Q3 2019 Earnings Call
Good morning, and thank you all for joining US today's call will cover Energy's third quarter 2019 financial results announced earlier. This morning News released financial results presentation, and financial supplement where posted on our website at www Dot E.G. Dot com at seven this morning, and the 10-Q for the quarter.
We'll be filed later today after the call.
Our speakers today include Bryan do borough, President and CEO , Peter Zaffino, CEO General insurance and global Chief Operating Officer, Kevin Hogan, CEO life, and retirement and Mark Lyons Chief Financial Officer. Following their prepared remarks, we will have time for couponing.
Before Brian begins please note that our commentary and discussion may contain forward looking statements relating to company performance market conditions business mix and opportunities and strategic priorities. These statements are not guarantees of future performance or events and are based on management's current expectations actual performance any that's made.
Differ materially factors that could cause results to differ include the factors described in our first and second quarter 2019 reports on Form 10-Q R. 2018th annual report on Form 10-K , and other recent filings made with the FCC AI Jie is not under any obligation and expressly disclaims any obligation.
Any forward looking statement, whether as a result of new information future events or otherwise.
Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures that are included in our earnings release financial supplement and presentation.
I'll now turn the call over to Brian .
Good morning, and thank you for joining us this morning, as I've said over the past few quarters.
<unk> leadership team has taken significant action on a number of fronts lay the foundation for long term sustainable and profitable growth at a at GE.
The execution of our strategy is reflected in our results this quarter, which were in line with our expectations.
Our efforts in general insurance have been focused on fostering a culture of underwriting ex outlining a consistent risk framework and reducing risk and volatility in our portfolio.
Theater and the team and G.I. are executing with focused urgency that is impressive and the marketplace has taken notice.
Beginning to see these significant significant efforts payoff in our results with the third quarter performance in Gi yielding remarkable improvement over prior years I'm, particularly pleased that the G.I. reinsurance strategy played out as design dramatically reducing volatility in season and preserving capital we've been leading the market.
Our professional approached you did you sleep wind capacity appropriately addressing loss cost inflation and continued underwriting discipline in our pricing bonds. These actions are playing out against an industry backdrop is the long pressures on accident year loss ratios loss cost inflation significant catastrophes over.
Multiple years pressuring the property lot lower interest rate environment, a complex retro market and up achieved alternative capital.
This market dynamic is different from the past because we now see the industry as a whole is acting more rationally and this combination of change behavior and external forces reaffirms my belief that this market cycle sustainable for the foreseeable future.
One example, where she has taken a leadership position in the industry is the way we tackle the increasing industrywide issue in cyber insurance.
He is a more focus on the severity of losses increased systemic risk or more stringent regulatory environment and ransom demands that are dramatically escalating in September we formally announced our affirmative cyber initiative and it provided clarity to the market on how cyber covered should be addressed that mitigated ambiguity that exist.
Turning to our third quarter financial results as you saw in our press release. This morning adjusted return on common equity in the third quarter was 4.1% and 8.6% year to date. Adjusted after tax income was 505 million or 56 cents per share for the third quarter compared to an adjusted after tax.
Loss of 301 million worth 34 cents per share in the prior year quarter year to date, when the Nike and adjusted after tax income was $3.57 per share, reflecting a $1.80 cents per share improvement over the first nine months of 2018.
General insurance delivered a third consecutive quarter of adjusted accident quarter underwriting profit the adjusted accident quarter combined ratio, excluding cats was 95.9% and we remain on track to deliver an adjusted underwriting profit for the full year and.
In addition, last week G. I announced a new syndicate at Lloyds, serving the 50 billion specialist U.S. high net worth market.
Voice has undertaken a comprehensive plan to regain its preeminent position in the marketplace. We've been actively seeking opportunities to be part of that effort first with our acquisition of Dallas, which included Talbot, a respected Lloyds platform and now with this further partnership Peter will give you more detail of the great progress, we're making in general insurance as we pursue.
Vision that business for the future.
Turning to life and retirement, we continue to produce solid results in the third quarter with adjusted pre tax income of 646 million adjusted return on on equity of 10.1%, including the impact of the annual assumptions review. The adjusted return on equity was 12.5% if you exclude the impact from the actuarial review process.
Despite continued headwinds from sustained low interest rates, we remain optimistic that our ability to deliver return on common equity in the low to mid teens for year, given the strength of our diversified product portfolio and broad distribution network.
Evan will provide additional information on the work he and his team are undertaking in life and retirement.
Net investment income was 3.4 billion for the quarter in 11 billion for the first nine months, which is ahead of our original expectations. Our year to date performances due largely to strong alternative returns Mark will provide more detail on this and our overall financials.
Finally, I wanted to touch on AG 200, our multiyear enterprise wide program to improve our core processes.
And infrastructure.
We have four core objectives Ray Archie 200, which are achieving underwriting excellence modernizing our operating infrastructure enhancing user and customer experience is becoming a more unified company.
This work is absolutely critical if they are GE is to become a top performing company and we are carefully prioritizing areas for investment.
And transformation, we will provide estimated levels on investment charges and savings for 2020 on our fourth quarter earnings call Peter as the executive leading this important initiative.
That rate further on the progress we've made through the third quarter.
Our ability to tackle transformational projects is supported by our strong balance sheet.
Focused on maintaining financial flexibility, while reducing our leverage and reinvesting in our businesses.
Looking through the remainder of the year and into 2020 were confident in our ability to achieve our goals for 2019 and continue to believe.
Momentum, we have generated will enable us to deliver a double digit aro CE by the end of 2021.
We still have a lot of work ahead of us and I'm very pleased with the progress we're making across the organization remain confident they RG as well on its way to being a leading global insurance company.
With that I'll kick it over to Peter.
