position shortly.

With respect to the earnings, prior year comparisons are virtually impossible, given the fact that we took a massive charge in the third quarter of 2003. All in all, I feel quite positive regarding the third quarter. Net operating income before net realized investment gains or losses was slightly positive at $14 million, despite four hurricanes and the strengthening for bad debt related to PEOs. We have achieved almost $400 million of net operating income YTD. Larry will take you through the numbers in detail in a moment.

The hurricanes, all four of them, obviously impacted our third quarter results. Earnings were impacted to the tune of $174 million after tax, and the combined ratio for Property/Casualty was impacted by 15.7 points from all catastrophes in the quarter.

Quite frankly, as bad as the hurricanes treated the industry and the state of Florida, our results are actually quite satisfactory. We had been managing our coastal exposures heavily for the last three years, had these events taken in place in 2002, the estimated loss could have been higher by as much as $50 million pre-tax, and that does not include the impact of CNA Re, which we feel would have made it considerably higher.

As I said, not bad and we do not expect to dramatically change our underwriting strategies in Florida as a result of these storms. I think we look very good in the absolute, and I think we look very good compared to many of our competitors.

Absent the hurricanes, the core PC business continues to progress consistent with our prior two to three quarters; slow, steady improvement and a consistent focus on underwriting discipline. Excluding catastrophe impact, the combined ratios of 96.1 and 96.4 for the quarter and YTD are quite acceptable.

The Property/Casualty market conditions continue to soften slowly and gradually. Pricing is still positive in both Standard and Specialty lines, at 3 and 6 percent, respectively. Premiums on a gross basis are down in Standard lines due to deliberate underwriting initiatives, and I think we talked about that in the last call. And in Specialty lines, our Program business continues to benefit from new business and rate increases. Specialty premiums are down a touch, primarily because of the change in mix between premiums and fee income in our Warranty business. And Lewis will discuss the Property/Casualty operations in more detail.

The businesses that have been sold or placed into run-off have also -- have been placed under the leadership of one senior CNA executive, and I also think I mentioned that to you in the second quarter call. And this includes our Life and Group lines, as well as CNA Re. I am comfortable that these businesses are in good hands and are receiving the necessary attention and supervision to effect an orderly run-off. And Larry's going to talk about that in detail a little bit further.

In summary, despite the weather, I think we had a pretty decent quarter. The focus on fundamentals, both in Underwriting and Claims, continues and continues to be evident. Non-catastrophe combined ratios continue below 100 percent. Catastrophe levels were lower than most outside parties expected. Market conditions have emerged as expected and we've responded accordingly. Premiums, particularly in Standard lines, have dropped off predictably due to deliberate underwriting initiatives. And we continue to pay very close attention and to be very focused on expense management.

As mentioned at the end of the second quarter, given emerging market conditions, it will be very, very interesting to see who sticks to their underwriting guns after the rhetoric of the past two years.

Now, before I turn this call over to Larry for review of our financial results, I would like to offer a comment on a topic which I am certain is on everybody's mind, the New York Attorney General's investigation. My comments will be limited this morning, given that this matter is in the hands of our lawyers, and I therefore cannot and will not take any questions on this matter during the call. And as with previous situations, we have not - nor will we - fuel any situation with speculation, conjecture or from contribution to rumors.

As with many other carriers, CNA has received subpoenas and requests for information and data from the New York Attorney General's Office and also from the Connecticut Attorney General's Office. CNA has and will continue to respond to these requests. We will do so willingly and promptly as directed. And at this point, we have no reason to believe that CNA has participated in any bid-rigging activities. And I would point your -- or direct your attention to paragraph 72 of the New York Attorney General's complaints against the broker involved, which provides that a CNA underwriter specifically refused to submit a fictitious quote as requested by the broker.

We were surprised to learn of the behaviors of the kinds described in Mr. Spitzer's complaint, that they were going on not only on the brokerage side, but at other companies as well. We were very -- we were certainly not pleased to learn about this. And that is truly all I have to say about it this morning.

