CNA Financial Corp (CNA) 2008 Q2 法說會逐字稿

Good day and welcome to the CNA Financial Corporation's second quarter 2008 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Nancy Buffalino. Please go ahead, ma'am.

Thank you and good morning. Welcome to CNA's second quarter 2008 conference call. With this morning to discuss our financial results is Steve Lilienthal, Chairman and CEO; Craig Mense, CFO; and Jim Lewis, President and CEO of P&C Operations. Hopefully everyone has had an opportunity to review the press release and financial supplements which we released earlier this morning and can be found on the CNA website at www.CNA.com. Before we get started I would like to advise everyone that during today's call there may be forward-looking statements made and references to non-GAAP financial measures. Please see the sections of the earnings release available on CNA's website for further clarification of both. In addition the forward-looking statements speak only as of today, July 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. Following the conclusion of today's prepared remarks by CNA's senior management we will be available to take questions from the investment community. With that I'll turn the call over to CNA's Chairman and CEO, Steve Lilienthal.

Thank you, Nancy, and good morning everybody. Thanks for joining us today. In the second quarter CNA continued to move forward diligently and intelligently, and to say it's a very difficult insurance financial markets, not to mention the issues presented by a sluggish economy. Consistent with what we said we would do when the insurance market began to soften our actions have matched our your words. We remain committed to underwriting discipline. Retention of existing profitable business is a priority, that provides better margin than reckless pursuit of new business. Accordingly, our retentions have persisted in the low 80s since 2006 and new business as a percentage of total production has come down incrementally and and is now about 17%, exactly where we said it would be.

We continue to adjust and optimize our portfolio as market conditions evolve, rather than attempt to simply maintain market share. This approach is evidenced in our investments in the so-called standard specialty hybrid products, such as property and the marine, boiler machinery, excess and surplus lines and umbrella. This is in addition to middle market segmentation initiatives and standards and specialty cross sell initiatives which we have mentioned in previous calls as well as strategic expansion of our specialty products. We have managed, enhanced, and built upon our distribution outreach, market access primarily through preferred distributors, agents and brokers who support our strategies and with whom we've had a winning track record. We have a very balanced multi channel distribution network which protects us from becoming overly dependent on any single channel and allows us to optimize our segmentation and penetration strategies as well as understand the total cost to serve our distribution network.

We are committed to adjusting and managing our expense structure to match out business size. And we have shown an ability and willingness to do so consistently and aggressively over the last several years. Overall our strategy has continued to serve us well as measured by ten consecutive sub100 combined ratios and five out of six of the last quarters under sub -- under 30 for an expense ratio. While we don't underestimate the challenges but with strong ratings, a solid balance sheet, increased financial flexibility and underwriting and expense discipline, we feel CNA is well positioned to weather the storms in the insurance and financial markets not to mention those of a meteorological variety.

Before turning it over to Craig and Jim I would like to touch on a few topics. First, our financial results. All in all, I feel our second quarter was a very solid quarter, attributable to our consistent and rational underwriting approach to a very competitive environment. It is reflective of our commitment to and disciplined execution of previously stated underwriting strategies. Craig will provide more detail on this in a moment.

With respect to the underlying performance of the business, the core property and casualty operations continues to perform well. Second quarter combined and expense ratios were 97.7 and 28.2 respectively. As mentioned, this makes 10 consecutive quarters of sub 100 combined ratios. Production metrics were consistent with selective controlled underwriting and as mentioned we continue to shift our business mix to more profitable segments and product lines. Adverse selection, while always a concern, is not an issue as measured by positive spreads and a renewal efficiency and business being written in target classes. This has also been discussed in previous calls. Overall, in a market that is testing our strategies and discipline, CNA is sticking to and delivering on the fundamentals and Jim will give you a little bit more detail on that in a moment.

In other topics of note, back in May I announced my decision to retire in June of '09, with Tom Motamed, the Chubb veteran stepping in as my successor. He is an extraordinary individual and well-known throughout the industry. We have thrilled to have Tom come on board to take the helm. Contractual requirements with Chubb prevents him from joining CNA sooner than June of next year. This is an orderly succession plan which was well received, internally and externally by rating agencies, our Board, agents and employees. There is no change in CNA's execution or operational focus, it is a business as usual approach and we have significant number of challenges at hand that are much more of an immediate nature.

