CNA Financial Corporation
Q2 2021 Earnings Call Transcript

Published: 2 Aug 2021

[Operator:]

Good morning and welcome to CNA’s discussion of its 2021 Second Quarter Financial Results. CNA’s second quarter earnings release, presentation and financial supplements were released this morning and are available via its website, www.cna.com. Speaking today will be Dino Robusto, CNA’s Chairman and Chief Executive Officer, and Al Miralles, CNA’s Chief Financial Officer. Following their prepared remarks, we will open the line for questions. Today’s call may include forward-looking statements and reference to non-GAAP financial measures. Any forward-looking statements involve risk and uncertainties that may cause actual results to differ materially from the statements made during the call. Information concerning those risks is contained in the earnings release and in CNA’s most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, August 2, 2021. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during the call.

[Dino Robusto:]

Thank you, Rochelle and good morning everyone. In the second quarter we produced record core income resulting from improvement in our underlying combined ratio along with strong investment income and a much lower level of catastrophe losses compared to the prior year quarter. Core income was $341 million or $1.25 per share. Net income for the quarter was $368 million or a $1.35 per share. And as we reported last quarter, we sustained a sophisticated cyber security incident in late March. Notwithstanding that this resulted in a complete shutdown of our systems for the early part of the quarter and impacted our transactional capability, we quickly regained momentum and finished the quarter with a very strong June. This in turn allowed us to achieve gross written premium growth ex-captives of 8% in the quarter which was consistent with the first quarter. In addition, new business grew 10% to $393 million consistent with the first quarter and amongst the highest quarterly new business volume since 2004. Of particular note, we achieved a plus 10% rate increase for the quarter, only one point lower than the prior quarter and the fifth consecutive quarter of double-digit rate increase. And importantly, earned rate is now just shy of 12% and long-run loss cost trend is running about 4.5% after we increased it roughly 0.5 a point in the first quarter which portends a meaningful margin growth. And based on four quarters of double-digit rate increases, margin should continue to build into 2022 all else equal. The all in combined ratio was 94%, 15.2 points lower than the second quarter a year ago. The improvement is largely due to a significant reduction in Cat losses. In the second quarter of 2021 pretax catastrophe losses were $54 million or 2.8 points of the combined ratio. During the second quarter of 2020 pretax catastrophe losses were $301 million or 17.5 points. The P&C underlying combined ratio was 91.4%, 1.8 point improvement over the last year's second quarter results. Adjusted for the impacts of COVID in last year's second quarter, the improvement is 2.2 points. The underlying loss ratio improved 0.7 points and the expense ratio improved 1.5 points.

[Al Miralles:]

Thanks, Dino and good morning to everyone. Starting with the financial results, core income for the quarter is $341 million compared to $99 million from the prior year quarter. For the core ROE of 11.3% for the period, clearly we continued to make great progress. A meaningful component of our underwriting progress comes from our expense ratio. To that end, our second quarter expense ratio 31.6% reflects 2 points of improvement versus the prior year quarter and 4/10 of improvement from the fourth quarter of 2020. As you will recall the prior year quarter reflected a 0.5 point adverse impact associated with COVID-19. Expense ratio improvement was again achieved in all three of our P&C business segments. As I've said previously, the expectation was that written premium growth would ultimately translate into earned growth and expense ratio would benefit from this as we maintain discipline in our expense spend. And while the timing of our discretionary investment in talent, technology and analytics will lead to some volatility in our expense ratio from quarter-to-quarter, over time we would expect to sustain our progress.

[Dino Robusto:]

Thanks, Al. We are pleased with our production execution, especially considering the transactional challenges we experienced early in the quarter. We produced the lowest quarterly underlying combined ratio and record core income. Price increases and our earnings grew at a double digit level and we continue to opportunistically grow our new business at record levels. We believe the favorable market conditions will persist throughout the year. We are well positioned to capitalize on the many opportunities. And with that, we are ready to take your questions.

[Operator:]

Thank you. And our first question, we'll hear from Gary Ransom with Dowling & Partners.

