Q1 2024 CNA Financial Corp Earnings Call
Ladies and gentlemen, good day and welcome to D. C N a first quarter 'twenty 'twenty four earnings conference call.
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Speaker Change: At this time I'd like to turn the call over to really to tell the robo VP of Investor Relations and rating agencies for opening remarks and introduction of today's speakers. Please go ahead.
Reilly: Thank you Jamie good morning, and welcome to Cna's discussion of our first quarter 2024 financial results. Our first 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 C N a dotcom.
Reilly: Speaking 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 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.
Reilly: Really from the statements made during the call.
Reilly: 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 May six 2024.
Reilly: CNA expressly disclaims any obligation to update or revise any forward looking statements made during this call rigor.
Reilly: Regarding the 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.
Reilly: 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 with that I will turn the call over to our chairman and CEO Dino Robusto.
Thank you Rohit and good morning, all in the first quarter, we produced very strong results with excellent profitability.
Reilly: Your investment income robust top line growth and accelerating rate achievement in our commercial casualty lines as well as strong retention in all segments.
Dino Ennio Robusto: Core income increased by 30 million in the first quarter to 355 million, our highest first quarter core income on record.
Dino Ennio Robusto: The last two quarters have produced the largest volume of core income on record for our organization.
Dino Ennio Robusto: Estimate so our underwriting performance strong investment returns and overall profitable growth.
Dino Ennio Robusto: Net investment income of 609 million pretax increased 84 million year over year.
Dino Ennio Robusto: With our alternatives portfolio in our fixed income portfolio contributing almost equally to.
Dino Ennio Robusto: So the increased income.
Dino Ennio Robusto: The all in combined ratio was 94.6% wood.
Dino Ennio Robusto: Pre tax catastrophe losses of 88 million or three eight points of the combined ratio.
Dino Ennio Robusto: Compared to the relatively benign first quarter last year with $52 million or 2.4 points.
Dino Ennio Robusto: This year was more in line with our first quarter average of 3.7 points over the last five years.
Dino Ennio Robusto: Prior period development for P&C overall was favorable by 0.2 points on the combined ratio.
Dino Ennio Robusto: Our pretax P. N C underlying underwriting gain was over 200 million for the fourth successive quarter with our P&C underlying combined ratio of 91%.
Dino Ennio Robusto: This is the 13th consecutive quarter with an underlying combined ratio below 92%.
Dino Ennio Robusto: The underlying loss ratio was 60.5% and.
Dino Ennio Robusto: And the expense ratio was 31% in the quarter.
Dino Ennio Robusto: The underlying loss ratio was up a little more than half a point compared to the most recent four quarter average.
Dino Ennio Robusto: This slight increase was driven mainly by a mix shift within the commercial segment.
Dino Ennio Robusto: Which had greater growth in national accounts in recent quarters.
Dino Ennio Robusto: The casualty lines carry a higher underlying loss ratio.
Dino Ennio Robusto: The remainder is from several puts and takes including the negative rate pressure.
For several quarters in management liability lines, which impacts specialty.
Dino Ennio Robusto: And to a lesser degree international as well.
Dino Ennio Robusto: Yeah.
Dino Ennio Robusto: In the quarter, we continued to achieve strong production performance with 8% growth in gross written premiums ex captives.
6% growth in net written premium.
Dino Ennio Robusto: Renewal premium change overall was 6%.
Dino Ennio Robusto: Up a point from the fourth quarter.
Dino Ennio Robusto: Rate change was up half a point, but still rounds to 4%.
Dino Ennio Robusto: And exposure was also up half a point.
Dino Ennio Robusto: In the U S, where there has been persistent pressure from social inflation.
Rate was plus 6% ex work comp and renewal premium change was plus 8%, which continues to be above our long run loss cost trends of six and a half per cent in the U S.
Dino Ennio Robusto: Outside the U S long run loss cost trends in the aggregate.
