CNA Financial Corp (CNA) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the CNA Financial Corporation's Second Quarter Earnings Conference Call. Today’s call is being recorded. We will now turn the call over to Ms. Dawn Jaffray. Please go ahead, ma’am.

Thank you, operator, and good morning. We'd like to welcome you to CNA's Second Quarter 2005 Financial Results Conference Call. My name is Dawn Jaffray and I'm a Senior Vice President in the Corporate Finance Team with 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 at www.cna.com under the Investor Relations menu. 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; Craig Mense, our CFO; and Jim Lewis, our President of P&C 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. These forward-looking statements speak only as of today, July 28, 2005. 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 analyst questions may be directed to myself at 312-822-7757, or Ken De Vries at 312-822-1111.

And with that, I'll turn over the call to Steve.

Thank you, Dawn, and good morning to all. Thanks for joining us.

CNA had a solid second quarter from both a financial and an operational standpoint. Earnings were strong at $288 million of net income, and $272 million in net operating income. We did benefit from one-time items, most notably being a federal income tax benefit in the net amount of $115 million after tax. More on this in Craig’s remarks.

Overall, CNA continues to operate in a very normalized fashion. Operations on the front line, underwriting, risk control and claim are quite stable and executing effectively. Our distribution management and relationships are the best that they’ve been in quite some time, production has held up, retentions have improved in new businesses appropriate for the market, and our runoff operations continue to perform in an orderly fashion, and we continue to make progress on expenses.

A little bit on the financials, which will be amplified in Craig’s remarks. For the quarter, as I mentioned, net income of $288 million was slightly down 2%, while net operating income was up 55% at $272 million. The slight drop in net income relates to a $105 million gain on our Canary Wharf investment in the second quarter of 2004.

The key drivers of net operating income were the previously mentioned tax benefit, continued steady Property and Casualty results, and positive results from our Life and Group operations. Offsetting these positives were two significant negatives -- a $17 million after tax impact of a Surety loss related to a large national contractor, and a $36 million after tax impact of a finite reinsurance commutation. Craig will comment on the economics of the commutation in a moment.

Year to date, net income was up 176% to $466 million over the prior year, while net operating income was up 21% to $164 million. In addition to the previously mentioned drivers of net and operating income, the net income comparison was impacted by a $389 million net realized loss in the first quarter of ’04 from the sale of our Life businesses.

Turning to our core Property and Casualty operations, we had another solid quarter. The combined ratio came in under 100%, making this our seventh consecutive sub-100 quarter before the impact of the third quarter catastrophes in ’04.

Our accident year results. We continue to see the benefit of shifting our portfolio to lower hazard, less volatile businesses over the past few years, while achieving significant rate increases at the same time.

The expense ratio continues to improve. It is now well below the levels of the past few years. There is more work to do on this front and we are continuing to grind away at it with smarter, more efficient business processes and analysis versus a slash and burn tactic, which is good for show, but ultimately more expensive in the long run.

Overall, Property and Casualty operations continues the progress made over the past few years, and Jim Lewis will give you more detail on that in a moment.

Turning to our runoff operations. Life and Group -- our Life and Group Non-Core produced second quarter net operating income of $5 million, a nice rebound from the $26 million loss of last year. The improvement reflects steady results in the individual Long-Term Care, along with lower overall expenses. In addition, second quarter results last year included a $22 million after tax impact of a reserve increase related to accident and health reinsurance programs.

The runoff operations of CNA Re and Other Property and Casualty operations lines continues to be well managed and are performing appropriately.

Overall, I would characterize this as a good quarter; strong financial results, solid operating performance. We’re not declaring victory and we have many challenges to be addressed, most notably the softening market, nor can we ignore the early onset of the hurricane seasons, which thus far has little to no effect on the financials of CNA and we’re very happy about that.

Having said that, I continue to feel very good about our position and our future prospects. We are grinding forward, quarter by quarter, and we feel we know how to get that done.

Before turning it over to Craig, I would like to address one other item. During the second quarter we received a letter from the SEC requesting information relating to the restatement announced last quarter for the Accord Re contracts. We are cooperating fully with the SEC, just as we are cooperating with the other authorities who have requested information from us. All of this is described in more detail in our 10-Q, which will be filed very shortly. As we have stated before, in light of the fact that these inquiries are still open, I cannot and will not be commenting any further on these matters during this call.

