CNA Financial Corp (CNA) 2008 Q3 法說會逐字稿

Good day, and welcome to the CNA Financial Corporation third 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 Bufalino. Please go ahead, ma'am.

Thank you, Patrick, and good morning. Welcome to CNA's third quarter 2008discussion of our financial results. Hopefully everyone has had an opportunity to review the press release and financial supplement which were released earlier this morning and can be found on the CNA website. With us this morning to discuss our financial results are, Steve Lilienthal, Chairman and CEO, Craig Mense, CFO, and Jim Lewis, President and CEO of P&C Operations. Before we get started, I would like to advise everyone that during this call there may be forward-looking statements made and references to nonGAAP financial measures. Please see the section of the earnings release available on CNA's website headed forward-looking statements with regard to both. In addition the forward-looking statements speak only as of today, October 27nd, 2008. CNA expressly disclaims any obligation to update or revise and forward-looking statements made during this call. This call is being recorded and webcast. During the next week, this call may be accessed on CNA's web site at www.CNA.com. Following the conclusion of today's prepared remarks by CNA senior management, we will with happy to take questions from the investment community. With that I will turn the call over to CNA's Chairman and CEO, Steve Lilienthal.

Thank you, Nancy, and good morning everybody. Thanks for joining us today. This was a complex and challenging quarter on all fronts, economic conditions remain stagnant, the global financial market experienced the most sever pressure in memory if not history, and the insurance marketplace remained competitive, further aggravated by significant catastrophe activity. CNA has continued to operate in a disciplined fashion and consistent with previous quarters and consistent with our head-on proactive approach to other issues.

During the course of this morning's call we will discuss the following, the financial results for quarter and year-to-date, the CNA financial and for our business segments, the impact of the global meltdown in the financial markets on our investment portfolio and we will discuss the details of our comprehensive capital plan. We believe that by taking these proactive steps we further augment our solid capital base in the well positioned to both meet the challenges and act on the opportunities likely to emerge in the marketplace. In addition to bolstering the statutory capital by $1 billion in our Insurance Company, we have a significant level of cash on hand at the Holding Company and the details of the plan are included in the press release and Craig will discuss this in a few minutes. We will also discuss our P&C operations and our disciplined, cautious, conservative approach in the difficult market.

Premium levels have reduced a bit in line with market conditions, retentions are holding solid at just over 80, rate levels are running at about minus 4% on average and in are line with market if not a little bit better. As an additional note we are not significant players in the large cap casualty marketing segment which appears to be the most aggressive at this time. New business of 17% of total is very appropriate for the market and exactly where we said it would be four to five years ago. The combined ratio of 107 for the quarter includes approximately 16 point points of catastrophe activity but remains at just over 100 combined for the year and well under 100 excluding cats in the quarter. Our expense ratio which has been consistently managed to reflect the changing size of the business remains in the 30% range year-to-date despite investments made in certain key business segments in both standard and specialty lines. The strategy going forward, as it has been in the past, is to leverage a very, very diversified product portfolio by moving and shifting in and out of segments and cross-selling our existing customer base to a very solid distribution network. Overall, in a market that keeps getting tougher, CNA is sticking to and delivering on the fundamentals, and Jim Lewis will give you the details on that in a few minutes.

Before turning the call over to Jim Lewis and Craig Mense, let me add a final note regarding our leadership succession plan. As you will recall, when we announced Tom Motamed, my successor to be last June, he had a 12 month noncompete covenant in his employee arrangement with Chubb. Knowing and respecting that I agreed to stay on until June of '09 even though I intended to retire when my contract expired at year end 2008. We had hoped that at some point Chubb would be agreeable to allowing Tom to join CNA at an earlier date. I am happy to report that we have reached an agreement with Chubb for Tom to join CNA on January 1st, 2009 as Chairman and Chief Executive Officer. Tom is an extraordinary individual. We are delighted to welcome him sooner rather than later and I am looking forward to working with Tom through the transition. This will certainly eliminate any possibility of organizational loss of focus. And we feel that this was a very well planned and executed succession plan. In summary our ability to withstand and navigate through the pressures of the third quarter speaks to the very solid business we have built over the past several years. With good work on the fundamentals and a smooth leadership transition, we are very well positioned to stay on our profitable course. With that, let me hand it over to Craig.

