Q2 2023 CNA Financial Corporation Earnings Call
Ladies and gentlemen, good day and welcome to the Cna's second quarter 2023 earnings Conference call.
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I would now like to turn the call over to Randy to turn over a V. P of Investor Relations for opening remarks, and introduction of today's speakers. Please go ahead.
Thank you Rocco good morning, and welcome to Cna's discussion of our second quarter 2023 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 at Www Dot C N a dotcom.
Making today will be Dino Robusto, Chairman and Chief Executive Officer, and Scott Linquist, Chief Financial Officer. Following their prepared remarks, we will open the line for questions today's.
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, before it.
Statements speak only as of today Monday July 31st 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 is 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, all in the second quarter CNA. Once again produced very strong results with excellent profitability and double digit topline growth from continued strong renewal change retention and new business success.
Core income increased by 34% in the second quarter compared to last year with net investment income up 33% with strong income growth in our alternatives portfolio.
Tenured tailwind in our fixed income portfolio, Scott will provide more detail on investments.
The P&C all in combined ratio was strong at 93, 8%.
With pretax catastrophe losses of 68 million or three one points of the combined ratio.
In 0.4 points of favorable prior period development.
The underlying combined ratio was 91.1% generating a record 200 million of pretax P&C underlying underwriting gain.
The underlying loss ratio was 59, 9% slight.
Slightly less than the same period last year.
The expense ratio was 39%.
Four tenths of a point compared to last year, primarily due to higher pension expense.
In the quarter, we achieved very strong production performance with 12% growth in gross written premiums ex captives and 9% growth in net written premium.
Excluding currency fluctuation.
Gross growth was 12% and net growth was 10% led by our commercial and international segments. This quarter.
Renewal premium change was stable at 7%, but accelerated two points in commercial to 11%.
Importantly, <unk>.
Great change in the portion of exposure change that acts like rate.
Didn't use to cover our long run loss cost trends, which were unchanged this quarter at roughly six and a half per cent.
New business was up 11% in the quarter in.
In line with the growth in the first quarter and with the most significant opportunity is continuing to be across our commercial business units.
We continue to closely track the strength of our pricing on new and renewal business.
And that has remained consistent as have the stronger terms and conditions to cheap.
During the hard market years.
We continue to lock in the hard market improvements in pricing and terms and conditions.
With consistently high retention levels.
Which in the second quarter for P&C overall was 86%.
And it has been at that level for five straight quarters.
Turning to our three business units.
All in combined ratio.
Was 99% for specialty this quarter.
Which includes 0.3 points of favorable prior period development.
The underlying combined ratio was 91, 2%.
With an underlying loss ratio of 58.6% would.
Which is stable compared to last year.
Well the expense ratio in specialty was up by two points to 32, 4%.
The increase in the expense ratio is.
It's partially due to the lower net earned premium growth than as usual Scott will provide more detail on expenses.
Gross written premiums ex captives gross and net written premium growth for specialty.
Were each down minus 1% this quarter.
New business was down 9%.
Well most of the decrease was driven by the protracted decline in M&A opportunities affecting our transaction liability book.
We are also being prudent in management liability lines, given the competitive landscape.
Within specialty written rate change was minus 1% in the quarter driven by continued competitive pressure on management liability lines.
Where the rate decrease was 9% compared to flat pricing at the end of last year.
Cumulative rate movement across these lines since mid 2018 through the hard market years.
And inclusive of the declines in the first half of 2023 is plus 61%, which continues to favorably impact the overall strong profitability of the portfolio.
And the other specialty segments rate increases persist.
Our affinity programs have much less pricing volatility over time.
Continue to produce stable rate increases in the low to mid single digits.
Our health care business has undergone tremendous re underwriting in addition to significant improvement in pricing as well as terms and conditions that we pushed through the portfolio.
Over the last five years.
We highlighted these changes quite regularly on prior calls and pointed out that our health care portfolio is now smaller but profitable.
Of course, we remain vigilant and pursuing additional rate increases and in the second quarter rates were up mid single digits for health care.
Retention in specialty remains strong improving by one point to 89% in the aggregate and it's up in each of the three business areas.
Turning to commercial.
The all in combined ratio was 96, 3%, which includes 5.2 points of cat loss in the second quarter.
The underlying combined ratio was 91, 6%.
Four points lower than last year and the lowest on record.
The underlying loss ratio of 61, 5% with stable year over year.
