CNA Financial Corporation

Good morning and welcome to CNA's discussion of its 2021 third quarter financial results. CNA's third quarter earnings release, presentation, and financial supplement were released this morning and available via its website, www.CNA.com. Speaking today will be Dino Robusto, CNA's Chairman and Chief Executive Officer, and Larry Hafner, CNA's Interim 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-GAMP 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 the risk is contained in the earnings released and in CNA's most recent SEC filings. In addition, The forward-looking statements speak only of today, Monday, November 1st, 2021. The DNA 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 accessed on CNA's website. If you are reading the transcript of this call, please note that the transcript may not be reviewed for accuracy. Thus, it may contain transcript 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.

Thank you, Jennifer, and good morning, everyone. CNA performed extremely well in the third quarter. with core income up 23% year-over-year despite the elevated catastrophe activity. In the third quarter, core income was $237 million or $0.87 per share driven by improved underlying underwriting performance and favorable life and group results. Net income for the quarter was $256 million or $0.94 per share. Gross written premium, excluding our captive business, grew by 10% this quarter, fueled by excellent new business growth and continued strong price increases. And importantly, momentum continued to build throughout the quarter. As we expected, the transactional capability limitations that we mentioned last quarter following the cybersecurity incident are now behind us. Earned rate was 11% in the quarter, and written rate was 8%, which remains well above lost cost trends and which we believe portends continued progress towards building margin as the written premium earns in over a third renewal cycle in 2022. Additionally, the tighter terms and conditions we have been able to secure during the hard market persist with no early signs of pressure to relax them. I'll have more to say about production performance in a moment. The all-in combined ratio was 100% this quarter, about a point lower than the third quarter of 2020, which included elevated catastrophes in both periods. In the third quarter of 2021, pre-tax catastrophe losses were 178 million or 9.2 points of the combined ratio, which included 114 million for Hurricane Ida. The PNC underlying combined ratio was 91.1%. A 1.5 point improvement over last year's third quarter results. This is a record low for the third consecutive quarter. After adjusting for the impacts of COVID and last year's third quarter, the improvement in our underlying combined ratio is actually 2.1 points. The underlying loss ratio in the third quarter of 2021 was 60.2%. which is down 0.3 points compared to the third quarter of 2020. Excluding the impacts of COVID in the prior year quarter, the underlying loss ratio improved by 0.9 points. And the decrease reflects our prudent acknowledgement of margin improvement. As I've mentioned before, we increased our loss cost trends about two points over the last couple of years in classes impacted by social inflation. This quarter, We increased our loss cost trends in property lines about two points because of the supply chain shortages, which have increased the cost of material and labor and don't look like they will revert back lower anytime soon. This change pushed up our overall P&C loss cost trends marginally and are now about 5%. During the third quarter, earned rates are running close to 11%, so earned rate is exceeding loss cost trend by about six points. Applying that to a 60% loss ratio should portend about three points of improvement in the quarter. We have reflected about a point of improvement in the underlying loss ratio in the third quarter. In the first half of the year, we acknowledged slightly less than a half a point improvement in the underlying loss ratio. We are going to continue to be prudent in terms of acknowledging margins since the courts are just starting to open up and the dockets are only starting to clear. The underlying combined ratio for specialty was 89.6%, a .9-point improvement compared to last year, entirely from an improvement in the underlying loss ratio, while the expense ratio was comparable to the third quarter of 2020. The all-in combined ratio was 88.2%, a 1.3-point improvement compared to the third quarter of 2020. The all-in combined ratio for commercial was 111.6, including 18.6 points of CAT, compared to 111.3 in last year's third quarter, including 17 points of CAT. The underlying combined ratio for commercial was 92.5%, which is the lowest on record, and is 1.2 points lower compared to last year, and 2.3 points lower, excluding the COVID frequency impacts that reduced the loss ratio in 2020. The underlying loss ratio improved by 0.4 points, excluding the COVID frequency impacts last year, while the expense ratio improved by two points. Incidentally, compared to the second quarter of 2021, the underlying loss ratio is higher simply because of the resulting