James Anderson - Investor Relations Tom Motamed - Chairman and Chief Executive Officer Craig Mense - Chief Financial Officer.

Bob Glasspiegel - Janney Capital Jay Cohen - Bank of America Merrill Lynch Josh Shanker - Deutsche Bank Adam Klauber - William Blair Ron Bobman - Capital Returns John Thomas - Williams Blair.

Good day and welcome to the CNA Financial Corporation's First Quarter 2014 Earnings Conference Call. Today’s call is being recorded. At this time I would like to turn the conference over to James Anderson. Please go ahead..

Thank you, Greg. Good morning and welcome to the CNA’s discussion of our 2014 first quarter financial results. By now hopefully all of you have seen our earnings release, financial supplement and presentation slides. If not you may access these documents on our website, www.cna.com under the Investor Relations menu.

With us on this morning’s call are Tom Motamed, our Chairman and Chief Executive Officer; and Craig Mense, our Chief Financial Officer. Following Tom’s and Craig’s remarks about our quarterly results we will open it up to your questions.

Before turning it over to Tom, I would like to advise everyone that during this call there may be forward-looking statements made and references to non-GAAP financial measures. Any forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the call.

Information concerning those risks is contained in the earnings release and in CNA's most recent 10-K on file with the SEC. In addition, the forward-looking statements speak only as of today, Monday, April 28, 2014. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

Regarding non-GAAP measures, reconciliations to the most comparable GAAP measures have also been provided in the financial supplement. This call is being recorded and webcast. During the next week the call may be accessed on CNA's website.

I would also like to remind you that presentation slides have again been posted on our website to provide additional perspective on our financial and operating trends. With that, I will turn the call over to CNA's Chairman and CEO, Tom Motamed..

Thank you, James. Good morning everyone and thank you for joining us today. In the first quarter of this year CNA produced operating income of $190 million, compared with $225 million in the first quarter of 2013.

Current accident year non-catastrophe underwriting results improved over prior year but were offset by higher winter-related catastrophes and lower limited partnership investment income. Our property and casualty combined ratio was 101.6 for the quarter, in line with last year's first quarter.

Catastrophes affected the loss and combined ratios by 4.5 points as compared with 2.4 points in the first quarter of 2013. Our property and casualty combined ratio, excluding catastrophes in development was 97.2. This was almost a four point improvement as compared with the first quarter of 2013.

This includes just over a three point improvement in our loss ratio and a 0.7 point improvement in our expense ratio. Our results in the first quarter are consistent where we ended full year 2013.

Property and Casualty net written premium was flat in the quarter as rate increases were offset by lower retention in commercial resulting from underwriting actions, including exiting classes outside of our appetite, as well as continuing to focus on underwriting and pricing actions to improve profitability.

We continue to seek and achieve rate increases exceeding loss cost trends. Commercial rates increased 6% in the quarter with retention in the mid-70s. Specialty rates increased 4% and retention remained strong in the mid-80s. With that I will turn it over to Craig..

Thanks, Tom. Good morning everyone. As Tom mentioned first quarter net operating income was $190 million or $0.70 per share and the operating return on equity was 6.3%.

Our reported net income of $13 million includes a $214 million impairment charge related to the pending sale of our life subsidiary Continental Assurance Company, which we announced last quarter. The results of that business as well as the impact of the impairment charge are now being reported as a discontinued operation.

We still expect to close this transaction sometime in the second quarter. The majority of our business' balance strength reflects our continuous improvements. We are pleased with the ongoing progress in our specialty, hardy and long term care businesses as well as our investment results and capital management activities.

Our results in certain parts of commercial lines are not what we expected. Continued loss caused pressure on auto and certain classes within our small business segments slowed our overall progress. Our middle market business and customer segment strategies are taking hold and are making meaningful positive contributions to our progress.

Our core P&C operations produced net operating income of $219 million in the first quarter compared with $257 million in the first quarter of 2013. The decrease was primarily the result of lower limited partnership investment income and winter related catastrophe losses.

