CNA Financial Earnings Call Nuggets: P&C Portion, Limited Partnerships & Fixed Income

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

P&C Portion

Amit Kumar – Macquarie Research: Using Slide 13 as a backdrop, how would you quantify what percent of your P&C book is focus versus non-focus?

D. Craig Mense – EVP and CFO: You are saying that segments?

Amit Kumar – Macquarie Research: No, just as an overall percent. What would you say is your focus – just looking at the P&C portion, not looking for exact numbers, I’m just looking for a percentage.

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D. Craig Mense – EVP and CFO: Right now, Amit, I would say in terms of what’s written about two-thirds is in focus segments.

Amit Kumar – Macquarie Research: I guess related to that would be what would be the loss ratio bands if you will for the focus versus non-focus portion?

Thomas F. Motamed – Chairman and CEO: The loss ratio has been improving. It’s roughly – I’d say let’s say, this year, it’s roughly equivalent has (been equivalent). Over past years there had been about a 5 to 10 point loss ratio disadvantage from the non-focus segments, but as we’ve shrunk the segments that the non-focus segments, as well as re-price those non-focus there’s not a big loss ratio differential.

Amit Kumar – Macquarie Research: Eventually, does that keep on diminishing or as you take underwriting actions as you just said, that the loss ratio is equivalent, does the non-focus end up becoming focus over time?

Thomas F. Motamed – Chairman and CEO: No, we would drive more growth as we said and that’s really been our strategy, it has been to specialize, remember, as we’ve said in the past, and write so that we sell outward through producers and two customers that fit our specialized appetite, so we would expect the percentage of focused business meaning where we think we have the expertise, the price and we can deliver a distinctive solution beyond just price in terms of risk control and claims to become a larger and larger portion of our business and that’s what we would expect to drive the growth and to drive improved profitability in the business.

Amit Kumar – Macquarie Research: The second question is, you’ve talked about in the press release, non-rate underwriting actions for 2013 and 2014. I know we spent a lot of time talking about this in the past, what other specific actions do you foresee for 2013 and 2014?

Thomas F. Motamed – Chairman and CEO: Well I think what we talk is managing the mix so we are looking at problematic lines in Commercial like auto and workers comp and addressing those we address them by line, we address them by geography. We have told you on prior calls that we’ve had a bit of temperature and lawyers professional liabilities. So, we’re kind of reevaluating how we’re approaching that not only from our pricing standpoint, but risk selection. So, I think going back to Craig’s earlier comments, we’re focused on customer segments which we believe over time will be profitable for CNA and within those segments managing the mix from a line of business perspective, we believe will improve our returns over time.

Amit Kumar – Macquarie Research: And the final question and I will re-queue. This is a broader question on excess and surplus lines marketplace there has been a lot of chatter about a team moving from the leading surplus lines writer to another company. If you look at sort of the broader excess and surplus lines and I think you’re the seventh or eighth largest writer, how do you expect this to play out and how could this possibly impact your business going forward?

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Thomas F. Motamed – Chairman and CEO: Yeah, I think first of all we have some funny business in the E&S business that you quoted us being eighth we have some cell phone warranty business and some other things and also we have malpractice would be in there. But from our standpoint what you are talking about that type of business is pretty small for us, what we call CNA select it’s pretty small, been a weak performer over time we’re re-underwriting the book. We’ve gotten out of habitational property, we’ve told you that in the past. We’ve gotten out of transportation. So, it’s very, very small to us. So, we don’t think this has any impact. Now, I would tell you this, we are getting rate increases in the low-teens in our surplus lines business, what I call the casualty business that you’re reading about. So, I think for us we’re trying to improve that. We like our medical malpractice business, that’s a good business so, but that’s not what they’re talking about that you’re describing. So, I think that’s probably the story…

Amit Kumar – Macquarie Research: Then what is the large account business as a percent of your surplus lines?

Thomas F. Motamed – Chairman and CEO: I don’t know surplus lines. Of the other – if you look at the other number on the slide, its 17% of the other premium, it is about $50 million I think.


Limited Partnerships & Fixed Income

Jay Cohen – Bank of America Merrill Lynch: A couple questions. I guess starting with Hardy. We don’t have a great history with the numbers obviously. I guess in a quarter, where there is no major catastrophes, I found it a little disappointing to see that number, the combined ratio comfortably over a 100, what’s going on there, what would be your expectations for business like that over the course of a year?

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Thomas F. Motamed – Chairman and CEO: I think remember, Jay, we said, we are still relatively early in and mostly integration effort and expenses will be reflected in 2013. So, you do have some integration expense and still P-GAAP amortization expense running through there and recall that given the year of account underwriting and we’re taking 100% of the 2000 year of account, you really just start to earn that premium and that increase, kind of slowly over the course of the year. So, what we’ve said in the past is don’t expect the material either positive or negative for the majority of this year, but we’d expect that to improve pretty considerably late in ’13 and we’d expect Hardy to make a meaningful contribution to both growth and earnings starting in ’14. I think what we had also said to you is that, the loss ratio that you’re seeing there is a reasonable expectation and that we thought the expense ratio would come down about 10 points over the course of the time as we finish the integration, if that helps you.

Jay Cohen – Bank of America Merrill Lynch: Numbers question. The investment income from P&C operations, do you have a break out between limited partnerships and fixed income, you used to break that out separately. I don’t see that in the supplement. Do you happen to have that data?

Thomas F. Motamed – Chairman and CEO: Well, I would tell you that all of the limited partnership income is attributed to the P&C, and I think you ought to be able to see – I would think you’d be able to see in the P&Ls that are in the supplement in the press release and we can go back and find for you Jay, exactly what the pretax investment income. As I recall, the pretax investment income in Life & Group is a little over $200 million, like $204 million. So, if we had 490 something almost 500, the remainder would be in P&C and Corporate.

Jay Cohen – Bank of America Merrill Lynch: Now you breakout the investment income for P&C and Corporate, we just modeled just the P&C and I was wondering the breakdown between that number, which you do give that number between limited partnerships and other, but I can work offline on that one, that’s not a big deal. And I think you had mentioned in one of the segments in the call you has said that non-cat weather was a little elevated, I just — I didn’t catch where you were talking about?

Thomas F. Motamed – Chairman and CEO: There were a couple of storms in the Southeast that didn’t qualify for the ISO definition of cat, but they were weather-related. They added about just over a point to the loss ratio.

D. Craig Mense – EVP and CFO: That will be the Commercial lines.

Jay Cohen – Bank of America Merrill Lynch: The overall loss ratio…

Thomas F. Motamed – Chairman and CEO: Commercial lines.

Jay Cohen – Bank of America Merrill Lynch: Commercial lines loss ratio got it. And then lastly overall claims trends, can you talk about what you are seeing and if there are any changes in what you’re seeing?

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Thomas F. Motamed – Chairman and CEO: No, I’d say that general claim trends have been pretty steady, elevated a little bit in auto which I think we mentioned before. But if you’re looking for your claim trend percentages, we think in Specialty line something around 3% or 3.5% the general inflation trend and in Commercial lines somewhere between 3.5% to maybe 4% as a general claim inflation trend. But relative to frequency no particular upticks or changes in frequency from what we’ve seen past.

Thomas F. Motamed – Chairman and CEO: I think that the point to, Jay, when you look at loss trends, in Commercial earned rate is clearly exceedingly loss trends. The same thing is happening in Specialty and if that’s kind of what we would call improvement on the margin, really didn’t start until the second half of 2012, but is now picking up. So, pretty good differential between earned rate and loss trend. So, we’re pleased with that, but that’s going to take a little time to kick in.