Good day, everyone, and welcome to the CNA Financial Corporation Second Quarter 2016 Earnings 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, Lori. Good morning and welcome to CNA’s discussion of our 2016 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 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 and Craig’s remarks about our 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 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 in CNA’s most recent 10-Q and 10-K on file with the SEC. In addition, these forward-looking statements speak only as of today, Monday, August 1, 2016. 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, Tom Motamed.

Thank you, James. Good morning, everyone, and thank you for joining us today. I am pleased to report what I view as very solid and steady results this quarter. In the second quarter CNA produced net operating income of $201 million compared with $132 million in the second quarter of 2015. Operating return on equity was just under 7%. Our Property & Casualty business had another solid quarter with a combined ratio of 97.4%, an improvement of 1 point compared with the prior year quarter. This was driven by favorable prior year loss development across all of our Property & Casualty segments and achieve despite a higher level of catastrophe losses and a higher than expected number of large losses in international. Specialty continues to produce outstanding results in a competitive environment. The second quarter combined ratio of 85.4% nearly a 6 point improvement compared with the second quarter of 2015 driven by favorable prior year loss development coupled with a stable accident year loss ratio. The underlying combined ratio was 94%. Specialty rates increased 1% in the second quarter with retention of 86%. Net written premiums grew 3% in the quarter aided by healthy retention, positive rate and a modest level of new business reflective of our disciplined approach to the market. Commercial continues to make good progress. The quarter’s combined ratio of 103.5% was 4 points better than the second quarter of last year, helped by a modest amount of favorable prior year loss development. Catastrophes of 8 points were in line with the prior year quarter. The underlying combined ratio for commercial was 97.7% with an underlying loss ratio of 61.6%, 1 point lower than the prior year quarter and steady with where we ended the full-year 2015. Commercial rates were flat for the quarter. Retention improved 4 points to 83% and net written premium was up 3% while new business was steady. We had a challenging quarter in international with a number of large losses in Europe and Hardy, primarily in political risk, property and financial institutions. Canada continues to perform very well. Catastrophe losses added 10.6 points to the loss ratio driven by the Fort McMurray wildfires. International second quarter combined ratio was 118.6% including 7 points of favorable reserve development. The underlying combined ratio was 115.3%. International net written premiums decreased 22% in the quarter compared with the prior year quarter. Excluding the effect of foreign currency exchange rates and the timing of reinsurance spend the decrease was 12% due to lower retention and rate. With that I'll turn it over to Craig.

Thanks, Tom. Good morning, everyone. CNA produced another quarter of steady results and demonstrated steady overall progress. This characteristic was especially true for all our U.S. based businesses as well as for our investment results. Our International segment results were disappointing. Our core Property & Casualty operations produced net operating income of $229 million compared with $237 million in the prior year quarter. Our second quarter calendar year Property & Casualty loss ratio was 63%, nearly a 2 point improvement as compared to the second quarter of 2015, despite a higher level of catastrophe losses. The underlying loss ratio was 63.9% above where we ended full-year 2015 and reflective of the elevated level of large losses in our International segment. Our U.S. based Commercial and Specialty businesses generated significantly improved underwriting profit through stable underwriting loss ratios and favorable prior year development. Importantly, the underlying loss ratios in both our Commercial and Specialty segments were consistent with where we ended full-year 2015. The meaningful level of prior year loss reserve development was relatively broad based and reflected improvements in more recent accident years. This was especially true in the Commercial segment and a reason for optimism as we navigate through today's competitive environment. Our second quarter Property & Casualty expense ratio was 34.2%, a 1 point improvement compared with the first quarter of this year and consistent with our full-year 2015 results. We continue to maintain our long-term focus and to invest in the business. We remain committed to becoming among the very best at selecting pricing and managing risk. We also remain mindful of the need to improve our expense competitiveness over time. Life & Group produced a $4 million net operating loss in the quarter much improved from a $24 million loss in the second quarter of last…

Thank you, Craig. In conclusion, the market looks much like it did in the first quarter and our strategy remains unchanged. We will continue to focus on portfolio management and margin improvement, which is evident in our results we shared with you today. With that, we will be glad to take your questions.

Thank you. [Operator Instructions] We will go to Bob Glasspiegel with Janney.

