CNA Financial Corporation

Ladies and gentlemen, good day and welcome to the CNA third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. If you would like to ask a question at the conclusion of prepared remarks, you may press the star key followed by the number one on your telephone keypad. If you withdraw your question, please press star and then two. As a reminder, today's conference is being recorded. I would now like to turn the call over to Relitsa Totorova, Vice President of Investor Relations and Rating Agencies, for opening remarks and introduction of today's speakers. Please go ahead.

Thank you, Jason. Good morning, and welcome to CNA's discussion of our third quarter 2023 financial results. Our third 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, October 30th, 2023. 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 our earnings press release, financial supplement, and other filings 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, Gino Robusto.

Thank you, Relita, and good morning, all. In the third quarter, CNA continued to produce very strong results with a significant increase in core income driven by higher investment income, record P&C underlying underwriting gain, lower levels of catastrophe loss, and improved results in life and group. Our top line production continues to be driven by our commercial business segment with broad success across our middle market, construction, and national accounts units. And as discussed in prior quarters, we have continued to push for appropriate rate in those lines which have been adversely affected by social inflation. Last quarter, I specifically addressed the inflection point that we saw in excess casualty and commercial auto, where rate increases accelerated. And this quarter, that trend continued. We believe higher rates for longer are appropriate in these lines, and we are pleased that there is an increasing awareness for this need in the marketplace. Drilling down on the details for the quarter, Core income increased considerably in the third quarter to $289 million from $43 million in the prior year period. We conducted our annual life in group reserve assumption review in the quarter, resulting in an essentially neutral change in total. Last year, the reserve assumption review resulted in a loss of $143 million after tax adjusted to reflect LDTI accounting. Excluding the impacts of life and group reserve assumption review in both periods, core income was still up 56%. Net investment income was up 31%, with positive income in our alternatives portfolio compared to a loss in the prior year quarter and a higher gain in our fixed income portfolio due to greater yield and a higher volume of invested assets. SCOTT WILL PROVIDE MORE DETAIL ON INVESTMENTS AND LIFE IN GROUP RESULTS. PNC CORE INCOME WAS UP 35% IN THE QUARTER, REFLECTING HIGHER INVESTMENT INCOME, RECORD PRE-TAX UNDERLYING UNDERWRITING GAIN, AND LOWER CAT LOSSES. THE PNC ALL-IN COMBINED RATIO WAS STRONG AT 94.3%, WITH PRE-TAX CATASTROPHE LOSSES OF $94 MILLION or 4.1 points of the combined ratio compared to 114 million or 5.5 points in the third quarter last year. Our CAT result in the quarter was also below our 10-year average for third quarter catastrophes. Favorable development was 0.2 points in the quarter. The underlying combined ratio was 90.4 PERCENT GENERATING A RECORD 220 MILLION OF PRE-TAX P&C UNDERLYING UNDERWRITING GAIN. THE UNDERLYING LOSS RATIO WAS 60%, AND THE EXPENSE RATIO WAS 30.1%. THE P&C EXPENSE RATIO BENEFITED BY .6 POINTS IN THE QUARTER FROM A FAVORABLE REINSURANCE ACQUISITION-RELATED CATCH-UP ADJUSTMENT IN INTERNATIONAL. IN THE QUARTER, WE ACHIEVED 7% GROWTH IN GROSS-WRITTEN PREMIUMS EX-CAPTIVE AND 6% GROWTH IN NET-WRITTEN PREMIUM. RENO PREMIUM CHANGE IN THE QUARTER OF 6% REFLECTED A RATE CHANGE OF 5%, CONSISTENT WITH THE FIRST HALF OF THE YEAR, AND INCLUDED AN EXPOSURE INCREASE OF 1%. EXPOSURE CHANGE IS LOWER THAN THE PRIOR QUARTER BECAUSE OF UNDERWRITING ACTIONS WE TOOK ON CERTAIN ACCOUNTS leveraging the favorable hard market conditions to further improve the loss profile. As an example, we increased attachments and reduced participation on certain large national accounts. While these actions had the effect of reducing the exposure metric we report, it is masking the positive impacts of exposure increase that act like rate, which we continue to experience in the quarter. This includes mid-single-digit exposure increases in work comp and high single-digit valuation changes in our property portfolio similar to last quarter. Rate and exposure that acts like rate is still covering our long-run loss cost trends, which continue to run at about 6.5% in aggregate. Retention was 84% in the quarter. DOWN TWO POINTS COMPARED TO THE PRIOR QUARTER. AND IN ANY GIVEN QUARTER, THERE CAN BE SOME FLUCTUATION BASED ON THE MIX OF ACCOUNTS UNDER COMPETITION, AND WHEN WE CAN'T GET THE TERMS AND CONDITIONS WE DEEM NECESSARY, WE'LL LET THE ACCOUNT GO. YEAR TO DATE, OUR RENEWAL RETENTION IS 85%, WHICH IS THE SAME LEVEL FOR THE FIRST NINE MONTHS OF 2022 AND IN LINE WITH OUR EXPECTATIONS. NEW BUSINESS WAS UP 20 MILLION IN THE QUARTER, OR 