CNA Financial Corp (CNA) 2008 Q1 法說會逐字稿

Good day everyone. Welcome to CNA Financial Corporation's first quarter 2008 earnings conference call. Today's conference call is being recorded.

At this time, I would like to turn the call over to Nancy Bufalino. Please go ahead.

Thank you Steve, and good morning. Welcome to CNA's first quarter first quarter 2008 financial results conference call. With us this morning are Steve Lilienthal, Chairman and CEO, Craig Mense, CFO, and Jim Lewis, President and CEO, P&C Operations. Hopefully everyone has had an opportunity to review the press release and financial supplements released earlier this morning, and can be found on the CNA website.

I would like to advice everyone that during this call there may be forward-looking statements made in references to non-GAAP financial measures. Please review the section of the Earnings Release headed forward-looking statements. In addition the forward-looking statements speak only as of today, April 28, 2008.

CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This call is being recorded and webcast. During the next week the call may be accessed again on CNA's website at www.Cna.Com. Following the conclusion of today's remarks, by Senior Management, we will be happy to take questions.

With that, I will turn the call over to CNA's Chairman and CEO, Steve Lilienthal.

Thank you Nancy, and good morning everybody. Thank you for joining us today.

Before I get started I would like to introduce Larry Haefner, who will be proceeding Mike Fusco as our Chief Actuary. Larry joins us from The Travelers, and previously XL, where he held a number of senior actuarial positions. So welcome , Larry. I would also like to thank Mike Fusco for his contributions and very distinguished service over the last several years. Both Mike and Larry are with us on the call today. Now turning to the business of the call.

While there certainly is a significant amount of distraction provided by the financial markets, courtesy of sub-prime and the broader credit crisis, and while there certainly is a measurable amount of pressure provided by the continued softening of the insurance market, CNA continues to grind ahead, with focus and committment to strategies we have talked about for the past several years.

CNA is a highly disciplined and skilled underwriter, as measured by continued sub-100 combined ratios, solid retention levels across a high quality renewal book, better rate levels than reported by peers and industry observers, reduced new business to appropriate levels given pricing spreads between new and renewal business, exactly at the level we said we could do five years ago, positive spreads on our renewal efficiency reports, which answers the age-old question, as how do you know whether you are being selected against.

We are also skilled from an operating standpoint, as measured by sub-30 expense ratios for virtually all of the last two plus years, very much in-line and competitive with our peer group, answering the question as to whether or not our expense ratio is a disadvantage, no, it is not. Continued an aggressive cross-selling, across what we believe is one of the most highly-diversified commercial portfolios in the business. It is also less volatile, less price sensitive than a so-called new-new business.

Constant rationalization of our infrastructure as recently as the third quarter 2007 to fit market opportunity needs and our business size, without losing step which is what we said we would do. A balanced well spread distribution network-based on the leaders and consolidators, and not dependent on or vulnerable to any one sector or segment of the distribution food chain. A highly segment and recently award-winning claims operation that has been redesigned, and has implemented issues to address indemnity, litigation management, fraud, and overall expense issues, without missing a step. Jim Lewis will give you more detail on this in a moment.

CNA is financially quite strong, very liquid, and very well capitalized, as measured by the size and quality of it's investment portfolio, a very low leverage ratio, including paying down $150 million of debt in January, continued positive cash flows, stock repurchases of $70 million in the quarter, continued payment of a two-step dividend plan put in place in 2007, a 2007 upgrade from Fitch Ratings to A, in the face of falling financial insurance markets, to go along with our A rating from A.M. Best, and a stable outlook from all core rating agencies. Our ability to withstand the incredible volatility in the current financial markets, without any impact on our day-to-day operations.

I point this out in the context of once having refocused the business several years ago, we laid a new foundation, based on a balance sheet that addressed reserve and bad debt issues, cut reinsurance receivables in half, eliminated all finite reinsurance, refinanced the deferred with a less expensive debt and equity combination, steadily increased book value, introduced a two-step dividend, purchase back some stock, paid down the debt, and delivered record earnings back to back for 2006 and 2007.

So yes, the softening market concerns us. But Jim Lewis and I have dealt with this or even more draconian conditions during 25 years plus of our 36 year careers respective careers, and yes, the subprime and credit spreads and investment income is of concern to us, but we are large, well capitalized liquid and well-positioned to deal with these issues, which we ultimately believe will resolve themselves.

Jim Lewis and Craig Mense will now provide more information on these issues, but let me conclude my remarks by reminding you we laid out underwriting, operational, and financial plans several years ago, and we did exactly what we said we would do, on time, on budget, no excuses, and we think the results speak very strongly for themselves.

Let me turn it over to

Thanks, Steve. Good morning everyone. I am pleased to share our first quarter results.

