James Anderson - IR Thomas F. Motamed - Chairman and Chief Executive Officer D. Craig Mense - Executive Vice President and Chief Financial Officer.

Jay Cohen from Bank - America Merrill Lynch Chris Martin - Macquarie Bob Glasspiegel - Janney Capital Josh Shanker - Deutsche Bank Adam Klauber - William Blair.

Good day, and welcome to the CNA Financial Corporation's Third 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, Noah. Good morning, and welcome to the CNA's discussion of our 2014 third 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.

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 in 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 and 10-Q on file with the SEC. In addition, the forward-looking statements speak only as of today, Monday, November 3, 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 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 to our website to provide additional perspective on our financial and operating trends. With that, I'll 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 third quarter, CNA produced net operating income of $182 million or $216 million if you exclude the previously announced $34 million charge related to the reinsurance transaction associated with the sale of our payout annuity business.

Our operating return on equity for the quarter was 6% without the reinsurance charge our return on equity would have been 7.1%. Our Property & Casualty combined ratio for the quarter was 96.1, excluding catastrophes and development, the combined ratio was 96.2% slightly higher than last years third quarter.

We are pleased with improvement in our Specialty and Commercial underlying loss ratios. The third quarter loss ratios improved compared with the third quarter of 2013 and the year-to-date loss ratios improved compared with the full year 2013.

Specialty had a strong quarter with a combined ratio of 81.6%, which was helped by almost a 11 points of favorable loss development. Specialty's combined ratio, excluding catastrophes and development was 91.8%. Net written premium for the quarter was down 2%, due to the termination of an MGA relationship as we discussed last quarter.

Rates increased 3% consistent with the second quarter and retention remained strong in the mid-80s. Commercial's combined ratio was 108.3% for the quarter, which included 7.5 points of unfavorable prior year development, with higher severity in recent accident years for primary general liability being the largest component.

Commercial's combined ratio, excluding catastrophes and development was 98.9%. Commercial rates increased 4% overall and 5% in the US, consistent with the second quarter. Retention improved 3 points from last quarter to the mid 70s. With that, I will turn it over to Craig. .

Thanks, Tom. Good morning, everyone. As Tom mentioned, the third quarter net operating income was $182 million or $0.68 per share and the operating return on equity was 6%. Our net income was $213 million. Adjusting for the payout annuity reinsurance charge, earnings per share were $0.80 and the operating return on equity was 7.1%.

Our core P&C operations produced net operating income of $241 million compared with $330 million in the third quarter of 2013. The decrease was a result of lower net investment income and a reduced amount of favorable reserve development.

The P&C loss ratio, excluding catastrophes and development was 62.9%, essentially flat with last years third quarter. As non-catastrophes losses at Hardy offset improvements in Specialty and Commercial. The year-to-date underlying loss ratio of 63.2% is now slightly more than a half point better than our full year 2013 result.

Our third quarter expense ratio was 33.1%, consistent with full year 2013 results. We continue to be pleased with the performance of our Specialty business.

Specialty’s third quarter combined ratio was 81.6%, which included almost a 11 points of favorable development, was more than a three and half point improvement as compared with the prior year quarter. The loss ratio, excluding catastrophes and development was 61.6% more than two points lower than last years third quarter.

On a year-to-date basis, the accident year loss ratio was now almost one and a half points lower than where we ended full year 2013. The improvements were due to continued refinement of the portfolio mix, as well as earned rate increases in excess of loss cost trends.

Commercial's combined ratio of 108.3% included 1.9 points of catastrophe losses and 7.5 points of reserve strengthening as Tom described. Commercial’s third quarter combined ratio, excluding catastrophes and development, was 98.9% almost a half point better than last years third quarter.

The underlying loss ratio was 64%, slightly better than the prior year period. On year-to-date basis, the underlying loss ratio is now almost one point better than the full year 2013.

We continue to aggressively manage our Commercial book and pursue rate targets that are built upon differentiated pricing tied to expected profitability of individual accounts. Net written premium was down 7% compared with the prior year quarter, reflective of the underwriting actions we have taken.