mixed change between property and casualty net earned premium due to the new property quarter share treaty we purchased in June. In ceding an annual estimate of property earned premium to the reinsurers in June, it altered the underlying loss ratio with a higher casualty mix going forward. The underlying combined ratio for international improved by four full points to a record low of 91%. This reflects a 2.8 point improvement in the expense ratio and a 1.2 point improvement in the underlying loss ratio. which was 58.9% in the quarter. Importantly, as our re-underwriting has largely been completed in international, we've continued to see that benefit in the underlying loss ratio, as well as a more modest catastrophe ratio from the meaningful reduction in our PML exposures. The all-in combined ratio of 95.5% compared to 98.1% in the third quarter of 2020 reflects the success of our re-underwriting strategy. Now turning back to production statistics. As indicated earlier, our P&C operations at 10% growth in gross written premiums ex-captive, which was two points above what we achieved in the first half of 2021 and one point above full year 2020. Our growth in the quarter was fueled by strong new business growth of 24%, and written rate of 8% while retention was stable at 81%. Net written premium growth for P&C was plus 5 for the quarter, up 4 points over the first half of the year. Our specialty gross written premium growth ex-captive was plus 10%, driven by excellent new business growth of 40%, concentrated in affinity programs and management liability, and continued strong rate of 9%. This is our fifth consecutive quarter of double-digit growth in specialty, notwithstanding that our retention in the third quarter was down about five points to 80%. In the quarter, we continued our re-underwriting of the healthcare portfolio and we non-renewed a portion of our hospital medical malpractice business because we could not achieve our required returns even after the rate increases we secured to date. Non-renewing this segment also lowered the rate increase for specialty this quarter because it was the segment achieving some of our highest rate increases in recent quarters. But improving our profitability is always our first priority, and walking away from this business was the right action to take. In commercial, our gross written premiums, ex-captives, grew 10% in the quarter, representing an eight-point improvement over the second quarter's growth. As we mentioned last quarter, commercial was disproportionately impacted by the cyber incident as the majority of the underwriters in the branches are in the commercial business unit. And so we expected to see the biggest rebound in commercial now that it's behind us. And we did indeed see that this quarter. Commercial new business growth grew by 21% in the quarter with all segments contributing. and retention increased three points to 83% compared to the last quarter, and rates increased 6%. Although rates moderated in certain segments like national accounts, where rate increases were lower by three points, we still achieved a very strong 13% increase in the quarter, which is well above lost cost trends. Our middle market rates were lower by one point this quarter, but we had a seven-point increase in retention to 84%. We also achieved two points of exposure increase in commercial in the quarter from higher payroll and sales compared to the third quarter of 2020. Our international gross written premium growth was 16% for the quarter, or 11%, excluding currency fluctuation. As we mentioned, with the re-underwriting actions behind us, we are focusing on growing the portfolio. We continue to achieve strong rate in international at 13%, consistent with the second quarter. Retentions have improved each quarter this year and stand at 79% in the quarter, up from 77% last quarter and 74% in the first quarter. For P&C overall, prior period development was favorable by 0.3 points on the combined ratio. Turning to life in group, we conducted our annual gross premium valuation or GPV analysis on our active life reserves as well as a claim reserve review on our disabled life reserves. There was no result in unlocking of the assumptions which we believe is due to our continued prudent management of this runoff book and we now have $72 million of gap margin on the active life reserves. The claim reserve review resulted in favorable development of $40 million on a pre-tax basis. Larry will have more detail on the life and group reserve analysis, and our P&C prior period development. And before I turn it over to Larry for his remarks, just a few comments on Larry and our CFO search. Larry, of course, is no stranger to CNA. He retired as CNA's chief actuary in August of last year after serving over a decade as CNA's chief actuary, during which time he worked hand-in-hand with the finance function. Larry's willingness to come out of retirement has afforded us the time to accomplish a thorough search for this vital role, which is going well, and we expect to complete it soon. Larry will also help facilitate a smooth transition with the incoming CFO. And with that, I'll turn it over to Larry.