Our net operating income was $221 million, reflecting solid underlying operating performance from our businesses in an increasingly competitive environment, but dampened by a lower level of net investment income, primarily related to the decline of limited partnership returns. Operating return on equity was 8.8% below our targeted range. Book value per share declined from year-end to $34.79, reflecting an adverse change in unrealized investment gains and losses, which was driven by significant credit spread widening, related to the difficult credit conditions during the quarter.

Our balance sheet remains strong. We have a relatively low level of financial leverage, and maintain a high degree of liquidity in our investment portfolio. Our financial flexibility continues to improve. We chose to retire the $150 million of debt that matured in January.

We are pleased to continue to return capital to our shareholders, via our quarterly dividend of $0.15 per share. CNA repurchased 2.6 million shares of it's Common stock in the first quarter, at an average price of $26.53, for a total cost of $70 million.

Now I would like to give you a bit more detail on the financials. For the first quarter, net operating income from continuing operations was $221 million, or $0.82 per diluted share, compared with 307 million, or $1.13 per diluted share in the prior year period. Net income for the quarter which includes the impact of realized investment gains and losses as well as discontinued operations was $187 million, or $0.69 per diluted share, compared with 296 million, or $1.09 per diluted share last year.

Property and Casualty Operations produced first quarter net operating income of $219 million, compared to $296 million in the prior year period. The decrease was primarily driven by lower net investment income, higher current accident year, and catastrophe losses. Pre-tax catastrophe losses were $53 million this quarter, which compares to $32 million in the prior year period. We believe the action we have taken to book higher action year loss ratios in response to rate declines is prudent.

With respect to non-core segments, Life and group produced a First Quarter net operating loss of $3 million, compared to income of $2 million in the prior year period. The corporate segment had first quarter net operating income of $5 million, compared to $9 million in the prior year period. As mentioned in previous calls, results for the non-core segments may vary from quarter to quarter.

The driver of our first quarter results at our non-core segment was reduced net investment income. The underlying operations continued their orderly run-off. Pre-tax net investment income in the first quarter was $434 million, compared to $608 million in the prior year period. The primary drivers of the decline were limited partnership results and the trading portfolio.

Our fixed income portfolio continues to deliver steady results. Short-term investments and fixed income produced $550 million of income, roughly comparable to the prior year period income of $553 million, and down from the $564 million in last year's fourth quarter. The declines in the fourth quarter reflects the impact of lower interest rates on our short-term holdings.

The change in trading portfolio income on a quarter-over-quarter basis was an $80 million decline, but you will recall that the trading portfolio results are largely passed on to contract holders. Limited partnership losses of $39 million this quarter, a negative 1.8% return compared to LP income of $52 million, a positive 2.8% return in the first quarter of '07, and to $41 million, a positive 2% return in the fourth quarter of '07. Last year's Limited Partnership returns were $183 million, or 9%.

It is worth noting that this is a first negative quarterly return we have experienced in over five years. Our portfolio of Limited Partnership investments remains a very attractive source of diversification, and long term returns for the Company. The volatility is expected, and we are confident that they will continue to perform well over the long term.

After-tax net realized investment losses were $33 million this quarter, compared to losses of of $13 million in the prior year period. Impairments were $56 million this quarter. Further writedowns of subprime and Alt-A investments accounted for 29 million of that total. Our invested assets were $41.2 billion as measured by book value, roughly equivalent to year-end.

Operating cash flow remains positive, and we chose to use our improved liquidity and capital position to retire 150 million of debt maturing in January, and repurchase $70 million of our Common Stock this quarter. We have again provided expanded disclosure in our financial supplement, as you will see on pages 6 through 9, I trust this information along with the disclosures in our 10-Q to be filed later today will provide you with further insight, as well as improved understanding of why we continue to be so comfortable with our portfolio.

During the quarter, you will note that we increased our position in subprime and Alt-A exposures by over $550 million, as we continue to find market opportunities to acquire structurally-advanced securities, with short weighted average lives at very attractive prices. Our investment portfolio ended the quarter with a net pre-tax unrealized loss of $1.3 billion, compared to an unrealized gain of $74 million at year-end. The change in unrealized was primarily the result of significant credit spread widening that took place during the quarter, that affected both taxable and tax-exempt securities, and was not related to any specific asset class or sector.

We do not consider these losses to be reflective of an overall deterioration of the credit worthiness, or a significant increase in the credit risk in the portfolio. We continue to sustain our emphasis on expense management, which remains a key component of our cycle management strategy. The PC Ops expense ratio was 28.4% for the first quarter, in-line with the prior year period, and an improvement from the fourth quarter Of '07, but remember there is some seasonality in our spending levels. We also recognized that the competitive market will continue to pressure our ratios, but we are committed to taking timely steps to sustain our much improved competitive position.

