Good day everyone and welcome to the CNA Financial Corporation's First Quarter 2008 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over Nancy Bufalino. Please go ahead.

Thank you, Steve and good morning. Welcome to CNA's 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 of P&C Operations. Hopefully everyone got an opportunity to review the press release and financial supplements, which were released earlier this morning and can be found on the CNA's website. I'd like to advise everyone that during this call there may be forward-looking statements made and references to non-GAAP financial measures. Please see the section of the earnings release headed Forward-Looking Statements with regard to both. 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. And 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'd like to introduce Larry Haefner, who will be succeeding 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'd 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 I am turning to business of the call. While there is certainly is a significant amount of distraction provided by the financial markets, courtesy of the sub-prime and the boarder credit crisis, and while there certainly is a measurable amount of pressure provided by the continuous softening of the insurance markets, CNA continues to grind ahead with focus and commitment through strategies we have talked about for the past several years. CNA has 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 and at the level that we said we would do five years ago, positive spreads on our renewal efficiency reports which answers the age-old question as how do you know what 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 inline 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 and aggressive cross-selling across what we believe is one of…

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 return. Operating return on equity was 8.8% below our targeted range. Book value per share declined from year end to $34.79, reflecting the adverse change in unrealized investment gains and losses, which was driven by a significant credit spread widening related to the difficult credit market 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 its 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 a $1.13 per diluted share in the prior year period. Net income for the quarter which includes the impact of realized investment gains or 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 $290 million compared to $296 million in the prior year period. The…

Thank you. [Operator Instructions]. We'll go to Jay Cohen with Merrill Lynch.

Yes. Good morning. I've got a couple of questions. I guess first on the balance sheet side. If I recall, you began... you are actually buying some sub-prime 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 trailing at that point. I want to see if those have worked out okay? Mark-to-market standpoint, were there significant marks in the more recent purchases?

No. not Jay.

Okay. So, that the marks that we saw were largely the stuff that you had a while ago?

No you are talking about the mark across the entire portfolio?

Yes, it was... more specifically in the asset-backed portfolio.

No, they are pretty... I mean they are... there were some further declines in the sub-prime and Alt-A marks. But I would tell you that the securities we bought and talked to you about in last quarter turned out well. We're confident and we are confident of the purchases we've made this quarter.

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

Well, I think you can... I think you can see it if you look at the supplement of disclosures as well. What we told you before was, we are going to buy structurally advantage 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'll see that the amount of sub-prime is AAA has gone from 63% of the portfolio to 77%. The weighted-average life which last year I told you.... last quarter I told you sub-prime was 1.7 years, it's now 1.2 years. The weighted average life of all the sub-prime is under one year. Last quarter it 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 life... very short weighted average life 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 that credit markets have... some spreads have come back in again. Do you have any sense towards say your portfolio what the... what would be happening from a mark standpoint kind of year-to-date... quarter-to-date in the second quarter through this week?

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

Okay. Next question, what's the word from Loewe's. I mean clearly you 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 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 look at stock market via 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 had just recently, as all of these issues settle down, as we believe they will.

And the last question may be for Jim Lewis, do you guys think you can keep the overall combine below a 100 over the next couple of years. Just giving the direction of the market, is it a sort of forgone conclusion that it goes above a 100? James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: There is no question that we're feeling pressure, when you look at where rates are going and as we look at the marketplace that we're in right now, we think we're actually doing better than the overall market if you believe external surveys of late. But it is having pressure on the overall loss ratio. That's why within my remarks what I've really indicated is there's not going to be one look silver bullet, that's really going to help us to protect the overall loss ratio. It's a multitude of things. We've talked about portfolio optimization and then in our specialty portfolio, we have been optimizing every part of that portfolio with all the different crisis and sub-segments of business that we have either within helpful, within our pro-commercial open brokerage part of our book, we shifted that book from large accounts to the smaller mid-sized accounts. We've actually increased our overall writings of specialty in our overall book of business. Last year especially, our net premium basis to the first quarter represented 50% of the book. It's now up to 52% and I think you'll continue to see specialty via place that we will continue to grow, especially with the combine 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 been optimizing the portfolio from an account-size…

Great. Thanks Jim.

We'll 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 don't mean... that's 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 I think what's 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 the negative 1.8% return last quarter, but last year as I said the returns were 9% and if you look back on time on a rolling ten-year basis, the returns were over 13% and on a rolling five-year basis they were 16%.