The expense ratio improved to four tenths of a point.
The 29, 6% in the quarter.
Representing the lowest quarterly expense ratio in 15 years.
Gross written premium ex captives grew by 21% this quarter and net written premium grew by 17% this quarter.
Renewal premium change was 11% in the quarter up two points from the first quarter.
And it's close to the hard market high of 12% we achieved in early 2021 excluding.
Excluding work comp the renewal premium change was plus 13% in the second quarter actually similar to the high watermark, we achieved early 2021.
The commercial written rate change in the second quarter of plus 8% continues to accelerate and reflects double the level. It was in the third quarter of last year.
Commercial rate increases excluding work comp were up plus 10% in the second quarter.
Fortunately.
The increase in the rate change was broad based across business units and lines of business.
In middle market.
Rate was plus 6% and renewal premium change was plus 8%.
Each up two points from last quarter.
Construction rate was plus 6%.
Up a point from last quarter and renewal premium change was plus 10%.
And national accounts.
Rate was plus 20 per cent compared to plus 17% last quarter.
Looking by line commercial auto rates were low double digit in the quarter.
Two points higher than the last quarter.
Rates for excess casualty I've also accelerated over the past year and are now high single digits.
Primary liability rates are up in the mid single digits also representing an increase.
From last quarter.
We believe it is rational that rate in casualty lines inflected.
And continue to increase since bottoming out in the third quarter of 2022.
Because as we have said social inflation had only been obfuscated during the pandemic.
Although loss cost trends remained essentially stable in the second quarter.
It is an annual compounding cost.
And it's appropriate that rates increase for longer.
Work comp rates continue to be flat to slightly negative, but renewal price change remains quite strong about mid single digit.
As we are benefiting from exposure increases as payrolls rise 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.
Property continued to achieve significant rate increases this quarter.
And our national accounts area property rates are up in the 25% to 30% range.
In addition, we continue to achieve increases in valuation averaging mid single digit and non rate terms and conditions also remained strong.
And on the middle market space property rates are now low double digits up four points from last quarter.
We continue to see insurance to value increases here as well.
We renewed all of our property reinsurance treaties June 1st.
We were successful in maintaining all coverages and covered perils in all our treaties and layers.
There were very minimal increases in attachment points.
On our corporate Cat Treaty, the attachment increased a little less than $50 million, but remains still lower than the 250 million it had been historically.
Well costs increase overall as anticipated the increases were in line with our good performance and prudent management of our cat exposure over the last several years.
And with a very favorable price and valuation increases we expect to continue to achieve across our property portfolio.
We don't anticipate margins to be impacted.
Commercial retention.
Maine's strong that 85% and was strong in all business units.
New business was up 23% with excellent opportunities are spread across all our commercial business units.
We have been effectively leveraging the favorable property market conditions and growing our property portfolio.
Significantly increasing our P M L.
Well, we are writing cat and non cat property New business. We are also optimizing our renewal book by changing layers, then exposures leading to a better risk adjusted returns than we had at expiry on certain renewals.
And we're also letting accounts go where we can't achieve the improved pricing and terms and conditions available today.
We also saw some great opportunities indeed in the E&S channel for National accounts.
So it's still a relatively small portfolio, but providing excellent opportunities.
For international the all in combined ratio was 92, 2% and the underlying combined ratio was 89.1% a record low.
International had a strong top line growth this quarter with gross written premiums up 10% or 12% excluding currency fluctuation.
Net written premiums grew 9% or 10% excluding currency fluctuation.
Renewal premium change was 7% with written rate change of 4% consistent with last quarter we.
We see many analogous trends to the U S in our continental European in London portfolios with continuing hardening of property rates and rate decreases on management liability classes.
Retention was strong and international at 83% for the quarter and has been stable at this higher level for more than a year.
New business was up by 5% in the quarter.
Our international Operation continues to contribute it.
Contribute positive top and bottom line results. This DNA.
And with that I'll turn it over to Scott.
Thank you Dino and good morning, everyone.
I will provide some additional information on our results as Gino indicated core.
Core income of $308 million was up 34% compared to the second quarter of last year.
Leading to a core return on equity of 10, 2%, while our P&C segment had record pre tax underlying underwriting income of $200 million in core income of $374 million.
Our second quarter P&C expense ratio was 39%, which is a slight increase when compared to last year's second quarter expense ratio of 35% due to higher legacy U S pension plan expense, reflecting financial market conditions at the time of valuation in late 2022.
