CNA Financial Corporation

Good morning and welcome to CNA's discussion of its 2020 second quarter financial results. CNA's second quarter earnings release presentation and financial supplement were released this morning and are available via its website www.cna.com. Speaking today will be Dino Robusto, CNA's Chairman and Chief Executive Officer, and Almir Ales, P&A's Chief Financial Officer. Following their prepared remarks, we will open the line for questions. Today's call may include forward-looking statements and references to non-GAAP financial measures. Any forward-looking statements involve risk and uncertainty 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 SEC feelings. In addition, the forward-looking statements speak only as of today, Monday, August 3rd, 2020. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding non-GAAP measures, reconciliations with the most comparable GAAP measures and other information have been provided in its financial supplement. This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website. If you're reading the 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 of meaning of the statement. With that, I will send the call over to CNA's Chairman and CEO, Dino Robusto.

Thank you, Diana. Good morning. It is very good to be with you today, and I hope you and your families are coping well in these unprecedented times. The second quarter has been a challenging one as the pandemic continues to impact the lives of all of us. For CNA, those challenges have been multifaceted and have impacted our underwriting results considerably. as we disclosed in our free announcement on July 15th. Before Al and I provide more detail on the impacts of COVID-19 and other catastrophes in the quarter, I wanted to start by commenting on our underlying business, which performed extremely well in the quarter. Starting with pricing, rate increases continued to accelerate as we achieved a plus 11% in P&C overall, up three points from the first quarter. and the 11% is inclusive of workers' comp, which had slightly negative rates. Importantly, increases were broad-based as each business unit achieved higher rates. In light of our written rate increases over the last four quarters, our earned rate increases are now 7%. They're clearly above our long-run loss cost trends of around 4%. But as I have said before, we need to sustain this gap over several more quarters before we would favorably adjust our current accident year selections, because we experienced almost four years of rate changes below long run loss cost trends prior to this hardening market. And as I have highlighted on prior calls, we experienced rising severity trends during that period in several product lines like agent services and primary and excess auto liability. In terms of growth, growths written premium X capsules do 7%, while net written premium growth was 3%. includes the international results that are still impacted by our re-underwriting and our London operations. In the U.S., growth rate and premium growth ex-captives was 8% for the second quarter, consisting with Q1. We achieved this level of growth even though exposure on our renewal business was minus 1% in the quarter versus plus 2% in last year's second quarter, a swing of almost three points due to the economic disruption. The business growth, while modestly up 1% over the prior year quarter, is actually a very good result, as we were able to write attention to the same amount of new business as we did last year, despite the disruptive events in this year's quarter. We were also able to increase our retention by one point from the first quarter to 83% while we achieved stronger rate increases. All the efforts we invested in to strengthen our agent and broker relationships over the last few years have been a key driver and our ability to continue to effectively meet their new business needs. The second quarter had often involved responding to shorter timeframes on commissions as they dealt with the disruption of converting to a remote work environment and contending with an increasingly hardening market. Our underlying combined ratio in the quarter, when we set aside the various COVID-19 impacts, which I will detail shortly, improved by 0.8 points, from a year ago. This consists of half a point improvement in the underlying loss ratio and 0.3 points improvement in the expense ratio. When compared to the first quarter of this year, the expense ratio, excluding the impacts of COVID, is flat. Now, we obviously did have less travel and entertainment expenses, but we also made additional investments in technology as well as operations staff. to ensure our servicing capabilities transitioned seamlessly to a remote work environment. After all, it could still be a while before we fully return to a pre-COVID office work environment, and we are well prepared for this. Turning to the impact of COVID-19, our catastrophe losses due to the pandemic were 182 million pre-tax as we pre-announced in mid-July. This number reflects our best estimate of ultimate insurance losses including anticipated legal expenses from events that occurred through the second quarter from which we believe claims will eventually emerge. Thus, the charge in the court is almost entirely IBNR. The projections are also broad-based upon the various legal statutes that have already been put in place to June 30th, whether workers' comp presumption or state health care immunities. In addition to the direct COVID-19 losses of $182 million, we accrued for future audit return premiums based upon the pattern of lower exposures we saw in the policies renewing during the quarter. This accrual adversely impacted our underlying combined ratio for the quarter, but it was offset by improvement in our underlying loss ratio due to favorable frequency in several of our commercial casualty product lines due to the shelter-in-place policies. As mentioned