With that, let me turn it over to Craig.

Thanks, Steve. Good morning, everybody. Steve provided you with a summary of this quarter’s major events, and I’d like to try to give you a bit more detail on the financials before turning it over to Jim.

Today we reported first quarter operating income before realized investment losses and gains of $272 million, or $1.00 per share. That’s up significantly from $175 million or $0.62 a share in the prior year period. These per share amounts include the impact of undeclared preferred stock dividends.

Property and Casualty net operating income was $181 million for the quarter, up slightly from the prior year. Bear in mind that this quarter’s results were negatively affected by a $40 million pre-tax -- that’s current accident year -- loss reserve charge established by CNA Surety related to our exposure to a large national contractor. After applying our ownership percentage in CNA Surety, this loss reduced Property and Casualty net operating income by $17 million.

Second quarter results for P&C also include $33 million of after tax net prior year development. This net development, which was identified as part of our regular quarterly reserve reviews, was primarily driven by additions to workers compensation and professional liability reserves in accident years 2002 and prior. These reserve additions were partially offset by continued improvement in results in our more recent accident years across most lines of business.

The Life and Group Non-Core segment reported net operating income of $5 million for the quarter, compared to a loss of $26 million in the prior period. The loss in 2004 included a $22 million charge related to the IGI program. Contributing to 2005 -- earnings are steady, Long Term Care results, and diligent expense management.

The Corporate and Other Non-Core segment reported net operating income of $86 million compared to $22 million in the prior period. This current quarter includes the $115 million tax benefit that Steve mentioned, and this relates to the settlement of our 1998 to 2001 tax returns.

A few points to bear in mind about this. First, this effectively closes our returns for the ’98 to ’01 years. The $115 million benefit is comprised of two parts; first, a net $79 million of refund interest, as well as the fact that our previously established tax reserves for the uncertainty surrounding the outcome of the settlement proved to be conservative.

The segment’s results also include a $36 million after tax loss related to the commutation of an old Continental Insurance aggregate stop loss treaty. We took back $400 million of previously [seeded] losses in exchange for $344 million of cash. The economics that drove this decision were the prospects of improved investment returns and the elimination of certain maintenance fees.

Net investment income for the quarter was $439 million, up significantly from both the prior year and the first quarter of 2005. The change was driven by the fixed maturity sector, where favorable cash flows contributed to an expanded asset base. In addition, short term security yields improved significantly.

Realized investment gains for the quarter were $16 million after tax, compared to $118 million in the prior year period. The 2005 amount includes a $13 million after tax impairment on loans to the major national contractor we mentioned earlier. The 2004 amount, as Steve mentioned, included a $105 million gain from the disposition of our equity holdings in Canary Wharf.

I would now like to turn to our expense management efforts. You will recall that we had previously established a goal to further reduce expense in our ongoing operations by $100 million this year. This is in addition to the $100 million reduction of last year. We have now put in place specific plans to meet that goal and are executing against those plans.

With that, I’ll turn it over to Jim.

Thanks, Craig, and good morning everyone. In the second quarter, Property and Casualty held a steady course. We stayed focused on underwriting discipline and delivered another solid quarter with sub-100 combined ratio. As Steve mentioned, we built our portfolio over the past few years by reducing risks assumed by achieving significant rates. Now, we’re building on that platform; steadily, consistently and profitably.

Starting with premium volume. Property and Casualty operations, gross written premium was up 2% to $2.2 billion in the second quarter, and up 1% to $4.5 billion YTD. In both Standard lines and Specialty lines, gross written premium was up 2% in the second quarter. Year-to-date, Standard was essentially flat; Specialty was up 5%.

Overall, we feel good about the size and quality of our book of business. In the Standard lines, the underwriting initiatives launched last year have largely paid out. Average hazard rates are down. As a result, we are more comfortable with our Standard book and better positioned to focus on steady, profitable production.

In Construction, for instance, we have specifically transitioned to larger commercial contractors and away from the construction defect risks associated with smaller residential contractors.