At the segment level, both commercial and international saw improvements in their expense ratio as compared to prior.
Primarily driven by strong growth in net earned premium.
For specialty.
Oh, just noted the expense ratio increased due to lower net earned premium growth higher employee related cost, including higher pension expense.
As well as higher acquisition expense, partially due to mix of business in the quarter.
As I have noted in prior calls there will be a certain amount of variability quarter to quarter. However, we continue to believe in expense ratio of 31% is a reasonable run rate for 2023.
Yeah.
The P&C net prior period development impact on the combined ratio was favorable by 0.4 points.
In the specialty segment favorable development was driven by surety and then the commercial segment favorable development in Workers' compensation was partially offset by unfavorable development in general liability and auto.
The P&C paid to incurred ratio was 0.83 in the second quarter, which is about flat with the first quarter of this year and is broadly consistent with the second quarter of 2022.
The ratio, which fluctuates quarter to quarter has been consistently lower over the past three years.
Our corporate segment produced a core loss of $46 million in the second quarter.
Compared to a $78 million loss in the prior year quarter.
We conduct a comprehensive review of mass tort reserves in the second quarter of each year.
And we also react to facts and circumstances in the interim quarters.
As a result of this quarter's review the segment includes a $28 million after tax charge related to unfavorable prior period development largely associated with legacy mass tort claims.
As a reminder, our asbestos and environmental reserves are reviewed every fourth quarter.
Right.
As to life and group second quarter results, we had a core loss of $20 million as compared to a 9 million dollar core loss for last year's second quarter.
Investment income was up $28 million pre tax compared to the prior year, mostly driven by limited partnership performance, while the underwriting loss reflects a $13 million pre tax loss related to the impact of $67 million of cash policy buyouts during the quarter.
For year to date license group core loss was $23 million compared to a core loss of $4 million in the prior year to date period.
Year to date life and group results reflect $30 million and higher pre tax investment income as well as a $26 million pretax loss related to $121 million of cash policy buyouts.
Excluding policy buyouts life and group year to date underwriting results are broadly in line with reserve expectations.
As I noted last quarter as an integral component of our risk mitigation strategy. We expect to continue offering policy buyouts as part of approved rate increases for.
For the rest of 2023 and future years.
GAAP losses are expected on the buyout program given the cash offers are linked to higher statutory reserve levels.
In the near term, we expect policy buyouts could generate quarterly GAAP losses up to $10 million pretax does.
Depending on the respective policy or cohort and the actual acceptance rates of such offers.
Looking to future years, we expect such buyouts will continue to impact underwriting results with a certain amount of variability quarter to quarter.
Okay.
Also as I noted last quarter, our LTC business is now accounted for under L. T. G I.
Which we adopted as of January one 2023, and prior period results were adjusted to reflect L. D. G I.
A reminder, that L. D. G. I has no effect on the underlying economics of Cna's business.
However, we expect a modestly higher underwriting loss under L. D. G. I over the next several years as compared to legacy gap, putting aside any assumption changes arising from our annual third quarter assumption review.
You can find a reconciliation of our 2022 quarterly results adjusted for L. D. G I.
As reconciled to legacy gap in our first quarter financial supplement as well as our first quarter Form 10-Q.
Yeah.
Turning to investments.
Total pre tax net investment income increased 33% to $575 million in the second quarter.
The increase was driven by our limited partnership and common stock portfolios, which returned $68 million, which returned $868 million gain in the second quarter compared to a 15 million dollar loss in the prior year quarter.
The second quarter gain reflects positive contributions across strategies.
And a favorable equity market environment, while the prior year quarter includes losses from our hedge fund and common stock portfolios and were in line with unfavorable equity market performance at that time.
Italy, our fixed income and the other investments portfolios were $60 million favorable to the prior year quarter.
Our fixed income portfolio continues to produce consistent income, which has been steadily increasing over the last year as well as a result of favorable reinvestment rates.
In our P&C portfolios as well as a growing investment base funded by strong cash flow from operations.
Within our P&C and corporate segment portfolios.
Average effective income yield was four 2% in the second quarter.
Compared to 4.0% in the first quarter of this year and three 7% in the prior year quarter.
As of the end of the second quarter of reinvestment rates were well above our P&C effective income yield.
Our life and group portfolio effective income yield was five 5% in the second quarter.
Compared to five 4% in the prior year quarter anymore.
