CNA Financial Corporation
Q1 2021 Earnings Call Transcript

Published: 3 May 2021

[Operator:]

Good morning and welcome to CNA’s discussion of its 2021 First Quarter Financial Results. CNA’s first quarter earnings release presentation and financial supplements were released this morning and are available via its website, www.cna.com. Speaking today we will have 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, May 3, 2021. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

[Dino Robusto:]

Thank you, Ashley and good morning everyone. We started the year with good earnings from an improved underlying combined ratio and solid investment returns and which together, largely offset a record setting first order for catastrophe losses. But before getting into our results, I wanted to comment on our cyber incident. As you likely know, in late March, we sustained a sophisticated cybersecurity attack, which we determined was caused by Ransomware. Promptly upon detection, we undertook steps to address the incident, including proactively disconnecting our systems from our network out of an abundance of caution we contained the attack and most importantly to ensure that external parties were not at risk of cross contamination. We also engaged a team of third-party cybersecurity experts to investigate and determine the full scope of the incident and notified law enforcement and key regulatory agencies. I was personally involved in our remediation and recovery efforts and I'm proud of the way we responded as a company. I'm pleased to report that the attack has been fully contained and our systems are back online and operations are back to normal. There is no evidence to indicate that external customers or other parties were at risk of infection or cross-contamination due to this incident. Most importantly, we were able to continue to meet the needs of our agents and brokers and insurance throughout the incident and we received positive feedback from them that recognized our commitment to transparency and open communication. We kept the agents and brokers consistently upraised of the latest developments throughout the three-week restoration process and provided them with incident updates to share with their clients should they receive questions. Our agents and brokers have been very supportive through this incident and I want to thank them for their remarkable understanding and flexibility. We are continuing to review any impacted data to determine our legal obligations with respect to any notifications we may be required to make. To the extent this incident impacted the data of insurance, employees or others we will notify them directly as required.

[Al Miralles:]

Thanks Dino and good morning to everyone. Before I get into the results, I would like to highlight a few changes to our earnings presentation materials intended to enhance information provided to you and to align this reporting with how we manage the business. Even are specifically related to our production metrics it can be found on pages 7 and 9 of the earnings presentation. This information for the Specialty and Commercial segments and I will provide a more refined and more detailed breakdown of our rate retention metrics into the sub segment of these businesses. Specifically for Specialty, we separated out the Affinity Professional E&O program business from financial management liability given very different business dynamics. As we said before, our Affinity programs have been in place for many years with long term, multiyear renewal periods. As such, these programs are less impacted by day-to-day pricing dynamics in the market. Financial management liability on the other hand, as we've told you over the last few years, has been a growth area for us and we have been very successful in penetrating these lines of business and may be the rate retention dynamics typical to the traditional underwriting cycle.

[Dino Robusto:]

Thank you, Al. We are pleased with our production execution, capitalizing on the very favorable market conditions, as well as continuing to improve our underlying underwriting performance, as we have consistently done over the last several years. And we expect meaningful opportunity to do more of the same as we believe the favorable market environment will persist throughout the year. And with that, we are ready to take your questions.

[Operator:]

Thank you. We'll take our first question from Joshua Shanker of Bank of America. Please go ahead.

[Joshua Shanker:]

Yes, good morning everybody. Thanks for taking my questions. So, you said that you're not yet ready to interpolate the frequency data into your results and that's why the loss improvement isn't material as you had imagined. There's two sort of frequencies, there's the frequency of actual like, incidence and then there's the social inflation issue about whether it's on hold or not and there's no evidence, as you say, one way or the other. But the incidence, the number of workers comp claims, or the numbers of slip and falls or things like that, don’t we have good knowledge about whether or whether or not they occurred over the last, call it 16 months?

[Dino Robusto:]

Yes, actually, Joshua, thanks. We do. And, when it all started, the pandemic we had indicated that we anticipated seeing a lot less frequency benefits and many of the other potential carriers just to get to the nature of the type of insurance we had with a lot of healthcare business, manufacturing, construction, contracting, many of which were all essential services. As I -- I think I referenced in my comments, we did have about a half a point benefit in the fourth quarter, that continue to play out from a frequency standpoint, and there was nothing in this first quarter. Again, we started it off from a base that was probably a lot less than others and obviously, we started to see that play out. So we had recognized some frequency benefit and that's why sort of in comparing it and trying to sort of normalize it by taking it out and then suggesting that the underlying actually loss ratios actually came down more than 1 point. Hope that makes sense.

[Joshua Shanker:]

There's some stuff in there. And then with regard to the social inflation, one of your competitors increased their loss cost trend assumptions this quarter, saying that social inflation is worse in their modeling. Is there, and I understand the hesitancy to take down concerns over social inflation, but have -- is there any evidence that social inflation is accelerating over the last 12 months?

