Q4 2020 CNA Financial Corp Earnings Call

Good morning, and welcome to Cna's discussion of its 2024th quarter financial results.

Cna's fourth quarter earnings release presentation, and financial supplement were released this morning and are available via its website www CNA dot com.

Speaking today will be Dino Robusto, Cna's, Chairman and Chief Executive Officer and.

And morality CNA 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 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 release and in Cna's. Most recent S E C filings.

In addition, the forward looking statements speak only as of today Monday February the H 'twenty 'twenty one.

CNA X Ray sleep 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 and the financial supplement.

This call is being recorded and webcast.

During the next week the call and maybe 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.

And they'll say they contain transcription errors that could materially alter the intent on meaning all of the statements.

With cash I will turn the call over to see and as chairman and CEO Dino Robusto.

Thank you Marguerite good morning, everyone.

I am pleased to share our fourth quarter on results and our full year performance and what what's clearly and unprecedented year.

Importantly, our industry rose to meet the challenges and effectively deliver on our commitment.

And I'm very proud of our CNA employees will effectively serve the needs of our agents and brokers.

And as well as our Insureds and.

And have positioned us well to continue to.

And take advantage of the hardening market conditions.

Before I provide detail on the quarter.

There are a few highlights for the full year.

Core income was.

735 million or $2 70 per share and net income for the year.

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 pretax catastrophe losses.

$550 million, which included a reserve charge for the pandemic of 195 million and we announced and the second quarter of 'twenty and 'twenty.

And as compared to $179 million of catastrophe losses and 2019.

On the other hand, our P&C underlying underwriting profit for the full year increased.

Increased 38% to 498 million at the underlying combined ratio improved one seven points to 93, 1%.

It is the fourth consecutive year of improvement and the underlying combined ratio.

The improvement and the underlying combined ratio came from both the loss ratio and the expense ratio.

Our underlying loss ratio improved four eight points from 2019 I.

And I have a point that the improvement reflected the favorable claim frequency.

From the shelter and place directed.

The frequency benefit was relatively muted for us because as I said on our second quarter call on.

A substantial portion of our Insureds.

And the central industries, such as healthcare construction and manufacturing.

We're not subject to shelter and place restrictions.

And your expense ratio improved nine 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 and talent.

Technology and analytics.

Yeah ill and combined ratio was 100.9% with 7.7 points of catastrophe losses and prior period development.

Well its written premium growth ex captives grew 9% in 'twenty and 'twenty.

The impacts of 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.

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Above our long run loss golf strength.

11% of written rate and we achieved in 'twenty and 'twenty was eight points on and earned the basis for the full year.

While our long run loss cost trends were about four points.

However.

And I have said before.

We are going to continue to be prudent on how we act on any margin due to the global Pandemics disruptive impact on <unk>.

And it's gating claim strength and particular social inflation. Moreover.

And the economy has not recovered and 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 and every aspect of our business, including significant growth.

Driven by double digit rate.

And your business growth and income.

Moving to retention.

As well as and improved underlying loss ratio and expense ratio.

We also benefited from low catastrophe quarter and strong investment performance.

Core income for the quarter was a record $335 million, one dollar and 23 cents per share and increase of 70 million over the prior year fourth quarter.

The increase was largely driven by improved underlying underwriting profit.

Net income for the quarter was $387 million or $1 42 per share and more.

It's an increase of $114 million over 2019 fourth quarter.

The P&C 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 to underlying combined ratio CNA they've.

And they've had and 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 four four points to 96, 2% and international which improved three four points to 96, 9%.

Although specialty you had less favorable prior period development and then the fourth quarter a year ago. They had a very strong combined ratio of 89, 4%.

Pre tax catastrophe losses were benign at 14 million or four eight points of the combined ratio.

Our estimated ultimate losses from COVID-19 are unchanged and $195 million.

Claim activity continues to unfold slowly as we expected.

Iberia development and no impact on the combined ratio and the quarter.

The underlying loss ratio was 64 and 5% for the quarter, a 0.4 point year over year improvement and.

Consistent with Q3.

Specialty was 60%.

Commercial was 51, 1% and international was 61%.

And the fourth quarter and the expense ratio was 32%.

One seven points better than the prior year quarter.

