CNA Financial Q2 2023 Earnings Call Transcript

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July 31, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to the CNA Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. As a reminder, today's conference is being recorded. I would now like to turn the call over to Ralitsa Todorova, AVP, Investor Relations for opening remarks and introductions of today's speakers. Please go ahead.

Speaker 1

Thank you, Rocco. Good morning, and welcome to CNA's discussion of our Q2 2023 financial results. Our Q2 earnings press release, presentation and financial supplement were released this morning and are available on the Investor Relations section of our website, www.cna.com. Speaking today will be Dino Robusto, Chairman and Chief Executive Officer and Scott Lindquist, Chief Financial Officer. Following their prepared remarks, we will open the line for questions.

Speaker 1

Today's call may include forward looking statements and references 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 press release and in CNA's most recent SEC filings. In addition, the forward looking statements speak only as of today, Monday, July 31, 2023. C and A expressly disclaims any obligation to update or revise any forward looking statements made during this call.

Speaker 1

Regarding non GAAP measures, reconciliations to the most comparable GAAP measures and other information have been provided in our earnings press release, financial supplement and other filings with the SEC. This call is being recorded and webcast. A replay of the call may be accessed on our website. If you are reading a transcript of this call, please note that the transcript may not be reviewed for accuracy, thus it may contain transcription errors that could materially alter the intent or meaning of the statements. With that, I will turn the call over to our Chairman and CEO, Dino Robusto.

Speaker 2

Thank you, Ralitza, and good morning all. In the Q2, CNA once again produced very strong results with excellent profitability And double digit top line growth from continued strong renewal change, retention and new business success. Core income increased by 34% in the 2nd quarter compared to last year, with net investment income up 33% With strong income growth in our alternatives portfolio and a continued tailwind in our fixed income portfolio. Scott will provide more detail on investments. The P and C all in combined ratio was strong at 93.8% With pretax catastrophe losses of $68,000,000 or 3.1 points of the combined ratio and 0.4 points of favorable prior period development.

Speaker 2

The underlying combined ratio was 91.1%, Generating a record $200,000,000 of pretax P and C underlying underwriting gain. The underlying loss ratio was 59.9%, slightly less than the same period last year, And the expense ratio was 30.9%, up 4 tenths of a point compared to last year, primarily due to higher pension expense. In the quarter, we achieved very strong production performance With 12% growth in gross written premiums ex captives and 9% growth in net written premium. Excluding currency fluctuation, gross growth was 12% and net growth was 10%, led by our Commercial and International segments this quarter. Renewal premium change was stable at 7%, But accelerated 2 points in commercial to 11%.

Speaker 2

Importantly, rate change and the portion of exposure change that acts Like rate continues to cover our long run loss cost trends, which were unchanged this quarter at roughly 6.5%. New business was up 11% in the quarter, in line with the growth in the 1st quarter We continue to closely track the strength of our pricing on new and renewal business and that has remained consistent As have the stronger terms and conditions achieved during the hard market years, we continue to lock in the hard market improvements In pricing and terms and conditions, with consistently high retention levels, which in the second quarter for P and C overall was 86%, and it has been at that level for 5 straight quarters. Turning to our 3 business units. The all in combined ratio was 90.9% for Specialty this quarter, which includes 0.3 points of favorable prior period development. The underlying combined ratio was 91.2% With an underlying loss ratio of 58.6%, which is stable compared to last year, Well, the expense ratio in specialty was up by 2 points to 32.4%.

Speaker 2

The increase in the expense ratio is partially due to the lower net earned premium growth. And as usual, Scott will provide more detail on expenses. Gross written premiums ex captives growth and net Written premium growth for specialty were each down minus 1% this quarter. New business was down 9%. While most of the decrease was driven by the protracted decline in M and A opportunities affecting our transaction liability book, We are also being prudent in management liability lines given the competitive landscape.

Speaker 2

Within Specialty, written rate change was minus 1% in the quarter, driven by continued competitive pressure On management liability lines, where the rate decrease was 9% compared to flat pricing at the end of last year. Cumulative rate movement across these lines since mid-twenty 18 through the hard market years And inclusive of the declines in the first half of twenty twenty three is plus 61%, which continues to favorably impact The overall strong profitability of the portfolio. In the other specialty segments, rate increases persist. Our Affinity programs have much less pricing volatility over time and continue to produce stable rate increases in the low The mid single digits. Our Healthcare business has undergone tremendous re underwriting in addition to significant improvement in pricing as well as terms and conditions that we pushed through the portfolio over the last 5 years.