[Gary Ransom:]

Yes, good morning. Thank you for the comments on the market. You know that was helpful, but I wanted to talk about that a little bit more. I was just thinking about the impact of inflation generally and granted, the CPI doesn't really correlate with social inflation, but it might indirectly over time. And you mentioned that the -- your long term loss cost trend is 4.5, maybe it will be 5, but I look at all these inflationary pressures and wonder if it might turn out to be 6 or 7. And we don't really realize it for a while and I wondered if you could just comment on that kind of scenario or how the market might react to that emergence of a worst trend?

[Dino Robusto:]

Yes, thanks Gary. Clearly, that’s the important question. I mean, can it go up higher than a 0.5 a point? It's possible and it is mainly the social inflation. As you indicated, right, CPI does impact as we see it a little bit on the property obviously, you'll probably see it in demand surge if you have a large Cat, but if it reveals itself quickly, you put it in your loss fix quickly. And in your reserving medical inflation, typically been or at least for the last several years, really hasn't impacted Work Comp as the reforms continue to play out. So it's mainly the other casualty lines, it's social inflation. It has gone up as I indicated over two points in the last couple of years and we have been quite transparent in what lines, it was obviously the Medical Malpractice, it was Commercial Auto Liability and excess Umbrella. So that's why I think we continue to be prudent, both in the action year pick and how we look at reserves in prior accident years. So, I was playing out the math at 1 point a quarter coming down on rates and say it goes up another half a point, it might go up higher in 2022. And I think this is why you still see the difference in pricing in these lines still in big double digit. And I think they'll stay up there. As the shelter in place plays out and or diminishes, and you start to see the trends I think the market will have those rates persist. So maybe the math still plays out the way I suggested, but it is possible, it's why a little bit less definitive on the issue of rate adequacy and it being sort of a moving target, somewhat. So it's possible, we'll keep an eye on it and I think you can use the math and if you play a different number and it will then depend whether the rate continues to moderate in those lines or it stays flatter. So that's really all I can say, Gary. I wish I had a better insight. So we just monitor it and stayed I'd say disciplined and prudent.

[Gary Ransom:]

And just one more level of that and when I think about what happens in court, sometimes medical cost trends are the baseline for pain and suffering additions or multipliers. And have you seen, you had mentioned you haven't seen it very much in Worker's Comp, but has that played any role so far that has been visible in any of the liability lines or the injury cases?

[Dino Robusto:]

I mean, clearly, injury cases that impact individuals and the health of individuals are going to have some impact, but if you look at the medical trends outside bit of Work Comp, we really haven't seen it. It's been still fairly stable. There hasn't big, the gyrations that are more representative of the overall social inflation. So it's more than the medical. It's all of the things that people comment on relative to social inflation and sentiment, corporate, anti-corporate sentiment, et cetera, et cetera.

[Gary Ransom:]

Thank you for that. If I can just change subjects too, I wanted to ask about the cyber impact. Just wondering if in hindsight, was there anything that you're now doing differently, or just from a high level things that you may have changed that will either help or prevent future things like that?

[Dino Robusto:]

Yes, I mean, I think you're going to -- it's a little bit akin to an arms race. Whether it happens to us or whether you see it happening, the Ransomware, across the industry, you're going to react as they get more sophisticated, you're going to elevate your own security. We clearly are elevating our own security. I'd like to believe we would have continued had it not been directly impacting us, because it's just, it's a function of what happens to us, but what's happening out there, and it's getting clearly much better publicized. And so, you've just got to keep on going with it and you'll probably say the same thing a year from now, and probably say the same thing five years from now Gary. So, but clearly, we have made additional changes and investments.

[Gary Ransom:]

As this affected how you might underwrite cyber exposure as well, just due to chance, was it?