Dino Ennio Robusto: Our about a point lower than in the U S. As we don't experience the same level of social inflation pressure. So our overall PNC long run loss cost trend remains between six and 6.5%.
Dino Ennio Robusto: New business was up 5% in the quarter to $529 million with continued strong growth in our commercial business units as we achieved throughout 2023.
Dino Ennio Robusto: Overall P&C retention remained high at 85% this quarter consistent with last quarter.
Dino Ennio Robusto: Turning to our three business units the all in combined ratio for commercial was 97, 6%.
Dino Ennio Robusto: Cat losses of 82 million this quarter added six eight points to the combined ratio.
Dino Ennio Robusto: The underlying combined ratio of 98% was a record low and one point lower than last year.
Dino Ennio Robusto: The underlying underwriting gain of 111 million in commercial was a record high.
Dino Ennio Robusto: The underlying loss ratio was 62% and the expense ratio was 28, 2%.
Dino Ennio Robusto: Lois on record.
Dino Ennio Robusto: As I mentioned last quarter the loss ratios for the post pandemic accident years in the classes of business most impacted by social inflation.
Dino Ennio Robusto: MAU auto G L and excess casualty continue to hold up well.
Dino Ennio Robusto: We took a conservative approach in those initial loss ratio selections.
Dino Ennio Robusto: For the remaining classes in aggregate, we have experienced favorable development from the more recent accident years based on our initial loss ratio picks.
Speaker Change: Of course. These recent years are still immature and we will continue to monitor for any emergence over time.
Speaker Change: That deviates from our initial expectations.
Speaker Change: Gross written premium ex captives grew 17% in the quarter.
Speaker Change: And net written premium growth was 13%.
Speaker Change: New business grew 18% and retention improved by two points to 85% in the quarter.
Speaker Change: Renewal premium change in commercial.
Speaker Change: Was 8% with rate up 6% and exposure increases up 2%.
Right and renewal premium change excluding work comp.
Speaker Change: We're nine and 10% respectively, continuing to exceed long run loss cost trends.
Speaker Change: An area. We have repeatedly highlighted for you is our success at pushing for higher pricing in our U S commercial casualty lines.
Speaker Change: And in the first quarter.
Speaker Change: Commercial auto rate increases were up 14%.
Speaker Change: Excess casualty was up 11%.
Speaker Change: In primary general liability was up mid single digit with renewal premium change of high single digit due to rising revenues in payrolls.
Speaker Change: These rate increases are double what they were six quarters ago.
Speaker Change: Our national accounts rate increases are down a few points compared to the fourth quarter.
Speaker Change: It's mainly a function of quarter to quarter variability given the impact individual large accounts can have on the overall rate change.
Although still early in the second quarter, we are not seeing that lower trend continue.
Speaker Change: In work comp overall renewal premium change is about flat in the quarter with exposure increase offsetting a low to mid single digit rate decreases.
Speaker Change: Within specialty the <unk>.
Speaker Change: All in combined ratio was 97% in the first quarter.
Speaker Change: Including <unk> six points of favorable prior period development, making this 15 straight quarters below 91%.
Speaker Change: The underlying combined ratio was 91, 3% with an underlying loss ratio of 59, 2% and.
Speaker Change: And the expense ratio was 31, 8%.
Speaker Change: Gross written premium ex captives growth for specialty was down 1% this quarter and net written premium growth was up plus one.
Speaker Change: We capitalized on some growth opportunities in portions of our health care portfolio, but this was partially offset by our decision to remain prudent in our management liability lines until we see further improvement in the pricing environment.
Speaker Change: Within specialty rates in aggregate were up plus 2% this quarter, reflecting a two point improvement from the fourth quarter.
Speaker Change: The rate declines in our financial institutions and management liability classes moderated this quarter and public D&O was only slightly negative improving in each of the last three quarters.
Speaker Change: Our health care rates continue to improve and are in the high single digits and the cumulative rate and improved terms and conditions, we achieved over the hard market years.
