Good day and welcome to the CNA Financial Corporation's Second Quarter 2014 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to James Anderson. Please go ahead.

Thank you, Randy. Good morning and welcome to the CNA's discussion of our 2014 second quarter financial results. By now, hopefully, all of you have seen our earnings release, financial supplement and presentation slides. If not, you may access these documents on our newly designed website, www.cna.com. 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 our quarterly results, we will open it up to 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 in 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 the call. Information concerning these risks is contained in the earnings release and in CNA's most recent 10-Q and 10-K on file with the SEC. In addition, the forward-looking statements speak only as of today, Monday, August 4, 2014. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding non-GAAP financial measures, reconciliations to the most comparable GAAP measures have also been provided in the financial supplement. This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website. I would also like to remind you that presentation slides have been again posted to our website to provide additional perspective on our financial and operating trends. With that, I will turn the call over to CNA's Chairman and CEO, Tom Motamed.

Thank you, James. Good morning, everyone, and thank you for joining us today. In the second quarter, CNA produced operating income of $272 million compared with $199 million in the second quarter of 2013, a 37% increase. Our operating return on equity for the quarter was 9%. Our Property & Casualty combined ratio was 101.3, slightly better than the second quarter of last year. Excluding catastrophes and development, the combined ratio was 96.3 more than one point better than the second quarter of 2013. This improvement was driven by lower non-Cat accident year loss ratios in Specialty and Commercial, improved Life & Group results and higher net investment income. Results were also positively affected by a post retirement plan curtailment benefit. Once again, Specialty had a strong quarter with a combined ratio of 86.4%. Net written premium for the quarter was down 2% due in part to the termination of a MGA relationship due to unprofitability. Excluding this action, premium was flat. Rates increased 4%. Commercial’s combined ratio was 115% in the quarter, which included 10 points of prior year unfavorable development. Seven of the ten points are attributed to run off programs that we have previously exited. Commercial rates increased 4% overall and 5% in the U.S. and retention was 70%. We continue to work diligently to improve the quality of the book. In addition, we strengthened reserves in small business this quarter. We continue to take underwriting and pricing actions in certain classes in our effort to improve profitability. These actions have also driven small business retention ratios down as well as reduced rate achievement, as we non-renewed accounts that would have otherwise provided larger rate increased opportunities. Finally, as announced last week, we completed the sale of Continental Assurance Company to Wilton Re. With that, I will turn it over to Craig. Craig?

Thanks, Tom. Good morning, everyone. As Tom mentioned, second quarter net operating income was $272 million or $1 per share and the operating return on equity was 9%. Our reported net income was $267 million. Our core P&C operations produced net operating income of $236 million compared with $258 million in the second quarter of 2013. The decrease was primarily the result of reserves strengthening in Commercial. The P&C operations loss ratio excluding catastrophes and development was 62.8%, an almost two-point improvement compared with last year’s second quarter. The year-to-date loss ratio of 63.4% has now improved nearly half a point compared with our full year 2013 results. Our second quarter expense ratio was 33.3%, essentially flat with the first quarter and the full year 2013 results. We continue to be pleased with the ongoing progress in our Specialty business. Specialty’s reported second quarter combined ratio was 86.4%, which included more than seven points of favorable development. The combined ratio excluding catastrophes and development was 93.1%, two and a half points better than last year’s second quarter. The year-to-date results of 93.4% has now improved almost one point compared with our full year 2013 results, driven by improvements in the underlying loss ratio. The loss ratio, excluding catastrophes and development, was 62.5% more than three points lower than last year’s second quarter, and on a year-to-date basis almost one point lower than where we ended 2013. The improvements were driven by targeted underwriting actions that continue to refine the portfolio mix as well as rate increases in excess of loss trends. Rate increases for the quarter were 4% with retention in the low 80s. As Tom described, our results in Commercial are not where we need them to be. The reported combined ratio of 115% included 5.7 points of catastrophe…

Thank you, Craig. Before we take your questions, I would like to offer a few comments on the current state of the market. First of all, I believe the market is exercising good discipline when you look at risk selection and pricing. Although rate increases are decelerating, our rates in the U.S. continue to exceed loss cost inflation. Second, profitable new business opportunities are not widespread. Underwriters are protecting their best accounts after several years of rate increases and putting them to bed earlier. Third, we continue to focus on our segment strategy and avoid expanding our appetite for the sake of growth. The carriers that have expertise in underwriting, risk control and claims will fare well even with the deceleration of rate increases. Let me close with this quarter’s highlights. Operating income of $272 million increased 37% compared with the second quarter of 2013. Book value increased 4% compared with the first quarter. We continue to make progress in our core Property & Casualty operations with our combined ratio, excluding catastrophes and development, improving over the prior period by 1.3 points. Lastly, we declared a quarterly dividend of $0.25. The entire team here is focused on execution and improvement and there is confidence about our strategy in our future. With that, we would be glad to take your questions.

