CNA Financial Corp (CNA) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to CNA Financial Corp.'s third quarter 2005 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 would like to welcome you to CNA's third quarter 2005 financial results conference call. My name is Dawn Jaffray and I am a Senior Vice President in the Corporate Finance area with responsibility for Investor Relations. By now all you should have received our earnings release or 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 in references to non GAAP financial measures. Please see the section of the earnings release available on our website headed Forward-looking Statements with regards to both. The forward-looking statements speak only as of today October 27, 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 Basil at 312-822-2592 or Katrina Parker at 312-832-5167. And investment analyst questions may be directed to Cathleen Marine at 312-822-4159 or myself at 312-822-7757.

And with that I will now turn the call over to Steve.

Thank you, Dawn, and good morning all. Before we get started on the review of the quarter I would like to say that the prayers and sympathy and support of all of us at CNA continue to go out of the victims of Hurricane Katrina, Rita, Wilma and the rest of the canes at this very horrific hurricane season.

I would also like to express special thoughts and support to the CNA employees in Florida, Texas, Mississippi and, in particular, Louisiana. We have not forgotten you.

And lastly I would like to recognize and say a special thanks to all of the CNA claims personnel and cat teams who are and have been out there doing the job for our customers. We appreciate it and we are proud of you.

In the course of the call this morning, we will be discussing several major topics. First the financial results of the quarter and the year, the impact of the hurricanes, performance of our core property casualty businesses, and performance of our non-core business.

With respect to the financials I feel quite positive about the results we announced this morning. In a quarter that witnessed the most costly hurricane in U.S. history, CNA came through with relatively modest net operating loss of $39 million versus 15 million net operating income in the prior period. Before the impact of the third quarter -- before the impact of the catastrophes, the third quarter operating income was 255 million for 2005 versus 196 million for 2004.

Key drivers of these results were solid underwriting and strong investment income. Year-to-date 2005 net operating income was 425 million versus 399 and 204. Net income for the quarter was positive at 3 million in spite of the hurricanes versus a $27 million net loss in the prior period. Year-to-date net income was 469 million versus 142 million in the prior period. And you should be aware that the '04 year-to-date results included the 389 million after-tax loss related to the sale of the individual life businesses.

Overall our third quarter performance was reminiscent of the third quarter of 2004. In both periods, we dealt with four major hurricanes without missing a beat. Both quarters were marked by solid underwriting performance.

Hurricanes Katrina, Rita, Dennis and Ophelia obviously impacted our third quarter 2005 results. Earnings were reduced to the tune of 294 million after-tax and the third quarter combined ratio for PC operations of 120 included 26 points from catastrophes.

As bad as it was the hurricane impact could've been worse. I'm sure it has not escaped your notice that our losses came in below many of the analysts' estimates. This was not luck.

As with the storms of 2004, our third quarter cat losses reflected several years of very deliberate coastal exposure management. Also we have the benefit of a very highly skilled claims team who are out there doing their best to get our customers' claims settled under the most trying circumstances.

They will be bringing the same dedication to the areas devastated by Wilma just a few days ago.

All things considered, CNA pulled through quite well on the catastrophe front. We are well positioned with our claims people on the ground and our underwriting strategy is solid going forward. Apart from the hurricanes the core property casualty operations turned in another solid quarter. Excluding the cat impact the combined ratios of 94% and 97% for the quarter and year-to-date are quite acceptable. This was our eighth consecutive quarter of combined ratios below 100 before the impact of catastrophes.

Other key business indicators are equally encouraging. Production is holding up, retention is improving, new business levels are appropriate and we continue to make progress, steady progress on the expense management front. As to market conditions, rate environment which was gradually softening over the last year or so has slowed and has begun to tighten or improve for us across all lines.

Our expectation is reinsurance costs will be a major factor in the market for 2006. Overall, P&C operations continues the steady progress it has been making for the past several years. Jim Lewis will discuss this in just a few -- in more detail in just a few minutes.

Turning to our non-core businesses they continue to operate in a controlled and very orderly fashion. The results for the light and group and corporate segments were essentially breakeven for the quarter. Craig will give you more detail on that in a moment.

In summary, in spite of the catastrophes we came through the third quarter in pretty good shape. Our focus on the fundamentals of risk selection, portfolio optimization and expense management continued to drive our underlying performance. Non-catastrophe combined ratios came in below 100 and the catastrophe losses were lower than many outside parties expected.

Our challenge is now to finish the year strong and carry our momentum into 2006. With that I'll turn it over to Craig.

I'd like to start by reemphasizing just how solid our underlying operating performance was this quarter. We continued to improve in our disciplined execution and production, risk management claims, and investment portfolio and expense management. After all it is the strength of our operating performance and our balance sheet that allows us to manage these catastrophic events that occurred in the quarter while continuing to confidently grind forward.