Good morning to CNA.

Good morning, Bob.

I was wondering – a couple quick questions on international. Could you quantify how many points you would characterize unusual large losses contributed to the quarter? And also just some commentary on how Brexit is going to impact your strategy there?

So let Bob, this is Craig. I would tell you that the unusual level of large losses added about 16 points to the international loss ratio this quarter. I'll let Tom answer your question about Brexit?

Yes. So first of all our European subsidiary is based in London, so with that we are evaluating what options are out there for us going forward. I would also make the point Bob, 2% of our premiums are on continental Europe, and it’s a very small percentage. Most of our business is UK and Hardy, and then Canada of course. So we are looking at options and it's a ways off, but we'll figure it out.

Thank you. You said Canada had a good quarter despite the wildfires. Or were you talking ex-wildfires?

No despite the wildfires.

Okay. So it performed in line, even with the pressure? And how much was the wildfires?

The wildfires was about $20 million total and about half was from Hardy and half was from Canada.

Got it. And last question, could you give us a little color on where the – you said it was more recent accident year. What drove the reserve releases?

A little bit different in both what I said, and maybe we want to emphasize that it was broad-based. So in specialty, it was across a lot of different products mostly professional liability products including medical professional and expand accident years 2018 through 2014, so – and the way we – and part of it is how we approach reserving, so we try to be mindful of what impact on volatility or variability is in specialty and it just turned out that really the emerging frequency across all those years and we had a few favorable claim outcomes, all those things added up to pretty significant dollar total. In commercial, likewise it's a several product, but over accident years 2010 through 2014, but most of it 2012, 2013 and 2014. And I think we really get some credit there or kind of the reasons there is that we also have been cautious that you know we've been investing very heavily in talent, and in new tools, and improving our execution and we haven't reflected what we anticipated the positive impact so that to be until we saw those results begin to really manifest themselves in the loss ratios. So what you're seeing now is a really a manifestation of a lower frequency which we would say is underwriting driven. So underwriting pricing risk selection and claim management driven and that's the reason for my optimistic remark as well in the script.

Thanks for the color Tom and Craig.

Thank you, Bob.

We will go next to Josh Shanker, Deutsche Bank.

Yes, thank you. Just following up on Bob's question about international. Can you talk about how many unusual losses were in that 16%? How often you would expect a confluence of a number – that many large events hitting in one single quarter and whether this has caused you to ask any questions about risk management in the sector?

I think first of all, if you look at the business at Hardy, where a lot of these losses came from, it's a volatile business. They do have ups and downs. Unfortunately, we got a couple losses in the same quarter. We'd like to think that over time that will balance out, but that's the nature of the business when you're writing trade credit and political risk and some of the other things that they do in Hardy. So the fact is it was a tough quarter. We would like to think that's not going to be every quarter, but political risk, trade credit is really a pretty small portion of the book, but things are a little tumultuous over there these days. So I don't think that changes our attitude about wanting to do business in the Lloyd’s marketplace or the continent or the UK. It is a smaller portion of our business. So it is going to show some fluctuations on the loss ratio side because it doesn't have the scale of the U.S. business or U.S. specialty or U.S. commercial.

And if I think about - what is the target combined ratio for the small and middle-sized attritional loss as part of international's mandate? Is this a business that we should think operates at an 80% combined ratio with standard deviation of 15%, depending on the impact of large losses? Or how do you guys think about the large loss portfolio versus the attritional loss portfolio?

Well, I think you have to look at it in different pieces, if you look at the UK business we think that's usually pretty stable. We like that business it doesn't have the volatility that Lloyd's has, so I think if we look at the Lloyd's business we think that's going to trade at a higher combined ratio at this point in time. Continental Europe pretty stable although they did have the financial institution loss on the continent. So I think we realize there are three very different businesses and our objective is, over time to make them all more profitable and get a little more scale. So I don't know that I can answer your question exactly Josh.

That's all right. I guess I'm trying to gerrymander into my own answer I guess. Is it possible…

Well I’d think of it this way, if you look at the markets that trade in Lloyd's it has been a market that suffered from rate decreases for quite probably two years now. So rates have been going down there it's extremely competitive. There are new entrants it's a tough market, the Lloyd's market is very tough doesn't look like its getting better. So I think that's the reality it's not a CNA issue, I think it's Lloyd's issue. And I think that that's probably going to continue with what's going on over there so.