Now, let’s look at rate. For the past two quarters, our rate increases have been diminishing by a point or two per quarter. We are now in a neutral zone of modest ups and downs. Over the course of the second quarter, average rates decreased 1 point across Property and Casualty operations. In Standard lines, average rates were down 2 points, while rates in Specialty lines improved 2 points.

Even without substantial rate increases of the recent past, we are comfortable operating in this market. Across our entire book, there is nowhere where the bottom is falling out. The question we have to ask is whether we can still compete for good business. The answer is yes. CNA’s broad product portfolio enables us to seek and cull selectively. It’s all about picking the right business and knowing when to walk away. We have been building that capability at the point of sale for the past three years.

Turning to retention. We are on an upward track. We ran at 80% in the second quarter versus the 73% we averaged for all of 2004. The improvement was mainly in Standard lines retention, 78% in the second quarter versus 67% in the prior period. This reflects the successful conclusion of the previously mentioned underwriting actions, as well as the success of our underwriters in keeping the business we want.

Meanwhile, Specialty retention continued to shine. We came in at 86% for the second quarter, which speaks to our strong overall position in the professional liability marketplace.

Turning to new business. We wrote approximately $395 million in the second quarter. At 22% of total premium, our new business volume is appropriate and right in line with where we said it would be as the market softens.

Our cross-sell strategy continues to be a major contributor to our new business. Cross-sell premium, which is new business from existing customers, amounted to $174 million during the second quarter. That represents approximately 44% of total new business. By comparison, cross-sell represented 22% of new business in the second quarter of last year. Obviously, we like to cross-sell business. This is business from customers we already know and like, so there’s already a built in check on new business quality.

In addition, CNA is very much in the market for new business from new customers. We are writing it selectively and we track key indicators of new business quality. As I’ve mentioned in prior calls, we watch the spread between pay and case loss ratios for new business and renewal business. Our front line underwriters are well aware of the importance of keeping this spread in a narrow range.

Now, let’s turn to our loss ratio. Our second quarter net calendar year loss ratio was 70%, up almost 2 points from the prior period. This includes 2 points from the Surety loss you just heard about from Craig. The second quarter Specialty lines in net calendar year loss ratio was up 5 points to 69% due to the Surety loss. Standard lines came in at 71%, up approximately 1 point from second quarter ’04.

Turning to accident year loss ratio, the Property and Casualty operation net accident year loss ratio was 64% versus 63% for 2004. In Standard lines, the 2005 net accident year loss ratio improved about a point to 64, while the Specialty lines was off 5 points to 62, again driven by Surety. These ratios are all evaluated as of the second quarter of ’05. Overall, our loss ratios remain at levels commensurate with profitable underwriting.

We expected some upward pressures in the markets, and when we see issues in specific lines, we deal with it. All this underscores the importance of the work that we’ve done over the past few years to shift our portfolio toward less volatile lines.

Turning to our second quarter combined ratio, Property and Casualty operations came in just under 100%, 3 points higher than second quarter last year. Standard lines came in at 103%, while Specialty was at 94%. The combined ratios were largely driven by the loss ratio issues already discussed.

Overall, we continue to take pride in having driven our combined ratios down from the 120% range of a few years ago. Not that we’re satisfied, but with underwriting discipline in place and expense initiatives underway, we’re on the right track to keep our combined on the right side of 100.

In summary, we held a steady course in the second quarter; disciplined underwriting, improving retention, and selective new business. 2005 is all about consistent quality earnings and we’re taking the right steps to keep it going.

With that, I’ll turn it back to Dawn.

Thanks, Jim. Operator, I would now like to open the line for questions, so please proceed.

(OPERATOR INSTRUCTIONS.) Stephan Petersen of Citadel Investment Group.

I was wondering if you might be able to provide a little bit more color on the Surety loss. Is that sort of at limit? Is that just sort of reserve strengthening? And have you put up loss reserves on this particular loss in the past?

It’s a -- you would have referred to it -- you would’ve seen it actually in our disclosures for some time now. All right?

OK.