I'd like to turn it over to Larry now.

Thanks, Steve. Good morning, everyone. Steve provided you with a summary of this quarter's major events. I'd like to give you a bit more detail on the financial results before turning it over to Jim.

Today, we reported income before realized investment losses of $14 million, or $0.00 per share for the quarter, and $393 million, or $1.34 per share YTD. These per share amounts include the impact of undeclared preferred stock dividends. As Steve noted, comparisons with 2003 are not meaningful due to the large reserves and bad debt charges we took last year.

Property and Casualty net operating income was $6 million for the quarter. Before hurricanes, negatively affected P&C results by $172 million after tax. Our estimate of losses from the hurricanes also includes the impact of reinsurance reinstatement premium and our share of expected assessments from the Citizens Property Insurance Corporation.

The P&C results for the quarter were also adversely impacted by a $62 million after tax insurance bad debt charge. This charge primarily relates to premium and deductibles owed by professional employer organizations, commonly known as PEOs. We completed our exit from this class of business in mid-2003. Our ongoing premium audits of PEO accounts indicates that the exposure base related to these policies is higher than previously expected. Accordingly, estimated ultimate losses within the policy deductible have been revised upward. Revised estimates of the amounts that will be collected on future billings for these accounts also contributed to the charge.

The Life and Group segment reported a net operating loss of $13 million for the quarter, driven by the stranded overheard we have discussed before. The improvement over the $26 million loss reported in the second quarter is due in part to improved results on our run-off block of individual long-term care business.

We reported $42 million of net realized investment losses in the quarter. The aggregate loss, as driven by derivative securities, helps protect the value of our fixed maturity portfolio against an increase in interest rates. While the decrease in long-term interest rates in the quarter resulted in realized losses, the interest rate movement increased the after-tax net unrealized gains in our bond portfolio by about $600 million.

With that, I'll turn it over to Jim.

Thanks, Larry, and good morning, everyone. The third quarter was tough for Property and Casualty insurers. But, as you heard from Steve, CNA was well-positioned. Our work on cat exposure management put us in a much better place than we would have been a few years ago, and disciplined underwriting kept us focused on the quality of our risk. Larry covered the cat losses. I'll be discussing the third quarter from the perspective of our core operating indicators.

Starting with gross written premiums. Property and Casualty operation was down about 9 percent to 2.1 billion in the third quarter, and down about 4 percent to 6.6 billion YTD. In Standard lines, third quarter gross written premium was down 13 percent. In Specialty lines, we were down 2 percent.

Overall, our premium volume reflects our strategy of portfolio optimization. In Specialty, for instance, we continue to grow our Professional Program business. But, in large carpet (ph) D&O, where terms and conditions are becoming less favorable, that kind of growth doesn't make sense. CNA's broad portfolio gives us a big advantage in this regard. We are well positioned to grow or pull back in various businesses, based on market conditions and profit opportunity.

Rate achievement averaged 4 percent during the third quarter, down from 18 percent in the third quarter of last year. In Standard lines, rate achievement was approximately 3 percent, while our Specialty lines ran at approximately 6 percent. For October, early indications on the rate are at 3 percent across P&C operations.

There aren't really any surprises here. After the major gains in 2002 and 2003, the market was due to level off. The question you have to ask yourself is whether rates are still outpacing the loss trend. We watch this spread very closely, line by line. Overall, rate achievement is above the loss trend for Specialty and just at it for Standard, with variation by line of business. We can still write profitable business across the entire portfolio, we just have to be very disciplined and not overly concerned about the top line.

Turning to retention. P&C operations ran at 70 percent in the third quarter, 72 percent YTD, versus the 75 percent we averaged for full year 2003. Retention is running quite a bit better in Specialty; 81 percent in the third quarter and 82 percent for the year.

In Standard lines, the underwriting actions I mentioned last quarter continue to play out. For instance, we're getting off accounts with construction defect exposure and refocusing on larger commercial contractors.