Thank you for that, Dino. I must say it has been both a professional and personal pleasure working with the CNA executive team once again these past two months. Good morning, everyone. As Dino highlighted, the 23% increase in core income for the third quarter produced a core ROE of 7.7%. Before providing more information on the financials, I will first discuss life and group. As you know, each year in the third quarter, we complete our annual reserve reviews for life and group. These reviews include our long-term care active life reserves, which we refer to as gross premium valuation, or GPV, as well as our long-term care and structured settlements claim reserves. Before going over the results of these reviews, I will point you to slides 12 through 14 of our earnings presentation. Slide 12 contains key demographic information about both our individual and group long-term care blocks. As a reminder, both blocks are closed with no new policies issued for individual since 2004 and no new group certificates since 2016. As a result, the average attained age for the individual block is 80 years old and the group block is 67. While the group block is less mature in age, you can see from the table in the top right of slide 12 that the benefit features on average for the group block are less rich. As we have discussed on past calls, we have proactively reduced risk in both blocks while obtaining meaningful rate increases and using a prudent approach to setting assumptions in our reserve analyses. both for active life and claim reserves. One clear result of our efforts is the 35 percent reduction in policy counts since 2015, which is shown on the bottom left graph on slide 12. As we continue to push for needed rate, we also offer benefit reduction options to our policyholders as a means to avoid or mitigate rate increases. This reduces the cost of future claims while providing a viable option for our policyholders. Also worth noting on slide 12, our claim counts are down significantly over the past two years, as can be seen in the graph on the bottom right. Starting with the GPV analysis, the results of which are shown on slide 13. Our efforts involved a thorough review of all of our reserving assumptions, including critical factors related to morbidity, persistency, rate increases, and discount rate. The key result is that we did not have an unlocking event, And we now have margin in our gap-carried reserves of $72 million. Starting with the discount rate, recall that last year we moved meaningfully on our assumption by lowering the normative risk-free rate to 2.75 percent and increasing the gradient period for the risk-free rate to rise to that level to 10 years. For the first three years of that 10-year period, as you might recall from last year's analysis, we used the forward curve. We followed the same approach this year, and the current forward curve has interest rates that are higher than the assumptions we locked in last year, creating margin. Given the higher interest rate environment, we also reviewed our estimates around the cost of care assumptions and determined a small increase was warranted, which decreased margin. Taken together, the changes result in creating the $65 million of margin disclosed in the table. Turning next to morbidity, we refined our claim severity assumptions specifically those related to utilization rates in our group block, expected recovery rates, and claims status mix, which together drove margin improvement of $205 million. Importantly, we did not include our favorable experience in 2020 due to COVID-19 as part of the data sets that are analyzed to update the long-term assumptions. Not including the 2020 experience is further evidence of the prudent approach we take with our reserving assumptions. With respect to persistency, the key assumption change was a decrease in healthy life mortality. While this result may seem counterintuitive as the pandemic caused elevated mortality, we excluded the impacts from the pandemic when setting our long-term GPV assumptions as we do not believe this recent elevated mortality will persist over the duration of our liabilities. Rather, the assumption change is from a periodic review of past policy terminations to better determine their attribution between mortality and lapse. For this year's review, we used external data sources, obtaining data at a more granular level, to examine the terminations over multiple past years. The result of that effort was a slightly lower level of mortality than we had used in the 2020 assumptions. Of course, even a slight change in mortality rate applied against the entire tail of the portfolio will have a leveraged effect, and these assumption changes resulted in margin deterioration of $233 million. We will continue to monitor active life mortality relative to our revised assumptions to see how our approach plays out. Regarding future premium rate increases, our actual rate achievement over the past year exceeded our assumption in last year's analysis, contributing $27 million to the favorable margin increase. As you may recall, our prudent approach is to include rate increases that have been approved, filed but not yet approved, or that we plan to file as part of a current rate increase program. As a result, the weighted average duration of future rate increase approvals assumed in the reserves is less than two years. As you can see on slide 13, the cumulative impact of these changes, including a slight margin improvement of $8 million from lower operating expenses, resulted in a reserve margin of $72 million in our carried reserves while continuing to use a prudent set of reserve assumptions. As a result, there's no need to have an unlocking event, and we feel good about the reserves. In addition to the GPV, we concluded our annual long-term care claims reserve review, which