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

Thank you, Jamie. Good morning and welcome to CNA's discussion of our fourth quarter and full year 2022 financial results. Our fourth quarter earnings press release, presentation and financial supplement were released this morning and are available on the Investor Relations section of our website, www.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, February 6, 2023. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this 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 with the SEC. 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 the 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. CNA produced strong results in the fourth quarter, capping off a great year of underwriting performance. I'll start off by drilling down on the fourth quarter and then provide some detail on our full year performance. Core income increased by $9 million in the fourth quarter to $274 million. Our P&C operations produced core income of $342 million down only slightly compared to last year, even with cat losses nearly twice as large in the fourth quarter of this year compared to last year and investment income was down due to lower returns on our alternatives portfolio. We were able to largely offset that with higher underlying underwriting gain and slightly more favorable prior period development. In the fourth quarter, the all-in combined ratio was 93.7%, an increase of only 0.8 points compared to the prior year quarter with pretax catastrophe losses of $76 million or 3.6 points of the combined ratio compared to $40 million or 2 points in the prior year period. Approximately 90% of our catastrophe losses in the quarter were from Winter Storm Elliott and the rest from several smaller events. Prior period development for P&C overall was favorable by 1.1 points on the combined ratio. The P&C underlying combined ratio was 91.2%, consistent with last year and continues a string of underlying combined ratios of near-record levels for 7 consecutive quarters. The underlying loss ratio in the fourth quarter of 2022 was 59.9%, down 0.2 points compared to the fourth quarter of 2021. The expense ratio of 31.1% was up slightly from last year. As usual, Scott will provide more details on expenses. In the quarter, we continued to achieve a strong production performance with 8% gross written premium ex captives growth and 9%, excluding currency fluctuation. Net…

Thank you, Dino and good morning, everyone. I will provide some additional information on our results, as Dino indicated. Core income of $274 million is up 3% compared to the fourth quarter of last year, leading to a core return on equity of 8.9%. Net investment income of $503 million pretax was down $48 million this quarter. Our fixed income portfolio generated a $33 million increase in investment income this quarter offset by an $88 million decline in investment income in limited partnerships and common stock. Our P&C expense ratio for the fourth quarter was 31.1% which is a slight increase compared to last fourth quarter's expense ratio of 30.8%. The increase of 0.3 points was driven by higher underwriting expenses, including continued investments in technology, analytics and talent partially offset by net earned premium growth and lower acquisition expenses. As I have noted in prior calls, 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 2023. The P&C net prior period development impact on the combined ratio was 1.1 points favorable in the current quarter. Favorable development in the Specialty segment was driven by surety and was somewhat offset by management and professional liability. In the Commercial segment, favorable development in workers' compensation was partially offset by unfavorable development in general liability and commercial auto. Our Corporate segment produced a core loss of $52 million in the fourth quarter compared to a $94 million loss in the fourth quarter of 2021. The loss this quarter was predominantly driven by our annual asbestos and environmental reserve review. The results of the review included a noneconomic after-tax charge of $28 million driven by the strengthening of reserves associated with higher defense and indemnity cost on…

Thanks, Scott. To recap, we have steadily and methodically improved our results over the last 6 years and 2022 was a particularly strong underwriting performance with record low all-in and underlying combined ratios and strong production results across the board. Of course, it's all about going forward and we are encouraged by the opportunities in front of us. With the anticipated continued acceleration in property pricing and growth in exposures that act like rate, we expect to continue to cover our current loss cost trends as we enter 2023. Additionally, we will gain meaningful benefit from the tailwind of fixed income returns. And with that, we will be happy to take your questions.

[Operator Instructions] And our first question today comes from Josh Shanker from Bank of America.

Yes. I was looking at the operating cash flow, I'm not the best thing to look at for insurance for me [ph] but substantial growth, $2.5 billion of operating cash flow generated this year, up from $2 billion last year. But the -- it looks like -- and obviously, FX is part of it but reserves didn't grow at all over the course of the year. Can you sort of break out why you're having such good cash flow growth and why, I guess, paid to incurred levels are somewhat less attractive in the year?

