Q3 2022 CNA Financial Corp Earnings Call
Ladies and gentlemen, good day and welcome to the CN, a 2022 third quarter earnings Conference call. If you would like to ask a question at the conclusion of our prepared remarks. Please press star one on your telephone keypad as a reminder, today's conference is being recorded.
Like how to turn the call over to Lisa to narrow that a VP investor relations for opening remarks and introductions off today's speakers. Please go ahead.
Thank you Sarah good morning, and welcome to Cna's discussion of our third quarter 'twenty to 'twenty two 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 Dot CNA Dot com speaking today will be Dino Robusto, chairman and chief.
Officer, and Scotland Quest, 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 31st 2022, 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 those statements with that I will turn the call over to our chairman and CEO Dino Robusto. Thank you really to and good morning to all.
Before beginning my remarks on our third quarter results I would like to take a moment to acknowledge the terrible impact of hurricane Ian on so many lives and businesses.
All of us at CNA are saddened by the devastation and our thoughts are with those that lost loved ones and the communities that suffered and are working to recover.
Turning to results despite the elevated industry catastrophes, including the effects of Ian and pressure on equity markets.
They recorded impressive third quarter results.
The P&C all in combined ratio improved to 95, 8% from 100% in the third quarter of last year, and we achieved continued strong production performance.
<unk>, 9% gross written premium ex captives growth.
And 10% excluding currency fluctuations.
Our core income declined by 24 million to $213 million.
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Just indicating that our core income declined by 24 million to $213 million.
On a pre tax basis in the quarter limited partnerships and common equity returns were lower by $121 million year over year.
It was largely offset by an increase in the P&C underwriting gain of 85 million and an increase in income from our fixed income portfolio of $28 million due to an increase in yield and a higher asset base.
In the third quarter the P&C all in combined ratio of 95, 8% its 4.2 points lower year over year, reflecting a stable underlying combined ratio lower catastrophe losses and increased favorable prior period development.
Pre tax catastrophe losses were 114 million or five five points of the combined ratio.
278 million or nine two points in the prior year period.
Hurricane Ian pre tax catastrophe losses were $87 million of that total.
Our disciplined re underwriting and portfolio management strategies that we have referenced over the last several years helped mitigate our losses from yet another elevated industry Khatab cat quarter.
For P&C overall prior period development was favorable 0.8 points compared to the 0.3 points favorable in the third quarter of 2021.
Our P&C underlying combined ratio of 91, 1% continues to perform in line with record levels over the last six quarters.
The underlying loss ratio of 59.9 was lowered by three points.
To the prior year quarter and the expense ratio of 38% was in line with the third quarter of 2021, and the fifth consecutive quarter at or below 31%.
In life and group, we conducted our annual gross premium valuation analysis.
There was no unlocking of the assumptions and GAAP margin on the active life reserves was strengthened by 53 million to $125 million.
In addition, the annual claim reserve review resulted in favorable development of $30 million on a pretax basis.
Scott will have more detail on the life and group Reserve analysis.
Drilling down on P&C production overall, net written premium growth was 8% and 9% excluding currency fluctuation.
New business grew by 12% this quarter and pricing as well as overall terms and conditions remain consistent with our renewals.
Retention was 85% this quarter and is also 85% on a year to date basis, which is three points greater than our nine month results last year.
The P&C renewal premium change in the third quarter was 8%.
What the second quarter comprised of five points of rate increase and three points of exposure increase of which half acts like rate.
We are seeing stronger exposure premium from inflation sensitive lines like work comp property and general liability. So we feel good about the renewal dynamics as we continue to cover our long run loss cost trends remain stable at 6% in the third quarter.
On an earned basis for P&C overall rate in the quarter was 7% and earned rate is a little over 8%. When we include the portion of exposure change that acts like rate.
Now, let me provide a little more detail on our three business units.
The all in combined ratio for specialty was 88, 7% in the third quarter, which is now the ninth consecutive quarter below 90%.
The underlying combined ratio was 94% up <unk> eight points compared to last year.
The underlying loss ratio improved <unk> seven points to a record low 58, 4%.
We have reflected some margin improvement.
The expense ratio of 31, 7% was higher by 1.1 points largely due to higher underwriting expenses driven by investments in technology and talent.
Gross written premiums ex captives and net written premium for specialty each grew by 2% in the third quarter growth was lower this quarter due to less new business, partially from fewer ipos and M&A opportunities that impacted our D&O line and program growth as.
