CNA Financial Corp (CNA) 2006 Q1 法說會逐字稿

Good morning, everyone. Welcome to CNA Financial Corporation's first quarter 2006 financial results conference call. This call is being recorded and webcast. During the next few weeks this call will be accessed again on CNA's website at www.CNA.com. With us this morning is Steve Lilienthal, CEO, Craig Mense, CFO, and Jim Lewis, 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 CNA's website, headed forward-looking statement with regard to both.

Forward-looking statements speak only as of today May 2, 2006. Further CNA 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 CNA's remarks. Members of the news media may call Katrina Parker at 312/822-5167. And investment analyst questions may be directed to Jack Hanrahan at 312/822-6586, Cathleen Marine at 312/822-4159, or David Adams 312/822-2183.

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

Thank you, operator. Good morning, everybody, and thank you for joining us today. CNA had a solid first quarter, both financially and operationally. There are strong fundamentals in evidence, there is good momentum in our core business. There are no surprises to announce. All-in-all, we are reporting on a rather quiet uncomplicated quarter, and my remarks will be simple, positive and brief. Our report should sound very familiar to you.

We were doing all the things we said we would do -- focusing on the fundamentals in our core Property Casualty business, containing our runoff business risk, strengthening our balance sheet. These have been our priorities, and these are the drivers of first quarter results, and we intend to stay the course going forward.

After my overview, Craig Mense, our CFO will cover the financial highlights, Jim Lewis who leads the Property Casualty Operations, will provide some detail on the big engine of CNA, and then we'll open it up for questions and discussions.

First, a word about the financials. Net operating income from continuing operations was $234 million for the quarter, up 22% from $192 million in the prior year period. Driving the improvements were better underwriting results, increased investment income, and reduced expenses. Net income was $229 million, up 24% from $185 million in the first quarter of '05. The aforementioned items were the primary drivers, along with improved net realized investment results.

Turning to our operating highlights, the combined ratio for our core Property Casualty operations came in at just under 97, a 2 point improvement over the prior year period. Production was a healthy 4% increase on the gross written premiums. Specialty lines continued to grow as a very strong franchise, while standard lines increased its traction in target markets, with attractive risk/reward characteristics. We held rates flat while retaining 83% of our renewals, our flow of new business at 20% of production was appropriate to market conditions, and we continued to leverage our broad market capabilities via cross-sell initiatives.

Catastrophe losses were relatively light, $8 million after tax, despite the hit the industry took from Mid-West tornadoes and hail storms. We remain very focused on cat management and cat exposure management throughout this year. In addition, I would like to point out that our estimates for the 2004 and 2005 cat losses continue to hold.

Our Life and Group and Corporate segments produced a first quarter operating loss of $13 million. More on this from Craig. Suffice to say that managing the volatility of these businesses remains a major focus of CNA's leadership team.

Turning to expenses. Our ongoing efforts are reflected in our 29.7% Property & Casualty Ops expense ratio. There is more work to do here building on that, settling for the progress made over the past several years.

Finally a word about investment income, which increased $164 million on a pre-tax basis. There were a number of helps here, including the ongoing benefit of the reinsurance commutations, which we discussed with you last quarter.

In summary, CNA had a nice quarter, strong fundamentals, solid performance on every front, with good prospects for the rest of the year. With that, let me turn it over to Craig.

Thanks Steve, and good morning, everyone. I'm very pleased to be able to share our first quarter results with you. They are reflective of what I believe are the improving fundamentals we have been discussing with you for the last few quarters.

Against all key drivers of our results, underwriting, claims, operating cash flow, investment income, expense management, we continue to demonstrate an improved performance. Bottom line earnings were solid, and we delivered an operating ROE of 10.5% above our cost of capital.

Steve called this a quiet uncomplicated quarter with no surprises. I would add that this quarter is further evidence of the consistently improving earnings power of CNA. We continue to make steady progress toward becoming a smarter, faster, more profitable company. Now I would like to give you a bit more detail on the financials before turning it over to Jim.