Now I'd like to give you more detail on the financials before turning it over to Jim.

Today, we reported a net operating loss for the third quarter of $39 million or $0.22 per share, which is a decline from $15 million of net operating income or $0.00 per share in the prior year period.

Net income for the quarter which includes realized investment gains and losses was $3 million, which translates into $0.06 loss per share compared to a net loss of $27 million or a $0.16 loss per share in the prior year period.

You'll recall that these per-share amounts include the impact of undeclared preferred stock dividends. By the way the first share NOI before the impact of cat was $0.93 for the quarter which compares favorably to $0.71 at cats in the third quarter of last year.

Property and casualty had a net operating loss of $36 million for the quarter compared to $6 (ph) million of net operating income in the prior year period. The after-tax impact of catastrophes, which was significant in both periods, reduced property and casualty net operating income by 294 million and $179 million respectively.

Pages 15 and 16 of the financial supplement provide detail on the impact of catastrophes on the property and casualty segment.

As previously disclosed, our corporate property catastrophe reinsurance treaty was fully utilized in connection with the losses from Hurricane Katrina. After payment of a reinstatement premium the treaty provides coverage with one additional occurrence in 2005.

Our aggregate reinsurance receivables -- recoverables arising from the losses on the four hurricanes in the current quarter are approximately $340 million. We believe our reinsurers remains financially strong and we don't anticipate any credit issues regarding the end balances.

I also want to point out our purchase of a multievent catastrophe treaty earlier this year. The treaty provides limited but meaningful protection to mitigate any upward movement in loss estimates from Rita and/or possibly our net loss on Wilma.

Excluding the impact of catastrophes, third quarter operating results for P&C improved by $73 million. This improvement is primarily due to $62 million of after-tax bad debt provision related to PEOs in the prior year period. After-tax net prior year development for P&C in the current period was 16 million.

The life and group non-core segment reported a net operating loss of $35 million for the quarter, compared to a loss of 13 million in the prior year period. The primary drivers of the decline in results were 17 million after-tax provision for indemnification liabilities, related to the sold life business and a $14 million after-tax increase in reserves for CNA's past involvement in an accident and health reinsurance program. The impact of these items was partially offset by improved investment return.

The corporate and other non-core segment recorded net operating income of $32 million compared to $22 million of income in the prior period. The improvement is due primarily to the absence of prior year development in the current quarter.

Pretax net investment income for the quarter was $500 million. This is up significantly from both the prior period and the second quarter of 2005. The increase was driven by the trading portfolio, limited partnership and higher returns for the short-term sector.

It is important to remember that approximately $62 million of the trading portfolio income is largely offset by a corresponding increase in the policyholder funds liabilities supported by the trading portfolio. After-tax realized investment gains for the quarter were $42 million compared to a realized loss of $42 million in the prior year period. This improvement was primarily due to derivative gains in the current quarter compared to derivative losses in the prior year period. The derivative results in both periods were driven by the relative change in interest rate.

Now turning to expense management efforts. You should know that we're already close to reaching our previously established goal of further reducing expenses in our ongoing operations by $100 million this year. We would expect to achieve this goal by year end. This is in addition to last year's $100 million reduction.

The P&C OPs expense ratio for the quarter is 31.2. and is 30.5 year-to-date. The year-to-date number of 30.5, while still not where we need to be, is more reflective of our progress this year. We continually challenge our expense structure and we recognize the work still to be done here.

With that, I will turn it over to Jim.

Thanks, Craig, and good morning, everyone. Third quarter was tough for property and casualty insurers. But as you heard from Steve, CNA was well positioned to handle it. Our work on cat exposure management put us in a much better place than we would have been a few years ago. Our cat claims teams are working professionally and efficiently and our underwriters continue to focus on the quality of our risks.

Craig covered the cat losses. I will be discussing the third quarter from the perspective of our core operating indicators.

Starting with gross written premium. Property and casualty operations was up 5% to 2.2 billion in the third quarter and up about 2% to 6.8 billion year-to-date. In standard lines third quarter, written premium -- gross written premium was up about 4% and specialty lines were up about 8%. Overall, our business volume continues to reflect our strategy of portfolio optimization. And (indiscernible) we're growing selectively in health and nonhealth professional liability for the market remains fairly attractive. In standard where the market is moving away from us we have become even more selective.

Now let's look at third quarter rates. For P&C operations as a whole, average rates were essentially flat. In standard lines average rates were down about 2 points, while specialty lines of achieved rate increases of about the same magnitude.

Over the past year or so we have seen rates slipping one to two points per quarter. So it's encouraging to see some leveling in this trend. Overall the rate environment is one where we can still write (indiscernible) business across our entire portfolio. We just have to hold the line on our underwriting standards.