Speaker Change: Lowering us to profitably grow this business again.
Speaker Change: Our profitable affinity programs continue to produce stable rate change in the low to mid single digit range down slightly this quarter, which is impacted by program mix seasonality.
Retention in specialty remained very strong at 88% for the quarter and retentions have been at or above 87% for almost two straight years.
Speaker Change: For international the all in combined ratio was 93, 3% in the quarter, including 6 million or two points of cat losses.
The underlying combined ratio was 91, 3% with an underlying loss ratio of 58, 1% and the expense ratio was 33, 2%.
Speaker Change: The underlying combined ratio in international has been below 92% for 11 consecutive quarters.
Speaker Change: International gross written premiums were down 6% and net written premiums were down 4% in the quarter.
Speaker Change: Similar to the U S specialty actions, we remain prudent in our management liability lines, which limited our new business opportunities.
Speaker Change: We also had a two point impact on retention from our underwriting actions to non renew our political violence exposure.
Speaker Change: Which we initiated in the fourth quarter.
Speaker Change: Rates in international like 1% or down a point from the fourth quarter.
Speaker Change: Given the cumulative rate increases and extensive re underwriting actions we took over the last several years, we expect our international operations to be an increasingly consistent contributor to our overall profitable growth.
Speaker Change: With that I will turn it over to Scott.
Scott Robert Lindquist: Thank you Dino and good morning, everyone.
Scott Robert Lindquist: Core income of $355 million is up 9% compared to the first quarter of last year, leading to a core return on equity of 11, 5% and reflects another quarter of strong underwriting and investment results.
Scott Robert Lindquist: Our P&C expense ratio for the first quarter was 31% compared to 30.0% last year, reflecting higher net earned premium.
Speaker Change: We tend to have a certain amount of variability quarter to quarter and this ratio for the balance of 2024, we expect higher spend on technology and talent as compared to the quarter. Just ended accordingly, we believe an expense ratio closer to last year's first quarter ratio of 37%.
Speaker Change: Is a reasonable run rate for the full year.
Speaker Change: The P&C net prior period development impact on the combined ratio was 0.2 points favorable in the current quarter.
Speaker Change: Favorable development in the specialty segment was driven by surety.
Speaker Change: And was partially offset by unfavorable development in warranty.
In auto warranty higher labor rates and car park costs are driving an increase in severity, while higher car prices and interest rates are resulting in lengthier durations of car ownership, which leads to higher frequency of warranty claims.
Speaker Change: This same dynamic is impacting claims cost in our non insurance auto warranty business, which were up 3% while related revenues are flat as compared to 2023 first quarter.
Speaker Change: You can see these line items in the specialty results of operations in our financial supplement.
Okay.
Speaker Change: For life and group, we had core income of $5 million for the first quarter compared to a 3 million dollar core loss for the prior year quarter, reflecting higher earnings from limited partnership investments.
Speaker Change: Active enforce management risk mitigation activities continue including rate filings benefit reduction offers and policy buyouts.
Speaker Change: The current quarter results include a $4 million pretax loss related to $29 million of cash policy buyouts.
Speaker Change: We expect to continue offering buyouts in 2024 with the impact to earnings from such activities varying quarter to quarter, depending on timing and mix of buyout elections.
Speaker Change: Our corporate segment produced a core loss of $22 million in the first quarter compared to $18 million loss in the first quarter of 2023.
Speaker Change: Included in the first quarter results is a $5 million after tax charge related to ongoing office consolidation activities I previewed in our last quarter's earnings call.
Looking forward and as previously mentioned, we expect we expect additional office consolidation charges of $7 million pre tax in each of the second and third quarters.
Finally, a reminder, that we will be undertaking our annual ground up review of legacy mass tort exposures during the second quarter the results of which will be recorded in the corporate segment.
Speaker Change: Turning to investments total pre tax net investment income was $609 million in the first quarter compared to $525 million in the prior year quarter.