in our earnings pre-announcement, the lower frequency benefit was muted because a substantial portion of our insurance are in essential industries, such as healthcare, construction, and manufacturing, which were not subject to shelter-in-place restrictions, and so saw little frequency reduction. In addition, in casualty lines like auto and general liability, the potential for a higher severity compels us to be prudent and let this evolve longer. before reacting too favorably. Taken together, the combined impact of the reduced net earned premium and the lower frequency of losses decreased our second quarter underlying combined ratio an additional 0.4 points beyond the 0.8 point improvement I referenced without the COVID-19 impacts to the reported 93.4%. The underlying loss ratio decreased an additional 0.9 points partially offset by a half-point increase in the expense ratio from the accrued audit return premiums, reducing the earned premium, and a moderate increase in bad debt expense. As we also indicated in our pre-announcement, we incurred 61 million of catastrophe losses due to the civil unrest events. In addition, we had 58 million of losses due to the severe weather storms. On a combined basis, the three categories of catastrophes added 17.5 points to our second quarter loss ratio. Our prior period development in the quarter increased our combined ratio by 1.4 points. This includes the impact of the $50 million of adverse development from recognition of potential losses due primarily to the New York Revival Statute that we also preannounced. The estimated losses were developed as part of our annual mass tort review, which we completed in the second quarter. Excluding the mass storage charge, we had favorable prior period development of $25 million. Including the impacts of catastrophes in prior period development, the total combined ratio for the quarter was 112.3%. According to investments, the overall portfolio fared well in the second quarter, with the unrealized gain position increasing significantly as fixed income markets stabilized. As well, net investment income was strong, driven by real-time healthy positions and common stock investments. Our life in groups segment produced $14 million of core income in the quarter, driven by better-than-expected persistency experience. As usual, Al will provide more detail on the investment portfolio and long-term care. Finally, our core income for the second quarter was $99 million, or $0.36 per share, and net income was $151 million, or $0.55 per share. And with that, I'll turn it over to Al. Thank you, Gino. Good morning to everyone. As Gino indicated, I will now provide details of our core results by business segment. Starting with specialty, the combined ratio was 104.2% this quarter. The combined ratio includes favorable prior period development of 2.9 points and 15 points from catastrophe losses. A lot are essentially all due to COVID-19. The favorable prior period development was largely driven by favorable outcomes in professional management liability, predominantly for accident years 2017 and 2018. The underlying combined ratio for specialty was 92.1% this quarter, 1.1 points of improvement compared to second quarter 2019. The underlying loss ratio was 59.9%, and the expense ratio was 32%. The expense ratio was improved by 1.1 points compared to second quarter 2019, due to both growth in net earned premium and lower expenses. The gross written premium growth ex-captives was 7% especially for the quarter and was 4% on a net written premium basis. Rates continue to increase at 12%, up from 9% last quarter. Retention was 85% this quarter, which was up a point compared to last quarter. New business volume was at the same level as the prior year's quarter. The combined ratio for commercial was 118.5% this quarter. This is 18.8 points higher than the second quarter of 2019 and includes 19 points of catastrophe loss and six points of unfavorable prior period development. The CAT losses include 7.7 points due to civil unrest, 5.9 points from weather-related events, and 5.4 points attributable to COVID-19. As previously disclosed, prior period development included a charge for mass tort primarily due to New York Reviver statute-related claims. Excluding mass tort, commercial prior period development was $2 million favorable, with favorable workers' compensation development across multiple accident years prior to 2019 offset by adverse development in property for accident year 2019 and auto liability for accident years 2017 through 2019. The auto development was due to higher severity than expected. The underlying results were very strong for commercial with an underlying combined ratio of 93.5% this quarter, 1.4 points of improvement from second quarter 2019. The underlying loss ratio was 59% compared to 61.7% and benefited somewhat from lower loss frequency. The expense ratio at 33.9% compares to 32.6% in second quarter 2019, and was adversely impacted by the decrease in estimated audit premiums in the second quarter. Excluding the COVID-19 impacts on favorable claim frequency and additional return premiums, the underlying combined improved by 0.7 points driven by the loss ratio. First written premium growth ex-captives was 9% in commercial for the quarter, and net was 4%. The rate change of 9% was up one point from the last quarter. The tension was a healthy 83%. New business growth strong again this quarter at 10%, Despite the events in the quarter, it was again broadly distributed across our target market segments. The combined ratio for international was 115.3% this quarter, compared to 97.5% in the second quarter of 2019. The combined ratio reflects 19.9 points of catastrophe losses for the quarter, substantially due to COVID-19. The underlying combined ratio for international was 96.6% this quarter, an improvement of 0.8 points compared to prior year quarter. The underlying loss ratio