Our first quarter P&C operations loss ratio excluding catastrophes in development was 64%, a 3 point improvement as compared with last year's first quarter and consistent with our reported full year 2013 results.

Our first quarter expense ratio was 33.1%, a seven-tenths of a point improvement from the prior year period and again consistent with our full year 2013 results reflecting our ongoing expense management efforts and a lower level of underwriting expenses.

Specialty’s first quarter combined ratio excluding catastrophes in development was 93.9%, four points better than last year's first quarter and modestly better than the full year 2013 results. The reported combined ratio was 94.4%, which included 1.4 points of cat losses and just under one point of favorable development.

The loss ratio excluding catastrophes in development was 63.7%, three points lower than last year's first quarter and slightly below the full year 2013 results. The improvement was driven by rate increases and excessive trends as well as targeted underwriting actions that continue to refine the portfolio mix.

Commercial's first quarter combined ratio excluding catastrophes and development was 101.2% almost three points better than last year's first quarter. The loss ratio excluding catastrophes in development was 66.9%, an improvement of almost two points over the prior year's period but one point above full year 2013.

Non-cat weather and other large first party losses added approximately 1.5 points to the reported loss ratio. The reported combined ratio of 109.8% included 7.5 points of catastrophe losses and compares with the prior year period, 106.8% which had 4.6 points of catastrophe losses.

Hardy reported net operating income of $7 million in the first quarter with the combined ratio excluding catastrophes in development of 88.6% as both the underlying loss ratio and expense ratio improved compared with the first quarter 2013 and the full year.

Reported combined ratio was 87.1%, which included a smaller amount of favorable prior period development items. Hardy's first quarter expense ratio includes almost four points of one-time items. The run-rate expense ratio is now in the mid-40s.

Hardy continued to produce a modest amount of organic net written premium growth and also benefited from a reduced level of reinsurance spend.

The life and group segment produced $2 million of net operating loss in the quarter, slightly better than the first quarter of 2013, primarily driven by higher net investment income due to a higher invested asset base.

The results were helped by the ongoing positive impact of our rate increase actions; morbidity was generally favorable while persistency was unfavorable to recent quarter’s results. Our corporate segment which primarily includes corporate expenses reported a $27 million first quarter net operating loss consistent with the prior year’s first quarter.

It includes a small $2 million benefit from the recognition of the deferred gain established last quarter related to the NICO retroactive reinsurance transaction. Our balance sheet continues to reflect CNA’s financial strength and stability. Book value per share decreased 1% in the first quarter to $46.61 per share.

Excluding accumulated other comprehensive income book value was $44.05 per share, down 3% from year-end 2013. The decrease was driven by our previously announced $1 a share special dividend and $0.25 a share quarterly dividend as well as the negative impact of the CAC sale.

Our investment portfolio’s pretax net unrealized gains stood at approximately $2.5 billion at quarter-end, an increase of approximately $600 million from year-end 2013. Our statutory surplus at quarter-end was $11 billion and we continue to maintain significant dividend capacity at the insurance operating company level.

As previously announced, we completed a $550 million debt offering in February with the proceeds earmarked to retire senior notes maturing in December of this year. The coupon on the new debt is 3.95%, 190 basis points lower than the existing debts.

Cash and short term investments at the holding company level were approximately $1 billion at quarter-end, up significantly due to the proceeds from the debt offering. In the first quarter, operating cash flow excluding trading activity was approximately $150 million.

Cash principal repayments through pay down, bond calls and maturities were approximately $850 million. Net investment income was $526 million pretax in the first quarter. Limited partnership income of $73 million was a solid 2.7% return this quarter but lower than the exceptional return in the same period last year.

Income from our fixed maturity and other securities, excluding LPs in the first quarter was $553 million pretax, down slightly from the prior year period.

More importantly, you will note that we generated $324 million of after tax income from these securities, which is above the level of first quarter 2013 reflective of the opportunity that we saw in fees last summer and the tax exempt municipal bond market.