Hardy had a net operating loss of $15 million in the third quarter with a combined ratio of 112.9%, including over four points of unfavorable premium development. The loss ratio was affected by large aviation losses, which accounted for approximately 30 points, plus higher than expected attritional losses in our marine cargo book.

The expense ratio increase was driven by the effect of foreign currency exchange rates, as well as by costs related to moving to a service company operating model, including real estate cost.

The Life & Group segment produced $42 million net operating loss in the quarter, which includes the $34 million charge attributed to a reinsurance transaction tied to the sale of our structured settlement annuities.

As I explained last quarter, in addition to the sale of our life company, CAC, we reinsured a block of annuities from our Bermuda subsidiary to Wilton Re. The transaction was structured on a funds withheld basis, meaning that we maintain legal ownership for the assets associated with the transaction, but Wilton Re assumes the economic risk.

At the inception of the contract, the market value of the assets was $34 million higher than the $150 million book value, causing us to recognize the $34 million loss. Over time, we would expect the $34 million loss on reinsurance to unwind as the assets are sold or mature, and the gain or loss is recognized.

Excluding the impact of the payout annuity reinsurance transaction, the Life & Group loss for the quarter was $8 million compared with the $33 million loss in the third quarter of last year. The improvement was driven by improved results in our long-term care business which was favorable affected by morbidity, rate increase actions and persistency.

Results are also benefited from higher net investment income due to a higher invested asset base. Our corporate segment, which primarily includes corporate expenses, produced a net operating loss of $17 million compared with a $26 million loss in the third quarter of 2013.

The improvement was driven by a reduction in the allowance for uncollectible reinsurance receivables. Our investment portfolio’s pre-tax net unrealized gains stood at approximately $3.2 billion at quarter end, roughly equivalent to the end of second quarter. Our statutory surplus at quarter end was $11.4 billion.

We continue to maintain significant dividend capacity at the insurance operating company level. Cash and short-term investments at the holding company level were approximately $1 billion at quarter end, up significantly from 2013 year end, due to the proceeds for February debt offering to pre-fund our upcoming December maturity.

In the third quarter, operating cash flow, excluding trading activity improved to approximately $460 million. Cash principle repayments through pay downs, bond calls, and maturities were approximately $950 billion.

Third quarter after-tax net investment income of $346 million decreased $40 million from the prior year results driven by limited partnership income, which returned 1% versus 3.5% in the same period last year. Overall, portfolio allocations did not change significantly in the third quarter.

Average credit quality of our fixed maturity portfolio remained at A. Fixed income assets that support our long duration life-like liabilities had an effective duration of 11.1 years at quarter end. The effective duration of the fixed income assets, which support our traditional P&C liabilities, was 4.1 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. Before turning it back to Tom, I want to highlight a pension settlement charge that will flow through our fourth quarter financial results.

We recently offered a lump-sum payment opportunity to about 11,000 vested pension plan participants who are no longer employed by CNA. The high end of the estimated range of the after tax charge, which is dependent on the participant acceptance rate of the offer is approximately $65 million.

The charge will be recognized when the lump-sum payments are made from the pension plan assets in December.

The corresponding charge associated with the settlement will have no effect on shareholders equity, as the settlement charge represents immediate recognition of the proportional share of prior unrealized actuarial losses already reflected in shareholders equity. With that, I will turn it back to Tom..

Thank you, Craig. Before we take your questions, I would like to offer a few comments on the current state of the market and on our European operations. Since we spoke in August, there is not been a change in our view of the market.

We continue to see limited exposure growth and competitive pricing with some lines of business more aggressive than others. However, our strategy is not changed, and more importantly our underwriting improvement in recent years is not solely based on rate increases.

We continue to achieve underlying loss ratio improvement in Commercial & Specialty, as we shift our book to higher margin business and exit poor performing accounts and classes. For example, since 2011, we have successfully changed our mix of business in the US from 73% in our focus segments to 80% so far this year.