Today we reported net operating income from continuing operations of $234 million, or $0.84 per share, versus net operating income of $192 million, or $0.68 per share in the prior year period. Net income for the quarter which includes the impact of discontinued operations, as well as realized investment gains and losses was $229 million, or $0.82 per share, compared to net income of $185 million, or $0.66 per share in the prior year period. You will recall that these per share amounts include the impact of undeclared preferred stock dividends. Property and Casualty operations produced net operating income of $247 million in the first quarter, versus $180 million in the prior year period, a 37% increase.

Our core business performed well on every front -- rate, retention, new business, losses, expenses, operating cash flow, and investment income. There was no net development to speak of. We had a minor amount of cat losses in the quarter, $12 million pre-tax from the Mid West tornadoes. And Steve mentioned our prior estimates for the 2005 hurricanes continue to hold.

Life and Group Non-Core reported a net operating loss of $3 million, versus a $1 million operating income in the prior year period. These results are within the range we have discussed in previous calls, from small gains on one end, to losses in the mid-20s on the other. Overall, the business is performing as expected. This quarter's comparative decrease is largely due to our life settlement business, which had an especially strong quarter, strong first quarter of '05.

Corporate and other Non-Core reported a net operating loss of $10 million, versus an $11 million in operating income in the prior year period. The primary drivers here were the discontinuation of royalty income, associated with sold business, a small loss related to an assumed reinsurance commutation, and a number of miscellaneous expenses accruals. Pre-tax investment income for the quarter was $570 million, up significantly from the prior year period, when it was $406 million, and from the fourth quarter of '05, when it was $547 million.

The increase was driven by improved period over period yields, especially short term yields, and reduced interest expense as a result of the commuted reinsurance treaties. As importantly, we continue to generate positive operating cash flow, and add to our invested asset base, albeit at a slightly reduced rate because of the '05 hurricane claim payout.

Two other points about our investment income. First, it's important to remember that the period over period improvement includes a $72 million increase in trading portfolio income, attributable to separate account business in Life & Group Non-Core. This income largely passes through to the benefit of contract holders.

Second, with respect to reduced interest expense, the pre-tax benefit from the commutations was $20 million in the first quarter. This is right in-line with the expectation we set during last quarter's call. The full year cost for Corporate cover and other finite interest expense is expected to be $60 million. The first quarter cost was approximately $24 million. After tax realized investment gains for the quarter were $1 million, compared to realized losses of $14 million in the prior year period.

Turning to expenses, I'm very happy to report that the Property & Casualty operations expense ratio improved to 29.7%. This is reflective of steady if not slightly reduced spending levels, when compared to the prior year, and a fairly significant decrease in acquisition costs. Our spending patterns here are somewhat seasonal, and our ability to sustain the sub-30 ratio is highly dependent on our ongoing management of acquisitions, as well as directing expenses. We are not letting up one bit on our effort to drive out expenses here, and our focus really allows us to make significant investments in future growth, as an example IT infrastructure for small business while at the same time keeping total direct expenses flat.

With that, I will turn it over to Jim.

Thanks, Craig and good morning, everyone. Property & Casualty operations had a solid first quarter with a 97% combined ratio. Operationally, we focused on disciplined underwriting, executed our strategies, and continue to leverage the breadth of CNA products with cost/sell strategies. In short, we are off to a good start, which is clear to see in our key business metrics.

Starting with premium volume. Property & Casualty operations gross written premium was $2.4 billion for the first quarter, up about 4% from the prior year period. Standard lines was up about 3% for the quarter, while specialty lines was up 7%. On a net written basis, our premiums were essentially flat. A 5% decrease in standard lines was offset by a 9% increase in specialty lines.

Overall, our premium volumes continue to reflect our ongoing emphasis of portfolio management. In specialty we continue to see a range of opportunities to write quality business at prices we like. As a result, this part of our portfolio has grown significantly over the past few years. Within standard lines, the price to risk balance hasn't been as attractive. Still, there are a number of focus areas we like quite a bit. For instance, property, small business, manufacturing, and technology. Growth in these areas is picking up, and will be a big part of our future in standard lines.

Now let's look at rates. Average rates across our entire portfolio were virtually flat for the third consecutive quarter. Standard lines rates were slightly down while specialty was up slightly. While rates have leveled in the past few quarters, I would like to point out that CNA continues to look for every opportunity to drive rate into our books. I have underwriters go for every point of rate the market will bear. I am pleased to report that our focus on rate has not hurt in our retention, which I touch on in a moment.