We maintained a 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 'twenty and 'twenty one.

We expect that could drive additional improvement.

Well its written premium XR captive business grew 15% and the quarter.

With significant contributions across all operating segments.

With specialty at plus 17% and commercial life plus 14%.

International was also strong net plus 14%.

Fueled by strong rate in the quarter, and our London operation and strong rate and new business growth and our Canadian operations.

Net written premium for total P&C increased 12% and the quarter.

And the quarter, the hardening market persisted as evidenced by our continued double digit rate achievement.

12%.

While increasing our retention by three points to 85% from the third quarter.

We achieved strong right across the board with specialty at plus 13% and commercial at plus 12% and international life plus 18%.

Inhibitions and double digit rate achievement for the quarter.

We continue to implement tighter terms and conditions across our portfolio.

These improved terms and conditions as I have mentioned before.

Equally important to strong pricing.

And they improve attritional loss ratios.

Helped to prevent unintended coverage and are typically slower to be relaxed.

Market conditions start to soften.

New business growth was strong and the quarter, 17% higher.

Compared to last year's fourth quarter.

Specialty grew 23% and commercial 22%.

Well 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 on our management liability portfolio.

At a time and we can get excellent terms and conditions.

We carefully monitor pricing on new business relative to renewal policies.

And the new renewal relativity to have been stable all year across the portfolio.

Indicating rate on new business has increased commensurately, and obviously contributed to the overall growth and new business.

We are well positioned to grow and these hardening market conditions and indeed, we believe it is the best time to grow.

And then in addition to restoring pricing and use the levels and improving terms and conditions.

And the disruption from insured dislocation and a half.

And the market.

And it is broad remarketing by agents and brokers, but also fair itself tremendous high quality new business opportunities.

And we have been able to secure more on these opportunities and we.

And are leveraging all the investments we have made and the last few years.

And our specialized underwriting expertise and <unk>.

<unk> and food solutions to our customers.

Finally, we completed our annual asbestos and pollution Reserve review, which resulted in a non economic after an 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.

And it as well as our asbestos and pollution review and with that I will turn it over to al.

Thanks, Dino and good morning to everyone with Dino mentioned and I will provide more detail on our life and group results as well as our corporate segment, including expenses Environmental Reserve review.

Before I do that let me just highlight a few items related to our overall results as well as our PNC operations.

Core income for the quarter was a record at $335 million, 26% higher than the prior year quarter result.

With a core ROE of 11, 4% for the period. We are certainly pleased with the close to 2020 and it's of interest significant progress made to build upon on underlying underwriting profitability.

He has spoken about this progress with regards to our combined ratio improvement.

And 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.

And I was 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 and the efforts to reduce acquisition cost as part of our re underwriting strategy is paying dividends.

Likewise with respect to specialty and commercial with significant progress. We've made on our expense ratio reflects our ability to grow while being disciplined about our and spend and also making investment back into business.

Considering the trajectory of our net written premium and would expect that our earned premium growth will further aid our progress on the expense ratio from 2021.

Turning to net prior period 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, and especially during the quarter driven by professional and management liability.

Offset by adverse premium development on general liability within commercial.

For the full year, 'twenty and 'twenty overall development was essentially flat versus points seven 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 on because of the reserve and a.

Previously established estimate of ultimate loss remains appropriate.

And our loss estimates still virtually all in IV and are.

Finally, with regards to the P&C operations on January 1st.

Several of our reinsurance treaties renewed and maybe one thing from management liability and casualty lines of business.

E treaties renewed with more favorable terms and conditions relative to expectations given current market conditions.

Now turning to life and group.

The segment produced core income and 26, $9 and the quarter and $9 million from the full year. This compares to Q4 2019 loss of $4 million and our full year 2019 loss of $109 million.

Favorable long term care results for full year, 'twenty and 'twenty relative to 2019 reflect the lower reserve charge and the current here relative to the prior year as well as better than expected morbidity experience from 2020 and.

The effects of COVID-19.

Specifically since the onset of COVID-19 experienced slower than usual and new claim frequency and higher claim termination and more favorable claim severity with policyholders paid hometown Pedro home health care versus the use of long term care facilities.

Higher levels of claim terminations is largely being driven by an elevated level of mortality and claim and recoveries.