Thank you. (Operator Instructions). We’ll take our first question from Jay Cohen from BoAML. Please go ahead.

Thank you. A couple of questions. I guess I was a little surprised to see the adverse development in small commercial and I’m wondering if you could go into more detail on what drove that and what lines of business drove that? And then separately, while the U.S. seems to be holding up reasonably well as you guys described it from a competitive standpoint, it sounds like London is getting quite competitive and prices are down there quite a bit. So the second question is, what’s the strategy in London given what appears to be more intense pricing pressure?

This is Craig, Jay. Why don’t I try to give you the answer on small business and then let Tom describe what’s happening in London. But the small business adverse development is really driven by a package, in the liability portion of package and that’s really where we’ve been focusing our attention as we’re working to correct by taking down some general liability limits, exiting some classes and reducing the unanticipated severity that we’re seeing in that business line.

And the last question, any particular accident years?

That was 13.

Okay.

Switching to Europe, we have two businesses there. We have Hardy Syndicate at Lloyd's and we have our regular business in the UK and the continent. The Lloyd's market is extremely competitive as you know and as you suggested, Jay. So our strategy at Lloyd's is basically to walk away from business when the pricing just becomes ridiculous. And we are very satisfied that they are maintaining the right kind of discipline and it’s affecting their retention and once again new business is very cheap there. So, I think the London Lloyd's market is, as you said, extremely competitive. What we call the company market our UK and European operations, it’s competitive but it’s not as competitive as Lloyd's. So I think we’re holding our own there. We’re happy with what we’re seeing. But once again, this is about walking away when the price gets ridiculous.

I guess just one follow up on that, if you don’t mind. Part of the story there has been the expense ratio has been coming down. That I assume is going to get a little tougher if you’re obviously willing to walk away from business to protect the loss ratio; but then the expense ratio, could that give us some upward pressure?

I think, Jay, yes, it could and we’re also in the – remember we’re investing there and we’re investing there for the long term. So we’re not going to let this short-term softening distract us from adding and building the right foundational elements to grow over the long term there. So we are actually relocating the offices of Hardy and our other European operations, co-locating them in the fourth quarter so there would be some one-time expense charges there and it will make improving that expense ratio which I think we even told you before, we had an objective of getting it down to the low 40s more challenging and take us a little longer to get there.

The thing I would add there also Jay is we have added people at Hardy. We have brought in a group of people in what they call casualty, but think of that as a little bit of professional liability. And also we are looking to inject some of our current capabilities in healthcare, et cetera into Hardy and that’s one of the reasons behind putting everybody in one place. Like Craig said, it’s to get the best of both worlds and create an additive situation rather than just follow the market down.

Got it. Thank you.

You’re welcome.

We’ll take our next question from Josh Shanker from Deutsche Bank. Please go ahead.

Yes. Good morning, everyone. Given the reserve charge, I just want to talk about thinking about a situation in the future where you would call CNA a business that has a higher probability that reserves are redundant as opposed to being deficient. And are you still putting out fires or do you believe that you’re already in that position.

I think we’ve identified all the fires and we have firemen surrounding them. We don’t think there are any more surprises we kind of call it the whac-a-mole phenomenon if you recall that game in an arcade where things pop up their ugly head, but we think we’ve got our handle on all of that. So our objective is to drive more of our business into the segments with those you are probably familiar with, but the segments today are 70% of the book that’s gone up from the prior quarter. The loss ratio on the segment business is four points better than the overall loss ratio and that’s an area that we think our specialization will continue to sell on the marketplace. So we keep pushing the business towards the segments. And think of it this way, if that’s 70% of the business we got 30% of the business and if you look at the pieces that are kind of what we’re focused on, it’s 18% of fixing to do, if you will. So we think we’re moving in the right direction and we have good traction, but we have identified what we call all the fires.

So the extent to which – I mean when you use the term for yourself, whac-a-mole’s kind of a pejorative term in that things are popping up and surprising. Why do you have more confidence after this quarter that you’re not going to be surprised, and why do you think you got surprised this quarter?