Turning to retention, the steady progress we have made since last year continues. P&C operation retention was about 80% in the third quarter for the second consecutive quarter. By comparison, we averaged 73% for the full year 2004. Third quarter retention and specialty was very acceptable at about 83% and standard lines retention was approximately 78% for the second consecutive quarter versus 70% for full year 2004.

For the past year or so, our retention levels have lagged some of our competitors. We are working through several major underwriting initiatives. Now that we are more comfortable with our book of business, our retention is returning to a more normal level. This reflects well on our front-line underwriters. They are succeeding at job number one. Retaining profitable accounts.

Now let's turn to new business. We wrote approximately 378 million of new business in the third quarter. This represents approximately 21% of total productions, the same levels we have been holding all year. We view this as an appropriate level -- selected, targeted, and controlled.

CNA's broad portfolio of products and services positions us well in the current market. You can see this clearly in our new business strategies. Cross-sell continues to be a mainstay of our new business production. Cross-sell is the sale of additional products to existing customers. New cross-sold premium amounted to 151 million in the third quarter or approximately 41% of new business. This compares to 78 million of new cross-sell business in the third quarter of '04 or 20% of new business.

Focus on cross-sell takes us in exactly the right direction. Maximizing new business generated for customers we already know and like. In addition to our cross-sell strategy we track new business quality while monitoring the spread between paid and case loss ratio for new business and renewal business.

Our underwriters are well aware of the importance of keeping this spread in a narrow range.

Now let's look at our loss ratio. Our third quarter 2005 net calendar year loss ratio was 89%, which includes 26 points of catastrophe losses. These losses drove the 106 net calendar year in loss ratio in standard line. The loss ratio in specialty lines which had relatively life catastrophe experience came in at 58%.

Overall the third quarter loss ratio reflects the heavy cat overlay on very sound underwriting focus. We saw the same thing in our loss ratios for the third quarter of 2004 which included four Florida hurricanes. In both years, third quarter net calendar year loss ratios were in the low 60s before the impact of catastrophe.

Turning to the accident year, Property and Casualty Operations' 2005 net accident year loss ratio was 72 versus 62 for 2004. These ratios include catastrophe losses nine points for 2005 and four points for 2004. In standard lines, the 2005 net accident year loss ratio was 78%, plus specialty lines came in at 61%. All these accident year loss ratios are evaluated as of the third quarter of '05.

Next, combined ratios. For the third quarter, property and casualty operation came in at 94% before catastrophe losses. The cat impact added 26 points to this figure. The standard lines' third quarter combined ratio was just under 100% before catastrophe. The cats added approximately 40 points.

Specialty lines quarter combined ratio was a very respectable 86% in spite of 3 points from cat losses. As Craig mentioned product details on the '05 and the '04 ratios before and after the cat impact are presented on page 15 and 16 of the financial supplement.

In summary, catastrophe losses notwithstanding, the third quarter was continuation of the first two in selecting and retaining the right business, optimizing our portfolio, and continuing to sharpen our underwriting disciplines.

With that I'll turn it back to Dawn.

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

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Donna Haberstadt (ph) with Goldman Sachs.

I wanted to ask an easy question and one completely unrelated to recent cats. Earlier this year you all had mentioned that a reserve review was being conducted by an outside actuary in connection with an off cycle regulatory (indiscernible) related to the streamline of some legal entities. Can you tell us what that status of review is in terms of (technical difficulty)?

The regulatory business, this is Mike Esco (ph) our chief actuary. The regulatory exam is just about finished. It was a year end 2003 examination. Did you have another question as to when it will be completed or when it will be released?

When the reserve review being done in connection with (indiscernible) cycle rate exams will be done?

I don't -- there's nothing in our documents yet on that but probably in our fourth quarter Q2 (indiscernible) fourth quarter 10Q might have some information on that.

Just wondering if you look at your premium cat combined ratio for standard lines for the nine months of '04 versus '05 the deterioration from 99 5 to 102 1, can you just give us some additional color on what (technical difficulty)?

Could you repeat that question? You kind of broke up here a little bit?

I am looking at the free cat combined ratio for the nine months '04 versus nine months '05 for standard lines that went from 99 5 to 102 1. Can you just give us a little more color on that deterioration?

Can you hear her?

The question was the spread between 99 last year and 102 this year. Standard.

Are you looking at including cats or excluding cats?

Excluding cats.

Business on a year-to-date basis?

Yes. Year-to-date.

I think what you are referring to been is what happened in first and second quarter especially the second. As we looked at in second quarter, we had a large loss on a large national contract that shows up in those numbers. And also (indiscernible) small part of (indiscernible) development that occurred in previous years. That's the only difference. Expense ratio is about the same.

Bill Wilt with Morgan Stanley.

Could you comment on what actions CNA would take in the event Trea (ph) is not renewed or renewed in some fashion?