With that, I will turn it over to Jim.

Thanks Craig, and good morning everyone. Property & Casualty Operations turned in a solid first quarter, continuing our run of sub-100 combined ratios. Specialty lines performed well, and we continue to strengthen the operating fundamentals of standard lines. As for the market, it is tough out there. Retention of good accounts is a battle, New business is a war, and regional competitors are especially aggressive. Against this back drop, our strategies continue to serve us well.

We continue to adjust our mix of business to optimize our portfolio, refine our predictive modeling tools, segment and sub-segment our middle market book, maximize our market and outreach through cross-sell, and invest in our people and infrastructure, to sharpen our competitive edge. These strategies combined with a well-diversified book of business, and a strong market franchise, position us well to stay on course.

Now let's turn to a few of our key operating metrics starting with premiums. Property and Casualty Operations net written premiums of $1.6 billion were down 6% for the quarter. Premiums decreased 11% in standard lines, and 2% in specialty lines.

Overall our production levels reflect a disciplined approach to the market. We won't shake business when we can't make money on it, but we aren't shutting our door either. Selective underwriting is our mantra.

In standard lines we are focused on our underwriting sweet spot, to strengthen our position in a competitive small business and small/middle segment. Overall we like middle market, and we know what it takes to win. In construction, for instance, our long established programs, many of which are endorsed by trade associations have made us a strong competitor.

Now, we are building the same type of franchise in targeted non-construction segments. The objective is not rapid growth overnight, not in the current market, instead we are building a portfolio of good risk and profitable classes. When the market turns back up, we will be well-positioned to grow our non-construction book.

In Specialty meanwhile, we continue to buildout our strong franchise, to find profitable new niches and shift our book towards more profitable small and mid-sized risk. In our Health Pro business, for instance, we are pursuing growth opportunities in long term care, specialty hospitals, and advanced medical technology firms. In other specialty units we are increasing our penetration of smaller privately-held companies, with our package management liability products, and we continue to strengthen our market leading programs for lawyers, accountants, and other professionals.

Now let's look at rate and retention. For our book of business as a whole, average rates decreased by approximately 4 points in the first quarter. Standard lines was up a little more and Specialty lines a little less. For some time we seen our rates incrementally decline at a rate of about 1 point per quarter.

In the first quarter, however, this gradual slide actually came back a point from fourth quarter of '07. Not that one quarter makes a trend, but it does reflect our discipline in the market, that continues to give up more rate than we do. But we are seeing more rate from our competitors, and we are reflecting discipline. As for retention, our book of business continued to holdup very well. Property & Casualty Operations came in at just over 81% for the quarter, up 1 point from a year ago.

Standard line retention was 79%, Specialty lines was 84%, which is a very strong retention in our most profitable business. The 80-plus percent retention we have been reporting since 2006, reflects a normal level of turnover in a quality book of business.

With respect to quality of our renewals, we continue to track the spread between the incurred loss ratios of renewed business versus non-renewed business. We call this measure renewal efficiency, and it tells us whether we are retaining the right business in the right way. Our underwriters are getting in front of renewals early, and locking them in before a bidding war erupts. Our risk controlling claims services give our underwriters something to sell beyond price, and when we give up rate, we are giving it up on better accounts, that share our focus on managing risk.

Now let's turn to new business and cross-selling. We wrote approximately $274 million of new business in the first quarter, which represents approximately 17% of total production. This is exactly where we said we would be, and continues to be right where we should be under current market conditions. Most of this new business is coming from our targeted segments.

With respect to risk assessment, pricing, and terms and conditions, CNA is a bit more conservative than the market, and yes, it affects our ability to write new business. However, it enables us to maintain and continue to build a quality book of business, while providing a consistent market presence over time. As we have discussed with you before, a cornerstone of our new business strategy is cross-sell.

Cross-sell allows us to further leverage our world diversified portfolio. For instance, when we sell our commercial package policy to a manufacturer, we also are looking at the opportunity to sell the international D&O and practices liability coverage. Cross-sell like this generated 81 million, or 30% of total new business in the first quarter.

Now let's turn to loss ratio. Our first quarter net calendar loss ratio was 69, versus 67 in the prior year period. Standard lines loss ratio was 74%, up 5 points, with Specialty up 1% to 65%. First quarter loss ratio was pushed up by two manufacturers. First was catastrophe loss, which were entirely in the standard lines, and second was the continued pressure on Re. The cat debt is 3.2 points to the P&C Ops loss ratio, and 6.8 points of the standard lines loss ratio.

Simply put, these storms were not abnormal. Rather there were a couple of severe tornadoes that happened to occur in this quarter. These factors more than offset approximately 1 point of favorable development in P&C in the first quarter of '08. There is more information on the impact of casualty development on page 10 of the financial supplement.

