CNA Financial Corporation (CNA)

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CNA Financial (CNA)

Q3 2012 Earnings Call

October 29, 2012 10:00 am ET


Marie Hotza

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


Amit Kumar - Macquarie Research

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Ron Bobman - Capital Returns Management



Good day, and welcome to the CNA Financial Corporation's Third Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Marie Hotza of Investor Relations.

Please go ahead.

Marie Hotza

Thank you, Drew. Good morning, and welcome to CNA's discussion of our third quarter 2012 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 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 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, October 29, 2012. 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 supplements.

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

Now I will turn the call over to CNA's Chairman and CEO, Tom Motamed.

Thomas F. Motamed

Thank you, Marie. Good morning, everyone, and thank you for joining us today. We reported net operating income of $216 million, much improved over last year's third quarter and driven primarily by strong results from our limited partnership investments.

This quarter CNA's results include the Hardy group for the first time. Hardy contributed significantly to our accident year loss ratio improvement. The third quarter Property Casualty non-cat accident year loss ratio was 66.3%, 1 point lower than this year's second quarter. We continue to achieve meaningful rate increases across our Property Casualty business with retentions holding firm. The 6% overall rate increase in the third quarter was broad-based, and while consistent in the aggregate with the second quarter, we did achieve improved rates across our Commercial segment.

Our Specialty business delivered solid underwriting results again for the third quarter combined ratio of 93.7%. Specialty achieved a 5% rate increase in the third quarter. Retention remained unchanged. Specialty's non-cat accident year loss ratio was relatively flat as compared to earlier periods. In the quarter, Specialty net written premiums decreased 4%, reflecting a lower level of new business as we tightened pricing and underwriting standards.

In Commercial, our third quarter combined ratio was 106%, which included 2.8 points from catastrophes. Excluding catastrophes and development, Commercial's third quarter combined ratio was 102.9%. Our Commercial non-cat accident year loss ratio was 67.4%, relatively consistent with this year's second quarter. Commercial rate increases continued to rise. 8% rate increase in the third quarter was a 1-point improvement over the second quarter while retention also improved 1.79%. Commercial's third quarter net written premiums decreased 3% for the quarter. Before the impact of last year's fourth quarter sale of First Insurance Company of Hawaii, Commercial grew 2% in the quarter.

Before turning it over to Craig, I wanted to spend a moment on the Hardy group, our newly acquired Lloyd's operation. Hardy produced net operating income of $3 million on net written premium of $56 million. Premiums were down approximately 17%, reflecting their increased reliance on third-party capital and the reprofiling of Hardy's property treaty portfolio. Hardy's combined ratio was 85.8%. Excluding catastrophes and development, the ratio was 94.7%.

With that, I will turn it over to Craig.

D. Craig Mense

Thanks, Tom. Good morning, everyone. CNA had a solid third quarter from a financial perspective, much improved level of earnings, 4% book value per share growth and continued improvement in financial stability and flexibility.

CNA's third quarter net operating income was $216 million and operating return on equity of 7.5%. Our year-to-date operating ROE was 7%.

Third quarter operating income available to common shareholders was $0.80 per share. Period-over-period comparisons were favorable driven by improved results in our Property & Casualty Operations segments.

Recorded net income also improved on the prior year to $221 million or $0.82 per share.

Our Property & Casualty business produced net operating income of $264 million in the third quarter as compared to $130 million in the prior-year period. The improvement was driven by strong limited partnership investment results, improved accident year underwriting results and lower catastrophe losses.

We had modest amount of favorable prior year development in the quarter, $35 million pretax or 2.6 points on the P&C combined ratio. This compares to $90 million pretax or 5 points on a combined ratio at last year's third quarter.

As you heard from Tom, the Hardy group made a modest but meaningful contribution this quarter. You should be aware that Hardy utilized third-party capital for the 2011 and 2012 years of account. That reason, the Hardy segment results exclude the external capital providers proportionate share of Syndicate 382's results. The third-party capital percentages are 7.5% and 25% for the 2011 and 2012 years of account, respectively. The 2013 year of account CNA's results will include 100% of the Syndicate results.

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