Bill, this is Steve Lilienthal. I think it probably would be a bit premature for us to give any specifics relative to what we would do. What I can comment on is the fact that we would expect that there would be disruption in the worker's compensation market, particularly in the large segment and particularly in the larger metropolitan areas. And I think that would probably impact virtually every major writer worker's compensation in the U.S. marketplace.

And then I think the second area that you will see additional constriction would be in the large property market particularly with respect to target risks. And that won't be a function of pricing. I'll think it will be more a function of availability. What we're wrestling with here, Bill, is the level of volatility that we would be wanting to expose the balance sheet to. And it's extremely difficult to model the impact of these events and we are struggling with it.

So our hope and our expectation is that Trea will be renewed. We have been very aggressive with respect to our own efforts and involving ourselves in industry level efforts to lobby to get this thing renewed.

It is a very big deal and seems to have fallen a little bit off the radar screen given the hurricanes of the third quarter.

Sure. That's helpful. Thanks. I guess related in so far as it deals with exposure management, have you thought about whether CNA will be buying the same more or less reinsurance in '06 versus '05 and a follow on to that would be what are the key reinsurance renewal dates in '06 for CNA?

The one that you're probably most interested in would be our cat renewal which is 1/1 and we are in the marketplace on that now and, so, I really can't comment much on what the expectations are of pricing because obviously that would be aspirational not something that we control.

We were very comfortable with our reinsurance structure that we had in place for the events -- not only of 2005 but 2004. We look -- every year we look at buying down and we look at buying up. We are buying more but relative to the size of the Company and the strength of the balance sheet and the ten-year look that we get for this and even longer, we are extremely comfortable with our ability to deal with cats of the size that we had this year, last year or in previous years.

I would tell you that just to give you -- the last ten years -- I just had this information pulled the other day. Within the last ten years this is the only storm that came even remotely close to and I say remotely by a long ways close to hitting the attachment point of our cat covers.

But yeah, for us as I said a buydown is a strictly economic deal. If the price was right we would do it. And but we figure our balance sheet is strong enough to take the risk below the 200 that we attach that now.

Bob Glasspiegel with Langen McAlenney.

Good morning. Some of your competitors and, certainly, the reinsurers are giving a lot more positive outlook towards impact of Katrina and a pricing effect. I don't think I heard any crystal balling for implications of Katrina. But just from your prepared remarks, it seems like you're very pleased the way your cat program worked. You weren't blindsided by how bad Katrina was relative to your modeling.

And it sounds like you don't think you need to raise prices or changed reinsurance buying in a post Katrina world. That's unique. Maybe I'm misreading here what you're saying but if your competitors are raising rates going into the renewal season and having to pay for substantially higher reinsurance costs, does that suggest that your premium growth could really accelerate if competitors do raise rates and you don't?

Bob, let's get real here. I mean we were anticipating a softening market conditions rates as we reported them out over the past couple of -- several quarters have been dropping slowly and incrementally, almost like the tide going out. What we did see was the fact that within a very, very short period of time, pricing across all lines in particular property book not only firmed but started to go up.

And our expectation is that as the facts play out, not just in the reinsurance part but the market in general, prices will impact go up across all lines, property and casualty. We would expect that pricing is going to go up on the reinsurance -- in the reinsurance market dramatically if not stridently on risk coverage as well as cat covers and I would expect that you're going to see sort of a title rising of rates across the casualty book.

We would be extremely happy to see prices, to see rates to reverse and go up. We continue to have need across our entire portfolio to get additional price. We were concerned about the fact that for the first time in three to four years that pricing levels would not carry loss cost to pressure and that would put not only pressure on our topline, but it would make the need for portfolio optimization even more important.

So I'm not sure how or what you heard or what time you dialed in but we wouldn't know how (MULTIPLE SPEAKERS)

I heard your whole presentation. And what I heard is we're going to continue to hammer away on expenses and I did not hear it you articulate a view that rates were going to be up much more than you had thought going into '6 or that you needed to raise rates.

No, Bob, I think -- I'm just -- if we go back to my remarks I thought that prices that had been dropping firmed and had started to go up. I think that's pretty much exactly what I said. I'm not reading from anything here now but -- and I can't forecast the market and I'm not -- none of us are big enough to control the market but at the end of the day, we would be very pleased and it would make it a lot easier for us to participate in the market going forward if rates and prices did reverse and go up. Because we obviously did see a trend for five or six quarters of them dropping.

So no, we will go -- we will be very aggressive with pricing. We have given instructions to our underwriters in the field to push price to find what the market will take. We did not make -- we did not implement dramatic changes to our catastrophic risk management program because we felt we had a pretty good one in place. We obviously have to cover the cost of any increases in our reinsurance program and -- that's a pass-through.