Speaker 2

We highlighted these changes quite regularly on prior calls and pointed out that our healthcare portfolio is now smaller, but profitable. Of course, we remain vigilant in pursuing additional rate increases and in the second quarter rates were up Mid single digit for Healthcare. Retention in specialty remains strong, improving by 1 point to 89% In the aggregate, and it's up in each of the three business areas. Turning to commercial, the all in combined ratio was 96.3%, which includes 5.2 points of cat loss in the 2nd quarter. The underlying combined ratio was 91.6%, 0.4 points lower than last year and the lowest on record.

Speaker 2

The underlying loss ratio of 61.5 percent was stable year over year. The expense ratio improved 0.0 0.10 The 29.6% in the quarter, representing the lowest quarterly expense ratio in 15 years. Gross written premium ex captives grew by 21% this quarter and net written premium grew by 17% this quarter. Renewal premium change was 11% in the quarter, up 2 points from the 1st quarter And it's close to the hard market high of 12% we achieved in early 2021. Excluding work comp, the renewal premium change was plus 13% in the 2nd quarter, actually similar to the high watermark We achieved early 2021.

Speaker 2

The commercial written rate change in the Q2 of +8 percent Continues to accelerate and reflects double the level it was in the Q3 of last year. Commercial rate increases, excluding work comp, were up plus 10% in the 2nd quarter. Importantly, The increase in the rate change was broad based across business units and line of business. In middle market, rate was +6% and renewal premium change was +8%, Each up 2 points from last quarter. Construction rate was plus 6%, up a point from last quarter And renewal premium change was plus 10%.

Speaker 2

In national accounts, rate was plus 20% compared to plus 17% last quarter. Looking by line, Commercial auto rates were low double digit in the quarter, two points higher than the last quarter. Rates for excess casualty have also accelerated over the past year and are now high single digits. Primary liability rates are up in the mid single digits, also representing an increase from last quarter. We believe it is rational that rates in casualty lines inflected and continue to increase since bottoming out In the Q3 of 2022, because as we have said, social inflation had only been During the pandemic.

Speaker 2

And although loss cost trends remained essentially stable in the second quarter, It is an annual compounding cost and it's appropriate that rates increase for longer. Work comp rates continue to be flat to slightly negative, but renewal price change remains quite strong about mid single digit As we are benefiting from exposure increases as payrolls rise and medical trends Continue to be below our long run loss cost trend assumptions, which we have not lowered despite the favorable trends over the last several years. Property continued to achieve significant rate increases this quarter. In our national accounts area, property rates are up in the 25% to 30% range. In addition, we continue to achieve increases in valuation, averaging mid single digit And non rate terms and conditions also remain strong.

Speaker 2

In our middle market space, Property rates are now low double digits, up 4 points from last quarter. We continue to see insurance We were successful in maintaining all coverages and covered perils in all our treaties and layers. There were very minimal increases in attachment points. On our corporate cat treaty, the attachment increased a little less than While costs increased overall as anticipated, the increases were in line with our good performance and prudent management of our cat exposure over the last several years. And with a very favorable price valuation increases we expect to continue to achieve across our property portfolio.

Speaker 2

We don't anticipate margins to be impacted. Commercial retention remains strong at 85% and was strong in all business units. New business was up 23% with excellent opportunities spread across all our commercial business units. We have been effectively leveraging the favorable property market conditions and growing our property portfolio Without significantly increasing our PML, while we are writing cat and non cat property new business, We are also optimizing our renewal book by changing layers and exposures, leading to a better risk adjusted returns than we had at expiry on certain renewals. And we're also letting accounts go where we can't achieve The improved pricing and terms and conditions available today.

Speaker 2

We also saw some great opportunities In the E and S channel for national accounts, now it's still a relatively small portfolio, but providing excellent opportunities. For international, the all in combined ratio was 92.2% And the underlying combined ratio was 89.1%, a record low. International had strong top line growth this quarter with gross written premiums up 10% or 12% excluding currency fluctuation. Net written premiums grew 9% or 10% excluding currency fluctuation. Renewal premium change was 7% with written rate change of 4% consistent with last quarter.

Speaker 2

We see many analogous trends to the U. S. In our Continental European and London portfolios with continuing hardening of property rates And rate decreases on management liability classes. Retention was strong in international at 83% for the quarter and has been stable at this higher level for more than a year. New business was up by 5% in the quarter.

