Ladies and gentlemen, good day, and welcome to the CNA 2022 Second Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would like to turn the call over to Ralitza Todorova, AVP, Investor Relations for opening remarks and introduction of today's speakers. Please go ahead.

Thank you, Elaine. Good morning, and welcome to CNA's discussion of our second quarter 2022 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, wwe.cna.com. Speaking today will be Dino Robusto, Chairman and Chief Executive Officer; and Scott Lindquist, 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 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, the forward-looking statements speak only as of today, Monday, August 1, 2022. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during the 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 made with the SEC. This call is being recorded and webcast. A replay of the call may be accessed on our website. If you're 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, Ralitza, and good morning all. We are very pleased with the second quarter results, as we had excellent production performance including 17% gross written premium ex-captives growth and a 64% increase in underwriting gain. Our core income declined by $96 million driven by limited partnerships and common equity returns, which declined by $171 million, while income from our fixed income portfolio was up $16 million as we turn the corner in the second quarter with fixed income yield now increasing. Scott will provide more detail on investments. In the second quarter, the P&C all-in combined ratio was 91%, a 3 point improvement compared to the second quarter of 2021, reflecting a lower underlying combined ratio increased favorable prior period development and lower catastrophe losses. Pre-tax catastrophe losses were $37 million or 1.8 points of the combined ratio, compared to $54 million or 2.8 points in the prior year period. For P&C overall prior period development was favorable by 1.6 points, compared to 2 points favorable in the second quarter of 2021. Our P&C underlying combined ratio was a record 90.8% this quarter, reflecting 0.6 points of improvement over the second quarter of 2021. In the quarter, our Corporate segment core loss was $25 million higher year-over-year. These results include a $51 million after-tax charge related to unfavorable prior period development largely associated with legacy mass toward abuse claims including the recent diocese of Rochester proposed settlement, which occurred in the second quarter. Drilling down on P&C production, gross written premium growth excluding captives was 17% and net written premium growth was 20%. Excluding the impact of a one-time catch-up related to the addition of the property quota share reinsurance treaty in the prior year period, net written premiums grew by 13%. New business grew by 27% this quarter,…

Thanks, Dino, and good morning, everyone. Core income of $245 million is down 28% as compared to the second quarter a year ago, leading to a current quarter core return on equity of 8.1%. Our P&C operations produced core income of $317 million. Underlying underwriting income of $191 million pre-tax was up 15% over the second quarter of 2021. Overall, underwriting gain in the quarter was up 64% year-over-year to $185 million. Net investment income of $432 million pre-tax was up $16 million in our fixed income portfolio offset by a $171 million decline in our limited partnership in common stock investments, which we report in core income. More on our investment results in a moment. Our Q2 expense ratio of 30.5%, which is 1.1 points lower than last year's second quarter. Lower acquisition expenses and higher net earned premiums drove the favorability despite continued strategic investments in technology, analytics and talent. To drill down a bit further, specialty incurred higher underwriting expenses primarily related to technology. Commercial benefited from lower acquisition costs and higher net earned premiums, while International acquisition expenses continue to benefit from the repositioning of this portfolio over the last several years. As I noted last quarter, there will be a certain amount of variability quarter-to-quarter. However, we continue to believe an expense ratio of 31% is a reasonable run rate. For the second quarter, overall P&C net prior period development impact on the combined ratio was 1.6 points favorable compared to 0.2 points favorable in the prior year quarter. In the Commercial segment, favorable development in workers' compensation was partially offset by unfavorable development in general liability and auto. In the Specialty segment, favorable development in surety was partially offset by management and professional liability. Favorable prior period development in International was driven by the…

Thanks Scott. Our second quarter generated fantastic results across Commercial, Specialty and International. We have been clearly focused on accounting for social inflation for several years, both prospectively and retrospectively, and we continue to be prudent in the face of uncertainty and backlog the court dockets. More recently, we have similarly included the impacts of the rise in economic inflation. Market pricing remains relatively rationale and we are successfully optimizing the rate and retention dynamics across the board and effectively growing our new business at strong terms and conditions. Bottom line, we remain enthusiastic about our business opportunities going forward. And with that, we'll be happy to take your questions.