As well as a two point moderation in price increases.
We achieved rate increases of 5% and earned rate of 9% for the quarter.
Within specialty rates were down in management liability lines, where in particular cyber increases have come off of the almost triple digit increases we were experiencing over the last year and now are more in the mid double digit range.
Plus 6% written rate increase in the quarter management liability is keeping pace with loss cost trends and earned rates continue to be well above.
Specialty retention improved by two full points to 87% the strongest level since 2019, and particularly benefited from higher retention in our healthcare segment as our underwriting actions over the last several years and cumulative rate increases have improved the performance of the portfolio.
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Turning to commercial the all in combined ratio improved to one or one 9% from 111, 6% in the third quarter of last year with Katz, representing 10 points versus $18 six points last year.
The underlying combined ratio was a record 91, 9% and six points lower than last year.
The underlying loss ratio of 61, 5% is consistent with the prior year quarter.
The expense ratio improved by <unk> five points to 29, 9%, which is our lowest level since 2008.
Commercial gross written premium ex captives grew by 18% this quarter and the net written premium growth was 16%.
In the quarter commercial renewal premium change was 8% up one point from the second quarter.
Which includes four points of exposure and four points of rate about a half a point lower than the second quarter before rounding.
This was primarily driven by work comp where rate was down a point from the second quarter, but it's still in the low single digit negative range.
In areas, such as general liability and marine rate was up slightly compared to the second quarter and national accounts for operator remained strong in the low double digit range.
Finally earned rate in the quarter inclusive of the portion of exposure change that acts like rate is closer to 7%.
Commercial retention was 84% down from the second quarter, but remains higher than the full year 2021, as the underwriters continue to effectively balance the rate retention dynamics in this favorable market environment.
For international the all in combined ratio was 94, 4% this quarter, a one point improvement over last year.
Allying combined ratio was 93% the lowest on record, reflecting <unk> seven points of improvement from the prior year quarter.
The underlying loss ratio of 58, 6%.
Is lower by <unk> three points, reflecting some margin improvement.
The expense ratio of 31, 7% is.
It was down 4.4 points compared to last year.
On a year to date basis, the underlying combined ratio of 97 is down one eight points compared to the prior year.
International gross written premiums grew 4% and 12% excluding currency fluctuation.
Net written premiums grew 1% or 8% excluding currency fluctuation.
Renewal premium change in international was plus 12% with rate and exposure both up 6%.
Retention was also strong at 82%.
We are very pleased with our international operation as it increasingly contribute to the success of the overall company and with that I will turn it over to Scott.
Thank you Dino and good morning, everyone.
As Dino noted we are pleased with our third quarter results highlighted by a 95, 8% combined ratio with outstanding underlying fundamentals covered coupled with strong gross written premium ex captives growth of 9%.
Before providing more information on the financials I will first discuss life in groups.
As you know each year in the third quarter, we undertake our annual reserve reviews for the life and group segment.
These reviews include the annual review of assumptions underlying our long term care active life reserves.
We also referred to as the gross premium valuation or G. P V.
As well as our long term care and structured settlements claim reserves.
I would like to point you to slides 12 through 14 in 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 81 years old and the group block is 68.
While the group block is less mature and age you can see from the table on the top right of slide 12 at the benefits feature on average for the group block are considerably narrower than the features for the individual block.
As we've discussed in past calls, we have proactively reduced risk in both blocks over the years, while obtaining meaningful rate increases and using prudent a prudent approach in setting assumptions and our reserve analysis, both for active life and claim reserves.
Well I'm clear result of our efforts is the 38% reduction in policy count since 2015, which are shown on the bottom left graph on slide 12.
As we continue to file for rate increases, we also offer benefit reduction options to our policyholders as a means to mitigate the impact of rate increases.
This reduces the cost of future claims, while providing a viable option for our policyholders.
Starting with the G. P V analysis the results of which are shown on slide 13, our efforts involved a thorough review of all of our reserving assumptions, including economic morbidity persistency and rate increase assumptions. The key result is that we did not have an unlocking event.
And we have increased the margin on a GAAP carried reserves from $72 million in 2000 $21 million to $125 million at the end of the third quarter.
Economic assumptions are comprised of discount rate assumptions as well as cost of care inflation assumptions.
Our approach to setting the discount rates remain unchanged the discount rate reflects the current LTC investment portfolio yields and assumes future investment yields.