Sure. Thanks, Josh. It's Scott here. So yes, you're right, $2.5 billion operating cash flow for the full year 2022. It was about $2 billion in 2021. So recall, in 2021, we had a significant loss portfolio transfer from some older workers' comp business, that was a negative -- that was about a negative $600 million or so, maybe $500 million impacting that 2021-year amount. So if you adjust for that, cash flow from operations are about flat year-over-year, albeit still very, very strong. As far as paid to incurred goes, so for the fourth quarter 2022 by 85%, a year ago was by 89%. So there's going to be some natural distortions quarter-to-quarter, I mean much of that driven by catastrophe activity. And when you look at it, it has increased as courts have reopened. But at the end of the day, it's still substantially below where it was pre-pandemic. So that would be really my observation on the -- paid to incurred as well as the cash flow question.

And Scott, you really took it where I wanted to take it as well. So if we talk about courts reopening and what is the frequency of losses being paid right now compared to what might have been thought about a normative frequency had courts not been closed, is there a catch-up going on? And how long should this last?

Yes. I think we've talked about this before. I mean the courts, there's significant backlog out there. We're seeing it, absolutely. We expect it to emerge slowly as we move out from the pandemic. I'm not in a great position to predict how quickly that will emerge this year but things are loosening up and we're seeing that.

And social inflation in line with what it was a year ago?

Yes. Josh, it's Dino. Thanks. We had said that, during the pandemic years, right, we just thought it was obfuscated. And clearly, as soon as the courts opened up, notwithstanding the -- some of the backlog that Scott mentioned, you could see it, it just sprung right back. So we're at an elevated 6% loss cost trend. And so it's right what we had expected it.

And if I can sneak one more in. You just said an elevated 6%, do you perceive that 6% to be elevated? Or is that a new normal that it's 6% for the foreseeable future and we have no plans to expect it to go down? Or do you think that's a temporary 6%?

Yes, that's a good question, Josh. I mean, I think elevated just relative to pre-pandemic levels, right? And so social inflation clearly impacted it tremendously. Now it's at 6%. As the backlog gets worked through, is it possible it can go higher? I mean, I guess so. But even at 6%, compounding annually, it's going to take a lot of discipline and we got to keep pushing hard for rates to stay ahead of those loss cost trends. So right now, we see it at 6%. I guess it could go higher but that's high, 6%.

Our next question comes from Meyer Shields from KBW.

You talked about keeping property PMLs broadly flat. I was wondering, if you could remind us of what the internal constraints are on that and what you're building in for, I guess, loss trend there relative to rate increases that you're expecting.

Yes. okay. So we don't parse out sort of our PML accumulations. It is less about internal constraints and more simply just given what we have seen over the last decade of elevated cats and secondary type cat perils having such a dramatic impact. We're just prudent in how we manage our cat PMLs and the reinsurance that we purchased. In terms of the property, you'll recall early on when we saw the inflation hit, right, we had increased our property loss cost trends about 2% and we've kept them at the elevated levels. So clearly, the rate we're now getting and also the TIV which is why I wanted to sort of detail that we're being successful in getting valuations up, we're covering -- we're clearly covering our loss cost trends there. But we had increased them about 2 points.

Okay. And I know it's early but I was wondering whether you've had any conversations yet with the property quota share reinsurers. Just we're trying to get a sense in terms of how net exposure might change over the course of this year in a tougher reinsurance market.

Yes, yes. I mean that's -- we haven't -- and I think they were all sort of consumed with the 1/1s and that made a lot of sense. You've got to get through the April 1s and then the June 1s. Look, I mean, all I can say is when I look at what the press has been about the activity on renewals, there's clearly a possibility that we can get a little bit more -- have to take a little bit more net. And so we'll just -- we'll see how that plays out. And then on the pricing which obviously was quite substantial, I mean it was -- it had a big variability to it. And I think, look, our overall results have been good for us and the reinsurers and we would expect to be on the better end of that. But we'll have to see, right? To a large extent, Meyer, it probably depends also on what happens in the next several months. You have a very active catastrophe season before June 1, that could change the calculus a little bit. But we're being -- one of the reasons why we're prudent now about how we write property and how we look at cat PML.

Okay. That's helpful. And then one final question, if I can. I know there was a lot of commentary in the back half of last year about sort of the sudden emergence of rate cuts in D&O. and I'm wondering whether that trajectory has changed more recently. Or is it the same intensity of competition as in previous months?