Thank you, Brian and good morning, everyone. Today, I will provide an update on the general insurance third quarter financial performance. The turnaround that we are executing in key business units along with our observations on the current rate environment.
We'll discuss the recently announced new Lloyd's syndicates, serving the U.S. high net worth market and finally, I will close with comments on a RG 100.
The general insurance third quarter results reflects steady progress towards our goal of achieving sustained underwriting profitability.
We continue to execute on the bolt strategic moves we identified as critical to reposition our global portfolio, which include disciplined underwriting and reinsurance strategies, a clear focus on operational excellence and investing in talent for the future.
We continue to significantly reduce volatility through improved risk selection aggressive lemon management and align our businesses with our redefined underwriting strategy, we're achieving better rate adequacy in many cases are leading the market.
As we expected it will take time for these actions to fully earned through our reported results, but I'm very pleased with our improving financial performance.
Turning to our results the third quarter adjusted accident quarter combined ratio was 95.9% of 350 basis point improvement year over year, including a 210 basis point improvement and the adjusted accident quarter loss ratio and a 140 basis point improvement and the expense ratio in North America the adjust.
Accident quarter loss ratio was 69.5% 30 basis point improvement year over year, our financial performance in the third quarter reflected favorable impact and changes to our business mix, which was achieved through reductions in higher loss ratio businesses strong results from Gladfelter improved rate adequacy across a number of lines.
Lower frequency of property attritional losses across retail wholesale in western world and the benefit of Treaty and facultative reinsurance.
As positive drivers were largely offset by our crop and specialty business.
Crop negatively impacted north Americas, adjusted accident quarter loss ratio by approximately 100 basis points.
Significant spring flooding in the Midwest affected many of our insured farmers, which drove a higher volume of prevented planting claims as a result, we increased our 2019 loss ratios. Despite remaining uncertainty regarding the ultimate profitability of this properties.
We experienced higher losses in inland Marine aviation and energy, which negatively impacted north Americas adjusted accident quarter loss ratio by approximately 250 basis points.
We continue to take actions to improve performance in U.S specialty lines through enhanced risk selection rate improvement strategies in reinsurance. Despite these headwinds in North America on a global basis, our specialty business performed very well with international seeing lower expected losses.
North America personal insurance performed as expected with 110 basis point improvement in the adjusted accident quarter loss ratio and 100 basis point improvement in the adjusted accident quarter combined ratio.
Overall, I'm very pleased with north America's poor performance and believe the trends, we're seeing demonstrate a higher quality better price and more balanced portfolio that is improving each quarter.
Moving to international the adjusted accident quarter loss ratio was 53.9%, a 430 basis point improvement year over year in international commercial fewer severe and attritional losses that were below trend, particularly in specialty and Talbot, our Lloyd's syndicate.
Additionally, re underwriting efforts and property within the UK in Europe are beginning to earn into our reported financials. The international personal insurance adjusted accident quarter loss ratio improved 290 basis points as we continued to see a favorable trend in Japan personal auto the third quarter expense ratio for general insurance of 34.4%.
That was in line with our expectations and reflects our sustained diligence around expense control.
The third quarter 2019 was an active cat quarter.
Total net cat losses were 497 million compared to 1.6 billion in the third quarter of 2018, and 3 billion in the third quarter of 2017.
There were nine events in the quarter six of which occurred in North America three occurred in Japan.
Our net cap ratio in the third quarter was 7.5% with 2.9% attributable to events in North America, 3.5% attributable to Japan, and 1.1% attributable to Validus re.
Net cat losses from events in North American over 203 million Hurricane Dorian was a single largest driver of net losses at 135 million, which 10 million was attributable to Validus re the five remaining smaller events in North America range from 10 to 14 million net losses per event.
Net cat losses from the Japan events for $294 million with what 65 million was attributable to Validus re tightening taxi the strongest type the will to hit the Contel region. Since 2004 was the main driver of these losses.
I want to provide an overview of our business in Japan, given our significant market presence in the actions weve taken to address our cat exposure.
Japan is AI jie largest market outside the United States. It represents approximately 5.1 billion in gross premiums written of 82% in personal lines, an 18% in commercial lines.
Gee is the largest corn on general insurance company in Japan, with an average market share of 6% in the regions. Most impacted by recent cat events as I've said in the past as part of our strategy to contain volatility and managed cat within our risk appetite, we enhanced our reinsurance coverage in Japan to reduce net retention and protect against.
Revance when we restructured our worldwide cap program for 2019. This included moving to a single occurrence tower for Japan with a model expected attaching point of the one in seven year event.
Dedicated occurrence protection exhaust at the model, one and 69 year event, we have additional protection from our global Cat cover that provides protection in excess of the one in 500 here.
Also.
Additionally, we also purchased international annual aggregate protection.
Which attaches at 110 year event for losses outside of North America with approximately 80% of the model expected losses coming from Japan.
Overall, Japan has been a profitable business with an average historical adjusted accident year loss ratio of approximately 50% and its prospects for improved profitability our very strong.
With respect to the recent cat events in Japan. It is still early days from piping taxi and as a result industry loss estimates from the modeling from span a broad range of between three and 9 billion.
Typing Haga bus a fourth quarter event is also expected to be sizeable AI ours early industry loss estimate currently at eight to 16 billion.
But the recent cat activity in Japan and perspective, there have been 12 designated catastrophic tropical storm since 1984 of which occurred in the last two years 2018 in 2019 will be the two largest years for insured losses from tropical storm events in the last 40 years.
However, irrespective of the eventual size of these industry losses AIG is expected maximum retain a net loss is limited due to the benefit of both the occurrence reinsurance and the international Cat annual Agra protection.
Based on our current estimation of year to date cat losses in international and excluding Validus re our net loss before reinstatement premium arising from this event is estimated at no more of an approximately $75 million.
