CNA Financial Corporation

Ladies and gentlemen, good day and welcome to the CNA 2022 Second Quarter Earnings Conference Call. If you would like to ask a question at the conclusion of prepared remarks, please press star 1 on your telephone keypad. As a reminder, today's conference is being recorded. I would like to turn the call over to Rilidza Todorova, AVP Investor Relations for opening remarks and introduction of today's speakers. Please go ahead.

Thank you, Elaine. Good morning and welcome to CNA's discussion of our second quarter 2022 financial results. Our second quarter earnings press release, presentation, and financial supplement were released this morning and are available on the Investor Relations section of our website, www.cna.com. Speaking today will be Dino Robusto, Chairman and Chief Executive Officer, and Scott Lindquist, Chief Financial Officer. Following their prepared remarks, we will open the line for questions. 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 press release and in CNA's most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, August 1st, 2022. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding non-GATT measures, reconciliations to the most comparable GATT measures and other information have been provided in our earnings press release, financial supplements, and other filings made with the SEC. This call is being recorded and webcast. A replay of the call may be accessed on our website. If you are reading a transcript of this call, please note that the transcript may not be reviewed for accuracy. Thus, it may contain transcription errors that could materially alter the intent or meaning of the statement. With that, I will turn the call over to our chairman and CEO, Dino Robusto.

Thank you, Rolita, and good morning, all. We are very pleased with the second quarter results, as we had excellent production performance, including 17% gross written premium ex captives growth, and a 64% increase in underwriting gains. Our core income declined by $96 million, driven by limited partnerships and common equity returns, which declined by $171 million. Well income from our fixed income portfolio was up $16 million as we turned the corner in the second quarter, with fixed income yields now increasing. Scott will provide more detail on investments. In the second quarter, the PNC all-in combined ratio was 91%, a three-point improvement compared to the second quarter of 2021, reflecting a lower underlying combined ratio, increased favorable prior period development, and lower catastrophe losses. Pre-tax catastrophe losses were 37 million or 1.8 points of the combined ratio compared to 54 million or 2.8 points in the prior year period. For PNC overall, prior period development was favorable by 1.6 points compared to two points favorable in the second quarter of 2021. Our PNC underlying combined ratio was a record 90.8% this quarter, reflecting 0.6 points of improvement over the second quarter of 2021. In the quarter, our corporate segment core loss was $25 million higher year over year. These results include a $51 million after-tax charge related to unfavorable prior period development largely associated with legacy masks toward abuse claims, including the recent Diocese of Rochester proposed settlement, which occurred in the second quarter. Drilling down on P&C production, Gross written premium growth excluding captives was 17%, and net written premium growth was 20%. Excluding the impact of a one-time catch-up related to the addition of the property quarter share reinsurance treaty in the prior year period, net written premiums grew by 13%. New business grew by 27% this quarter, which we are pleased with given that pricing and terms and conditions remain strong and consistent with our renewals. Retention was up two points to 85% this quarter, our strongest in nearly five years, and they were up in each of our operating segments. Exposure change improved by a point and now is about plus 3% across our entire portfolio and plus 5% in our core middle market and construction business units. The overall written rate increase was 6% in the second quarter, down one point from last quarter. With some exposures, we actually saw a modest upturn, such as larger cat-exposed property and national accounts and auto in our construction portfolio. Overall, for commercial, rates have remained relatively stable at about 5%, moderating only one point from the third quarter of 2021. So pricing dynamics, by and large, continue to reflect rationality in the marketplace. We see this as we look across lines of business and compare the results to our overall P&C increase of 6% in the quarter. By way of example, within commercial, auto rightfully continues to achieve rate increases above that overall average. Work comp continues to be below, which is reasonable. given the continued strong profitability. Property is above, and large national accounts property is low double digits. In specialty, medical malpractice continues to be above. D&O, with a cumulative rate increase of over 100% since the start of 2019, is now below the overall average, while the rest of management liability is still above as cyber, continues