Thanks, Steve. Good morning, everyone. As Steve mentioned the markets have made this a very challenging quarter. It is obviously a challenging time for all of us but it is one that we are certain we are up to meeting. As we look at our Company, we see one that has a well established record of generating meaningful operating income, is a disciplined participant in the insurance market, is generating significant positive cash flow, and has more than ample liquidity. While our capital levels have been pressured by the extreme valuation of our invested assets in today's dysfunctional markets, we have acted preemptively to eliminate any concerns about our financial strength and to further bolster our already strong capital and Holding Company cash position. As a result, we are well positioned to act on opportunities that may emerge over the near and longer term.

Now let me take a moment to give you a bit more detail on the financials. For the third quarter net operating income from continuing operations was $83 million or $0.31 per diluted share compared with $212 million or $0.78 per dilute share in the prior year period. The net loss for the quarter which includes the impact of realized investment gains and losses as well as discontinued operations was $331 million or $1.23 per diluted share. This compares to $174 million of net income or $0.64 per diluted share last year. Year-to-date, net operating income from continuing operations was $554 million or $2.06 per diluted share compared with $837 million or $3.08 per diluted share in the first nine months of 2007. Year-to-date net income was $37 million or $0.14 per diluted share compared with $687 million or $2.53 per diluted share for the prior year period.

Property and casualty operations produced third quarter net income of $92 million compared with $331 million in the prior year period. The primary drivers of the decline were higher catastrophe losses and lower net investment income. After tax catastrophe losses were $168 million this quarter compared with $7 million in the prior year period. Year-to-date cat losses were $233 million after tax. This compares with $37 million in all of 2007. With respect to the noncore segments, life and group produced a third quarter net operating loss of $36 million compared with $131 million loss in the prior year period.

Last year's results included an after tax loss of $108 million related to a reinsurance arbitration settlement. The corporate segment had third quarter net operating income of $27 million compared with $12 million in the prior year period. The current period benefited from a $27 million after tax relief from an allowance for uncollectible reinsurance receivables. We continue to closely manage all our operations to mitigate earnings risks. Third quarter pretax investment income was $439 million, down from $580 million in the prior year period. These results include $23 million of losses from our trading portfolio in the current period as compared to $2 million of trading losses in the previous period. Excluding the impact of trading gains and losses the primary drivers of decreased results were our limited partnership investments and the effect of lower short term interest rates.

Limited partnership losses were $77 million or a negative 3.5% in turn compared with LP income of $19 million in the third quarter of '07 and $46 million in this year's second quarter. Our portfolio of limited partnerships continues to be a very attractive investment despite recent earnings volatility. These holdings bring diversification to the overall portfolio, with less volatility and higher absolute returns than equities. The volatility is expected, and we are confident that they will perform well over the longer term, just as they have over the last decade.

After tax net realized investment losses were $423 million this quarter compared with losses of $38 million in the prior year period. Those realized losses included after tax impairments of $380 million this quarter, the majority of which were driven by credit issues. The realized losses and impairments were primarily related to preferred securities and corporate bonds including securities issued by Fannie Mae, Freddie Mac, Washington Mutual and two Icelandic banks. The net unrealized losses issued on our investments was $3.4 billion at the end of the quarter, an adverse change of $1.9 billion from June 30th of 2008. This change affected virtually all asset classes and accelerated in the last 10 trading days of the quarter, which accounted for approximately 75% of the total quarterly change in unrealized loss. The market freeze up at the end of September was especially tough on the valuation of our corporate and municipal bond portfolios. We regard the unrealized loss position as temporary and based on current circumstances are very confident in the ultimate recovery.

