CNA Financial Corp (CNA) Q1 2021 Earnings Call Transcript

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CNA Financial Corp (CNA 0.27%)
Q1 2021 Earnings Call
May 3, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to CNA's discussion of its 2021 First Quarter Financial Results. CNA's first quarter earnings release presentation and financial supplement were released this morning and are available via its website www.cna.com. Speaking today, we will have, Dino Robusto, CNA's Chairman and Chief Executive Officer; and Al Miralles, CNA's 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 release and in CNA's most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, May 3, 2021. 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 the financial supplements.

This call is being recorded and webcast. During the next week, the call may be accessed on CNA's 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 CNA's Chairman and CEO, Dino Robusto.

Dino E. Robusto -- Chairman and Chief Executive Officer

Thank you, Ashley, and good morning, everyone. We started the year with good earnings from an improved underlying combined ratio and solid investment returns, which together largely offset a record-setting first quarter for catastrophe losses. But before getting into our results, I wanted to comment on our cyber incident. As you likely know, in late March, we sustained a sophisticated cyber security attack, which we determined was caused by ransomware. Promptly upon detection, we undertook steps to address the incident including proactively disconnecting our systems from our network out of an abundance of caution to contain the attack and, most importantly, to ensure that external parties were not at risk of cross contamination.

We also engaged a team of third-party cyber security experts through investigating and determine the full scope of the incident and notified law enforcement and key regulatory agencies. I was personally involved in our remediation and recovery efforts and I'm proud of the way we responded as a company. I'm pleased to report that the attack has been fully contained and our systems are back online and operations are back to normal.

There is no evidence to indicate that external customers or other parties were at risk of infection or cross contamination due to this incident. Most importantly, we were able to continue to meet the needs of our agents and brokers and insurers throughout the incident, and we received positive feedback from them that recognize their commitment to transparency and open communication. We kept the agents and brokers consistently upraised to the latest developments throughout the three-week restoration process and provided them with incident updates to share with their clients, should they receive questions. Our agents and brokers have been very supportive through this incident, and I want to thank them for their remarkable understanding and flexibility. We are continuing to review any impacted data to determine our legal obligations with respect to any notifications we may be required to make. To the extent of this incident impacted the data of insurers, employees or others we will notify them directly as required.

Now turning to our results for the quarter. We had core income of $263 million or $0.96 per share. Net income for the quarter was $312 million or $1.14 per share. The P&C underlying combined ratio was 91.9%, a 1.8-point improvement over last year's first quarter results and it is the lowest underlying combined ratio in over 12 years. Each of the three business units improved their underlying performance in the quarter. The all-in combined ratio was 98.1%, 0.8 points higher from the first quarter a year ago. The increase is driven by a 2.5-point increase in the catastrophe loss ratio in the quarter compared to last year, largely offset by the improved underlying combined ratio.

In the first quarter of 2021, pre-tax catastrophe losses were $125 million or 6.8 points of the combined ratio. The cat losses are primarily due to winter storms Uri and Viola. The combined ratio for our specialty was very strong at 88.8%, a 2.5-point improvement compared to last year. The combined ratio for commercial was 106.7%, a 1.5-point increase, as cat losses were 13.4 points this quarter versus 7 points a year ago. International combined ratio improved considerably to 95.5% as the reunderwriting we executed earns into the portfolio. Prior period development was favorable in the quarter by 0.6 points on the combined ratio.

The expense ratio for the first quarter was 31.5%, 1.6 points lower than Q1 2020. We continue to see the improvement in our expense ratio as our higher written premium growth rate over the past three quarters earns in. Net earned premium was up 6% this quarter, and I will have more to add on the expense ratio as well as prior period development. The underlying loss ratio in the first quarter of 2021 was 60.1%, a little less than 0.5-point lower than the fourth quarter of 2020. However, the fourth quarter, as a result, had a continued COVID frequency benefit. Excluding the benefit from COVID, the underlying loss ratio in the first quarter of this year actually improved about a point from the fourth quarter of 2020, and that is due to acknowledging earned rate being well above our long run loss cost trend assumptions.

Of course, our earned rate change at 11 points is meaningfully higher than the margin we acknowledged. But as we have said before, we have been prudent about significantly lowering our underlying loss ratio until we have clear evidence of how social inflation trends will play out, as sports come back to full capacity and the economy rebounds, particularly because we have been successful and profitably growing lines of business such as management liability and umbrella, which are impacted by social inflation. And to date, there is nothing that leads us to believe that social inflation has been even marginally extinguished throughout the pandemic.