Speaker Change: The increase was driven almost equally by our fixed income and other investments as well as our limited partnership and common stock portfolios.
Speaker Change: Limited partnerships and common stocks returned to a $68 million gain.
Speaker Change: We're a 2.9% return in the current quarter compared to a $28 million gain or one 3% return in the prior year quarter.
Speaker Change: Fixed income and other investments generated $541 million of income.
Up 9% compared to the prior year quarter.
Speaker Change: Our fixed income portfolio continues to produce consistent income, which has been increasing as a result of favorable reinvestment rates and strong cash flows from operations.
Speaker Change: The effective income yield of our consolidated portfolio was four 7% in the first quarter.
Speaker Change: Compared to four 6% in the prior year quarter.
Speaker Change: As of the end of the first quarter reinvestment rates continues to be well above our P&C effective income yield of four 3%.
Speaker Change: And modestly above our life and group portfolio of effective income yield of five 6%.
Speaker Change: A reminder, that the life and group portfolio has a longer duration portfolio with embedded yields more comparable to today's interest rate environment.
Speaker Change: Looking ahead, we currently expect income from fixed income and other investments to be about $540 million in the second quarter, which will be a 7% increase from the second quarter of 2023.
Speaker Change: And for the full year 2024, we currently expect about $2 billion $175 million or a 5% increase as compared to the full year 2023.
Speaker Change: Which would result in the total portfolio effective yield to approach, 4.8% by the end of 2024.
At quarter end, our balance sheet continues to be very solid with stockholders equity, excluding a OCI of $12 $2 billion or $45 10 per share an increase of 2% from year end 2023 adjusting for dividends.
Speaker Change: Stockholders equity, including a OCI was $9 $7 billion or $35 62 per share.
Speaker Change: As a result of rising interest rates during the quarter. The net unrealized loss in our fixed income portfolio is now at $2 $3 billion as of quarter end.
Speaker Change: Finally, we ended the quarter with statutory capital and surplus and the combined continental casualty companies of $10 $9 billion, which is flat with year end 2023.
Speaker Change: Operating cash flow was strong once again at $504 million for the quarter, Despite $29 million in long term care cash policy buyouts during the quarter, reflecting both strong underwriting results and higher earnings from our fixed income portfolio.
Speaker Change: Yeah.
Speaker Change: Turning to taxes, the effective tax rate on core income for the first quarter was 29%, which is in line with our full year 2024 expectations.
Speaker Change: Finally, we are pleased to announce our regular quarterly dividend of 44 cents per share to be paid on June six 2024 to shareholders of record on May 20th 2024.
Speaker Change: With that I will turn it back to Dr.
DR: Thanks Scott.
DR: <unk> is off to an excellent start in 2024 with strong levels of core income driven by substantial net investment income and strong underwriting performance.
DR: We achieved high single digit growth in gross written premium ex captives and our retention remains very strong at 85%.
DR: The market remains rational in most classes of business would rates reflective of the individual dynamics impacting the various lines of business.
DR: And the commercial casualty classes in the U S rates continue to improve.
DR: And in property rates, although off from their high watermark in 2023 continue to offer great new business opportunities.
DR: And so we remain optimistic about our ability to successfully navigate the favorable market dynamics and continue to grow the company profitably as well as build our investment returns with that we will be happy to take your questions.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star and then one on your telephone keypad.
Speaker Change: Using a speakerphone please pick up your handset prior depressing the keys.
Speaker Change: If at any time. Your question has been addressed we would like to withdraw. Your question you May Press Star two.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: And our first question today comes from Josh Shanker from Bank of America. Please go ahead with your question.
Joshua David Shanker: Yeah, Good morning, everybody I hope you're doing well.
Joshua David Shanker: If I can go back to the time in.
Joshua David Shanker: 20 years ago too.
Joshua David Shanker: 2004.