In light of our unrealized loss position is worth noting that the abnormal condition in the fixed income market. Credit spreads and pricing marks are extreme. We believe there has been no appreciable change to the credit quality of our portfolio. CNA has the intent and ability to hold these assets in an unrealized loss position until they recover their value. The combination of positive operating cash flow and principal payments is generating over $2.5 billion annually of investable cash. As yields return to historical norms, we expect our unrealized position to improve substantially. In the meantime, we are able to deploy our investable cash flow at very attractive rates.

In light of financial market uncertainty, we also felt it was prudent to move ahead in the plan to supplement our capital base. The details of the capital actions are in our press release, so I will confine my remarks to a few high level observations. The cornerstone of the plan is a $1.25 billion preferred stock issue to be purchased by Loews. The proceeds will fund a $1 billion surplus note transaction with Continental Casualty, our major insurance subsidiary to strengthen statutory surplus. Our risk based capital levels are strong and this addition provides an added level of comfort at a time of financial uncertainty. The remainder of the proceeds, $250 million, will be held at the CNA Holding Company level and will further bolster cash and increase our financial flexibility.

These funds are in addition to the more than $700 million in short term investments already held at the Holding Company level. We expect to have approximately $1 billion of cash at the Holding Company level when we complete this transaction. Between the addition to statutory capital and the enhanced liquidity at the Holding Company level, our view is that we are very well positioned to withstand further financial market stress, and as importantly, to act on emerging market opportunities. By the way, our thought here relates to the prospects for organic growth not acquisitions.

Finally, we will discontinue the quarterly common stock dividend beginning this quarter to further conserve cash and capital. Next, let me add a few comments about our securities lending program. In light of external concerns about securities lending it is important to note that we only lend securities for purposes of enhancing investment income. We require borrowers of these securities to maintain collateral with us of at least 102% of the fair value of the securities loan. We only accept US Government securities, agencies or Ginnie Mae securities as collateral. We do not utilize collateral received for operating our financing purposes. Our securities lending programs are managed as a matched book portfolio where the collateral is invested to substantially match the term of the loan which limits risk. We have never experienced a loss from our securities lending activities. I trust that you recognize that CNA is a Company that is producing steady, meaningful operating income, has ample liquidity, is generating significant positive cash flow, has acted prudently to eliminate uncertainty, is well positioned to sustain additional financial market stresses, and as importantly, to take advantage of emerging market opportunities. With that, I will turn it over to Jim.

Good morning, everyone. The soft market, hurricanes and a sluggish economy didn't make it easy for property casualty insurers in the third quarter. But as you heard from Steve and Craig, Property and Casualty Operations continued to perform well. Our focus on catastrophe exposure management helped contain our losses to a manageable level. I am also pleased to say that as soon as possible after each storms passing our claims teams were on the ground serving our customers, professionally and efficiently. This type of operational discipline is completely consistent with our focus on the fundamentals. As I have mentioned before we continue to focus on portfolio optimization, to maximize risk adjusted returns, driven decision making for improved risk selection and pricing, fuel and distribution management aligned with business strategies, cross-sell to leverage our broad portfolio and performance monitoring tools and government processes to navigate the market cycle. In short we continue to push hard on the key drivers of our business.

Now let's turn to a few of our key operating metrics starting with premiums. Property and casualty operations net written premium volume decreased 3% for third quarter and 4% year-to-date. In standard lines net written premiums decreased approximately 4% for the quarter and 7% year-to-date. Specialty lines was essentially flat for the quarter and year-to-date. Our premium volume reflects three major factors, market pressure across our portfolio especially on standard lines, very solid retention of renewal accounts, and a disciplined approach to new business in a soft market. I will touch on the latter two items in a moment.