[Dino Robusto:]

Okay, so, the way I categorized it was that we didn't really see. We had -- let me take you back and maybe provide some context. If you recall, at the beginning of 2020 Josh, what we did because of various casualty lines, like the aging services, medical mal we had referenced, we had also referenced umbrella. And at that time, we increased our long run loss cost trends about 100 basis points to 4 points. And I think, throughout the pandemic, the social inflation or these trends remained at the elevated levels. Since then though, we also experienced some higher loss cost trends in 2020, due to elevated losses in cyber, both a sort of frequency and severity. And also, during the year, you have to contemplate mix changes during the last several quarters, because as we indicated in the prepared remarks, we grew our casualty lines, such as management liability, and they're going to hold substantially higher, long run loss cost trends in our first party or for our big bulk of affinity programs. So what we did at the beginning of this year, Josh to your question specifically, we increased our long run loss cost trends roughly another 50 basis points, and now it sits at about 4.5 points. Hope that helped.

[Joshua Shanker:]

That helps and one other pandemic related frequency severity item. When would we have information about how the pandemic has changed future behaviors around convalescent care, whether in-home care versus nursing home care, and what that means for longer term modeling of long term care losses and whatnot?

[Dino Robusto:]

Yes, I'll turn that over Al. Al?

[Al Miralles:]

Yes, hi Josh. Look, we are really week-to-week, month-to-month of evaluating that and looking at those trends. To date relative to the trends we've seen through the pandemic, it has not abated. We continue to see lower claim frequency, higher claim terminations and more of an inclination towards home health care. So to date that hasn't changed, but we're looking very closely and as I mentioned, we continue to hold higher IBNR in anticipation that we could see that certainly abate and change back to pre-pandemic levels.

[Joshua Shanker:]

If people opt to choose in-home care versus nursing care, because permanent behaviors have changed, is that positive or negative for the long term care carriers in-home care is more expensive or is nursing care more expensive?

[Al Miralles:]

Home health care is typically less expensive. And so that is some of what the positive effects we're seeing come through our results is that our cost of care is actually less. What we're holding from an IVR perspective is more the frequency, but cost of care has been lower because there's been a propensity towards home health care.

[Joshua Shanker:]

Okay, well, thanks for all the answers and putting up with me.

[Dino Robusto:]

Thanks, Josh.

[Operator:]

We'll take our next question from Gary Ransom of Dowling & Partners. Please go ahead.

[Gary Ransom:]

Yes, good morning. I just wanted to follow up on the expense ratio. What I heard was that there really wasn't anything unusual at all in the expense ratio, and that that is a reasonable expectation going forward, is that correct or was there anything unusual in the number this quarter?

[Al Miralles:]

Yes, hi Gary, it’s Al. Nothing unusual. I think really the storyline we've been giving you, we expected that earned growth would begin to kick-in with our net written growth in 2020. You're seeing that show up this quarter. At the same time we've been disciplined about our expense spend while we make investments and I think you're just kind of seeing -- you're seeing a continuation of that. With respect to kind of the path forward, we would expect that our earned growth will continue to come in and we'll continue to manage as we have. The only variable I'd give you Gary is look, our investments in the business, talent, technology, analytics are not a straight line, and therefore it is going to move around a little bit on the expense ratio, but I think the level you're seeing and in and around 31% is a good target.

[Gary Ransom:]

All right, terrific. And Dino, thank you for the info on the cyber attack. I wanted to ask though, if the -- you have an arrangement with a vendor that handles all of your hardware as I understand it. I'm not sure that -- I think that's still in place. But was that company involved in fixing this and were they -- is that an entirely separate from what you experienced?

[Dino Robusto:]

Gary, all our vendors that we use, we have infrastructure and other partners, and we also have in-house IT and our technology and security, and everyone was involved along with some forensic experts that obviously we hired when this event started. So everyone was involved, everyone did, in my opinion, quite an incredible job working around the clock to get it back up and running in the course of that three-week period.

[Gary Ransom:]

So is there, if I look at where you are today, in terms of cyber security versus say six months ago, is this, you not only fixed this problem, are you in better shape in terms of the protective considerations you have around your technology?

[Dino Robusto:]

Yes, I mean, I would say look, we took obviously a number of steps and measures, first, you know, just removed the hackers and but also the further secure the environment, a host of actions, additional endpoint detection, monitoring tools, et cetera, so we did post this event.