Finally, a word about the commercial PC outlook. Rates continue to drop slowly but persistently. Certain parts of the market, large cap property and casualty for instance have softened to the point that many are priced well below our walk away price and so we do. Terms and conditions are likewise eroding including provisions related to cat risk. We expect these conditions to continue through '08 and into '09. As I have said before, we will play the market as it lies but we will not recklessness follow it down. In summary, with challenges and threats abounding we are executing well on all fronts, good work on the fundamentals in the second quarter and well positioned to sustain our profitable course. Craig?

Thanks, Steve. Good morning, everyone. I'm pleased to share our second quarter results. Net operating income of $250 million reflects solid underlying operating performance in a challenging environment. Second quarter operating ROE was 9.8%, an improvement from the first quarter but still slightly below our target range at this stage of the cycle. Book value per share was $34.74 at the end of the second quarter, relatively unchanged from the first quarter.

Our first quarter dividend payment and an adverse change in unrealized investment gains and losses, which was mainly driven by credit market conditions slightly exceeded net income. Our core property casualty operations delivered solid performance as measured by combined and expense ratios. Our balance sheet is strong. Operating cash flow is positive. And we enjoy a relatively low level of financial leverage and a high degree of liquidity in our investment portfolio. Our financial flexibility continues to improve as measured by additional debt capacity and holding Company liquidity where we have now accumulated over $750 million of cash and short-term investments. During the first six months, we moved approximately $700 million from the insurance subsidiaries through dividends and other capital transactions to the holding Company. Finally, we are pleased to continue to return capital to our shareholders, via our quarterly dividend of $0.15 per share.

Now I'd like to give you a bit more detail on the financials. For the second quarter, net operating income from continuing operations was $250 million or $0.93 per diluted share, compared with $318 million or $1.17 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 $181 million, or $0.67 per diluted share, compared with $217 million or $0.80 per diluted share last year. Year-to-date, net operating income from continuing operations was $471 million, or $1.75 per diluted share, compared to $625 million or $2.30 per diluted share in the first half of 2007. Year-to-date net income was $368 million, or $1.36 per diluted share, compared to $513 million or $1.89 per diluted share for the prior year period.

Property & Casualty operations produced second quarter net operating income of $269 million compared with $325 million in the prior year period. The primary drivers were lower net investment income, decreased current year underwriting results and higher catastrophe losses, partially offset by lower expenses. After tax to free catastrophe losses were $31 million this quarter which compared to $8 million in the prior year period. Year-to-date cat losses were $65 million after tax. This compares to $51 million after tax in all of 2007.

With respect to the non-core segments, life and group produced a second quarter net operating loss of $30 million compared with a $13 million net operating loss in the prior year period. The primary drivers of the second quarter decline in this segment were adverse investment performance on a portion of our pension deposit experience and unfavorable experience in long-term care. The corporate segment had second quarter net operating income $11 million compared with $6 million of income in the prior year period. We continue to closely manage these runoff operations to mitigate earnings risk. Second quarter pretax investment income was $576 million, down from $671 million in the prior year period.

These results include trading portfolio gains and losses which are largely passed onto contract holders. The comparison excluding the trading portfolios is $580 million this quarter, versus $631 million in the prior year period. The primary drivers were decreased income from fixed income and short-term securities due to lower interest rates on short-term holdings, as well as unusually strong LP income in the prior year period. LP income this quarter was $46 million, a 2% return, which did rebound from first quarter results. And you'll recall that second quarter of '07 LP income was $71 million, a 3.6% return. After tax net realized investment losses were $71 million this quarter, compared with losses of $91 million in prior year period. After tax impairments were $111 million this quarter, further write-downs of subprime and Alt-A investments accounted for $64 million of that total. These impairments of $111 million were offset by $40 million of gains primarily driven by derivatives.

I would characterize our investment portfolio as liquid, well-diversified and of high quality. The portfolio continues to have an overall average credit quality of AA minus. Effective duration of the total portfolio was 5.3 years. You'll recall that I pointed out previously that our investments are separated into two distinct portfolios. The larger portfolio, approximately 75% or $27.8 billion of our interest rate sensitive securities support the PC and corporate segment. That portfolio had a 3.6 year duration. Second, smaller portfolio, approximately $9.1 billion or 25% of of our interest rate sensitive securities, are segmented and aligned to support certain long-term liabilities, primarily in the life group non-core segment. That portfolio had a 10.6 year duration.