Now having said all of that, as earned rate is expected to continue to outpace our long run loss cost trends assumptions, we should be in a position over the next few quarters to continue to see further improvement in our underlying loss ratio all else equal. For the first quarter, rate increases continued to be strong at plus 11% for total P&C, which is consistent with the full year 2020 increase. On a business unit basis, international rate was plus 14%, while commercial was plus 10% consistent with Q4 2020 and was plus 13%, excluding work comp.

In the first quarter, work comp rate was essentially flat, marginally better than full year 2020, which was slightly negative. Similar to 2020, the first quarter work comp rate included positive rate in several areas like manufacturing, while other areas were slightly negative, which aggregated to flat overall for the first quarter. Specialty also achieved double-digit rate at 10%. Now although specialty was down from the prior three quarters, it was impacted due to mix of business as our affinity professional E&O programs are a larger percentage of specialty renewal premium in the first quarter and the rest of the year. When you drill down, specialty continued to get double-digit rate on rate in the areas that continue to need it, like aging services where rates increased 33% in the first quarter and public D&O rates increased 34% and cyber rates increased 21%, which incidentally was 6 points higher in Q4.

Although rate for total P&C is a point less than the fourth quarter, we continue to get double-digit rate which is merited because of all the environmental issues we have commented on over the last 18 months. Moreover, the increases remain appropriate and necessary, when you put them in the context of how our industry operates, it's consistently competitive with an underwriting cycle defined by long periods where price increases do not cover long run loss cost trends that compound annually, like the roughly 20 plus quarters prior to this hardening market phase were at through the first quarter of this year, earned rates have exceeded long run loss cost trends for only five quarters. So when we think about rate adequacy, we do so against this reality, otherwise we can too quickly fall behind in lines of business with higher and potentially accelerating long run loss cost trends, such as several casualty lines we have discussed on prior calls. Therefore, we appropriately need to and will continue to push for rate increases well above long run loss cost trends and we see that persisting through the year end. We also continue to implement tighter terms and conditions across our portfolio which can provide immediate benefit in the case of higher deductibles or co-insurance percentages, but in other cases, materialize over time, for instance, in cases where we strengthen our policy language.

Retention was down 1 point from Q4 2020 at 83%, the decrease was due to reunderwriting our Lloyd's operation, now although the decision is to eliminate certain programs were made in the fourth quarter of 2020 some policies that are early 2021 renewal dates. Retentions in commercial and specialty remain consistent with the fourth quarter at 84% and 86%, respectively.

Our new business growth was strong at plus 16%, which continued in line with the double-digit growth rate, in Q4, plus 17%. With our success at growing new business and our double-digit rate achievement, gross written premium ex our captive business grew 8% in the quarter led by specialty at plus 10%, commercial at plus 5% and international at plus 12%. Net written premium increased 4% in the quarter. So as we look across the various production metrics for the quarter, we continue to effectively capitalize on the favorable market conditions and expect to continue to do so throughout the year.

With that, I'll turn it over to Al.

Al Miralles -- Executive Vice President and Chief Financial Officer

Thanks, Dino, and good morning to everyone. Before I get into the results, I would like to highlight a few changes to our earnings presentation materials intended to enhance information provided to you and to align this reporting with how we manage the business. These enhancements are specifically related to our production metrics and can be found on pages 7 and 9 of the earnings presentation. This information for the Specialty and Commercial segments, I'll provide you the refined and more detailed breakdown of our rate retention metrics into the sub-segments of these businesses.

Specifically for Specialty, we've separated out the Affinity professional E&O program business from financial management liability, given very different business dynamics. As we've said before, our affinity programs have been in place for many years for the long-term multi-year renewal periods. As such, these programs are less impacted by day-to-day pricing dynamics in the market. Financial management liability on the other hand, having told you over the last few years has been a growth area for us and we've been very successful in penetrating these lines of business and the exhibited rate retention dynamics typical of the traditional underwriting cycle.

You will also note on specialty that we've included a line item for medical malpractice, which would have previously been classified as healthcare but did not include the medical malpractice Affinity business. This line item now includes all of the medical malpractice including any related Affinity business that would have previously been included in the management and professional liability category.