And you would’ve seen it in a large national contractor loan we’ve established and recognize that we had, with Surety, entered into a restructuring plan to support this contractor’s restructuring plan. So, the change here reflects the decision made by Surety, by CNA Surety, after visiting with the contractor relative to their view of the change of exposure, and the likelihood of them meeting the restructuring plan. So, they’re in the midst of -- I would characterize this as an initial reserve. And I would suggest to you that they are in the midst of re-evaluating the restructure plans, although they are continuing to support restructuring efforts of the contract.

OK. So this is not a new claim. This is an ongoing development on what you’ve described in the past.

That’s correct. This has been disclosed for quite some time. And I think just to add to that a little bit, CNA Surety, which you’re aware of, is a separate company from us, and which we do not have any influence or control over how they reserve or evaluate loss scenarios, that writes on CCC paper, which is us. OK? So, as they write on that paper and they identify a loss, we basically have to mirror that and take our percentage of it. So, that’s a lot of what this was about. And as Craig said, that this is not -- I don’t want to say older, but it’s certainly been disclosed for some time now, for several years.

OK. I just wanted to make sure of that. And I just wanted -- a quick numbers question of the tax benefit. Did you say 79% was -- or $79 million was interest?

That’s correct.

Arun Kumar of JP Morgan.

Couple of questions. One is, given what you talked about rates, which is not that dissimilar from what your peer group is also stating, flat to modestly down in Commercial and somewhat similar in Standard as well, your combined ratio seems to lag the other -- your peer group by a fair amount. And you gave some of the reasons. We’d like to get a little more behind those numbers. And the context of the rate environment going forward for the rest of 2005, what should we expect in terms of performance for both Standard and Specialty; one, for rate, and also for overall performance and so on.

And the second question relates to the context of your ratings and where you stand with rating agencies and what the prognosis is going forward. And also if you can frame the overall climate of the P&C business.

Well, let me take the last part of that. With respect to rating agencies, you’re aware of the fact that Fitch removed the negative outlook from CNA in the first quarter. And you know, our -- you know, we continue to perform from an earnings standpoint quarter-to-quarter and we make no forecasts or have any opinions relative to what will happen with respect to the other rating agencies.

And you know, our business is to show consistent quality and earnings and performance. And our belief is that, as a result of that, the outlooks will be removed. But that’s for them to -- that’s their decision to make, not ours. And our business is to give them results to base their decisions on. That’s that.

Now, I’ll let Jim Lewis take the question that you had on the Property and Casualty operations.

Yes. On the rate itself, after four years of solid rate increases of 17 and 27, 19 and 5, we did expect to see rates moderate. There is still a lot of discipline in the overall marketplace, which is why we’re seeing rates only drop 1% to 2% per quarter. For us, we had a 1 point increase in the first quarter, minus 1 in the second quarter. Overall, our rates are flat.

So, this is still a very healthy marketplace. We actually expect that same discipline to hold up, and we would still expect to see the 1 to 2 points. And if it continues on that basis, with what we’ve seen with the improvement in our portfolio, the way we’ve reduced our overall hazard rates and volatility in the book, the trends that we’re seeing in the Accident year loss ratios, this is still a healthy marketplace for us to do business and compete. And we would expect to be able to see our loss ratios continue in a very positive fashion, along with what we’ve indicated with our expense initiative. You know, we understand that we’re not getting enough rate to cover loss costs, so that puts more pressure on expenses. And Craig talked about the initiative that we have there.

The other thing I’d just like to highlight on why we’re really comfortable with our loss ratios, is that we have taken significant volatility out of our book. And one of the lines of business, as an example, is workers compensation. In 1998 in workers comp, we had a market share of 7%. Our market share is now down to 2.6%. Over the last four years, we reduced our exposures 50%. We reduced the high hazard business that we had in our book by 58%. Policy counts are down by 39%. And at the same time, we’ve got 47 points of rate over that book. So, we’re sitting at year end ’04 with $1.2 billion in premium. A lot less exposure. And quite frankly, if we factored the rate in, that $1.2 billion was more like $900 million.

The other thing that we’ve done is significantly reduced our mix of business in workers comp, so we were more into the mid-25% of our book in comp. It is now at 14%.

