Tom Motamed - Chairman & CEO Craig Mense – EVP & CFO James Anderson - IR.

Jay Cohen - Bank of America Merrill Lynch Amit Kumar - Macquarie Bob Glasspiegel - Janney Capital Josh Shanker - Deutsche Bank Mike Zaremski - BAM Funds.

Good day, and welcome to the CNA Financial Corp’s Fourth Quarter 2014 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to James Anderson. Please go ahead, sir..

Thank you, Randy. Good morning, and welcome to the CNA's discussion of our 2014 fourth 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 on our quarterly results, we will open it up for 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 could 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-Q and 10-K on file with the SEC. In addition, the forward-looking statements speak only as of today, Monday, February 9, 2015. 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 the presentation slides have again been posted to 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 fourth quarter, CNA produced net operating income of $205 million, essentially flat with the fourth quarter of 2013. Net operating income was $260 million if you exclude the previously announced pension settlement charge.

Our results this quarter reflect continued underwriting margin improvement in our property casualty operations, as well as a meaningful contribution from favorable reserve development in our specialty and international segments.

In addition to our commercial and specialty segments, we now report an international segment that includes the results of Hardy, CNA Europe and Canada. As discussed on our last earnings call, we have aligned our international operations under the leadership of Dave Branson.

This move was made to ensure that our multinational capabilities are seamlessly delivered to our agents, brokers and customers in all geographies. It also emphasizes the importance of the multinational marketplace to CNA. Slide four of our earnings presentation highlights the property and casualty segment realignment.

For the full year, CNA produced net operating income of $849 million, compared with $901 million in 2013. Of note, our property and casualty operations delivered over $1 billion of operating income for the second year in a row, while improving the underlying margin by more than a full point.

Our property and casualty combined ratio for the quarter was 91.8, an improvement of 3.2 points, compared with the fourth quarter of 2013. Excluding catastrophes and development, the combined ratio was 93.6 or seven tenths of a point better than last year’s fourth quarter.

Specialty had another strong quarter, with a combined ratio of 88.4, which was helped by two points of favorable loss development. Specialties combined ratio, excluding catastrophes and development was 90.4. Rates increased 3% consistent with the second and third quarters. Retention remained strong in the mid-80s.

Commercial had a better quarter, with a combined ratio of 96.8. Excluding catastrophes and development, it was 95.6. Commercial rates increased 4%. Retention improved more than three points from the third quarter to the mid-70s.

International also had a good quarter, with a combined ratio of 86.9, including more than 13 points of favorable development, primarily from CNA Europe. The combined ratio, excluding catastrophes and development, was 98. Rates decreased six tenths of a point in the quarter, a slight improvement from the two prior quarters.

Reflective of our financial strength and consistent earnings, we are pleased to announce a special dividend of $2 per share, in addition to our quarterly dividend of $0.25 per share. With that, I will turn it over to Craig..

Thanks, Tom. Good morning, everyone. As Tom mentioned, we reported fourth quarter net operating income of $205 million, or $0.76 per share. The operating return on equity was 6.7%. Our results for the quarter adjusted for the $55 million after-tax pension settlement charge, with $260 million or $0.96 per share and an operating return on equity of 8.4%.

Our core P&C operations produced net operating income of $314 million, compared with $340 million in the fourth quarter of 2013. The decrease is largely attributable to lower investment income. Underwriting profitability for the quarter was solid across all of our property casualty segments.

We continued to demonstrate steady progress in our underwriting loss ratio as we moved throughout the year. P&C’s underwriting loss ratio was 61.4 for the fourth quarter, which brings the full year results one point better than 2013.

Specialty and commercial 2014 non-cat current action year loss ratio for the full year improved by 1.9 and 1.5 points respectively. While international’s underlying loss ratio increased by 3.1 points due to several large losses in our aviation and cargo business at Hardy.

The property casualty operations expense ratio was 32% in the fourth quarter and 32.9% for the full year. The ratio this quarter benefited from an insurance receivable recovery and other one-time items that had an approximate 1.5 point positive effect.