We have significant additional covers in place to protect against further fourth quarter cat activity in our international business, including Japan, and taking Hagibis into account our Maxwell retention on any one losses now 20 million before any additional reinstatement premiums for the remainder of the year.
Respective validus re we havent aggregate retro in place given the wide range of model loss estimates is too early to provide a net cat loss estimate from typhoon high give us. However, we expect the retro aggregate to attach with another 155 million in cat losses.
As I've done in past calls I'd like to highlight a few businesses that exemplify the work, we're doing to reduce risk reposition our portfolio and establish AI jie as a market leader.
Recognize that I've mentioned, Lexington, often but the magnitude of the turn around in this business over the past years powerful unworthy of another update.
And casualty submission volume increased 62% in the third quarter and we were successful in further diversifying in the middle market, while reducing total limit by 58% and improving rates by 31% in property submission volume increased 47%, while we reduced total limits by 74% an increase our over.
Paul proportion of excess policies from 11% at the end of 2018% to 25% on a 2019 year to date basis. In addition, we increased deductibles by 18% continued to improve terms and conditions and achieve third quarter renewal rate increases a 15%, which we expect will continue to increase particularly.
Due to the recent global cat activity.
Turning to North America retail property, we continue to reduce aggregates and exposure to certain classes.
Increased deductibles and achieve meaningful rate increases we've reduced total gross limits by over 20 billion or 37% in the third quarter and over $80 billion or 49% year to date average deductibles increased by 27% in the quarter and 30% year to date.
These significant underwriting actions or reducing volatility improving attritional loss exposure and significantly reducing cat exposure.
Our year agreements represented approximately 30% of the retail property portfolio at the end of the third quarter. These agreements will be approximately 20% of the portfolio by the into 2019 and will trend lower during 2020.
We will drive additional momentum in our re underwriting efforts in the third quarter, we saw North America retail property rate increases accelerate.
As there was broader pull back and market capacity and disciplined underwriting was more prevalent.
The portfolio yielded high teen rate increases and achieve mid twentys rate increases when you exclude the impact of long term agreements, we expect to continue to see rate increases through the remainder of the year and into 2020.
In North America financial lines, we accelerated remediation of challenge segments and in the quarter, we achieve rate increases exceeding 30% across commercial Dino led by increases exceeding 35% in public Dino.
The same time, we reduced primary commercial do you know aggregate limits by over 40% compared to a 30% reduction the second quarter and we reduced primary commercial policies with limits greater than 10 million and lead layers by over 40%.
Well, we've done significant work to re underwrite our global portfolio. We're also focused on investing and attractive growth opportunities such as accident and health.
It's represents more than 3 billion and gross premiums written and is one of our best performing businesses, we believe and age will be a strong engine of future profitable growth because global demographic trends and demand for NH products match up well with our product offerings and global footprint.
Now I'd like to comment briefly on the overall rate environment and some broader market observations.
We continue to see meaningful rate increases across the board and the third quarter a trend that has accelerated throughout the year in some lines rate improvement has been at the highest level and over a decade.
The overall third quarter rate improvement for general insurance, excluding valdis in Gladfelter was in the high single to low double digits, North American commercial rates increased in the low double digits compared to a high single digit rate increased in the second quarter.
Our national commercial rates increased in the low to mid single digits on average across all geographies consistent with the second quarter.
Hi, this specific businesses I highlighted earlier in North America, we're seeing meaningful rate increases in the mid 20% range in admitted excess casualty and energy in international rate increases continue to accelerate in the UK driven by approximately 20 points of improvement in Dino over 30 points of improvement in marine low double digit improvements in energy. These.
Increases are being.
Driven by proactively addressing loss cost trend inflation as well as our unique position as a primary and lead market across the commercial insurance landscape.
As we've noted on prior calls loss trends due to the toward environment and social inflation continued to be key areas of focus for us. We recognize is growing trend a while ago and continue to monitor the changing landscape and respond to risks as they evolve.
Given recent news reports about settlement activity I want to touch on developments concerning litigation related to opioids, which has been filed primarily by state and local governments against manufacturers distributors and retailers, while it's too early to predict or quantify the outcome of all the litigation or the insurance that may apply we've been very closely tracking these days.
Elements that we can address these complicated risk appropriately as they continue to evolve.
As Brian noted, we recently announced the planned to launch in innovative syndicate with Lloyds focused on the U.S. high net worth portfolio.
We expect to syndicate will support new and renewing business starting in the first quarter of 2020 specialists Syndicate Syndicate 2019 is expected to be Lloyds largest ever singled you mentioned premium of up to a billion dollars.
Lloyds unique capital structure provides us with increased flexibility and efficiency and enables us to attract new and diverse long term capital partners to support profitable growth we're opportunities exist.
Before turning the call over to Kevin I'd like to make a few comments on AI Jie 200, as Brian noted AIG 200 is our global multiyear effort to reposition AI jie as a top performing company.
We are focusing on programs that involve transformational change to our infrastructure and underwriting operations as well as developing a new data architecture, all of which will be designed to achieve best in class operations that deliver value through scale and simplification, while AI jie. Two hundreds primary purpose is not cost cutting we do expect to achieve a reduced.
Expense base over time, and more importantly, a much better experience for our distribution partners clients policyholders and colleagues.
G 200 reflects our commitment to continuous improvement as we pursue operational excellence and fortify our competitive position. We're very pleased with the high level of engagement from colleagues across the company, we're committed to shaping the future of AI Jie.
Now I'll turn the call over to Kevin.
Thank you Peter and good morning, everyone life and retirement recorded adjusted pretax income of $646 million for the quarter and adjusted return on attributed common equity of 10.1%.
Excluding the annual actuarial assumption update adjusted pretax income was 789 million in adjusted return on attributed common equity was 12.5% within our expectations.
Adjusted pre tax income decreased by 67 million from the prior year quarter.
