Ladies and gentlemen, good day, and welcome to the CNA Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Ralitza Todorova, Vice President of Investor Relations & Rating Agencies, for opening remarks and introduction of today's speakers. Please go ahead.

Thank you, Rocco. Good morning and welcome to CNA's discussion of our fourth quarter and full year 2023 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 5, 2024, 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 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. In the fourth quarter, we produced very strong results, capping off another great year of excellent underwriting performance and robust investment income. Gross written premium ex-captive growth was double digit for the quarter and for the full year, representing our third consecutive year of double-digit growth. We achieved a 39% increase in underwriting gain for the quarter, which included modest catastrophe losses and we achieved record underlying and all-in underwriting gains for the full year. Net investment income before tax increased 21% and 25% for the quarter and full year, respectively. And importantly, in the lines of business with elevated loss cost trends due to social inflation impacts, that we've commented on over the last several quarters, renewal pricing continues to keep pace with loss cost trends, and we expect that to continue as we move into 2024. I will focus on the fourth quarter, but I will also provide key highlights associated with our full year results. Core income increased by $97 million in the fourth quarter to a record $362 million. Net investment income was $611 million pretax, up $108 million over the prior year's fourth quarter with our alternatives portfolio and our fixed income portfolio contributing almost equally to the increased income. Our P&C operations produced a core income of $434 million, up $92 million in the fourth quarter. The all-in combined ratio improved to 92.1%, a decrease of 1.6 points compared to the prior year quarter, reflecting relatively benign pretax catastrophe losses of $22 million or 1 point of the combined ratio and favorable prior period development of 0.3 points. The P&C underlying combined ratio was 91.4% in the quarter and represents the 12th consecutive quarter it has been below 92%. The underlying loss ratio in the fourth quarter…

Thank you, Dino, and good morning, everyone. I will provide some additional information on our results, as Dino indicated. Core income of $362 million is up 37% compared to the fourth quarter of last year, leading to a core return on equity of 11.6% and reflects a 21% increase in net investment income and a 39% increase in P&C underwriting gain. Our P&C expense ratio for the fourth quarter was 31.2%, which is about flat with last year's fourth quarter. Overall, higher net earned premium was offset by higher employee-related costs, including incentive compensation and legacy pension plan costs. As I've 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 2024. The P&C net prior period development impact on the combined ratio was 0.3 points favorable in the current quarter. Favorable development in the Specialty segment was driven by surety and was 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. The paid-to-incurred ratio was 0.72 for the fourth quarter and 0.8 for the full year 2023, which is about flat with 2022 and in fact has been relatively stable since the beginning of the pandemic. we do see some fluctuation quarter-to-quarter, so we tend to take a longer view of this metric. Our Corporate segment produced a core loss of $76 million in the fourth quarter compared to a $52 million loss in the fourth quarter of 2022. The loss this quarter includes the results of our annual asbestos and environmental reserve review. The results of this review included a noneconomic after-tax charge of $24 million driven by the strengthening of…

Thanks, Scott. This was a terrific year for CNA with record levels of core and net income. Our P&C operations continue to produce strong results with record levels of underwriting and underlying underwriting gains. We achieved double-digit growth in gross written premiums ex-captives and record volumes of new business. The market is experiencing varying cycle dynamics by class of business, and we have navigated that environment very well and expect to continue to leverage profitable growth opportunities in 2024. Earned rate and the portion of exposure that acts like rate continues to cover our loss cost trends overall, and rate is strongest where we need it most. And in those lines particularly plagued by social inflation, we would expect price increases to stay higher for longer as well as continued robust property pricing in 2024. And with that, we'd be happy to take your questions.

Thank you. [Operator Instructions] Today's first question comes from Josh Shanker with Bank of America. Please go ahead.

Yes. Thank you. Good morning, everybody.

Good morning.

Dino, I did take it at the last statement about loss cost inflation to be absolutely correct in your numbers. We have much more simple numbers. I think if we go back to 2020-2021, you had talked about moving the inflationary compounding effect in aggregate from about 5% to 6.5% over those two years. And right now, in aggregate, rate is up about 4% with another 100 basis points of exposure acting as rate. Those are pretty cumbersome numbers, but can you talk about how we should feel confident that the current rate environment is covering the loss cost if the numbers maybe don't seem to, I guess, factor in a number above 6.5%?

Yes. So thanks, Josh. So our loss cost trends are running somewhere between 6% and 6.5%. They had gone up, as you pointed out. And at the time, I thought, okay, maybe 6.5%, but they're somewhere in and around 6% and 6.5%. And I commented on earned rate. Obviously, the earned portion of the rate is higher. And the exposure gains -- and exposure gains, about half of it acting as rate. It's different in different points. The work comp is probably a little bit more than half, and it was up 6%, the exposure. So I think, what I'm splitting hairs, that you're covering the long-run loss cost trends. And I think importantly, Josh, is why I tried to add a little bit more information on where I see the social inflation impacted lines, because those were the ones that had the moving target. That increase was -- that indeed what was increasing it from the 4.5% to 5%. And we're starting to see continued acceleration in those lines. So we feel very good going into 2024 that we should be able to continue to cover the loss cost trends.