We went into 2006 feeling very comfortable with our book of business. It's a more profitable higher quality book than we have had for some time. So it's very encouraging to be holding on to this good business at the right price.

Turning to retention, the improvement from last year carried into 2006. Property & Casualty operation retention for the first quarter came in at 83%, about the same as fourth quarter of '05, and 7 points better than first quarter '05. Standard lines retention was a strong 81% during the first quarter, with specialty running at an even stronger 87%. These retention figures are completely consistent with what we have told you in the past.

We let retention drop a few points while completing our reunderwriting initiatives. Now that we are more comfortable with our portfolio, our retention is up, and holding at much higher levels. Our front line folks are doing what it takes to grow the franchise, and sell the value of continuing to do business with CNA.

Now let's turn to new business. We wrote approximately $[355] million of new business in the first quarter or 20% of total production. This compares with approximately $382 million in the prior year period, or 22% of total production. Overall, new business volume is consistent with a very disciplined approach to the market. You will not see us give enough deep discounts to increase new business a point or two.

That being said, we have some proven capabilities for optimizing new business quality, regardless of market conditions. One, we continue to focus on selling more CNA products to existing customers. Cross-sell initiatives were very successful over the past three years, and produced an approximately $1.5 billion in new premiums. We built on this momentum in the first quarter of '06, with an additional $105 million of new cross-sold business, approximately 30% of our total new business written.

As I've mentioned before, we like cross-sell business because it mitigates adverse selection. This is business from customers we already know and like. In addition, we continue to be very vigilant with respect to new business quality. For instance, we watch the spread between new and renewal pricing; we also track the spread between paid and case loss ratio, for new business and renewal business. Quantitating measures like this enable us to execute a very selective control of new business strategy.

Now let's turn to our loss ratios. For the first quarter, Property & Casualty net calendar year loss ratio was approximately 67%, down a point from the prior year period. Standard lines came in at about 72%, up a point from the prior year period. On the specialty side we reported an excellent 59%. Overall, our net calendar year loss ratios reflect solid underlying performance. The accent year ratios tell the same story.

The Property & Casualty operation net accident year loss ratio for 2006 is approximately 65%. This compares with 71% for 2005, which includes approximately 7 points for cash. 2006 net accident year loss ratios for standard lines and specialty lines are approximately 68% and 59% respectively. By the way, these accident year loss ratios are all evaluated as of the first quarter of '06.

Turning to combined ratios. Property & Casualty operations came in at approximately 97%, 2 points better than the prior year period, in spite of higher reinsurance cost in '06. Standard lines came in at approximately 103%, on-par with the prior year period; specialty continued to shine. This Combined Ratio for the quarter was approximately 86%, 4 points better than first quarter last year.

Overall our combined ratios are consisted with solid performance on risk selection, pricing, and claims. In addition, as you heard from Craig, our expense initiatives continue to make a difference. An expense ratio of just under 30% contributed approximately 1 point of improvement to our first quarter Combined Ratio.

In summary, we started the year well -- selective disciplined underwriting, stable rates, strong retention, and strength initiatives. All the things we have mentioned before. Now our challenge is to stay focused, and keep it going.

With that, I'll turn it back to the operator for our Q&A.

Thank you, sir. [OPERATOR INSTRUCTIONS] First question, Jay Cohen, Merrill Lynch.

Good morning, everyone. I have several questions. I'll just ask and you can answer and I'll ask the next one, rather than just listing them. The first is acquisition costs were lower in the quarter, can you explain what were the drivers of that decrease?

On the acquisition cost, as we look to manage our overall expenses, we manage every component of the expense and acquisition is one of those. And we were able to reduce our overall commissions on some of our larger arrangements in our specialty portfolio where we were able to rate those at net of commission.

The other thing that's impacting us on the acquisition ratio is just an overall mix of business that's occurring during the quarter. So the drivers were mix, and the fact that we have been very successful in writing business on a net of commission basis in our specialty portfolio.

I assume that commission change didn't really hurt your production at all?

Not at all. You saw what happened with our gross written premium, it is up. And our net written premium was flat. And in our specialty portfolio, we actually had increased written premium from a gross written and also on a net written.