We have also demonstrated discipline in our approach to new business where our reduced volumes reflect our willingness to avoid inadequately priced opportunities. Earlier Craig discussed our transition to a service company operating model for CNA Europe and Hardy.

This was one element of a broader strategy to streamline our international management, which was further enhanced in August by the appointment of David Brosnan, as Chief Executive of CNA Europe and Hardy, with oversight of CNA Canada.

This operating model will facilitate our ability to efficiently serve the Lloyds market, the European local markets, and the unique and expanding needs of multinational customers. With that, we'll be glad to take your questions..

Thank you. (Operator Instructions). And we’ll take our first question from Jay Cohen from Bank of America Merrill Lynch..

Yes. Thank you. A couple of questions. The first is, I've had several quarters now of adverse development in the Commercial segment. After years of that segment being I guess relatively benign from a loss standpoint, in fact seeing favorable development.

And I was just wondering if you can talk a little bit more about what you're seeing, and did you make sort of an effort to get all this behind you? Was there a concerted effort in this quarter to say, hey, let's try to nip this in the bud?.

Jay, well, the answer to the last question is no. So there is concerted effort to try to pile on or nip it in the bud, I think a similar question was asked of us last quarter. And so you can count us, it hopefully has reputation that we act on things as we see them.

I think what's kind of plagued us here in Commercial has been you know we've gotten out of a number businesses that we thought were unprofitable, those have continued to be even a little worse than we thought they were and that bleed, that’s been little slower, has continued and even contributes a bit to this quarter.

This quarters results in Commercial were driven primarily by general liabilities severity, which is something that surprised us in terms of direction it was headed. As we really shifted our book from lessor [ph] of premises ops book to things that have more severity.

So I think that’s a bit of a – that is, was an action to catch up in our perspective going forward. So we are you know, disappointed by having to report these and we work hard to get our reserves accurate all the time and we think we have acted appropriately. So we're not – we certainly not holding back on any thing..

Yes. I think I would just add to that Jay, that you know, last quarter we talked about Commercial Auto and that has popped its ugly head for the industry. So I don’t think that was anything unique to us. But we recognized it you know, we are dealing with it. The good news is, it’s a small portion of our book today. Its gets smaller all the time.

The international work comp which we have exited most of it you know, we are still paying the price for some of that, but once again it was one of our exit strategies to get out of that business. So I think you know, we are dealing with the things in a timely fashion when I come up, but clearly severity has been the issue. It has not been frequency.

And if you look at our claim counts, our claim counts are dropping, both on the outstanding number of claims, as well as new arising claims. So I think it’s a reflection of the changing mix of business, but we are paying for sins of the past..

Got it. And I guess because a lot of the reserve changes you made were in businesses that you've exited.

It doesn't have much of an effect on your current year accident pick then?.

Well, the general liability does, yes. So you're right about the majority in the past, and in the past calls. But certainly the GL, if we look at GL severity does have an effect on our pick in the current accident year. So, in other words it would have been proved more if not for the reflection of this severity..

Got it. And then the second question, I guess we're seeing premiums falling now in all of your segments and part of that is obviously underwriting discipline, which is what we don't want to see. For many companies when premiums start to fall, which obviously is potentially a negative from a profitability standpoint.

The – one of the options they have is to, well, this will free up capital, we can buy back stock. That's not much of an option for you. Obviously, you have other capital management leverage you can pull. My question is, does it free up capital for you? As you see premiums going down and your business mix is changing.

And that can change your capital needs too, is this affecting your view of how much capital you need?.

Yes. So, obviously it’s a – that growth or prospects of growth are a significant input to our capital plans and capital perspectives going forward..

Okay. I still had the – well, that's it for now. I'll circle back if I have other stuff. Thank you..

And we'll take our next question from Amit Kumar with Macquarie..

Hello, good morning. It's Chris Martin today.

So the one question that we have is sort of, as we get closer to 1-1, what potential changes might you be thinking about for your reinsurance purchase? With the current reinsurance pricing where it is and how some of this pressure and some of the more favorable terms have started to show up in Casualty lines.