to be well above in high double digits. And from a geography standpoint, our international book, which includes Canada, Europe, and our syndicate, continues to be above the overall 6% increase. So we think that rates have been moderating in a measured way, and we expect to see some up and down movements across the various lines, influenced by how lost cost inflation, cat exposure, and overall economic conditions continue to play out. We feel good about the return on the majority of our book, but as I have mentioned before, we don't anchor rate adequacy to a point in time, but rather on a longer-term basis because it is a moving target. First, we don't assume we will cover our long-run lost cost trends every year going forward. History from past underwriting cycles clearly teaches us that. And second, in periods when lost cost trends have been increasing, essentially doubling to about 6% in the last four years in our portfolio, the pace at which the rate adequacy target moves is also changing. So we view this period in the cycle as a time to opportunistically continue pushing very hard for rate and balancing the rate retention dynamic in ways that will grow our PNC profit dollars. On an earned basis, overall PNC rate in the quarter was 8%, which is still nicely above our long-run loss cost trend assumptions. But with the uncertainties regarding the various aspects of inflation in the broader market, we remain prudent in acknowledging margins. So let me add a little color on how we are considering inflation in our retrospective reserving and prospective pricing. But first a comment on what inflation metrics we focus on because the headline CPI inflation number isn't necessarily the best proxy for the aggregate impact of economic inflation on lost costs in our portfolio. When we think about economic inflation, we focus on three components that can impact our claim costs, medical inflation, non-medical cost of goods sold inflation, and wage inflation, and how each impacts our portfolio, which often will not equate to the weighting ascribed in the CPI metric. For example, in our portfolio, medical inflation has a much larger impact than the weight it has in the CPI. And within the non-medical cost of goods sold inflation, we focus more on a few key items, such as increases in construction materials and used car and truck prices rather than an overall average. Wage inflation obviously increases costs but has a partial offset on the premium side, so we incorporate that dynamic. The impact from these refinements are used in our reserving and pricing studies. more so than the headline CPI number. And importantly, these impacts are treated separately from the impacts of social inflation, which has become a prevalent liability loss cost inflation over the past several years. We think about social inflation as being driven by somewhat independent factors we and others in the industry have spoken about at length, such as more aggressive plaintiff's bar, a higher number of nuclear verdicts, higher prevalence of litigation funding, and changing jury attitudes which are increasingly punitive regarding corporations. And as we have previously noted and we continue to believe, social inflation may still be obfuscated somewhat because court dockets are still backlogged. So let me provide some examples of how we have and continue to incorporate these inflation pressures together with our earned pricing trends, into our assessment of prior and current accident years. Our medical malpractice business has been impacted by social inflation and higher long-run loss cost trends starting several years ago. We saw that in the data and increased our accident year loss ratio picks considerably, which led us to start raising prices very early on at the expense of retention. And we increased prior year reserves through unfavorable prior period development of $210 million from 2017 through 2021, which we have spoken about on prior calls. And we continue to maintain ongoing loss cost trends for this class above our overall P&C average. For commercial property, we reacted to increases in loss costs from inflation in the third quarter last year, and we increased our long-run loss cost trend assumptions about two points in our property lines, which we also previously discussed. These increases impacted the pricing and reserving for our current and most recent accident years, given the short-tail nature of the claim development patterns. And the last example is workers' compensation. We did not reduce our accident year picks to reflect the lower levels of benign medical trends over the last five plus years as we maintained the higher long-run loss cost trends that were more evident prior to this period of benign medical trends. In addition, we have only partially reacted to the favorability in prior accident year reserves that the lower, more benign trends would suggest. Accordingly, we believe our current reserve position is strong, and further, that our prudence will allow us to withstand a period of higher medical inflation should a situation occur where the rate environment remains slightly negative, but medical inflation accelerates in the next 