As referenced in the previous quarters, beginning uncertainties. These trends we've been taking a cautious approach from an income recognition perspective.

On a quarterly and we get high holding a higher level of IV and our reserves.

As well and our annual gross premium valuation review completed and 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're closely evaluating 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 from the fourth quarter and $108 million for the full year.

This compares to $68 million loss from Q4, 2019, and $102 million watch and the full year 2019.

Net loss for Q4, 'twenty and 'twenty was driven by our annual expenses Environmental reserve with you.

During the quarter.

The review included a non economic after tax charge of $39 million driven by the strengthening of reserves associated with higher defense and indemnity and cost 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 and <unk>.

And 2010 and paid losses are now at $2 $1 billion.

You will recall from previous years reviews, and while we continue to be covered under the L. P. T limit there is a timing difference with respect of recognizing the benefit of the cover relative to incurred losses as we can only do sell and proportionate to the paid losses recovered under the tree.

As such a loss recognized today will be recaptured over time, because the amortization of the deferred accounting gain and paid losses, ultimately catch up with and incurred losses.

As previously and now we've entered into a loss portfolio transfer transaction.

Scenarios, and Cerner Corporation and relating to a leg to legacy excess workers' comp reserves.

This non core portfolio has been the run off from for 10 years and the transaction enables us to strengthen our focus on going forward operation, while reducing potential future reserve volatility.

The transaction closed on February 5th.

Going forward, we report the impacts associated with this line of business.

She didn't loss portfolio transfer through the corporate segment.

Turning now to investment pre.

Pretax net investment income was $555 million and the fourth quarter compared with $545 million and the prior year quarter.

Results reflected more favorable returns from our limited partnership income and equity portfolios relative to the prior year more than offsetting the decline and net investment income from our fixed income portfolio and attributable to lower reinvestment yields.

As a point of reference pre tax effective yield on our fixed income holdings was four 4% at Q4, 'twenty and 'twenty compared to four 7% as of Q4 2019.

Pretax net investment income from the full year was $1 $9 billion compared with $2 $1 billion from the prior year.

While lower interest rates have certainly been a headwind to our net investment income and also drilling 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 driven by the tightening of credit spreads across the market.

Risk free rates have remained low.

Fixed income.

Income invested assets that support our P&C liabilities and then.

And the effective duration of four five years at quarter end.

The effective duration of the fixed income assets and support our life and group liabilities was $9 two years at quarter end.

Usual slides from our earnings presentation will provide you with additional details on the investment result, and the composition of our investment portfolio.

Our balance sheet continues to be very solid quarter.

Quarter, and shareholders' equity was $12 $7 billion or $46 82 per share reflective of the increase and our unrealized gains and shouldn't during the quarter.

Shareholders' equity excluding accumulated other comprehensive income of $11 $9 billion or $43 86 per share.

Book value per share ex Aoc I and excluding the impact of dividends paid and 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 and supportive already things.

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 $1 $1 billion from 2019, a significant increase.

Essentially driven by the improvement and our current accident year underwriting profitability and a 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 on investment and have sufficient liquidity to meet obligations and withstand significant business variability.

Finally, we are pleased to announce an increase and our regularly quarterly dividend <unk> 38 cents.

This increase reflects our confidence that we can continue to grow our underwriting profit and build upon our financial strength.

In addition, notwithstanding and extraordinary even in 'twenty and 'twenty, including the elevated impacted catastrophe on our results.

Were pleased to declare a special dividend of 75 cents per share.

With that I will turn it back to Dino.

Thank you all and summary, we had a great quarter generating record core income.

We effectively leverage the opportunities from the hardening market as we did throughout the year.

And we are confident and our ability to continue to do so as these market conditions persist in 'twenty and 'twenty, one and with that we are.

Happy to take your questions.

Thank you if you would like to ask a question on the call today piece Press Star one on your telephone keypad.

And we'll now pause for a moment to allow and we wanted to signal.

And our first question.

It comes from Gary Ransom from Dowling and partners. Please go ahead.

Yes, good morning.

On the morning.

On the rate outlook.

Do you take the fact that some of the lines are leveling out on rate increases.

But perhaps the market is starting to approach adequacy.