I guess, in terms of thinking about - if the possibility of hitting a 115, 120 is a reality in this market, can we envision that there's also quarters where we will see, even in this kind of market, combined ratios in the 80s given the volatility? There should be a trade-off there. So if a 120 is possible, then maybe an 80 or 85 should be possible, too, but in this market maybe that's not possible.

I don't think you're going to see 80 combined ratios coming out of the Lloyd's marketplace I just don't see that. Now what you hope is you don't have three or four 115's. Maybe you have 115 one quarter and you can get things down to 100 or 90 in the 90's, but I think you are kidding yourself if you're thinking it's 80's business with an occasional 110, 115.

No, no, no. I'm saying that the volatility - that I'm just as likely maybe to show up with a 120 as I am an 80 in an unusual quarter, I guess is how I'm sort of thinking about it. But maybe that's too much. The market is tough, I understand.

Let's hope it's not like an EKG where it's up and down, all right. I think we'd like to see it get closer to 100 overall, but 115 we're not happy with that.

In terms of the business that you are going to leave in about six months, a little less than that actually, can we conceive of the reserve situation getting to a point where you're looking to have the reserves have a steady sort of trend, depending on where the market is going? It seems like if I try and forecast reserve release for CNA, good luck to me. Good luck for any company, but they are pretty volatile. And that's a result of trying to get the book in order, which there's a number of things changing all the time. Should it be less volatile in time or is this sort of normal volatility?

I would say we are comfortable with reserves and we're comfortable that we've had now a couple quarters of reserve releases in commercial, specialty has been consistent in that regard. This is not the serial reserve company that somebody knew in the past. This is a much different place. We’re very comfortable with the reserves. Sure, there are ups and downs periodically, but we think we're really doing a nice job on the reserve side more comfortable.

And Josh, this is Craig. I'd say over the last 10 years, our reserve history has been remarkably consistent in terms of favorability most of the time. We don't get it right all the time. But pretty remarkably consistent and that we do see some small amount of favorable reserve development because of the approach we've taken.

And I think the point that Craig made a little earlier, you're seeing reserve releases now from more current accident years. If you are going back a few years ago, it was the older accident years. It’s more consistent now. So we're pleased.

All right. Well, good luck with the rest of the year and I'll talk to you soon.

See you next quarter.

Thanks, Josh.

We’ll go next to Jay Cohen with Bank of America. Please go ahead.

Thank you. I guess starting on the international side, can you maybe put a little color around one or two of these large losses? When you say trade credit political risk, what exactly happened that gave rise to the loss?

So it means I don't know if you understand the trade credit business, but essentially we are – what’s giving rise to the loss is the commodity depressed prices, guarantees made about deliveries or prices of those commodities and failures of the companies to transact or complete those businesses. So that's really a function of the currency in emerging markets and commodity pricing and the impact of that business and the guarantee is made in that business.

Got it. And on the financial institutions loss, this is a liability-type product?

Actually, there are several there Jay, so it is financial institutions. Some are directors and officers liability and there also is one large Fidelity crime loss. So it was relatively – there are a handful of large losses with different characteristics across that portfolio.

Got it. And then on the international premiums, it makes sense that you would see the shrinkage given the market conditions. It did seem to really step down this quarter versus the last several. Are you reacting more aggressively to the competitive environment?

I think remember also, and you want to be able to see that some in the commentary and in the press release that there's a bit of a timing difference in the reinsurance spend at Hardy, which reduced net written premium by about 10% this quarter. You might remember that last quarter we're explaining that it wasn't quite as high as it looks, so some of it is that. But even when you take currency impacts away and you take that reinsurance timing away, the topline on a local basis to be down about 10 points, 10 or 12 points and that is a function of the market rates in the market and retention in the market and there are reaction to the rationality or lack of rationality in the market. I think also remember that at Lloyd's, one of our bigger sectors was energy and energy has been under significant pressure both from just the assets that are being insured, declining less purchasing from those eventual customers and then the kind of competitive environment of that. So there is a lot of different things going on, which are I don’t know why Tom was saying what he's saying about the relative stress now ongoing at Lloyd's.

