CNA Financial Corporation

Stand by, we're about to begin. Good morning and welcome to CNA's discussion of its 2021 second quarter financial results. CNA's second quarter earnings release, presentation, and financial supplement were released this morning and are available via its website at 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 risk 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 SEC filings. In addition, the forward-looking statements speak only as of today, Monday, August 2, 2021. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during the call. Regarding non-GAAP measures, reconciliations to most comparable GAAP measures and other information have been provided in the financial statement supplement. This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website. If you are reading the transcript of the 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 statement. With that, I will turn the call over to CNA's chairman and CEO, Dino Robusto. Please go ahead, sir.

Thank you, Rochelle. Good morning, everyone. In the second quarter, we produced record core income. resulting from improvement in our underlying combined ratio, along with strong investment income and a much lower level of catastrophe losses compared to the prior year quarter. Core income was $341 million or $1.25 per share. Net income for the quarter was $368 million or $1.35 per share. As we reported last quarter, we sustained a sophisticated cybersecurity incident in late March. Notwithstanding that this resulted in a complete shutdown of our systems for the early part of the quarter and impacted our transactional capability, we quickly regained momentum and finished the quarter with a very strong June. This, in turn, allowed us to achieve gross written premium growth ex-captives of 8% in the quarter, which was consistent with the first quarter. In addition, new business grew 10% to 393 million, consistent with the first quarter, and amongst the highest quarterly new business volume since 2004. Of particular note, we achieved a plus 10% rate increase for the quarter, only one point lower in the prior quarter than the fifth consecutive quarter of double-digit rate increase. And importantly, earned rate is now just shy of 12%, and long-run loss cost trend is running about 4.5% after we increased it roughly a half a point in the first quarter, which portends a meaningful margin growth. And based on four quarters of double-digit rate increases, margins should continue to build into 2022, all else equal. The all-in combined ratio was 94%, 15.2 points lower than the second quarter a year ago. The improvement is largely due to a significant reduction in CAT losses, In the second quarter of 2021, pre-tax catastrophe losses were 54 million or 2.8 points of the combined ratio. During the second quarter of 2020, pre-tax catastrophe losses were 301 million or 17.5 points. The P&T underlying combined ratio was 91.4%, a 1.8 point improvement over last year's second quarter result. Adjusted for the impacts of COVID in last year's second quarter, the improvement is 2.2 points. The underlying loss ratio improved 0.7 points, and the expense ratio improved 1.5 points. Importantly, each of our three business units improved their underlying performance in the quarter. As we have articulated repeatedly over the last four and a half years, we have been laser focused on improving our underlying combined ratio by institutionalizing an expert underwriting culture throughout the organization, which included shedding business when we could not achieve an excellent path, an expedient path to profitability. This included the re-underwriting of our Lloyd's portfolio over the last 18 months. It also involved building our talent base, increasingly specializing our target market focus in commercial, as we had historically done in specialty, sharpening our expense management and building an optimal reinsurance program to allow us to be increasingly opportunistic in the marketplace while reducing volatility. This quarter, we took another step in optimizing our reinsurance program and strengthen our overall property protection by adding a property quarter share treaty. Currently, property lines represent less than 20% of our overall portfolio. because of our heavy concentration in professional liability and other casualty lines. After multiple years of strong rate increases, there is an opportunity for us to further grow the property portfolio at very favorable terms and conditions. And like we have done before, when we opportunistically expanded lines of business like management liability and umbrella, we do so initially with some proportional reinsurance, and then over time, as the book matures, we revisit our reinsurance structures. In addition to sharing dollar one protection for attritional losses, we achieve the same for both critical cat perils and other cats created by convective storms and wildfires. And given the average catastrophe levels in the last four years do not appear to be reverting to historical means, the additional protection allows us to maximize underwriting returns and reduce volatility as we grow the portfolio. All of the efforts to improve our underwriting performance have steadily paid off. Our underlying combined ratio has decreased in each of the last four years from 97.9% at year-end 2016 