Okay. Next question.

If I can follow, this is Steve. I want to follow up on that. The reason we track that new business writing is exactly to get at that issue. And if you recall, conference calls maybe two years ago, we said that in the midst of a hard market we would be writing anywhere from 23 to 25% of the portfolio would be new, and in a sort of a normal state, gently declining market that the writings would be in the very high teens to low 20s, and that in a facility or a market where we were underwriting it, it would be in the mid-teens.

So we are exactly where we thought we would be, and exactly where we told you we would be. The fact that we are there, and that our acquisition rates had dropped would be indicative of the fact that it has not hurt us at all. I would attribute it more to mix and more to a net basis, rather than some overall program of commission reduction.

It doesn't look like, second question, underwriting expenses I guess overhead expenses relative to premiums were up, what's going on there?

Really no change. This is Craig. So it's not really a change, just where net earned premium has changed. Our spending is actually flat year-over-year although last year in the first quarter we did have a few expense accrual releases that related to '04 and prior, that would have driven it down. Our overall level of spending has continued to stay flat or decline over the years.

So a tough comparison there basically.

Right.

Two other questions. The first is the corporate and other line jumps around a heck of a lot, and it's pretty frustrating to try to model. And I know you don't give guidance on this, but maybe as far as really rough guidance if you could suggest if you think going forward it is going to be positive or negative on a net basis.

I know we have been reluctant because it jumps around some, and it does go from some small gains in corporate to, and particularly corporate segment, because we had the tax, you will recall we had the big tax benefit last year in the second quarter, and in a reason there I think generally you should expect those things to be relatively neutral, and trade around a small range of 10 to 20 million loss to 10 to 20 gain. That's what it's really been if you take some of the bigger noise off of it, for the last 6 quarters or so. I don't know if that helped or not.

That's good. And then the last one, maybe it's a bigger picture question. Your standard business combined ratio in this quarter of 103, even with last year, given what we've heard from all of your peers, Chubb, St. Paul, Travelers, Hartford, it almost looks like you were in a different business. Their combined ratios and their standard commercial business are in the 80s. And I'm wondering if you can kind of looking at the broad universe of insurance players partly explain why yours is so much higher than everyone else's.

This is Jim Lewis. This is a question that has come up in the past, and I think that a lot of that has to do with where did we start from, as far as our standard lines portfolio was concerned. You notice the reunderwriting we have done in the past few years has been in that standard lines portfolio; that's the same place where we have founded significant rate over the past three years.

And what you are seeing now is a reflection as we look at these loss ratios. I can't speak to the competition and say their loss ratios or showing combines of in the 80s, I can't speak to ours with the controls that we now have in place. How we actually review our reserves on a quarterly basis, the fact that we look at each one of the lines of business at least twice a year.

What we have done as far as the reunderwriting within that book is that I feel very good about where our loss ratios are today and the rate that we pounded on those, that particular book. I think we started at a different point, and we had more to really do, to fix our standard line portfolio. When you look at the accident year loss ratios, we have seen significant improvement in our accident year loss ratios in our standard portfolio.

Okay, thanks.

We go next to Bob Glasspiegel, Langen McAlenney.

Let me follow Jay's pattern, and hit you one at a time. You mentioned higher reinsurance costs, and I assume that might have been a factor reinsurance might have been a factor in the gross versus net differential in growth. But maybe you could give us some more flavor on what the net impact of your reinsurance is going to be for '06, and how it is going to affect the gross versus net premiums?

That's a portion of it. And then I will let Jim talk a little bit about the production mix, and things that are there. We had about a $40 million or so increase year-over-year in costs of the reinsurance program.

For the full year?

The full year.

It's pre-tax?

That's pre-tax. I will let Jim talk to the impact of where our rates are going, and our ability to recover those increased costs and such. But that's the impact of reinsurance.

The $40 million is apples to apples, or did you raise retentions, too?

Retentions stayed exactly. We said this on the last call. They stayed exactly the same, $200 million on the Cat treaty. We bought the aggregate cover that we had last year that was so helpful again. Modest change in terms in price there, and we actually bought another $200 million layer on top on the Property Cat this year.