On a net accident year basis, Property & Casualty loss ratios approximated 70%, an increase of 4 points, reflecting the aforementioned factors. The pressure on our loss ratio underscores the importance of our strategies to protect it.

I have already mentioned segmentation, predictive modeling, and portfolio optimization. To these I would like to add two other items. First, we continue to invest in our risk control services, which are widely recognized for their excellence. Risk control is a key to optimal risk assessment and selection, particularly in a soft market. Second, our segmented claims operation directs routine claims to our low touch, highly automated service center, while the most complex claims go to our most experienced adjusters. Not only is our approach cost effective, I am pleased to add that two weeks ago, CNA was recognized with an Industry Award for Claims Management Excellence.

Now let's turn to combined ratios. In the first quarter we came in at 98%, our ninth consecutive sub-100 quarter. The 3 point increase in the prior period is almost entirely related to the loss ratio as previously discussed. The first quarter combined ratio remained in the low-90s, while standard lines came in at 104%. Ratcheting down the combined and standard lines is a priority we are addressing on many fronts.

In small business, for instance we are in the midst of a major system upgrade to automate the renewal process. We are also making it much easier for our agents to do business with us. Earlier this month our agency interface capability was recognized for excellence, with an award from the user group of a leading vendor of agency management systems. In middle market we are segmenting our $1.8 billion book, and rolling out focused classes and industry programs, that give our underwriters the tools and support they need to penetrate profitable classes.

In addition, we continue to refine our predictive modeling and our other underwriting systems. These new tools not only improve risk assessment, they also free up our underwriters to spend more time in agents offices.

In claims we are addressing the loss out of the combined ratio, by enhanced litigation management procedures, medical case management, and fraud control. On the expense side, we are rationalizing our vendor relationships and streamlining workflows. In short we are putting on a full court press with one simple objective, improving our standard lines combined ratio.

Turning to our expense ratio for a moment, as you heard from Craig, our first quarter expense ratio was flat to the prior year period at approximately 28%. With our premiums under pressure in the market, our expense discipline becomes an even more important part of our strategy for managing through the cycle. In summary, Property & Casualty Operations had a solid quarter to start the year. The market continues to test our strategies, but we are responding well, with disciplined underwriting, strong retention, appropriate levels of new business, and proactive expense management.

There is nothing here new that I haven't told you before. It is all about patient, intelligent participation in the market, optimizing our business mix, and being willing to strengthen the top line for the sake of the bottom. In short, we are executing our strategies, and we continue to feel good about our ability to maneuver through the softening market.

Operator, we are now available for our Q&A.

Thank you. (OPERATOR INSTRUCTIONS) We will go to Jay Cohen with Merrill Lynch.

Yes, good morning. I have got a couple of questions. I guess first on the balance sheet side, as I recall you began, you were actually buying some subprime and I think even Alt-A-related securities in the first quarter, and I was wondering how those purchases have worked out, because clearly you are kind of contrarian at that point, I want to see if those have worked out okay? From a mark-to-market standpoint, were there significant marks in the more recent purchases?

No. No, Jay.

Okay so the marks we saw were largely the stuff that you had awhile ago?

Now you are talking about the mark across the entire portfolio?

More specifically in the asset backed portfolio.

No. They are pretty, I mean, there were some further declines in the subprime and Alt-A marks, but I would say that the securities we bought and talked to you about in the last quarter have turned out well. We are confident, and we are confident in the purchases we made this quarter.

And with these purchases this quarter can you give us, I am not sure how to ask the question, but I want to get a sense of the spread differential, what kind of extra yield are you getting? I know it is going to vary by security. I am not sure you could answer it, but could you at least speak qualitatively to it some

Well, I think you can see it if you look at the supplemental disclosures as well. What we told you before was we were going to buy structurally advantaged securities, high quality at attractive yields, with short weighted average lives, right? And so I say if you look at the exhibit in the supplement you will see the amount of subprime that is gone, from 63 to 77%, and the weighted average lives which last year, last quarter I told you subprime was 1.7 years is now 1.2 years. The weighted average life of all of the subprime that is under one year, last quarter was 55%, and is now 59%, and I can tell you the yields on these investments are over 10%.

10% yields, okay.

So 10% yield, weighted average, very short weighted average lives, and moving up the quality curve.

Okay. Next question, I don't know if you can answer this one either, but second quarter it seems the credit markets have, some spreads have come back in again. Do you have any sense in terms of your portfolio what the, what would be happening from a mark standpoint kind of year to, quarter to date through the second quarter through this week?

I think what you would see is our portfolio reaction to market is going to be reflective of the changes in the market, but with the credit spreads tightening, the changes won't be that significant.

Okay. Next question, what is the word from Lowes, I mean clearly, they have got to be disappointed in how the stock has performed, and the value being associated with CNA by the market. What are they telling you guys?