We continue to find a limited number of attractive opportunities in subprime markets and had purchases net of principal paydowns of $140 million this quarter. The additional subprime and Alt-A purchases made this year have a little more than 8% total return year-to-date. Given the recent attention to Fannie Mae and Freddie Mac credits I thought you would also be interested in our direct exposures to Fannie and Freddie. On a combined basis at book value we have $321 million in preferred stock, and $83 million in debt. We had also held Freddie discount notes at June 30, but all have either matured or were sold at a gain as of last week.

Turning to expenses, the second quarter Property & Casualty operations expense ratio of 28.2% was more than 1 point better than the prior year period and slightly better than the first quarter of 2008. These sub 30 loss expense ratios are a clear reflection of our determined efforts to sustain competitive expense levels. Second quarter ratio had the benefit of a favorable change in our estimates. Certain insurance related assessments. You should expect us to continue our focus on expense management but recognize that market pressures would challenge these ratios for the rest of the year and beyond. With that I'll turn it over to Jim.

Thanks, Craig and good morning everyone. Property & Casualty operations continues to hold a steady profitable course. You've heard us talk about focused underwriting and the controls we have in place to navigate in the market cycle. These strengths were clear to see in the second quarter as measured by our tenth consecutive quarter with sub 100 combined ratios. We continue to optimize our portfolio by selective growth, segment and subsegment our book of business, focus on data driven decision making, work closely with our distributors to be their go to market in our chosen classes, cross-sell to get a bigger piece of each customer's insurance dollar and aggressively manage our expenses. Market conditions are challenging, very much so in sub segments and the worst mistake is trying to win in the wrong way and paying for it later. I prefer our course, focused in on the opportunities, maneuvering around the issues and coming out even stronger on the other end.

Now let's turn to a few of our key operating metrics. Property & Casualty operations net of the premium volume increased 4% for the quarter and 5% year to date. Standard lines was down approximately 6% for the quarter and 9% year-to-date, while specialty lines was essentially flat for the quarter and year-to-date. Given the current environment, we do expect downward pressure on the top line and we also expect the pressure to be the greatest on standard lines. As I've said before, while we pay attention to the top line, we are not top line driven. The key issues for us are the quality of our portfolio, and whether we're maximizing our risk adjusted returns. In specialty lines the numbers speak to our focus on portfolio optimization. I'm also encouraged by the progress that we're making in standard lines. I've mentioned our small business momentum in the past, a business that has historically delivered attractive returns.

We're also building momentum in our $1.6 billion middle market business. Perhaps the toughest battle field or battle ground in the softening market. We're improving the quality of our business mix as measured by positive renewal efficiency, segmentation and sub segmentation strategies are gaining traction as measured by submission, hit ratio and new business mix. Our industry specific programs have already made us a preferred market in many construction segments and we're applying the same approach to our general industry programs. We're also on the move with a standard stretch of the hybrid products Steve mentioned in his remarks. In property and (inaudible), access in surface lines and umbrella, we're building out what are already profitable operations.

Overall we've done a great deal to revitalize our standard lines business. We've reorganized, launched focus classes, enhanced coverages, upgraded predictive models, partnered with our distributors and much more. What we're building here is a sustainable platform that will serve CNA for years to come. Now let's look at strong rate and retention metrics.

During the second quarter our average rates declined by a bit less than 5%, in line with our rate trends in the past few quarters. Standard lines which has given us a rate a little faster, saw rate decreases of approximately 6% in the second quarter, Specialty line rates were off about 4%. With respect to market conditions, many carriers continue to show a degree of discipline. There are some exceptions, though in just about every territory in every line of business. Against this back drop we're holding our renewal book together and we continue to find opportunities to write quality new business. Speaking of renewal retention, we have been running in the low 80s since 2006 and we've maintained those levels in the second quarter. P&C ops ran at approximately 82%, standard lines retention was at 80% and specialty was over 83%. Our underwriters have been very effective in getting ahead of renewals and locking them in before the accounts get put into the marketplace. We also benefit from claims and risk control services that our customers appreciate and value.

