CNA FINANCIAL CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Third quarter had very strong results with increased core income, highest quarterly top-line growth of the year, excellent profitability including sixth consecutive quarter with pretax underlying underwriting gain of $200 million or greater, higher investment income, and 1 point increase in renewal premium change for both Commercial and Specialty compared to Q2. Year-to-date core income was a record high at $974 million with all-in combined ratio of 95.6% and underlying combined ratio of 91.5%.
• Third quarter core income was $293 million, net investment income increased $73 million year-over-year to $626 million pretax. Alternatives portfolio generated over half of the increase in net investment income. P&C all-in combined ratio was 97.2% with $143 million catastrophe losses. P&C underlying combined ratio was 91.6% for fifteenth consecutive quarter below 92%.
• Achieved strongest production performance of the year with 9% growth in gross written premiums excluding captives and 8% growth in net written premiums. Renewal premium change for P&C overall stable at 5%, up 1 point in U.S. to 6% and down 1 point in International to 1%. Rate increases in U.S. stable at 4%, International rates slightly negative. P&C retention high at 85% with additional point of renewal premium change in U.S. New business up 15% to $547 million.
• Total pretax net investment income in Q3 was $626 million, up 13% from prior year quarter. Alternatives portfolio returned $80 million gain. Fixed income and other investments generated $546 million income, up 4% from prior year quarter. Effective income yield of consolidated fixed income portfolio was 4.8% in Q3. Expected income from fixed income and other investments in Q4 about $550 million, full year 2024 figure about $2,175 million, up 5% from 2023.
• Balance sheet very solid with stockholders' equity excluding AOCI of $12.6 billion at quarter end, up 7% from year-end 2023 after adjusting for dividends paid. Net unrealized loss in fixed income portfolio reduced to $1.0 billion as of quarter-end. Statutory capital and surplus for combined Continental Casualty Companies was $11.3 billion. Operating cash flow strong at $748 million in Q3.
• Effective tax rate on core income for Q3 was 21.9%, year-to-date 21.2%. Closed pension risk transfer transaction on October 10, 2024, will impact Q4 results with one-time, non-cash, pretax settlement charge of $370 million. Announced regular quarterly dividend of $0.44 per share.

Segment Performance

• Commercial: All-in combined ratio was 100.2%. Underlying combined ratio was a record low of 90.7%, 0.8 points lower than prior year quarter. Underlying loss ratio was 62.5%, up 0.5 points from Q2. Expense ratio was a record low of 27.7%, resulting in record high underlying underwriting gain of $124 million. Gross written premiums excluding captives grew 15% in the quarter, net written premiums growth was 14%, new business grew 18%. Renewal premium change in Commercial was up 1 point from Q2 to 8%. Renewal premium change excluding workers' compensation was up 2 points to 10%. Rate change in Commercial was 6%, with property rate down 2 points but still healthy at 7%, commercial auto rates up 15%, excess casualty rates 10% (double-digit all year), primary general liability rates in mid-single-digit growth, renewal premium change in high single-digits for commercial casualty lines (including auto, primary general liability and excess casualty) was 11%. Workers' compensation rates continued negative due to favorable loss ratio results, but beneficial exposure increases due to rising payrolls.
• Specialty: All-in and underlying combined ratio remained very profitable at 93.0% in Q3. Expense ratio was 32.7%, underlying loss ratio was 60.1%, up 0.5 points from Q2 due to continuing pricing pressure in management liability lines. Specialty production performance improved with gross written premiums excluding captives growth of 3% and net written premiums growth of 4%. Surety business grew double-digit. Healthcare business grew mid-single digits, financial institution and management liability business grew mid-single digits with double-digit new business growth in private D&O. Rates in aggregate were flat in Specialty, healthcare business secured high single-digit rate increases, affinity programs produced stable low single-digit rate increases, rates in financial institutions and management liability fluctuated but improved 1 point this quarter. Retention in Specialty was 89% and stable.
• International: All-in combined ratio was 96.1% in Q3, including $16 million catastrophe losses. Underlying combined ratio was 91.7%, underlying loss ratio was 58.1%, expense ratio was 33.6% (up from 28.1% prior year quarter). Competition was strong, resulting in flat gross written premiums growth. Net written premiums were down 2% (down 1% excluding currency fluctuation). Rates in aggregate turned low single-digit negative, but new business grew 18% and retention improved 2 points to 82%.