Joshua David Shanker: There might've been some conservatism on the margin, but you probably should just written every piece of business that was out there. It was that good of a market.
Joshua David Shanker: And I think were more mixed today are they more or less.
Joshua David Shanker: They were let's say 2021, how good of a market that is out there I know that maybe things have gotten no grandma.
Joshua David Shanker: We've gone through.
Joshua David Shanker: There will never be a universally hard market.
Joshua David Shanker: But.
Joshua David Shanker: I.
Joshua David Shanker: We don't know group worth Blackman.
Some competitors didn't grow at all this quarter.
Joshua David Shanker: I'm good.
Joshua David Shanker: How good is that market that's out there right now.
Dino Ennio Robusto: Hi, Josh its a its dino.
Speaker Change: We agree with you that the market is is favorable and we continue to.
Dino Ennio Robusto: To take advantage of it but you also highlighted that it's a nuanced almost a mini cycle approach and that is indeed.
Dino Ennio Robusto: The issue and very very different than prior cycles without a doubt and so we navigate each one accordingly on casualty.
Dino Ennio Robusto: We continue to get very strong rate increases and.
Dino Ennio Robusto: And I expect they will continue.
Dino Ennio Robusto: And that will continue to give us good opportunities as we saw in national accounts also casualty as well as middle market on property.
Dino Ennio Robusto: When you think about all of the cumulative rate you think about the valuation changes to terms and conditions.
Dino Ennio Robusto: Favorable opportunities there.
Management liability notwithstanding that we still have a cumulative.
Dino Ennio Robusto: 50 to maybe 60% of rate increase since the start of a hard market. The reality is some of the competition in particular from new entrants has been is as it has been expressed by others also.
Dino Ennio Robusto: Yeah.
Dino Ennio Robusto: It's too aggressive and so we are fine to wait on the sidelines and pursue those areas. So we can still have a good growth rate as we do whether that'd be it in surety be it in health care on the specialty side or as I just talked about in the commercial so.
Dino Ennio Robusto: I think it gets down to your point.
Dino Ennio Robusto: <unk>, a very nuanced mini cycle market.
Dino Ennio Robusto: And and you have to act accordingly.
Dino Ennio Robusto: But overall I would consider it a favorable market.
And it's going to continue in 'twenty four.
Dino Ennio Robusto: Okay. Thank you and and is it you have the ability to capture as much business.
Dino Ennio Robusto: Where you want it or <unk> it.
Dino Ennio Robusto: Your appetite.
Dino Ennio Robusto: Would that effect right.
Speaker Change: So what I would say is josh over the years.
In particular, the last six seven years, we've talked extensively about our migration from a generalist commercial underwriter to a specialist underwriter.
Speaker Change: And we focus on those specialties.
Speaker Change: And we penetrate them quite successfully but as ive indicated before.
Speaker Change: Our market share in a lot of those areas remains relatively small so there is plenty of opportunity.
Speaker Change: And we're going to you know continue to go after it and it is one of the reasons as Scott indicated youre going to see additional investments technology talent.
And then we're going to divert that to continue to penetrate our specialties. So we see.
Speaker Change: Plenty of opportunity.
Speaker Change: For both you and Scott.
Speaker Change: Scott you mentioned, a warning or not a warning as I said, while we're completely what I did say guidance that we should expect that as usual and QQ, we're going to see the legacy mass Torts review.
Is that is that the environmental or are there other math toward that get reviewed.
Speaker Change: No.
Speaker Change: So yes, thanks, Josh its Scott here. So if you take a look at historically spend kind of general mass tort a cup.
Scott Robert Lindquist: A couple of years ago Archdiocese cases abuse cases over the past few years I, you know I I hate to predict what's going to happen. This this quarter.
Scott Robert Lindquist: The team is still doing the work on that but I would just kind of take a look at the history over the past few years and what we've done in the second quarter and we've we've done some refreshes in the fourth quarter to past couple of years, but.
Speaker Change: That's probably all I'll say at this point.