Thank you. [Operator Instructions]. We will take our first question today from Gary Ransom of Dowling & Partners. Please go ahead.

Good morning. I had a few questions. One was just on the catastrophes and the impacts from the new quota share. Is it possible to quantify how much benefit you got in the quarter from that or how to think about what a run rate for your CAT load might be going forward?

I think going forward, well probably, the more recent average makes a lot more sense. But I'd say about a third probably benefited from the quota share. Keep in mind also, Gary, that obviously all the re-underwriting that we did on the Syndicate, which had a lot of U.S. CAT exposure that was coastal, also wildfire, we underwrote all of that. We also mentioned on several calls some of our property re-underwriting from the healthcare aging services, coastal exposures, wildfire exposures, and some of that probably benefited the CAT ratio this quarter. And then, I guess always probably appropriate to put a little luck in there.

Right. Okay, that's helpful. I just also wanted to ask about the rate versus loss trend. I mean, you gave us a lot of material there and I -- if I think about what's going on, we have rates gradually decelerating but we also have the potential for inflation accelerating loss cost trends, perhaps. It all seems to be bringing the point at which those two lines cross, maybe a little bit closer, it seems like you were preparing for that possibility. But is the market per -- do you think there's any place where the market is prepared for that? Is the market reacting to that possibility? Or it just seems like there's the fact that there's so much uncertainty isn't -- I don't see it from the outside completely reflected in market behavior but you might have a different viewpoint.

I mean, it's really -- it's hard to say. I think it has been rationalists, been moderating quite slowly. Gary, we did see on our larger property, in national accounts, in particular, anything that's CAT exposed, there the rate actually went up from probably high-single-digits to slightly over double-digit. So that could be one would say, a rationale reaction. Clearly, there's a lot of talk of that in large property. Now, it's not a huge portfolio for us. But clearly, we do have a national accounts property strategy. I mentioned before we are trying to balance the portfolio a little bit. So we are seeing that conversation on property. Commercial auto, we saw it on, as I said, in our construction, and its high single-digit in auto, so that's good. And the rest, we just are going to be as prudent as we can be on the loss cost trend side. And as I said, look up, I mean, we don't think about rate adequacy at any moment in time. And so we've got an opportunity to continue to push for rate and that's what we are doing. And I think, the tradeoff that the underwriters are making are good ones. It's harder to, sort of, incorporate more of a market overall their perspective, that's just, the way I see it and hence why I think in the end, you get the gap still persisting maybe through year-end, as I indicated. And we'll see. You have a tough CAT season that can turn around because not only -- the inflation is going to put a pretty big toll on -- if you have a large CAT in addition to sort of demand surge. So that's probably not enough from what you wanted, but that's the best I could offer.

That's -- that's -- that's great. Yes. It's always difficult to see all the trajectories of these things.

Yes.

I also wanted to ask about the retention in International. It's up at 85%. You did talk about it a little bit, but are there any particular classes or types of business where it's a little more sticky for you now after all that re-underwriting?

Yes. So let me just parse out because we throw in Canada there too. I mean, Canada has always maintained a relatively stable and good retention ratio. It was more with respect to as you point out, Europe and the Lloyd's Syndicate. And you had seen retentions in the low-60s for quite a few quarters. And as we re-underwrote the portfolio, what we did is just aligned it with our appetite in the United States. And so what we do in Commercial here and what we do in Specialty here is, is what we are targeting. We took down the portfolio substantially. What we left, we really wanted to hang on to. And I think we saw some good increase on the retention. It's nothing more significant than that. Both Europe and Hardy were 80% or a little over. So that -- so we had expected, right? We went in to the renewal season expecting that after the re-underwriting and so many quarters of it being down substantially.

