CNA Financial Corporation (CNA)

CNA 
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CNA Financial Corporation (CNA)

Q4 2009 Earnings Call

February 8, 2010 10:00 am ET

Executives

Nancy M. Bufalino - Investor Relations

Thomas F. Motamed - Chairman and Chief Executive Officer

D. Craig Mense – Chief Financial Officer

Jonathan D. Kantor - Executive Vice President, General Counsel and Secretary

Richard Scott – Unidentified Executive

Analysts

Jay Cohen – Bank of America Merrill Lynch

Robert Glasspiegel - Langen McAlenney

Matthew Carletti - Macquarie Research Equities

Adam Star - Gulfside Asset Management

Daniel Johnson – Citadel Investment Group

Presentation

Operator

Good day everyone. Welcome to the CNA Financial Corporation’s fourth quarter and full year 2009 earnings conference call. Today’s call is being recorded. At this time I would like to turn the conference over to Nancy Bufalino.

Nancy Bufalino

Welcome to the CNA’s fourth quarter earnings call. Our press release was issued earlier this morning so hopefully everyone has had an opportunity to review it along with the financial supplement which can be found on the CNA website.

With us this morning are Tom Motamed, our Chairman and CEO and Craig Mense, our CFO. Tom and Craig will provide some prepared remarks before opening it up for questions.

Before we get started, I would like to advise everyone that during this call there may be forward-looking statements made and references to non-GAAP financial measures. Please see the sections of the earnings release headed Financial Measures and Forward-Looking Statements for further detail. In addition, the forward-looking statements speak only as of today, February 8, 2010. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This call is being recorded and webcast. During the next week the call may be accessed again on CNA’s website at www.cna.com.

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

Thomas Motamed

Thanks Nancy. Good morning everyone and thank you for joining us today. We are pleased to report that our fourth quarter full year results improved significantly in 2009. Fourth quarter net operating income was $197 million or $0.63 per common share in 2009 as compared to $21 million net operating loss or $0.15 per common share in 2008.

Net income in the fourth quarter was $246 million or $0.81 per common share compared with a net loss of $336 million or $1.31 per common share in 2008. Key drivers of these improved results were investment income, favorable prior year development, and net realized investment results. For the year, net operating income was $982 million or $3.20 per common share as compared to $533 million or $1.91 per common share in 2008.

Net income was $419 million or $1.10 per common share compared with a net loss of $299 million or $1.18 per share in 2008. In addition to the drivers I just mentioned, our full year results benefited from lower catastrophe losses.

Turning to our core property casualty operations, the 2009 combined ratio was 96.9 which included 6.5 points of favorable development compared to 4.4 points in 2008. Catastrophes added 1.4 points to the 2009 combined ratio and 5.7 points in the 2008 ratio.

Before development and catastrophes, the 2009 combined ratio was 102 as compared to 96.7 in the prior year. The 2009 accident year loss ratio before catastrophes increased approximately 2 points to 69.1% driven by large loss activity and property lines early in 2009 and higher frequency and severity in certain areas of our workers compensation business.

Property and casualty operations net written premiums decreased 6% in 2009 to $6.1 billion. The decrease reflects the impact of the economy on our exposure base as well as our decision to push for improved pricing and risk selection. The impact of this work is evident in our rate and renewal trends.

In 2009 rate decreases averaged less than 1% compared to a 4% decrease in 2008. Our retention came down a point to 82%. The property and casualty operations 2009 expense ratio increased 3 points to 32.6%. The major drivers were lower earned premiums, higher employee related expenses, and industry assessments. I will come back to expenses at the end of my remarks.

CNA Specialty delivered an outstanding fourth quarter combined ratio of 78.4 in 2009 compared with 92.6 in 2008. This change was driven by a 10 point increase in favorable development. The other major driver was an improvement in the fourth quarter accident year loss ratio which was much less effective by credit crisis related losses than the prior year period. These factors were partially offset by an increase in the expense ratio, once again, mainly driven by employee related expenses.

Specialty net written premiums declined 2% in the fourth quarter, largely due to competitive pressure. Renewal retention was down slightly to 84%, rate decreases of 2% represented a 1 point improvement from the prior year period. We continued to achieve positive rate in our financial institutions business.

In addition to competitive conditions, Specialty premiums were pressured by exposure decreases notably in our architects and engineers and surety businesses. Overall, we remain very positive about our Specialty business which represents 52% of property casualty operations on a gross written premium basis.

Combined ratios are excellent and our competitive position is strong. We have market leading positions in healthcare and professional services which industries we believe will do better than the overall economy in upcoming years.

While our Specialty premium volume was down slightly, we continue to see opportunities for growth and profit. We are adding underwriters to drive growth and target segments and the early indications are encouraging. Premium new business and policy count are increasing in these segments. I would also mention that we continue to focus on smaller and mid-sized accounts. They have historically been less volatile and more profitable than larger risks for CNA.

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