Speaker 2

Our international operation continues to contribute positive top and bottom line results to CNA. And with that, I'll turn it over to Scott.

Speaker 3

Thank you, Dino, and good morning, everyone. I will provide some additional information on our results as Dino indicated. Core income of $308,000,000 is up 34% compared to the Q2 of last year, Leading to a core return on equity of 10.2%, while our P and C segment had record pretax Underlying underwriting income of $200,000,000 and core income of $374,000,000 Our 2nd quarter P and C expense ratio was 30.9%, which is a slight increase when compared to last year's 2nd quarter expense ratio of 30.5 percent due to higher legacy U. S. Pension plan expense reflecting financial market conditions at the time of valuation in late 2022.

Speaker 3

At the segment level, both Commercial and International saw improvements in their expense ratios compared to prior, primarily driven by strong growth in net earned premium. For Specialty, as Dino just noted, increased due to lower net earned premium growth, higher employee related costs, including higher pension expense, as well as higher acquisition expense, partially due to mix of business in the quarter. As I have noted in prior calls, there will be a certain amount of variability quarter to quarter. However, we continue to believe an expense ratio of 31% is a reasonable run rate for 2023. The P and C net prior period development impact on the combined ratio was favorable by 0.4 points.

Speaker 3

In the Specialty segment, favorable development was driven by surety and in the Commercial segment, favorable development in workers' compensation was partially offset by unfavorable development in general liability in auto. The P and C paid to incurred ratio was 0.83 in the 2nd quarter, which is about flat with the Q1 of this year and is broadly consistent with the Q2 of 2022. The ratio, which fluctuates quarter to quarter, has Our Corporate segment produced a core loss of $46,000,000 in the 2nd quarter Compared to a $78,000,000 loss in the prior year quarter, we conduct a comprehensive review of mass tort reserves in the Q2 of each year And we also react to facts and circumstances in the interim quarters. As a result of this quarter's review, the segment Includes a $28,000,000 after tax charge related to unfavorable prior period development largely associated with legacy Mass tour claims. As a reminder, our asbestos and environmental reserves are reviewed every 4th quarter.

Speaker 3

As to Life and Group's 2nd quarter results, we had a core loss of $20,000,000 as compared to a $9,000,000 core loss for last year's Q2. Investment income was up $28,000,000 pretax compared to the prior year, Mostly driven by limited partnership performance, while the underwriting loss reflects a $13,000,000 pre tax loss related to the impact of $67,000,000 of cash policy buyouts during the quarter. For year to date, Life and Group core loss was $23,000,000 compared to a core loss of $4,000,000 in the prior year to date period. Year to date Life and Group results reflect $30,000,000 in higher pretax investment income as well as a $26,000,000 As I noted last quarter, as an integral component of our risk mitigation strategy, we expect to continue offering policy buyouts as Part of approved rate increases for the rest of 2023 and future years. GAAP losses are expected on the buyout program given the cash offers are linked to higher statutory reserve levels.

Speaker 3

In the near term, we expect policy buyouts could generate quarterly GAAP losses up to $10,000,000 pretax depending on the respective policy or cohort and the actual acceptance rates of such offers. Looking to future years, we expect such buyouts will continue to impact underwriting results Also, as I noted last quarter, our LTC business is now accounted for under LVTI, which we adopted as of January 1, 2023, and prior period results were adjusted to reflect LVTI. A reminder that LVTI has no effect on the underlying economics of CNA's business. However, We expect a modestly higher underwriting loss under LVTI over the next several years as compared to legacy GAAP. Reconciliation of our 2022 quarterly results adjusted for LVTI as reconciled to legacy GAAP in our Q1 financial supplement as well as our Q1 Form 10 Q.

Speaker 3

Turning to investments. Total pretax net investment income increased 33 percent to $575,000,000 in the 2nd quarter. The increase was driven by our limited partnership and common stock portfolios, which returned $68,000,000 which returned a $68,000,000 gain in the 2nd quarter compared to a $15,000,000 Loss in the prior year quarter. The 2nd quarter gain reflects positive contributions across strategies And a favorable equity market environment, while the prior year quarter includes losses from our hedge fund and common portfolios were $60,000,000 favorable to the prior year quarter. Our fixed income portfolio continues to produce consistent income, which has been steadily increasing over the last year as a result of favorable reinvestment rates In our P and C portfolios as well as a growing investment base funded by strong cash flow from operations.

