CNA Financial Corporation (CNA)

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CNA Financial (CNA)

Q2 2011 Earnings Call

August 01, 2011 10:00 am ET

Executives

Nancy Bufalino - Assistant Treasurer

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

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

Analysts

Robert Glasspiegel - Langen McAlenney

Jay Cohen - BofA Merrill Lynch

Adrian Meli

Amit Kumar - Macquarie Research

Presentation

Operator

Good day, and welcome to the CNA Financial Corporation's Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Nancy Bufalino. Please go ahead.

Nancy Bufalino

Thank you, James, and good morning. Welcome to CNA's Second Quarter 2011 Earnings Call. Our press release was issued earlier this morning, along with our financial supplement that can be found on CNA's website.

On the call this morning are Tom Motamed, our Chairman and Chief Executive Officer; along with Craig Mense, our Chief Financial Officer. Following Tom and Craig's remarks about the quarterly financial 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 this 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, August 1, 2011, and CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

Regarding references to 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 the financial supplement. Finally, this call is being recorded and webcast. During the next week, the call may be accessed again on CNA's website.

And with that, I'll turn the call over to CNA's Chairman and CEO, Tom Motamed.

Thomas Motamed

Good morning, everyone, and thank you for joining us today. Let me start by saying we are delighted with the positive premium growth in our Specialty and Commercial businesses. This is the first quarter in which we have had positive growth in both Specialty and Commercial since the fourth quarter of 2006. Submission activity in new business continued to be strong, particularly in those industries where we are concentrating and dedicating our resources. We are also pleased with the improving rate trends across our Property & Casualty business. CNA's financial foundation continues to improve as well. Book value per common share increased 3% since the end of this year's first quarter and 6% since year end 2010.

Turning to our financial results, net operating income was $116 million or $0.43 per common share in the second quarter of 2011 as compared to $269 million or $0.91 per common share in the same period last year. The decline was primarily due to lower levels of favorable prior year development, $0.17 per share in this year's second quarter versus $0.64 in last year's second quarter, as well as an increase in catastrophe losses. These losses reduced this year's second quarter earnings by -- earnings per share by $0.24 versus $0.12 last year. Net operating income from Property & Casualty Operations was $153 million in the second quarter of 2011 as compared to $293 million in the second quarter last year. These results included after-tax catastrophe losses of $65 million and $31 million, respectively.

The second quarter net operating loss from our Life & Group and Corporate segments was $37 million in 2011 and $24 million in 2010. Craig will comment on these segments in a moment. The Property & Casualty Operations combined ratio was 105.7% in the second quarter of 2011 as compared to 89.5% in the same period last year. These ratios benefited from favorable development of 4.8 points and 18.4 points, respectively. Second quarter catastrophe losses represented 6.9 points in 2011 and 3.3 points in 2010. While our cat losses were significant considering the severity of the widespread events and their impact on industry loss ratios, we believe our 6.9 points of losses reflect well on our disciplined approach to catastrophe management. Before development and catastrophes, the second quarter 2011 combined ratio improved 1 point to 103.6% from 104.6%. The improvement was primarily driven by the accident year loss ratio before catastrophes. This ratio was 69.4% in the second quarter of 2011 as compared to 70.3% in the second quarter of 2010.

The Property & Casualty Operations expense ratio in this year's second quarter was 34.2%, which was inflated by a onetime charge. Our run rate expense ratio is approximately 33.5%, consistent with our full year expense ratio in 2010 at which we've been able to sustain while continuing to make investments to grow our Property & Casualty business.

Noncommissioned expenses contributed 15.1 points to the expense ratio in this year's second quarter, a 0.2 point decrease from the prior year period, while commission expenses contributed 19.1 points, an increase of 0.6 points. The Property & Casualty Operations combined ratio was 103.8% for the first 6 months of 2011 as compared to 95.8% in the same period in 2010. These ratios benefited from favorable development of 3.4 points and 10.6 points, respectively. Catastrophe losses in these periods represented 5.3 points in 2011 and 3 points in 2010.

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