Okay. That's great. And maybe just one more on the mass tort abuse claims. You seem to be implying that there were other things besides Rochester that might have been in the abuse claim category. Is there anything there you can mention or talk about?

Yes. So I think Scott mentioned it, right? We do the mass tort review every second quarter. We don't parse out all the components in there. A lot of it has to do with abuse and the impact of reviver statutes, but there's other old mass torts. And based on that review, we think and all the information we have that we have it appropriately reserved and broadly across all of the mass torts. But there's a host of things in there.

I guess I was dancing a little bit around the Boy Scouts too, if there's anything specific you can say. I'll understand if there isn't anything you can say.

Well, yes. No. I mean, listen -- and that falls under the abuse. But at this point, there isn't anything for us to comment as it's ongoing and active, as you saw. And listen, when and if warranted, we'll obviously comment on it, like we always do.

Terrific. Thank you very much, Dino.

Okay. You're welcome.

Thank you. We take our next question from Meyer Shields of KBW. Please go ahead.

Thanks. Dino, I want to start, if I can, I'm trying to understand one of the comments that you made where you say we don't assume we will cover our long-run loss cost trends every year going forward. Does that mean that when things are accelerating we should expect in the short-term loss ratios to go up?

So this is -- this was more -- as I caveated the end of that sentence well history taught us that. But in any underwriting cycle, Meyer, it plays over 15, 16 years. You get, I don't know, 8, 10 years of a soft cycle. You've got pricing that will drop below long-run loss cost trend. So that's why it was more -- just that that's a reality. I've seen it happen over 40 years. It's going to continue to happen. Now is the time to continue to take advantage of the pricing in the marketplace and keep pushing harder. It's nothing more sophisticated than that. It's just a reality that causes us not to talk about, well; we're rate-adequate now. And so that's really all I was trying to get at.

Okay. That’s helpful. Thanks for clarifying that. Within Specialty, I guess, both last quarter and this quarter, we've seen the warranty expenses rise faster than the revenues. And I was wondering whether there's anything material there and how that -- how are you expecting that to play out maybe going forward?

No. There's nothing really there a little bit of -- as we indicated some technology and a little bit of analytics. We also hired some additional staff in talent as we sort of moved away from the shutdown period of the pandemic, but it's nothing really significant.

Okay. And then final question, I'm just wondering whether or what you're seeing with regard to your clients in terms of a possible economic slowdown going forward. Are you seeing any level of concern?

Well, yes. So when we talk to a lot of the clients, I think they still remain relatively optimistic. And I mean, I think the economy is going to be what it's going to be, right, Meyer? So we -- what we do is we pay close attention to exposures and the audit premium. Now both of them were up considerably in the quarter. And so far, the signs continue to look good. And we'll just keep tracking exposure; we'll keep tracking audit premiums. Obviously, if you get into a deeper recession, you'll see it in the audit premiums and we'll be able to reflect it. But right now, it continues to be a pretty good outlook.

Thank you. Our final question today comes from Josh Shanker of Bank of America. Please go ahead.

Yes. Thank you. The disclosure in the call has been excellent, but I want to go a little deeper. And I -- well, you said on the call that you want to talk about both pricing and reserves for preparing for inflation. You've been very fulsome, and please don't let me get anything wrong. If I say something wrong, correct me. But I think about two years ago, you were estimated 2.5%, 3% long-term cost inflation, and now you're closer to 5.5%, 6%. Have the reserves for 2016, 2017, 2018, 2019 the unpaid losses been revised up in all classes other than workers comp over that time? Every time -- and you're not alone. There's a lot of folks that say oh, we're taking up our loss picks and yet they still release reserves. And so I'm trying to figure out how you when taking the long-term. So can you talk a little bit about that and what's happened in the last, like nine months?

