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

Thank you, Don. Good morning and welcome to CNA's discussion of our 2018 first 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 website, www.cna.com. With us on this morning's call are Dino Robusto, our Chairman and Chief Executive Officer; and Craig Mense, our Chief Financial Officer. Following Dino's and Craig's remarks about our quarterly results, we will open it up for your questions. Before turning it over to Dino, 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 those risks is contained in the earnings release and at CNA's most recent 10-K on file with the SEC. In addition, the forward-looking statements speak only as of today, Monday, April 30th, 2018. 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 and other information 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. With that, I will turn the call over to CNA's Chairman and CEO, Dino Robusto.

Thank you, James. Good morning everyone. I am pleased to share our first quarter results with you today, which showed our continued progress in growing our underwriting profits. Our pretax underlying underwriting income was $111 million in the first quarter, the highest quarterly amount at CNA in over 10 years and reflects the benefit of actions CNA has taken during the past several years and strengthened over the past year by our relentless focus on execution. Driving the growth in our underlying underwriting income is an excellent underlying loss ratio of 60% for the quarter, a 2.2-point improvement from first quarter 2017. Our first quarter underlying combined ratio of 93.2% included an expense ratio of 32.8%, which was 2.1 points better than a year ago. While the expense ratio comparison benefited from an unusually low net earned premium quarter a year ago due to the small business premium adjustment, it still improved to 1.2 points after adjusting for that impact. Overall, our first quarter 2018 combined ratio of 93.1% improved by 4.1 points compared with last year's first quarter as the impacts on loss ratio from prior period development and catastrophe losses were essentially the same in both quarters. We also had strong growth with net written premium in the quarter increasing 8% from last year after adjusting for small business. Our growth for the quarter benefited from favorable currency fluctuation impact of 1%, renewal premium change increase of 4%, and growth in new business. From an operational perspective, I am encouraged by the success our underwriters had in managing the rate retention dynamics in the early stages of this transitional market. You will recall that this is a topic I discussed at length in last quarter's call. Our results in the quarter evidenced our disciplined approach to receiving more…

Good morning everyone and Dino thank you for the kind words. As I look back over my time here at CNA, I'm extremely proud of what has been accomplished by all of us over those 14-plus years and I'm especially excited about the bright future that CNA has in front of it. And further, I'm absolutely confident that James is well-positioned to have built upon the strong foundation that is in place today. So with that said, let's turn back to the quarter. In the first quarter of 2018, we produced core income of $281 million and net income of $291 million, both of which included a noneconomic charge of $32 million related to the retroactive reinsurance accounting for our 2010 loss portfolio transfer of asbestos in environmental liabilities to National Indemnity Company. Core income was $46 million higher than a year ago. And while we certainly benefited from the change in the corporate tax rate, the fundamental driver of the improvement was increased property and casualty underwriting profit. Our property and casualty operations produced core income of $327 million, up 22% from the prior year quarter's $268 million of core income. Pretax underwriting income nearly tripled from $43 million to $113 million. The earnings contribution from investment income was down given lower limited partnership results. Our improving underwriting discipline is again evident in our property and casualty underwriting loss ratio of 60%, which is over two points better than the fourth -- first quarter of 2017 and consistent with the results that we've posted each of the past three quarters. In addition, we benefited from $39 million or two points of favorable loss reserve development. Throughout my tenure, we have worked very hard to build a high quality disciplined reserving process and to create and sustain a strong loss…

Thanks Craig. Before we move to the question-and-answer portion of the call, let me leave you with some summary thoughts on the quarter's performance. Our first quarter core income of $281 million was $46 million higher than our Q1 2017 despite lower LP investment returns. We had pretax underlying income of $111 million, our highest amount since 2006. Strong growth of 8% in adjusted net written premium fueled by higher rate and exposure as well as growth in new business. We had favorable prior period loss development impact on our combined ratio, consistent with Q1 of 2017. We have positive earnings in our long-term care business in the quarter, broadly consistent with the assumptions incorporated in the 2017 GPV analysis. Our 2018 first quarter core return on equity is 9.3%. We announced our regular quarterly dividend of $0.30, per share. And with that, we'll be glad to take your questions.