With respect to market pressure, it is not letting up. So while we pay attention to the top line, we are not top line driven. We continue to focus on the quality and mix of our business. Specially lines is a matter of adjusting and refining an already high quality profitable portfolio. In standard lines it is more of a matter of strengthening our fundamentals through segmentation, subsegmentation and predictive analytics, we are improving the quality of our middle market book. In small business we are building a franchise with enhanced products, award winning agency interface and expanded distribution outreach. In addition we are already well positioned in businesses like boiler and machinery, (inaudible) marine, excess and surplus lines and others. By adding staff in resources to these specialized businesses we expect to balance out our more main stream commercial insurance risks. Overall we feel very good about our progress in standard lines.

Now let's look at rate and retention metrics. For the third quarter, average rates decreased by a little less than 4%, a slight improvement over the previous three quarters. The average rate decreases for standard lines was approximately 5%, for specialty lines it was 3%. This is the sixth consecutive quarter that rate change across our portfolio has run in the range of negative 3% to 5%. In the soft market of the late '90s rates fell off a cliff. This time around we continue to see a steady gradual decline. It is still very challenging, but with our diversified portfolio, strong distribution relationships, and business quality metrics, CNA is well positioned to deal with this type of market pressure. For retention we are running at approximately 82%, very solid and in line with the past few quarters. The underlines retention was 80% during the third quarter with specialty lines running at 84%. Overall our rate and retention numbers underscore the importance of managing the risk of adverse selection. Our renewal efficiency metrics are critical in this regard. Favorable rate and retention also reflect strong distribution relationships which enables us to get out ahead of renewal accounts before they go to market. These close-working relationships are critical for retaining quality accounts without giving away the store.

Now let turn to new business. We wrote approximately $264 million in new business in the third quarter. This represents approximately 17% of production, appropriate for the market and ranked where we have been all year. Overall I would characterize our new business strategy as controlled, selective, and forward-looking. As with renewals we attract a quality of new business with a range of metrics. With respect to selectivity our new business strategy is in direct support of portfolio optimization, most new businesses in our target classes. In addition, cross-sell continues to provide a nice boost to our new business, $86million in the third quarter and 32% of all new business.

And finally, despite market competition, we are beginning to realize modest growth in our target classes. At the same time we are increasing our understanding of customer needs in these classes and building a franchise with our agents. But when the market eventually hardens we will be in a better position for growth. Turning to loss ratio, our third quarter 2008 net calendar year loss ratio reflects a heavy cat overlay on a sound underwriting focus. P&C's ops loss ratio of 76% includes approximately 15 points of catastrophe losses and four points over favorable development. Most of the cat losses came in standard lines, which had a net count loss ratio of approximately 96% including 31 points of cat loss and one point of unfavorable development. Specialty lines loss ratio of 59% included one point of cat losses and eight points of favorable development. The impact of cats and development is fully broken out on page 10 and 12 of our financial supplement. On a net accident year basis, the 2008 loss ratio for property and casualty is approximately 73% versus 67% for 2007. Again, catastrophe losses were the major drivers of change adding seven points to the current year ratio.

As mentioned in previous calls we are very diligent when it comes to our loss ratio. I already mentioned catastrophe exposure management, portfolio management and predicted modeling. With these, I would add three others, first, a very disciplined process of unwriting controls and granted authority. Second, claims involvement in every stage of underwriting management which alerts us to trends and coverage interpretation and emerging hazards. And finally, risk control experts who specialize in the industries we serve. Their assessment of account quality helps improve our risk selection and pricing. Now I should turn to our combine ratio. With the third quarter property and casualty operations came in at 107%, the 15% increase from the prior year period is primarily related to the loss ratio of the previously discussed. Year-to-date, the P&C operation's combined ratio of approximately 101%. This includes approximately seven points for catastrophe which puts our noncat combined ratio in the range we have been running for past few quarters. In standard lines the third quarter combined ratio was approximately 129% specially lines. Specialty lines came in with a respectable combined ratio of 88%.