4%, AND $127 MILLION, OR 9% FOR THE FIRST NINE MONTHS OF THE YEAR. TURNING TO OUR THREE BUSINESS UNITS, THE ALL-IN COMBINED RATIO WAS 90.1% FOR SPECIALTY THIS QUARTER, WHICH INCLUDES .6 POINTS OF FAVORABLE PRIOR PERIOD DEVELOPMENT. THE UNDERLYING COMBINED RATIO WAS 90.7%. WITH AN UNDERLYING LOSS RATIO OF 58.6%, AND THE EXPENSE RATIO WAS 31.8%. GROSS-WRITTEN PREMIUMS EX-CAPTIVE GROWTH WAS DOWN MINUS ONE, SIMILAR TO THE SECOND QUARTER, AND NET-WRITTEN PREMIUM GROWTH WAS DOWN MINUS 2% THIS QUARTER. NEW BUSINESS WAS DOWN 7%, AND THE DECREASE CONTINUES TO BE DRIVEN BY THE PROTRACTED DECLINE IN BUSINESS OPPORTUNITIES WE COMMENTED ON OVER THE LAST FEW QUARTERS such as M&A activity and our prudent approach to new business on management liability lines. Within specialty, the rate change turned positive to plus 1% in the quarter, up two points compared to last quarter. FIML pricing improved five points, driven by D&O price decreases, which moderated in the quarter. And we believe that is rational, as the third quarter reflects the start of a second round of price decreases. Although encouraged by the moderation, it is too early to know if this is a hard inflection, as the result in any one quarter, as I just mentioned, can be impacted by the mix of individual accounts renewing in the quarter. We were also successful in raising rates by an additional two points in the quarter, TO 7% IN OUR HEALTHCARE MED-MAL BUSINESS. AND OUR AFFINITY PROGRAMS CONTINUE TO PRODUCE STABLE RATE INCREASES IN THE LOW TO MID-SINGLE DIGITS. RETENTION AND SPECIALTY REMAINED VERY STRONG AT 87% IN THE QUARTER AND 88% ON A YEAR-TO-DATE BASIS, UP TWO POINTS COMPARED TO 86% IN THE SAME NINE-MONTH PERIOD LAST YEAR. TURNING TO COMMERCIAL, THE ALL-IN COMBINED RATIO WAS 98.9%, WHICH INCLUDES 7.4 POINTS OF CAT LOSS IN THE THIRD QUARTER. THE UNDERLYING COMBINED RATIO WAS 91.5%, .4 POINTS LOWER THAN LAST YEAR, AND THE LOWEST ON RECORD. THE UNDERLYING LOSS RATIO OF 61.5% WAS STABLE YEAR OVER YEAR, AND THE EXPENSE RATIO IMPROVED BY .4 POINTS TO 29.5% IN THE QUARTER, REPRESENTING THE LOWEST QUARTERLY EXPENSE RATIO IN 15 YEARS. WE HAD ANOTHER STRONG DOUBLE-DIGIT GROWTH QUARTER IN COMMERCIAL. GROWTH-WRITTEN PREMIUMS EX-CAPTIVES GREW BY 13%, AND NET-WRITTEN PREMIUM GREW BY 11%, IN PART FUELED BY CONTINUED EXCELLENT NEW BUSINESS GROWTH OF 19% IN THE QUARTER. RENO PREMIUM CHANGE WAS PLUS 9% IN THE QUARTER, DOWN TWO POINTS FROM THE SECOND QUARTER, DUE MAINLY TO THE EXPOSURE DECLINE FROM UNDERWRITING ACTIONS THAT I MENTIONED EARLIER. THE COMMERCIAL RATE CHANGE WAS PLUS 8% IN THE QUARTER, COMPARABLE TO THE PRIOR QUARTER. CASUALTY RATES CONTINUE TO IMPROVE with commercial auto rates at low double-digit in the quarter, one point higher than the prior quarter. And rates for excess casualty are now double-digit, up a couple of points from last quarter. Property pricing continues to be very strong. In national accounts, rate increases in the quarter were in the mid-20s, and middle market property rate increases are at their highest levels during this hard market, at low double-digit levels. Work comp rates were a couple of points lower than the prior quarter, a continuation of the quarterly fluctuation we have seen in the pricing between slightly positive and slightly negative over the last three years. Additionally, renewal price change in the quarter remained positive as we continue to benefit from exposure increases as payrolls rise. Audit premiums continue to favorably impact growth as well. And medical trends continue to be below our long-run loss cost trend assumptions, which we have not lowered despite the favorable trends over the last several years. Commercial retention was solid at 83%, down a few points in national accounts and middle market. I am very comfortable with the rate retention decisions the underwriters are making as they focus on leveraging this hard market to write quality new business while increasingly optimizing the portfolio. The evidence of this can be seen across the commercial portfolio through the continued very strong pricing on property, as well as the rate improvement we are achieving in the casualty lines. The consistently lower catastrophe results against our 10-year average and our record underlying profitability. For international, the all-in combined ratio was 88.3%, and the underlying combined ratio was 86%. The underlying loss ratio of 57.9% is 0.7 points lower than last year, and the expense ratio was 28.1%. As I mentioned earlier, our international segment benefited from a favorable reinsurance acquisition-related catch-up adjustment AND EXCLUDING THIS BENEFIT, THE INTERNATIONAL EXPENSE RATIO WOULD BE 32.8% IN THE QUARTER. INTERNATIONAL GROWTH'S WRITTEN PREMIUM GROWTH WAS 6%, AND NET WRITTEN PREMIUM GROWTH WAS CONSISTENT WITH LAST QUARTER AT 9%. NEW BUSINESS OF $62 MILLION WAS DOWN IN THE QUARTER, BUT IN LINE WITH LAST YEAR ON A YEAR-TO-DATE BASIS. RENEWAL PRICE CHANGE WAS 7% SIMILAR TO THE PRIOR QUARTER, AND RETENTION WAS STRONG AT 84%. AS I'VE HIGHLIGHTED BEFORE, OUR INTERNATIONAL OPERATION IS CONSISTENTLY CONTRIBUTING PROFITABLE GROWTH TO CNA. AND WITH THAT, I'LL TURN IT OVER TO SCOTT.