Our actions have enabled us to sustain an after tax book yield of 3.5% on this part of the portfolio. While our overall portfolio allocations did not change significantly in the first quarter, we did continue to increase our allocation to the tax exempt municipal bond market.

The Investment grade corporate bond sector continues to represent the largest component of our invested assets.

The average credit quality of our fixed maturity portfolio remained at A, with fixed income assets that support our long duration life like liabilities and an effective duration of 11.5 years at quarter-end, the effective duration of the fixed income assets which support our traditional P&C liabilities was 4.3 years at quarter-end.

These durations are both in line with portfolio targets. Overall, our investment portfolio remains well diversified liquid, high quality and aligned with our business objectives. With that I will turn it back to Tom..

Thanks, Craig. Before we open it up for questions I would like to make some final comments. As Craig said our steady progress is evident across the majority of our businesses. We are pleased with our progress in specialty and Hardy and with our capital position and investment income. We know we have to work -- we have to work to do in commercial.

We remain focused on the disciplined execution of our articulated business strategy and are committed to driving further improvement in our results. With that we would be glad to take your questions..

Thank you. (Operator Instructions). And we will take our first question from Bob Glasspiegel with Janney Capital..

I was wondering if you could -- good morning everyone.

I was wondering if you could expand on what sort of has changed in commercial auto within the small business segment that's causing some pressures?.

I think the industry is acknowledging that commercial auto is a class that's not doing very well. And the fact is for us that would be middle market as-well-as small but particularly in the small area. I think the good news is we're refining our underwriting and pricing strategies there Bob. We're getting double-digit rate in small on commercial auto.

So we believe a combination of strict underwriting guidelines and pricing as well as rate increases is going to have the impact of turning that around overtime..

Well, thank you.

If I could follow-up just with a numbers question for Craig, I see in the Life and Group non-core on page eight, you had a $32 million pretax loss and $30 million of tax benefits, anything driving the sort of higher tax credit rate this quarter?.

That's just a reflection of the investment portfolio which you'll recall is more heavily weighted to tax exempt municipals..

Okay, thank you..

You're welcome, Bob..

And our next question comes from Jay Cohen with Bank of America Merrill Lynch..

Thank you. Your one number that looked a little worse than we've been seeing was the favorable development in the specialty segment.

And I am wondering is that -- maybe it's – [I’d] move back a little, it looks like there might be some seasonality there where the first quarter tends that have a lower reserve release, is that what's going on or is there any underlying change what you're seeing from a claim standpoint in that segment?.

I think you're right in what you said Jay. First quarter typically is lighter, we had a big fourth quarter reserve releases in specialty. It's seasonal. The fact is we don't look at every line, every class, every quarter and specialty tends to be more towards the end of the year than the beginning of the year..

And I guess on the commercial business you had some very modest amount of adverse development but it was adverse.

Can you give us a kind of glimpse into what's happening with various classes of business from the reserve standpoint, is that more in the commercial auto side you're seeing some pressure in those reserves?.

Jay, I can give you just a little bit of color there. Yes there was some adverse in commercial auto, in the more recent accident years and but that was largely offset by some favorable development we had in property mixed with property cap from '13 as-well-as general liability in some older years.

And what you are really seeing there is just the residual of what's left in the workers comp aggregate discount on the line. So I would say -- I would characterize that result as flat for the quarter..

That's fair. Very good. Thank you very much..

Welcome..

(Operator Instructions). Next we will hear from Josh Shanker with Deutsche Bank..

Hey, good morning everyone..

Good morning..

No one's digging a little further on the commercial auto, can you talk a little about what the combined ratio you're running at for that business right now is and I think that's probably about $300 million-$400 million of premium annually, can you give us some color on that?.

Yeah, hold on. On an exiting year basis it's running about at $121 million and $159 million on a calendar year..

And how much premium is that?.