And that’s just an example of what we’ve done to reduce that volatility that really gives us a lot more comfort level, aside form the re-underwriting that we’ve done on that portfolio.

If I -- this is Steve Lilienthal -- if I could add to that just a little bit, and maybe reiterate a couple things that Jim said, because some of this gets lost in the noise here.

You know, Jim mentioned reduced volatility. But at the same time, over the past couple of years, we actually -- we shrunk the overall Property and Casualty operations and basically had -- we had less units of risk, got a lot more money for it, a lot less volatility. And by way of improved data quality, have a lot of those correlated risks so that -- and that’s a very important initiative for us. And at the same time, took out a lot of expense.

We’ve made the point on more than one occasion that the advantages that CNA has are several, but the top three or four are, number one, we’re big. OK? And we have the opportunity to manage a portfolio. We can shrink and grow without putting huge amounts of pressure on our expense base, and we think we’ve shown -- you know, we’ve shown an appetite and a willingness to do so.

Secondly, I think we’re highly diversified. We’ve got a very, very broad portfolio with respect to product and services that we offer, and we’ve got very good geographic cover. So, we can kind of move and shift as opportunities present itself as apposed to, I think, there are a number of carriers that are kind of limited as to what game they can play. So, the combination of size and diversification is a big deal for us.

And I think -- you know, another area that we have an advantage is, is the ability to do internal cross-selling. And that is not something that all companies have. So, size, diversification and cross-selling, in addition to doing all the things that Jim talked about the portfolio, we think positions us going forward and will allow us to compete in whatever market conditions there are.

And by the way, the market conditions are not something we control. I mean, we ride the market just like everybody else does. Nobody’s big enough to control it. So, it’s going to be interesting to see how people play and how responsible they are, and if they remember what they said a couple of years ago as to how they would respond when soft market conditions returned.

Scott Frost with HSBC.

Yes, I think I may have missed something here, and I apologize if I have. But you’re saying the Corporate and other Non-Core, the results were largely driven by the tax settlement. Excluding those results you would’ve shown a fairly significant deterioration. And I’m not sure I understand -- and again, I apologize if I’ve missed it here -- what drove that deterioration. Is that the right way to look at that?

No, I don’t think it is. You -- there are two things in the Corporate results.

OK.

One is the tax settlement, which is a 115 good guy.

Right.

And the other is the commutation of the reinsurance, which is a $36 million the other way.

Right.

So, if you take those two things out, you’ll see relatively, you know, consistent numbers.

So, 115 less 35, that’s around what, I mean--.

79.

OK. So, excluding those results from your bottom line, I guess, you’re talking about a $79 million positive impact and your total net income was 81, right?

Yes.

OK. So, excluding that, your net income would have been 2 versus 58 in 2004, right?

Yes. And there were a lot of investment gains in 2004, which accounts for the majority of the difference.

OK. All right. So that’s the main driver is lower investment gains. OK. Thank you.

Bob Glasspiegel of Langen McAlenney.

I was wondering, I guess you’re not going to be surprised that I’m ecstatic about your commutation of your finite cover. How significant of this, the total finite is this? And can you help us a little bit more drill down to how this effects our models prospectively? I assume that this was an interest in funds without account so the interest goes down, or does it go right into investment -- the core investment income?

Bob, I expected you to start with applause.

I was.

You should. It’s actually a pre-’02 treat. In fact, it’s the oldest of the ones we had.

Right.

So, a couple things you should -- I guess to keep in mind. First, it is -- it will go right to investment income. All right? It will not reduce the interest drag on the other finites. And the other is that, given the shifting around in loss reserves and expectations in terms of accident years, we’ll actually have about -- I would tell that for the year, we had given earlier guidance of about 190 in finite interest expense. That will likely be 200 for the year.

Because there’s more losses in the cover or what?

Just a guess, but--.

OK. But we basically should use whatever reinvestment proceeds we -- rate, 344 million of investment income?

That’s exactly right.

Annualized? And maintenance costs, are those trivial, or is that--?

--It’s trivial. Yes, I think it’s insignificant. I mean, they’re important in the evaluation of the economics, but I don’t think they’re important for your modeling in terms of, you know, the direction things are going.