On the commercial side of the business, we have separated out the national accounts business, which includes both large account property and large accounts casualty. Again, these are important lines of business which we've been targeting for growth and the rate retention metrics reflect the unique business dynamics therein. Overall, we believe the additional information and granularity on these pages will provide insight into our business and the progress being made. Finally, all information here has been restated for the four previous quarters for comparative purposes.

Now turning to the results. Core income for the quarter was $263 million compared to $108 million for the prior-year quarter. With the core ROE of 8.8% for the period, we continue to build upon the progress made on our underwriting profitability notwithstanding a period of elevated catastrophes. A meaningful contributor to our underwriting results for the quarter was the expense ratio. Our first quarter expense ratio of 31.5%, which is our lowest ratio since 2009 and reflects 1.6 points of improvement versus the prior-year quarter and a 0.5-point sequential improvement from the fourth quarter. Expense ratio improvement was achieved in all three of our P&C business segments. During 2020, progress on our expense ratio was primarily driven by managing overall expense spend, while investing judiciously in talent, technology and analytics. The expectation was that the trajectory of our net written premium would subsequently translate into earned growth further benefiting the expense ratio. This is clearly coming to fruition, evidenced by our results and we are proud of our progress on this front. We would anticipate that our earned growth will continue to benefit the expense ratio and assist in funding rational investment into the business.

Turning to net prior-period development and reserves, for the first quarter overall, P&C net prior-period development was 0.6 point favorable essentially flat to the prior-year quarter. Favorable development especially during the quarter was primarily driven by the surety business. There were no material prior-period development impact in commercial and International segments. In terms of our COVID reserves, we've made no changes to our catastrophe loss estimates for the quarter. We continually review our COVID reserves and our previously established estimated ultimate loss remains appropriate, and our loss estimate is still virtually all in IBNR.

Now turning to Life & Group. The segment produced core income of $36 million in the quarter compared to $4 million in the prior-year quarter. Consistent with the last several quarters, results benefited from lower new claim frequency, higher claim terminations and more favorable claim severity. As referenced in the previous quarters, giving the ongoing uncertainty of these trends, we've been taking a cautious approach from an income recognition perspective and accordingly have been holding a higher levels of IBNR reserves.

Our Corporate segment produced a core loss of $36 million in the first quarter compared to $17 million loss in the prior year. The results for the quarter included a $12 million after-tax loss from the closing of the loss portfolio transfer -- transaction associated with legacy excess workers' comp reserves. As previously announced, we entered into this transaction with a subsidiary of Enstar Corporation and the transaction closed on February 5th of this year.

This block of business which was previously reported as part of the commercial business segment is now reported as part of the corporate and other business segment. In addition, the results also reflect a change made to the segment presentation for certain legacy mass tort reserves. Similar to the excess workers' comp block of business, these legacy mass tort reserves were previously reported in the commercial business segment and are now reported as part of the corporate and other business segment. These changes were made to better reflect the manner in which we are organized for purposes of managing these businesses and assessing performance.

Turning to investments. Pretax net investment income was $504 million in the first quarter compared with $329 million in the prior-year quarter. Results included income of $61 million from our limited partnership and common equity portfolios as compared to a loss of $125 million on these investments from the prior-year quarter. Our fixed income portfolio continues to provide consistent net investment earnings, stable relative to the last few quarters and moderately down relative to the prior-year quarter. The year-over-year decrease was largely attributable to the effect of lower reinvestment yields. As a point of reference, the pre-tax effective yield on our fixed income earnings was 4.4% at Q1 2021 compared to 4.6% as of Q1 2020. The decline in our portfolio yield over this time reflects the cumulative effect of the persistently low interest rate environment, and while the recent increase in interest rates may help to alleviate some of the pressure on income absolute reinvestment rates remain a headwind for the business.

From a balance sheet perspective, the increase in interest rate during the quarter resulted in a decrease in our unrealized gain position on our fixed income portfolio to $4.3 billion at quarter end, down from $5.7 billion at the end of 2020. Fixed income invested assets that support our P&C liabilities had an effective duration of 4.9 years at quarter end. The effective duration of the fixed-income assets that support our Life & Group liabilities was 9.1 years at quarter end. As usual slides from our earnings presentation will provide you with additional details of the investment results and the composition of our investment portfolio. Our balance sheet continues to be very solid. At quarter end, shareholders' equity was $12.1 billion for $44.50 per share reflective of the decrease in our unrealized gain position during the quarter. Shareholders' equity excluding accumulated other comprehensive income was $11.9 million or $43.81 per share. We have a conservative capital structure with a leverage ratio below 19% and continue to maintain capital above target levels in support of our ratings.