Speaker 3

Within our P&C and Corporate segment portfolios, the average effective income yield was 4.2% in the 2nd quarter compared to 4.0% in the Q1 of this year and 3.7% in the prior year quarter. As of the end of the second quarter, reinvestment rates were well above our P and C effective income yield. Our life and group portfolio A more modest increase as this portfolio is longer duration and has embedded yields more comparable to today's interest rate environment. Additionally, within the other category of net investment income, which includes interest income on short term investments and cash, We are benefiting from significantly higher short term rates as compared to a year ago. We believe our investment portfolio to be both high quality and well diversified.

Speaker 3

Our fixed income portfolio, which makes up 88% of our total investments, Has a weighted average credit rating of A and is made up of 96% investment grade securities. While we maintain an allocation of risk assets, including limited partnerships, common stocks and below investment grade securities, We believe it is positioned conservatively and well within our risk appetite. Additionally, we maintain ample liquidity to meet obligations and withstand At quarter end, our balance sheet continues to be very solid with stockholders' equity, excluding AOCI, of $12,200,000,000 or $44.86 per share, an increase of 5% from year end 2022 adjusting for dividends. Stockholders' equity, including AOCI was $8,700,000,000 or $32.22 per share. We continue to maintain a conservative capital structure with a low leverage ratio and a well balanced debt maturity schedule.

Speaker 3

During the Q2, we successfully issued $400,000,000 of senior notes to help position us ahead of upcoming debt maturities In November 2023 May 2024. Cash flow from operations was $501,000,000 for the 2nd quarter, which is down $608,000,000 from last year's Q2. The decrease in the 2nd quarter is primarily attributable to the aforementioned long term care policy buyouts. Otherwise, cash flow from P and C underwriting activities and fixed income investments remains very strong, reflecting continued excellent underwriting and fixed income results respectively. Turning to taxes, the effective tax rate on core income was 21.6 Looking forward, we continue looking forward, we expect our full year 2023 effective tax rate To be about 21% with a certain amount of variability quarter to quarter.

Speaker 3

Finally, we are pleased to announce our regular quarterly dividend of $0.42 per share to be paid on August 31, 2023, to shareholders of record on August 14, 2023. And with that, I will turn it back to Dino.

Speaker 2

Thanks, Scott. To recap, we had an excellent quarter with strong top and bottom line performance and significant improvement In net investment income, the pricing cycle continues to be varied by line reflecting the unique dynamics impacting loss cost trends. The rate decreases in management liability is consistent with prior underwriting cycles post very large spikes During the hard market years and the firming in all commercial lines ex work comp is a reflection of the market need For further rate increases for longer due to the elevated cats and the compounding impacts of economic and social inflation. It's improved. The commercial pricing continues to flow through to our new business writings And with our major reinsurance treaty renewals complete with no substantial changes in protection, We feel confident about our ability to continue to leverage those segments and lines of business with the most Favorable overall terms and conditions in the second half of the year and to do so while covering our long run loss cost trends.

Speaker 2

And with that, we will be happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Meyer Shields with KBW. Please go ahead.

Speaker 4

Good morning. I was hoping to spend a little time on a couple of lines of business within Specialty. First, I guess, I was a little surprised that as rate decreases accelerated in financial institutions and management liability, I'm sure that's D and O, but we saw a sequential Up tick in retention, which went sort of the opposite direction. I was hoping you could talk us through that.

Speaker 2

Yes, Maher, hi, thanks. It's Dino. Again, this is a very profitable portfolio. And as I indicated, even if you account for The increase in loss cost trends. The rates today are still above a pretty hard market.

Speaker 2

And so we feel good about the portfolio and we obviously want to lock in good strong Terms and conditions on our renewal book. As I said, I don't think it's very inconsistent some of the rate decreases given Some of the large increases you've seen over the hard market. So I think in general, all of the underwriters Doing a good job at balancing rate and retention in the management liability lines, and we still feel Very comfortable with the portfolio.

Speaker 1

Okay.

Speaker 4

Fair enough. Second question on medical I guess I'm surprised that that line's rate increases are decelerating just based on how some Can you give us any insight into the CNA specific book?

Speaker 2

Yes. I think You hit the nail on the head. CNA's book today, Meyer, is unique because of As I alluded to in my prepared remarks, it's been a 5 year process of remediating this portfolio. It's been a tremendous amount of re underwriting. The book is considerably smaller.