Jay, this is Steve. I think that they are telling us to stick to the fundamentals of the business, which has gone quite well for the past several years. They have given us guidance not to let the stock market be our report card, but let the operating results speak to that, and they have also told us that they believe that the underlying quality of the Company would emerge again, as it has just recently as all of these issues settle down as we believe they will.

And the last question maybe for Jim Lewis, do you guys think you can keep the overall combined below 100 over the next couple of years, or just given the direction of the market, is it sort of a foregone conclusion that it goes above 100?

Yes, there is no question that we are feeling pressure when you look at where rates are going, and as we look at the marketplace that we are in right now, we think we are actually doing better than the overall market, if you believe external surveys from rates, but it is having pressure on the overall loss ratio.

That is why within my remarks, what I really indicated is there is not going to be one silver bullet, that is really going to help us to protect the overall loss ratio. It is a multitude of things. We talked about portfolio optimization, and in our specialty portfolio, we have been optimizing every part of that portfolio, with all of the differing classes and sub-segments of business that we have, either within Health Pro, within our pro-commercial, or open brokerage part of our book, we shifted that book from large accounts to the small/mid-size account. We have actually increased our overall ratings of Specialty in our overall book of business.

Last year Specialty on a net written premium basis through the first quarter represented 50% of the book, and it is now up to 52, and I think you will continue to see Specialty be a place that we will continue to grow, especially with the combined ratios that we have in that portfolio, and the fact that there are still opportunities to cross-sell into that book.

In our middle market part of the portfolio, we have an optimizing the portfolio from an account size perspective, also from an industry perspective. We have launched several classes of business focused classes in the fourth quarter, and the first quarter this year, we will continue to launch those throughout this year.

We will be launching three to five classes of business that, these are classes that as we have looked at our historical loss ratio over a 10-year period, they actually have the best loss ratios of our overall book of business. We are not only just launching those, we are also used our predictive modeling tools to help as we write new business in those targeted classes, as the predictive modeling goes, our underwriters get a lot more direction, we get a lot more consistency on how we are priced in the new business, and target which ones to really go after are the better performing accounts, but the walk-away price will be and we are using that same tools as we inspect our renewables.

Small business has been a key investment for us. That is a place where we have made a huge investment in technology product, and we have made an investment in technology. That is really paying off for us. We are starting to see traction in our small business part of the portfolio. We have talked about this in the past as far as our new business writings there.

We are also emphasizing the lower end of the middle market within small business, and utilizing our technology and our current product, to go after that end of the lower end of the middle market, which is the most of profitable piece of the overall portfolio, we indicated that we were recently recognized by an agency interface management group for the technology that we have, and the ease of business that we are creating on the small size. We have got our risk control operation that we already consider is world class, and I think that is helping us as we look at how we select risk, how we service the risk so that we are really just getting away from a pricing side of the equation.

From a claims standpoint, we have our overall litigation management procedures, our medical case management, our overall product control. We have a much more efficient operation. We are actually sending all of our low touch camp claims into an automated service center, so we have segmented so that that service center houses the low touch, and then for the more complex claims, we are assigning those to our adjusters.

From an expense standpoint, we are looking at the quality of business we can really get in our overall operation, and so we are taking a look at MDM processes in every part of our operation, in claims and risk control, even in our middle market underwriting side of our operation, and just to give you an example of something that we think is going to pay dividends on the efficiency side for small business, is we have just automated our overall renewal process. We had a process where every renewal is being touched by someone in the overall organization.

Now we actually have that whole MDM process automated, where about 50% of our renewals are automatically going through a rules engine, and not being touched, over time we think we can get that to 70% of those items. So as I indicated, it is not one thing. It is really focused on the fundamentals and making sure that we are doing the write thing to protect the loss ratio, and I think you can see, Jay, we are actually doing it when you look at what is happening to the top line. Our top line is down 11%, and the top line is down 11% in standard line, and is primarily in middle market, which is the place where we are seeing the most pricing pressure, and we are not going to change business.

In large property, our M&A, to see how capacity has been utilized on the coast, and people have forgotten that there was a hurricane, and then stands risk management casualty. The overall pricing terms there have gotten to the point that it is really becoming very due to us, so we are not playing, so we are doing the things to protect the bottom line, and walk away when we can't really get rates and terms, that we think are going to be attractive in the market for us.

Great. Thanks, Jim.

We will go next to Charles Gates with Credit Suisse.

Hi. Good morning. My first question, could you zero down on some of the key components of Limited Partnerships which contributed to the swing in results there?