And as we look at our first quarter results, we are actually able to offset the overall costs of the reinsurance, with rates that we are seeing, especially in our large property arena. And large property through the first quarter our rates are up 21%. And as you looked at that quarter, January was the lowest month, February was 26%. March was 30%. So we are seeing significant opportunity to get rate terms and conditions in the large property arena.

As we manage down our overall exposures on the coast, this is also an opportunity to be opportunistic for us. We have got a wholesale property unit that we added last year, and that unit is having significant opportunities to grow, and actually get more premium for less exposure. So as we manage down our coastal operations, we are being opportunistic at the same time. And property has consistently been a profitable area for us. As we see the rate terms and conditions should continue in that fashion.

Okay. Taking Jay's question a little bit further recognizing in standard lines that you started with an arm behind your back or whatever, compared to your competition, if we can look to the finish line, you are at 103.4 in Q1 with modest cats, and with rates going down, and retentions as you are being more careful in your underwriting, one would suggest there is not going to be much growth prospectively.

I guess the question is, is this as good as it gets? Or can your reunderwriting actions and expense actions be sufficient to overcome the negative obstacles, that drive this unit to an underwriting profit.

Steve, I believe that this is not as good as it gets. I think the gain becomes more difficult from here because of the fact that we've lost for the strong tailwind that the market provided us. But I think we fully exploited the opportunity that was made available to us by way of the market. We shifted the portfolio enormously.

I think the glide path for standard lines is very positive. I do believe that it can be driven to underwriting profitability by continued growth in the segment, that I'm going to ask Jim to highlight for you in just a minute, and particularly our small business operation and the wholesale property operation, among others that he just mentioned. I do believe that there is still some additional legs by way of expense management that we can take advantage of, and there is no one particular home run ball that is lying in the expense bucket that we go after. It's just constantly managing and constantly paying attention to our expense issues.

But, no, we aren't satisfied with where standard lines is. But we kind of look at standard lines without respect to the fact that CNA is a very, very diversified company, and has the advantage that several other companies do not have, of the very, very strong specialty operations allows us to drive results to where they are today, which is two points better than last year, and still under 100. We also have shown over the last two years in particular, that we have been at least more conservative perhaps more prudent than how we've attacked and managed our catastrophic risk portfolio. Because we have not taken the heavy shots that some of our competitors say have taken. And so the asterisk of your standard lines is good, up this or that, our catastrophic hits have been I think substantially less than perhaps you would expect, and certainly less than what many of our competitors have taken.

We do think that standard lines has lagged. We do think there is an opportunity to drive it to profitability beyond where it is today and we do think expense has some more work to do or some more opportunity for us. I don't know, Jim, if you want to talk about some of the areas that we are going to grow and I just say don't discount the fact that we have a very, very strong and robust specialty operation, that allows us to do this in a very rational way.

And in the standard lines portfolio, there are significant opportunities to grow the overall portfolio. So this is the place where we shrunk it intentionally because of the reunderwriting. When I look at our accident year loss ratios and some of our business segments, i.e. Property. Property is an excellent opportunity and a place that we really want to grow, and we are seeing increased growth this year. We also saw growth last year in the overall property portfolio.

Small business is a place that we made a significant investment in, about a $700 million part of our portfolio in standard lines. We've made significant investment in new product, in new technology to make it easier for the agents to do business with us. We've added more personnel at the point of sale, and we are seeing traction now with this new product, that has been launched in 45 states, our new business writings are up over prior year. Hit ratios are up in that particular segment. Retentions are stronger than they ever been, and we are also seeing opportunities to increase the amount of business that we service in our service center for our agents in small businesses. So there is significant upside potential there.

Manufacturing is an area that we have been targeting $350 million portfolio in standard lines. It is growing for us this year. We've already got the capability from a claims risk control and underwriting standpoint, to be even more of a factor.

And our technology business is more of a startup business for us this year, that we have added resources to, and we are seeing growth there. So all-in-all, when I look at this, I think there is significant upside for us in our standard portfolio role, aside from the other points that Steve already made for improvement.

Okay, I hope you are right. My last question is on the corporate you alluded to mass torts as being a pressure, was that sort of a, you know, one-time or cameo, or something that you are just going to be booking more conservatively in '06?