[Operator Instructions] And we'll take our first question from Josh Shanker with Deutsche Bank.

Good morning everyone. Congratulations on a good quarter and Craig, congratulations. James, congratulations. Lots of things going on.

Thank you.

Wanted to ask a question about the healthcare rate increases; 8% in 4Q, 10% in 1Q with 15% in March alone. Those rate increases sound like they were responding to losses. Can we talk about the margin in that business and what's going there?

Josh, right, I'll make some observations. And then if there's any other detail, I'll turn it over to Craig. Look, we've had a long history in healthcare and profitable results in a broad sort of range of the areas within healthcare. We've also built a lot of expertise across our underwriting, our claims, our risk control, actuarial. And frankly, we really have data that I think no one else has. And over the sort of two decades that we've been in it, we've generated a lot of profits. Now, we have talked about in the past, on past calls, that we had some challenges in recent history driven by some higher frequency and severity trends, which incidentally newer entrants, over the last few years, with their sort of naïve pricing, are now seeing an exiting from it. But look, we're an industry leader. We know what to do to mitigate the trends that we've seen. I've spoken about and given you some pretty detailed examples of our rate retention dynamic and we had another quarter of some strong performance. Now, you'll lose a little bit of retention in some of the areas like aging services probably in the mid-70s, but that's okay. We know what we have to do, and it's starting to really look good. Healthcare, so we are committed to it. We're going to stick with it and remain an industry leader.

And when you say healthcare, there's a lot of lines in healthcare, which lines in particular are we talking about here?

The segments aging services and hospitals principally are the two areas. And Craig, I think over several calls, had talked about the frequency and severity trends, some of the litigation jury awards that were higher. So, we see it, we know it. Risk control, exceptionally talented at CNA in this area because we've been at it so long. They know what to look for. And I think we're responding very effectively. And because we have cloud, Josh in, in this segment, I think we can continue to lead with the right terms and conditions, and the March results was really strong. [Indiscernible]

Yes. Do you think with this pricing, you're at -- you're getting to where the loss costs are? Or do you think there's still multiyear pricing to happen to get to where you want to be?

I wouldn't say multiyear, but I know we're there. Now -- right now, no, right? We're going to -- it depends how we continue to play this. But how quickly we can get big rate increases, where we need it. Keep in mind that in the short-term, even when you drop your retention, right, 20%, 25%, that has an immediate effect because you dump the frequency of the losses. So, it's not there today. It's not a multiyear process, so shorter than that.

Okay. Thank you very much for the detail.

We'll go for our next question to Jeff Schmidt with William Blair.

Hi, good morning everyone.

Good morning.

Just looking at the underlying loss ratio in the commercial side. You'd mentioned in recent quarters that you'd seen sort of severity tick up, maybe an increase in legal costs. Are you seeing a shift there, maybe a favorable trend? Or has that declined? I think it was 240 basis points. Is that really just being driven by sort of re-underwriting, better business mix?

It's by the latter, by re-underwriting better business mix. And Jeff, I don't recall mentioning seeing expenses. And those in -- really, in healthcare, we had mentioned -- actually, in architecture and engineers, we had mentioned we're seeing declining legal costs affecting and improving the loss ratio in some of our specialty businesses. So, no, we're not seeing any increasing legal expenses that are having a negative effect on losses.

Okay. And then I don't know it was mentioned. But did you discuss what are rates doing in workers comp and how does that compare to loss cost trends there?

So, I mentioned the rate decrease, in particular for middle market, which was minus 3.2%. But we have again a lot of profitability in the line of business. We're comfortable with the line of business, with the mix that we have, where comp is a state-by-state, right, so you've got to play it differently by different states, but we continue to feel comfortable with our work comp.

Okay. Thank you.

For our next question, we'll go to Meyer Shields with KBW.