Or maybe right will start drifting down closer to loss trends over the next few quarters.

Just wondered if you could comment on what you see on that trajectory.

Yeah. It's.

It's a good question, Gary I think you know.

The way I see the corridor I actually see it.

Further evidence.

And.

A sustained a hardening market, we'll look at our waves at 12% overall.

Four P M C.

We also achieved double digit rate.

Three points increase and the retention. So it's three quarters of double digit rate and I think you're going to see and any one sub segments on the lines can go up and a quarter and some can even go down and some will stay flat because invariably you go on.

I have.

You know a different mix.

Accounts of profitability, which ones might need more or less weight, where you might be going after as an example, a better terms and conditions and so as you look at the quarter and where we got great. We got a strong.

Right and different areas that were higher on.

Our financial institution management liability was the highest actually and the fourth quarter.

Health care it does move.

Quarter to quarter again based on the book, but it's eight quarters right a double digit rate on the rate and I think all of the you know all of the conditions that everyone is as I've talked about the dynamics COVID-19, the low interest rate environment elevated cats, the history of rates and loss costs.

And I think this market is just is going to persist.

In 2021, albeit you might see some fluctuation quarter over quarter. If you look at January gout, and that's really we just on our activity and in and January seems.

Market persisting and so I'm not really sure when it will start to flatten out, but oh, we see a lot of opportunity and quite frankly, I think it's needed, but it's going to take some time to make up for all of the dynamics that everyone's been talking about.

And that's all like two a quarter.

So I can I can take that that your you think the market is still.

Generally has sufficient rates, there's still a need yet.

For water above life, I I do I do and I think youre going to see that persist in 'twenty and 'twenty one.

Okay.

Another question on the on.

On the overall distortions of 'twenty and 'twenty and looking at your reserves and loss picks I guess I would assume that.

Loss payments would be lower.

Cuz courts were closed and maybe there's a little bit reduced frequency and some places.

Does that mean, we ended the year with proportionately more reserves, either case or IBD and our history. If you look at the numbers or is that just the mix of reserves higher at the end of 'twenty versus 19.

Okay.

Gary I can take that this is al and.

Good morning, Yeah, I think that's fair Gary if you look at it.

Our cash flow you can see obviously your operating cash flow was up year over year and as well our paid and incurred are down and that he is a reflection, obviously of our stronger underlying profitability, but as well that we had a higher level of cats, and including Covid and some of which.

Has not been paid out so our paid are down and our particularly on cat reserves on Vida.

And when you were picking your loss picks were you just more or less.

Ignoring 'twenty 'twenty and kind of thinking about the trends from prior years or how did you. How did you build in and what you saw in 2020 and those loss picks.

Prior people are getting you know prior to the prior to the pandemic.

Youll recall and we had articulated on several calls that we had seen.

We've had we had increased some of our loss picks we had increased our.

Long run loss cluster and is actually about 100 basis points and yes.

Over the prior over the prior year, a function and all of those I had indicated social inflation and particular in areas like.

Our medical malpractice and umbrella et cetera.

And and so we go into 'twenty, and 'twenty, and and and Covid hits and as I've indicated pretty well every quarter.

At clogged up the court dockets and and.

So we just.

We acknowledge some of the benefit and we said on this call and.

The rest we just held on and stayed the course on our loss picks which are you know were elevated from from prior and and we're gonna just.

Oh hang on to that a margin that.

It's the agenda by rates over the long run loss loss trends and Phil.

Until we get a little bit more clarity I think it's gonna take still some time as I said in my prepared remarks.

Yes.

Alright, Thank you very much.

Thank you Sir.

Yeah.

And our next question comes from Josh Shanker from Bank of America. Please go ahead.

And good morning, everybody.

Oh, I'm wondering if and when you talk a little about about the dividend the math behind how the specialist calculated in conjunction with the decision to raise the quarterly.

Quarterly dividend.

What sort of.

Economic factors, where you're looking at this year's dividend versus the long run dividend.

Yeah, Thanks, Josh Zelle and.

And look I think and keeping with the approach we've articulated and kind of on capital management strategy right. We look at our net income and our intensive and less we have opportunity otherwise, they're going to maximize return to shareholders are moving.

