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spk05: Good morning and welcome to CNA's discussion of its 2020 four-quarter financial results. CNA's four-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 Al Morales, CNA'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 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 released and in CNA's most recent SEC filing. In addition, the forward-looking statements speak only as of today, Monday, February the 8th, 2021. 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 been provided in the financial supplement. This call is being recorded and webcast. During the next week, the call may be assessed on CNA's 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 CNA's Chairman and CEO, Dino Robusto.
spk03: Thank you, Marguerite. Good morning, everyone. I am pleased to share our fourth quarter results and our full year performance in what was clearly an unprecedented year. Our industry rose to meet the challenges and effectively deliver on our commitment. I am very proud of our CNA employees who effectively serve the needs of our agents and brokers, as well as our insurers, and have positioned us well to continue to take advantage of the hardening market conditions. Before I provide detail on the quarter, here are a few highlights for the full year. Poor income. was $735 million or $2.70 per share, and net income for the year was $690 million or $2.53 per share. This compares to $979 million and $1 billion in 2019, respectively. The shortfall from the prior year is primarily attributed to the impact of the elevated pre-tax catastrophe losses of $550 million, which included a reserve charge for the pandemic of $195 million that we announced in the second quarter of 2020, as compared to $179 million of catastrophe losses in 2019. On the other hand, our P&C underlying underwriting profit for the full year increased 38% to $498 million as the underlying combined ratio improved 1.7 points to 93.1%. It is the fourth consecutive year of improvement in the underlying combined ratio. The improvement in the underlying combined ratio came from both the loss ratio and the expense ratio. Our underlying loss ratio improved 0.8 points from 2019. A half a point of the improvement reflected the favorable claim frequency from the shelter-in-place directives. The frequency benefit was relatively muted for us because, as I said on the second quarter call, a substantial portion of our insurance are in essential industries, such as healthcare, construction, and manufacturing, who are not subject to shelter-in-place restrictions. The expense ratio improved 0.9 points from 2019 to 32.6%, which reflected our disciplined approach to managing expenses as we grow the business and continue to make meaningful investments in talent, technology, and analytics. The all-in combined ratio was 100.9%, with 7.7 points of catastrophe losses and flat prior period development. Gross written premium growth, ex-captives, grew 9% in 2020, despite the impacts of the economic downturn, which reduced our exposure almost three points from the prior year. Net written premium increased 6% for the full year. We successfully achieved rate increases of 11% for the full year, more than double our 2019 rate increases, and new business was up 6% for the year. We continue to leverage this hardening market to build margin, all else equal, as rates continue to earn out above our long-run loss cost trend. The 11% of written rate we achieved in 2020 was eight points on an earned basis for the full year, while our long run loss cost trends were about four points. However, as I have said before, we are going to continue to be prudent on how we act on any margin due to the global pandemic's disruptive impact, obfuscating claims trends, in particular, social inflation. Moreover, The economy has not recovered nor have court dockets reverted to pre-pandemic activity. Therefore, we are staying the course. Turning to the fourth quarter. Our results in the quarter evidence our strong execution in every aspect of our business, including significant growth driven by double-digit rate, strong new business growth, and improved retention, as well as an improved underlying loss ratio and expense ratio. We also benefited from a low catastrophe quarter and strong investment performance. Core income for the quarter was a record $335 million, $1.23 per share, an increase of $70 million over the prior year fourth quarter. The increase was largely driven by improved underlying underwriting profits. Net income for the quarter was $387 million, or $1.42 per share, and was an increase of 114 million over 2019's fourth quarter. The PNC underlying combined ratio was 92.7%, a significant improvement over last year's fourth quarter result, and in line with Q3 results, both of which are the best two underlying combined ratios CNA has had in over 10 years. The all-in combined ratio was 93.5%, slightly more than two points of improvement compared to the fourth quarter a year ago, driven by commercial, which improved 4.4 points to 96.2%, and international, which improved 3.4 points to 96.9%. Although Special P had less favorable prior period development than the fourth quarter a year ago, they had a very strong combined ratio of 89.4%. Retax catastrophe losses were benign at 14 million or 0.8 points of the combined ratio. Our estimated ultimate losses from COVID-19 are unchanged at 195 million as claim activity continues to unfold slowly as we expected. Prior period development had no impact on the combined ratio in the quarter. The underlying loss ratio was 60.5% for the quarter, a 0.4 point year-over-year improvement and consistent with Q3. Specialty was 60%. Commercial was 61.1% and international was 60.1%. In the fourth quarter, the expense ratio was 32%, 1.7 points better than the prior year quarter. as we maintain the disciplined approach to managing expenses as we continue to grow the business. We are pleased with the improvement, and as our growth continues to earn out