Sure. So let's -- look, first of all, if you look at the open claims on quite a few of the lines, so if you look umbrella, you look at medical malpractice, you look at auto, all of those are unfavorable, and you can see it. Of course, we had offset on comp, but don't forget, we also had offset on surety, and that's significant. But if you look at the other lines, as I gave you, there were $200 million just on medical malpractice. When you add commercial auto and umbrella, which you can obviously see to a large extent in our disclosures, it's been substantial because it does, to your point, Josh, and a point you've been making effectively, it does affect the past, not only the future, because of all of the open claims.

And so when you said, look, we -- I don't want to -- I read it was just rhetorical in some ways and Meyer got into it a bit. But when you say that we're not always going to be below, we're not targeting a long-term pick -- I guess it's hard for me to parse that. we're not targeting a long-term inflation pick in how we're pricing. We're attacking it more organically. I just -- is there confidence that those reserves are now being picked at or above the long-term loss cost inflation that you have in your assumptions?

Yes. We clearly -- we've increased those long-run loss cost trends substantially, right. They doubled, as I said, in four years. And we believe with the actions we have taken over this period and in this quarter, that the reserves do capture it. Now, it's possible that long-run loss cost ratios, which we are sitting at about 6%, might go up. My point on the other aspect that Meyer brought up of rate, it was a question of rate adequacy because you hear conversation around rate adequacy. What I was simply suggesting is that we don't focus on that as much because it is, it has been increasing. It can continue to increase. And so you might be rate adequacy in a rate adequate line and quickly you're not anymore because of long-run loss cost trends. And then the other component I was just making is let's be realistic. There's also times in a soft cycle where you're not going to make it. And so my point there was simply that, hey, now's the time to go get more rates. And that's all I was intending.

And that makes sense. And then my other question on medical loss inflation, to what extent is it just a lagging indicator? Medicare and the HMO does have a lot of bargaining power. And so the cost of medical services had been tame as we're using pricing for medical services that was set in the past. But should we expect that the input costs for hospitals are rising, even if the cost to the patients haven't gone up yet?

Well, first of all, let's just put in context the medical malpractice line and our actions on that medical malpractice line, which have been substantial, both in terms of unfavorable, prior period development and long-run loss cost trends. And of course, in consequence pricing, et cetera, was a function clearly of social inflation. We saw significant attorney representation increase on those cases. We saw on embolden plaintiffs. We saw higher settlement demands even when the facts didn't warrant it. That's what drove that a lot. Hard for me to sort of then sift through all of that and say, is it an indicator for what medical trends are going to do as we see it in work comp? Not -- it's not something that I can assess and I wanted to be clear on the social inflation impact on professional or medical malpractice. Does that help?

That helps. And what about on workers compensation, which has been very favorable. Some of that -- there's some medical in that. Is it -- and look, I certainly expect that workers comp loss trend will rise in the future. But to what extent is that -- is medical costs a delayed or a lagging indicator of inflation as opposed to a concurrent indicator?

I mean, I'm not really sure how to -- when you look at the CPI, medical inflation on the CPI this quarter, I think it changes every quarter, went up to 4.5%. Our trends are showing less, probably under 4% and a function of some of the things that offset it, fee schedule, the opioid utilization, which has come down. The fee schedule does -- those kinds of things does cause a lag and so some of that has a lag impact. We watch it; we clearly have a good handle on it. As I was trying to point out on the work comp, because we've been so conservative that that if it goes up. We think we've got some room there. Of course, if it really turns a corner, a function of economic inflation goes up for a protracted period of time, well, the good news is we'll have a little bit of time to react, and we think we can, based on our portfolio that we have, which to a large extent is more sort of the white collar work comp.

Well, I just want to say, as usual, the disclosure, the detail, the depth, it's all top tier. And thank you for doing so much work on this.

Okay. Thanks, Josh.

Thank you. We'd now like to turn the call back over to Dino Robusto for any additional or closing remarks.

Well, thank you very much everyone, and we look forward to chatting with you next quarter.

Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation. You may now disconnect.