Might you start to be thinking about any changes in how you purchase that moving forward? Thanks..

Hello, good morning. It's Chris Martin today.

So the one question that we have is sort of, as we get closer to 1-1, what potential changes might you be thinking about for your reinsurance purchase? With the current reinsurance pricing where it is and how some of this pressure and some of the more favorable terms have started to show up in Casualty lines.

Might you start to be thinking about any changes in how you purchase that moving forward? Thanks..

We are certainly actively engaged in paying attention to what's going on in the reinsurance market. But we don’t have any – no plans at this moment to be buying anything differently. Our Casualty, you referenced Casualty, you see how profitable our Specialty business is which is highly Casualty.

So it doesn’t seem to make much sense to us to give away that profit, given the diversification we have in the book, you know, the typical desire of reinsurance purchases is to shed severity and volatility, so no reason think about it doing it.

So we're in the midst of negotiating or beginning to plan for the negotiation of the renewal of our Property Cat treaty and we buy a war comp, the Cat treaty and those are underway. But as we look at it we don’t see anything that would be particularly attractive or add to the value of CNA longer term in the reinsurance market..

Got it. Thanks. That's really helpful. And then just a second thing. In the Hardy business you'd mentioned that I think you had said there were 13 points were attributed to the aviation losses.

Can you sort of talk about what sort of or maybe other lines that you said had higher than average attritional losses?.

Got it. Thanks. That's really helpful. And then just a second thing. In the Hardy business you'd mentioned that I think you had said there were 13 points were attributed to the aviation losses.

Can you sort of talk about what sort of or maybe other lines that you said had higher than average attritional losses?.

Well, the other lines that had attritional losses were marine cargo. So we had quite few cash in transit type losses over the quarter..

And how many points do you think that would be about?.

Well, that, the aviation losses – in total both of them were about $20 million worth of losses. So whatever the delta is between the 13 points..

Got it. Thanks a lot. That's all I have today. Good luck..

Thank you..

We'll take our next question from Bob Glasspiegel with Janney Capital..

Good morning, CNA.

What was the adjustment in the receivables on collectible re-insurance?.

It was about $14 million less reduction..

Okay.

And the Wilton Re, would you have a pretax number for that?.

That pre tax was 36, so 3.5 was about the same thing, Bob, because there was Bermuda..

And I think if you went back and looked we – I think we had a slide detailing it in the last quarter. .

Okay. Will do.

How would you handicap the likelihood of a special dividend going forward?.

Well, and maybe the best way to answer it is, that, I am not sure Jay was trying to get at that earlier. That as we sit around and talk about it. We recognize that we start with a very strong capital position as a company.

The earnings, even though they haven’t been quite as high as we – Tom and I would like them to be, they've been consistent and very steady. We'd love to see an opportunity to put that capital that we're continuing to accumulate the work to grow the business. But I would say there is no potential for that moment as we're looking out for it.

So at the end of the year we'll complete our review of at year end 2014 and what the 2014 results were. We'll add in what our outlook is for 2015 and then we'll decide whether and what to do with the common and or special dividend..

Okay. That's a thoughtful answer. Finally on long-term care, you do a great job in the K and Q of sizing up the various sensitivity analysis. I can't remember if you do a year-end review or it comes up periodically. But it seems like you got interest rates lower, but experience and pricing improved.

If you had to sort of weigh the battle of those two countervailing forces, does it come out sort of more positive, more negative, or stay tuned?.

Well, we do, well, first, you're right, we do a – our gross premium evaluation review at long-term in the fourth quarter. We did complete the claim review of long-term care in the third quarter and the outcome of that was actually a slight positive change on about $2 billion of reserves. The gross premium review was underway.

As you said, the big components of morbidity I wouldn’t give our results out over the last year. I wouldn’t expect any adverse for morbidity persistency even though it’s been better this than last, is still running a little worse than what our expectation would be. And interest rates as you said would be the biggest driver.

So you know, what the dividend, I mean, you look up and you can see the difference in the spot rate on this 30 is almost 50 basis points lower, September 30 of this year against September 30 of the year ago. But we're really looking at the forward curve that we're thinking about, which would be a bigger delta.