The more modest increase as this portfolio is longer duration and that's embedded yields more comparable to today's interest rate environment.
Additionally, within the other category of net investment income, which includes interest income on short term investments and cash.
We are benefiting from significantly higher short term rates as compared to a year ago.
We believe our investment portfolio to be both high quality and well diversified.
Our fixed income portfolio, which makes up 88% of our total investments has a weighted average credit rating of a.
And it's made up of 96% investment grade Securities.
While we maintain an allocation of risk assets, including limited partnerships common stocks and below investment grade securities.
We believe it is positioned conservatively and well within our risk appetite.
Additionally, we maintain ample liquidity to meet obligations and withstand significant business variability at both the holding in operating company levels.
[laughter].
At quarter end, our balance sheet continues to be very solid with stockholders equity, excluding a OCI of $12 $2 billion or $44.86 per share.
An increase of 5% from year end 2022 adjusting for dividends.
Stockholders equity, including a OCI was $8 $7 billion or $32.22 per share.
We continue to maintain a conservative capital structure with a low leverage ratio and a well balanced debt maturity schedule.
During the second quarter, we successfully issued $400 million of senior notes to help position US ahead of upcoming debt maturities in November 2023.
In May 2024.
Cash flow from operations was $501 million for the second quarter, which is down $608 million from last year's second quarter.
The decrease in the second quarter is primarily attributable to the aforementioned long term care policy buyouts.
Otherwise cash flow from P&C underwriting activities and fixed income investments remains very strong reflecting continued excellent underwriting and fixed income results respectively.
Turning to taxes, the effective tax rate on core income was 21, 6%.
And it reflects several adjustments related to state tax audits and our foreign operations as well as lower tax exempt investment income as compared to prior periods.
Looking forward, we continue looking forward, we expect our full year 2023 effective tax rate to be about 21% with a certain amount of variability quarter to quarter.
Finally, we are pleased to announce our regular quarterly dividend of 42 cents per share to be paid on August 31, 2023 to shareholders of record on August 14th 2023.
And with that I will turn it back to Dino.
Thanks, Scott to recap.
We had an excellent quarter with strong top and bottom line performance and significant improvement in net investment income.
The pricing cycle continues to be varied by line, reflecting the unique dynamics impacting loss cost trends.
The rate decreases in management liability.
It is consistent with prior underwriting cycles post very large spikes during the hard market years.
And the firming in all commercial lines ex work comp is a reflection of the market need for further rate increases for longer.
Due to the elevated cats in the compounding impact of economic and social inflation.
It's improved the commercial pricing continues to flow through to our new business writings.
And with our major reinsurance treaty renewals complete with no substantial changes in protection.
We feel confident about our ability to continue to leverage those segments and lines of business with the most favorable overall terms and conditions in the second half of the year.
And to do so while covering our long run loss cost trends.
That we will be happy to take your questions.
Thank you well now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
We were using a speaker phone.
I'll just pick up your handset before pressing the keys.
If at any time your question has been addressed and he would like to withdraw your question. Please press Star then two.
Today's first question comes from Mayor Shields.
Please go ahead.
Good morning, I was hoping to spend a little time on a couple of lines of business within specialty for.
I guess I was a little surprised that as rate increases accelerated in our financial institutions and management liability I'm sure that you know, but we saw a sequential uptick in retention with when sort of the opposite direction it'll be you could talk us through that.
Yeah, my or how he thinks it's a it's Dino are again this is a a very profitable portfolio and as I indicated you know even if you account for it.
The increase in in in loss cost trends you know the rates.
Today are still above a pretty hard market and so.
We feel good about the portfolio and we obviously wanted to lock in a good strong terms and conditions on our renewal book as I said I don't think.
I think it's very inconsistent in some of the rate decreases given some of the large increases you've seen over the hard market. So I think in general all of the underwriters are doing a good job at balancing rate and retention are in the management liability lines and we still feel very calm.
First of all with the portfolio.
Okay Fair enough second question on medical malpractice, I guess I'm surprised that that line rate increases are decelerating.
Just based on how some competitors are doing can.
Can you give us any insight into the specific book.
Yeah, I think you hit the nail on the head Cna's book.
Today Meyer is unique because of as I alluded to in my prepared remarks, it's been a five year process of Remediated. This portfolio its been a tremendous amount of our re underwriting the book is considerably smaller.