Is there other low-bearing fruit to go after with this, or--?

No, I don’t think anything’s low bearing here. We were kind of -- Steve and I were sitting and laughing about White Sox ads earlier this morning, about them being grinders. I think that we’re more likely to be spitting out dust than we are sipping Champaign.

So this is like 5 to 10% of the covers? Or what -- I mean, what order of magnitude should we think of as far as -- relative to the total?

I think it’s a small part of the total, but it’s a start.

OK. And expense ratio target?

Well, we said that we’d like to get it down under 30, and that’s kind of where we are. I think that you should -- since you asked the question, there is some -- you know, you see a number here this quarter that’s quite a bit. Effectively less than that. And you should understand that there is some seasonality to expense.

And as Steve was saying, that there are also some places where we want to make investments in things like technology, which is really -- as well as people -- that are important for us long term. So, that’s about a little lower than we would expect it. I may be a little more optimistic than is representative of where we are right now. But we are making -- we’re making solid, steady progress and we’re getting towards the 30 on a more sustainable -- we’re approaching the 30 on a more sustainable basis.

And the last question, the Surety, did you say there was a realized loss of the write-down of a loan, or was that all in the combined ratio?

No, it was both.

So what was the realized loss?

The realized loss was 13 after tax.

$13 million after tax. OK, and so that’s not in the underwriting results. So what’s the aggregate -- remind me of the aggregate loan balance now?

It’s all written. It’s all written off.

It’s at zero now?

Yes.

Thank you very much.

Hey, Bob, this is Steve. I wanted to add something on your -- on the question about expense. In my remarks, I indicated that we were not embarking on a slash and burn, you know, good for show but not good for ultimate results. And I had said earlier, you know, maybe six or seven quarter ago, that we had a lot of expense ratio to float up a little bit higher than we normally would have in order to make investments in the claim area and in the underwriting area and our systems are to improve our data quality. And we will continue to do so, because I think mortgage is the future and you know, straps this company from an ability to perform down the line in exchange for something that would be interesting but not totally fulfilling, I think, in the short term.

We also need to make some -- you know, continue to make investments in the training and development of our people, so that they really, truly are able and capable of operating in the environment that they will be, which is more difficult than it has been for the last couple of years. And we will continue to make investments in our technology platform to support some of the major initiatives that we have out there, not only in data quality, but with respect to small business and several other product areas that we’re looking to build out.

So, I think, you know, there’s a fixation on expenses, particularly as the market gets -- as the market softens, everybody’s looking to see how you’re going to manage that number down below 30, which has been a traditional measure of success. You know, I continue and we continue to look at investments that generate profitable income. We continue to look at the indemnity side of it, or the loss ratio side. There’s much more leverage than a couple of tenths of a percent on the expense ratio. So, that has been a strategy since we got here a couple of years ago. That will continue to be a strategy going forward.

Steve Shapiro of Sam Frank Investments.

Yes, [SAF] Investments. Thank you. You know, I’ve heard these calls over many quarters and I’m trying to reconcile a number of the things that you‘ve talked about with the results that we are looking at. And if I look at your -- actually in your combined ratio on your -- especially your Standard book of business, it’s noticeably higher than that of your closest peers. And if it can’t be explained by the cost of the cover, if there’s no adverse development, if you guys have made a lot of cost cuts, if you’ve reduced the volatility of your business and you like the book of business you have, if pricing is generally flat and you think there’s discipline in the market, and you’re happy with your retention, I’m trying to -- I’m trying to come up with the explanation why you’re writing at a less profitable rate than your closest competitors. Is it your distribution costs? Or do you just have a much more conservative view of this business than everybody else does? Or am I missing something entirely?

Well, no. I don’t think you’re missing anything entirely and I’m going to respond quickly to you before I turn this over to Jim to talk specifically about Property and Casualty operations.

You know, number one, we may have started a little bit later with respect to the initiatives that we undertook. And I do think some of our approach is conservative. And relative to our competition, we celebrate their success and applaud their enthusiasm, but we stand on our position that we think the portfolio that we’ve managed down, you know, from rather lofty combined ratios, we think is a good starting point. We think it will improve and we think we have the discipline to do so.