Now let's turn to new business. We wrote approximately $290 million of new business during the second quarter, or approximately 17% of total production. This compares with approximately $328 million of new business in the prior year period, or 18% of total production. As we have said, new business is right where it should be under current market conditions and most of it continues to come from our target classes. I won't pretend it's easy. When you won't follow the market down you have to work harder. However, we do enjoy three big advantages. One, the diversification and breadth of CNA's product portfolio. Two, the local presence of our branch networks. And three, the very active disciplined approach we take to new business opportunities. For instance, we focus on cross-sell, selling additional products to every customer. During the second quarter, cross-sell generated about $103 million in premium of 35% of our total new business.

What's more, there's still a lot more opportunities out there. In the past year, we've focused our attention on several high potential cross-sell opportunities, management liability, cyber liability and international products. Along with cross-sell controls on adverse selection are a key cornerstone of our new business strategy. We monitor the differential between new and renewal pricing as well as the use of discretionary pricing modification. We also watch the spread between paid and case loss ratios to new business and renewals. Our front underwriters are well-aware of the importance of keeping this spread in a relatively narrow range.

Now let's turn to loss ratios. For second quarter, the Property & Casualty net calendar year loss ratio was approximately 69%, up four points from prior year period. Standard lines came in at just under 74%, up 5 points and specialty came in at approximately 65%, up 4 points. Our loss ratios were impacted by the same two factors that impacted our first quarter. Catastrophe losses and the continued pressure on rates. The cats added 2.9 points to the P&C ops loss ratio and 5.9 points for standard lines. These factors more than offset approximately 1 point of favorable development in P&C ops.

On a net accident year basis the 2008 loss ratio for Property & Casualty operations was approximately 70%, a 3 point increase reflecting the same two factors. Given the state of the market, we expect upward pressure on our loss ratios. This underscores the importance of our strategies to protect this key metric. I've already mentioned some of them, portfolio optimization, segmentation and predictive model. To these I would add a very positive impact from our claims and also risk controlled services. In claims we're moving forward on a strategy that will take our award winning claims talent to even higher levels. In risk control we do thousands of assessment of clients and prospects every year. All this data is now integrated with our price and model, giving our underwriters a very objective evaluation of account quality.

Turning to combined ratios, Property & Casualty operations came in at approximately 98%, versus 95% in the prior year period. This is our tenth consecutive sub 100 quarter. Specialty lines continues to perform well with a second quarter combined of 93%, our specialty lines -- our standard lines came in at approximately 103%. Bringing down our standard lines combined ratio remains our major challenge and as I mentioned we are addressing the loss ratio side on many fronts. As for the expense ratio side we continue to challenge every dollar spent and we're pleased to be recording a second quarter expense ratio of 28.2%. Our expense ratio can vary a bit from quarter-to-quarter. We are (inaudible) but when it comes to expense management. It was, is and will continue to be a cornerstone of our operations. In summary, Property & Casualty operation is holding a steady course in the face of challenging market conditions. I mentioned the danger of trying to win in the wrong way. Let me close by saying we look forward to winning in the right way. Easy to say, hard to do, but with selective underwriting, volat retention, appropriate new business, and agressive expense management I continue to feel we're on the right path. With that I"ll turn it back to the operator.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Jay Cohen with Merrill Lynch.

Yes, thank you. And good morning. I've got a number of questions. First is the transaction between CCC and the holding Company on the surplus, I guess mostly through a dividend. What was the rationale for moving that much money up to the holding Company?

Jay, it's Craig. It was just a desire to really optimize liquidity at the holding Company and improve our financial flexibility.

Okay. You didn't need approval to get that; right?

We actually did seek approval, the transaction -- majority of the money move was actually a stock redemption transaction and we did get approval from state regulators to do it.

Okay. Secondly, I remember in the first quarter you had bought back some stock, as I recall. I didn't notice any in the second quarter. Could you confirm that? And what are you thinking about that as a form of giving money back to shareholders, given the valuation?

I could confirm we did not -- we bought back $70 million of stock in the first quarter. We did not buy back any stock in the second quarter. And I would tell you that really our thinking here is that given -- whether you call it prudence or conservatism or whatever, we've just decided that it's -- given the financial markets and given we're also facing storm season, it was wise to accumulate cash at present and we can decide later when and how to put it to use.

Okay. Fair. Two other points unrelated. On the life non-core business, you had mentioned some adverse experience in the long-term care business. If you could quantify and discuss what's happening there and how do we get comfort that that won't be a continuing drag on earnings?