Are the preponderance of this limited partnerships real estate-based?

No, there's very little real estate, little private equity, but the best way to think about it, think of that negative 1.8 debt return against the S&P was down over 6%.

Is there any place where analyst or observer can get good insight into the structure of those limited partnerships?

Whatever you can see from the stats line, but that's really... and we've not talked about it before at investment presentations and conferences. But we don't disclose a lot of details about those expect that what I have said to you before about the degree of diversification and the long-term performance. James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: And I would just reiterate, we are very confident of the long-term performance there.

My second question. To what extent were insurance underrating results; say in E&O and D&O adversely impacted by the sub-prime mess?

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

Yes sir, that's what I was trying to do.

Yes, I mean there's not... no material adverse developments since the last quarter when I reported in pretty much detail the situation with sub-prime. 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 the financial institutions.

One of you said that I think the worst part of the market... may be I got this wrong, was what you call the middle-market. How do you define the middle market? James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: Yes, this is Jim Lewis. On the middle-market if you just kind of... and this just a kind of an arbitrary definition; if you look at small business, small business is the low touch type of business where you can use automation as a means to handle it. You can either preset roll engines that you would have the low touch claims and low touch type of business going through this. If you look at it from a volume standpoint or a premium size, it 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's $50,000 roughly to $1million. James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: Right and as I look at that middle market, 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's why we've got an emphasis to when using our technology and our product from small business to even write more of our share of that book of business. Where we're seeing the most pricing pressure is really accounts that are greater than $500,000.

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

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

Thank you.

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

Good morning and you get it all right. Good job. Your answer to Jay's question on how upset Loewe's 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 investment portfolio and the partnership results, I am correct that they are sort of running that correct, Loewe's manages the portfolio?

Yes they do and that's obviously where the majority of the issues that we're talking about this quarter and last and the fundamental operation that Property and Casualty business has performed quite well through not only this quarter but over the past several. So, I wouldn't describe Loews' position as being like extraordinarily worried or whatever. I mean they're asset investment manager and they want to do the right thing in terms of maximizing the return.

Right and my perception from outside is that Loewe's has done an outstanding job creating long-term shareholder value from investment point of view, recognizing their contrarians and often take outside the bucks, positions that are controversial. If my perception is wrong, correct me and may be the next investor day you might want to outline how your overall portfolio over time has created excess value and shareholders?

I think Bob that was fairly put and we'll take you up on that point for our next investor day.

Okay, how much wriggle 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 pull back?

I don't think we can. 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 and the decisions we made about retiring the debt that came to in January. And so that's indicative of improved liquidity, dividend capacity at the insurance company level and improved capital strength relative to rating agencies or how we looking at ourselves. So, we have significantly more room and flexibility than I think, we're given credit for.

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 that bigger than a bread basket... box or smaller?

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

Where could you take your adjusted capital just to keep your ratings?

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

Okay, well that at least gives me one number I can calculate, I appreciate. I am 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 its not real estate then its not priced at 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 buy some sort of categorization, tell us a little bit more about what's in the LPs?

Well, as I said it's a broad variety of strategy. So... and I didn't mean to say that there was no real estate and no private equity as you sell a smaller portion. But we do some fixed income arbitrage, some risk arbitrage, there is some global macro strategies followed, there is a little... there is some equity-related value strategies, there is some distress strategies as a result of some long short equity plays in the --

I got. This is a definitional issue and whereas some people break it out into those two categories, alternatives and LPs. You guys have may be more than 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's fair.

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

And I'm sorry Dan... you're 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 took?

Well, what we took was about another... remember that the prices where we're using are market prices, here. So and we're using independent. Our primary evaluation 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 sub-prime and Alt-A, the decline in unrealized is about a $100 million on the sub-prime. So and I would say that 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?

That's right, that's the cumulative.

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

Did I answer your question or?

Well actually I think you helped with... if I did the math right, I've got your cumulative marks, it would look like the sub-prime 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, we...

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

Okay. Then finally may be more on operational front, can we talk about the warranty business that was highlighted in the press release, just may be a little more color about where the... what sort of products were generating the... what I thought was a reserved redundancy and may be from years that came from? James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: Yes. 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 the vehicle warranties. They also provide the warranties from a motorcycle perspective. And that's really limitative... their operation is providing the warranty services on non-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'll go next to Bill Van Ornum [ph] with Principal Global Investors.