18 or 24 months. Should it then keep increasing for several years hence, that will put pressure on our lost costs. But in that situation, we will at least have ample time to thoughtfully react. This general pattern of prudence in reacting to prior year favorability and not reflecting the entire perceived margin between lost cost trend and earned rate in recent accident year picks is evident across our entire portfolio. and reflects our conservative underwriting company bias. Even maintaining that prudence, the P&C underlying combined ratio was a record 90.8% this quarter. The expense ratio of 30.5% was lower by about a point, and the underlying loss ratio of 60% was a half a point higher than the prior year quarter. But as I've mentioned in prior quarters, The property quota share treaty that we purchased in June of last year lowered the net premium mix between property business and our other classes. And since our property business has a lower underlying loss ratio, this mixed effect increased the overall P&T underlying loss ratio by about a half a point. We remain very pleased with the purchase of the quota share treaty as well as the additional cap cover in our property per risk treaty and cat treaty, all of which were successfully renewed last month at a modest mid single digit rate increase. Now let me provide a little more detail on the three business units. The all in combined ratio for specialty was 88.1% in the second quarter, which is now the eighth consecutive quarter below 90%. The underlying combined ratio was 89.2%, a record low and consistent on last year. The expense ratio of 30.4% is up slightly from the second quarter of 2021, while the underlying loss ratio improved by 0.4 points to 58.6%. Gross written premium ex-captives grew by 8% in the second quarter, and net written premium growth was 6%. we achieved rate increases of 7% in the quarter. This is down three points from the first quarter, but it's still exceeding long run loss cost trends and earned rate at a little over 10% is still well above long run loss cost trends. Retention was 85% consistent with last quarter and new business grew 9%. Turning to commercial, The all-in combined ratio was 93.2%, the lowest all-in quarterly combined ratio since 2008. Cats in the quarter were three points compared to our 10-year average in commercial of six points. The underlying combined ratio was 92%, a one-point improvement over last year. The underlying loss ratio of 61.5 is 1.4 points higher than the prior year quarter, However, as I've mentioned earlier, this is largely due to the mixed impact of the property reinsurance program we purchased last June. The expense ratio improved by 2.3 points to 30% in the second quarter due primarily to strong growth. Commercial gross written premium ex-captives grew by 25% this quarter and the net written premium growth was 20%, excluding the impact of the one-time catch-up related to the addition of the property quarter share reinsurance treaty in the prior year quarter. New business was up 39% in the quarter, as several larger opportunities we had been courting for quite a while successfully landed in the quarter. For commercial, the rate increase was plus 5%, and excluding workers' compensation, the commercial rate increase was plus 6%, and plus 7% on an earned basis. With the modest moderation in pricing we are experiencing, we continue to believe that commercial earned rates ex workers comp should remain at or above long run loss cost trends through year end. Commercial retention was strong again this quarter at 86%, which is higher than any quarter since prior to the pandemic. We continue to see middle market digit exposure changes in lines, We continue to see mid-single-digit exposure changes in lines of insurance with inflation-sensitive exposure bases like work comp and general liability, and we are clearly highly focused on valuation for property. In national accounts, valuation increases were up nearly 10% prior to other account-level changes like higher deductibles and movement within a property tower. These various exposure increases are a good outcome, and we estimate that up to half of the increase acts as additional rate in our portfolio over and above our 6% rate increase. For international, the all-in combined ratio was 91.6% this quarter. The underlying combined ratio was 90.6%, reflecting 1.9 points of improvement from the prior year quarter. The underlying loss ratio of 58.5% is lower by a half a point, and the expense ratio of 32.1% is down 1.4 points compared to last year. In terms of our loss exposure to Russia-Ukraine, it continues to be de minimis. International gross and net written premiums grew 13%, or 18%, excluding currency fluctuations. Rates were up plus 7%, which is a one-point decrease compared to last quarter, but remain above long-run loss cost trends. Retention in international was particularly strong at 85%, and it was broad-based, including our Lloyds syndicate. With the syndicate and European business re-underwriting behind us, international retention increases are meaningfully contributing to the profitable growth of our P&C operations, as is new business, which grew by 24%.