I think we got under the machine and we saw the moles before they popped up, so we’ve kind of identified the outliers that have been outside the business, so outside the segment business. So if you think of long haul trucking and international work comp and things that just didn’t fit our strategy, we’ve got a very good handle about that today.

I think Josh, listen, you can never be absolutely sure of anything, right. But what we’d like to have the reputation and believe we’ve earned is that when we see something, we don’t delay it. We don’t put it off thinking it’s going to get better. So we act on what we see when we saw it. So these are primarily businesses that we exited more than two years ago where the severity trend has been even worse than we anticipated when we decided getting out. And so count on us to act on things when we see things and no delay things.

I appreciate the candor there. The other question I have, can you discuss the last three months of rate approval trend in long-term care? And then what progress you’ve made there?

Well, the rate approvals are now slightly over half of what we filed for, at least the most recent filing. Remember we had really two series of rate increase filing; one started in 2010, one started in 2012. The 2010 one is largely completed; 2012 is about halfway through although we’re not seeing all of it yet follow through the incremental increase from rate this quarter was an additional $5 million and actually from both programs if you think of it starting at 12 – an additional $12 million in rate coming through the segment this quarter.

And in the states where you haven’t gotten as much approvals you’ve asked for, knowing as much as you know about the political process, what do you think the odds are of you getting rate on rate in the coming year and the regulators trying to just slow your pace of you getting what you think you need versus trying to put a restriction on you achieving that rate?

Well, it is different in every state as I’m sure you appreciate and know. Regulators have largely been – worked with us through this. They appreciate the circumstances situation and they’ve been reasonable in most respects. They’ve certainly been sympathetic to where we are and what we need; not all of them, some move a lot slower than others. Some states have been reluctant to do anything at all. But in the main, we haven’t really seen any change in their attitude towards working with us to get rate increases which are actuarially justified.

Do they come back and tell you, look, you asked for too much rate this year but come back next year and we might give you some more? I mean what sort of color do they give you in those cases?

Well, that is one of them. We might get no response. We’re working on it. We might get a, yes, it’s approved. We might get a, yes, it’s approved but we want you to take it in three different annual increases. We might get it in, here’s a small amount. Come back next year and we’ll work with you to get it. So kind of goes across the board as you’re describing.

Okay. Well, thank you very much and good luck.

Thank you, Josh.

(Operator Instructions). We will now take our next question from Bob Glasspiegel from Janney Capital. Please go ahead.

Good morning, CNA. With the Wilton Re transaction, I mean you’ve showed, Tom, that you’re willing to make some tough decisions where businesses can’t get to your targeted ROE. On the standard commercial business, which seems like it for a long time has been obscuring much better results from Specialty, what is the glide path to get that to an acceptable ROE? How much patience do you have to work though it? I mean you’ve shown a lot of patience to-date for sure. And in an environment where you’re getting less rate, do we really have to wait until the next up cycle to get to sort of attractive returns in that business, or is there a path that you can get there sooner?

I think a couple of things. I think you had about 12 questions there, Bob, so I’ll try to remember a couple of them. I think, first of all, we believe that the segment strategy has legs and will help commercial going forward. And when I came here, I would say the commercial book was very generic. We just would write anything if it had premium dollars connected to it. We have moved much more into specialization, if you will. So although it’s commercial business, we’re trying to be more specialized whether that be technology or manufacturing, its construction, professional firms, healthcare, whatever it might be. So the book is changing dramatically. If you look at the mix of types of customers as well as the mix of product line, so less worker’s comp. Worker’s comp is more white collar today than it was years ago, but this takes a lot of time to churn through it. Yes, we may appear to be patient but I can tell you we’re pretty impatient. We are looking at this stuff all the time and constantly putting more tools to work to improve this and improving our pricing and predictive analytics. So, it’s all work in process but the commercial industry – commercial for the industry historically is not a business that makes a lot of money. Specialty is where all the gravy is. But we think we can improve commercial and the first goal is to get it clearly under 100 from a calendar year perspective and then keep driving it down towards 90, and we showed improvement this quarter. We’ve showed improvement for the last few years and the legacy is these run-offs things that are adding to reserves as well as some severity that we’ve seen in commercial auto, for example. So the fact is we keep fine tuning the book but we think we’re going to get there. And we do have the support of the agency force. They like the strategy and are working with us. So we’ll get there but it takes a long time when you have these legacy things that pop their head up. We have been, as you pointed out, whether it’s the transaction with Wilton Re or the asbestos or the sale of Argentina work comp business which is not a good business, FICOH when we sold our interest, we have been cleaning up a lot of stuff so we just now are really – have our attention turned to getting commercial fixed in a big way and even long-term care made a little money this quarter. So the fact is we keep hunkering down, we’re going to get it done.