In Workers Compensation, we continue to shift our capacity toward states with more a favorable looking environment. In addition, we're getting off business that involves silica exposures. Together, these underwriting strategies had a negative 9 point impact on third quarter retention in Standard line. So, retention is a different story in Specialty versus Standard.

There is no difference, however, when it comes to the idea that what we retain is more important than how much. As I've said before, we measure the quality of our renewals. We call is "Renewal Efficiency," the spread between paid and case-loss ratios on the business we renew versus the business non-renewed. We have tracked renewal efficiency back to 1999. The ratios 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. In other words, our underwriters improve the quality of our renewal book and are keeping it that way.

Now, let's turn to new business. We wrote approximately 373 million of new business in the third quarter, or 22 percent of total production. This compares to 457 million, or 24 percent of total production in the third quarter of '03. I said at the beginning that we are well positioned for the softening market. Our new business strategies are a good example.

Cross-sell continues to be a mainstay of our new business production. This is selling additional products to existing customers. New cross-sell premium amounted to $261 million YTD, through the third quarter, or approximately 21 percent of total new business. This is business from customers we already know and like. The risk of adverse selection is less than with new new business.

In addition to our cross-sell strategy, we track new business quality with a measure similar to renewal efficiency. It's the spread between paid and case loss ratio for new business and renewal business. We watch this spread carefully. So long as it remains small, we know that our underwriters are making the right new business decisions.

Now I'd like to turn to our loss ratio. Our third quarter net calendar year loss ratio was 75 percent, which includes 15 points of cat losses. These losses drove the 80 percent net calendar year loss ratio in Standard lines. Specialty lines came in at 63.

Overall, the third quarter loss ratios reflect a heavy cat overlay on a sound underwriting focus. We see the same focus in our net accident year loss ratios. The Property and Casualty operation's 2004 net accident year loss ratio was 68 percent, versus 66 percent for 2003. These ratios include catastrophe losses, 5 points for 2004, 2 points for 2003.

In Standard lines at 2004, net accident year loss ratio was up 4 points from 2003 to 70 percent. This includes 7 points for catastrophe. Specialty lines improved 2 points to 63 percent. All the accident year loss ratios have been evaluated as of the third quarter of '04.

Turning to our third quarter combined ratios. Property and Casualty operation came in at 96 percent before catastrophe losses. These losses added 16 points to our third quarter combined. In Standard lines, our third quarter combined ratio was just under 100 percent before catastrophes. The cat losses, reinsurance/reinstatement premium, and estimated the windstorm assessments added 22 points.

Larry had mentioned the bad debt associated with PEO business. This is a class of business we decided to exit in 2002. Additional bad debt added 8 points to the Standard lines combined ratio, or 5 points to the P&C operations combined ratio. The Specialty lines third quarter combined ratio continue to shine at 90 percent.

In summary, catastrophe losses not withstanding, the third quarter was a continuation of the first two; selecting the right business, improving our portfolio, and continuing to sharpen our underwriting discipline.

With that, I'll turn it back to Dawn.

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

(OPERATOR INSTRUCTIONS.) Ira Zuckerman, Nutmeg Securities.

You're reporting your numbers, first of all, ex-cat. What do you assume would be a normal cat year, given that obviously this year was grossly abnormal?

The normal cat loss ratio for us would be 2.5 to 3 points.

And given the -- what appears to be an acceleration of the competition in commercial lines, what kind of price increases do you expect to be getting next year?

This is Steve. I think it's too early to really forecast what pricing's going to be for next year. What we do know for a fact is that it's just been gradually and continually sliding about a point a month over the past, you know, over the past year or so. And we don't look for certainly the market to firm up or prices to move the other way at this point. So, you know, we do the best we can to anticipate the fact that it's going to continue to soften a little bit each quarter and that's how we set our plans.

And if it continues to soften, does this basically mean that we're going to see some margin declines ex-non-recurring next year?