And pay out the majority of our net income a year over year EBIT came second and historically that's been in the 90% to 95% of net income. So if you contemplate the new dividend net we declared as well as the special and they look at that relative to our net income for the year.

And not shouldn't be consistent and.

And so I think that's and that's what I'm, saying in terms of kind of our approach and nothing's really changed there.

Okay and.

And then on <unk>.

You talked about the general liability.

All reserves can you talk about what and how different user and looking at and what's the magnitude of the changes are and and developments there.

Yeah.

Oh, I didn't hear that and Josh you can either repeated or al if you heard and you want to jump in and feel free to do so.

The comments you made about the general liability reserve development I'm wondering if you can give some color about yours and magnitudes.

Sure.

So Josh that was premium development on general liability and essentially and ongoing we go through state reviews that look at a premium on it and we had some adjustments that would've gone back just the last few years and it was positive adjustments and negative adjustments the net effect was.

A $14 million adjustments and GL premium.

For those years.

Okay and can I take from that that the loss reserves throughout the business, while there'll be changes and giving us a generally unchanged from where they were a year ago and more time on the recent reserves and I am talking about long dated reserves.

Yeah no.

No material change and loss reserves for the period for Dino.

Okay. Thank you.

Yeah.

And our next question comes from Sheila.

She is from K B W. Pease go ahead.

Great. Thanks, good morning.

Do you know what if you could talk a little bit about sorry. Good morning, I was hoping to talk a little bit about.

Whether there are any changes going on and Hardy and that would impact the components of the combined ratio.

And just assuming that the Lloyd's book is more subject to change the competition there and your other segments.

Yeah.

Yeah, So as you know well we've been and.

A process over the course of 12 to 18 months of a.

Re underwriting that portfolio and.

And which you know I had indicated would be largely completed in the fourth quarter, which it was the biggest change was.

On the property side in particular, and our cat exposure and over the course of.

The life.

Four or five quarters you saw.

A lot less impact on.

And our cat results are coming out of international which used to be heavily impacted.

By the Oh Hardy portfolio, so there our goal going forward.

And Hardy is to leverage this.

Specialties that we have at CNA.

Developed here and expanding there and our lines of business.

And segments.

And like.

Our profitable.

These segments are profitable commercial segments, and it's gonna be a lot more in line.

And with what we do in the United States, but the biggest change you'll see it and it is it's in the cat exposure and and evidenced by a lot less catastrophe activity and the last six to.

Maybe seven quarters.

Okay perfect. That's exactly I was looking for and I guess.

A question for Al So we've seen and some of the limited partnerships assets I guess move to a life from P&C Covid.

That must have done and does that have any impact on your ability to raise rates on long hair long from careful.

Yeah.

Thanks for that and I am.

Yeah. So at the end of Q3 and through their reserve review for long term care and.

We decided on a.

Modest allocation to limited partnerships and as you can imagine and give them a long duration and that makes sense that was a zero sum change basically.

And across P&C and life and group and we wouldn't anticipate that's going to have any material movement on our and.

Ability to get there and.

Really it was all part and parcel to our evaluation of our discount rate and what we think we could reasonably on on our assets relative to and.

And the discount on the on the liabilities. So I don't I don't anticipate that's gonna meeting given the allocation that's going to meaningfully move anything on the rate adequacy from.

Okay, and it certainly makes sense and just finally, if you could update us on commercial auto it sounds like there were no reserve charges.

Quarter.

Does that product line and seem reasonably price.

Yeah.

So you know we have been life you know continuing.

Continuing to get a strong great Oh, all our auto and.

About the 13 points.

All right.

In the fourth quarter, and we've been doing that for a while.

And we still have a ways to go on auto.

Clearly, it's moving and it's moving in the right direction and.

And we didn't need to act on Oh on loss cost trends or loss picks in the quarter.

Okay excellent. Thank you so much.

Yeah.

Thats Star one to ask a question.

Again, we will pause for one moment to allow people to stick now.

Okay.

Yeah.

Yeah.

There are no further questions on the line at this time I went and I would like to turn the call back to the host for any additional or closing remarks.

That's great. Thank you very much for joining us and we'll see you in a quarter. Thank you.

That concludes today's conference.

Yeah.

Thank you for your participation.

You may now disconnect.

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