The primary drivers of the difference where the annual actuarial assumption update which accounted for 45 million of the decrease and elevated mortality.
These unfavorable impacts were partially offset lower interest rate environment driving increased collin tender in.
And higher returns on fair value options securities as well as other net investment income adjustments there was nothing and our assumption review nor mortality experience at suggested a change in the inherent profitability of our products, nor a need to change our pricing strategy.
So it's worth noting that from a pre tax income perspective, the overall impact from the assumption update was positive 20 million.
Year to date, our adjusted pretax income was 2.6 billion and adjusted return on attributed common equity was 14%.
We are pleased with our results to date and recognize the challenges and headwinds the low interest rate environment presents along with the potential for increased volatility and equity markets, given global trade and geopolitical concerns.
Declining equity markets would among other things negatively impact fees as well as deferred acquisition cost amortization.
Declining interest rates would typically results in higher returns on fair value options securities. Although the impact on net investment income could be uneven and would depend on the timing and degree of interest rate movements.
At interest rate levels as of the ended the third quarter. Our current expectation is for based net spreads to declined by approximately one to three basis points per quarter through the end of next year.
Finally, some statutory perspective, we expect to continue to generate solid earnings for our year end 2019 risk based capital levels to be higher than our strong year end 2018 levels.
Our topline results continued to reflect our ongoing strategy to leverage our broad product portfolio and diversified distribution network to satisfy customer needs.
During the quarter, we grew index annuity sales in individual retirement and executed opportunistic transactions in institutional markets.
We expect lower levels of sales for certain product lines in the fourth quarter due to lower interest rates and the uncertain environment.
We will remain disciplined with respect to product pricing and features and continue to deploy capital to available attractive new business opportunities.
For individual retirement premiums and deposits increased slightly due to growth in index annuity sales.
Although fixed annuity sales were basically flat from the prior year quarter. They have declined significantly from first quarter levels.
We expect lower sales and fixed annuities in the prevailing interest rate environment.
We achieved positive net flows excluding retail mutual funds, which is a comparatively small part of our earnings.
Total assets under administration increased driven by strong equity market performance and growth of annuity deposits during the first half of the here.
For group retirement premiums and deposits were lower than the prior year quarter, driven by a decrease in individual product sales related to lower crediting rates.
Net flows improved from the prior year quarter due to lower group surrender activity, but still remain negative.
Although the timing of group acquisitions and individual contributions will result in quarter over quarter variances in deposits, we expect surrenders and other withdrawals to continue to drive negative net flows.
It is also important to note at the financial impact of outflows will vary based on product characteristics.
Despite facing negative that flows for a period of time, we've continued to produce solid earnings for this business as assets under administration have continued to grow.
For our life insurance business total premiums and deposits increased international sales.
Are you asked life sales declined as we deemphasize guaranteed universal life sales in the current interest rate environments and index Universal life sales remain under pressure.
While mortality was elevated during the quarter it should be viewed in the context of general generally favorable mortality trends, we have seen over the last two years.
For institutional markets premiums and deposits increased due to a large kick issuance and select transactions in our pension risk transfer business.
We have continued to opportunistically grow our asset base in our institutional markets business continues to be well position to capitalize on available growth while remaining focused on achieving targeted returns.
Across our businesses, we are continuing to invest as needed to prepare for the evolving regulatory and accounting landscape, including the Fccs regulation Best interest New York States regulation 187, Nei sees variable annuity framework and fast be LGT among others.
We will take the opportunity to leverage these ongoing investments to further improve our efficiency and competitive position.
To close we remain committed to our ongoing strategy to leverage our broad product expertise and distribution footprint to deploy capital to the most attractive opportunities, which we believe positions us well help me growing needs for protection retirement savings and lifetime income solutions now I will turn it over to Mark.
Thank you, Kevin and good morning, all.
Oh jeez adjusted after tax earnings per share 56 cents for the quarter compared to a negative 34 cents per share and the corresponding quarter 2018, representing a 90 cents per share improvement adjusted book value per share, which excludes AOCI I in the DTA increased 1.2% sequentially from second quarter and increased four point.
An 8% relative to year end 2018.
As Brian mentioned adjusted return on equity was an annualized 4.1% for the quarter and 8.6% on a nine month year to date annualized basis, keeping that theme the individual segments achieved the following annualized nine month year to date return on attributed equity General insurance, my 0.5% life and retirement.
14% and legacy at 4.6%.
Net investment income or Eni the third quarter was nearly 3.5 billion on an adjusted pre tax income basis, a 3.4 billion on the gap.
This was nearly identical to the third quarter of 2018 on both an adjusted and GAAP basis and sequentially was $260 million lower on an adjusted pre tax income basis 337 million lower on a GAAP basis.
This quarter investment income from all fixed income securities was virtually identical to that of the third quarter of 2018, whereas returns from the hedge fund and private equity positive, it's down materially down materially to an annualized 4.6% versus the previous six but the year to date returned about.
Absolutely 17.6 per home.
Turning to general insurance, Brian and Peter commented on the accident quarter result.
So contrasting Lee the calendar quarter combined ratio of 103.7% reflects 7.5 points of cat losses, and Peter pointed out with Japan, representing approximately 60% of the global cat losses.
The combination of gross line re underwriting together with our group.
Reinsurance program has resulted in a material reduction in general insurance net cat ratios.
45.5% of premium in the third quarter, 2017% to 22% even in the third quarter of 28 gain because a 7.5% this quarter and 84% reduction over a two year period.
Additionally, the prior period development ratio was negligible for the quarter net of agency recoveries and AG amortization broadly speaking calendar quarter underwriting gain was nearly $1.5 billion higher than the third quarter 2018, with North America, contributing 802 million of underwriting gain improvement and international operation.
It's providing 675 million underwriting gain approval.
Also both commercial and personal lines grew their accident quarter underwriting margin third quarter over third quarter.
