Q3 2020 American Financial Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the American Financial group 2023rd quarter results Conference call. At this time all participant lines are in a listen only mode. After the speakers presentation. There will be a question and answer session. That's the question during the session you won't need to press star one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Diane Weidner, Vice President of Investor Relations. Thank you. Please go ahead ma'am.
Thank you good morning, and welcome to American Financial group's third quarter 2020 earnings results Conference call.
We released our 2023rd quarter results yesterday afternoon, our press release Investor supplement and webcast presentation are posted on <unk> web site under the Investor Relations section. These materials will be referenced during portions of todays call.
I'm joined this morning by Carl Lindner, the third and Craig Lindner Co Ceos of American Financial Group, and Brian Hoffman AFG CFL B.
Before I turn the discussion over to Carl I would like to draw your attention to the notes on slide two of our webcast. Some of the matters to be discussed today are forward looking these forward looking statements involve certain risks and uncertainties that could cause actual results and or financial condition to differ materially from these statements.
A detailed description of these risks and uncertainties can be found in <unk> filings with the Securities and Exchange Commission, which are also available on our website.
We may include references to core net operating earnings a non-GAAP financial measure in our remarks or in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.
And finally, if you are reading a transcript of this call. Please note that it may not be authorized or reviewed for accuracy and as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.
Now I'm pleased to turn the call over to Carl Lindner, the third to discuss our results.
[music].
Good morning, before we begin our remarks, Craig and I would like to take a moment to honor the passing of they have cheap board member count Hambrecht your past suddenly in September.
Cancer Gaudio cheese board of directors for 15 years. He was a tremendous resource to the main Craig for many years and will be remembered as a trusted advisor and friends.
Well, we really start 2023rd quarter results yesterday afternoon. If you. Please turn to slide three of the webcast slides for an overview.
You can see the day of Ci reported core net operating earnings of $2.45 per share in the third quarter 2020 compared to $2.25 per share in the third quarter of 19.
Third quarter 2020 annualized core operating return on equity was in excess of 17%.
Turning to slide four you'll see that the third quarter 2020 net earnings per share of $1.86 included after tax non core items aggregating to.
59 cents per share loss.
Last quarter, we provided for your 2020 core net operating earnings per share guidance, excluding earnings or losses from alternative investments due to the uncertainty of the implications of COVID-19, and a resulting volatility in the financial markets.
Based on results through the first nine months of the year and she now expects its 2020 core net operating earnings per share excluding alternative investments to be in the range of $7 to $7.50 an increase of 25 cents a share from the midpoint of our previous guidance.
Craig and I will each discuss our guidance for each segment of our business in more detail later in the call.
We're very pleased with the performance of our core operating businesses during the third quarter I'm.
I met the challenges presented by the COVID-19 pandemic, we believe our underlying results demonstrate the strength of our portfolio of diversified specialty insurance businesses and the contributions of our exceptional employees we.
We thank God are talented management team and our employees for helping to achieve these results.
Now I'd like to turn our focus to our property and casualty operations <unk>. If you would please turn to slides five and six the webcast.
Which include an overview of our third quarter results, our specialty property and casualty group performed exceptionally well during the quarter, especially taking in line with with higher frequency of catastrophe losses across the industry and continued uncertainty from the COVID-19 pandemic.
As you'll see on slide five gross and net written premiums were down five and 8% respectively, when compared to the third quarter of 19.
Primarily as a result of the run off the neon.
Excluding the impact of the new yard run off gross and net written premiums decreased 1%, 3% respectable year over year.
Core operating earnings and they have cheese PNC operations were.
$205 million in the third quarter 2020, compared to $194 million in the prior year period, an increase of 11 million or 6% higher year over year property and casualty underwriting profit and higher earnings from alternative investments were partially offset by lower other.
Property and casualty net investment income, primarily the result of lower interest rates on cash balances and floating rate investments.
Specialty property and casualty insurance operations generated an underwriting profit of $104 million in the 2023rd quarter compared to $88 million in the third quarter of last year higher.
Higher year over year underwriting profit center specialty casualty and property and transportation groups were partially offset by lower underwriting profit center specialty financial group.
The third quarter 2020 combined ratio of 92.1.
Percent was 1.9 points lower than the 94% reported in the comparable prior year period.
It includes 2.7 points in catastrophe losses.
By comparison cutting.
Catastrophe losses in the third quarter of last year added 1.6 points.
Third quarter 2020 results included 3.7 points of favorable prior year reserve development compared to 3.1 points in the comparable prior year period.
