CNA reported fourth-quarter and full-year 2016 results, with its new CEO indicating that while there is a strong foundation at the insurer, the company has work to do in improving underwriting discipline and results, and that is his main focus.
“We need to grow our underwriting profits,” stressed CNA Chairman and CEO Dino Robusto in an earnings call with analysts, adding that this is necessary but not easy to do when market pricing is running below loss cost trends.
Robusto said he is focused on lowering CNA’s expense ratio, which is higher than its peers’ ratio and is a competitive disadvantage, through various initiatives including using more automation and analytics.
CNA Financial Corp.’s fourth-quarter 2016 net income was $241 million, and net operating income was $221 million. Full-year 2016 results were net income of $859 million and net operating income of $824 million.
Property/casualty operations net operating income was $217 million for the fourth quarter of 2016 compared to $202 million the prior year. The increase was driven by higher net investment income.
Robusto called the fourth-quarter net operating income of $221 million “a solid result” but stressed that he sees room for improvement.
Robusto, a former Chubb executive, succeeded Thomas Motamed at the top at CNA on Nov. 21. Robusto took about a year off between leaving Chubb and starting at CNA. He said being away from the business was “difficult” for him and “it feels great to be back in the game.”
Robusto said he wants to instill an “expense discipline mindset” so that all employees are thinking about what they are spending and how they can be more productive.
CNA’s professionals “know what is working and what is not” and have the ability to change, Robusto said. He said he appreciates that his predecessor Motamed, who also came from Chubb, built a culture of continuous improvement at CNA that he can build on.
But Robusto stressed that he sees room for improvement. “There is a lot of upside for us to capture,” he told analysts.
On lowering expenses, Craig Mense, executive vice president and chief financial officer, pointed to $50 million in expense reduction expected in 2017 as a result of actions taken in 2016. “But there is more to be done,” he said. “Nobody’s complacent.”
CFO Mense commented that the insurer’s “singular focus” on growing underwriting profits involves improved decision-making and is not dependent upon any changes in corporate taxation that may come out of Washington.
Asked about recruiting new talent at CNA, Robusto said he considers it his personal responsibility to be involved in finding the best talent as well as in taking the talent already at CNA and “making it the best.” He said he is not looking to recruit from just one other carrier but looks “across the entire P/C supply chain” and that he believes there is a growing desire by many professionals to be a part of CNA. “I see it and I can feel it, ” he said.
P/C operations net operating income was $982 million in 2016 compared to $966 million in the prior year. This increase was due to higher favorable net prior-year reserve development and net investment income, partially offset by an increase in the current accident-year loss ratio and higher underwriting expenses. Catastrophe losses for the full year were $111 million, after tax, as compared to $95 million, after tax, in the prior year.
The P/C combined ratio was 99.9 for fourth-quarter 2016 and 95.9 for the full year. In the fourth quarter of 2015 it was 98.9, while for the full year it was 95.4.
The fourth-quarter result was negatively affected by a strengthening of reserves in the runoff Defense Base Act workers compensation business within the Commercial segment. CNA exited the DBA business in 2012 and recently devoted more resources and a dedicated team in this area to address claims and improve recovery from the government. This business contributed 13 points to the combined ratio for the fourth quarter and thee points for the year.
Fourth-Quarter Specialty and Commercial
- Net operating income increased $55 million for the fourth quarter of 2016 as compared with the prior-year quarter, driven by higher favorable net prior-year reserve development.
- The combined ratio improved 9.4 points as compared with the prior-year quarter. The loss ratio improved 9.6 points, driven by higher favorable net prior-year development offset by a higher current accident-year loss ratio, reflecting an increase in both catastrophe and other large losses. The expense ratio increased 0.7 points due to ongoing investment in underwriting resources.
- Net written premiums decreased $32 million as compared with the prior-year quarter due to a lower level of new business and slightly lower retention due to underwriting actions undertaken in certain business lines. Average rate was flat for the policies that renewed in the fourth quarter of 2016 while achieving a retention of 86 percent.
- Net operating income decreased $65 million for the fourth quarter of 2016 compared with the prior-year quarter. This decrease was primarily due to the unfavorable period-over-period effect of net prior-year reserve development partially offset by an increase in net investment income.
- The combined ratio increased 18.4 points compared with the prior-year quarter. The loss ratio increased 20.6 points driven by unfavorable net prior-year development compared to modest favorable development in the prior-year quarter. The unfavorable net prior-year development reflects a $90 million increase in reserves related to the Defense Base Act workers compensation program that the company began to run off in 2012. The current accident-year loss ratio was also negatively affected by an increase in large losses. Catastrophe losses were $21 million, or 3.0 points of the loss ratio in the fourth quarter of 2016, compared to $18 million, or 2.7 points for the prior-year quarter. The expense ratio improved 1.7 points in the quarter. The lower IT infrastructure servicing expense referenced in last quarter’s earnings call was the primary driver of the improvement.
- Net written premiums decreased $31 million compared with the prior-year quarter due to a decrease in new business as well as premium adjustments in the Small Business unit. Average rate was down 1 percent for the policies that renewed in the fourth quarter of 2016 while achieving a retention of 84 percent.
- Net operating results improved $25 million for the fourth quarter of 2016 compared with the prior-year quarter, primarily due to lower catastrophe losses and higher favorable net prior-year reserve development.
- The combined ratio improved 23.8 points compared with the prior-year quarter. The loss ratio improved 22.0 points primarily due to a decrease in catastrophe losses and higher favorable net prior-year reserve development. Catastrophe losses were $3 million, or 1.7 points of the loss ratio, compared to $22 million, or 10.7 points of the loss ratio for the prior-year quarter. The expense ratio improved 1.8 points in the current quarter primarily due to a decrease in underwriting expenses.
- Net written premiums increased $3 million compared with the prior-year quarter and includes favorable period-over-period premium development of $5 million. Excluding the effect of foreign currency exchange rates and premium development, net written premiums for the fourth quarter of 2016 increased 4.3 percent. Average rate decreased 1 percent for the policies that renewed in the fourth quarte while achieving a retention of 71 percent.
CNA’s insurance products include commercial lines, specialty lines, surety, marine and other P/C coverages. CNA’s services include risk management, information services, underwriting, risk control and claims administration.
*This story appeared previously in our sister publication Insurance Journal.