Thanks. Good morning and again, congratulations, both Craig and James on this move. Two quick questions, I guess, on reserves. The first is can you give us a sense of what the revised schedule looks like for the rest of the year? In other words, when there are prominent reserve review scheduled?

They are actively across the year. We've been stepping it up, Meyer, so that we're looking at most all lines at least twice a year, but we're really -- if we're not doing an in-depth review, we're doing actual expected and some other analytics on them. So, you shouldn't expect it's going to be -- there's some seasonality to our reviews. You should expect more frequency and then more reaction. I think that surety is one example that I've mentioned this quarter where we stepped up the frequency of our review schedule.

Okay. Yes, I was asking about seasonality, so that's perfect. And second, the -- does the -- so you mentioned that the asbestos and environmental charge this quarter is noneconomic. Does the charge in the first quarter -- like what's the future quarterly impact of the unwind of the charge in this quarter? Is there any way to explain that?

Well, yes -- well, that's what I meant. When you mean -- I don't want to get into accounting exercise obviously. I'm sure you don't either. You -- feel free to call us and we're happy to lead you through. But remember that the deferred gain, because we're in a deferred gain on the contract, we only get to recognize that percentage of the gain that is equal to the paid losses against the ultimate expected loss. So, we're about -- we have a little over $750 million of deferred gain. We recognize slightly more than 50% of it because that's kind of where we are. The paid losses are a little less than $1.6 billion against an estimated ultimate; it was about $3 billion right now. So, there's another $350 million plus of deferred gain that we'll get unwound as the contract runs out over many years.

Okay. That's terrific. I'll follow-up. Thank you very much.

You're welcome.

[Operator Instructions] We'll go next to Gary Ransom with Dowling & Partners.

Yes, good morning everyone. I wanted to ask about small commercial. There has been other peers talking about entering that business, the amount of technology needed to get into it and stay in it and be strong in it. And I just wondered if you have any technology investments that you may need to make to defend yourself in that area or if there's any other comments you might have on what's going on in the smaller commercial area.

Hi Gary, Dino. So, look, we've actually been in small business for, I guess, about 15 years now and we have some good premium in the business. And -- but to your point, you've got to continue to evolve the technology. We've invested significantly over the last year in upgrading our rating plans. We have a newer online presence that you probably saw in the last couple of quarters. So, it's an area we're interested in continuing to invest in because we've been at it a long time. We have many agents and brokers that we partner with, that have favored us. And as long as we keep making it easy to do business that the rating plans are in line with the target segments that we tell them that we're interested in, this is going to continue to be an important business for us. Now just as a point when I indicated about the online, the online is not any direct. It is just an ability to get quote indication. But if you do want to proceed, then you get directed to an agent and broker, which is the way we're going to continue to do this business.

Can you give us a sense of the size, average size of your small commercial premium size? I just was kind of wondering how small it is.

Small business? So, both $2,000 roughly, the average size of our policies.

Okay. Maybe I'll follow-up later to go in a little bit more depth. Thank you very much for that. Good start.

Okay, great. Thanks Gary.

We'll take our next question from Scott Frost with SSGA.

Hi. Do you think these types results are what NRSROs are looking for in terms of upgrade track? And are higher ratings desirable? Or should we think of capital management in the context of your current rating stand as a BBB name?

I think that -- I think what we said before, Scott, or I said to investors I met before; our objective is to get upgrades from here. Last year, recall, we were upgraded by Standard & Poor's to BBB+ and we're kind of at that same level with Moody's right now. I think if you look at the credit metrics, whether it's leverage ratio or fixed coverage charge or even -- or improvements in the level of capital, all are indicative of a higher rated firm. So, the -- our hope and expectation over time. Now, it's up to the rating agencies' perspective, as we said before, would be -- that we would be -- continue to be upgraded from here.

Okay. Thank you.

You're welcome.

[Operator Instructions] And it appears there are no further questions. So, at this time, I'd like to turn the conference back to Mr. Dino Robusto for any closing comments.

Great. Thank you and we look forward to chatting with you in a quarter.

This does conclude today's conference. Thank you for your participation. You may now disconnect.