And setting the future yield assumptions, we grade to a normative risk free rate over a 10 year period.
Following the forward curve for the first three years.
Normative assumption for the 10 year Treasury rate is 275%, which is consistent with last year.
The investment portfolio actions taken in both the second and third quarter of this year, which I will speak to which I will speak more to in a few moments.
Together with the higher forward curve beneficially impacted reserve margin.
We also updated our cost of care inflation assumptions in recognition of the current elevated inflation environment.
In doing so we were guided by the PCE or personal consumption expenditures inflation index, and we increased near term inflation expectations.
It is our view that the current elevated inflation. It is temporary in nature and that over the longer term inflation will revert to more historic levels.
Viewers in this.
This view is informed by the stated objectives and the aggressive actions taken through the day chicken to date by the fed.
And is also shared by the market as evidenced by an approximate two 5% 10 year breakeven inflation rate that is published by the Federal Reserve Bank of St. Louis.
The expected average inflation rate over the next 10 years.
Overall, the changes to the economic assumptions drove margin deterioration of $130 million.
I would characterize our updates to both morbidity and persistency is relatively neutral.
From a morbidity we refined our claim frequency and severity assumptions, specifically those related to utilization rates and homecare versus facility care mix, which resulted in margin deterioration of $30 million.
With respect to persistency the key assumption change was a small refinement to a healthy life mortality.
This resulted in a margin improvement of $40 million.
Regarding future premium rate increases or actual rate achievement over the past year exceeded our assumptions and last year's analysis contributing $190 million.
The favorable margin increase.
As you May recall, our prudent approach is to include rate increases that have been approved.
Trial, but not yet approved or that we plan to file in the near term as a part of a current rate increase program.
As a result, the weighted average duration of future rate increase approvals assumed in our reserves is less than two years.
As you can see on slide 13, the cumulative impact of these changes, including a slight margin deterioration of $17 million from operating expenses.
It resulted in a reserve margin of $125 million and our carried reserves, while continuing to use a prudent reserve assumptions there.
The result was no unlocking event and we remain confident in the adequacy of these reserves.
In addition to the G. P V. We completed 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, which flows through to our bottom line was a $25 million pre tax reduction in long term care reserves.
It's driven by a $107 million favorable impact from the release of the remaining IV in our reserves established during 2020 in 2021 in response to the COVID-19 pandemic.
Really offset by an $82 million unfavorable impact.
From higher than anticipated claims severity.
<unk> utilization and cost of care inflation.
In addition, there was a $5 million pre tax reduction in the structured settlement claim reserves due to discount rate assumption changes.
Okay.
While we're on the topic of life and group I'd like to give a brief update as to the approaching change in GAAP accounting methodology related to long duration targeted improvements otherwise known as L. DTI that will apply in our long term care business.
As a reminder, we will be adopting this change effective January one 2023, but we'll play it as of January one 2021.
Two years of adjusted financial results will therefore be included in our 2023 financial statements.
The estimated impact of adopting <unk>.
We will be a $2 3 billion decrease of stockholders' equity as of the transition date of January one 2021.
Assuming September 32022 interest rates were in place on January one 2021, we estimate an immaterial transition impacts your stockholders equity.
As corporate single a rates were substantially higher at September 32022 dozen of January one 2021.
Okay.
It is important to note that under <unk>. There remains the requirement to review and update if there is a change cash flow assumptions at least annually and any such update is expected to change the pattern of earnings being recognized.
Under current accounting guidance and as I, just discussed our third quarter 2022, gross premium valuation assessment and.
Indicated a pre tax reserve margin of $125 million with no unlocking event.
However, under the new guidance the effective changes in cash flow assumptions from the Companys assessment.
It would be recorded in the company's results of operations, except for discount rate changes, which will be recorded quarterly to accumulated other comprehensive income.
Yeah.
As we have noted in prior calls I'd like to emphasize this change in accounting has no impact at all to the underlying economics of CNS business.
Okay.
Turning to slide 14, our overall life and group segment produced a core loss of $22 million in the third quarter.
Which compares to a Q3 2021 income of $41 million.
Limited partnership results for Q3, 2022 were 54 million unfavorable to the prior year quarter as well as a favorable impact from the annual LTC claims review that I just discussed.
Yeah.
Turning to investments.
Pre tax net investment income was $422 million in the third quarter compared with $513 million in the prior year quarter.