Yes, you are not alone there, certainly. And then the last question, given the ongoing favorable development, how are you adjusting your current accident-year loss ratio PICs? Has that allowed you to use a somewhat lower PIC, maybe not as low as the reserves might indicate, but a somewhat lower PIC anyway?

We do adjust our current fix based on how we see the base loss ratio improve. So that is a factor and how we look at things. I wouldn't say that we adjust that anything this quarter, I mean we take it into consideration and as we go along we try not to act too quickly on the current accident year, particularly in this rate environment right until we're a little further in the year and then we can see how all the different components that might drive the outcome is a little more settled in, but certainly that is a positive factor and will be a positive factor as we're going forward.

Got it. Thanks for the answers, Craig.

You're welcome, Jay.

[Operator Instructions] We’ll go next to Jeff Schmidt with William Blair.

Hi, good morning, everyone. Question on the commercial book, it looks like small business rates are holding up well. The middle-market book is down for the second straight quarter it went negative. Could we get a sense on how much of the book is broken between the two small business and middle market?

Small is about 20% of the total commercial line segment.

Okay. And are you seeing rate pressure there kind of across the Board or are you seeing any lines deteriorating more?

No, rates are up in small business and we tier our business one to five and all of the tiers are up, some are high single-digits, some are low single-digits, but small business we're seeing good rate increases.

I meant for middle market there. I'm sorry…

What's the question on middle market?

Well, it's gone negative here now for the second straight quarter and I was just wondering if that's kind of broad across business lines or is there any...

The package business is off low single-digits and that would be a big driver of the middle market.

And then the expense ratio for that book is up, I think it's for like the seven straight quarters. Is that mainly being driven by investments in the business or where does that top out at?

Yes. Investments in the business.

Is this at 38%, 39%? I mean is there much more?

I think what you saw it’s actually down this quarter from the last, right. So it has been up year-over-year, but down this quarter a little bit from last and a little bit more consistent. As I said, overall we think the expense ratio – we are going to continue invest in the business, because we think long-term, this is a game of how well are you and how good are you would quantifying, selecting, and managing risk. And we are very mindful of where our competitive position is that’s compared by the accident year loss ratio to pears and I see – and I think you'll see if you look at it how much we've closed that gap if not completely close that gap. So that is a significant positive factor for the business trading forward. And you expect us to be mindful of that expense ratio on competitiveness which is about 2 or 3 points now, but essentially we arrested any increase this quarter from the last. And what I said in my remarks as we expected to be closer to that where we began the year around 34, 34.5 and we end the year.

Okay. Thank you.

You’re welcome.

[Operator Instructions] We’ll go next to Meyer Shields with KBW.

Thanks. Good morning.

Good morning.

Is there any useful rule of thumb in terms of saying that when you've got loss ratio improvement of X points there's an offsetting expense in terms of incentive compensation within the expense ratio? Is that a driver at all in this quarter?

I'm sorry, we're having a hard time – I'm having a hard time hearing you or understanding the question.

Okay. I'm wondering whether the successes that you are showing on the loss ratio in commercial and in specialty, does that come – does that imply a higher expense ratio for incentive compensation at all.

No, not necessarily. I mean depending on how well we do, we could have some impacts here, but if it is it would be a one-time and it'd be incremental, I don't think it would be particularly noticeable and I wouldn't – but we do, certainly do reward our underwriters for their performance or outperformance against expectations.

Okay, that helps. I think, Tom, you mentioned the improvement in frequency as a function of internal underwriting. Is there anything changing in the external environment in terms of frequency or severity, particularly on the liability side, getting worse?

I don't know I think the only thing is management liability looks pretty bleak to me from a claim standpoint and the market continues to push rates down, it doesn't make any sense at all. But I think management liability is a bit troubled particularly the large public stuff, so that would be the only other thing. I mean we look at our claim accounts and new claims were down 5%. Our outstanding claims were down 5%. That's been going on for a while and that's part of the portfolio management. I think we're doing a good job managing frequency.

Okay, that covers me. Thanks so much. End of Q&A

That will conclude the question-and-answer session. I would like to turn the conference over to Mr. Tom Motamed for any additional or closing remarks.

Thank you, everybody. We will see you next quarter.