It's also inform and have to comment on the general insurance performance on a year to date nine month basis versus the first month of 2018 first nine months of 2018 and on that basis year to date current accident year combined ratio. Excluding cat grew 390 basis points the loss ratio contribution being at 240 basis point and.
Proven another 200 basis point improvement from the Geo we ratio with a partial offset of a marginal 50 basis point increase due to the acquisition ratio as respects volume year to date reported net earned premiums on nearly flat with last year, our U.S. dollar basis, but the continued success of the improved gross underwriting.
Atg together with the increasing ceded earned premium for reinsurance treaties place are expected to reduce the fourth quarter net earned premiums by approximately 5% sequentially bring any additional reinsurance purchasing.
Now.
I want to take the opportunity to reinforce the magnitude of the portfolio reshaping that Peter outlined in his prepared remarks.
This level of change is unprecedented in my 42 years in this business, but there are nuances. However that should not go unnoticed for example, reducing Lexington casualty total limits by an impressive 58% in the quarter white, while simultaneously increasing for achieving an average rate increase in excess of 30%.
It is only part of the store.
62% increase in submission volumes signals the igniting of the wholesale distribution channel along with an emphasis on smaller account.
More localized exposures at a lower capacity.
The resultant spectrum of risk quality has also brought thereby improving overall rate outages the as well.
Peter also commented on general insurance is a cheap rate increases for the quarter and helping to put the trajectory of those rate increases will context to lines will be highlights first us directors and officers liability or do you know combining primary and excess coverages accelerated between the fourth quarter 2018, and the third quarter of 20.
Nike and inclusive as follows.
9%.
Increasing the fourth quarter 2018, 11% in the first quarter 2019, 17% in the second quarter 2019, and then 28% this quarter secondly, electing his casualty business rate increases were similarly, decreasing as follows 6% in the fourth quarter of 2018, increasing.
8% in the first quarter 2019, 20% in 20 in India.
This quarter and then 30%.
The 1% this quarter.
Furthermore, we were extremely pleased that our leadership position in driving rate extended even further beyond the United States with Canada, achieving a 9% weighted overall increase the UK with a 10% increase in continental Europe , achieving 6% in the quarter.
Turning to prior year development, although actual versus expected loss emergence viewed in the corporate globally. The major areas receiving deeper reserved types. This quarter, where is decreasing order of reserve size.
US primary workers compensation UK in Europe casualty line UK in Europe financial life, U.S. commercial property and us financial life errors in the mission exposures.
The negligible prior period development referenced earlier benefited from 58 million a favorable impact from the AIDC amortization of the deferred gain and therefore adjusting for this that development was unfavorable by $55 million.
Unpacking. This further the pre AIDC prior period development before any ADC recoveries was favorable by 74 million. This potentially counter intuitive result stems from the flooding by accident year 226 million of net favorable development emanated from accident years 2015 and prior.
Has approximately 152 million of net unfavorable development stemming from X years 2016 through 2018.
The accident year 2015, and prior net favorable development emanated, primarily from us workers compensation, whereas accident year 2018, 2016 through 2018 net unfavorable developments stem primarily from U.S. financial you know line in UK European Casualty financial lies with a partial.
Offset a favorable development from European property in specialty and European and Japan personal lines.
Digging further approximately one third of the aggregate hundred 52 million of net favorable development for accident years 2016 to 2018 stem from that isolated impact of one large long term agreements affecting all three accident years.
Approximately another third we'll centered in the U.S. architects and engineers book on both the primary and excess basis and we reacted to this due to an increased frequency of moderate severity claims so as to reflect negative trends more quickly than positive trends.
The remaining one third reflected various UK and European.
Impacts in casualty and financial lines, driven by a smattering of large claims such as in French and Italian motor business and Irish employers liability overall, though both pre and post AIDC prior period development represents approximately.
110th of 1% carried reserves.
As for accident year 2019 implications from the net unfavorable development.
We don't see any Eric for issues with the one long term agreement, whereas the U.S. architects and engineers was deemed to have a minor roll forward impact as it was some of the European indication as a result, these deep dives, which year to date represent 65% total loss reserves saw a half point loss ratio increased to exit.
Your 2019, which reflected about 0.2 points for the current accident quarter with another 0.3 points of catch up for the first two quarters plenty night team.
This was virtually offset by the earned impact the stronger rating versus being a cheap on the subject lines of business and anticipated within the original Tony 19 budgeted loss ratio.
Turning to the likely retirement segment the annualized nine month return on attributed common equity at 14% would be unchanged. After adjusting for both the actuarial assumption impact and the removal of a large beneficial IPO gain discussed last quarter since they virtually negated each other.
It's also informative to note that on a nine month year to date basis. The adjusted after tax income is nearly identical at 2 billion, even compared to 2018.
Net spreads on the variable an index annuity composite we're up marginally from last quarter and for fixed annuities was virtually flat with the sequential quarter surrender rates on a year to date basis were flat for the variable and index annuity composite slightly better fixed annuities within individual retirement 70 basis points better for group retirement.
Life insurance experience moderately increased mortality relative to the first half of the year with overall lapse rates fairly consistent with a year ago and institutional markets had roughly 350 million of pension risk transfer deals and also had roughly 375 million and GEC issuance as Kevin noted.
Lastly assets under administration increased 1.1% sequentially and grew 10.4% year end 2018.
Turning to legacy adjusted pretax income was down slightly to 93 million on a sequential basis, but up from 84 million in the third quarter 2018, like life and retirement luggage result, legacies results reflected an adverse impact of the actuarial.
Annual actuarial assumption update of $30 million legacy net investment income on a year to date basis was flat with 2018 at 1.8 billion and the annualized return for the quarter was 4.4%.
As respect tax the estimated effective tax rate is 22.6%.