Again, I think you're asking me to forecast something that's subject to the vagaries of the market and the behaviors of competitors. I think -- in the last two quarters, my comments are it'll be just very interesting to see if rhetoric matches activities from an underwriting and claims management standpoint.

Yes, but if you're getting 3 percent rate increases now and costs are going up 3 percent and rates are softening, doesn't that mean that the margins will soften?

Unless you follow Jim's -- Jim's -- the logic of Jim's argument there, which is basically we optimize the portfolio. I mean, you manage -- manage your portfolio to its most profitable position. And then, if that results in a shrinkage of your overall position, you manage your expenses accordingly.

And I think when you look at the overall rate, even though they're dropping, they haven't fallen off the cliff. We're getting a lot more rate in our overall Specialty portfolio than what we're seeing in Standard. We still are getting rates on a YTD basis of 6 points. When you look at that 6 points, you know, in our Standard lines portfolio, we're getting 5 points YTD, loss costs are going up 4.5. In Specialty lines, we're getting 10 points YTD, so well in excess of loss costs.

And we continue to look at where rates are. We've set up business strategies for each one of our businesses, each sub-segment within that business. We know exactly where the profit opportunities are within that, and we monitor it on a monthly basis. And so, we will take action based on what we see in the market.

We've already done that to date when you look at several lines of business. For example, the Private -- or the Public Company D&O, which is the Fortune 500s, we've really backed away from that marketplace because of where rate terms and conditions are.

Same thing is true in the large risk management casualty. We're really starting to really see a business that already had very thin profit margins. We're backing away from that part of the portfolio because of what's now happening with rates, discounted of loss fixed (ph) and less requirements for collateral. And so, we will take the appropriate action and that's how we're going to manage the portfolio.

Ira, this is Steve. I've just got to -- maybe we'll conclude on this point that, you know, I think your point in a very clinical sense is intuitively correct, okay? If you have the same portfolio and a level of inflation and prices that are either at or below that, that would imply less margin if you have no ability to respond to the market or control your own destiny.

Wow. Isn't it very likely that the competition has been going after the most profitable business, not the least profitable?

I can't -- all I'm saying is it'll be interesting to see if all the stuff that everybody's said about underwriting focus and discipline, whether it matches up with their actions next year.

It never does.

I'll leave that with you.

Been around long enough.

Thanks for saying that, though.

Arun Kumar (ph), J.P. Morgan

A couple of quick questions. One is, in terms of the A&E reserves, I know you mentioned in the last call that you're going to be -- you're doing your true-up, and I wanted to check what the status of that is and when you think your study will be completed. And the second one is more general in terms of your ratings. Given the continued modest improvement and results as the year's unfolding, it looks like both the rating agencies, in fact all three of them, seem to have a negative outlook on your company and it's been there for awhile. Could you tell us the status of any discussions you're having with them and if we could expect any changes?

This is Mike Fusco, our Chief Actuary. I'll take the first question, which was about our asbestos and environmental reserves. I'm not sure what you mean by a true-up. What we've said in previous calls is that we do a -- we conduct a semi-annual ground up study of our asbestos and environmental reserves. The next one will be accomplished in the fourth quarter of this year.

With respect to the ratings, we are always in regular conversations with our rating agencies. And in terms of the negative outlook, I believe our continued delivery, as we have in the fourth quarter of last year, the first, the second and the underlying performance of the third quarter this year, are all positive moves that support CNA's consistent -- delivery of consistent earnings. So, we certainly will look forward to having a negative outlook remain. There's nothing on the horizon currently.

I believe that watching how the market performs in this next short period of time will be the situation. Just because they have a negative outlook on us does not mean that there's an imminent rating action, as evidenced by the fact that it's remained with us.

The semi-annual average -- Mike Fusco again. The semi-annual study is a part of our regular process. It's not a special study that we're doing. So, there is no true-up ranging associated with that. It's just our regular semi-annual approach.

Gary Ransom, Fox-Pitt, Kelton.