is a review of the sufficiency of our reserves for current claims. The impact from this review was favorable, driven by lower-than-expected claim severity. Specifically, we observed higher claim closure rates, most notably driven by mortalities. The favorability, which flows through to our bottom line, was a pre-tax benefit of $40 million or $31 million on an after-tax basis. Turning to slide 14, our overall life and group segment produced core income of $41 million in the third quarter, which compares to a third quarter 2020 loss of $35 million. In addition to the $31 million favorable impact from the annual long-term care claims review that I just discussed, Activity in the quarter contributed another $10 million to core income, as we had strong net investment income performance predominantly from our alternative investments portfolio. Returning now to financial results, our third quarter 2021 pre-tax underlying underwriting profits increased 28% on a year-over-year basis, driven by the 6% growth in net-in premium and the record low underlying combined ratio. A key component of the combined ratio improvement is the expense ratio. The third quarter 2021 expense ratio of 30.7% was 1.1 points lower than last year's third quarter. Our commercial and international segments drove the overall improvement as commercial improved 1.9 points to 30.4% and international improved 2.8 points to 32.1%. Our focus on expense discipline as we grow the company has driven meaningful expense improvement. And this quarter's result reinforces the success of our strategy. Of course, as we have mentioned before, the improvement will not be a straight line down because we continue to make investments in talent, technology, and analytics, which in any one period can materially vary. As this quarter's expense ratio reflected somewhat less investment, we believe a more appropriate expectation on run rate is 31%. For the third quarter, overall P&C net prior period development impact on the combined ratio was 0.3 points favorable compared to 0.4 points favorable in the prior year quarter. Favorable development was driven by surety in the specialty segment, somewhat offset by amortization of workers' comp tabular reserves in the commercial segment. In terms of our COVID reserves, we made no changes to our COVID catastrophe loss estimate following an in-depth review during the quarter. and our loss estimate is still virtually all in IV&R. Turning to investments, total pre-tax net investment income was $513 million in the third quarter compared with $517 million in the prior year quarter. The results included income of $77 million from our limited partnership and common stock portfolios as compared to $71 million on these investments from the prior year quarter. The strong LP returns for the quarter across both the P&C and life and group segments were significantly driven by private equity investments and reflected the lag reporting results from the second quarter. As a reminder, our private equity funds primarily report results on a three-month lag basis, whereas our hedge funds primarily report results on a real-time basis. Our fixed income portfolio continues to provide consistent net investment income, stable relative to the last few quarters and modestly down relative to the prior year quarter. The year-over-year decrease reflects lower reinvestment yields due to the ongoing low interest rate environments, with pre-tax effective yields on our fixed income holdings of 4.3 percent during the third quarter of 2021 compared to 4.5 percent during the third quarter of 2020. However, our strong operating cash flows have fueled a higher investment base with the book value of the fixed income portfolio growing by $1.5 billion over the past year. From a balance sheet perspective, the unrealized gain position of our fixed income portfolio was $4.8 billion at quarter end, down from $5.1 billion at the end of the second quarter, reflecting the slightly higher interest rate environment. Fixed income invested assets that support our P&C liabilities and life and group liabilities at effective durations of 5.1 years and 9.3 years, respectively, at quarter end. Slide 17 and 18 in our earnings presentation provide you with additional details of the composition of our investment portfolio and our investment results. Our balance sheet continues to be very solid. At quarter end, shareholder's equity was $12.7 billion, or $46.67 per share. Shareholders' equity, excluding accumulated other comprehensive income, was $12.3 billion, or $45.39 per share, an increase of 8% from year-end 2020, adjusting for dividends. 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 third quarter, operating cash flow was strong once again at $669 million, In our P&C segments, the pay to incurred ratio was 0.75, consistent with the last two quarters. Contributors to this include our growth, which increases the incurred losses while paid losses lag, especially for casualty lines, as well as the ongoing impact of slowed court dockets. Certainly, the occurrence of catastrophe events in a given quarter and the payout over subsequent quarters impact this ratio as well. In addition to strong operating cash flow, We continue to maintain liquidity in the form of cash and short-term investments, and together they provide ample liquidity to meet obligations and withstand significant business variability. Finally, we are pleased to announce our regular quarterly dividend of $0.38 per share. Before turning it back to Dino, I wanted to let you know that our 2021 Virtual Investor Day presentation is posted on the CNA Investor Relations website. The strategic discussion that accompanies the presentation is hosted by Dino and myself. We invite you to view the presentation and hope that you find it informative. With that, I will turn it back to Dino.