through 2021, we expect that to drive additional improvement. Gross written premium, XR captive business grew 15% in the quarter, with significant contributions across all operating segments. with specialty at plus 17% and commercial at plus 13%. International was also strong at plus 14%, fueled by strong rate in the quarter in our London operation and strong rate and new business growth in our Canadian operations. Net written premium for total P&C increased 12% in the quarter. In the quarter, the hardening market persisted. as evidenced by our continued double-digit rate achievement of plus 12%, while increasing our retention by three points to 85% from the third quarter. We achieved strong rate across the board, with specialty at plus 13%, commercial at plus 12%, and international at plus 18%. In addition to double-digit rate achievement for the quarter, we continued to implement tighter terms and conditions across our portfolio. These improved terms and conditions, as I have mentioned before, are equally important to strong pricing as they improve attritional loss ratios, help prevent unintended coverage, and are typically slower to be relaxed once market conditions start to soften. New business growth was strong in the quarter, 17% higher compared to last year's fourth quarter. Specialty grew 23% and commercial 22%. While international remains slightly negative. We are writing high quality accounts within our target market segments. Examples, we continue to grow our profitable specialty affinity portfolio. We grew our very profitable construction segment within commercial, and we are building our management liability portfolio at a time when we can get excellent terms and conditions. We carefully monitor pricing on new business relative to renewal policies, and the new to renewal relativities have been stable all year across the portfolio, indicating rate on new business has increased commensurately and obviously contributed to the overall growth in new business. We are well positioned to grow in these hardening market conditions, and indeed, we believe it is the best time to grow. In addition to restoring pricing to new levels and improving terms and conditions, the disruption from insurer dislocation in a hardening market causes broad remarketing by agents and brokers that also ferrets out tremendous high-quality new business opportunities. And we have been able to secure more of these opportunities as we are leveraging all the investments we have made in the last few years to deepen our specialized underwriting expertise and provide improved solutions to our customers. Finally, we completed our annual asbestos and pollution reserve review, which resulted in a non-economic after-tax charge of $39 million, which compares to last year's after-tax charge of $48 million. And we also had positive core income of $26 million from our life and group operations. Al will provide more detail on this as well as our asbestos and pollution review. And with that, I will turn it over to Al.
spk04: Thanks, Dino. Good morning to everyone. As Dino mentioned, I will provide more detail on the life and group results, as well as our corporate segment, including the asbestos environmental reserve review. Before I do that, let me just highlight a few items related to our overall results, as well as our P&C operations. Core income for the quarter was a record at $335 million, 26% higher than the prior year quarter results. With a core ROE of 11.4% for the period, we are certainly pleased with the close to 2020 and the significant progress made to build upon our underlying underwriting possibilities. Dino spoke about this progress with regards to our combined ratio improvement. A meaningful contributor was the expense ratio. I would like to highlight the advancements made during 2020. Our fourth quarter expense ratio of 32% reflects significant progress on a year-over-year basis as well as on a sequential quarter basis during 2020. The expense ratio improvement was reflected in all three of our P&C business segments, especially in international notably recording improvements of two and three points respectively versus the prior year quarter. We are particularly pleased with the international results as the efforts to reduce acquisition costs as part of a re-underwriting strategy is paying dividends. Likewise, with respect to specialty and commercial. The significant progress we've made on our expense ratio reflects our ability to grow while being disciplined about our expense spend and also making investments back into the business. Considering the trajectory of our net written premium, we would expect that our earned premium growth will further aid our progress on the expense ratio in 2021. Turning to net prior peer development and reserves, for the fourth quarter overall, P&C net prior period development was flat compared to 2.2 points of favorable development in Q4 2019. Favorable development, especially during quarter, driven by professional and management liability, was offset by adverse premium development on general liability within commercial. For the full year 2020, overall development was essentially flat versus 0.7 points of favorable development in 2019. In terms of our COVID reserves, we've made no changes to our catastrophe loss estimates during the quarter. We continually review our COVID reserves, and our previously established estimate of ultimate loss remains appropriate, and our loss estimate is still virtually all in ID&R. Finally, with regards to the P&C operations, on January 1st, several of our reinsurance treaties renewed, the main ones being for management liability and casualty lines of business. These treaties renewed with more favorable terms and conditions relative to expectations given current market conditions. Now turning to life in group. The segment produced core income of $26 million in the quarter and $9 million for the full year. This compares to a Q4 2019 loss of $4 million and a full year 2019 loss of $109 million. Favorable long-term