CNA Financial Earnings Call Nuggets: Large Losses and Trends in Professional and Management Liability

CNA Financial Corp (NYSE:CNA) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Large Losses

Jay Cohen – Bank of America Merrill Lynch: I just had one quick question. In the Commercial business in the press release you highlight a kind of one-off large loss and I am wondering, if you can give us a sense of how big that was?

Thomas F. Motamed – Chairman and CEO: While there were several large losses, Jay. We typically always account for a couple in that particular quarter but we probably had twice as many as before, total of five large ones. We consider a large loss $5 million or more. So the three in excess of what we normally look at, were probably about $16 million.

Jay Cohen – Bank of America Merrill Lynch: That’s just in the Commercial segment?

Thomas F. Motamed – Chairman and CEO: Correct.

Jay Cohen – Bank of America Merrill Lynch: Or that’s overall?

Thomas F. Motamed – Chairman and CEO: In Commercial. That will be in specialty we had a large dental malpractice loss as well.

Jay Cohen – Bank of America Merrill Lynch: So I guess the underlying question of course is when I look at this underlying loss ratio you take in Specialty, it looks like it ticked up in the fourth quarter relative to the first three quarters. Can we assume a lot of that has to do with some of this large loss activity? There was nothing underlying in that that we should be addressing, is there?

Thomas F. Motamed – Chairman and CEO: No. Think about the large loss impact.

D. Craig Mense – EVP and CFO: I think Jay, this is Craig. If I’d just add on, take a look at the full year in Specialty loss ratio which was 67.7% and you can see that’s roughly equivalent to what it was at the end of last year’s full year.

Jay Cohen – Bank of America Merrill Lynch: I guess maybe related to that, would you suggest that in that business and I would also think in the Commercial business that the kind of earned price increases you should see in 2013, is it fair to say they are above what you would expect for a normal claims inflation?

Thomas F. Motamed – Chairman and CEO: We are certainly seeing that now in Commercial. It’s favorable when you look at written rate, earned rate, loss trend, yes, we have a positive margin in Commercial. We don’t have that yet in Specialty. It’s slightly negative. But as you know, we have been raising Specialty rates. The market is a little slower in that regard versus Commercial but we expect Specialty rates to continue their upward swing.

Jay Cohen – Bank of America Merrill Lynch: So at 6% rate increase that you don’t think materially exceeds your claims inflation?

D. Craig Mense – EVP and CFO: No. I think what Tom was referring to Jay, is just the earned. At the moment, the earned rate increase is more in the 3%, slightly over 3% range in Specialty.

Jay Cohen – Bank of America Merrill Lynch: So I guess what I am thinking about……

Thomas F. Motamed – Chairman and CEO: Yeah. The 6% that we said in the conversation was written rate, right? So, of course earned rate lags.

Jay Cohen – Bank of America Merrill Lynch: Actually the question was more on ’13, so I guess assuming these price increases continue even at these levels, in ’13 your earnings increase. I would assume certainly by the second half of the year your earned rate would be exceeding your expected claims inflation.

Thomas F. Motamed – Chairman and CEO: Yes.

Trends in Professional and Management Liability

Amit Kumar – Macquarie Research: Just a few quick questions. First of all, you mentioned the uptick in non-cat AY LR for Specialty, and you referenced some trends in professional and management liability. You had talked about these trends even in the third quarter. Is this the same trends we’re talking about or was there something new this quarter?

Thomas F. Motamed – Chairman and CEO: If you look at the Specialty business, what we would call large lawyers, program lawyers, and employment practices are three hotspots for us and we continue to push on the pricing and there is a falloff in retention as we push for pricing, but we like that trade-off, so we’ll continue to push on that, but the claims don’t go away after one quarter. So we’re on top of it, but we will continue to push rate and we are getting good rate in that business.

Amit Kumar – Macquarie Research: The second question relates to Hardy. We’ve talked about how CNA will be providing 100% capital support for 2013. We talked about expense ratio even last quarter. My question is does it normalize immediately for Q1 2013? Or is there a lag where the expense ratio will fall over the next few quarters?

Thomas F. Motamed – Chairman and CEO: The answer Amit is it will fall over the course of the year. So we are still – remember we said earlier that we expected large and both any positive/negative out of Hardy this year. We would expect a small positive in ’13. We still have purchase accounting adjustments, unusual ones running through operating expenses, you will see that in the K when you get it, but it’s about $5 million of unusual. Most of the money we will spend on the financial systems integration which will be spent this year. So that should start – that expense there should trend down and by more than 10 points over the course of 2013.

Amit Kumar – Macquarie Research: Similar to that how should we think about the retentions for 2013 for Hardy?

Thomas F. Motamed – Chairman and CEO: Well Hardy is – I’m not sure exactly how to answer. Remember Hardy is a little bit lumpier business because its specialization and one-offs coming as well as how the business really is conducted there. So I think it’s a little less meaningful in terms of looking at retention honestly.

Amit Kumar – Macquarie Research: The other question I had, just the final question is a sort of big picture question and this goes back to the prior discussion. Just based on I guess the margins on rate you are getting, what do you think – and again I am not looking for specific guidance. What do you think is now an achievable ROE goal for 2013?

D. Craig Mense – EVP and CFO: I think you are going to – maybe the right way to answer, right now we are probably running at about somewhere around 6%. On a run rate basis, if you kind of look back at P&C ops improvements over the course of ’12 that might be a reasonable thing to think about is you think of ’13. So and it’s also important when you think of ’12 that you kind of look back and it’s in the financial supplement by the way, the way we look at ’11 today. So the way we look at ’11 today in terms of non-cat accident year loss ratio probably a point higher. Recall that we increased our comp medical severity and auto frequency was up. So if you looked at that, you’d see that P&C probably got close to 2 points better in combined over the course of the year, maybe that’s a reasonable way to look at it. We do have some headwinds naturally out of investment income because of lower yield rates which will slow, to a certain extent, slow the progress.

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