So that will be the bigger driver of the outcome. And I think all things being equal we'd expect some pressure on margin coming out of that interest rate review, but I can't tell you what the outcome is exactly…..

I thought there was a fourth factor, which is that price increases that you're able to get….

Yes, those are..

Expectations….

Yes, that’s true and those are slightly better than we expected..

Okay. I appreciate it..

Thank you, Bob..

We'll take our next question from Josh Shanker with Deutsche Bank..

Yes. Good morning, everyone. Over the last couple of years, you've obviously focused on weeding out businesses that you CNA didn't have a necessarily a value added edge on.

When you look at the portfolio today, how far are you in terms of weeding out those businesses do you think that you are? Is the CNA portfolio a enviable collection of businesses? And if so, why do think that the gap is so persistent between your pricing and peers profitability on underwriting at this point?.

Yes, I think we still believe in the focused segments. We think they are the right places to be and we are not going change any direction on that at this time. I would say this, but you know, the industry has gotten rate and that rate has probably helped everybody a large degree.

But as I said in my remarks and I believe Craig said the same thing, we're really trying to manage the mix of business or I think of lines of business within a segment. We're really trying to do a much better job tiering the best customers from the lease profitable customers.

So it is work in progress, but we think we're getting more sophisticated of it and as we put more analytics in place to really analyze what the exposures are for these customers, we think its moving in the right direction.

As Craig mentioned, the loss ratio improvement is a little slower than we would like, but it still is improving and we are throwing out this legacy business which has hurt us. But we expect we'll continue to push into the segments and we will do better over time. We think we have the expertise to do that..

Do you think, just with that analytics set up there, if the markets generally stayed stable.

With what you have in place right now, there is margin improvement to be found just in letting things play out as you set them up today?.

Yes, I think you know, we told you about rates for the quarter, you know, rates are still pretty good, actually in Commercial September was the best month of the third quarter and if we looked at October, October looks pretty good. And so….

On what's without rates?.

I didn’t hear you..

I am sorry, without out rate? Can you achieve margin without rate….

Yes, that’s the whole issue of tiering, in other words figure out which is the best accounts and how you keep them. And the ones that aren’t that good, you get rid of. That’s what you call loss business. So, we think there is you know, room there and also managing the mix.

So we have accounts that may have heard us from workers comp or auto perspective and we find ways to try to keep the best pieces of the accounts throw out the worst. So all work in progress would be pretty consistent with other markets do with their business and how they manage their portfolio. But mix of business is big deal.

One example is less blue collar work comp and more white collar work comp, which effects the proportion of business we write in you know, some white collar industries, whether that be law firms, financial institutions et cetera. So that’s a lot of behind the scenes stuff.

But yes, we think that’s all going to help and continues help, we get better at it..

Well, thank you. And good luck..

Thanks..

Thanks, Ross..

We'll take our next question from Adam Klauber with William Blair..

Thanks. Good morning, everyone. A follow-up on data and analytics.

What are some of the next steps in 2015, 2016 as far as rolling out better data and analytics?.

As you know it’s a very big area, you know, people talk about big data, you got to kind to distill that to down the ground.

But we are looking at data and analytics that helps us assess risk, so that’s kind of on the underwriting side, as well as on the claim side, you know, how come we get people back to work sooner or what we can see relative to claims that can be helpful.

We do have some pretty good analytics in Specialty and our Specialty results we're pretty proud of. We have tool now that we rolled out on automobile, which is trouble line for us, so we expect to see more improvement in auto, although it is small line for us as overall percentage.

So, you know, auto and work comp are two areas that seem to be as well, as some of the Specialty lines whether you look at lawyers or some other areas. The fact is these are all things that are going to help us make better decisions as to what business we keep and how we price it..

Yes. Adam, this is Craig. So it is a ongoing, sort of think of it is ongoing than some fundamental add and replace. And we're probably in second generation of both predictive tools and pricing mechanisms and this now become an annual you know updating and perspective than improvement. So there are some fundamental things.