care results for full year 2020 relative to 2019 reflect the lower reserve charge in the current year relative to the prior year, as well as better than expected morbidity experience in 2020 amid the effects of COVID-19. Specifically, since the onset of COVID, we've experienced lower than usual new claim frequency, higher claim termination, and more favorable claim severity as policyholders favor home healthcare versus the use of long-term care facilities. A higher level of claim terminations is largely being driven by an elevated level of mortality and claimant recoveries. As referenced in the previous quarters, given the uncertainty of these trends, we've been taking a cautious approach from an income recognition perspective. And accordingly, we've been holding a higher level of IV&R reserves. As well, in our annual gross premium valuation review, completed in the third quarter of 2020, we did not build any of this favorable experience into our ongoing reserving assumptions. With all of this in mind, we are closely evaluating these favorable claim trends to assess the extent to which they may persist beyond the pandemic. Our corporate segment produced a core loss of $60 million in the fourth quarter and $108 million for the full year. This compares to a $68 million loss in Q4 2019 and $102 million loss for the full year 2019. The loss for Q4 2020 was driven by our annual Asbestos Environmental Reserve Review concluded during the quarter. The results of the review included a non-economic after-tax charge of $39 million driven by the strengthening of reserves associated with higher defense and indemnity costs on existing claims and this compares to last year's non-economic charge of $48 million. Following this review, we have incurred cumulative losses of $3.3 billion, well within the $4 billion limit of our loss portfolio transfer cover that we purchased in 2010, and paid losses are now at $2.1 billion. You will recall from previous year's reviews that while we continue to be covered under this LPT limit, there is a timing difference with respect to recognizing the benefit of the cover relative to incurred losses, as we can only do so in proportion to the paid losses recovered under the treaty. As such, the loss recognized today will be recaptured over time through the amortization of the deferred accounting gain as paid losses ultimately catch up with incurred losses. As previously announced, we've entered into a loss portfolio transfer transaction with a subsidiary of NSTAR Corporation and related to legacy excess worker comp reserves. This non-core portfolio has been a runoff for over 10 years, and the transaction enables us to strengthen our focus on going forward operations while reducing potential future reserve volatility. The transaction closed on February 5th. Going forward, we report the impacts associated with this line of business and the associated loss portfolio transfer through the corporate segment. Turning now to investments. Pre-tax net investment income was $555 million in the fourth quarter compared with $545 million in the prior year quarter. The results reflected more favorable returns from our limited partnership and common equity portfolios relative to the prior year, more than offsetting the decline in net investment income from our fixed income portfolio and attributable to lower reinvestment yields. As a point of reference, the pre-tax effective yield on our fixed income holdings was 4.4% at Q4 2020 compared to 4.7% as of Q4 2019. Pre-tax net investment income for the full year was $1.9 billion compared with $2.1 billion in the prior year. While lower interest rates have certainly been a headwind toward net investment income, has also driven the increase of our unrealized gain position on our fixed income portfolio, which stood at $5.7 billion at year end, up from $5 billion at the end of the third quarter and $4.1 billion at the end of 2019. The change in unrealized during the quarter was driven by the tightening of credit spreads across the market, while risk-free rates have remained low. Fixed income invested assets that support our PNC liabilities and an effective duration of 4.5 years at quarter end. The effective duration of the fixed income assets to support our life and group liabilities was 9.2 years at quarter end. As usual, slides from our earning presentation will provide you with additional details of the investment results and the composition of our investment portfolio. Our balance sheet continues to be very solid. At quarter end, shareholders' equity was $12.7 billion, or $46.82 per share, reflective of the increase in our unrealized gain position during the quarter. Shared holders' equity excluding accumulated other comprehensive income of $11.9 billion or $43.86 per share. Book value per share ex-AOCI and excluding the impact of dividends paid has grown by 6% over the last year. We have a conservative capital structure with a leverage ratio below 18% and continue to maintain capital above target levels in support of our ratings. In the fourth quarter, operating cash flow was strong at $367 million compared to $160 million during Q4 2019. On a full year basis, operating cash flow was $1.8 billion versus $1.1 billion for 2019, a significant increase substantially driven by the improvement in our current accident year, underwriting profitability, and the lower level of paid losses. In addition to our strong operating cash flow, we continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity to meet obligations and withstand significant business variability. Finally, we are pleased to announce an increase in our regularly quarterly dividend to $0.38. This increase reflects our confidence that we can continue to grow our underwriting profits and build upon our financial strength. In addition, notwithstanding an extraordinary year in 2020, including the elevated impact of catastrophe on our results, we are pleased to declare a special dividend of 75 cents per share. With that, I will turn it back to Dino.