[Dino Robusto:]

Yes, that's a great point. I don't know if it's really because of our own, other than when you look at our portfolio and you look at the frequency of Ransomware in particular claims over the last 24 months, right? We knew we had to take substantial action. Now, okay, I broke it only represents a little less than 5% of our Specialty, but nevertheless, we have taken substantial action and it's much more strict underwriting controls now both on new business and renewals, with respect to the security protocols that our insurance have, and then, like many others have commented, we've clearly lowered our average limit. We've increased our deductibles and coinsurance. We got about 59, 60 points of rate in the second quarter, but also we have good reinsurance. Right? so we have a quota share treaty on individual cases Gary, individual losses rather. And we have an aggregate spot loss to protect us against a more catastrophic type scenario, where it hits multiple insurance. So I think, we're doing all the right things lot more if you take out rate lot less growth. And so we're going to continue to be stringent in our underwriting in light of the activity.

[Gary Ransom:]

Thank you very much Dino.

[Dino Robusto:]

Thanks, Gary.

[Operator:]

And next we'll move to Josh Shanker with Bank of America.

[Joshua Shanker:]

Yes, thank you for taking my question. So I really don't want to get in the habit of some, you didn't talk about June production numbers and I think it was net or maybe it was gross premium written. Can we talk a little about maybe March, April, May, June, just to understand the trajectory of how the attack suppressed your underwriting and then give us a, I guess a better sense of how we can project that? And maybe if you can layer in on that, talk about 2Q, 2020, which obviously had depressed writing because of the pandemic and maybe there was a boost here in 2Q, 2021 because of easy comps? So I guess there's a lot in there, but maybe there's a bit more detail that we can get to and understand better your trends.

[Dino Robusto:]

Well, so Josh, I think you think about the trend as the cyber incident is behind us. Right? So it happened on March 21. Our systems were totally locked down for three weeks. And so, obviously that limits your transactional ability. And you, when you get up and running, it takes a little bit of time to do some of the catch-up. So we said it was -- gross written premium was 13% in June, 8 for the quarter. So, you do the math, it's pretty simple what sort of April and May, was considerably lower and not surprising. The question is, is that, -- it's sort of a disjointed. Right? In the sense of that now we are back up and running and we had a good June, and continuing sort of along the path that we had before the cyber incident and as I said, it continued in July. So I think it's behind us and then they'll move forward as it did in the absence of the cyber event. I don't know if that helps, Josh. I mean I'm not…

[Joshua Shanker:]

Yes, I mean I'm -- in terms of, can we say that the first two weeks of April your production was down 40%? I mean, like just trying to understand just how, when the cyber attack happened, I mean did it cut things off to zero? I mean, I know you had work around whatnot, but in the peak of the cyber attack, what was really happening with production?

[Dino Robusto:]

I think the way to think about it, I mean, - Josh, it's hard to know exactly what you say what it would have been had it not been there. I think, look the way to simply think about it is that, you know the number of submissions had been down in April and parts of May, maybe about 20%. But those are submissions, right? You then have a quote ratio, you then have a hit ratio, what you would have gotten had you didn't have it versus you had it, it's difficult to say. Right? So we want it to be as transparent as we can be by sort of telling you what the quarter is, what June is, and the net effect of April and May. And that's about, the best detail honestly I could provide and be accurate at the same time.

[Joshua Shanker:]

Absolutely, fair. Absolutely, fair. And just, you made a very smart comment about not wanting to interpolate pandemic, your frequency into your loss pick yet, because you still don't know what's going to happen maybe down the line, it is going to be a great windfall for the insurance companies, maybe it's not; but can you talk about the loss pick in the context of how much conservatism, it is a bit of these fears. There's the broader inflation theme and then there's the pandemic frequency. To what extent -- when would we see you be more comfortable making a decision on how to interpret the loss picks, based on your current concerns about inflation and whatnot? Are we going to have to wait a number of years before you'd be willing to interpolate current information into your loss picks ?

[Dino Robusto:]

Yes, that's a great question, Josh. And hard as you can tell by the way, I commented in the prepared remarks along the issue of rate adequacy. Right? In my opinion it just remains, I remain a little bit uncertain about it. And so, I think it depends how this evolves right now. COVID, how the Delta variant plays out, whether it protracts, the obfuscation or not, hopefully not. Listen, I think in three to four quarters you'll have a better sense, unless of course, the situation gets worse and then it might protract it a little bit longer. So, what we are trying to do is, move when we actually know it and see it and are comfortable with it. And if we're not, we'll just tell you we're not, we'll tell you what the spread is and then you can interpret it as you like Josh. But I mean, that is, okay, that's the bottom line. That's what we're trying to figure out and I understand your question.