Charlie, this is Craig Mense again. I mean, that is just really a reflection of what was going on in the market last quarter, and there wasn't a whole lot that went right in the market last quarter, I think if you recall so what is important to know is that the LPs are well-diversified across strategies. We have over 90 different Limited Partnerships that we invest in. Yes, the results produced a negative 1.8% return last quarter, but last year as I said the returns were 9%, and if you look back in time on a rolling 10-year basis, the returns were over 13%, and on a rolling 5-year basis, they were 16 %.

Are the preponderance of these Limited Partnerships Real Estate based?

No. There is very little Real Estate, little Private Equity. Probably the best way to think about it is think about that negative 1.8% return against the S&P was down over 6%.

Is there any place where analysts or observers can get good insight into the structure of those Limited Partnerships?

I think just whatever you can see from the stat lines, but that is really, and I have talked about it before at Investment Presentations and Conferences, but we don't disclose a lot of detail about those. Except what I have said to you before about the degree of diversification and the long term performance.

And I would just reiterate we are very confident in the long term performance there.

My second question, to what extent were insurance underwriting results say in E&O and D&O adversely impacted by the subprime mess?

Well, this is Jon Kantor. If you are asking about claims activity?

Yes, sir that is what I was trying to do.

There is no material adverse development since the last quarter, when I reported in pretty much detail on the situation with subprime, just to recap very high level, I mean our financial institutions book was $72 million of premium in '07, which was only 2% of our overall Specialty book, we are not a very big player in financial institutions.

One of you said that I think the worst part of the market , maybe I got this wrong, was what you called the middle market. How do you define the middle

Yes. This is Jim Lewis. On the middle market, if you just kind of, and this is just kind of an arbitrary definition, if you look at small business, small businesses, the low touch type of business, where you can use automation as a means to how much you can actually set up rule engines that you would have the low touch claims and low touch type of business going through those, if you look at it from a volume standpoint, our premium size is primarily accounts that are 50,000 and under, middle market then goes really from the 50,000 up to roughly $1 million from an account size perspective.

So it is $50,000 roughly to $1 million?

Right. And as I look at middle markets, and we have sub-segmented the middle market, the most profitable part of our middle market book are the accounts that are 250,000 and less, and that is why we have got an emphasis with using our technology and our products from small business, to even write more of our share of that business. Where we are seeing most pricing pressure is really accounts that are greater than 500,000.

What roughly, and I realize this is a tough question, roughly what portion of your, this is my last question, roughly what portion of of your standard markets business is this roughly 500,000 to a $1 million in annual premium?

I don't have that number exactly right now for you, Charlie , but I can get that for

Thank you.

And we will go next to Bob Glasspiegel with Langen McAlenney.

Good morning, they got it all right. Good job. The answer to Jay's question, on how upset Lowes is given how the stock is doing, it seems to me, this is an observation, I mean the most recent weakness is more related to the investment portfolio and the partnership results. I am correct that they are sort of running that, correct? Lowes manages the portfolio?

Yes, they do, and that is obviously with the majority of the issues that we are talking about this quarter and last, and the underlying, the fundamental operations of the Property & Casualty business has performed quite well through, not only this but for the past several. But I wouldn't describe Lowes as position as being like extraordinarily worried. They are an asset investment manager, and they want to do the right thing in terms of maximizing their return.

Right and my perception from the outside is that Lowes has done an outstanding job creating long term shareholder value, from an investment point of view, recognizing their contrarians and often take outside the box positions that are controversial. If my perception is wrong, correct me, and maybe at the next Investor Day, you might want to outline how your overall portfolio over time has created excess value to shareholders?

I think, Bob that was fairly put, and we will take you up on that point for our next Investor Day.

Okay. How much wiggle room do you have with respect to capital on A) buyback, B) taking more risky assets on the portfolio, before rating agencies might give you some pullback?

I don't think, I can't give you, this is Craig, Bob. I can't give you a number, but I would just tell you that certainly, our capital position has improved significantly over some period of time, and you can see that in the decisions we made about retiring the debt that came due in January, and so that is indicative of improved liquidity, dividend capacity at the Insurance Company level , and improved capital strength relative to rating agencies are probably looking at ourselves, so we have significantly more room and flexibility than I think we are given credit

Let me rephrase the question. How much excess capital do you think you have right now? To maintain your ratings?

We are not prepared to disclose that, or talk about that, Bob.

Hundreds of millions of dollars? Is it bigger than a bread box or smaller?

Let me just, rather than saying that, if you look at the dividend capacity in the Casualty Company, hundreds of millions of dollars, and if you look at the flexibility we have on the debt side, the low level leverage we have which would be indicative of our ability to raise leverage if we needed to and at the appropriate time, so I think we have lots of, let me just say that we have much improved financial flexibility.

Where could you take your debt-to-capital just to keep your ratings?

We haven't really talked with the rating agencies about it. We have said before that we are comfortable at 20%.