We continue to carefully monitor claims and loss trends related to the COVID-19 pandemic.
Numerous why just waited and regulatory actions as well as the specifics of each claim contribute to a highly fluid evolving situation.
She didnt record any additional reserve charges for COVID-19 in the third quarter.
Given the uncertainty surrounding the ultimate number or scope of claims relating to the pandemic approximately 82% are they up cheese COVID-19 related reserves.
From the $95 million in charges recorded in the first half of 2020.
Our held as incurred but not reported.
These reserves represent the company's current best estimate of losses from the pandemic and related economic disruption.
Our claims professionals and those who support them are working tirelessly to review claims with the care and attention each deserves.
Turning to pricing.
We continue to see strong renewal rate momentum and have achieved broad based pricing increases in the quarter with especially exceptionally strong renewal pricing in our longer tail liability businesses. Our average renewal rate increases year to date are the highest weve achieved in over 15 years.
And then quarter average renewal pricing across our entire property and casualty groups I was up approximately 13%.
For the quarter.
And if you exclude our workers comp business renewal pricing was up approximately 16% in the third quarter Moshe.
Bush measures reflect an improvement from rates achieved in the first half of 2020.
We believe the current market conditions reflect a continuation of the meaningful renewal pricing increases achieved prior to the pandemic.
Which had been in response to the low interest rate environment trends in social inflation.
Elevated loss experience following heavy.
Industry Cat experience in 2017, and 18 now 19.
And higher expected reinsurance pricing among other factors.
We expect current market conditions to continue into 2021.
Now I'd like to turn to slide six to review a few highlights from each of our specialty property and casualty business groups.
Property and travel Transportation group reported an underwriting profit of $47 million in the third quarter of 2020.
Paired to 38 million in the comparable 2019 period.
Higher underwriting profitability in our non crop agricultural an ocean marine businesses and improved results in our aviation business in Singapore branch.
Were partially offset by lower year over year underwriting profit center transportation and property and inland marine businesses cutting.
Catastrophe losses for this group were $18 million in the third quarter of 2020 compared to $8 million in the comparable prior year period.
Third quarter 2020, gross and net written premiums in this group were five and 4% lower respectively than the comparable 2019 period. The decrease was largely the result of lower year over year crop premiums, resulting from delayed premium reporting in 2019 due to the late planting of corn.
In in soybean crops.
Excluding the impact of crop insurance third quarter 2020, gross written premiums increased 1% and net written premiums decreased 2% when compared to the.
Last year's third quarter lower.
Lower premiums in our transportation business due primarily to the return premiums and reduced exposures as a result of COVID-19 were tempered by growth in new business opportunities and our property and inland Marine and Ocean Marine businesses.
As far as crop the month of October serves as the discovery period for the majority of our corn and all of our soybean businesses.
Corn and soybean harvest pricing is averaging about 3% and 15% higher respectively than the spring discovery pricing.
Potentially record setting national yields for both corn and soybeans.
Were adversely impacted by the Iowa direct show and dry conditions across much of the Midwest that accelerated crop maturity and the pace of harvests.
But despite these conditions both crops will exceed their respective trend yields knowing.
Knowing what we know at this point, we expect to have a normal to slightly below normal crop year.
Overall renewal rates in this group increased 6% on average for the third quarter of 2020 with continued strong renewal rate momentum.
Now moving onto the specialty casualty group, we reported an underwriting profit of $53 million in the 2023rd quarter compared to $23 million in the comparable 2019 period.
Our year over year underwriting profit center excess and surplus in excess liability businesses and the impact of underwriting losses at neon in the third quarter of last year were partially offset by higher adverse development in our general liability business and lower underwriting profits in our targeted markets in workers' comp businesses.
No underwriting profitability in our workers comp business overall continues to be very strong.
I'm very pleased with improved market conditions, and our excess and surplus lines in excess liability businesses, which have achieved significant renewal rate increases and have acted on new business opportunities as the market is hard.
Gross and net written premiums in specialty casualty group did decrease five and 14% respectively for the third quarter of 2020, when compared to same period last year, primarily due to the runoff in knee on.
Excluding the impact of neon.
Gross written premiums incur.
Increased 6% and net written premiums decreased by 1% in.
In the third quarter 2020, compared to the same period in 2019.
The COVID-19 pandemic has resulted in reduced exposures in our workers comp businesses, which when coupled with renewal rate decreases also were significant contributors to the lower year over year premiums gross and net written premiums in this group grew by 13 and 5% respectively. When you Ics.