Speaker 2

We've gotten substantial Cumulative rate increases, we started considerably before the broader market. And if you recall, Meyer, during those years, our retention had plummeted in the low 60s, a reflection of the fact that we were Clearly swimming upstream in pursuit of the rate increases. But today, we find ourselves With a smaller portfolio, it's profitable. It's the segments of middle of medical now that are typically more profitable. I think some of the rates reflect that, but Make no mistake about it.

Speaker 2

We're going to continue to push for rates and continue to work on all of the underwriting strategies that we've had over the last 5 years, and I think it's fair to consider the CNA portfolio today somewhat unique.

Speaker 4

Okay, perfect. Thank you so much.

Speaker 2

Thanks.

Operator

Thank you. And it appears our next question is a follow-up from Meyer Shields. Please go ahead.

Speaker 4

Thanks. Just one other thing I was hoping to ask about And I apologize if I missed this, but we saw the P and C and Life and Group durations contract the quarter, and again, that was a little bit surprising, and I was hoping that we could talk through that.

Speaker 3

Sure, Meyer. Hey, it's Scott here. Thanks for the question. So I would say nothing dramatic at all changed within the portfolio either the portfolios. There's going to be a certain amount of variability Based on just where interest rates are at quarter end, but I have you were probably carrying a little bit more cash in P and C right now than we were At the last quarter end, that's probably the only thing I would flag for you on that.

Speaker 3

Other than that, no real significant or material change at all And the portfolio composition.

Speaker 4

Okay, perfect. And I know the starting point is different from a lot of P and C carriers. So thank you.

Speaker 3

Yes, sure.

Operator

Thank you. And our next question today comes from Kyle Labarre with Dowling and Partners. Please go ahead.

Speaker 5

I just wanted to talk a little bit about the property growth. I know you gave some good commentary on the opening remarks from a rate perspective, but I was wondering if we could Dive a little bit deeper into what are the sort of the makeup of that portfolio, where you're seeing the best opportunity across national accounts and middle market?

Speaker 2

Yes. So I think we're seeing it both in national accounts and middle market. But obviously, in the national accounts Space, you're seeing a lot more rate increases, larger schedules. We're also seeing Larger valuation increases, there are also some opportunities in the E and F space, which we started about a year ago. And So we're seeing some good opportunities there.

Speaker 2

It's all within our target market. Nothing has really changed in what we go But obviously, both in the shared and layered and ground up, there's Plenty of opportunity and capacity needs. And so as I indicated, We're growing the portfolio, but also we continue to optimize it as we Get better terms and conditions even at renewal today than we did a year ago before the market really hardened at

Speaker 5

Great. Thanks. And then just another question on loss cost trends. I imagine They're relatively stable. You had mentioned overall loss trend relatively stable at 6.5%.

Speaker 5

But we've heard some varying trends within the medical side so far during Reporting season, curious what you're seeing there in terms of medical cost inflation?

Speaker 2

When you look at Our work comp, Kyle. Medical costs are up and you got got to be specific. You got to really look at the components of medical costs when you look at CPI that really impact Work comp like, for example, physician services. So but even with them being up somewhat, they are Still well below our baked in assumptions, which we have never lowered, notwithstanding the benign trends For many years, so still very good and we feel very good about the portfolio and it's very profitable.

Speaker 5

Perfect. And just one more for me. We started to see some more headlines on whether it's the Forever Chemicals or the lead wiring, just sort of The increase in latent liability concerns, I know you've got the reserve cover in place for A and E, but maybe just from a high level, curious how you're thinking about those sorts of exposures? What are the things that we should be focused on as we think through what the impact for the industry could be?

Speaker 2

Kyle, as Scott mentioned, right, we do a ground up Mass toward review in the Q2 and then as you also indicated, I mean, if there's anything Specific that might transpire during the year like abuse cases, then we'll act during the quarter. And we look at all of those things and we try to capture In our reserves and mass toward the information that we have, it's obviously evolving. It's going to take time to evolve and we'll continue To incorporate the information as it develops, there's not much else we can say at this particular juncture.

Speaker 5

Understood. Thanks very much. Thank you.

Operator

Thank you. This concludes our question and answer session. I'd like turn the conference back over to Dino Robusto for any closing remarks.

Speaker 2

Well, thank you, everyone, and we'll chat again with you Next quarter. Thank you.

Operator

Thank you, sir. This concludes today's conference We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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CNA Financial Q2 2023
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