Okay, well that at least gives me what number I can calculate, I appreciate it. I am a numbers guy, sorry. Thank you.

You are welcome.

We will go next to Dan Johnson, Citadel Investment Group.

Thank you very much. Let's see, can I follow-up on Charlie's question on the LPs? If it is not realistic and it is not private equity, those are typically what we see when people talk about their Limited Partnerships, as opposed to say alternative, investments which typically would qualify hedge funds and other such similar vehicles, so can you at least by some sort of categorization tell us a little bit more about what is in the LPs?

Well, as I said, it is a broad variety of strategies, and I didn't mean to say that there was no real estate and no private equity. It is just a smaller portion, but we do some fixed income arbitrage, some risk arbitrage, there are some global macro strategies followed, there are some equity relative value strategies, there are some distressed strategies, and there are also some long cord equity plays.

I have got it. This is a definitional issue then, whereas some people break it out into those two categories, alternatives and LPs, you guys have maybe one bucket, and they all go in there, and it might be more alternatives and less LPs than the name would imply, and therefore the equity sensitivity to it?

I think that is fair.

Okay, thanks very much on that. Then if we go to the Alt-A and subprime pieces, kind of of hard to exactly tie this out, but can you give us a rough sense as to what your view via the marks you took through the AOCI, what sort of reduction percentage-wise we thought was appropriate for subprime and specifically Alt-A in the first quarter? Thank you.

I am sorry, you are asking what we thought was appropriate, or how much we took?

Well I was actually assuming those were probably the same , so actually, what you

Well what we took was about another, remember that the prices we are using are market prices here. So and we are using independent, or primary valuation and data source for pricing is independent pricing services, as well as broker dealers, so those are market prices, and I think that overall, the subprime and Alt-A, the decline in unrealized is about a 4? No, it is about a 100 million on the Subprime, so the, what I would tell you we think the market prices are not reflective of the underlying value of those investments.

That 100 million is your cumulative mark, not the one that you took in the first quarter?

Right. That is the cumulative.

And that's kind of where I was going, just since things had moved around quite a bit in the first quarter. That is where I was curious as to what sort of marks you took there.

Did I answer your question or --

Well I think you helped, if I did the math right I have got your cumulative marks, it would look like the subprime and the Alt-A took very low sequential marks in the first quarter, but I can't tell you that I have that number perfectly calculated, so--

You could look at those sequential marks, and you could also, ultimately remember that we did impair, we took about 29 million after-tax of impairments against those securities in the first quarter. So it was a relatively small change.

Okay. And then finally maybe more on an operational front, can we talk about the warranty business that was highlighted in the press release, just maybe a little more color about what sort of products we are generating, what I thought was a reserve redundancy, and maybe from what years that came from?

On our warranty business itself, this is an automobile warranty business that we have in place. It is located out of Arizona, and they provide vehicle warranties. They also provide warranties from a motorcycle perspective, and that is really the limit of their operation is providing the warranty services on vehicles and also on the motorcycles, and then also handling the claims with respect to those particular two items.

Okay, thank you very much.

We will go next to Bill [Van Arnem] with Principal Global Investors.

Good morning. I guess a couple of my questions have been answered, but I guess just for further clarification on the investment partnerships, first are the subprime asset backed securities, are they part of the investment partnerships, or are they separate?

The majority, the vast majority are separate, and those are all detailed in the supplement. We do have another about a less, about $20 million of subprime exposure in the Limited Partnerships.

And since Lowes is involved in these partnerships, are they also involved in the subprime investments?

I think that the answer to your question is Lowes is our investment manager, so we do, I mean Lowes does manage all of CNA's investment.

Okay, got it. And I guess so far in the second quarter, on the marks, or on the fair market value that you are taking, I assume the fair market value estimates are actually doing the opposite of what happened in the first quarter, is that correct?

Well there has been a rally on the credit side of the market, but remember risk free rates have also increased some, so as I said, our mark is going to be relatively reflective of what is happening in the market, so in the intermediate term, funds are going to see some increase in the risk free rate, and you are going to see credit spreads coming in quite a bit, offsetting a lot of that, particularly at the longer end.

Okay and I guess final question, just how large an investment are you willing to make in this area?

We are not prepared to talk about that. I would just reiterate we are confident in the ones we have made, and we are confident going forward, extremely confident.

Thank you.

This is Jim Lewis, Charlie. I have an answer to your question on how much of our middle market book is greater than 500,000 in premium. Our overall middle market book is 1.8 billion, and 20% of that is greater than 500,000.

And we have a follow-up question, Jay Cohen, Merrill Lynch.

Yes, back to the limited partnerships, I am assuming that the losses that are showing up this quarter in the 35 million roughly, those were essentially marks. In other words if those same investments were held in your regular portfolio, they would not be going through, of course much of it, or some of it wouldn't be going through the P&L. Is that fair?