In the first quarter, operating cash flow was $82 million and impacted by a $640 million payment associated with the loss portfolio transfer transaction. Excluding this payment, operating cash flow was very strong at $722 million compared to $212 million at Q1 2020 and driven by the improvement of our current accident year underwriting profitability and a lower level of paid losses.

In addition to these net operating cash flows, we continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity holdings to meet obligations and to withstand significant business variability. Finally, we are pleased to announce our regular quarterly dividend $0.38.

With that, I will turn it back to Dino.

Dino E. Robusto -- Chairman and Chief Executive Officer

Thank you, Al. We are pleased with our production execution, capitalizing on the very favorable market conditions as well as continuing to improve our underlying underwriting performance as we have consistently done over the last several years and we expect meaningful opportunity to do more of the same as we believe this favorable market environment will persist throughout the year.

And with that, we are ready to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Josh Shanker of Bank of America. Please go ahead.

Josh Shanker -- Bank of America -- Analyst

Yeah, good morning everybody. Thanks for taking my question. So Dino you said that you're not yet ready to interpolate the frequency data into your results and that's why the loss improvement isn't as material as you had imagined, but is it true sort of frequency, there is the frequency of actual life incidents and then there is the social inflation issue about whether it's on hold or not, there is no evidence as you say, one way or the other. But the incidence, the number of workers comp claims or the numbers of slip and falls or things like that -- don't we have good knowledge about whether or whether or not they occurred over the last call it 16 months?

Dino E. Robusto -- Chairman and Chief Executive Officer

Yeah, actually, Joshua. Thanks we do. And when it all started, the pandemic, we had indicated that we anticipated seeing a lot less frequency benefit in many of the other potential carrier, just that the nature of the type of insurance we had with a lot of healthcare business, manufacturing, construction, contracting, many of which were all essential services. As I think I referenced in my comments, we did have about 0.5-point benefit in the fourth quarter, that continue to play out from a frequency standpoint and there was nothing in this first quarter.

Again we started off from a base that was probably a lot less than others and obviously we started to see that play out. So we had recognized some frequency benefit and that's why sort of in comparing it and trying to sort of normalize it by taking it out and then suggesting that the underlying actually -- loss ratio actually came down more than a point of that. Hope that makes sense.

Josh Shanker -- Bank of America -- Analyst

No there's some stuff in there. And then with regard to the social inflation, one of your competitors increased their loss cost trend assumptions this quarter saying that social inflation is worse in their modeling, is there -- I understand you did have some steward take down concerns over social inflation, but have -- any evidence that social inflation is accelerating over the last 12 months?

Dino E. Robusto -- Chairman and Chief Executive Officer

Okay. So the way I'd categorize it was that we didn't really see -- we had -- let me take you back and maybe provide some context, if you recall at the beginning of 2020, Josh, what we did because of various casualty lines like the aging services, medical. Now we had referenced, we had also referenced umbrella. And at that time, we increased our long run loss cost trends about 100 basis points to 4 points, and I think throughout the pandemic, the social inflation or these trends remained at the elevated levels.

Since then though, we also experienced some higher loss cost trends in 2020 due to elevated losses in cyber both sort of frequency and severity. And also during the year, you have to contemplate mix changes during the last several quarters because as we indicated on -- in the prepared remarks, we grew our casualty lines such as management liability and they're going to hold substantially higher long run loss cost trends in our first-party or our big bulk of affinity program. So what we did at the beginning of this year, Josh, to your question specifically, we increased our long run loss cost trends roughly another 50 basis points, and now it sits at about 4.5 points. Hope that helps.

Josh Shanker -- Bank of America -- Analyst

That helps. And one other pandemic-related frequency severity item, when would we have information about how the pandemic has changed future behaviors around convalescent care, whether in-home care versus nursing home care, and what that means for longer-term modeling of a long-term care losses and whatnot?

Dino E. Robusto -- Chairman and Chief Executive Officer

Yeah, I'll turn that over to Al. Al?