to our current 91.4%, which includes a relatively modest benefit from our implied margin build through this hardened market. The underlying loss ratio in the second quarter of 2021 was 59.5%, representing .6 points of improvement from the first quarter of this year. The underlying loss ratio was .2 points higher than the second quarter of 2020. However, the prior year loss ratio reflected a COVID frequency benefit of .9 points. The improvement in our underlying loss ratio this quarter, excluding the COVID impacts, is due to earned premium growth and recognizing some modest earned rate above our long-run loss cost trend assumptions. The underlying combined ratio for specialty was 89.2%, a 2.9-point improvement compared to last year. This is the lowest underlying combined ratio in three years. The expense ratio improved by two points year-over-year to 30%, and the loss ratio improved by 0.9 points to 59%. The underlying combined ratio for commercial was 93%, comparable to last year, but favorable by almost a point, excluding the COVID impacts that lowered the loss ratio in 2020. The loss ratio and expense ratio each improved about a half point year over year, excluding the COVID impacts. The underlying combined ratio for international was 92.5% this quarter, which is the lowest since international was first presented as a separate segment in 2014. The expense ratio dropped to 33.5% from 36.7% last year due to significant earned premium growth and our strategies to reduce some poor-performing Lloyd's program business, which carried higher acquisition costs. The loss ratio of 59% is down 0.9 points compared to last year. I am particularly pleased with our re-underwriting execution that has generated these improved results, which now allows us to turn our focus to growing the international portfolio. And you can see this in the quarter, as well as the first half of this year, with growths written premium growth of 22% in the quarter and 17% year to date, or 13% excluding currency fluctuation in the quarter, and 9% year-to-date. In specialty, we also had strong growth. In the quarter, growth in premium excluding our captive business grew by 11%, and new business was up 26%. Retention dropped slightly in our medical malpractice business as we continue to impose the necessary terms and conditions to achieve our required rates of return. as you have evidenced us consistently doing. If we can't achieve the proper terms and conditions, we will walk away. We have made a lot of progress, but additional rate is still needed. And in the quarter, we achieved 13 points of rate. And we believe that men-mow price increases will persist at the double-digit level through year end. Turning to commercial, gross written premium, ex-captives grew plus 2% in the quarter. which was disproportionately impacted by the cyber incident that began on March 21st. Through the tremendous work of our employees and the steadfast support of our agents and brokers, we continued to underwrite and pay our claims throughout the incident. But the limited transactional capabilities slowed down our production in the early part of the quarter. The impact was most notable in commercial, in particular middle market, because the underwriters are primarily based in our branch offices where they focus on local agent and broker relationships and typically handle a high volume of smaller and mid-sized accounts as well as the smaller end of our construction business segment. This is in contrast to public B&O underwriters or large national account underwriters that are more centralized in key cities like New York dealing with fewer but larger accounts. Middle market retention and new business levels were both impacted, which lowered growth. In addition, middle market and national accounts retention were also impacted by some targeted re-underwriting in the quarter. Importantly, however, we saw significant increases in momentum throughout the quarter, and retention for the month of June increased 82% for middle market. Broadly, during the month of May, we pivoted. from using transactional workarounds to an increasingly normal state of technology and operations, which allowed us to improve our production statistics. Our overall PNC gross written premium growth in June jumped to 13%, fueled by new business growth of 32% and overall retention of 82%. And this momentum has continued into the month of July. So we are confident that we can continue to leverage the favorable marketplace in the latter half of the year, as we have effectively done since the start of the hardening market. Overall, for the quarter, net written premium growth for PNC was down 1%, which was distorted by the one-time unearned premium catch-up associated with the new property quota share treaty we purchased effective June 1. Excluding the effect of the one-time catch-up, net written premiums grew 5%. For P&T overall, prior period development was favorable in the quarter by 0.2 points on the combined ratio. Al will provide more detail later. But before I turn it over to Al, I'll make a few comments on how I think about the pricing environment at this point in the cycle. As I mentioned last quarter, written rate changes began to exceed long run loss cost trends eight quarters ago. Earned rates have exceeded long-run loss cost trends for six quarters after being