[Gary Ransom:]

Okay. Thank you for that. And then back on the, the underwriting, you still have this concern about social inflation, that's kind of a downside with potential risk of loss ratios rising. Every quarter, we from the outside are trying to assess whether those loss ratios reasonably reflect what's going on. And when I look back at the loss ratios historically accident, your loss ratios at this stage of the cycle, they've had a very strong tendency, at least in long tail lines to develop favorably. I don't know if that's going to happen this time necessarily. But if you think about the reasons why that happened in the past, do you think any of those reasons might apply to today where we are in the cycle now?

[Dino Robusto:]

That’s something we, you think about every day. I mean, I -- even when I was commenting on how I sort of contextualize the loss ratio and rate adequacy in my prepared remarks, it's you look back at the cycle and you see many quarters, as I said, it was a little above 22 quarters in our case where rate increases with the low long run loss cost trends, and now we're at 5. And so, you'd think if that plays out, you have to, at least from my vantage point, think about rate adequacy, and loss ratios a little bit of a longer context. Of course, one could make the observation that this cycle, not having hit the same highs could be different than the other ones. And social inflation clearly is unlike really anything I've seen in the last several decades. And so, it's hard to know. We've seen it impact our capital T lines, not being really changed during the pandemic, not sure whether the pandemic involved in the plaintiffs' bar. So look, I -- we try to do the best that we can, adding a little bit of may be bias for prudence as we suggested and try to be as transparent as we can before you in how we think about it. Right? So, difficult to know for sure Gary whether it's going to play out as it did in past. We take what's there in front of us and we think we're making the right decisions.

[Gary Ransom:]

Right. Okay, that's helpful. Thank you for those thoughts and I guess that's it from me.

[Dino Robusto:]

All right, thank you, Gary.

[Gary Ransom:]

Thank you.

[Operator:]

We'll take our next question from Meyer Shields of KBW. Please go ahead.

[Meyer Shields:]

Great, thanks. So, I was hoping for a little more color in small business within Commercial, because on year-over-year on a sequential basis, it's the only broken outline where we saw higher retention and higher rates and I'm curious as to what's going on there in the market?

[Dino Robusto:]

So, our small business has been a real positive for us. Meyer, you know we continue to see opportunities to be able to grow the small business, to hold on more retention. We're seeing a little less rate headwind pressure on work comp. So, and it's been historically very, very strong. The loss ratio and we envision it continuing to contribute significantly, both on the production side and profitability side going forward. We are highly focused on the small business.

[Meyer Shields:]

When we hear macroeconomic commentary about new business formation, only small business formation, does that flow into Specialty or Commercial?

[Dino Robusto:]

Say that again? I'm sorry Meyer. Where our small business shows up?

[Meyer Shields:]

Well I know it shows up in Commercial, but when we hear about new business formation that tends to hit the excess and surplus lines market, I'm wondering whether that shows up in the Specialty or Commercial segment?

[Dino Robusto:]

I'm not sure if I'm following all of that. Yes, you know the small Affinity – the Affinity programs on the Professional E&O obviously show up all in the Specialty and everything else, all other P&C lines where the small business show up in Commercial. So, if for example, architects and engineers and Professional E&O, for the singular architect and engineer will show up in Specialty Affinity program, the P&C components of it, just like the law firms is an example will show up on the Commercial and if -- not sure if that helps.

[Meyer Shields:]

Done, yes that was exactly what I was looking for.

[Dino Robusto:]

Okay.

[Meyer Shields:]

And then final question, I guess. The P&C fixed maturity duration moved up relatively abruptly I guess compared to what still looked like long term low interest rates and I was hoping you could talk us through what's driving that?

[Al Miralles:]

Hi Meyer, it's Al. Yes, sure. Yes, the P&C duration went from 4.5 to 4.9, that's largely driven by with the backup in rates here we have an agency RMBS portfolio. So, as you would imagine with rates backing up you get slower prepayment speed and that for the duration extends a bit. So, that’s predominant driver of what's -- of that duration pickup there.

[Meyer Shields:]

Okay. Is that also what drove the average rating?

[Al Miralles:]

Yes, then it is a little bit of that, but also from my commentary, we held a higher level of short term investments at the end of the year, and then made the payment from that LPT. Obviously our short term investments could be higher rated, so that dropped it. But just to be clear on P&C portfolio, we really toggle between A minus and A, so we're kind of laid on that line, so it's pretty easy to move up, to flip from one to the other.

[Meyer Shields:]

Got it. Okay, great. Thank you so much.

[Al Miralles:]

Thanks Meyer.

[Operator:]

And there are no further questions at this time. I would like to hand the call back to Dino.

[Dino Robusto:]

Great. Thank you everyone and we look forward to chatting with you next quarter. Be safe.

[Operator:]

Thank you. That now concludes the call. Thank you for your participation. You may now disconnect.