Guidance

• Expected income from fixed income and other investments in Q4 about $550 million, full year 2024 figure about $2,175 million, up 5% from 2023.
• Announced regular quarterly dividend of $0.44 per share to be paid on December 5, 2024.
• Pension risk transfer transaction will result in one-time, non-cash, pretax settlement charge of $370 million in Q4 2024, but not impact core income or cash flow.

Risks

• Intense competition in International segment led to flat gross written premiums growth and overall rates turning low single-digit negative.
• Protracted period of rates below loss cost trends in Specialty segment portends potential margin compression in future.
• Finalization of actuarial assumptions for pension risk transfer transaction may impact expense results.

Q: Are you seeing anything on workers' compensation that makes you feel differently about the line?

A: We continue to feel great about workers' compensation. Though loss cost trends are up a little bit from where they were a few years ago due to higher medical inflation, they continue to be below our long-run loss cost trend assumptions based on much longer-run historical averages that we never lowered. This line remains profitable.

Q: Are you seeing increased plaintiff attorney representation on casualty claims?

A: Yes, we continue to see this dynamic play out. The increasingly aggressive plaintiffs' bar and higher attorney representation has been one of the major drivers of social inflation over the last several years on casualty lines in our book.

Q: As to the pension risk transfer transaction, what will be the impact on expenses on a run-rate basis?

A: We closed on a pension risk transfer transaction several weeks ago for about 60% of our $1.7 billion defined benefit pension obligation. We previously disclosed that we will incur a one-time, non-cash charge of approximately $290 million (after-tax) in our fourth quarter earnings, which will be outside of core income. This reflects settlement accounting where we record an approximate pro-rata portion of our unamortized net actuarial loss that resides in AOCI into earnings. In normal course this unamortized net actuarial loss would otherwise be amortized into earnings in future years as the pension obligation runs off. If you look at Note H of our third quarter 2024 financials in our 10-Q, you will see our net pension expense is minimal for the year, excluding settlement charges. Each component of the pension expense would be reduced by roughly 60% into 2025 (as we've now reduced the assets supporting the pension, the pension obligation and actuarial loss by roughly 60%) so we expect the impact on expenses to continue to be insignificant going forward, all else equal. As a reminder, there are other moving parts that will determine total 2025 pension expense including where interest rates are on December 31, 2024, and our go-forward assumption of expected return on pension assets. Accordingly, we anticipate disclosing additional information regarding the precise effect of this transaction and updated assumptions in our first quarter 2025 results.

Q: In review of CNA's Financial Supplement, it looks like you recently reallocated about half of the limited partnership balance in the Life & Group portfolio to Property & Casualty and Corporate & Other. Can you speak to this shift in allocation?

A: During the second quarter we reduced the limited partnership allocation in our Life & Group portfolio by $500 million. These investments were redeployed in our P&C portfolio in exchange for high quality, long duration fixed income securities with attractive yields that will further aid our asset-liability management objectives. Over the past two years we have been able to take advantage of higher interest rates to extend the maturity of our Life & Group fixed income portfolio while also achieving yields that surpassed our reserving assumptions. The cumulative result of this activity has significantly reduced the level of reinvestment risk in this block, with the duration gap between our assets and liabilities now under one year.

Q: In review of CNA's Financial Supplement, for the International segment in the Other expenses line, there is a $14 million variance from a loss last year to a gain this year, can you tell me what is happening here?

A: The International segment's core income was favorably impacted by a pretax foreign currency exchange (FX) gain of approximately $8 million compared to a pretax loss of approximately $6 million in the third quarter of 2023, which drove the variance in the Other expenses line. The FX gain this quarter was driven by the U.S. dollar weakening against the British pound during the quarter. Our Lloyd's syndicate has U.S. dollar insurance reserves that revalue to the syndicate's functional currency of the British pound through the income statement. Note that economically our Lloyd's investment portfolio is also denominated in the U.S. dollar, thus effectively hedging our currency risk and this change is reflected through other comprehensive income within stockholders' equity.