The long-term care claim impacts were about $7 million after tax for the quarter and that was -- this quarter we had a little higher than usual claim. And that that's $7 million after tax on pretax incurred claims of about $106 million for the quarter in long-term care. And last year's second quarter of '07 was a very low, unusually low number. So I don't think -- it's only been a couple of months and we don't see anything that would suggest a long-term trend but we'll see.

Okay. And then last question, you guys in the property casualty operations you break out sort of other revenues and other costs and we kind of just take the difference and call that other. But that number, that difference was a lot better than it had been running and I'm wondering if there's anything unusual flowing through there?

Not unusual. But it's really our non-insurance revenue which really relates to our warranty operations, so it's really the earnings and income from majority of it is from our warranty operations.

Okay. Just so happened to have a good quarter this quarter?

Well, been having a good year and it's been a very good little business for us for a while.

Okay. That's all I got. Thanks a lot.

You're welcome.

We'll take the next question from Bob Glasspiegel with Langen McAlenney.

Good morning. I was very interested on your recruitment of Mr. Motamed, and it's sort of unusual at this one year sabbatical to recharge his batteries as the non compete works its way through. Has there been any negotiations with Chubb to accelerate that and would that be of interest?

We certainly would not have any comment on that and Tom's 12 month period is not a sabbatical. It is a -- it comes about by virtue of some very strong non-competes that he had with Chubb and we were mindful of them when we recruited him and we were mindful of them when we hired him and they reminded us of them and we were all in agreement this is how things will be. We look at this, Bob as a very orderly, logical, high quality transition and there was no issue here with respect to any breach in stewardship, it was the ability to get a very, very high quality individual and the timing of it worked out just fine.

All understood. So you're saying you don't have any desire to accelerate the process from your end?

No, the process is what the process is. We hired a guy with a 12 month non compete and it was a very firm non compete and we respect that as we would expect to be respected if the situation were reversed.

Understood. What's the size of your long-term care book?

I'm sorry, say that again, Bob.

What's the size of your long-term care book currently?

Long-term care book is about $5 billion in reserve.

In premium?

In premium it was a little over $100 million this quarter.

It's scaling down slowly?

It's scaling down -- well, I should say the revenue is scaling down slowly but the reserves will continue to grow for some period of time. Very long payout on the reserve.

Understood. And the dividend to the parent was $700 million did you say? I didn't get the exact number.

I said we moved $700 million from the insurance sub to the parent.

Okay. The last question, can you remind me what your buyback factors in? Is it to grow book value? Long-term returns? What drives the buyback valuation parameters?

What I said in the past drove buyback parameters was just really the value, the relative value of the stock at certain points in time. But what also is a factor, obviously, is our desire to accumulate cash, which is very precious commodity at present. And so we're really looking for the -- how we could return the best value to shareholders over the long term.

Okay. I've got one more but I'll go back in the queue.

We'll take our next question from William Wilt with Morgan Stanley.

Good morning. A few questions. I'm looking at page four of the press release, the accident year loss ratios measured over time. The specialty loss ratio on a gross basis, accident year '07 to accident year '08 deteriorated by about 360 basis points. The net loss ratio by far less. I think only 110 basis points. I was curious if you could could add some color on why the net specialty loss ratio showed far less deterioration than the gross. Didn't look like cats or reserve development was--?

This is Jim Lewis. What's driving that is within our specialty portfolio, we do have a large cell phone captive that shows up in gross premium, doesn't show up in the net, and then as you look at the overall loss ratio itself, the accident year loss ratio for that particular program did increase but from a net perspective the overall impact was really 0.1.

Okay. I'm sorry, that was what kind of program?

It's a cell phone, it's a captive program for cell phones.

Okay. Shows up in the gross, not in the net. Got it. Okay. The -- thanks for that. The acquisition expense ratio decreased by numbers -- I guess it was in the standard lines, the acquisition expense ratio decreased pretty meaningfully from the year earlier period so I was going to ask for some color behind that.

Yes, on the acquisition expense we did get a benefit from some guaranteed funds. There were some rate changes that had went up previous year that actually went down this year and that was kind of the biggest driver of the change, aside from the fact outside of that, we are still seeing pressure on overall commissions and I think we'll probably still continue to see pressure in the future on that piece, especially, of the hearings that occurred New York, of any positive trends with it. But what's driving the favorable results is really the guaranteed funds and also second injury funds.