Turning to expenses for a moment, property and casualty operations had a third quarter expense ratio of approximately 32%. This includes approximately one point from wind storm assessments. We continue to manage expenses aggressively, but as we have said before, market pressures will challenge our ratios going forward. In addition we continue to invest in CNA's future, for instance, adding underwriters at the point of sale and upgrading our claims operation. Before wrapping up, I would like to say a few words about our outlook for the rest of the year and into '09. Overall, I am cautious about the market, but cautious in our direction. CNA is well diversified by product, account size and geography. Our distribution relationships are solid. We have a track record of building strong, sustainable market positions. I feel good about our specialty lines businesses, where we are leveraging our strong positions in health pro, professional liable, and management liability, to related market niches. Our small business operation continues to gain traction. In middle market, we are growing a core book of more profitable construction and general industry business. I am encouraged by the potential of a more specialized standard line businesses where we are building out what we already have a profitable operation.

Finally there's our award winning claims operation. We triage claims by size and complexity. Our expressed inner turns around less complex, professionally and efficiency. With respect to medical claims management, our integrated approach goes after every driver of medical and indemnity costs. We also have an excellent record of favorable settlements and verdicts. It's all about excellence in execution, which we continue to enhance with investments in imagining, fraud control and certification of our staff. In short, I continue to feel good about our ability to maneuver through the market cycle. In summary the third quarter was another solid quarter, catastrophe losses notwithstanding. We continue to optimize our portfolio, sharpen our underwriting discipline, manage expenses while investing selectively and leverage our strong franchise in our chosen industry segments. As I said at the beginning, we are executing well on our business drivers. With that, I'll turn it back to the Operator.

(OPERATOR INSTRUCTIONS). We will take our first question from Jay Cohen with Merrill Lynch.

Good morning. Question relates to the capital raise. I guess I was a little surprised by it, and two questions actually. First, how much of this related to the statutory surplus in your life insurance companies?

None of it related to statutory surplus in the life companies, Jay. This is Craig.

Okay. It seems on the property casualty side, maybe I'm using the wrong metrics, it seems like you had a reasonable cushion and even though you had some descent realized losses there, it seemed like you had that cushion.

That's true. And I would say that would continue to be the case, and would have been the case before we did the capital raise. So, our objective here in the capital raise was, as I said, to eliminate any questions of uncertainty and to position us to really withstand any stresses as well as really act on opportunities we thought were more likely to emerge whether on the investing side or particularly on the organic growth side in the business going forward. So before the capital raise, our targeted -- I know I talked to you before about kind of ignoring or saying ow crude the surplus ratios were but I think maybe another more standard ratio to look at is risk-based capital in terms of rate authority minimums. Our target has always been to be somewhere in the 325 to 350 range. So before the range, we were in -- we were at our minimum, down at 325. And after the range we were really closer to 370, 375. So we are at historical -- near of at the historical highs across any measures. And we have done it nor be anticipatory more than anything.

And have you had a dialogue with the rating agencies for example? Do they have any say essentially in the capital raise?

Well, no, they had no say in the capital raise.

I phrased that wrong. Were they part of the rational for raising capital?

No, they weren't part of the -- I mean we, I guess to be clear, they certainly weren't the [imputous] or the catalyst for raising capital to be be clear. That was ours. Among the capital measures and metrics we look at are all of the rating agencies capital models as well as our economical capital, as well as surplus, as well as RBC. So -- and again this puts us at or near historic highs on any of those measures. I think that maybe what you are also getting at, and we will let them speak for themselves, but we had, we certainly had conversations with them, each and every one of them, about these decisions and about the raise and the specifics of it. I would say they were very complimentary of our preemptive action and how comprehensive the thought process and the plan was. And we hopeful they're all very supportive of it.

It is kind of life company, it looked like the June surplus that you guys show is about a little over $500 million, and yet if you look at the realized losses, or just the reported net loss for life, much of it was realized losses, you lost about $230 million, which suggests you you lost half of the capital in the life operation. So I was a little surprised you said none of it related to the life company because it looked like you lost half of the capital there, the statutory capital. Am I thinking about that incorrectly?