Mike Fusco, I will take that one. Just putting a prudent provision in place in IBNR for mass torts. Not a big number -- not a big deal whatsoever.

That is going to continue or it's a one-timer?

We will review that quarter by quarter.

So maybe it will come back. Thank you.

Bob, before you go, I did want to mention one thing, we casually while we were having the reinsurance discussion, we casually talked about this aggregate cover, and I guess I alluded to it last year when we first bought it as a second event cover. I didn't want to let the moment go by, just to point out that given the proliferation of large multiple large events in the same year, I think one of the ways -- we either look pretty smart or pretty lucky, and either way was pretty good last year on this thing, was the fact that we did take advantage of a cover that was made available to us to buy it. It was a second event cover. It had significant advantage to us financially. I think it was almost $100 million pre-tax. And we did buy it again this year, and we think that's a rather unique cover.

I think it is a very significant and unique hedge to the volatility and as I say, proliferation of large storms. So after we take the first hit and our attachment of $200 million, we have a significant drop down for second and subsequent events until we exhaust a fixed amount of cover.

I do want to point out that it's kind of a big issue these days, that we would continue to expect to see multiple large catastrophical wind storm type events going forward, and we do have that cover in place.

Thank you.

We go next to Tom Cholnoky with Goldman Sachs.

Good morning, I have got four questions if I can. First of all, in the Life & Group area, I was curious, you reported $14 million of pre-tax loss, and had $11 million tax benefit against that. What's driving that big benefit?

Just the increase, just municipal tax, just the munis.

The munis? I mean, I'm not sure I understand it. How do you lose $14 million, and have a 78% tax benefit against that? Hello?

Just, well we had some – there are also some -- just a difference between tax reserves and what we had there. Nothing really unusual going on, I don't think.

Is that what we should expect in subsequent quarters? That kind of relationship. I mean to drive a $3 million loss, it's nice to have those tax benefits. I'm just curious, is that a one-timer, or is that something that will continue?

That's a one timer.

Okay. Fair enough. And then, Craig, I believe you mentioned there was no development, but I think if you look at the difference between accident year and calendar year loss ratios, it would suggest that you strengthened reserves by $39 million in standard lines.

No, there's an interplay of premium and wealth development in standard lines, it was less than a $10 million impact actually overall. Because the premium in loss development was interplaying, you can't quite use that to do a perfect calculation.

I'm sorry, so what should be the overall number then? You stand by your statement that there was no reserve development either favorable or --?

-- Premium loss. There was no development -- virtually no development for standard, a little slightly favorable for specialty, and virtually nothing for all P&C.

Okay. And then I was just curious, there was a question I think earlier on the underwriting expenses, or on the operating expenses, and if you look at specialty lines, it looks like your quarterly run rate in expenses in specialty lines jumped 25% in the first quarter. The run rate in the four quarters of '05 was around $40 million, and now all of a sudden you are at $52 million. Is that something that you are investing in the business? Is that what is driving that? What is going on there?

That's some investment in the business, because we have seen continued growth there, and we have been going after some middle markets. Salary increases and some additional head count in specialty, as well as that business has grown, it has also attracted a little bit more of overhead.

So that run rate, it should stay at those kinds of levels I would assume.

Exactly right.

This is Jim Lewis. A big piece of that is we have been growing our specialty portfolio for the last three years. So this is a place where we are adding additional resources, just to make sure that we are prepared to handle the influx of the new business from an underwriting perspective.

Okay. And I guess my last question is, lead paint been out of the news here for a little bit, but I was just wondering if you have received any notices at all, without obviously naming accounts on lead paint? Is this something we need to worry about?

This is John. Yes, we have notices. We have been involved with the lead pigment problem for at least 10 years, maybe 15 years. And as you know, there have been developments recently. It's still unclear what if any liability these targets may have.

And it's even more unclear what if any coverage there may be. So we are going to see what happens. And we are going to evaluate it later this year in the context of our [APNT] annual reserve review. And we will let you know what comes out of that.

Are there any, one last follow-up. Are there any significant events that we should look for at the court level, or the corporate level not with CNA but in general? I know there is the appeal process in Rhode Island, and are there any events that could move the needle one way or another in the near term?

Well, the California decision is an intermediate appellate decision so that will go to the Supreme Court, and well hopefully the California Supreme Court could take it up. I think that will be important.