Hold on we have to get that. Yeah, it's about less than 10%, it's around 10% of our commercial sales..

And can we also sort of scale the small business that’s not really a reporting category you have so I am not sure exactly what you can tell me there.

But I would be interested to know how you guys think about that as well?.

So you can see the scale in the earnings slide as James referred to earlier, Josh you can see the general revenue as well as rate and retention so that -- I might -- I don’t know exactly that page..

Okay, that category it's shown that. There is some small commercial in and there is some commercial auto in the small business that’s a class as opposed to a line..

Yes..

Yes, okay.

And so in terms of thinking about the pace of improvement, if where we are today where given the rate improvements you are at, how quickly do you think you will take to turn this around given the pricing right now and the trends involved?.

Well we are taking a pretty hard line on rate increases like I said a small low double-digit. Retention we’ve really dropped a lot of business there, retention is kind of just under 60%.

So a combination of really getting rid of the bad stuff that we don’t think we can fix plus applying rates for the remainder of the book will be helpful and we are extremely cautious on what we are writing new and really trying to write the new business at profitable level.

So it's going to take some time to get through it but I couldn’t give you an exact time on that..

But would it be and of course that even if you could hold loss cost generally flattish given double digit rate increases it would take you a couple years to get to where you want to be on commercial auto?.

Well, I certainly think to find a couple two to three that’s probably will apply to….

Oh, couple two yeah..

Yeah and I think that really it's the power of written rate turning to earned rate and exceeding loss cost that will drive the margins more favorably. So we are confident that we’ll be able to continue to get rate increases in this line..

All right, well I appreciate all the color. Thank you very much and good luck..

Yeah, you are welcome..

(Operator Instructions). And we have a follow-up question from Jay Cohen. Please go ahead..

Yeah, thank you, a couple of questions. The first is, I am wondering if you can discuss the competitive conditions in the commercial segment, I see which your average rate increases are -- But if you can give more color around that? And then separately you talked about non-CAT weather and some severe losses affecting the loss ratio.

So I am wondering if you can just talk about some of these severe losses, what kind of losses are we are talking about?.

Okay, on the loss side obviously was a tough winter some of it gets cataloged as CAT and we’ve kind of given you the CAT numbers. We did have some non-CAT large losses, like I say probably in the amount of $15 million, so a couple of fires et cetera.

So you have that and then there is in general the fact that you have weather-related losses that are not CATs. So we’ve had some activity there as well as I think most people, so a combination of CATs, large loss and weather-related claims from the severe winter.

And your other question Jay was?.

On competitive conditions, Tom?.

Yeah, you know it's always competitive but I think what we are seeing and probably have seen for the last six months, maybe a little more is people are very protective of their renewals.

They are putting them to bed earlier, they are not letting them get to market and in fact maybe cutting their or not applying rate to some of them, renewing them flat. So I think people are more protective of the renewal book which creates less new business opportunities.

We have seen less new business opportunities here at CNA and it’s not for not trying. It’s clearly people are trying to put their stock to bed much earlier, so we see that.

Our new business I would say people when a piece comes out there people are competitive and writing some of the business in commercial probably below expiring in many cases and everybody has different analytics to predict one account is better than the other.

So I think you have some trading when business comes out to the market on a new business standpoint, so but that has been going on for a while. I don't think it’s anything new.

Kind of interesting though when we look at commercial the month of March had the highest rate increases in the first quarter compared to January and February, so it’s a little lumpy out there but that’s how I would describe it..

That’s great. Thank you..

And next we’ll hear from Adam Klauber with William Blair..

Thanks. Good morning. So when you look through some of the weather and noise it looks like your accident year loss ratio in first quarter was better than the first quarter last year.

Do you think we’ll continue to see accident year improvement throughout this year?.

That’s the goal..

Okay.

Next question worker’s comp, how is that trending and again do you think the accident year worker’s comp this year will be better than last year?.

You know I think there are couple of things going on in worker’s comp here; number one, we’re getting rate increases in excess of loss cost trends so that will improve margin.