Specialties underlying loss ratio in the quarter was 60.1%, compared with 58.9% in the fourth quarter of 2013. The unfavorable period over period comparisons was driven by the significant favorable revaluation of the 2013 accident year that we made in the fourth quarter of 2013.

Specialties full year 2014 accident year loss ratio was 61.7%, almost two points lower than where we ended in 2013. Commercials accident year non-cat ratio continued to improve this quarter. The reported underlying loss ratio this quarter was 63%, 2.5 points lower than the prior year period results.

Remember the loss ratio improvement reported in the quarter reflects a catch up adjustment for the full year. We would point you to the 2014 full year results of 64.6%, which is 1.5 points lower than where we ended 2013 as the more clear indication of our progress.

The insurance receivable recovery and the other one-time items that I mentioned earlier were entirely reflected in commercial results and lowered its reported fourth quarter of 2014 expense ratio by approximately 2.5 points. Absent the benefit of that recovery, commercial expense ratio for the quarter would have been approximately 35%.

International’s underlying fourth quarter loss ratio was 60.3%, or 5 points higher than the fourth quarter of 2013. International’s full year 2014 underlying loss ratio of 60.3% was 3.1 points higher than the full year of 2013. The unfavorable comparison for both time periods were due to the large aviation and cargo losses that I mentioned earlier.

Life & Group produced a $34 million net operative loss in the quarter compared with a $6 million gain in the fourth quarter last year. The unfavorable comparison was primarily driven by morbidity in our long-term care business, partially offset by higher investment income.

Additionally, the prior year period results included a $22 million non-recurrent benefit. Page 15 of our earnings presentation shows the results of our annual analysis of our long-term care active life reserves.

While you’re flipping to that slide, let me remind you that in the third quarter we performed our annual review of our long-term care claim reserves. That study resulted in a modest $9 million pretax reduction of claim reserves and provided a relatively neutral backdrop going into the fourth quarter analysis.

Looking back to the fourth quarter of 2013, the GAAP margin on our long-term care active life reserves was $350 million. As a result of the analysis completed in the fourth quarter of 2014, that margin has decreased to $100 million. The margin reduction had no impact on our fourth quarter earnings.

While the analysis is very granular and includes numerous factors, the four primary variables driving analysis are investment yields, morbidity, persistency and anticipated premium rate increases. The largest driver of 2014 margin change was the change in our estimated future investment yields on assets backing the long-term care liabilities.

The drop in investment market yields over the course of 2014 affected our future interest rate assumptions, which influenced the discount rate. The decrease in the discount rate assumption resulted in a $640 million reduction in the GAAP margin.

Somewhat offsetting this impact was our actual investment performance over the year, and our updated assumptions for future investment allocation and duration positioning.

While we reported favorable morbidity results in the first half of 2014, the morbidity trend over the past few years, including our results in the fourth quarter have been somewhat volatile. We rolled the analysis forward one year and updated our assumptions to reflect this volatility, which resulted in a $195 million reduction in margins.

Finally, we updated our assumptions related to our anticipated premium rate increases. Based on our historical experience with rate increase approvals and reasonable expectations regarding regulatory action, the impact was an improvement of $260 million in margins.

Hopefully, the additional disclosure of our specific margin and both the moving pieces within the GAAP analysis, as well as the significance of those movements, is helpful to your understanding. Consistent with prior years, our 10-K will provide sensitivity information on the key assumptions when it is filed later this month.

Our corporate segment produced a net operating loss of $75 million compared with a $140 million loss in the fourth quarter of 2013. Both periods were affected by significant charges.

The fourth quarter of 2014 includes the $55 million after tax pension settlement charge, and the fourth quarter of 2013 included $123 million after tax charge related to our 2010 asbestos environment and pollution loss portfolio transfer. Excluding these two charges, both quarters produced results in line with our expectations.

Our investment portfolio’s pretax net unrealized gain stood at approximately $3.4 billion at quarter end, an increase of 7.5% since the end of the third quarter. Statutory surplus at December 31 2014 was an estimated $11.2 billion for the combined insurance operating companies, where we continue to maintain significant dividend capacity.