It's -- I don't know if it's really changed much recently. I mean it was an abrupt change which we saw obviously, going into the third and fourth quarter. I think a function, as I said in my prepared remarks is the fact that, look, D&O got over 100% rate increases during that hard market. And so I think it's a bit of an adjustment. It's still -- our rate level still double what they were -- I think we'll -- now look, I mean, if it continues to persist that way, then obviously, in a few quarters, that could be a little bit more problematic. But I'm not there yet. I think we're going to continue to push and we have the expertise that continue to drive this thing profitably. And I think we've demonstrated, right, through all of our re-underwriting efforts and we're not going to chase accounts that you can't make a good return. So I think it's too early to suggest. Look, this thing is just overly competitive and it's going to play out -- continue to play out that well -- that way, rather.

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing -- we do have a follow-up question from Josh Shanker from Bank of America.

Well, I'm not going to let all this time go without getting more questions in. So...

I had a hunch, Josh.

All right. So obviously, this is not the quarter for the LTC study. Where do you -- in terms of thinking about interest rates and behaviors for reserving as we close out the year, obviously, we've gone through COVID, you're learning more about behaviors. Can you talk to us a little bit about how you think about incidents and adequacy of coverage given where rates are?

Sure, Josh. It's Scott here. So yes, if I can comment a little bit about just the past few years and then kind of where we're at right now with the long-term care book. So I would say, over the past 3 years relative to reserve expectations, the long-term care block [ph] has generally experienced lower claim frequency, higher claim terminations and more favorable claims severity amid the effects of COVID-19. And those effects were definitely more pronounced earlier in the pandemic. And as the pandemic has abated, these effects have largely dissipated as we've worked our way through 2022. I'd also remind you, in the third quarter call, when we talked about the GPV update, we also reduced our IBNR. We had actually built up IBNR over 2020, 2021, expecting somewhat of a delay in reporting of claims that did not materialize. So we reduced IBNR by $107 million. During the third quarter, it was somewhat masked by an uptick in our claims reserves for LTC for our disabled life [ph] reserves that was about $82 million. So I think that's a big picture how things are looking as we're emerging from the COVID era as we sit here right now.

And then obviously, the things -- you're probably more so than any [indiscernible]. You're slow to recognize good news in LTC but quick to recognize anything that might be unfortunate. Is there good news in the trends that's not baked into reserves yet?

Well, I guess I would point you back to the third quarter call when we did our GPV review. We ended up increasing the margin. We increased the margin from $72 million to $125 million. We had some puts and takes. We had a very positive tailwind around discount rate, higher interest rates. That was a significant positive. Also rate, we had increased margin by $190 million for -- increased outlook for rate on a net present value basis. And then offsetting that was cost of care inflation and higher utilization. So you kind of shake that all up and we were at a net plus $125 million margin at Q3. We have not updated our study since then. So I would say that's pretty much how we feel right now because right now that $125 million is our best estimate.

And then it's probably too early to ask this question. But if I go back in time to the previous decade, sometimes people might have said, if we knew how good the business was back then, we would have written more of it and maybe been a little more aggressive on the price because it turned out to be so strong in the profitability. When you think about the 2020 to 2022 period and then there's a lot of puts and takes with social inflation and whatnot but there was a lot of pricing, do you think that those years are going to be years that people reflect on, if we knew how good it was going to be, we would have written more?

I think that's obviously a wait-and-see, right? I mean, listen, we have been cautious and prudent in how we recognize margin because of the social inflation dynamic to relatively new sort of going back 2016, '17, it's had a significant impact. And we obviously watch it closely. As I mentioned earlier, we also had economic inflation. I think we'll just have to see how these more recent accident years where earned rates well above loss cost trends, how that all plays out over the next 4 or 5 years and in the meantime, it's really what's fueling the caution that we bring to recognizing margin.

And at this time, I'm showing no additional questions. I'd like to turn the floor back over to Dino Robusto for any closing remarks.

Great. Thank you very much, everyone and we will chat with you next quarter.

And ladies and gentlemen, with that, we'll end today's conference call and presentation. We thank you for joining. You may now disconnect your lines.