We've gotten substantial cumulative rate increases we started oh considerably before.
The broader market and if you recall Meyer during those years, our retention had plummeted.
In the low Sixty's, a reflection of the fact that we were clearly swimming upstream in pursuit of the rate increases, but today you know we find ourselves with a smaller portfolio. It's profitable it's the segments of middle of medical Mal.
That are typically more profitable I think some of the rates reflect that but make no mistake about it you know we're going to continue.
To push for rates and continue to work on all of the underwriting strategies that we've had over the last five years and I think it's fair.
They considered the CNA portfolio today is somewhat unique.
Okay perfect. Thank you so much.
Thanks.
And as a reminder, if you'd like to ask a question. Please press Star then one at this time, we will pause momentarily to assemble our roster.
Okay.
And it appears our next question is a follow up from Meyer Shields. Please go ahead.
One of the things I was hoping to ask about and I apologize if I missed this but we saw the the P&C and life group durations contract in the quarter and again that was a little bit surprising.
And I'm, hoping that we could talk to that.
Sure Meyer Hey, it's Scott here. Thanks for the question. So I would say, there's nothing dramatic at all changed within the portfolio either the portfolio. So it's gonna be a certain amount of variability.
Based on just where interest rates are at quarter end, but I have you you, we're probably carrying a little bit more cash in P&C right now than we were at.
At the last quarter, and that's probably the only thing I would flag for you on that other than that no no real significant or material change at all.
Portfolio composition.
Okay, Perfect and then I know the starting point is different from a lot of the carriers. So thank you yep.
Sure.
Thank you and our next question today comes from kind of a bar.
Partners. Please go ahead.
Thanks, Good morning, I, just wanted to talk a little bit about the property growth.
Gave some some good commentary on the in the opening remarks from a rate perspective, but I was wondering if we could maybe dive a little bit deeper into what are the sort of the makeup of that portfolio, where you're seeing the best opportunity across national accounts in middle market.
Yeah. So I think you know we're seeing it both in national accounts, and and middle market, but obviously in the national accounts space.
Ah you're seeing a lot more rate increases larger schedules. We're also seeing.
A larger valuation increases were also some opportunities in the E N S C.
Face, which we started about a year ago until where we're seeing some good opportunities there it's all within.
Our target market nothing has really changed in what we go after but obviously.
Both in the shared and layered in ground up there's a plenty of opportunity and and capacity needs and so as I indicated you know, we're we're growing the portfolio, but also we continue to optimize it.
As we are.
Get better terms and conditions are even at renewal today than we did a year ago before the market really hard and done a gen. One.
Great. Thanks, and then just another question on loss cost trends.
Imagine there they were relatively stable you'd mentioned overall loss trend relatively stable at six 5%, but we've heard some some varying trends within the medical side. So far during the reporting season curious what you're what you're seeing there in terms of medical cost inflation.
You know when you look at our our work Com Kyle you know medical costs are up.
You know and and you gotta be you gotta be specific you've got to really look at the components of medical costs. When you look at CPI that really impact us.
Work comp like for example, physician services, so, but even with them being up somewhat they are still well below our baked in assumptions, which we have never lowered our notwithstanding the benign trends for many years, so still a very good.
And we feel very good about the portfolio.
And it's very profitable.
Perfect and then just one more for me and you know we've.
We started to see some more headlines on you know whether it's a forever chemicals or you know the word wiring just sort of Oh.
The increase in weight and liability concerns I know you've got the the reserve cover in place for for A&D, but maybe just from a high level curious how you're thinking about those sorts of exposures. What are the things that we should be we should be focused on as we as we think through what the impact for the industry could be.
Kyle you know is as Scott mentioned right. We we do a ground up a mass tort review in the second quarter and then as you also indicated and if there's anything specific that might transpire during the year like Oh.
Abuse cases, then you know we'll act during the quarter and and.
No. We meant we look at all of those things and Ah, we try to capture in our reserves and mass toward the information that we have it's obviously evolving its going to take time to evolve and we'll continue to incorporate the information.
As it develops there's not much else, we can say at this particular juncture.
Yeah.
Understood Thanks very much.
Thank you. Thank you. This concludes our question and answer session I would like to turn the conference back over to Dino Robusto for any closing remarks.
Well, thank you everyone and what shut again with you.
Next quarter. Thank you.
You Sir This concludes today's conference call. Thank you all for attending today's presentation.
That's your lines and have a wonderful day.