Speaker Change: And one math towards I think a lot of prep, but theres not a lot of detail on our <unk> a lot of youth birthday certainly.
Speaker Change: <unk> is there anything that you can tell us about your thoughts on how you think about it.
Speaker Change: Yeah. Okay. Yeah go ahead, no I was going to say I mean, I have no specific comments on that other than you know what we see out there and our reserves right now.
Speaker Change: Nothing else really to say on that I totally agree with Scott it's early.
Speaker Change: And limited information, what we have as Scott pointed out is in the reserves.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Once again, if he would like to ask a question. Please press star and one to withdraw yourself from the question queue, you May press star and two.
Their Fields: Our next question comes from their fields from <unk>.
Their Fields: Go ahead with your question.
Theresa Fields: Hi, as gain alcohol and yeah. Thank you for taking my question.
Theresa Fields: I just have cash reserves.
Theresa Fields: Do you see any changes in patterns, namely Paul Leafing, yes for casualty lines.
Theresa Fields: Panther share suddenly feel on that.
Theresa Fields: Hi, It's Dino you know we've been highly transparent over the last several years and we have outlined in considerable detail all of the actions we have done.
Dino Ennio Robusto: The strength in our reserves and particular in the block of 2015 to 2019 and the biggest trend that we commented on and there's still a significant.
Dino Ennio Robusto: Albeit maybe more expected than a few years back it was social inflation, which really put severity pressure on our loss cost trends and and and and and quite a few casualty classes are actually doubling them over the last five years.
Dino Ennio Robusto: So that's the main essence of what we've seen.
Speaker Change: Got it thank you I'm.
Speaker Change: And my second question is on the international operation.
Speaker Change: And expecting contributing to overall.
Speaker Change: Positive E com.
Speaker Change: Just curious your strategy there.
Speaker Change: Can you please add more color on that.
Speaker Change: So on the international we also over the years have described all of the underwriting actions that we've taken in particular relative to our syndicate three deuce.
Speaker Change: Tasha fee exposure it has been profitable for a quite a few quarters now as we've indicated we.
Speaker Change: We had some pressure on growth in the first quarter for the reasons that I also indicated in my prepared remarks.
Speaker Change: Being that of of being prudent in our management liability and our decision to remove from political violence.
Speaker Change: But going forward, we expect it to continue to contribute a profitable growth to the organization and we feel very very good about our international operations in particular when you consider.
Speaker Change: That on some segments. The starting point is very good even before the hard market.
Speaker Change: Segments like middle market in the U K and Canada, we're already very profitable we got additional cumulative rate, we added improved terms and conditions. So.
As you can tell we are quite bullish on our international operation going forward.
Speaker Change: Got it that's very helpful. Thank you. Thank you so much.
Speaker Change: Welcome.
Speaker Change: And ladies and gentlemen that will now conclude today's question and answer session I'd like to turn the floor back over to you know Dino Robusto for closing remarks.
Dino Ennio Robusto: Thanks, very much I do have some this time around in closing I'd like to give an update as to future earnings calls for CNA.
Dino Ennio Robusto: Light of reduced analyst participation in recent years in future quarters, we will simply post the transcript in place of hosting a live call. The transcript. We posed will continue to include the level of detail you are accustomed to hearing in our earnings call remarks. The transcript will also incorporate select.
Dino Ennio Robusto: Q&A as that are intended to address timely and topical focus areas for CNA and our industry as well as answers to questions.
Dino Ennio Robusto: And we will answer questions that are submitted to us in advance we are of course.
Dino Ennio Robusto: Committed to remaining as transparent as we have always been and as always if you ever need any further clarification. We encourage you to reach out to our Investor Relations team.
Dino Ennio Robusto: Ali we look forward to attending industry investor conferences in the future as we have done in the past and we look forward to continuing the dialogue with the investor and analyst community.
Speaker Change: And thank you all for joining us today.
Speaker Change: Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.