I was wondering if you could add a little color on the pricing that you're seeing currently by line. You said that that does vary by line. And also, whether you could characterize what you see right now in the marketplace, whether competitors are sticking to their rhetoric or not. And I had one other little question, just whether -- on the Citizen's assessment, whether you've actually heard from the Citizens or if you're just estimating that on your own.

On the rate side -- and this has kind of been true every since the first quarter of this year. The areas where we've seen the most impact on rate have been the places that I indicated earlier, which is the large, the public companies, Fortune 500, D&O, the rich management casualty part of our portfolio, and also large property.

Now, large property to date the rates are negative. It's running somewhere around negative 11 for the quarter. That's not unexpected. As a matter of fact, because of the rate of increases we've gotten for the last two years, we expected that the rates would drop off there. That is also one of our most profitable lines of business. So, even though rates are dropping, it's still a growth area for us. We actually think that the hurricanes may have an impact -- not so much to change the rates to the degree that they start going up, but that maybe they stop going down on the large property part of the portfolio.

When I look at the rest of the book of business, whether it's the small business, whether it's middle market, whether it's our excess and surplus lines business, whether it's our -- any part of our overall Specialty portfolio, which is the healthcare, which is our program business, we still are seeing rate increases in those particular segments. Clearly not as much as what we've gotten over the last two years, but nothing that really concerns us to the degree that -- you know, we're seeing a 1 point drop-off each quarter in those particular segments, but still adequate rates in our view for those particular pieces.

So, we haven't seen competition really enter in to be much more aggressive than in the same places that we've seen since the first quarter of this year. So, we still see this from a rate standpoint, a very healthy environment, one where we still have opportunities to write new business. We've just got to pick and choose where we do it.

So on the smaller business, where you are getting rate increases, would you characterize the competition as still being relatively disciplined?

Yes, very disciplined. I wouldn't see that rates have -- if it was not disciplined, I think we'd see a much larger drop in rates and we just haven't seen that.

And Gary, on your question on the assessments, we have not heard from Citizens. That's our estimate of the assessments that we will ultimately receive.

Tom Cholnoky, Goldman Sachs.

I just have two questions. You talk a lot about pricing and I was just wondering what you could give us in terms of -- well, terms and conditions and the impact that that has on profitability. And then also, I always have trouble with your corporate line. It seems to bounce all over the place. I know you don't provide bottom line guidance, but at least could you give us some guidance on corporate? Thank you.

On the terms and conditions, the place where we've really seen the biggest change there is really in the Risk Management Casualty area, and this has more to do with the loss fix that you really set for that business, that we really think that inappropriate loss fix have been set and been discounted based on what you really see for the historical losses. This is also a business that's loss sensitive where, you know, and you've been able to get collateral in the past. We're also now starting to see collateral no longer being required.

When I look at the Standard portfolio, I really don't see any change or any lessening right now as far as terms or conditions are concerned. When I look at the D&O, it's really more -- even for the public companies -- it's really more a price as opposed to terms and conditions really going away. So, in the overall portfolio, we have not seen a significant change in the terms and conditions.

And have you tried to measure what tighter terms and conditions mean to you in terms of profitability?

Well, as we look at each one of our business segments, we have set up specifically where we think -- we see our overall loss ratio in that segment, what we're looking for for rate. Terms and condition is a key factor that we consider within that. And as we do our overall reviews for those segments, whether it's reserve or rate wise, and then the rate that we need, we consider those factors. But, we monitor that closely.

And on the big -- on the bigger -- on the larger customer segment, we -- where terms and conditions truly can affect overall results, we do our best to track that and also to factor that into our overall assessment of results. On the small and middle -- the low end of the middle market and small accounts, it's not a meaningful measure and almost impossible to track.

Right. And then on corporate?