The decrease was driven by our limited partnership and common stock results, which returned a $44 million loss in the current quarter compared with $77 million gain in the prior year quarter.
The current quarter results reflect losses in our private equity limited partnerships of $36 million.
And common stock portfolios of $9 million Directionally in line with recent equity market performance.
Our hedge fund portfolio was fairly flat for the quarter.
The gain in the prior year quarter reflected particularly strong results from our private equity portfolio.
As a reminder, private equity funds, which now represents 75% of our limited partnership portfolio.
Generally report to us on a three month lag. So our results. This quarter were primarily reflective of performance from Q2 2022.
Given the continued difficult public equity markets, which had been down for three consecutive quarters, we expect pressure on private equity valuations to continue into the next quarter.
Hedge funds represent less than 25% of our limited partnership portfolio and predominantly report results on a real time basis.
You can find additional details of our limited partnership holdings and income by the private equity and hedge fund strategies on pages 10 through 14 of our financial supplement.
Okay.
Our fixed income portfolio continues to provide consistent net investment income, which has been steadily increasing over the last several quarters.
We continue to benefit from a higher invested asset base driven by continued strong P&C underwriting results.
As a point of reference our average book value has increased $1 billion from the prior year quarter.
Additionally, we are pleased to note that the average effective income yield in our P&C portfolio was three 8% in the third quarter, an increase from three 7% in the second quarter.
And three 6% in the first quarter.
The consolidated CNA portfolio yield was four 4% for the third quarter as compared to four 3% for the second and first quarters of this year, reflecting the higher P&C yields with the licensed group portfolio yield about flat in the current year current quarter as compared to the first two quarters of this year.
As of the end of the third quarter reinvestment rates were about 125 to 150 basis points above.
Above our P&C effective yield and our up even further thus far in the fourth quarter.
Life and group current reinvestment rates are about flat to our effective yield given the long duration nature of our life and group portfolio.
Okay.
Fixed income invested assets that support our P&C liabilities yen life and group liabilities had.
The effective duration of four eight years and nine eight years, respectively at quarter end.
The increase in life and group duration from eight nine to nine eight years. During the last two quarters is reflective of strategic actions taken to simultaneous simultaneously reduce reinvestment risk by selling short dated holdings projected to roll off in the near term, while also extending duration by redeploying the proceeds into <unk>.
Longer dated high quality securities at yields exceeding our long term assumptions.
In total over $2 7 billion of long dated fixed income securities were acquired in the life and group portfolio over the last two quarters with an average yield of four 9%.
And an average rating of eight plus.
Meanwhile, the $2 6 billion and mostly tax exempt securities in that period sold in that period as part of this repositioning generated $26 million of pre tax investment gains.
Okay.
While higher rates are positively impacting the outlook for investment income from a balance sheet perspective, we have continued to adversely impact our net unrealized investment position.
Which ended the quarter at $4 $1 billion loss down from a $4 $4 billion gain at the end of last year.
The investment portfolio credit quality remains strong with a weighted average rating of a with very little in credit impairments.
Accordingly, we tend to look through interest rate driven fluctuations in market values as we have the ability in general intent to hold our fixed income securities to maturity.
Notwithstanding the decrease in our net unrealized position our balance sheet.
To be very solid.
At quarter end, stockholders' equity, including <unk> was $12 $2 billion or $45 16 per share an increase of 5% from yearend adjusting for dividends.
Stockholders equity, including a OCI, which reflects our investment portfolio moving further into a net unrealized position loss during the quarter was $8 $1 billion or $29 88 per share.
We continue to maintain a conservative capital structure with a leverage ratio of 19% excluding OCI.
And our capital remains strong with financial strength ratings of a from a M. Best then a plus from Fitch, having just been affirmed during the third quarter, both with stable outlooks.
Finally, net investment losses were $85 million in the third quarter compared with net investment gains of $19 million in the prior year quarter.
The current quarter results include $41 million of after tax net losses in our fixed maturity securities portfolio, reflecting portfolio repositioning.
And a $35 million non economic loss related to the expected novation of a co insurance agreement in our life and group segment and associated funds withheld embedded derivatives.
Operating cash flow was strong once again this past quarter at $737 million.
And as a result of solid underwriting and investment cash flows.
In addition to strong operating cash flows 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 confirm our regular quarterly dividend of <unk> 40 per share, which will be payable on December <unk> to shareholders of record on November 15th.
With that I will turn it back to Dana.