spk03: Thank you, Al. In summary, we had a great quarter. generating record core income as we effectively leverage the opportunities from the hardening market, as we did throughout the year. And we are confident in our ability to continue to do so as these market conditions persist in 2021. And with that, we are happy to take your questions.
spk05: Thank you. If you would like to ask a question on the call today, please press star 1 on your telephone keypad. We will now pause for a moment to allow everyone to signal. And our first question comes from Gary Ransom from Dowling and Partners. Please go ahead.
spk02: Yes, good morning. On the rate outlook, do you take the fact that some of the lines are leveling out on rate increases that perhaps the market is starting to approach adequacy, or maybe rate will start drifting down closer to loss trends over the next few quarters. I just wondered if you could comment on what you see in that trajectory.
spk03: Yeah, it's a good question, Gary. I think, you know, the way I see the quarter, I actually see it as further evidence of a sustained hardening market. We look at our rates at 12% overall for P&C. We also achieved that double-digit rate with three points increase in the retention. So it's three-quarters of double-digit rate, and I think you're going to see in any one sub-segment, some lines can go up in a quarter and some can even go down and some will stay flat because invariably you're going to have, you know, a different mix of accounts of profitability, which ones might need more or less rate, where you might be going after, as an example, better terms and conditions. And so as you look at the quarter and where we got rate, we got a strong rate in different areas that were higher. Our financial institution management liability was the highest, actually, in the fourth quarter. Healthcare does move quarter to quarter, again, based on the book, but it's eight quarters, right, of double-digit rate on rate. And I think all of the conditions that everyone has talked about, the dynamics, COVID, the low interest rate environments, elevated cash, the history of rates and lost cost trends. I think this market is just going to persist in 2021, albeit you might see some fluctuation quarter for quarter. You know, if we look at January, Gary, there's really, we just, our activity in January sees the market persisting. And so I'm not really sure when it'll start to flatten out, but we see a lot of opportunity. And quite frankly, I think it's needed because it's going to take some time to make up for all of the dynamics that everyone's been talking about. So that's how I see the quarter.
spk02: So I can take that that you think the market is still generally has deficient rates. There's still a need for rate above loss.
spk03: I do, and I think you're going to see that persist in 2021.
spk02: Okay. Another question on the overall distortions of 2020 in looking at your reserves and loss picks. I guess I would assume that loss payments would be lower because courts were closed and maybe there's a little bit reduced frequency in some places. Does that mean we ended the year with proportionally more reserves, either case or IBNR? If you look at the numbers, is the mix of reserves higher at the end of 20 versus 19?
spk04: Gary, I can take that. This is Al, and good morning. Yeah, I think that's fair, Gary. If you look at Our cash flow, you can see, obviously, our operating cash flow is up a year-over-year, and as well, our pay-doing curves are down. That is a reflection, obviously, of our stronger underlying profitability, but as well, that we had a higher level of CATs, including COVID, some of which has not been paid out. So our pays are down, and particularly our CAT reserves are indeed up.
spk02: And when you were picking your lost picks, were you just more or less ignoring 2020, kind of thinking about the trends from prior years? Or how did you build in what you saw in 2020 in those lost picks?
spk03: You know, prior to the pandemic, you'll recall, and we had articulated it on several calls, that we had seen... uh, we had, we had, uh, increased, uh, some of our loss picks. We had increased our, uh, long run loss cost transaction, about a hundred basis points in, uh, uh, over the prior, over the prior year, a function of, as I had indicated, social inflation in particular in areas like, uh, medical malpractice and, uh, umbrella, et cetera. And, um, And so we go into 2020 and COVID hits, and as I've indicated pretty well every quarter, it clogged up the court dockets. And so we just, we acknowledged some of the benefit, as we said on this call, and the rest we just held on and stayed the course on our loss picks which are, you know, we're elevated from prior, and we're going to just hang on to that margin that is pretended by rates over long-run loss-loss trends until we get a little bit more clarity. I think it's going to take still some time, as I said in my prepared remarks.
spk02: All right. Thank you very much.
spk03: Thanks, Gary.
spk05: And our next question comes from Josh Shanker from Bank of America. Please go ahead.