For the year applicable to adjusted pre tax income and with 25.3% for the quarter inclusive of discrete items as you know the effective tax rate is updated each quarter using actual year to date results and then supplemented by the forecast of the remaining quarter as always the tax rate is heavily influenced each quarter by the geographic.
You should that income by tax jurisdiction.
We did not repurchase any shares in the third quarters of our board authorization remains at $2 billion and moving to leverage as compared to year end 2008 gain our total debt and preferred to total capital ratio has now improved to 26.1% this quarter, which were represents a 320 basis point improvement relative to year end.
We also had a bond trucks redemption of $1 billion in mid July that had been prefunded by our March 2019 debt rates.
This that overlap at the end of the second quarter plus growth in earnings drove that leverage ratio remains at 26.1%.
Adjusted book value per share increased 4.8% from year end 2018, and GAAP book value per share increased 15.1% since year end 2018, benefiting from approximately $7 billion of year to date, AOCI game and with that I'll turn it back over to Brian . Thank you Mark so.
Let's go to the questions and answers.
So operator, please go ahead.
Thank you and ladies and gentlemen at this time, we will begin our question and answer session. If you like to ask your question. Please signal by pressing star one on your telephone keypad.
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We'll take our first question from Paul Newsome with Sandler O'neil. Please go ahead.
I guess I'd like to focusing on.
The underlying combined ratios improvement.
And is there any sense is how we can think about the magnitude as we look.
Respectively.
None assumed next quarter, but perspectively, obviously, there was sort of big thing this year with.
Yes, so pretty serious changes in reinsurance.
How does that rule for look into 2020.
Mark maybe mark you want to try this.
Well clearly you have a lot of things going out at the same time, which I understand makes us somewhat difficult to try to penetrate you have all the gross changes that Peters itemize, which are fairly massive you have an increasing accelerated rate change on a written basis that will earn in 2020.
And you have some level of loss trend that the industry says discussing that could perhaps go go a little bit the other way so without getting into chapter reverse I think it's fair to say there'll be some level of improvement into 2020, but the magnitude as let alone the reinsurance purchases, which affect your mix of business.
Really all need to come to bear so at this point I'd say there has got you should think about improvement, but I'm not prepared to get into magnitude.
Peter.
One thing I'd, just add to agree with everything March us outlined but the other pieces that we've been designing reinsurance structure is that reflects the portfolio that we have and so with all the massive changes that we've seen in the property book I mean, that's what we're assessing over the next call. It 45 days in terms of putting together some of the reinsurance structures that reflect.
The risk of the portfolio today, so that that will evolve as we enter into one one.
Yeah, Yeah. The other thing I'd say, Paul as you like.
I've given you a data point, which is our expectation for a return.
On equity, which by the end to 2021, we wanted to get over 10%. So in order for that to happen clearly the G. You portion of it.
Has to continue to improve and I think that that give some indication of what we think is going to happen a lot of the work that the that gets on his is in rate underwriting several but it also is the expense levels.
The G. I, Oh, Gee I has and those expense levels are high we have two we have to get to those as well so.
Yeah, we'd love to be a little a clear on that but all I would say to you as we're committed to continuous improvement in the combined ratios to get it too what should the world class levels, that's going to take some time, but we're committed to doing it over multiple years.
Next question.
Okay.
But book as you can do one more.
I was just going to ask.
On the life side any thoughts on or comments on the FCC investigation, that's obviously very topical too.
Yeah listen.
Did I I think you can appreciate that we're just we're not able to go into any detail about ongoing regulatory inquiries.
The on what you would read in our 10-Q disclosure. That's a that document is going to be on file a soon so I'd just point to point you to that for the additional information.
Thank you.
Okay next question please.
We'll take our next question from Tom Gallagher.
With Evercore ISI. Please go ahead.
Good morning.
I'll just ask two quick ones given given the increase in specialty losses in North American commercial this quarter.
Occurred while you've been growing that.
Top topline pretty well are you comfortable you've been growing that line profitably. That's my first question and then Peter your comments on high Hagibis losses for two I just wanted to make sure I have the numbers right I was getting Oh, hey, G.'s net retention being a maximum of around 75.
5 billion and Validus Max of 155 is that it is that a good way to think about for Q based on what you know today. Thanks goes through a backward so let's do the Haggen was first so the.
Correct I mean, the maximum the first part I just want to clarify the Validus re the first part is that because of the per occurrence and the way the international aggregate and our global aggregate works that the maximum we would have on occupancy of 75 million assuming.
The forecast, we've had for faculty and others.
End up having the gross loss that we anticipate so I think that's 75 is a very good number what I said in terms of the Validus is that their retro what attach with another 155 million or thereabouts of retro loss. So you should think about you know as it goes above 155, we have significant retro protection.
Yes.
Yes on the specialty I'll, let me start, but I think Peter needs to.
Give you the most clarity on it the first thing we said was north American specialty was higher.
The international was lower net net was actually pretty good but it just happens to be the geographies here and frankly, we manage that business on a global basis, we think of it as a truly global line you're writing.
Aviation across the world.
I'm not sure it's fair to Claire classified as something we've been growing dramatically and I, maybe Peter you could give a little bit more color did I think you really outlined it well, Brian I think the only other things even getting rate in the specialty classes. When we look at a global performance in the quarter. We're very pleased than when we look at the global performance, what we've seen year to date, it's been a very.
Strong performer and expected to continue to have.
Good performance in the future so like what I said in the prepared remarks is like we're looking at you know limit management, our driving rate and then how we're underwriting but overall, it's it's a very good book.
It's one of that.
Just one just one thing if I could oh I'm on a Peters I think good explanation to your question about the maximum just just keep in mind that 75 billion as he outlined that at a likelihood sense is more likely than valid.
Additive number.
As a collection of ceding companies a different attachment points and.