Yes. I think that the what you are looking at relative to those numbers are remember that long term care. It is a little bit different than what's in the statutory entity which remember that does not have long term care. Long term care results are in the CCC in the Continental Casualty Company. So they're really the stat capital in the life company is still very healthy levels.

Okay. Last question if you don't mind, on the life side, given that it is in run off and does obviously have some credit risk in there, any thought about just selling that business as a run off entity and not having to deal with any of the risks?

I can't really comment on that, Jay.

Okay. Thanks.

We will take our next question from Bob Glasspiegel with Langen McAlenney.

Good morning. Just trying to tie all of this together. You are cutting the dividend and raising dilutive capital just sort of sending a discouraging sign to the capital markets. But the spin on it is we are raising this to be proactive for opportunities, but Jim Lewis's commentary seemed grumpy and sober. I guess I was hoping you might be a little more positive about where the current environment is to justify raising this dilutive capital if it is offensive. Jim, can you give me a little bit of confidence that you're a little more optimistic or where are you seeing pockets of opportunity today, where this offensive capital can be used?

Yes, as you look at our overall premium volume you can see that our net written premium actually has improved in the third quarter. And I think a lot of that has to do with attraction that we are now getting in our standard lines portfolio, and some of the places that I have indicated earlier that we have subsegment, our middle market book. And we are now starting to see traction there. We have made investments in some of our specialized businesses that I had talked about earlier, such as (ball and) machinery, our excess and surplus lines, our inland marine portfolio, our specialty portfolio is still performing extremely well. And quite frankly as I look at this market right now, our overall rate levels seem to have leveled off, at least they're not continuing to drop any further, and they have been in the minus 3% to minus 5% level for the quarter they were down minus 4% for P&C compared to minus 5% in the previous period.

Our book of business is slanted toward the small to middle market part of the book itself, we are not much of a player in the large lines. But quite frankly, we still have market pressures and there still is competition from the market standpoint. I do think there is the potential for rates to harden, especially as you look at lower investment income, the fact that they're higher loss ratios and you are not able to cover overall loss costs and there's a higher cost of capital to date. And actually a reduced level of excess capital. I think over time all of those will have some variance. Today, we really haven't seen that and so I can't count on that.

So when you talk about my comments being sober, I am just being realistic that this is the marketplace that we are in right now. I'm assuming that marketplace is going to be where we are going to continue with, and we are doing all the appropriate things with portfolio optimization, subsegmenting, and segmenting our portfolio, using data driven decision making within the portfolio, all with the intent that this is the current market. If it changes, then we will be in a very strong position to take advantage of the market.

Yes, Bob. This is Steve. If I can add to Jim's comments. We have always taken a rather conservative and cautious approach to the market. And we have not seen anything yet that would have caused a compelling change in the insurance marketplace, absent everything that's going on on a financial and economic side. But no carrier has started to jettison business, as we commented earlier in the call, there's no real new source of growth that's out there. So the game continues to be one of displacement.

Some of the events of the quarter have caused rates to firm at the levels they are at right now, but there is nothing that has fundamentally changed that has caused any carrier to move up aggressively in their prices with any success. That being said, we constantly give instructions to our underwriters across both the standard and specialty lines to test the market. So we are constantly looking at opportunities to raise prices and then we look at retention. We poked the new business marketplace to see if the spreads between new business and renewal pricing is starting the close. That doesn't seem to have happened yet. So, we still remain very -- we remain hopeful, but we remain conservative in terms of how we actually operate the business.

Some of our competitors have derisked the portfolio. I assume that's not where you guys have been coming from. I know last quarter you were dipping in a little bit to some riskier assets carefully. Where does derisking the portfolio stand? And finally, to what extent was Tom involved in the capital decisions?