Glued, both neon and workers comp so.
Significant renewal rate increases, coupled with new business opportunities and our excess and surplus excess liability and executive liability businesses contributed to this growth.
Renewal pricing for this group was up 17% in the third quarter. If you exclude our workers comp business renewal rates in this group were up 25%.
An improvement from the rates achieved in the first half of 2020.
Specialty financial group recorded an underwriting profit of $13 million in the third quarter 2020, compared to $26 million in the third quarter of 19 higher.
Higher catastrophe losses in our financial institutions business were the primary driver of the decrease.
Third quarter 2020, gross and net written premiums were 11, and 8% lower respectively, when compared to the same 2019 period.
Nor premiums resulted primarily from the impact of various state regulations regarding moratorium on policy cancellations and the placement of force coverage and our financial institutions business.
Heightened risk selection also thats reduced new business and our trade credit business.
And Cobra related economic impacts on our surety businesses.
These decreases were partially offset by year over year growth in our fit owning crime business.
Renewal pricing in this group was up 7% for the quarter and is an improvement from the renewal rate increases achieved in the first half of this year.
Now if you would please turn to slide seven for a summary view of our 2020 outlook for the specialty property and casualty operations.
In light of the challenges and uncertainties presented by COVID-19 pandemic, we've conducted a detailed review of our expectations and other.
Key financial and operating items for each of our specialty PNC businesses base.
Based on the results for the first nine months of the year and our current expectation. So the impact of COVID-19, we now expect property and casualty pre tax core operating earnings excluding the impact of alternative investments in the range of $650 million to $690 million a meaningful increase from the 650.
Turning to $675 million indicated in our previous guidance and we continue to expect to 2020 combined ratio for the specialty property and casualty group overall between 92 and 94%.
Our revised premium guidance overall and within each of our specialty sub segments reflects an improved outlook from our previous guidance.
Excluding the impact of the neon run off we expect net written premiums to be 1% lower to 3% higher than our prior year results and when we exclude neon and workers comp. We expect net written premiums to be 1% to 5% higher than what we reported in 2019.
You'll see on the slide also that we adjusted our combined operating ratio and premium guidance within each of our specialty property and casualty sub segments to reflect our most current view of the impact of code of the COVID-19 pandemic.
We now estimate a combined ratio in the range of 90% to 93% or property and transportation group narrowed a bit from our previous range. We now expect net written premiums for this group to be 1% lower to 3% higher than last year, an improvement from the previous estimate.
And our specialty casualty group is now expected to produce a combined ratio in the range of 90% to 93% an improvement from our previous estimate.
We now expect net written premiums for this group to be 5% to 9% higher.
Last year's results, when excluding neon and workers comp.
We continue to expect the specialty financial group produced a combined ratio between 91, and 95% and we've improved our premium expectations for this group to be 2% to 6% lower than 2019 results.
Given the uncertainties of the implications of COVID-19, and the resulting volatility in the financial markets were not providing guidance for PNC net investment income.
Now with regard to pricing, we now expect overall property and casualty renewal rates in to 2020 to be up 10% to 12%.
And excluding workers comp, we expect renewal rate increases to be in the range of 13% to 15% as indicated by the significant momentum were seeing through the end of September.
Now I'm going to turn the discussion over to Craig to review the results in our annuity segment and of cheese investment performance.
Thank you Carl.
Before we start with a review of our annuity results for the third quarter I'd like to highlight A.M. best announcement yesterday that upgraded the financial strength ratings of our annuity subsidiaries to a plus from a.
These eight plus ratings reflect the quality of our balance sheet strong operating performance appropriate enterprise risk management, and a strong risk adjusted capital position.
We are very proud of the work of our annuity associates, which has helped us to achieve these upgrades.
Please turn to slide nine.
Gross statutory annuity premiums were $871 million in the third quarter of 2020.
Compared to $1.8 billion in the third quarter of 2019, and a decrease of 19%.
Annuity sales were lower in all channels into 2023rd quarter due to factors related to Cove at night, the COVID-19 pandemic.
He has significantly impacted our access to distribution partners as well as their access to current and prospective clients.
Although sales in the quarter declined from the comparable year ago period, 2023rd quarter sales were up 27% from the second quarter of 2020 and September sales in our financial institutions channel actually exceeded monthly sales in September of 2019.
I mean.