That is correct. All of the changes in market value in Limited Partnerships go through the P&L, and so we account for those on equity methods.

Can you say how much of it related to marks versus real losses?

No, I don't think, I mean those are changes in equity value, so I don't know how to really differentiate that in terms of how we account for it.

Fair enough. Okay, I get it. Thanks.

We will go to Charles Gates, Credit Suisse.

Hi, thank you for the follow-up. I guess two questions. If one was to zero in roughly on that $450 million of sales in that specific market, what kind of pricing competition have you seen there?

Well I think, let's just talk about middle market in general. When we look at middle market pricing, our rates in the quarter were down 6 points, slightly up from where it was in the fourth quarter by 0.5 a point, but what we are seeing is increased pricing competition across the portfolio, but more on the larger side, and it is really coming from everywhere. The regional carriers are getting significantly much more aggressive. They used to play in the lower end of the middle market, and now they are beginning to play in the upper end of the middle market. On an individual risk basis, if someone really wants to go after an individual account, even though rates are going down 6 points, in reality the rates that that accounts for could be anywhere from 10, 15, 20 points for an individual risk.

But in the aggregate, we have been able to manage the overall portfolio where our rates have only gone down 6 points, but we know that if an account goes to the market, that that particular account could be priced a lot more aggressive, which is why our underwriters have done a very good job of getting out front on pricing and really locking in overall rate levels themselves, but this is a point right now in the middle market that we pay very close attention to the pricing.

We give a lot of direction based on account size, by the industry segment itself to our underwriters from a new and a renewal perspective, and that is why when you look at within our standard lines, our middle market volume is down, and down the prior year, just as a result of what we are seeing with rates, and the fact that we are walking away from business because of the rate levels.

Maybe I got you wrong, but you say pricing was up 0.5 a point versus the fourth quarter, I didn't understand that.

This was for middle market overall. If you look at middle market-rate levels in middle market were down 6 points for the quarter, but it was actually up 0.5 a point from fourth quarter of '07.

The other question that I had was the fact that basically to what extent is it the regional companies, or the regional companies are smaller than that aren't they, as far as what they are writing?

Yes, they're smaller but I think normally what they would go after is the lower end accounts, anywhere from 50,000 to $150,000, but now, in order to grow the overall top line with the economy slowing, and there is not a lot of new-new business, what they are doing is ratcheting up their overall appetite, so now what they are doing is playing totally outside of their normal appetite level, and so it is not surprising to really see them now really going after it very aggressively, accounts that are 500,000 or more.

And the question you have to ask is, do they have all of the capabilities from a risk control and claims standpoint, to really handle all of that business, but they are much more aggressive on that upper end now, just because of there is not a lot of new-new business that is moving, and there is not a lot of new business that's being developed to where from an investment standpoint, so to grow the top line, they are now expanding beyond their normal appetite.

Charlie, this is Steve Lilienthal. Just to add to that, in addition to Jim's point about middle market or the regional carriers going up market, and playing out of their box and getting into some foreign turf for themselves, the large cap market, whether it is a standard casualty book or specialty lines, is actually the most volatile and most white hot right now, so as we are checking around for worthy competitors, you might want to take a look at that, when you get some of these guys on the phone, find out what that market is looking like.

We retreated from that market very quietly three or four years ago, so we are not experiencing the same volatility that some of our brethren out there are experiencing, competing with the Fortune 250 or 500 accounts. That is pretty much across-the-board, where comp has heated up big-time based on the perceived advantages of benefit improvements or containment, which we think is more notional than real, the excess comp markets come white hot. So that is the stuff that is out there, much of it is not within CNA's appetite, and we kind of moved away from that a long time a go.

But it's the very large risk as you said the Fortune 250 that is probably the most competitive marketplace?

250 to 500, yes.

The final question, what do you see is the impact on the industry in total of the acquisition of SafeCo by Liberty Mutual?

I think that has got to play out, Charlie. I think we were very interested to see that acquisition take place. We think we understood it. We thought it was very expensive, so I guess we will just have to see how it plays out. I think there is a lot of executional risk that is embedded there.

Not a lot of these good sized mergers have been successful over the last couple of years, so we are hoping that there is opportunity for CNA, as these two companies go together and create some disruption with the distributors. So that is quite frankly what we are interested in, so we will see.

Thank you.

This will conclude our question and answer session. I would now like to turn the conference over to Nancy Bufalino for any additional or closing comments.

Thank you Steve, and thank you all for joining us today. A taped replay of today's remarks will be available for one week immediately following this call until May 5th. Please see the Earnings Release for more details. We appreciate your participation in today's call. Thank you again.

This does conclude today's conference. Thank you for your participation. You may now disconnect.