CNA Financial Corporation (CNA)

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CNA Financial (CNA)

Q4 2012 Earnings Call

February 11, 2013 10:00 am ET

Executives

James M. Anderson - Senior Vice President of Financial Planning & Analysis and Corporate Development

Thomas F. Motamed - Chairman, Chief Executive Officer, Member of Awards Committee, Member of Proxy Committee, Member of Executive Committee and Member of Finance Committee

D. Craig Mense - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Amit Kumar - Macquarie Research

Ryan Butkus

Presentation

Operator

Good day, and welcome to the CNA Financial Corporation's Fourth Quarter and Year End 2012 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. James Anderson, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

James M. Anderson

Thank you, Shannon. Good morning, everyone, and welcome to CNA's discussion of our 2012 fourth quarter financial results. 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 the quarter and annual 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 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 today.

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, February 11, 2013. 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 our most recent 10-K and 10-Q, as well as in the financial supplement released today.

This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website.

With that, I will turn the call over to CNA Chairman and CEO, Tom Motamed.

Thomas F. Motamed

Thank you, James. Good morning, everyone, and thank you for joining us today. Today, CNA reported a fourth quarter net operating loss of $11 million and a net loss of $9 million, as compared with net operating income of $192 million and net income of $193 million in the fourth quarter of 2011.

Storm Sandy had a $190 million after-tax impact on CNA's fourth quarter results, including reinstatement premiums. This compares to $11 million impact from catastrophes in the prior year period. The Sandy loss, while a significant event for us, was not oversized given our market share in that region.

For the year, net operating income was $587 million and net income was $628 million, as compared with a net operating income of $610 million and net income of $612 million in 2011. The 2012 full year impact of catastrophes, including reinstatement premiums, was $270 million after tax, as compared with $144 million in 2011.

We've been hearing for years that the Northeast was due for a major event, and now we've had one. Loss estimates of as much as $25 billion put storm Sandy among the top 5 U.S. catastrophes on record. Numbers alone do not do justice to the devastation across the region, nor to the courage of first responders and the resilience of those who are putting their lives back together as we speak. I am extremely proud of the CNA claim team. Their tireless efforts on behalf of our policies and producers exemplify CNA at its best.

On a positive note, our core Property & Casualty operations produced net written premium growth of 7% in the fourth quarter and 3% for the year. We continue to achieve rate increases across our Property & Casualty portfolio, 6% in the fourth quarter and 6% for the year. This was our second consecutive year of rate improvement. Not only did the pace of improvement pickup in 2012, we sustained our rate momentum through the fourth quarter. We expect our sustained progress on rates should continue to drive improvement in our non-cat accident year loss ratio. Unfortunately, in the fourth quarter, rate-driven improvement was offset by several large losses. For the full year, the ratio improved 1.1 points to 67.7%.

With respect to the combined ratio, the fourth quarter and full year ratios were 116.1% and 105%, respectively. Excluding the impact of catastrophes and prior year development, our fourth quarter combined ratio increased 1 point to 103.2%. This increase was largely due to higher acquisition costs and some seasonality in our technology spend.

Our Specialty business delivered another solid underwriting result with a reported fourth quarter combined ratio of 93.9%. Specialty's net written premiums grew 3% in the fourth quarter and 2% for the year. As we've said before, we continue to increase pricing and tighten underwriting standards to address the unfavorable loss trends we have mentioned in earlier calls. In that regard, we are encouraged by the favorable rate trajectory in Specialty, reaching 6% in the fourth quarter with retention holding steady in the mid-80s.

Specialty's new to loss business ratio was approximately 1:1, consistent with recent quarters. Specialty's fourth quarter non-cat accident year loss ratio increased over the prior year period by 2.6 points to 68.4%. The increase reflects the continued unfavorable loss trend in Professional & Management Liability. For the 2012 full year, Specialty's non-cat accident year loss ratio was 67.7%, up modestly from the 67.2% we booked in 2011.

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