Okay. Great. Then I'll squeeze in a quick third one. The Fannie Mae, Freddie Mac preferred stock of $321 million, can you just -- how has that changed over time? For instance, where was that a quarter ago or two quarters ago?

You're talking about the amounts held?

Yes, the amount held, the carrying value of that, how has that changed?

The amount held is approximately about the same. We haven't really added -- in fact, actually down a little bit from the bulk. The market values declined at the quarter about I'd say about 25% from where they were past and since the quarter they have fluctuated some, the fair values have gone down a little bit more and then rebounded. Got it. Thanks for that. I'll requeue.

(OPERATOR INSTRUCTIONS) We'll go next to Dan Johnson with Citadel.

Great. Want to talk a little bit about the LP performance in the quarter. I know you referenced you had tough comparisons a year ago but the numbers were still pretty good, especially compared to the first quarter. Can you go give us a little more detail about what sort of underlying fund performance you saw and whether or not you felt there was any outliers to the up or the down side? Thank you.

Dan, no, there weren't any outliers to the up or the down side and as we said before, I think you actually would characterize them, many people look at these as alternative investments even though we call them LTs, so they're very much like hedge funds and they cover a multitude of strategies and overall performance looks -- they all rebounded very solidly. Nothing -- I don't think there was anything unusual in the quarter from LTs.

And then just on the loss cost environment, and I realize you're in a lot of lines and a lot of geographies so it's really hard to generalize, but can you tell us what we're seeing as you look through ex-cat, let's say, try to look through the loss cost environment that we're in. We've certainly been through a couple years of pretty benign losses in general. Is that environment persisting? Is it normalizing to history or how would you describe that?

This is Larry Haefner. I would characterize it as still fairly benign. We're still seeing favorable frequency trends, severity is still fairly modest. We haven't been impacted by some of the trends that maybe personal lines writers have seen in terms of severity. But we feel very comfortable with the environment that there's not adverse trends from what we have had the last several years.

Thank you very much.

(OPERATOR INSTRUCTIONS) We have a follow-up question from William Wilt with Morgan Stanley.

Thanks for that. I guess following-up on the last question on loss cost trends, another large commercial writer this quarter commented that they had not seen I guess with reference to commercial property specifically, had not seen any notable ramp-up in cost of raw materials. Cement, steel, plastics, stuff that goes into building or repairing a building. I take it from your comments that the same would be true and in a sense if that is true, why do you think that is? It would seem from the outsider's perspective that you would have begun to see some inflationary pressures in those areas, so any thoughts on that would be appreciated.

We really haven't seen a drive-up in severity from building material costs. I'm not sure I know certainly things like copper costs have gone up significantly. The flip side of it it's been a pretty benign rebuilding environment from a cat perspective over the last couple of years and compared to the rebuilding in Florida and the Gulf Coast after 2004, 2005, that may be relieving some of that pressure on a broader basis.

Okay. Thanks for that. And I'll ask one other broad question, if I may. I think in couple of folks' at the outset and Jim referenced -- used the term hybrid a couple of times in describing a new strategy. I apologize if I missed something or maybe asking you just to retrace steps you've already gone over, but I missed the reference to a hybrid strategy, reference boiler, machinery and some other coverages and maybe just taking a step back and describing that would be helpful for me, anyway.

This is Jim Lewis. As we look at that standard specialty hybrid strategy, since there is pressure in the middle market and that seems to be one of the most competitive areas right now in the marketplace and we've talked a lot in the past about the sub segmentation and segmentation that we're doing, to really optimize that part of the portfolio. There are also some still better performing or high performing ROE businesses that are in the standard lines but we actually treat them more like specialty lines of business and that's inland marine, which is very strong outperforming ROE business for us and it's about $100 million book of business. We are investing resources within the inland marine specialists and also products to really attack that market. We actually see the opportunity to take that book from $100 million to $150 million. We've got a very solid performing boiler book of business which is about $100 million. It is does complement what we're doing on the inland marine and also the property part of our portfolio. We're making investments to grow that piece of the portfolio.