Good morning. I guess a couple of my questions have been answered. But I guess just for further clarification on investment partnerships. First are the sub-prime asset-backed securities, are they part of the investment partnerships or are they separate?

The majority... vast majority are separate. Those are all detailed in supplement. We do have another about little less... about $20 million of sub prime exposure in the limited partnerships.

And since Loewe's is involved in these partnerships are they also involved in the sub-prime investments?

I think that... the answer to the question was Loewe's is our investment manager. So we do sub-contract... I mean Loewe's does manage all of the CNA's investments.

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

There has been a rally in the... on the credit side to the market. But remember, risk-free rate have also increased some. So as I said our marks going to be relatively reflective of what's happening in the market. So in the intermediate term, funds are going to see some increase in the risk-free rate and you will see credit spread coming in quite a bit, while 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'll just reiterate were confident in the ones we've made and were confident going forward, extremely confident.

Thank you. James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: This is Jim Lewis, Charlie. I haven't answered your question on how much of our middle market book is greater than 500,000 in premiums. 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'm assuming that the losses that are showing up this quarter the $35 million roughly, those are essentially marks. In other words if those same investments were held in your regular portfolio, if they would not be going through... much of it or some of that wouldn't be going through the P&L. Is that fair?

That's right. All of the changes in market values in the limited partnerships goes to the P&L. So we account of those on equity methods.

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

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

Fair enough. Okay, I get it. Thanks.

We'll go to Charles Gates, Credit Suisse

Thanks 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 are you seeing there?

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 six points, slightly up from where it was in the fourth quarter by a half a point. But what we're seeing is increased pricing competition across the portfolio, but more on the larger side and it's really coming from everywhere. The regional carriers are getting significantly much more aggressive that used to play in the lower end of middle market and they are beginning to play in the upper end of middle market on an individual risk basis. If someone really wants to go after an individual account, even though rates are going down, six points in reality, the rates for that account so far it could be anywhere from 10-15-20 points for an individual risk. But in the aggregate we have been able to up to manage the overall portfolio where that... our reserve has only gone down six points. But we know that if an account goes to the market, that particular account could be priced a lot more aggressive which is why, our underwriters have done a very good job of getting up front on pricing and really locking in overall rate levels itself. But this is the point right now in the middle market that we play very close attention to the prices. We give a lot directions based on accounts size by industry segment itself to our underwriters from a new and a renewal perspective. And that's why when you look at 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 said pricing was up, a half 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 six points for the quarter but it was actually up roughly a half 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 a regional company your small written that aren't they, as far as what they're writing? James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: There's 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 rack it in up their overall appetite. So now what they're doing is plans fully offset or they're normal appetite level until it's not surprising. They're really going after at very aggressively accounts that are $500,000 or more and the question you had that is just that. Do they have all of the capability from risk controlling claim standpoint to really handover their business. But they're much more aggressive on that upper end now just because the there is not a lot of new, new business. It's 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're now expanding beyond their normal appetite.

This is Steve Lilienthal just to add in addition to Jim's clarify middle market or regional carry is coming out market and playing out of their box and getting into some foreign turf for themselves. The large cap market whether it's a standard casualty book or the specialty lines is actually the most --. So to 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's looking like. Now, we retreated from that market very quietly 3 or 4 years ago. So we're not experiencing the same volatility that some of our brethren are experiencing out there competing with Fortune 250 or 500 accounts. So... and that's pretty much across the port. Our comp has heated up big time based on the proceed advantages of benefit improvements or containment which we think is more notional than real and the excess comp markets come white hot. So that's the stuff that's out there. Much of it is not within CNA's appetite, we kind of moved away from that a long time ago.

But it's the very large risk as you said the Fortune 250, it's probably the most competitive market place. James R. Lewis - President and Chief Executive Officer, Property & Casualty Operations: 250 to 500, yes.

The final question, what do you see as the impact on the industry in total of the acquisition of Cisco by Liberty Mutual.

I think that's got to play out Charlie. I think... We were very interested to see that, 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 to play that. I think there is lot of executional risks that is embedded there, a lot you know not a lot of these good size mergers have been successful over the last couple of years. So we are hoping that this opportunity for CNA as these two companies go together and create some disruption with the distributors. That's quite frankly what we are interested in and 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 Steven. 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 if you have any doubts. We appreciate your participation in today's call and thank you again.

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