Al Miralles -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Josh. Look, we are really week-to-week, month-to-month evaluating that and looking at those trends. To-date relative to the trends we've seen through the pandemic, it has not abated. We continue to see lower claim frequency, higher claim terminations and more an inclination toward home healthcare. So to-date that hasn't changed, but we're looking very closely. And as I mentioned, we continue to hold higher IBNR anticipation that we could see that certainly abate and change back to pre-pandemic levels.

Josh Shanker -- Bank of America -- Analyst

If people opt to choose in-home care versus nursing care because permanent behaviors have changed, is that positive or negative for the long-term care carriers, is in-home care more expensive or is nursing care more expensive?

Al Miralles -- Executive Vice President and Chief Financial Officer

Home healthcare is typically less expensive. And so that is some of what the positive effects we're seeing come through our results is that our cost of care is actually less. What we're holding from an IBR perspective is more of the frequency, but cost of care has been lower because there has been a propensity toward home healthcare.

Josh Shanker -- Bank of America -- Analyst

Okay. Thank you for all the answers and putting up with me.

Al Miralles -- Executive Vice President and Chief Financial Officer

Thanks, Josh.

Operator

We'll take our next question from Gary Ransom of Dowling & Partners. Please go ahead.

Gary Ransom -- Dowling & Partners -- Analyst

Yes. Good morning. I just wanted to follow up on the expense ratio. What I heard was that there really wasn't anything unusual at all in the expense ratio, if that is a reasonable expectation going forward. Is that correct or was there anything unusual in the number this quarter?

Al Miralles -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Gary, it's Al. Nothing unusual. I think really the story line we've been giving you, we expected that earned growth would begin to kick in with our net written growth in 2020. You're seeing that show up this quarter, at the same time, we've been disciplined about our expense spend while we make investments and I think you're seeing a continuation of that.

With respect to kind of the path forward, we would expect that our earned growth will continue to come in and we'll continue to manage as we have, the only variable I'd give you Gary is, look our investments in the business, talent, technology, analytics are not a straight line, and therefore, you're going to move around a little bit on the expense ratio, but I think the level you're seeing and in and around 31% is a good target.

Gary Ransom -- Dowling & Partners -- Analyst

All right, terrific. And, Dino, thank you for the info on the cyberattack. I wanted to ask though, if the -- you have an arrangement with a vendor that handles all of your hardware, as I understand it. I'm not sure that -- I think that's still in place, but was that company involved in the -- in fixing this and/or were they -- is that an entirely separate from what you experienced?

Dino E. Robusto -- Chairman and Chief Executive Officer

Gary, all our vendors that we use we have infrastructure and other partners and we also have in-house IT and technology and security. And everyone was involved along with some forensic experts that obviously we hire when this event started. So everyone was involved, everyone did, in my opinion, quite an incredible job working around the clock to get it back up and running in the course of that three-week period.

Gary Ransom -- Dowling & Partners -- Analyst

So is there -- if I look at where you are today in terms of cybersecurity versus say six months ago, is this -- you not only fixed this problem are you in better shape in terms of the protective considerations you have around your technology?

Dino E. Robusto -- Chairman and Chief Executive Officer

Yeah, I mean, I would say, look, we took obviously a number of steps and measures, first just remove the hackers, but also to further secure the environment, host of actions, additional endpoint, detection monitoring tools, etc. So we did post this event.

Gary Ransom -- Dowling & Partners -- Analyst

Okay. Thank you for that. And then back on the underwriting, you still have this concern about social inflation that's kind of the downside that or what's the potential risk of loss ratio is rising. Every quarter we, from the outside, are trying to assess whether those loss ratios reasonably reflect what's going on. And when I look back at the loss ratios historically, exiting your loss ratios, at this stage of the cycle, they've had a very strong tendency, at least in long tail lines, to develop favorably. I don't know if that's going to happen this time necessarily, but if you think about the reasons why that happened in the past, do you think any of those reasons might apply to today where we are in the cycle now?

Dino E. Robusto -- Chairman and Chief Executive Officer

It's -- that's something we -- you think about every day. I mean I -- even when I was commenting on how I sort of contextualized the loss ratio and rate adequacy in my prepared remarks is, if you look back at the cycle and you see many quarters, as I said, was about 22 quarters in our case where rate increases were below long run loss cost trends and now we're at 5. And so you think if that plays out, yes at least from my advantage point think about rate adequacy and loss ratios a little bit of a longer context. Of course one could make the observation that this cycle not having hit the same highs, it will be different than the other ones and social inflation clearly is unlike really anything I've seen in the last several decades.