Hello, we understand there were some technical difficulties for those who are joining via the webcast. So to make sure that you are all able to hear his remarks, he will repeat his opening remarks now.
Thank you Elisa and good morning, all take too.
Before beginning my remarks on our third quarter results I'd like to take a moment.
We acknowledge the terrible impact of hurricane in on so many lives and businesses.
All of us at CNA.
We are saddened by the devastation and our thoughts are with those.
Lost loved ones and the communities that suffered and are working to recover.
Turning to results despite the elevated industry catastrophes, including the effects of Ian and pressure on equity markets.
<unk> recorded impressive third quarter results.
The P&C all in combined ratio improved to 95, 8% from 100% in the third quarter of last year, and we achieved continued strong production performance, including 9% gross written premium ex captives growth and 10% excluding currency fluctuations.
Our core income declined by 24 million to $213 million.
On a pre tax basis in the quarter limited partnerships and common equity returns were lower by $121 million year over year, which was largely offset by an increase in the P&C underwriting gain of 85 million and an increase in income from fixed income portfolio of $28 million.
Due to an increase in yield and a higher asset base.
In the third quarter the P&C all in combined ratio of 95, 8%.
It's four two points lower year over year, reflecting a stable underlying combined ratio lower catastrophe losses and increased favorable prior period development.
Pre tax catastrophe losses were $114 million or five five points of the combined ratio compared to 178 million or nine two points in the prior year period.
Hurricane and pre tax catastrophe losses were $87 million of the total.
Our disciplined re underwriting and portfolio management strategies that we have referenced over the last several years helped mitigate our losses from yet another elevated industry cat quarter.
For P&C overall prior period development was favorable <unk> eight points compared to 0.3 points favorable in the third quarter of 2021.
Our P&C underlying combined ratio of 91, 1% continues to perform in line with record levels over the last six quarters.
The underlying loss ratio of 59, 9% was lower by <unk> three points compared to the prior year quarter.
And the expense ratio of 38% was in line with the third quarter of 2021, and the fifth consecutive quarter at or below 31%.
In life and group we.
Conducted our annual gross premium valuation analysis.
There was no unlocking of the assumptions in GAAP margin on the active life reserves was strengthened by $53 million to $125 million. In addition, the annual claim reserve review resulted in favorable development of $30 million on a pretax basis.
Scott went through the life and group Reserve analysis just before.
Drilling down on P&C production overall, net written premium growth was 8% and 9% excluding currency fluctuation.
Sure.
New business grew by 12% this quarter and pricing as well as overall terms and conditions remained consistent with our renewals.
Retention was 85% this quarter and it's also 85% on a year to date basis, which is three points greater than our nine month results last year.
The P&C renewal premium change in the third quarter was 8% consistent with the second quarter.
Comprised of five points of rate increase and three points of exposure increase of which half acts like rate.
We are seeing stronger exposure premium from inflation sensitive aligned like work comp proper.
Property and general liability. So we feel good about the renewal dynamics as we continued to cover our long run loss cost trends.
Which remained stable at 6% in the third quarter.
On an earned basis for P&C overall rate in the quarter was 7% and earned rate is a little over 8%. When we include the portion of exposure change that acts like rate.
Now, let me provide a little more detail on our three business units.
The all in combined ratio for specialty was 88, 7% in the third quarter.
Is now the ninth consecutive quarter below 90%.
The underlying combined ratio was 94%.
<unk> eight points compared to last year.
The underlying loss ratio improved <unk> seven points to a record low 58, 4% as.
As we have reflected some margin improvement.
The expense ratio of 31, 7% was higher by one one points largely due to higher underwriting expenses driven by investments in technology and talent.
Gross written premium ex captives and net written premium for specialty each grew by 2% in the third quarter.
Growth was lower this quarter due to less new business, partially from fewer ipos and M&A opportunities that impacted our D&O line and program growth.
As well as a two point moderation in price increases.
We achieved rate increases of 5%.
And earned rate of 9% for the quarter.
Within specialty rates were down in management liability lines, where in particular cyber increases have come off of the almost triple digit increases we experienced over the last year and now are more in the mid double digit range.
At plus 6% rate increase in the quarter management liability is keeping pace with loss cost trends and earned rates continue to be well above.
Specialty retention improved by two full points to 87% the strongest level since 2019, and particularly benefited from a higher retention in our healthcare segment as our underwriting actions over the last several years and cumulative rate increases have improved the performance of the port.
Folio.