We’re moving the mix much more into we would call white collar which I probably describe as companies that have people that really want to go back to work because they’re high wage earners. So we’re managing the mix. We’re pretty careful on what states we’re growing in or not growing in.

So it’s multifaceted strategy; get the rate increases, manage the mix, manage the jurisdictions but we think we’re going to gain on worker’s comp. We are seeing improvement there..

Okay, thank you very much..

And our next question comes from Ron Bobman with Capital Returns..

Hi, good morning. I got on the call late so I apologize if this is ground you covered. I was curious to hear your thoughts about what’s going on in the cyber market comp sort of broadly and then any actions or plans for CNA's participation.

And then switching to Hardy if there’s any description as far as does Hardy have a broadening underwriting appetite whether it’s geography or lines of business that you would describe any of that, I appreciate it. Thanks and helpful as well..

I’ll start with Hardy. I think Hardy is in a competitive environment in the Lloyd’s marketplace, it is quite competitive on pricing, whether that be new and renewal.

They did give up about 3.0 points of rate in the quarter but I would describe them as sticking to their strategy of various areas that they want to underwrite in and I think they really have a great attitude about keeping their powder dry. They are not going to chase the market down.

You know we’re constantly talking to them but they are pretty disciplined and I think they are not going to chase the market down. They’re going to wait for the opportunities and we’re pretty happy with what’s going on at Hardy and they obviously contributed to the results in the first quarter. As far as cyber we do offer cyber liability.

We have been doing that for a while. It is a hot topic, obviously what you read in the papers and I think fear sells, right. So companies are buying this product, they are not sure if they are going to have a breach or not but clearly it is a hot product. And there is a lot of competition for it.

There is a lot of people writing cyber and we would expect that to continue. To me it's a little bit reminiscent of public D&O back in the early 80s that you know we were selling the product and nobody really knew what the coverage was and there weren’t many claims.

And then all of a sudden there were claims and people started adjusting terms and conditions and policy language. So I think Cyber, quite honestly is going develop overtime, till we really know what it's all about et cetera but it's here to stay..

Thanks. Can I just go back to hardy, sort of make sure because you didn't say so I assume the answer was no, I didn't think you said.

As far as Hardy broadening its geographic risk profile or lines of business, no great, no meaningful changes planned there or currently being undertaken in fact you said it's sticking to their knitting, the same lines if they had been writing historically and largely in the same geographies?.

Yeah, that's true. Now the only thing I would give you there is one caveat and that is Lloyds is expanding their network. They operate out of Singapore now and the fact is we have to figure out how we're going to -- if we did go to Singapore for Lloyds we got to figure out how we're going to do that and what product lines.

But we're not going to do something we don't know anything about, I can assure that's the case. So we're going to stick to our core competency, our expertise if there is business that fits that coming out of the Singapore Lloyds facility we will be interested in entertaining it if it's the right price..

Okay..

But this is not about going like a barn burner here, this is cautious..

Good. We don't want any barn burners..

No, we don't like barns that burn..

All right. Bye-bye..

And our next question comes from John Thomas with Williams Blair..

Hi, some of my questions have already been asked already but can you breakdown the growth in specialty because that came in at 10% this quarter and I am just wondering what lines of business you're driving there?.

Yeah, that's gross; the net was let's see minus one..

All right, and so why were those so different?.

It's the Asurion cell phone captive, I think we have talked about it before but it's quite been a while since we've described it..

Okay..

That's booked as gross, so that does not contribute to the net..

Okay, and then your exposure growth this year compared to last year are you seeing increased business activity, lower?.

Slightly higher, but I am telling you slightly, less than a point..

All right. Thanks..

Yes..

And it appears there are no further questions at this time. Mr. Motamed I'd like to turn the conference back over to you for any additional or closing remarks..

Thank you very much. See you next quarter..

And once again that does conclude today’s conference. We appreciate your participation..