Cash and short-term investments at the holding company were approximately $500 million at the year end, consistent with 2013. The reduction from our third quarter of 2014 total reflects the $500 million payoff of our December debt maturity.

We continue to target cash at the holding company equal to about one year of our annual net corporate obligations. In the fourth quarter, operating cash flow, excluding trading activity improved to approximately $400 million. Cash principle repayments through pay downs, bond calls and maturities, were approximately $1.1 billion.

Net investment income was $511 million pretax in the fourth quarter. Income from limited partnership investments was $64 million, compared with $148 million in the prior year period. The full year 2014 rate of return from our limited partnerships was strong at 10%, but down from last year’s exceptional 18% return.

Income from our fixed maturity securities in the fourth quarter was $447 million pretax, down slightly from the prior year period, but essentially unchanged on an after tax basis of $322 million. Average credit quality of our fixed maturity portfolio remained at A.

Fixed income assets to support our long duration Life & Group liabilities had an effective duration of 10.5 years at quarter end. The duration decreased by six tenths of the year during the fourth quarter, reflecting the impact of lower interest rates and is not reflective of any change to the portfolio’s composition.

The effective duration of the fixed income assets, which report our traditional P&C liabilities was four 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.

We continue to maintain a very conservative capital structure. All our capital adequacy and credit metrics are well above our internal targets and current ratings.

This sustained capital strength, along with the other capital management action taken over the course of the year and the strength of our current earnings, all contributed to the board’s decision to declare the $2 a share special dividend and the continuation of the $0.25 per share quarterly common shareholder dividends.

With that I will turn it back to Tom..

Thank you, Craig. As we have discussed on prior calls, over the last few years, we have been focused on improving our margins, primarily through underwriting actions and rate increases. We have made progress. However, as expected, these moves have affected our premium volume.

Our underwriting actions have included exiting programs such as overseas worker compensation, and select risk transportation. We also have taken action on unprofitable small business classes, non-renewed poor accounts of all sizes and have been disciplined in avoiding inadequately priced new business opportunities.

With our customer’s segment strategy, we’ve successfully changed our mix of business to more profitable industries such as financial institutions and technology. For example, since 2011 we have changed our US mix of business and customer segments from 73% to 83%.

We are confident that we have taken the right actions and that our customer segment and international strategies will continue to produce better margins over time. With that, we would be glad to take your questions..

[Operator instruction] We’ll take our first question from Jay Cohen from Bank of America Merrill Lynch.

I just wanted to follow up on the comments you had about the expense ratio. I unfortunately kind of missed those numbers. If you could just go over that one more time, Craig..

What I said, Jay was that we had insurance receivable recovery and some other onetime items in the fourth quarter that lowered the reported expense ratio for P&C overall at a point and a half. For commercial, it was all reflected in the commercial segments.

So in commercial segment it would have had slightly more than a 2.5 point impact of lowering the expense ratio..

And nothing in specialty, then?.

Nothing in specialty..

Okay. And then just a request -- since you changed the format of your presentation, it would be really helpful since we model out each segment quarterly, to get some historical data on the new segment kind of looking backward that would allow us to model it going forward..

Jay, I understand you had a conversation with James Anderson about that and we’ll prepare that in short order for you. .

That's great. Thank you..

You are welcome.

We'll now take our nest question from Amit Kumar from Macquarie. Please go ahead..

Thanks and good morning. It’s Amit Kumar from Macquarie. Congrats on the numbers and the special. Just I guess two or three quick follow-ups. One is a broader question, Tom.

Just going back on your opening remarks, I was curious if you could share with us, how do you think about further ROE expansion from here based on the actions that you have taken? And I guess overlay that with the current market conditions.

Is there further room? Or I guess the 8ish -- 8%, 9%, is that sort of a number we should be thinking about going forward?.

I certainly agree with you that the market is becoming more challenging from a rate standpoint, but you know we’ve been saying for a long time it's not only rates, it’s risk selection, keeping your powder dry, not writing poor business for the sake of the topline.

So all our efforts are really to improve the loss ratio and there are lots of things that go into that other than rate increase. It's how you manage the mix, focusing on the segments, etc., etc.