Let me take the last one first. Tom Motamed was not involved in any decision making, nor had any input on capital decision nor any other discussion that has taken place with anything going on. He was prohibited very, very clearly. And we understood that very, very clearly last May. The approach to Chubb in mid to late October was something we had thought about all along just to see if we could shorten up the transitional period from 12 months down to seven, and also shorten up the -- or avoid the possibility of any organizational loss of focus given the length of the transition. So, he had no input whatsoever. And he will not be involved in decision making or strategic direction until he assumes his position as chairman and CEO in January. So that's the first. With respect to the risking of the portfolio, you are talking about the P&C insurance portfolio or the investment portfolio?

Both, yes.

How long do you have? Do you want to talk about the insurance portfolio first or you want to talk investments?

Well, are you let's go the investments.

Okay. This is Craig, Bob. Maybe first to come back to another comment you made about the preferred. It is not dilutive. There are no warrants with it, by the way there's no call premium.

Are you going to be able to get more than 10% with money?

There's no embedded option that are common in today's market.

So you'll be able to invest it at a higher than 10% rate?

I didn't say that.

It is dilutive; right, the earnings?

But remember also we will take those collars as well as the $2.5 billion of other cash we are generating we do have available to us, and available to us to invest at today's attractive rates. Relative to derisking the portfolio, I'd remind you that we've also maintained very high liquidity in the portfolio. So over 92% of our assets are either cash, or public bonds. And 89% of that is investment grade. We've made very little change over the course of this quarter in terms of asset allocations. Maybe it is slight tick up in governments and a slight tick up MUNIS, so not much different than that. We have not been a net buyer of subprimes like we were last quarter, although I'd tell you that those investments divisions have played out very well for us so far.

I guess Bob just to add on the insurance portfolio, we did that several years ago and I think we have talked about that at length and I'll ask Jim Lewis if he'd want to add any thing further than my comments. But if you recall, we did a major shift in the worker's comp portfolio, which took it down by about 40% and shifted the penetration in the states that we were in. We virtually exited the large casualty market and shipped it out specialty lines. We shipped out a large cap of the specialty lines also. We took down a tremendous amount of our coastal exposure. We have managed limits rather aggressively over the past several years, so that we are not at all dependent on reinsurance. We are much, much less dependent on reinsurance than we were before. And I think, we also managed terms on these policies so we had limited severely the number of multiyear policies that we were involved with. That's in addition to the controls and the monitoring that we put in place across the organization. Do you want to add anything else to that?

The only thing I would add is on work comp, in excess of 20% plus of our portfolio, closer to 25%, it is now down to 12%. So that is an area that we aggressively attacked when we got here and that we now you have that as a manageable level that we are very comfortable with.

I think that's also a reason why we feel we can exploit some of the opportunities that we'll present ourselves because we are not overloaded in a lot of these areas. So can kind of cautiously find ourselves exploring the large property market. A companion to that is in [boiler] market as well as the inland marine market. And we already have an excess in surplus lines operation that we are looking to expand. So I think the fact that we have (inaudible) the property casualty some time ago allows us to move around a little bit and take pieces as we feel appropriate against our risk tolerance on a going forward basis. That's our thought on the investment side and on the PC side.

Thank you for the thoughtful answer. I encourage you again to consider that your November analysts meeting to give some color on value-added long term investment numbers.

Okay. Thank you, Bob.

We will take our next question from Matt Carletti with Fox-Pitt Company.

Hi, good morning. Thanks for taking my question. Two questions actually. First is on the capital raise, has [AM] commented on how they will treat that equity versus debt? The second is you mentioned the unrealized movements in the quarter and that the last 10 days were the hardest hit. How has that looked if you can provide some color since 9/30, I guess October month to date?