That's remains to be thing I wouldn't take those two is additive necessarily good. Okay next question.
Our next question will come from Josh Shanker with Deutsche Bank. Please go ahead.
Thank you for taking my questions I'll be quick other similar one life one can see on the PNC improvement in our commercial is outstanding when you.
Medium and large loss from the crop numbers out of it I'm just wondering with the new orientation of the book is there seasonality in the accident year loss ratio in North American commercial that Threeq, you would be better than other quarters.
Yeah, well look at accident quarters are so little small that.
The volatility of a single accident quarter I think would.
Exceed any kind of seasonality.
I suppose you could come up with some in property, where were you know with with wind activities and things like that you could ever a seasonal movement, but I. Just think you can't look at this an accident quarter.
As a as something that's very very predictable, there's a lot of volatility in a particular quarter. That's why we you know we report it because we have to and I really point to the nine month as a a better indication of movement.
Okay I appreciate that and then on life, Kevin said that the mortality in the life business should be viewed in the context that you've had very good mortality for the last couple of years does that mean that.
Life has been over.
Earning.
That one sub segment and we should consider that in our forward model.
Oh well Kevin.
Got it thanks, Josh no I think that the underlying message is that the third quarter.
It was an anomaly we have seen the the you know our.
Well within pricing.
In fact that for eight of the last 10 quarters within within pricing and so the messages that we don't see this quarter as a suggestion that are ongoing trend from mortality is is likely to change yeah. Thank you. Okay Bridget.
Thanks, Josh next question.
Going next to Brian Meredith, Yes. Please go ahead.
Hi, Thanks, Yeah, one quick clarification number and then another one <unk> Peter I think I think you've said that.
The events going forward now, we're going to have a $20 million retention, so I, either California fires.
Going on right now.
With that get big or small whenever should be that.
Think of an issue.
What I was referring to was 20 is after high give us thats, our Maxim retention in our international business International MSI shift, yes, I mean, Brian in terms of North America, we still have significant cover I mean, we have.
You know some by downs that our California specific that attach a 50 million a we have a lot of occurrence cover and we have a lot of aggregate. So I mean, it's really hard to predict in terms of North America, what the wildfires, but we have ample protection and.
We'll see how it all evolves.
Great and then my next question is there's been a lot to discuss.
This quarter about the toward inflation environment, particularly with respect to general liability lines I'm, just curious given maybe give your perspective on it as well as what are the severity assumptions that you're assuming in your loss picks and you're kind of preserving actions.
Today.
Well I think markets probably more.
Yes.
Yeah happy to say Hello, Brian Thanks for the question. Thanks.
I think as we mentioned last quarter.
We have I think some pretty steep loss trend a pure premium assumptions a lot and the lines of business subject to what you're concerned about.
Some of them in the mid to upper single.
Digit trends.
Already so that's already been kind of baked in and how we look at things translates into pricing models, so forth and so on I think on even to a broader basis I mean, our view of those loss trends is based upon a lot of our own information and how that's moved.
Time between accident years, and when you kind of think about the overlay of the macroeconomic.
Macroeconomic environment with everything Peter described about moving up and attachment points chopping limits dramatically I tend to look upon a portfolio basis of all that reshaping, becoming a natural inflation.
Hedge.
Irrespective of whether its economic or social so I think the book characteristics are very protective in that respect yeah, I I can't emphasize enough. Thanks Mark.
You know about the.
Whether it's at deductible or it's an attachment point or its layering.
Done in some of the excess.
Let's see an hour or other access as all of those things.
Our more powerful than the rate in terms of adjusting for inflation.
Next question.
Our next question will come from Jimmy Bhullar with JP Morgan. Please go ahead.
Hi, Good morning. Another question first just on the lack of.
So far this year so.
Given that you've got the G 200.
Initiative coming up.
I'm, assuming you're still interested in acquisitions should we assume that buybacks are probably going to be.
Yeah really light until maybe the leverage ratios improve further.
And then.
The question also on just your flows on the life and retirement side, specifically about like that they seem pretty weak and if you could just comment on what's going on there and your outlook.
Okay, Kevin can take the flows let me let me address the buyback so yes, we didnt buy back this this quarter.
And my in my prepared remarks, I emphasize that I want to I want to invest well first of all we want to de leverage. So that's an important thing to keep in mind and I want to reinvest in the in the business some of that as the G 200 still being quantified.
And you know the other thing to keep in mind.
As you know when you're going to catastrophe quarter, you wouldn't normally buyback anyway and and.
Whether it's the third quarter the fourth quarter, we've seen in the fourth quarter also.
To do some catastrophes I just think it will be prudent not to buy back in any case, but but the emphasis is on.
The other aspects of <unk> capital management that I referred to.
Kevin wants to talk about the flows yeah sure. So.
Thanks, Jimmy so situation at a valid we have been in a negative flow environments over the last couple of years I think it's a reflection of the fact that the you know the new case acquisition for a period of time.
Tailed off we've seen an improvement and that recently, but this is a natural effective the aging of the portfolio.
The Valach has been a leading participant in this business for a long time and as either in plan participants roll out of the plan or as people.
Start to.
Lies the underlying benefits that they have a that certainly as part of what leads to the outflows. In addition to that particularly in the healthcare industry over the last couple of years, there's been a lot of M&A activity and cases, where plant consolidations occur in some cases were on the winning end of those.
Those in some cases were on the losing under those and we've reported those sort of large outflows as and when they occur so.
You know, we're continuing to be successful in new plan acquisition.
We continue to see strong periodic deposits a non periodic deposits and we're likely to continue to see some.
Negative flows in this business.
Because of that natural aging effect in the portfolio, but I think it's also important to recognize that the you know the dollar value of the flows is on even if they're higher guaranteed minimum interest rate flows that is less of an impact on future earnings then.
And then.