No, I’m impressed with the strategy. It just seems like the challenge may be tougher in an environment where rates are going up as much. So what you’re saying is you do – go ahead, I’m sorry.

What I would tell you, Bob, is it’s about risk selection and the quality of your pricing. We are spending a lot of time working on pricing whether that be for small or for middle market, whatever it might be. So as I said in my comments, this is not a period of time that you’re going to see the industry go like crazy, right. I mean people are protecting their best business, but if we can have a superior offering to our competitors, we’ll see the better risk and we’ll write them and that’s our plan. So, just like I said to the question about Europe, if we don’t get the price we write we’re not going to write it. So that stands true in the U.S. too. But we think there’s upside with the segment strategy and we will keep pushing it and hopefully these legacy things are going to be gone forever.

Good luck, Tom.

Thank you, Bob.

Thank you. I will now take a next question from Adam Klauber from William Blair. Please go ahead.

Thanks. Good morning, everyone. With new business opportunities slowing down, how does that impact your view on capital return and acquisitions? Thanks.

Adam, maybe just to make the obvious point that you can see where we are stat surplus and we’re certainly generating more capital that we need to support the business and the business growth. So, at the appropriate time we’ll be making decisions about that.

Okay. And then as far as worker’s comp, how are the worker’s comp loss picks this year compared to last year and the year before?

They are lower and have been behaving at least at this point. We’re going to do comp review again next quarter which will be the second time we’ve done it this year. Early indications are things are pretty stable in terms of the improvements that we had baked in and anticipated.

Okay, great. Thank you.

We will now take our next question from Jay Cohen from Bank of America Merrill Lynch. Please go ahead.

Yes. Thank you. I guess two questions. One is a follow-up on the reserve addition. The bigger piece was the businesses you’re no longer in. I’m wondering if you could specify what lines we’re talking about there?

So really three lines, Jay. One is the overseas worker’s comp, which we’d exited a while ago. There were a number of programs there and there’s actually one last program that runs through December of this year. So we’re not entirely out of that. And these roughly a third of each of them. So a third is overseas comp. A third was this transportation E&S, so all these are excess in surplus lines. E&S transportation book and an E&S habitational book, which really – also came from GL.

Got it, okay. And then secondly, I guess a follow-up on the last question on capital because not only the growth is not there, you’re generating more than you need. And you may have talked about this before and I just probably forget, but the sale of Continental Assurance to Wilton Re, how much capital does that sale free up?

It frees up a little north of $200 million.

So between that and the excess capital, so you’ll get to it when you get to it but what are some of the – can you share with us some of the thinking of what you might be doing with this excess capital which is only growing at this point?

We would – of course we’d love to be able to put it to work in the business. If we can’t put it to work in the business then we consider the options – those other options that we’ve had. And we told you before, share buyback is really not an option for us and we focused primarily on the common dividend and then of course last year, we did declare a special dividend. This is the middle of the year. We didn’t think it’s an appropriate time particularly facing wind season. Later in the year we’ll have a better sense of how the full year is going to play out earnings wise and that’s when we sit with the Board and come up with a recommendation to have those conversations.

Got it. All right. Thank you.

We’ll now take our next question from Ron Bobman from Capital Returns. Please go ahead.

Just because Jay Cohen’s a lot older than me, I don’t see why he gets to ask two sets of questions before me. I had a question about – you made mention of a life settlement gain – I think you said gain not sale, but can you describe that? I didn’t realize that the investment portfolio or sort of underwriting ops was in that business. Could you describe that?

Let me bring it back to you. In the Life & Group segment now that we’ve sold the life company and that’s in discontinued ops, what’s left is the long-term care business, a small amount of group business and viatical settlements, a life settlements business. So we’d insured or bought the life insurance on a high net worth individual who passed away, died last quarter and we received the proceeds of that. So you’ll see it if you look in the P&L, Ron, in other income.

So I guess in some date passed, we were in the business of buying these policies I guess but when did that stop? How far back were we active doing that?

So 10 years, 12 years ago.

Okay. All right. Thanks a lot. You had answered my other questions I had about the adverse development and run offs, so thanks again. All the best.

Thanks, Ron.

Thank you.

(Operator Instructions). At this time, there are no questions in the queue and I’d like to turn the call back over to Tom Motamed.

Thank you very much. Have a good day.