below long-run loss cost trends for five straight years. More rate is therefore still needed, and notwithstanding the one-point moderation in price increases in the first and second quarters, we are securing strong written rate increases where needed most. By way of example, in the quarter, aging services professional liability pricing was up 23%. Umbrella was up 16%, financial and management liability was up 17%, auto was up 13%, and property up 11%. Importantly, earned rate changes in 2021 are running close to 12%, and our long run loss cost trend assumption is about 4.5% in the aggregate with variations by class. That portends well for meaningful underlying margin improvement all else equal. Of course, things are rarely equal. Recall that we increased our long run loss cost trends by about two points over the last couple of years in response to clear increases due to social inflation. And we won't know the true impact of social inflation on these accident years until they develop over time. For now, we are not allowing that perceived margin to have a significant impact on our accident year loss ratio picks or it overly benefiting prior year reserves until we have greater clarity on the impacts of social inflation in light of the shelter-in-place mandates obfuscating those trends. Of course, this is all playing out against a substantial gap of roughly seven points between earned rates and long-run loss cost trends. So even if we assume an increase in long-run loss cost trends of another half a point at year end, And rates moderate as they did across the last two quarters, roughly 0.25. The strong written rate in the last year will continue to generate earned rate increases around 8% to 9% at year end 2021. Still well above even potentially elevated long run loss cost trends. And likely still fueling some margin expansion into the first half of 2022 all else equal. Just as important to the favorable pricing environment, are the improved terms and conditions we have been able to achieve over the last couple of years, which as I have mentioned before, tend to persist longer than the end of the favorable pricing environment. And when you combine that with the strong improvement in our portfolio from our re-underwriting actions over the last several years, as evidenced in our international portfolio, it should further serve to stave off upward pressure on the loss ratio, even when rates eventually fall below loss cost trends sometime in the future. In light of the disproportionate number of years rates tend to fall below long-run loss cost trends versus the years it exceeds them across an underwriting cycle, combined with the very real headwinds that persist, such as social inflation, low interest rate environment, and elevated catastrophe activity that hasn't reverted to the 10-year mean, I believe price increase discipline will persist for several more quarters. This is appropriate because determining what these headwinds will do and when in terms of improving or deteriorating is difficult to predict and makes the conversation on rate adequacy less certain, in my opinion. I believe discipline and prudence remain the order of the day. And with that, I'll turn it over to Al.

Thanks, Dino, and good morning to everyone. Starting with the financial results, core income for the quarter was $341 million, compared to $99 million for the prior year quarter. With a core ROE of 11.3% for the period, clearly we continue to make great progress. A meaningful component of our underwriting progress comes from our expense ratio. To that end, our second quarter expense ratio of 31.6% reflects two points of improvement versus the prior year quarter and four tenths of improvement from the fourth quarter of 2020. As you will recall, the prior year quarter reflected a half point adverse impact associated with COVID-19. The expense ratio improvement was again achieved in all three of our PNC business segments. As I've said previously, The expectation was that written premium growth would ultimately translate into earned growth, and the expense ratio would benefit from this as we maintain discipline in our expense spend. And while the timing of our discretionary investments in talent, technology, and analytics will lead to some volatility in our expense ratio from quarter to quarter, over time we would expect to sustain our progress. Turning to net prior period development and reserves. For the second quarter, overall P&C net prior period development was two-tenths of a point favorable, compared to 1.5 points favorable in the prior year quarter. Favorable development, especially during the quarter, was driven by the security business, somewhat offset by management and professional liability. In the commercial segment, favorable development and workers' compensation was offset by unfavorable development and commercial auto. In terms of our COVID reserves, we 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 IBNR. As Dino mentioned on June 1st, we renewed several treaties associated with our property reinsurance program. As part of this effort, we added a quarter share treaty which covers policies written during the treaty term, as well as policies that were enforced as of June 1st. As a result of our decision to have all enforced policies benefit from this new treaty and from the onset of hurricane