I think on the coverage side, as you may know, the New York case that Lloyd started was dismissed, and it's now the Sherwin Williams action is now pending in Ohio. But that's all based on duty to defend. I don't expect anything earth shattering to come out of that for a while. It's very early days as they say, in terms of the coverage.

But there is many, many coverage defenses here. And this has got a long way to go before it's something that reaches the sort of magnitude of some of these other things we talk to you about from time to time.

Great. Thank you.

Tom, this is Steve Lilienthal. I just wanted to follow up on the expense question that you raised, and just a follow-up on one of Jim Lewis' comments about investing in the business. There's one area in particular that we continue to invest and invest heavily because of the leverage on the loss ratio side, there is risk control or there are loss control of our engineering services. And we have deliberately resisted the urge to try to carve expenses out of the risk control area, because what we think is the more pressing need to spend the money, in order to identify the risks that we want to put into that standard portfolio in particular.

The leverage points are on an elimination of loss or mitigation of inevitable losses. And we will continue to invest in our risk control services very aggressively, in order to allow us really to manage this portfolio through, rather than trying to take a couple of tenths of a percentage of a point out of our expense ratio, and throw darts at the risk selection side.

The other areas that we are investing heavily in, is areas that have gone away from the industry and lost vogue, as people cannibalize other companies for their staffing is in the area of training and development. And we have initiated company-wide training and development programs for our skilled positions in particular, claims, underwriting, risk control, and actuarial, to make sure that we have skills throughout the organization to deal with the pressures of the soft market which are problems. I think I've said to you before that in the almost 35 years I have been doing this, 25 years of our lives or my life, has been in some form of a soft market of those.

There is a temptation to carve out some, the expenses in these areas because they kind of for show, but long term very, very expensive. In terms of not only being able to navigate through the difficulties of soft market conditions which are upon us, but also to sustain the progress that we have made into the future. I wanted to make that point.

That is the investment. It is in our people and it is in areas like risk control in particular, where we think there is a lot of leverage.

The technology investments we can talk about another time and that's big also in terms of how we manage our database. How we can access and manipulate it, so we have the smarter and better people that we have can access and manipulate the data, and do what they have to do. But this is an area that we are really, really sensitive on. I think it's been lost from an industry standpoint, and if you talk to people at our competitors, there is almost a lost generation of training. We stopped doing that maybe eight or nine years ago, and there is a whole generation of underwriters and claims and risk control people, that are sort of missing, and what we did was just hire from other companies. We are reinstilling the fundamentals back into the business here.

Great. Thank you, Steve.

Go next to Jay Cohen with Merrill Lynch.

Yes. Three questions. I think pretty easy. The first is just a numbers question, and that is do you have the paid losses in the quarter?

We will see if we can find it. Why don't you go on to number two.

Sure. Maybe a question for John. Can you talk about what you're seeing from an asbestos standpoint, just give us an update there, please?

Well, yes. I mean, asbestos is I guess as I said last time, you know, three more states enacted asbestos reform last year. There are five more slated for '06. I think a lot of the mass screenings have been shut down. [Hell] holes are getting cleaned up and a lot of the abuses, this is important, I think a lot of the abuses in the asbestos bankruptcies are getting cleaned up as well, and I think it signals a shift in judicial attitudes. I think there is now a palpable hostility to abusive plaintiff tactics, and to exotic coverage theories. So I would say to sum it up, we sort of -- do we have a way to go? Yes. But we have come a long, long way from where we were just two or three years ago.

These developments I think at CNA, these developments are beginning to positively affect our numbers. Our frequency is now down. Whether you measure it by new lawsuits, or new accounts, the numbers of newly arising claims are down. The inventory is still up because, you know, you still have a lot of presumably unimpaired claims sitting in the inventory.

But the key is that the newly arising claims are less in volume, and I believe it's due to the developments, particularly the elimination of the mass screenings, which is a very positive thing.

In terms of our own numbers, they continue to hold on a rather stable fashion whether you measure it by what we have in IBNR, or what we have on our survival ratio. And we continue to believe that our reserve is quite appropriate. I don't know if that totally answers what you are after.