We're always building and improving. Like we introduced a new property product and new property price in a year ago and a new GL pricing this year and new GL product that goes with the property product, next year together you know, do the same auto.

But I think that really more in terms of the continuous iterative improvement that Tom was referring to. So we are good generation two and we're actively working on generation three and making sure that that something that’s built into the fabric of the place that we do as part of the regular rhythm better than as an event..

Okay. Thank you. And then, do acquisitions become more likely given two things. One, within P&C, there's really very little growth out there. And two, you continue to do a good job of narrowing your focus, so does that give you more room to do acquisitions more on your focus.

Obviously it's probably not out of your focus, but in your focus?.

Yes. I would say we always have our eyes open as to what might be out there, you know, we had said for a long time that we prefer to do something that is a bolt-on which we define as less integration risk. So whether that was CNA surety or that was Hardy, but there really was no kiosk around making those acquisitions. So we like things like that.

And you know, we've gotten rid of things that didn’t fit the strategy going forward. So we keep our eyes open. We have to – we have to asses the risk of buying anything, but quite honestly the first foremost objective is we want to do a better job with our portfolio.

And that’s where we're focused and if something meets our eye and we like it, and we think it will help the profitability of the firm, we will make a decision..

Is there a pipeline of potential deals out there that would make sense, or are they're just not a good group? There's always deals out there, but is there just not a reasonable pipeline out there?.

Okay, let’s put it this way, we got list, everybody has a list. We have list you know, and the question is do they want to sell, is it the right fit, what is going to cost, is it going increase the shareholder value over time, all of those questions have to be answered.

So, but you know, we have a pretty good idea what's going on out there, and I think as the market continues to become less driven by rate and margins maybe become compressed for some companies may think about their future differently and you know, we're willing to talk to people.

So but I think in this kind of low growth environment you are going to see more M&A going forward. I think that’s true unless all sudden rates go up and the economy booms and exposure goes up and all of that kind of stuff. But don’t see that myself..

Right. Thanks. And then just one follow-up. I think you said the competitive conditions really haven't changed. I think you said you're having a good September.

Would you say that is the Commercial more competitive than the Specialty, or you're not seeing really a differential on that? I know each line is different, but just in general?.

You said that each line is different, everybody wants to be in the Specialty business its got a nice wing to it, so there is a lot of competition in Specialty and you know, somebody nipping it your feed on lawyers, professional or something else, but I don’t think its really changed much and the one thing I look at is everybody is trying to retain their business, there is very little good new business opportunities out there, at least from our standpoint what we see coming out is fairly distress there really isn’t a lot of good stuff.

So people are putting their renewals to that earlier and trying to keep their retentions up and get some rate and I think that’s what we saw in the third quarter and we saw it in the second quarter and I expect the fourth quarter will up much like to prior two quarters..

Right. That’s very helpful. Thanks a lot..

Yes..

(Operator Instructions). We'll take our next question from Jay Cohen with Bank of America Merrill Lynch..

Yes, just from a modeling standpoint, the -- obviously you made a lot of changes at Hardy from an expense standpoint. And, in fact, the underwriting expenses, the overhead expenses there have come down quite a bit.

The question I have is, is the number we're seeing in the third quarter, is that in your view a reasonable run rate to look at going forward, or will there still be a downward trend?.

Hi, Jay. There will still be a downward trend, but not I mean, we haven’t completed the real estate moves and some other people related move that would add some expense to the fourth quarter. But in 2015 that expense ratio it should start coming down pretty considerably.

There is about and FX impact in that number but now which is pretty meaningful and its about 1.5, little less than 1.5 of those integration combination cost this quarter, but that’s – we would expect that to improve considerably but not until 2015..

Got it. That’s helpful. Thanks so much..

You're welcome..

(Operator Instructions). And with no further questions at this time, I'd like to turn the call back to Tom Motamed, for any additional or closing remarks..

See you in 2015. Thank you..

That does conclude today's conference. Thank you for your participation..