So it's hard to know. We've seen it impact our casualty lines not been really changed during the pandemic, not sure whether the pandemic embolds in the plaintiff bar. So look, I -- we try to do the best that we can adding a little bit of maybe bias for prudence as we suggested and try to be as transparent as we can before you in how we think about it, right. So difficult to know for sure, Gary, whether it's going to play out as it did in the past and we take what's there in front of us and we think we're making the right decision.

Gary Ransom -- Dowling & Partners -- Analyst

All right. Okay, that's helpful, thank you for those thoughts and I guess that's it for me.

Dino E. Robusto -- Chairman and Chief Executive Officer

All right. Thank you, Gary.

Gary Ransom -- Dowling & Partners -- Analyst

Thank you.

Operator

[Operator Instructions] We'll take our next question from Meyer Shields of KBW. Please go ahead.

Meyer Shields -- KBW -- Analyst

Great, thanks. So I was hoping for a little more color in small business within commercial, because on -- year-over-year on a sequential basis, it's the only broken outline where we saw higher retention and higher rates. And I'm curious as to what's going on there in the market?

Dino E. Robusto -- Chairman and Chief Executive Officer

So our small business has been a real positive for us, Meyer. We continue to see opportunities to be able to grow the small business, to hold on with more retention, we're seeing a little less rate headwind pressure on work comp, so -- and it's been historically very, very strong. The loss ratio -- and we envision it continuing to contribute significantly both on the production side and profitability side going forward, we're highly focused on the small business.

Meyer Shields -- KBW -- Analyst

When we hear macroeconomic commentary about new business formation or new small business formation, does that flow into specialty or commercial?

Dino E. Robusto -- Chairman and Chief Executive Officer

Say that again. I'm sorry, Meyer, where our small business shows up?

Meyer Shields -- KBW -- Analyst

Well, I know it's for commercial, but when we hear about new business formation that tend to hit the excess and surplus lines market, I'm wondering whether that shows up in the Specialty or Commercial segment?

Dino E. Robusto -- Chairman and Chief Executive Officer

I'm not sure if I'm following all of that, the small affinity -- the affinity programs on the professional E&O obviously show up all in the specialty. And everything else, all other P&C lines for the small business show up in Commercial. So if for example, architects and engineers, the professional E&O for the singular architect and engineer will show up in Specialty's affinity program, the CMC components of it just like the law firms, as an example, will show up on the Commercial. And I'm not sure if that helps, Meyer.

Meyer Shields -- KBW -- Analyst

Yeah, done. That's what exactly I'm looking for. And then final question, I guess, the P&C fixed maturity duration moved up relatively of, roughly I guess, compared to what still look like long-term low interest rates, and I was hoping you could talk us through what's driving that?

Al Miralles -- Executive Vice President and Chief Financial Officer

Hi Meyer, it's Al. Yeah, sure. Yes, the P&C duration went from 4.5 to 4.9. That's largely driven by with the backup in rates. Here we have an Agency RMBS portfolio. So as you'd imagine with rates backing up, you get slower prepayment speeds and therefore the duration extends a bit. So that's predominant driver of what's -- of that duration pick-up there.

Meyer Shields -- KBW -- Analyst

Okay. Is that also what drove the average rating.

Al Miralles -- Executive Vice President and Chief Financial Officer

Yeah. There is a little bit of that, but also from my commentary, we held a higher level of short-term investments at the end of the year and then made the payment from that LPT. Obviously, our short-term investments would be higher rated, so that dropped it. But just to be clear, on the P&C portfolio, where we've really toggled between A minus and A. So we're kind of right on that line so it's pretty easy to move out to flip from one to the other.

Meyer Shields -- KBW -- Analyst

Got it. Okay, great, thank you so much.

Dino E. Robusto -- Chairman and Chief Executive Officer

Thanks, Meyer.

Operator

And there are no further questions at this time. I would like to hand the call back to Dino.

Dino E. Robusto -- Chairman and Chief Executive Officer

Great. Thank you, everyone, and we look forward to chatting with you next quarter. Be safe.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Dino E. Robusto -- Chairman and Chief Executive Officer

Al Miralles -- Executive Vice President and Chief Financial Officer

Josh Shanker -- Bank of America -- Analyst

Gary Ransom -- Dowling & Partners -- Analyst

Meyer Shields -- KBW -- Analyst

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