On corporate, Tom, you're right that, you know, it does vary because it is a combination of a lot of different run-off activities. You know, in the quarter we're reporting net operating income of 21 million for corporate segment. That compares to about 19 million in the second quarter. And for the most part, what that is, is remember the results from CNA Re is in the corporate segment. And for the quarter, that's about $9 million. And the rest of it is essentially investment income on reserves, and the primary component of that are the APMT reserves. So, you know, while that will bounce around some, for the most part, you're going to see something close to these levels.

So, assuming kind of a 20 million run rate per quarter positive number.

That's probably a little heavy, but something in that range.

Bob Glasspiegel, Langen McAlenney.

Steve or Jim, I was wondering if you could -- good morning. I was wondering if you could make a comment on what was behind the motivation behind some of the changes you made in the claims area, as far as management and operations, question one. Question two, following on Tom's guidance request, where are you sort of on aggregate costs to the cover and how it falls within the various lines going into '05? And three, looking for guidance on Life Group for '05. Would you revise what you said earlier?

Can you repeat those, Bob?

Claims--.

No, I'm only kidding. With respect to the changes in the Claims department, I don't think it would be appropriate for me to offer any comments on an individual basis. We're obviously -- we've been going through a significant amount of change in our Claims operation. We've been upgrading steadily and changes happen and did. And that's really all I can say about it. We've had a tremendous amount of focus on embedding Claims best practices throughout the organization and, you know, we're continuing to work on that for the future. So--.

If I can just follow up, are you happy with where you are in Claims? Or where do you want to get to, if not?

No, I'm very happy with where I am on Claims. I think we've made a tremendous amount of progress. We've consolidated the operations. We're making some changes in our overall operating model. And the Claims organization, you know, we'll be centralizing over time a lot of the -- a lot of our smaller, more transactional type claims and putting a lot more expertise and dedicated resource to the larger, more volatile claims.

I think -- so, I like where I'm at on the Claims. I think there's still some room to improve. And obviously, given the fact that, you know, we spend $6 or $7 billion a year -- or we pay $6 to $7 billion a year on claims, there's a huge amount of leverage in this area. So, anything I can take back, you know, half a point, 1 point. I mean, there's a lot of money. And our claims legal expense is a huge issue also and we're spending a lot of time and focusing on that because that's also in the hundreds of millions of dollars.

And so, anything we can take back there, anything we can improve, either from an expense standpoint or even if we don't work the expense side and we can -- we could pick up on the indemnity, I mean, it's massive because of the amount of dollars involved. Even, you know, a small movement on the needle generates, you know, tens and hundreds of millions of dollars. So, you know, the two major -- the core functional -- the functionalities that really define us as an insurance company are underwriting, where the money comes in, and claims where it goes out.

And you know, arguable on the PC, if you look at the $9 billion PC operation, you know, $6 to $7 billion in paid claims every year. I mean, there's $15 billion moving around every year, rain or shine. And so, to me, to be able to work on that -- Jim working on the underwriting side and getting -- and getting that part of the transaction right, and having Steve Rodriguez and his team working -- working, you know, the outflow, you know, we think there's a tremendous amount of leverage there.

And we will constantly work both the underwriting and the claims platform. It's not like we're going to get to a point and saw we got it, okay? It's a matter of constantly and continually improving, making sure the expenses are right and making sure, if the expenses are right, that what expenses we have leverage something else, okay? And the same thing on the claims side.

And I think the other important piece on the claims side is that, when you look at the personnel that we've got in the organization, it shows that we've done a lot to really improve our bench strength so that we are able to actually fill these positions internally. And I think that speaks very well for us for the future.

Bob, on the finites, in the past we've said for '05 that we were looking at something around $165 million in terms of finite interest costs, and we still think that that's a reasonable number.

What's the PC component of that? Do you have that broken up between PC and--?

No, I don't have that handy.

I think it's been like 75 to 80 percent roughly for PC?

It's the biggest component of it, Bob.

Financially, if you -- we're filing our 10-Q on Friday and there's some disclosures there that will help you in that regard.

Bob, we can get back to you on that. I don't think we want to grind that on the call here today.

And the Life area?