Turning to commercial the all in combined ratio improved to 101, 9% from 111, 6% in the third quarter of last year.
With Katz, representing 10 points versus 18 six points last year.
The underlying combined ratio was a record 91, 9%.
<unk> six points lower than last year.
The underlying loss ratio of 61, 5% is consistent with the prior year quarter.
The expense ratio improved by <unk> five points to 29, 9%, which is our lowest level since 2008.
Commercial gross written premiums ex captives grew by 18% this quarter and the net written premium growth was 16%.
In the quarter commercial renewal premium change was 8% up one point from the second quarter, which includes four points of exposure and four points of rate about half a point lower than the second quarter before rounding.
This was primarily driven by work comp where rate was down a point from the second quarter, but it's still in the low single digit negative range.
In areas, such as general liability and marine rate was up slightly compared to the second quarter and national accounts property remains strong in the low double digit rate range.
Finally earned rate in the quarter inclusive of the portion of exposure change that acts like rate is closer to 7%.
Commercial retention was 84% down from the second quarter, but remains higher than the full year 2021.
Underwriters continue to effectively balance the rate retention dynamic in this favorable market environment.
For international the all in combined ratio was 94, 4% this quarter, a one point improvement over last year.
The underlying combined ratio was 93% the lowest on record, reflecting <unk> seven points of improvement from the prior year quarter.
Underlying loss ratio of $58 eight.
58, 6% is lower by <unk> three points, reflecting some margin improvement.
The expense ratio of 31, 7% is down four points compared to last year.
On a year to date basis, the underlying combined ratio of 97 is down one eight points compared.
Compared to the prior year.
International gross written premiums grew 4% and 12% excluding currency fluctuation.
Net written premiums grew 1% or 8% excluding currency fluctuation.
Renewal premium change in international was plus 12% with rate and exposure both up 6%.
Retention was also strong at 82%.
We are very pleased with our international operation as it increasingly contributes.
Does the success of the overall company.
So to recap in the face of continued disruption in the equity markets and another quarter of elevated catastrophes for the industry.
We are very pleased with our third quarter performance. We are confident that all the work we have done over the past. Several years has resulted in a high performing core underlying portfolio. In addition, our disciplined cash management continues to meaningfully improve.
Our all in P&C performance, which is evident in our third quarter results.
Renewal premium change was stable at 8% as exposure growth continues to increase benefiting from lines of business with inflation sensitive rating basis.
And we think we will see a new level of price hardening in the property lines based on early commentary from the reinsurers going into 2023.
We believe these dynamics will allow us to continue to cover our loss cost trends all else being equal and to offer additional new business opportunities.
Finally, as reflected in our third quarter results, we can already see the effect of the higher interest rate environment and our fixed income investment results.
And we expect this to be a meaningful tailwind for us going forward in 2023.
And with that we'll be happy to take your questions.
Just before taking questions I would like to repeat that 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.
Our recent SEC filings. In addition to the forward looking statement. In addition, the forward looking statements speak only as of today Monday October 31st 2022, 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 pre.
<unk> 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 statements now ill.
Be happy to take your questions.
As a reminder, if you would like to ask a question or make a contribution on todays call. Please press star one on your telephone keypad.
Withdraw your question. Please press star two please ensure your lines are on mute locally.
We'll be advised when to ask your question.
The first question comes from the line of Josh Shanker from Bank of America. Please go ahead.
Well I like the second time better for what it's worth.
Thank you Josh greatly appreciate it yeah. So.
In terms of the thinking about the upcoming year of our renewables and whatnot can you talk a little about your net cash.
Cat exposure versus your gross cat exposure and how a pricing of reinsurance changes might affect your you've been a great cap manager for a number of years and is that because you're successful buyer of reinsurance or that's because you're successful.
Risk manager on what versus coming out of the book on a gross basis.
So I'd make a couple of observations Josh.
Not going to go through the gross to net I mean, we got some benefit from our quota share relative to hurricane Ian until we benefited from from some of that but but as we have highlighted in the past. We've also done a considerable amount of work on our Cat management strategy. We started off if you recall.
Paul with our syndicate Hardy that was principally a cat.
Syndicate, both on primary and reinsurance and and whenever we would have.
A large U S events, you would see a considerable contribution.
From the Syndicate, which you clearly did not see we also.
Over the course of the last roughly 18 months.
Had exited from our property exposures on our aging services portfolio because that had a heavy coastal.