But at the end of the day, the market will be the market. It is not something that CNA controls or any other carrier out there controls.

Absolutely. That was just a much more positive crisply worded view to the market than I thought I heard in your introduction.

If I could switch gears, life and group. Should we be nervous that these two items might not be just cameo appearances? Is it unit cover for the type risks for the life accident reinsurance?

No it was an accident health pool that we participated in and it was an independent actuary reviewed done of the other pool by the pool participants and we booked our percentage share of that reserve increase so (MULTIPLE SPEAKERS)

So on the life side I wasn't aware of any residual liability to you. What do that -- what was this sort of issue and then --?

Those are indemnification liabilities related to the sale of life company, Bob (MULTIPLE SPEAKERS)

So mortality experience versus expectation or --?

No. Just as some relating liabilities relate to some indemnification liabilities, (MULTIPLE SPEAKERS)

I wouldn't say they're not significant. We are working our way through the finalization of those transactions. We are pretty close to being -- I wouldn't give you any assurance that there absolutely can't be anything more negative that comes out of that. But I would tell you that we're pretty close to the end of that transaction and concluding any liabilities or changes that come out of that.

Are we talking like selling practices or underwriting? I'm just confused at (indiscernible) block could be blocking (ph) you. Just what is the general issue that's causing reserves to go up for that line? So we can assess whether it is an ongoing risk factor?

Just some final true ups, Bob. That's all really that relates to and that's really as far as I want to take it.

Jay Cohen with Merrill Lynch.

Two questions. First, I got sort of a numbers question. It looks as if based on looking at this supplement and then the June supplement that your investment portfolio, the book value went up quite a bit. Looks like that $1.3 billion before the securities lending collateral and cash flow didn't look that strong in the quarter. I was wondering what would explain that?

When you get the 10-Q, you'll see more of the detail that really what's not reflected in the supplement is about $1 billion of purchase securities that haven't -- we haven't settled out the cash yet. That number you're looking at in terms of relative change is about $1 billion higher. So it's about 300 million better and over the -- when you sort through all the detail and when you get to Q, you'll see it. It is about for the beginning of the year till now we are slightly less than a billion better in total invested assets.

So it is positive. Cash flow is positive, operating cash flow is positive but not to the extent of just doing the simple math mouth on the supplement.

That's helpful. It also looks like in the quarter there was a shift towards taxable securities, away from tax exempt. Is that accurate and if it is, what was behind that?

Yes but it was slight. it wasn't that significant and driven by where we think we see more appropriate returns. So we have gotten and I would characterize that the change of portfolio was fairly insignificant. We have gotten a little bit shorter, the average quality didn't change and asset allocations didn't really change, except for that slight move out of MUNY's and into government.

It looks like it -- the tax exempt number in the June supplement was 9.3 billion. Now it's down to 7.5 billion. That seems kind of significant. $2 billion, looking at the book value of the portfolio.

, Yes, most of that shift is we had variable rate notes that were short-term. That just matured.

Next question on the underwriting. Your standard lines business, you are down below 100 combined ratio barely. You look at some of your competitors, Chubb, Hartford, St. Paul Travelers. And they are what they define as kind of core commercial standard commercialists. They're 90 or below. They are 10 points better than you in many cases and maybe it's a definitional issue, I'm not sure but it's a pretty big difference though.

And I wonder what you account for that? How you account for that?

When you look at our competitors I can't tell you exactly what is going in the the numbers or what they've done as far as where their overall reserves are positioned. But I can tell you with our book of business we are very comfortable with the book as to the re-underwriting that we have done with our book of business especially in standard lines. That is where all the re-underwriting occurred. When you look at where our accident year loss ratios are, we are very comfortable with those off ratio and trends are performing very very well.

We know that three to four years ago we actually had some major issues in our book that we had to correct. And so we may have gotten a slower start than what our competitors did.

But I can tell you, that when I look at that book of business now I am very comfortable with every part of that portfolio. We get pounded (ph) rates double-digit rates for three straight years on that book of business. And we are positioned now to grow in that portfolio. Yes, it would be nice to say that we have got the combines that are in the 80s. That's not the case of were our book is but I can tell you after all the reviews we have done on that book and whether that is our underwriting reviews, whether that is the reserves in reviews we do twice a year on every individual line and subsegment within that book, we are very very comfortable with where we are.

Jay, this is Steve. I just want to add to echo Jim's remarks and -- we use the hard market basically to ship the portfolio and that's also when we did a lot of internal selling or cross-selling across the portfolio.

If you look at retention ratios on our renewal book from say, '01 through '03, but you are going to see some pretty stark numbers as we carved our portfolio down and reduced the volatility. We were adding new business during that but not enough to make up for basically for the shortfall that the retention levels were giving us.