On the Life area, you know, I mentioned that we had favorable results this quarter and I link that to the individual long-term care block. You know, the claim results there can be sort of up and down from any given quarter. You know, the two figures that I quoted were $26 million loss in the second quarter, $13 million loss this quarter. You know, from a run rate basis, it's probably going to be somewhere in that range, you know, and you can go from there.

Rob Medway (ph), Royal Capital.

I -- two questions. The first one has to do with the comments about underwriting discipline and it's for Steve. If -- you know, if the industry does get a little rough around the pricing side, what concerns me about C&A is you guys have done a great job of cutting costs but, you know, there's bone now. And how are you going to react to declining premiums, because you are being disciplined in underwriting? Do you still have a lot of flexibility? Are there enough variable costs?

Well, I mean -- I'm going to let Jim pick this up, but all costs are variable to a certain extent. I mean, you size -- you size -- you set your expenses to the size of your business and it's obviously -- it trails it a little bit. But, we have sent out very consistent messages over the last three years, and we pound them on a regular basis to tell these guys that, you know, we're interested in generating underwriting profit.

And not that we're indifferent to the size of the organization, but we're less focused on the top line than we are on the bottom line because we get to keep the bottom line. And you know, that's really all I can say. And it's going to be a matter of, you know, watching how we execute and behave as we enter into a softer market. And I think the actions will prove out whether we did it right.

I mean, do we have room to cut expenses, you know, if the business drops off? Yes, we do. Are we going to cut expenses just -- you know, just randomly as the market moves around? No, because we've made tremendous investments on the underwriting side, you know, from a technical standpoint and we've made tremendous investments on the claims side.

So, you know, we want to make sure that we don't take out expenses and, at the same time on a -- you know, start putting poorer business on or not handling our claims as efficiently as should be.

So, you know, I think, Rob, the open answer on this is that, you know, actions will prove out the rhetoric. And we have given very, very strong messages and guidance to our people about what the primary objective is, and that's underwriting profit. We can be smaller, but we're not intending to be unprofitable.

The second question has to do with, you know, commissions that you pay to your brokers, like Aon and Marsh and people like that. What is the amount of commissions maybe as a percent of premiums, you know, whatever the right way to quote it is? And how much of your commissions that you pay are contingent commissions?

Rob, I've just got to go back to my opening statement when I said what I had to say about the situation that exists out there and that's all we're going to talk about -- or we're going to comment on at this point. I apologize for not being able to go deeper, that's it as far as we're concerned.

Well, the reason I'm asking -- maybe you'll change your mind another time -- is if they're going to stop doing that as a practice, meaning the brokerage community, it might be good for you. So, I was just curious because you were not one of the big gorillas. And I was just curious, you know, how that might be good for your EPS.

You know, we have no idea how this is going to play out and that's why we don't want to -- we don't want to speculate. We don't want to conjecture, and we certainly don't want to get into any rumors. And so, we'll let the facts play out and things will be what they'll be.

Okay, but on the contingent commissions as they involve your business, will you at some point in the future give us some guidance as to how it -- mathematically it's going to affect you?

When I have facts, I can tell you.

Scott Frost, HSBC.

Yes, could you say whether or not your broker relationships involve tying arrangements?

I think we're back to -- you know, the answer for the previous question. I said all I have to say about the situation that's out there, when I have facts to discuss, we'll discuss them with everybody. But, at this point, we have no facts.

But I -- well, this is not with other companies, this is specific to yours. I mean, you know, do you know whether or not -- and I'm sorry to press the point, but do you know whether or not you agree to reinsure through a given broker as a condition of that broker placing your primary business? That's specific to the contracts you have with brokers.

All I'm telling you is that we have responded to the request for information from the Attorney General's Office. We provided that information and they're going to review that and we'll be in discussions with them over the next few weeks or months.

And at this time we're standing by with no further questions. Ms. Jaffray, I'll turn the conference back over to you for any additional or closing comments.

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.

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And this does conclude today's conference. We do appreciate your participation. You may now disconnect.