So our objective is to constantly focus on improving the loss ratio and that will help us in a decelerating rate environment, even though we are doing okay on rates today. We have nothing to be embarrassed about relative to our performance on rate. It is more challenging but we keep moving.

We did say 10% might take a little longer to get there in this current of environment, but we are going to forge ahead and we had nice quarter and we are going to bask in the glory for about an hour and get back to work..

Fair enough. The other question I had was the discussion on new business. In specialty and commercial, new business dipped sharply this quarter. And maybe I'm thinking about this wrong. If you are better equipped for risk selection, I would have thought that it would show some reversal in trends.

Is that more of a macro issue than a micro issue?.

Once again when you look at premium, look at retention. So our retention has been lower than most of our peers because we have been churning out blocks of business as well as weeding out business that we didn’t like.

We start from a, you might say further starting point that others because of the retention, but retention did improve 3 points in commercial in the fourth quarter compared to the third. So we like that trend. We are being very picky on what we write. Automobile, we are very concerned about automobile as you’ve heard from others in the industry.

If you look at that, we are paring that back. If you look at workers comp in construction, we are paring that back. Everything is about margin improvement. And as I've said in the past, if we have to get more rate, we are willing to give up retention.

Along with that, we are willing to give up growth if we can keep the margins moving in the right direction..

Good color on that. And finally, this might be for Craig. The discussion on aviation and cargo, can you expand on that? Maybe put some numbers around that and just give some more color on that. Thanks..

We actually mentioned it in earlier calls, Amit and we can kind of -- James can get those for you and give you that detail. But our aviation business, we were on a couple of the two Malaysian airline crashes, Tripoli Airport.

It's probably something in order of $12.5 million of losses just from those three incidents, as well as some other additional expected losses in aviation that in marketplace and some cargo losses also out of Hardy that occurred really second, third and fourth quarter..

Got it.

No, what I was trying to ask is, was there anything extraordinary about those losses, or is that a function of the book, or that was just the normal course of business losses?.

I'd say those were pretty extraordinary losses, the ones that I just mentioned and not anticipated, but it's also reflective of just the health of the marketplace..

Got it. No, I was asking about the quality of the book for the cargo losses and other losses..

Yeah, I think the quality of the book we feel is fine for the cargo losses..

Okay. That's what I was trying to ask. I apologize. I phrased the question poorly. That's all I have. And thanks for all the answers and good luck for the future. .

[Operator instruction] we’ll take our next question from Bob Glasspiegel from Janney Capital..

Good morning CAN. I've got some long-term care questions.

On a numbers perspective, can you quantify the morbidity penalty in the fourth quarter that ran through operations? Number two, the 10-K disclosure that will come out, do you have a sense for what the sensitivity to 50 basis points and 100 basis points on the tenure or the discount rate might be? And I do have one follow-up on that..

Let’s start with the 10-K sensitivity. A 50 basis point reductions in the discount rate would be roughly equal to the 640 reduction we showed in margin impact this year. That’s what you would have been in the 10-K a year ago. I don’t recall what the 100 is, but it's roughly double that amount. And then as far as ….

Last year was exponential, this year it is not?.

Remember last year we did not disclose the specific margin, remember. And so therefore what we are disclosing was the impact on reserves or earnings. The margin would have been first subtracted from the impact of it and this year since we have little to no margin, you’re seeing the full amount. So that’s simply the difference, Bob.

We are hoping that with the expanded disclosure and showing you what the specific movements were and then when you get the sensitivity charge you’ll have a good sense of the business..

That’s helpful..

The morbidity, really the difference -- remember, we’ve run on order of around $15 million of loss a quarter. So the difference between the 15 and the 34 is pretty much rough justice of the morbidity worse results this quarter than expected..

I got it. If I could just get a little more color on your page 15 disclosure, which is very helpful. You mentioned that you were able to offset the 640 down with a couple of items with rate increases.

But updated investment strategies, how are you able to get $325 million? Is that more of a credit risk or more duration or --?.