So our choice was to take huge levels of pricing across that book at times when we had very modest loss cost pressure and handle -- handle our underwriting strategies that way. Jim mentioned that we may have been slower to the gate than some of our competitors and so be it.

I think we probably would have observed that maybe some of the other major nationals had started a re-underwriting program or stronger pricing in 2000 or 1999 but at the end of the day, we are very very comfortable with the portfolio where it is now. Production levels are extremely solid. Rate levels we can hold in our own with respect to raise and all the numbers I hear our major competitors talking about, we are higher than they are with respect to the rates that we're getting on our book.

Our retention levels -- I mean, we did the old hockey stick with respect to our renewal -- the renewal book where we dropped down into the high 60s and our standard mid 60s and high 60s for the standard book. And then pushed it right back up pretty close to 80 right now. So we like where we are at and we hope to pick up on what I said to Bob Glasspiegel, we hope the market firms even more and allows us to take further advantage of the rates that are out there so we can push more price into the books.

So that's our view. We shifted during that hard market and took a lot of rate.

From a stock standpoint you guys are below book value and they are above book value too. One more question, I guess it's really a capital question. Your surplus at the end of September on the property and casualty side about about 7.3 billion. At least in my model I don't have you writing that on a net written basis, on an annualized basis at this point. So your premium to surplus -- and looks like it was for the past several quarters has been below one-to-one which, for your business mix, one would think you could be comfortably higher than that.

Are the rating agencies giving you guys any slack at all and at some point do we say, gee, we would like to give some of this back to shareholders? A dividend or maybe not buyback but at least a dividend?

I think that you've certainly got the numbers right and you know what the issues and understand what the issues are. We do think we are extremely well-capitalized for the risks we take, as well as the risks we have on the books.

You know where the rating agencies are with us necessarily and we can't -- that's really up to them. I don't want to start speculating about when and if or get get into their business what they're doing.

Can you remind us where the rating agencies are with you guys?

Yes (indiscernible) is A with a negative outlook. S&P is A- with a negative, Moodys about the same and Fishhook has now moved us to stable.

What is the basis for the negative outlook at this point again? I'm sorry I'm asking. I should know but I don't recall?

I don't think you are going to get into any quantitative with respect to the negative outlook. I think this was put on us back in 2003 as a result of a massive charge that we took in two of them basically in 2003. I would say that it was the qualitative tag that they put on us and I think the expectation was that they would stay on until we gave them a reasonable period of consistent quality earnings and that they would remove it, not based on capital ratios but based on the quality of the underwriting performance that we delivered.

That is basically it. There are no quantitatives around it and I don't think -- it was not meant to imply anything (indiscernible) other than to say, "Hey, we would like to see steady high quality earnings come out of CNA over a period of time."

Maybe another 10 years of good underwriting results and they will take that negative outlook off.

Yes we were thinking, Jay, an actually somewhat shorter horizon for ourselves. But let me say this. I think the rating agencies have traded us very fairly. I think we have had very good dialogue with these guys. I think we've had a very reasonable relationship with the rating agencies. It's been a very open and transparent relationship. We have regular dialogues with them.

My expectation is that we are not looking at a window anywhere near that. It probably would not be appropriate for me to speculate as to when I think things would move. Fitch coming off earlier this year was very gratifying. The A rating from AMvest is very gratifying and none of this has affected our ability to underwrite or participate in the market in the least.

No effect whatsoever on the distribution from a customer standpoint and, frankly, I think it was fair. I think they were very fair to say, "Hey, let's see what you got. You guys straightened out your balance sheet, you dealt with underwriting issues, you dealt with operational issues, you dealt with all the other issues and so let's see what you got after you get through the noise."

So from my perspective they're very fair. I have pretty high hopes and expectations for getting rid of those (indiscernible). That is a major objective to me if for nothing else other than an emotional one.

Angelo Rossi with Merrill Lynch.

I wanted to dig in to the accident year loss ratio for 2005 and if you look at standard lines in the second quarter, the net accident year loss ratio was 64.4. And then year-to-date in the third quarter, 78. Now obviously the hurricanes have had a major impact there but to what extent did the hurricanes increase that accident year loss ratio? And if you take that out, how was that segment performing in the third quarter relative to the first half of the year?

Yes if you take for -- you're just referring to standard lines?

Correct.

Yes on standard lines if you're on the accident -- net accident year loss ratio, if he pull the cats out for the quarter it's 64 5.

So it's flat quarter to quarter?

Correct. And on the year-to-date basis if you pull the cats out, it's still 64 5.

I also noticed that the impact of developments and uncollectible reinsurance came down in the third quarter, relative to first half of the year. I was just wondering if you could provide a little bit more color there on what you're seen seeing on the development front? And that is actually both in standard and specialty.

Yes I think Craig had mentioned in his remarks that there was no -- virtually no development in the third quarter.