And as I say, we have a large portfolio that we can shift and shrink as we see fit. It’s diversified. We have internal cross-sell opportunities. We have businesses that we’re growing out. And as I say, we think that we can stand toe-to-toe with anybody in the market right now, whatever their opinion is of their results and compete with them in an intelligent and consistent way.

So, maybe Jim, you want to add something to that.

The only other thing I would add is that, as you look at our book of business and where we really started from with the volatility and the high hazard nature of our book, we have significantly improved that. And our overall small business, which you would actually think would normally have been very low to moderate, was really more on the high hazard side. Now, 90% of that book is really low to moderate.

Steve talked about investments in training. We have significantly upgraded the overall technical expertise of our personnel at the point of sale, from an underwriting risk control and a claims perspective. As we looked at our book, as we look at the overall technical expertise that we have, and the control that we now have in place at the point of sale, that we know exactly what’s going on with every phase of our book of business, from a pricing standpoint. You know, the type of business that we’re putting on. We’ve got the appropriate audits in place to really see that the quality of that book of business, whether renewals and/or new business.

And so, we feel good about where we are and the book of business that we have. I cant’ speak to competitors’ books.

The only other thing I’d add with respect to distribution costs, since you brought that up, I didn’t know whether you were kind of zeroing in on a number or anything like that that you had read, but our distribution, our commission, whatever you want to call it, acquisition costs, costs to serve the channels that we distribute our products through, are market-based. They’re based on research that we do to analyze what we think the prevailing cost structure is. And we would be right in there with everybody else, as far as we’re concerned.

Well, Yeah, I mean I guess what I’m asking is, given that -- you know, what you’re saying is you guys were dealt such a band hand at the beginning, you know, four or five years ago, whenever it was, that you’ve tried to work it down and you’re happy with the progress you’ve made. But at this point in time, are you still forced to pay more for the right business than your competitors?

No.

No. Not at all.

Flat out no, and we don’t.

OK. Thank you very much.

(OPERATOR INSTRUCTIONS.) And from Morgan Stanley, Amir Atar (ph) has our next question.

Just a couple of quick questions. You guys already talked about it a little bit, but I just wanted to get a little more color, if I could, on the claim development and specific lines of business that caused you to decrease your accident and your 2004 loss ratios in the Standard and Specialty lines from 12/31 to now.

Sure. It’s Mike Fusco, Chief Actuary at CNA. You’ll see it in our Q that will be released very shortly, for Standard line of this quarter it was workers comp, which I think is a familiar line of business that we’ve been mentioning. It’s for old accident years, ’02 and prior. We did see some adverse developments, offset somewhat by a favorable development from Property and Marine overages in the more recent years.

And for Specialty, there was a very modest amount of development, I think it was $12 million in total for the quarter, architects and engineers was a negative, and there were some other overages with professional lines that were positive. So, that’s pretty much the story for the quarter.

OK, great. And would you see -- would you guys say that you’re seeing the same trends in 2003 business? IN those same lines, or--?

2003 we’re pretty comfortable with. So, we’re not seeing anything adverse in 2003 in particular.

OK, great. An then one more final one is, just comparing your loses fix for accident in year ’05 to your current accident year ’04, Standard seems to be about the same and then Specialty seems a bit higher. Is there anything else besides the Surety loss that’s causing that difference?

No.

Just the Surety loss.

Bob Averson (ph) of Merrill Lynch.

Thank you. Could you just tell me what the reinsurance recoverables were at quarter end? And then just update us on your view on asbestos.

Well, our total reinsurance recoverables are something in the $14 billion range. OK? So that’ be about $14 billion, $14.5 billion.

OK, thank you.

This is John Kantor, General Counsel. I think we’ve all been reading about what’s been going on with unimpaired claims with a very significant frequency drop. The opinion by Judge Jacks (ph) in Silica, which applies to asbestos, Texas and Florida reforms were passed in the second quarter. So, we think that’s all positive. And in terms of our own picture, you know, our survival ratios are better than industry averages at the moment and -- our assigned [IB&R] is pretty healthy.

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