Overall, we are finding that competitor pricing is becoming more rational we're encouraged by the trends that we're seeing.
Turning to slide nine you'll see the components of pretax annuity core operating earnings.
Third quarter 2020, pre tax annuity core operating earnings before earnings or losses from alternative investments increased 8% year over year, reflecting growth in annuity assets higher one time investment income and the impact of a strong stock market lower expenses.
And a reduction in the cost of funds due to renewal rate actions we've taken.
These favorable items, which may include items.
That may not necessarily recur.
Were offset by a decline in overall investment yields.
We were pleased that returns on alternative investments in the third quarter of 2020 increased sharply from the previous quarter.
The average return on these investments over the past five calendar years, which nearly 10% and the annualized return in the third quarter of 2020, which nearly 14%. This.
This return was exceptionally high however, and we expect to significantly lower return on these investments in the fourth quarter.
In total the annuity segment achieved an operating return on equity of nearly 15% in the third quarter of 2020 compared to 12% in the comparable quarter last year.
In addition, we're pleased we've been able to achieve targeted returns on our new sales in 2020, despite the low interest rate environment.
We believe that the unit annuity segment's third quarter increases in comparable returns and core operating earnings both before and after the impact of alternative investments demonstrate the strong fundamentals of our business our pricing discipline and the success of our operating model.
Turning to slide 10, you will see that have Gpus quarterly average annuity investments and reserves both grew approximately 6% year over year.
On the bottom half of the slide you will see information about our annuity spreads starting with our core net interest spread which takes into account our net investment yield and our cost of funds.
Primarily as a result of continued declines in short term and longer term interest rates throughout 2020, the annuity segments net investment yield in the third quarter of 2020, excluding alternative investments was 27 basis points lower than the comparable 2019 quarter.
In the third quarter of 2020, our cost to funds and other benefit expenses was 256 basis points, which included amortization of bonuses and accretion of withdrawal benefit reserves.
This compares to a cost to funds and other benefit expenses of 269 basis points in the third quarter of 2019.
Theres 13 basis point decline, partially offset the lower net investment yield.
In the first quarter of this year, we began taking more proactive measures at adjusting renewal rates, particularly on those products near the end or out of the surrender charge period.
For indexed annuities for fixed indexed annuities. These adjustments occur on policy anniversary. So we expect to continue to see our cost of funds come down several basis points each quarter over the next several quarters as a result of these adjustments.
As a result of these changes in the net investment yield and cost to funds. The annuity segments core net interest spread before alternative investments was 14 basis points lower in the third quarter 2000, <unk> thousand 20 compared to the third quarter of 2019.
However, due primarily to lower expenses growth in reserves and lower acquisition expenses the annuity sick the annuity segments core net spread earned before alternative investments remain the same as last year.
In the third quarter of 2020, we performed our annual detailed review or unlocking of the actuarial assumptions underlying our annuity operations.
Due to the significant decrease in both long term and short term interest rates throughout 2020. This review resulted in a net after tax unlocking charge of $36 million or 41 cents per share.
The primary driver of this charge was a decrease in the assumed ultimate 10 year us treasury rate.
We are now assuming that the 10 year us treasury rate will increase over 10 years to 2.75% down from our previous assumption of 3.5%.
This lower interest rate assumption resulted in negative impacts related to lower expected future investment income and changes in assumed persistency outside the surrender period on policies without guaranteed withdrawal benefits.
These negative impacts were partially offset by lower expected cost for fixed indexed annuity renewal options as a result of anticipated rune renewal rate actions.
Earlier this week, we announced the execution of a block reinsurance agreement that became effective on October Onest 2020.
This transaction presented an exceptional opportunity for AFG to further strengthen its already significant amounts of excess capital.
The agreement freed up between 300 million and $325 million of statutory capital in our annuity operations, most of which will be paid as a dividend to achieve.
In total the transaction is expected to create between 375 and $400 million of additional excess capital for GE.
At the same time the transaction is expected to result in modestly higher operating earnings in both the annuity segment and F. G.
As shown on slide 11 under GAAP certain items or record recognized immediately in the financial statements. While other items are recognized overtime.
The net of these non core items is that is after tax earnings of 55 million to $105 million or approximately 60 cents to one dollar and 15 cents of EPS and book value per share.
The agreement will have no impact on the F.G.'s relationship with and commitments to our renewed asleep annuity policyholders and distribution partners and you have to you. We'll continue serving be annuity market is a leading provider of fixed indexed annuity products.