And it looks like there was no asbestos developments in the third quarter. Is that correct?

That is correct.

I remember in the second quarter conference call management did -- you guys could provide some, I guess Ie would say cautiously optimistic views on asbestos litigation. And I was wondering is the Company doing a round up review in the fourth quarter on asbestos and to what extent does that outlook factor in to review? The recent court cases and state-level tort reform that we have seen over the past 12 to 18 months.

Well, I'll start. This is John Cantor. There's no question that the environment -- there's been some concrete developments in the environment that will play into our own case estimates, which will then be turned over to the actuaries. And the actuaries will perform their exercises, which will result in the appropriate IV&R (ph) provisions.

So I guess the short answer to your question is yes. Developments do get factored in, in terms of legislative and judicial. Many of which, as you noted, have been positive.

We will be doing a fourth quarter review of asbestos.

If we look at the charge that the Company took in 2003 and you look at that environment, and you look at the current environment now. If we superimposed the favorable tort reform and those changes on top of claims trends over the past couple of years, how did the claims trends compare to what you expected back then so far?

Claims are up. We get more claims every year. The question is are they quality claims. Are they going to result and close without pay or are they going to result in true claims situations? And we believe it is more the former than the latter. That truly has developed in the last two to three years. That perception is not just with us because we matter the least.

It's really the judiciary and the public which forms the jury pools which really count. And those attitudes have markedly shifted in the last two years -- two to three years. But just a note of caution. We are not getting carried away by this. The pendulum does swing back and forth. There's tort reform in the asbestos area but many of these -- many of these new laws haven't been tested constitutionally. There could be constitutional override in the state courts on these. They sell many many states that don'ts have these types of loss on the books and we are still left with a mesothelioma problem which is really immune pretty much immune to many of the recent legislative reforms.

So just a note of caution and it is going to be a factor in our round up study but I doubt it is going to be -- we're not going to get carried away by it.

And those claims trends? Have they been relative to what you factored in in the last charge? In line with expectations?

When we took the last charge we were looking at an avalanche of claims. The avalanche has -- you can't say there's an avalanche of new claims coming in the door and of the new claims that are coming in the door, many -- we are finding that many are being put in these parking lots and sidelined by these unimpaired claims statutes and/or court rules. So that the claims volumes don't tell the whole story.

It's really a question of what happens once the claim is filed? It doesn't even move in the judicial docket. In many cases it really doesn't. So it kind of makes our job a little more difficult at times to figure out what claims are going to close without pay and what aren't, in light of the very dynamic environment that we are seeing right now.

Ron Rodman (ph) with Capital Returns.

It was great to hear your response to Bob Glasspiegel's question. I had a question, some specifics about Katrina. Wondered if you could give us some claim number information as far as how many claims you received on Katrina and the relative size and premiums of your book and the affected areas, whether it be Louisiana or Louisiana, Mississippi, and Alabama?

I don't think we are going to the able to give you any further information on the claims data that you're looking for because that is very very much a -- that's a little bit of a moving number right now. We have done our best to estimate what the ultimate number of claims will be reported based on past patterns, and also based on how we see it reflecting or matching up with the claim patterns of last year's four storms and prior to that.

So I don't think I really can tell you anything further than what we have already publicly released. I'm not sure if that help you out or brings any comfort but we are very comfortable with the numbers that we came up with. We got a lot of specificity with respect to the larger claims and we are still going through a tremendous amount of analysis on exactly what we got on some of the big ones.

How about premium in the affected area?

(MULTIPLE SPEAKERS) Our market share in those three states on the property side is 3%; and it has been very consistent over the last three years at that same 3%. So as we managed our overall (indiscernible) exposures and obviously Florida was one of our big concerns but we also managed all the states from Florida up to Virginia.

But wouldn't C&P market share be more meaningful to correlate to your losses there or given that you are commercial writer or am I off base there?

I think that's really more a reflection if you look at what the losses are occurring it is really on the property side. And it's not on direct damage from the wind. It is also the business interruption losses that are coming from there and any consequential flood loss. I think really the property is a better indicator. But even if I didn't look at property and I looked at C&P the numbers are roughly the same.

Will you think about the rising claim number information, whether it be the ultimate number you're thinking of going to when you do your Q? Some other companies are providing that. It would be helpful.

If I could -- just to follow up on that just a little bit. With respect, it's a little bit difficult just to use a market share number as a proxy for what the expected loss will be. And that's why our numbers have come in I think very different from what a lot of the external estimates have been. And we have seem more of our dollar loss activity from the larger clients rather than the small middle market or small or smaller customer segment. That was a reflection of our strategy a couple of years ago to reduce our writings along the coast in those market segments and to take a more focused underwriting approach on the bigger stuff.