[Joshua Shanker:]

All right, and one more if I can. Can we talk about how highly competitive the market is? Obviously, you lost some business because of the cyber attack, but new business production was good. That means you took business from somebody else. But some others also were taking some business from you. And so, where rates are right now, is the market competitive? Is there anybody who's willing to -- is underpricing in this moment happening? I know, there's a lot of things, hey we think price increases are going to be sustained, but at the same time, your retention isn't as strong in this environment, it’s sometimes been. So I think can you talk about like, what does it mean for the competitive environment?

[Dino Robusto:]

Yes, okay. There's a lot there. The way I would describe the marketplace, I still think it's discipline. So if you take the lines, subject it to the largest, or most pronounced long-run loss cost trends, I think they're still strong grade. Take the middle market, and our middle market, which in our portfolio Josh is much more, more than half of it is professional services, financial institutions, tech, Life Sciences, as opposed to heavy manufacturing, very profitable business, middle market, at the high watermark, let's say the high watermark was Q4 I think everyone is solidifying around Q4, we never got over 8%. A year ago, it was only 7%. And so, that has always stayed a little bit more competitive. What may be happening a little bit now is, it appears insurance companies are at different positions in their rate adequacy, some suggesting they are there. So they may want to be a little bit more aggressive. And so, I think in general though, I consider it to be and remain a disciplined market. That's the way I'd categorize it. It is hotly competitive for many, many, many years in a cycle and that's not what I would suggest at this point.

[Joshua Shanker:]

Thank you for all the details. I very much appreciate it.

[Dino Robusto:]

Thanks, Josh.

[Operator:]

Next we move to Meyer Shields with KBW.

[Meyer Shields:]

Thanks. I'm pretty sure about the question in the past, but Al mentioned continued adverse reserve developments in commercial auto. And I wanted to dig into that a little bit, because it just seems like the industry continues to struggle with line of business where there's not that much innovation. I mean, this is in cyber, where the nature of losses should be shocking and I was hoping to get your thoughts on what's driving that sort of difficulty in terms of getting ahead of the losses and what your outlook is for the line over the next year or so?

[Dino Robusto:]

That's a great question. And Meyer, there’s no doubt that we are chasing increasing long-run loss cost trends. In auto, even though the book overall maybe a little over 4.5, the reality is auto is closer to the sort of 8% and that has been consistently going up. And you think you have a good handle on it and then the effects of social inflation are really bearing down on auto. Now, the good news is, now our rates rather than high single digits what we saw last year, we're at 13 points of rate. On the Commercial, obviously, because the Commercial fleets we have an ability to impact the pricing more in the short term. But this has been a little bit of chasing the long-run loss cost trends. And I think sometimes auto gets packaged in and you look at it overall, the reality is, this is a line of business that continues to need a lot of pricing focus. And if you were to remove the price increases from our portfolio; you'd see relatively flat, slightly negative growth.

[Meyer Shields:]

Okay, no, that's helpful. Switching gears just in terms of understanding things, did the transfer of earned premiums under the property quota share have any impact on the loss ratio in the quarter? In other words, was there an adjustments prior period?

[Al Miralles:]

Hey, Meyer, this is Al. No, it would not have had a material impact. Remember, as I said, the effective date for this was 06/01, so I talked about that unearned adjustment that's really a reflection of looking back at written policies and the unearned components of that. But given the effective date of 06/01, no really meaningful impacts on earns, expense ratio or loss ratio.

[Meyer Shields:]

Okay, excellent. Thanks so much.

[Operator:]

And there are no further questions at this time. I will turn the call back over to Dino Robusto for any additional or closing comments.

[Dino Robusto:]

Thank you, everyone. We look forward to next quarter and chatting with you. Bye now.

[Operator:]

And that will conclude today's call. We thank you for your participation.