Can you give us a little granularity about workers' comp versus commercial auto? Obviously, workers' comp is helping the numbers. The loss rates are much better than anticipated, and commercial auto is doing the opposite direction. How much of a weight on your numbers is commercial auto? How much of a lift on your numbers is workers' comp? And given where the rate environment in each is, what do you expect the trend will be for next year?

Yes. So let me try to parse it out this way. So commercial auto loss cost trends, as we indicated, they are above the average. And in fact, they're probably at high single-digit loss cost trends now. And we noticed that moving up at the beginning of the year which is why at the beginning of the year, we had about 9 points of rate on commercial auto, but now it’s 14 points, because we just made the decision that we got to push harder or we're not going to get to the other end of this thing on commercial auto. And I think it's gone up from 9% to 11% to 14%. And it's early in January but still looking very strong. Comp, on the other hand, even with medical inflation up a little bit, still the long-run loss cost trends are below the overall average, clearly below our long-term assumptions. And rate, even though slightly negative with a very strong exposure growth, we think that dynamic continues or the combination of the two continues to be quite favorable for us going forward. I hope that helps.

And if I can add one more philosophically. It's been a very long time since workers' comp has been poor, and it's been a very long time commercial auto has been good. Is there anything to think about these two lines that something has permanently changed in them? Or it’s just unusual factors that have made each of those cycles more extreme than they should have been?

Yes. And so first of all, Josh, just to emphasize your point about each of their cycles, right, we need to think about our business going forward as unique cycles rather than the classic, oh, the hard market, now, it's going to go soft. And what I would just say on comp, obviously, different dynamics because of the regulatory impact. And many of the changes that happened over 10 years have really stuck, and that's fantastic and I think continues. Commercial auto, clearly, it appears that a lot more rate was needed even earlier and maybe in general, a little slow to respond. The only thing I would say there is because commercial auto, to a large extent, gets packaged with other very profitable lines of business, you're selling it with your package policy, which your work comps are very profitable. And so, you put it all together and you might be a little bit more tolerant. However, you cannot treat auto as a commercial loss leader. And I think there is an awareness for that. And I do expect that the pressure -- the upward pressure on pricing is going to continue as -- because, and it's part of my comment on rational pricing environment, I do think we're looking at it all in separate cycles and going after each one of them. And so that is probably what I could add.

That’s very much appreciated.

[Operator Instructions] Our next question comes from Meyer Shields at KBW. Please go ahead.

Great. Thanks so much. Most of my questions are really smaller in scope. But you talked about medical inflation and workers' compensation picking up a little. What about other lines that also have medical exposure? Is the same trend showing up?

Yes. I think it's -- there's a little bit of pressure on medical, but it's still relatively small and captured within our loss cost trends.

Okay. Excellent. You mentioned in your comments that D&O price decreases or rate decreases are slowing down. All in, I guess, financial institutions and management liability rate decreases got a little bit bigger than in the third quarter. So what lines are seeing the accelerated decline?

Yes. So in the fourth quarter, because of what we call FIML, it's got a lot of lines of business in there. So in the quarter, you had a seasonality mix because we had a lot more of what is our miscellaneous professional E&O business in the fourth quarter. It's about 2 times the sort of average quarter. And in there, in particular, with some of the larger accounts on those lines of business and many of them excess, just had higher rate increases. So if you then break out two of the other sort of larger lines, as you pointed out, the D&O, we saw some moderation. The other one is cyber. But there too, although still negative, we saw some slight moderation also in cyber. But the seasonality mix of miscellaneous professionally is what caused it, Meyer.

Okay. Perfect. And then final question. In International, the gap between rate change and premium change, I guess, there wasn't. They were both 2%. Recent quarters have had somewhere between, I guess, 3 points and 5 points of what we would assume are exposure to unit growth. So I was hoping you could talk about what's changing there.

Yes. Thank you. First of all, just to remind every one of our definition of the exposure. So you have the classic sort of valuation increases in there or as companies sales go up and you capture, but whenever we have changes in participations in particular on different towers and we bring those down, that will show up as negative exposure. And in the quarter, in particular in International, we did come down on some property towers and also on some health care. And that more than offset the still increasing valuation increases that we're getting. So it is -- because we would put them together, it's the offset from the change in participations.

Okay. So if I understand that correctly, there's still -- if we could isolate somehow just the exposure component acting as rate, it will still be favorable in International?

Yes. Yes, it would be. It would be.

All right. Perfect. Thank you so much.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Dino Robusto for any closing remarks.

Thank you very much, everyone.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.