You really can't use market share as a proxy for loss. And I think as I said, it kind of led people down a false path and that is not just this year but last year also.

I did want point out one additional thing. That when we came up when we estimated our loss or gave a forecast of what our loss would be on the four storms last year we were rock solid on that and we were probably the only company if not one of the only companies that never moved with respect to its estimates so we have a very good track record of putting out solid numbers that don't move.

Rob Medway with Royal Capital.

Nice quarter. Just a quick question on your reinsurance receivable. If you look at your 2004 K, you mention Allstate, Swiss re Hanover, Hartford, American re in Berkshire, main reinsurers and your schedule F reflects that. Has your reinsurance partners, have they basically stayed approximately the same as they did in 2004 and then can you give us a sense for what percentage of your reinsurance receivables are with, a, ratings or higher? Just give us a sense of your reserve levels in relation to the people you've done business with?

Be happy to. I think that you can -- when you try to decompose our reinsurance recoverable balances, you first have to decompose the amount that are unsecured so the amounts that are unsecured are about 6, close to 7 billion. And of that amount a little more than half is with some is with pools. They are a little bit below a billion with different pools volunteer pools and associations (indiscernible) associations, of the unsecured from reinsurers over 50% is A or better. Well over 50%. So -- and if you look at like I said, decomposing, if you really compare our 550 (ph) of bad debt reserve against, really, almost like 5 billion of reinsurance recoverables that are unsecured and of that amount over 3 billion of the unsecured are from A or better.

So you're saying that there is 5 billion unsecured that is not in the pool and of that, 2 billion is below A?

No. One.

One going in is below A?

Yes.

And you would have the 550 reserve?

Yes.

Stephen Peterson with Citadel Investment Group.

First off, I was wondering if you could talk a little bit more about your modeling in the sense that there seems to have been a lot of pandering by many people in the industry over what the models were telling them, their expected P&Ls and what turned out to be the case. And I was wondering if you could talk a little bit more about why the results seem to be a little bit more in line with expectations at CNA, in terms of how you do things and the way you think about modeling?

I think a couple of ways to go about this. First and foremost I think you've got to start off with a pretty common sense approach that says you never trust your financial future to a black box or to a computer. I think there's a high level of common sense that goes with this. I think there also has to be a pretty high level of understanding from a technical standpoint as to what the expected manageability would be of certain market segments.

And our perspective is that, the more you write in the small to middle segment the higher the loss expectancy would be because of -- it's basically a vast array of risk out there and it becomes very very difficult to model or get your arms around it and get any comfort with the level of volatility that you've just taken on. I think you also have to have a very clear perspective with respect to what kind of returns you're getting from those business segments?

And our perspective is that in the small to middle area that the returns particularly in cat prone areas is not all that high. So to invest in extensive writings and low return businesses and high-risk areas is essentially I think a fool's game and folly.

So as I say the bulk of or the majority of the loss is that CNA saw out of Katrina was in the larger risk segment which is where we would expect it where get much higher returns and, historically, have had much higher returns, where we can move in and out of that market on a much more flexible basis. And so while we would've preferred not to have a loss of this magnitude this year the fact of the matter was, we felt comfortable going into the season with the levels of risk we had and when we modeled it out obviously for the size and extent of the storm and the geographic conditions in the area that hit, it fell in line with what our tolerances were and we were able -- more than able to handle it from a financial and from a claim standpoint.

The last thing I would say with respect to models is that you can't just use one model and so, in our world we use multiple models and try to derive basically a pattern of expected losses, rather than just trying to pick a number and saying that's it. I think we have people here who are very comfortable and familiar with the models as to what is in those models and what is not included in those models, what type of multiplier you have to put on with respect to things like business interruption. Or boats or cars and things like that.

And there are some other softer areas that add very quickly to cat levels or cat losses that don't get into those models. So and then when all is said and done the common sense factor which is whatever number you get out of there whatever you add all the stuff that you think you've got you bang it with another multiplier. Okay because you've got to expect the fact that while you don't run your business to the one in 1000 type of that, you have got to recognize the fact that you're going to get stuck like this.

So we feel that about the fact that we took the largest U.S. hurricane in history and it hurt and we would rather not have done it but we stand here in good shape following that storm. And we are in a position to participate in the market going forward and we think there's going to be some opportunities for us out there.

I just want to interject that is our last question. Thank you. Operator.

No further questions correct?

Correct.

Thank you. Any further closing comments?

Yes, thank you, operator. I will once again 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 one week immediately following this call until Nov. 3rd. You can access the replay by dialing 888-203-1112 or for international callers, 719-457-0820. The passcode is 2914462. The call will also be archived later in the day for replay on the Investor Relations pages on our web site. We appreciate you joining us this morning and thank you.

Once again, ladies and gentlemen, this will conclude today's conference call.