Umbrella business is about a $200 million book of business for us. We've got dedicated umbrella specialists throughout the marketplace and we see significant opportunities to grow the monoline part of that portfolio. Property, which is about $300 million book for us, we think there's excellent opportunities to grow that part of the portfolio. And then our excess and surplus lines. Excess and surplus lines for us is $180 million book of business and we see opportunities to really grow from a program standpoint and also on an individual risk perspective within our excess and surplus lines. So these are operations that are within standard but in reality, because of the dedicated resources that we line up behind them, whether it's the underwriting risk control or claims that we really treat these more like specialty businesses and from an ROE standpoint they perform in that fashion.

Thanks for that.

Bill, if I could just follow-up on Jim's point. When you add up those five product lines that we talked to and we deliberately wanted to draw attention to these lines because it gives more credence to the whole area of diversification and our ability to shift out of a totally undifferentiated line. There's a limited number of players in the large property. the inland marine umbrella, E&S, and boiler business, that adds up to $1 billion in terms of premium. As we stand right now, that's about $1 billion. You add to a robust construction portfolio, that's up in the 800, 900 range, you've got a lower end of the middle market and some segmentation going on down there and targeted classes, you pick up another couple of hundred million. You butt that up against the specialty business and you've got a lot of areas that we can actually grow and shift this Company into in order to offset the pressures that are on the really, truly undifferentiated product areas.

When we talk about hybrid specialty, although embedded in the standard area, these have this differentiation from a product standpoint, as I mentioned, limited players, Jim touched on services both from a risk control and a claims standpoint, the distribution often is differentiated and one of the additional benefits is we have flexibility of form and rate on this. So we can actually move around with a little bit more fluidity than we could have on some of the standard lines that are really structured to file, forms and rates. So we think, as I say, we keep talking about portfolio optimization and shifting and this is just one of the areas, and one of the major areas that we can actually take advantage of that portfolio and they're in a good spot right now and we're making active investments in terms of taking these things forward. So a lot of good stuff going on here.

Great perspective, thank you.

We have a follow-up question from Bob Glasspiegel with Langen McAlenney.

How should we think about a recession impacting the calculus of your strategy? I reviewed the CNA surety results which seem pretty good, no impact from the Chubb impact of a big reserve hit but are there any of the business lines, workers' comp, I know you've cut back, obviously that's going to get impacted by a recession, but what should we be thinking about in terms of your business lines?

Bob, I think you hit on probably the principal area that I would be concerned on, it would be the work comp portfolio associated with our construction book. I think with the slowdown in the housing industry, or some of the commercial construction, which hasn't felt it as bad as the housing industry, what we're concerned about there is the drop -- a drop in rates, as the number of the states have put reforms in place and put anticipatory rate reductions. They reform their benefit levels and they put anticipatory rate reductions in place that may or may not work out. Then you see unemployment moving up, we'll see payrolls drop. That could be an issue too. The good news is that we're not so loaded up in any one part of that marketplace and we have shrunk our work comp book significantly from almost -- I think we cut it by 40% over the last several years. We're spread out enough that while we certainly will feel it, we're spread out enough that I don't think it's cataclysmic to us. We haven't seen a real run-away in terms of loss cost and some other areas that would contribute to this.

We're respectful. We're mindful. I mentioned it in my opening remarks. The insurance market is tough, the financial markets are tough, and the economy is not making it any easier. I come back to our ability to move and shift. The other product lines that I mentioned to you that we're looking to grow out are not as sensitive to some of the some of the recessionary influences that you might see on work comp. If we had a heavy manufacturing book with a lot of products liability running through there I would be even more concerned. We down played the comp. We're not a big manufacturing player and the alternative product lines and our specialty business is not so dependent on payroll and sales as those are.

I think the other piece of that, several years ago comp was getting up to about 25% of our book. It's now down to 12% of our book. So we have comp at a very manageable level. And at the same time, as we kind of shifting the profile of the book from larger accounts to the smaller end of middle market and small business, I think that also helps to insulate us. Incidentally, that small business part of comp is the most profitable part of our overall work comp book.

Thank you very much.

We have no additional questions at this time. I would like to turn the call back over to Ms. Buffalino for any closing remarks.

Thank you, and thank you all for joining us today. A taped replay of today's conference call will be available for one week immediately following this call until August 4. Please see the earnings release for details. We appreciate your participation in today's call and thank you again for joining us.