spk00: Good morning, everybody. I'm wondering if you could talk a little bit about the dividend, the math behind how the specialist calculated in conjunction with the decision to raise the quarterly dividend. What sort of economic factors were you looking at this year's dividend versus the long-run dividend?
spk04: Yes. Thanks, Josh. This is Al. Look, I think in keeping with the approach we've articulated in kind of our capital management strategy, right, we look at our net income and our intent is unless we have opportunities, otherwise they're going to maximize return to shareholders. We're going to pay out the majority of our net income year over year. In this case, I think historically that's been in the 90, 95% of net income. So, If you contemplate the new dividend that we declared, as well as the special, and you look at that relative to our net income for the year, that math should be consistent. And so I think that's what I'd say in terms of kind of our approach, and nothing's really changed there.
spk00: Okay. And then you talked about the general liabilities. Can you talk about how different years are looking and what the magnitude of the changes are in development there?
spk03: Al, I didn't hear that. Josh, you can either repeat it, or Al, if you heard it and you want to jump in, feel free to do so.
spk00: The comments you made about the general liability reserve development, I'm wondering if you can give some color about years and magnitudes.
spk04: Sure. So, Josh, that was premium development. on general liability. And essentially, ongoing, we go through state reviews that look at premium audit, and we had some adjustments that would have gone back just the last few years. There were positive adjustments and negative adjustments. The net effect was a $14 million adjustment to GL premium for those years.
spk00: Can I take from that that the loss reserves throughout the business while there'll be changes in giving years are generally unchanged from where they were a year ago. I'm more talking about the recent reserves than I am talking about long-dated reserves.
spk04: Yeah, no material change in lost reserves for the period for Juneau.
spk00: Okay, thank you.
spk05: And our next question comes from Mayor Shields from KBW. Please go ahead.
spk01: Great. Thanks. Good morning. Do you know if you could talk a little bit about, sorry, good morning. I was hoping you could talk a little bit about whether there are any changes going on at Hardy that would impact the components of the combined ratio. I'm just assuming that the lawyers book is, is more subject to a change in composition than your other segments.
spk03: Yeah. So as you know, we've been in a, a process over the course of 12 to 18 months of re-underwriting that portfolio, which I had indicated would be largely completed in the fourth quarter, which it was. The biggest change was on the property side, in particular in our cap exposure. And over the course of the last four, five, six quarters, you saw a lot less impact in our cap results coming out of international, which used to be heavily impacted by the Hardy portfolio. So the goal going forward in Hardy is to leverage the specialties that we have at CNA developed here and expanding there and lines of business and segments like our profitable specialty segments, our profitable commercial segments, and it's going to be a lot more in line with what we do in the United States. But the biggest change you'll see, it's in the capped exposure and evidence by a lot less catastrophe activity in the last six to maybe seven quarters.
spk01: Okay, perfect. I see that's what I was looking for. And I guess a question for Al. So we've seen some of the limited partnerships assets, I guess, move to LIFE from P&C. Is that process done, and does that have any impact on your ability to raise rates on the long-term care book?
spk04: Yeah. Thanks for that, Meyer. Yeah, so at the end of Q3 and through the reserve review for long-term care, we decided on a modest allocation to limited partnerships. And as you can imagine, given the long duration of That makes sense. That was a zero-sum change basically across P&C and life in group. We wouldn't anticipate that's going to have any material movement on our ability to get rate there. Really, it was all really part and parcel to our evaluation of our discount rate and what we think we could reasonably earn on our assets relative to P&C. the discount on the liabilities. So I don't anticipate that's going to mean, given the allocation, that's going to meaningfully move anything on the rate adequacy front.
spk01: Okay, perfect. It certainly makes sense. And just finally, if you could update us on commercial auto. It sounds like there were no reserve charges in the quarter. Does that product line seem reasonably priced?
spk03: So, you know, we have been, you know, continuing to get strong rates on our auto and got about 13 points of rate in the fourth quarter. And we've been doing that for a while. And we still have, you know, a ways to go on auto. But clearly it's moving in the right direction. and we didn't need to act on lost cost trends or lost picks in the quarter.
spk01: Okay, excellent. Thank you so much.
spk05: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. That's star 1 to ask a question. Again, we will pause for one moment to allow people to signal. There are no further questions on the line at this time. I would now like to turn the call back to the host for any additional or closing remarks.
spk03: That's great. Thank you very much for joining us and we'll see you in a quarter.
spk01: Thank you.
spk05: That concludes today's conference Thank you for your participation.
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