season, we see that $122 million of premium as a one-time catch-up of unearned premium on policies previously written as of the treaty inception. This directly impacted net written premium for the quarter. Specifically, P&C net written premium was down 1% relative to the second quarter of 2020. Excluding the effect of the unearned premium one-time catch-up, net written premiums grew 5% relative to the prior year period. Specific to commercial, net written premium was down 12% relative to the second quarter of 2020. Excluding the effect of the unearned premium one-time catch-up, net written premiums contracted 1% relative to the prior year period. As this treaty was effective 6-1, the impact at earned premium for the quarter was modest. Now turning to life in group. The segment produced core income of $43 million in the quarter. This compares to Q2 2020 income of $14 million. The core income for the life in group segment in the quarter was largely driven by favorable net investment income. predominantly from the performance of our limited partnership investments. In addition, morbidity experience was moderately favorable for the quarter, while persistency experience was slightly unfavorable. As a reminder, we will perform our life and group annual reserve reviews in the third quarter of this year. As always, we will take a close look at all of our reserving assumptions, including critical factors related to morbidity, persistency, rate increases, and our discount rate. Please recall, last year we moved meaningfully on our discount rate assumption, setting the normative rate for the 10-year Treasury at 2.75%, with a 10-year grade-in period. While current interest rates are higher than one year today, they remain low on an absolute basis, further validating the prudent actions we took last year. Our corporate segment produced a core loss of $53 million in the second quarter. compared to a $40 million loss in the prior year. We conducted a review of our legacy mass tort reserves during the second quarter. As a result of this review, the segment includes a $40 million pre-tax charge related to unfavorable prior period development. The increase in reserves largely is associated with abuse claims. Turning to investments, total pre-tax net investment income was $591 million in the second quarter, compared with $534 million in the prior year quarter. The results included income of $156 million from our limited partnership and common stock portfolios, as compared to $84 million on these investments from the prior year quarter. The strong limited partnership returns of the quarter across both the P&C and life and group segments were significantly driven by private equity investments and the effective lag results from the first quarter. As a reminder, our private equity funds primarily report results on a three-month or greater lags basis, whereas our hedge funds primarily report results on a real-time basis. Our fixed income portfolio continues to provide consistent net investment earnings, stable relative to the last few quarters and modestly down relative to the prior year quarter. The year-over-year decrease reflects the effect of lower reinvestment yields substantially offset by the favorable effects of a higher investment base as strong operating cash flows have fueled portfolio growth. The pre-tax effective yield in our fixed income holdings is 4.3% at Q2 2021 compared to 4.6% as of Q2 2020. The decline in our portfolio yield over this time reflects the cumulative effect of the persistently low interest rate environment, which continues to be a headwind. At the same time, the book value of our fixed income portfolio has grown by $1.6 billion over the last year, mitigating the decline in the reinvestment yields. From a balance sheet perspective, the recent decline in interest rates during the quarter resulted in the increase in the unrealized gain position of our fixed income portfolio to $5.1 billion at quarter end, up from $4.3 billion at first quarter. Fixed income invested assets that support our PNC liabilities had an effective duration of 4.9 years at quarter end. The effective duration of the fixed income assets that support our life in group liabilities was 9.3 years at quarter end. As usual, slides from our 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 very solid. At quarter end, shareholders' equity rose to $12.7 billion, or $46.69 per share, reflective of our net income and the increase in our unrealized gain position during the quarter. Shareholders' equity excluding accumulated other comprehensive income was $12.2 billion, or $44.81 per share. We have a conservative capital structure with a leverage ratio of 18%, and continue to maintain capital above target levels in support of our ratings. In the second quarter, operating cash flow was strong at $603 million compared to $438 million at Q2 2020, and driven by the improvement in our current Accent-EAR underwriting profitability and a lower level of paid losses. This lower level of paid losses is also reflected in our lower P&C, paid-to-incurred ratio, which was 73% for the quarter. In addition to consistent net operating cash flows, 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. Finally, we are pleased to announce our regularly quarterly dividend of $0.38. And with that, we'll turn it back to Dino.