This is Craig again. So all, we have heard from all of the agencies, I think they will all be commenting independently, so you can see it. There is a comment from Moody's already out where they are affirming financial rating and affirming the outlook is stable. So I would refer you to their press releases which I expect to be forthcoming over the course of today and tomorrow about all of those things. As far as the change in unrealized since the end of the quarter, I mean you all know what is going on in the market, and I think if you also are very well aware of the composition of our portfolio. So, given your knowledge of our portfolio composition I think you can expect that it has moved in line with market conditions. Although I would tell you that the last week was certainly better than the first two weeks of the month.

Okay. And just on the rating agencies, I understand the kind of reiterating the outlooks. I was thinking more along the lines of just earlier this year, your idea of how they're going to treat it in terms of debt versus equity credit, given the structure of the product.

Well, we are -- we believe we will be treating it as equity on our financial statement. Moody's has announced that they're treating it as more debt-like than equity like. And I don't know if we have heard from [A Invest]. [A Invest] is treating it to be 80% equity.

All right. Thanks a lot.

(OPERATOR INSTRUCTIONS). We will take our next question from Ray [Whitlander] with Trade Winds Global Investments.

Hi. The 3.5 RBC ratio was that for CCC or was that a consolidated number?

That's CCC.

Okay. And it's 3.75 after?

Yes.

Okay. So for your level of rating I guess it is 325 seems still pretty high. How much is the rating agency's anxiety was caused by the OCI? The AOCI, I should say.

The rating -- we're not exactly sure what you're driving at there. But if I could just remind you that we developed and presented this plan to the rating agencies without any instigation or provocation from them. This is our feeling as to the best way approach the conditions that were presenting themselves in the marketplace to us, and as Craig said earlier to make sure at that there was no level of uncertainty regarding the financial strength of CNA and also to position us to deal with the opportunities we felt would present themselves going forward. So, I am hoping that answers your question.

Yes. It does, but we just seen a moving targets from the rating agencies for a couple of other companies where OCI seems to be much more important now. But all right. That's fine. The second question I guess you eluded to but were you net purchasers of subprime or Alt-A in the quarter?

No.

Okay.

We're not.

Okay. Alright. Thanks, guys.

We will take our next question from Ron Bobman with Capital Returns.

Hi. Thanks a lot. Good morning. The, I think the press release talks about the preferred rate being reset, I want to say on the fifth anniversary. I wanted to know what are the terms that drive the rate to be reset and also the investment from Loews, is it coming in the form of cash? Thanks.

We have a little hard time hearing you. It wasn't clear. Do you mind repeating your question?

Sure. I thought I read in the press release with respect to the Loews preferred purchase that the rate on the preferred stock starts at 10% but after 10 years the rate gets reset.

That's correct.

And I wanted to know what are the terms of the reset? What is it some floating number over an index?

Yes.

Is the adjustment factor determined? Could you tell us what it is? And then the second part of my question was their $1billion purchase of the preferred, are they paying cash in effect or using some other form of payment?

As far as the reset, it is after five years and it is 700 basis points over the 10-year treasury. It's not going to be a market risk adjustment, but there is a 10% floor on the preferred dividend.

And that's the one and only reset date? From then on it is a perpetual -- over that point?

It's every five years. It will be reset every five years.

Thanks. And how about the form of payment?

Cash.

Okay. Thanks a lot. Best of luck.

You have a follow up question from Jay Cohen with Merrill Lynch.

Actually my question was answered. Thank you.

(OPERATOR INSTRUCTIONS) I will pause one more moment. And we have no additional questions at this time. I would like to turn the call back over to our speakers for any closing remarks.

Thank you, Patrick. And thank you all for joining us today. Once again I call your attention to the disclosure concerning forward-looking statements and nonGAAP measures. I'd also like remind everyone that CNA's senior management will be speaking at the Loews's investment meeting the morning of Wednesday, November 5th at the Pierre Hotel in New York City. If you are interested in attending, please contact us CNA or Loews so we can send you the registration information. A taped replay of today's conference cal will be available for one week immediately following this call until November 3rd. Please see the earnings release for details and thank you all for your participation today.

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.