Footprint and one that we just didn't think we could get the right.
Returns on based on the terms and conditions that were out there so.
Honestly I think it is a function of a lot of the discipline and and we did get a little bit of benefit from our quota share treaty now.
Our our property treaties renew.
The one.
So we'll see how the one ones play out.
But what I would say is that based on the discipline I think it's fair to say that we and our reinsurers did well from a property standpoint, and we expect that to be reflected in how they treat our renewal.
Okay, and then I mean, I'm not asking for a forecast for CN.
CNA in particular, but do you expect one year from today given all the pressures in the market that are ultimately we're talking about a reacceleration of pricing from the current position.
Position, we're in right now or that the rate of rate increases will hold somewhat steady.
Okay.
I can only go by what Youre hearing also Josh right from the reinsurers and clearly it would appear that we will see.
Oh.
Some additional acceleration on the property lines.
It's difficult.
<unk>.
You know to know how that effects.
The other lines I guess.
Intuitive argument that that that sense.
They may take a much more broad brush approach as they attempt to mitigate the fix from the elevated cat activity over the last five plus years.
But.
I don't know, we'll just have to wait and see how that plays out, but but I think it's fair to assume.
Youll see an acceleration on the property side.
And.
In terms of.
The positioning of the company.
<unk>.
Theres admitted and Theres non admitted paper. This regulation, we think about the specialty book I assume almost everything is in a non admitted sort of way that you can price. What you think is an attractive price immediately is there any lag on you're getting pricing through the commercial book too.
Mitigate higher reinsurance costs.
So just just to clarify so some of our professional liability programs clearly R&D.
Our surplus lines and we've and we've also.
Again begin to expand in E&S sort of from a more traditional property and casualty, but still relatively.
Modest.
Volume and I think like you've seen over the course of.
The hard market, we should be able to take advantage of.
<unk> of what might be some additional <unk>.
Acceleration in pricing through the course of the year.
Okay. Thanks for the answers.
Thanks, Josh.
The next question.
<unk> comes from the line of Gary Ransom from Dowling and partners. Please go ahead.
Yes.
Yes, good morning.
I.
I wanted to ask about.
On the investment income, our new money rate and how that is likely to flow forward and just helping us with our models is there anything unusual about how the portfolio is rolling over because it's kind of a uniform roll or is there more is it is it a barbell sort or anything.
We should be considering when we in this 150 basis point increase that you're talking about.
Hey, Gary It's Scott. Thanks for the question. So as I said in my remarks on the P&C side, New money is about 125 to 150 basis points higher than book yield it's actually higher now as we sit here today.
End of October and its about flat with license group. So I think the best thing I could point Ya Chu as really the average duration of our portfolio of the P&C is four eight.
Right now life and group is considerably longer.
In the high <unk> right now so that's going to be a much longer term in that portfolio relative to the P&C I don't really have anything to point you to any particular lumpiness or bar Bell nature of our our cash flows I think that's probably the best guidance I could give you right now is just looking at the durations.
Okay. Thank you.
You also mentioned about the expense ratio in specialty going up and I wanted to.
You did mention in the prepared remarks, a little bit of what's out of but.
Can you give us a little more color about what technology, and what what kind of talent.
Talent, you're adding there or if there's particular areas where that you're targeting.
Sure Gary It's Scott again, so I would say really and we've been talking about this for a while we've been making substantial investments in technology, not only overall infrastructure, but specific technology that enhances our ability to underwrite profitable profitable our business, particularly in the specialty area.
And to serve our customers.
Significant investment in the analytic side.
Really getting a lot more granular analytical data around supporting our underwriting decisions and then talent, we've been very successful and aggressive in the marketplace.
Attracting and retaining our underwriting talent and that's certainly playing out and what youre seeing in the specialty expense ratio.
And Thats why Gary just to add on Scott's point, which is why we have said because we are going to continue to make these investments and I think investment is really the way to take a look at it is that you know probably in and around 31% is a fair sort of run rate on the expense ratio and presuming we made the right investments it'll it'll pay.
For us going forward is I think it has over the last several years, what our expense ratio coming down.
Yes.
Alright. Thank you and then I do want to ask of the bigger picture inflation question too and we've had this.
Call it unexpected inflation for over a year.
And it seems to be hitting different things at different times and I wanted to focus in on the medical trends that might have an impact on liability lines, where there seems to be somewhat more of a wagon and perhaps there is a risk that those costs might trend higher.