It’s more duration and it’s also importantly the fact that we are actually earning a much higher yield in our portfolio than we had baked into our assumptions a year ago. And we’re able to shift a significant number of longer duration higher yielding assets into the portfolio as a result of a life sale.

So it’s those three things together as well as some duration lengthening in terms of what our expectations are that gives us the positive..

Okay, great. And one final question, if I may, going back to sort of standard commercial. Tom, you seem to have a little bit more of a bounce in your step talking about that line.

Is it fair to say that you think that you’ve got your arms around the problem on tracking and comp with the rate actions that you are taking?.

I think we’ve always had an handle on what we needed to do. And whether it is international work comps or whether it’s the tracking books, there are a couple of other things that we’ve gotten out of totally. And then you’re always trying to improve your existing ongoing portfolio. We think we are doing much better at that.

What we find is that when we tier our business and the higher tiers are the best tiers, we continue to get rate and we have very good retention. And in the lower tiers, the less profitable or marginal accounts, we don’t have very good retention because we are pushing rate very hard and we are getting good rate increases on the stuff that sticks.

So it’s always work in progress, Bob, but I think we are executing at a better level today than we may have a few years ago. We have better tools. We are on top of this stuff.

And as I said earlier, we are not going to write business for the sake of writing business in a decelerating rate environment where all of our competitors are putting the best accounts to bed early. You’ve got to be choosy, but we think our execution is working very well in commercial. And we think it will continue to do so..

Thanks, Tom..

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

Good morning. Congratulations, everyone.

I was wondering if you can give really guidance, but when you think about the year, does fourth quarter seem more indicative of the P&C earnings power, or is the full year more indicative of what’s going on? And my guess would be that maybe the loss ratio is more indicative on the fourth quarter, but the expense ratio for the full year.

Do you have thoughts about that?.

I would think full year..

Take the full-year numbers.

And so you just have a lot of things go your way in the fourth quarter, you think?.

Well, it's nice to have a win behind your back. And remember, Josh that in the fourth quarter as we’ve re-evaluate our action year loss ratio, you get a pretty significant cumulative catch up. For example, in specialty, we reduced the full year loss ratio expectation by four tenths of a point, you get a four times impact on the fourth quarter.

So you can look at that in those slides. You can see exactly what I'm talking about in terms of that differentiation, which is why we always point to you to the full year re-evaluation of loss ratio is a better indication of our run rate, where we are going forward and what progress we’ve made..

I see and appreciate it. Another question is on the long-term care.

To the extent to which you like having a cushion, let's say interest rates next year or this year that we are in right now, didn't go your way and you were forced to take some reserving action to conflict that, would you take reserving action that would also give you a bigger cushion as well and increase the size of the cushion, or would you merely want to keep yourself in line with numbers?.

It's actually fairly well prescribed. If your margin is -- if you broached the margin and you have to re-evaluate or unlock, you unlock at zero. Now, we also then of course would be reevaluating all just like we did this year, we are re-evaluating all of our assumptions relative to the gross premium evaluation.

That’s the best way I could -- that’s how we would think about it..

Okay. Let's hope we don't have to think about it so much. Thank you and good luck in the coming year..

[Operator instructions] we’ll take our next question from Mike Zaremski from BAM Funds.

Good morning. Regarding the helpful LTC disclosure on slide 15, could you provide some context surrounding the planned rate increase by method of $260 million? I guess for example, are those filed rate increases or increases you expect to seek over let's see the next let’s say one, two, or three years? Thanks..

Michael, that’s a good question. It's really there are three components to them and first fit them into the category. They are all planned rate increases. So not something that we anticipate might happen a long time in the distance. It could be rate increases that we’ve already filed. They have already been approved but they haven’t been implemented.

They could be rate increases that we’ve filed and we are waiting approval and based on conversation of judgment, we expect them to be approved and implemented, but they could come in a third bucket where we are planning on filing them over the foreseeable future and we would anticipate, based on conversations in our own experience with regulators that they would be approved at those levels..

Got it. Thanks for the color.

[Operator instructions] At this time, with no question in the queue, I'll turn it over to management..

Okay, thank you very much. We’ll see you next quarter..

This does conclude today’s conference. Thank you for your participation..