That's a great question. Just one quick follow-up on that. The increase in the inventory, that's something that I assume you would have expected anyway. That's not -- that wasn't very much in your thinking, I'm assuming.

Well, you are talking about the frequency comment I made?

You said frequency was down, the newly arising claims down but inventory is still going up which makes sense, but that again is probably not surprising to you, right?

That's not surprising at all to me. I think over time with these legislative and judicial developments the inventory is going to start coming down.

Great.

Back to your first question, if you look at page five of the supplement, you will see a 1 billion 433 in claim payments for the quarter.

I'll go there then. That's for the Property Casualty operations? Rater than companies?

All P&C reserves.

Okay. And then lastly, Craig or Steve, if you could just update us in your thinking on capital which is a question I obviously asked before. But you are not growing your top line, and according to my numbers by the end of '07 your premiums and surplus ratio could be 0.8 to 1. Given your diversity that seems pretty low. I know you had some thoughts on capital. Could you just update us on your thinking there?

We don't –- no specific plans at present. Capital-wise. What we have said to you, we said to everybody earlier was that the first order of business was finite. Dealing with the finites, which we have pretty much taken care of, and they were one large remaining corporate cover comes to kind of a natural ending point in the third quarter of the year.

The next order of business really would be addressing the Series H Preferred. So if we would try to feed onto you the things that we look at as a priority, that would be the next thing. Again, nothing specific to announce or suggest, but as we think of things and look ahead, that would be the next order of business. We have some debt that matures in the fourth quarter, it's pretty small, 250, but it's really Series H that is our current focus.

And remind me on that. Was there some restrictions on when you could pay that back, as far as the rating agencies go?

There was some, we had announced some restrictions in terms of rating agency upgrades. But as long as all the parties agreed, there was mutual agreement, we could do it whenever.

That's great. Thank you.

[OPERATOR INSTRUCTIONS] We go next to Bob Glasspiegel with Langen McAlenney.

How are you dealing with the rating agencies now, give us a little bit of what your strategy, and what the next sort of decision points on getting watches taken off or upgrades?

I think, Bob, our strategy on rating agencies is to do exactly what we have been doing. We pay attention to the business and we figure the outcomes will follow. We have had two outlooks taken off by Fitch and Moody's, and we are very gratified about that. There is, we still have negative outlooks from A.M. Best, but I would remind you that A.M. Best, is a straight A. And Standard and Poor's is A- with a negative outlook.

We are optimistic on having outlooks removed. I think as long as we continue to perform as we promised, and as they expect, I think things should play out. That has been the strategy and that will be the strategy going forward. We have just got to show and show it consistently, and show it qualitatively. Period, end of discussion. I think that's what we have said all along.

How much does [Lowe's] financial strength factor into the ratings? I see that Lowe's initiated a buy-back for the first time in several years, and I know they were held back because of wanting to make sure they were putting the CNA ratings in the best possible light was a factor. Could we read anything there as far as the confidence about we could have some good news, or totally irrelevant?

I think good news is when good news comes. We don't forecast it and we don't anticipate it. We just stick to the business, and we figure that if we do a good job and show good results on a consistent basis, that it will all work out the way it should be and the way we hope and hopefully sooner than later.

With respect to Lowe's, I would say that Lowe's has remained, has been and is as committed to CNA as it ever has been. I think the strength of having a parent the size and the quality of Lowe's was never more evident than it was during all of the changes and challenges that we faced in 2003, but at the end of the day, the look at CNA with an eye towards having a big strong parent, the look at CNA is how do we do on our own as a separate publicly-traded company.

Thanks, Steve. You're as usual a good poker player and can't read your point of view on the ratings, and where they are going.

I think we have time for one more question.

We have no further questions, sir.

Operator, let me just say thanks to everybody for joining us today. And I think we have some phone numbers for folks to dial in to later on today if there are further questions, and that being the case, we will declare the meeting adjourned, and operator, thank you for your assistance.

You're welcome, sir. Once again I call your attention to the 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 May 9. You may access the replay by dialing 888-203-1112. Or 719-457-0820 for international callers. Utilizing passcode 5504613. The call will also be archived later in the day, for replay on the Investor Relations pages of CNA's website. Thank you for joining us this morning. We appreciate your participation in today's call.