was 59.9%, and the expense ratio was 36.7%. The expense ratio compared to 37.3% at second quarter 2019, and reflects continued improvement in both acquisition and underwriting expense levels. The gross written premium declined 3% international for the quarter. Net written premium declined 4%. Rate change of 13% was up five points from Q1. Retention was 74% this quarter, which is slightly higher than in 2019 and reflective of the progression of our re-underwriting strategy. As Dino indicated, our Life in Group segment produced $14 million of core income in the quarter. These results were moderately favorable to our expectations and were primarily driven by persistence experience. I will also note that amid the pandemic, we've experienced a decline in new claim frequency, an increase in claim terminations, and a slowdown in claimant transitions from home health care to long-term care facilities. We would attribute this to policyholders choosing to avoid these facilities, where possible, out of fear of contracting COVID-19. Given the immature nature of these trends, we did not recognize favorable morbidity experience in the second quarter. As we expect to conclude our annual long-term care reserve review in the third quarter, we would intend to evaluate these trends in more detail and address in the context of this process. Our corporate segment produced a core loss of $11 million in the second quarter. Free tax net investment income was $534 million in the second quarter compared with $515 million in the prior year quarter. The results reflected favorable returns from our limited partnership and common equity portfolios which produced pre-tax income of $84 million compared to $43 million during the same period last year. I should note that the results from our limited partnership investments reflect the current period's favorable impact and recovery in value of our real-time investments, somewhat offset by negative first quarter returns for our investments on a lag basis. we would anticipate that these investments on a lag reporting basis should have a favorable impact on the third quarter income given positive market returns in the second quarter. Pre-tax net investment income from our fixed income portfolio was $440 million this quarter compared to $465 million in the prior year quarter. The pre-tax effective yield on our fixed income holdings was 4.6 for the period. Pre-tax net investment gains for the quarter were $69 million compared to a loss of $18 million in the prior year quarter. The gains was primarily driven by recovery of the marked market on our non-regainable preferred investments. Our unrealized gains position on our fixed income portfolio stood at $4.4 billion, up from $2.1 billion at first quarter. The change in unrealized during the quarter was driven by the tightening of credit spreads across the market, reflecting the recovery and stabilization of the fixed income markets. Fixed income assets that support our PNC liabilities had an effective duration of 4.1 years at quarter end, in line with portfolio targets. The effective duration of the fixed income assets that support our left and group liabilities was 8.8 years at quarter end, Lines 14 and 15 of the earnings presentation will provide you with additional details of the investment results and the composition of our investment portfolio. Our balance sheet continues to be extremely strong. At quarter end, shareholders' equity was $11.6 billion, or $42.91 per share, reflective of the increase in our unrealized gain position during the quarter. Shareholders' equity, excluding accumulated other comprehensive income, was $11.5 billion, or $42.34 per share. We continue to maintain a conservative capital structure with a low leverage ratio and a well-balanced debt maturity schedule. At quarter end, all of our capital adequacy and credit metrics remain at thug target level, supporting our credit ratings. In the second quarter, operating cash flow was $438 million. In addition to our positive operating cash flow, we continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity holdings to meet obligations and withstand significant business variability. And we are pleased to announce our regular quarterly dividend of $0.37 per share. With that, I will turn it back to Dino. Thanks, Al. Before we move to the question and answer portion of the call, I want to provide some perspective on the hardening market landscape. Clearly, the unprecedented events of the second quarter hurt our underwriting results overall. However, the good news from our engagement in the quarter is that I am even more bullish that the hardening market conditions will persist well into 2021. All of the dynamics that have been broadly expressed by industry participants, namely an even lower interest rate environment, several years of pricing below long-run loss cost trends, social inflation, elevated catastrophe losses, and of course the impacts of this unprecedented pandemic, are currently well appreciated by the brokers as evidenced by their articulation of the dynamics in their quarterly calls, which means that insurers are being effectively educated in the need for higher pricing. And we see evidence of that through our conversations with our insurers. These hard market conditions, similar to only a few historically, will enable us to try for the needed improvements in policy terms and conditions, achieve stronger pricing across the portfolio, and secure more high-quality new business. Our second quarter execution, evidence that we are well-positioned to take full advantage of the hard market, and I could not be more proud of all the CNA employees for all their efforts during these unprecedented times. And with that, we'll be glad to take your questions.

Ladies and gentlemen, as a reminder, to ask a question, Start one. We will take our first question from Josh Shanker with Bank of America. Please go ahead.