More recent products and the finally that the assets under management of this portfolio, which is the source of earnings and the business have continued to grow along with the equity markets. So where we're outpacing the negative flows with growth and assets under management.
Okay. Thanks next question.
Well go next to lease Greenspan with Wells Fargo.
Oh. Please go ahead.
Hi, Thanks. Good morning on my first question on you guys provided a lot of good information on the pricing environment on high single to double dip double digit increases on getting a lot or wait and your commercial book I guess I'm trying to think through the rate first is trend if.
You could help us think were kind of loss trend is on a composite basis and then how we can think about I think you guys said half a point of rate first is trend this quarter, how we could think about that building up as we then I'm confident on over the course of the next year.
Mark.
Well, it's a great question.
If I can give you a great assets.
So you know at.
First it very generic comment weight when you get a 12% that's in North American number at 12% weighted average return rate increase.
Whether your loss trends assumption is for six or eight yeah, you're getting you're getting expansion.
Picking those out just illustratively so.
We don't really get into what our weighted average is across the board because it really does vary by quarter with the massive changes Peter Peter described but we're viewing that as a beneficial 2020, Inc.
Benefit.
And because the way things.
SCO and that's going to be more second half.
I see it with the rate of increases.
Changes so.
Its expansion.
On a gross basis, but you're looking at our results on a net basis.
And you get that that interaction between it is very difficult to measure.
And probably from you on the outside looking any even more so but I'll just keep it at least that you should expect expansion.
Okay. Okay. That's yeah. That's how helpful. And then my second question on kind of ties back to the comment you made about gross versus net.
As has been buying a lot.
No changing your reinsurance strategies in a different <unk>. In addition to re underwriting the whole Buck.
We think about 2020 are there still big on reinsurance projects or something that you have in mind, we should we think about kind of a stable ish retention year over year, meaning we can start seeing on some expansion on the.
The net premiums line.
Okay.
Thanks Lisa.
So a couple of things one is we will be consistent with making sure that we're looking across the portfolio for reduction of volatility and outsize line side. So there could be segments, such as financial lines that we'll look at a of doing something.
Perhaps as we enter 2020 and then you know the most important part is looking at the cap because we've made so much you know dramatic change in terms of the gross limit and cat exposed and the strategic projects that we're doing with Lloyds.
So again, there's a lot of moving pieces and the reinsurance.
And what we decide to put together for 2000, Tony will reflect the portfolio that we haven't force and so there will be some changes I can't describe those today because we're in the middle of it and but we'll be very transparent as we hit the you know sort of fourth quarter call protected. So we've just to cross the out but I think we should take when they one more question we'll.
So.
Operator, let's take one more one last question.
Thank you our final question will come from Eric based with autonomous. Please go ahead.
Hi, Thank you for fitting man.
Can you provide more details on the drivers of your annual assumption review updates and particularly any changes you made your long term interest rate assumption and if there's any impact on go.
Earnings from that.
Well Mark Okay, though I mean, Kevin Kevin's better yeah sure sure. Thanks, Thanks, Eric first let's talk about what we Didnt change we did not change our long term interest rate assumption a our assumption you know each product has its own parameters to define the derive the final assumptions.
But generally we assume a reversion to the mean over 10 years to 3.5% for the 10 year Treasury.
Now to the rest of the review as you know we have a strong diversified portfolio between fixed index and variable annuity as well as a life insurance and each of those lines response to economic changes.
Differently and.
The answer emerges separately.
So the overriding situation rates are lower this year, which inevitably results and reduced lapse expectations for the fixed annuities, where we write up the dock and that increases you know sort of a P.T. Guy and then in index one of our newer products. We're just seeing some experience emerge from where we updated.
You know lapse rates and then in the a you know in the end the guaranteed living benefits as you know we account for those as an embedded derivative below the line.
There were two different effects on that this year. The first was updating you know our lapse model in the second was updating our mortality and.
Both the fee income as well as the benefit usage goes below the line, which is why you see that.
Economic movement below the line and then finally, a you know in the life insurance business. There's the effect of interest rates on policy holder behavior, not dissimilar to fixed annuities and weve updated some of our premium projection capability and.
[noise] reinsurance calculation. So net net I think that these are largely changes associated with what we've seen happened in the market no dramatic changes relative to the sizes of our reserves and as I stated in my prepared remarks.
We do not see anything that Oh check changes our understanding of the.
Inherent profitability of the business, nor a need to change our pricing strategy.
Okay. Thanks.
I'm sorry. This is Ryan Tunis I just had one follow up on the PMC side for Peter.
And your opening statements you talked a little bit about the opioid and how it's still too early.
Just hoping you could maybe.
Spend a little bit on what you guys are looking forward there and what we should be thinking about in terms of timing of any potential reserve action or anything along those lines.
Well first of all I think looking reserve action I'd like Mark to talk about that first sure.
Well.
Sure thing Les I.
Hey, overtime has been building up mass tort reserves not that we really talk about it but it's a meaningful number.
So say within our aggregate reserve low levels across all accident years.
When you get into some of these complex coverage.
Issues, you're talking about it.
It's really.
Difficult to even.
Talk about it because they don't know the theory of liability that's going to come down you know, how it's going to be triggered a and therefore, you don't know exactly how it may or may also be play out, but we have a good them out.
Of Bob net mass tort reserves and we.
We still have a roughly six to the half billion in the 80 C. So that is still available for this so we feel from reserve standpoint, and given what we know today pretty good shape. Yeah look I think that probably is a is a good conclusion to the to the opioid question. So let me just the thanks, Eric Let me let me close by.
Yes.
And.
Selling ever going up because I am with our progress to achieve long term sustainable and profitable growth rate G and I want to thank our clients colleagues shareholders industry partners and other stakeholders for their continued support thank you and have a great day.
This does conclude today's.
Thank you for your participation.