And I know everyone thinks rate is ahead of loss trend, but that might not be true in all cases, and I. Just wondered if there are areas or lines, where you think there is a little bit greater risk that the loss cost trends might.
Accelerate further.
I mean.
Gary when we when we look at I mean, you clearly youll see the medical CPI and that.
Is is is up but I think we need to be a little careful and I believe I mentioned that at length also last quarter right. It's not really a great proxy for severity trends in particular relative to comp but for other areas. So we pay attention to the sub components.
Physicians Hospital services.
Been up.
Less than the overall.
CPI and and.
I think the reforms also when you look at comp in terms of the fee schedules that also has dampened volatility, giving you a little bit more predictability. So look I mean, I think it's clearly something we'll watch and and.
We have acted quite proactively on all forms of inflationary pressures in the possible social and economic and as we watch it closely we would act if it starts to escalate more than the <unk>.
Components that impacted our portfolio than that then we'll lap that but for now.
Still relatively.
Benign.
Yeah, I guess I'm, just thinking about how the.
You talked about acceleration of rate potential for property.
That could be there could be some other forces that might cause some acceleration in rate and casually.
I wondered if you're thinking about that as well.
Well like we said about social inflation right at it.
About 6% in our book, but it has doubled as I've indicated before.
Over the last three years.
Covid, probably only office gated the dynamics, probably still some lingering obfuscation or dockets not all fully back. So there's always a potential that it can increase it is the driving force behind our decision to be prudent.
And not.
Taken down.
Taking the margin.
From the earned rates being above loss cost trend so.
We're probably not far apart.
You went off.
Okay.
Thank you very much.
Thanks, Gary.
The next question comes from the line of Mayor Shields from K B W. Please go ahead.
Thanks Dino.
I guess a follow up on Jonathan's question I, just want to understand sort of bottom line.
What's your appetite for exposure I'm.
I'm, sorry, expanding its exposure in catastrophe exposed property.
As you expect and I expect pricing improved fairly significantly.
Okay.
Unfortunately, I didn't get that so one of you here.
Okay.
Sure.
Please repeat it.
Right more than just repeating yes can you repeat it.
We're just sort of trying to we all sort of strained over and I apologize.
No.
Okay.
I am happy to al.
Im just trying to understand bottom line, if we see significant rate increases in catastrophe exposed property.
How does what's <unk> appetite for actually growing exposure there obviously Tom.
Positive did you read a lot more.
Oh I see I see okay. Thank you my apologize for making you repeat that.
You might recall back in the.
The second quarter of.
2021.
Old you that property was about little less than 20% of our portfolio and we thought that we felt it was an opportunity to increase it in a smart way when we also had perched.
Purchased our quota share.
Now interestingly the proportion today Meyer is still about the same at 20% and that's really because.
During that time as I mentioned.
To Josh <unk> question.
We exited.
Our entire aging services property.
It's supposed to have a lot of coastal exposure, but since it's at roughly the same percent. What we did is essentially you know made some very smart trades and replaced it with property, where the terms and conditions offered a much better.
Risk return trade off and so we're going to continue to make those decisions.
Decisions and still believe as we did in 2021 that there is some room given the size of its contribution to the overall book.
But there is some opportunity for us.
To grow the property portfolio.
Okay fantastic. Thank you.
Question for Scott I'm, just trying to.
Put together the various pieces.
For rate filings in long term care, so you've got higher interest rates and higher inflation.
How does that impact.
Regulatory responsiveness to filed rate increases.
Yeah.
Thanks, Pierre well listen as I said in my in my remarks, we obviously addressed both in our latest <unk>.
And what we're seeing and that will obviously flow through our rate indications as we filed with the respective departments of insurance.
I would remark that we've been we've been fairly successful and in our filings we have actually over achieved our expectations in the past year and we find that generally speaking exceptions will apply but generally speaking our regulators who have been dealing with have been have been receptive.
With what we've been presenting for rate increases.
Okay.
The reason I'm asking is G. P. V doesn't include sort of long term expected rate increases.
And it seems that hasnt changed.
So if I understand you correctly, you're saying, they're just going forward youre not seeing any.
Increasing friction.
I am sorry, increasing what friction friction no not really not at all and so just to remind you. Our assumption is conservative the weighted average duration of rate increases. We've included is under two years thats consistent with past year. So I would characterize that assumption is prudent and conservative.
Okay perfect. Thank you so much.
Awesome.
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