In addition to the block reinsurance agreement the annuity segment entered into a flow reinsurance agreement in May of 2020 as shown on slide 12.
Under this agreement the annuity segment has the option to speed up to 50% of new premiums from the sale of select products.
In the third quarter of 2020, the annuity segment ceded new premiums of $168 million or nearly 20% of its $871 million of production.
Both the block reinsurance agreement and the flow reinsurance agreement served to reduce the statutory capital committed to any of Gs annuity business, while enhancing the returns on both our in force and new business.
Please turn to slide 13 for a summary of the 2020 outlook for the annuity segment.
Pre tax core operating earnings excluding earnings from alternative investments are expected to be in the range of $310 million to $325 million an increase from our most recent guidance of $300 million to $320 million.
By comparison annuity core operating earnings excluding alternative investments were $298 million in 2019.
Our guidance reflects the continued to continued negative impact of low short term interest rates on the annuity segments approximately $5 billion of net investment in cash and floating rate securities.
Our guidance also reflects the more the favorable impact of more aggressive renewal actions taken on policies near or after the end of.
They're surrender charge period.
Once fully implemented and depending on surrender activity, we estimate that our current renewal rate strategy will result in an annualized crediting rate savings of $40 million to $60 million before DAC, which is the equivalent of reducing our overall cost of funds by 10 to 15 basis points.
Yes.
Some of these savings have already been reflected in our reported results and our guidance reflects expected additional savings.
The guidance also assumes that the stock market and longer term interest rates remain relatively flat for the remainder of 2020.
Hi way of GE continues to expect an attractive return on its alternative investments over the long term.
Due to ongoing volatility and uncertainty it is difficult to forecast. These returns for the remainder of 2020. However, as I previously mentioned, we currently expect fourth quarter returns on these investments will be significantly lower than what we achieved in the third quarter of 2020.
The annuity segments actual and forecasted 2020 core operating earnings includes several favorable items, which may not necessarily recur in future years.
Following the block reinsurance transaction, we have the ability to lower credited rates on $26 billion of annuity reserves by an average of 180 basis points, giving us a great deal of flexibility and helping us manage returns on our in force business.
Importantly, our business continues to have a very strong balance sheet with unrealized gains on our annuity bond portfolio of $2.7 billion in December September 32020, before taking into account the block reinsurance transaction.
This represents an unrealized gain of 7.3% on the annuity bond portfolio at the end of the third quarter.
As noted earlier, we are clearly seeing positive momentum in premiums and as a result, we are raising our premium guidance.
Our current best estimate is for 2020 gross annuity premiums and the range of $3.7 billion to $4 billion compared to our previous guidance of $3.4 billion to $3.9 billion, which will result in growth in average an average assets and reserves of five.
5% to 7% in 2020.
This growth also reflects higher persistency in 2020 compared to 2019, which we attribute in large part to the low interest rate environment.
Please turn to slide 14 for a few highlights regarding our $58.1 billion investment portfolio.
AFG recorded third quarter 2020, net realized gains on securities of $35 million after tax and after deferred acquisition costs.
This compares to net realized losses on securities of $14 million in the third quarter of 2019.
Approximately $17 million of the realized gains recorded in the third quarter of 2020 pertained to equity securities that EMG continued to own at September 32020.
As of September 32020, pre tax pre DAC unrealized gains on fixed maturity portfolio were $3 billion.
We believe our investment portfolio is appropriately positioned for this uncertain economic environment.
As you can see on slide 15, our portfolio continues to be high quality with 90% of our fixed maturity portfolio rated investment grade.
In addition, the percentage of fixed maturity investments rated non investment grade by the any IC remains at less than 3% of total fixed maturity investments at September 32020.
I will now turn the discussion over to Brian who will discuss our financial position and share a few comments about capital and liquidity.
Thank you Craig Please turn to slide 16, where you will find the summary of F.G.'s financial position at September Thirtyth 2020, we.
We repurchased $96 million of AFG common stock during the quarter at an average price of about $66 per share.
Share repurchases, especially when executed at attractive valuations are important and effective component of our capital management strategy.
During the quarter. In addition to our share repurchases, we returned $40 million to our shareholders with the payment of our regular quarterly dividend as you may recall, we recently increased our annual dividend by 11% effective with this past Monday is payment. This was also our 15th consecutive annual dividend increase.
In September we completed the issuance of $200 million and 4.5% subordinated debentures. Due 2016, a portion of the proceeds from this offering will be used to redeem AFG is $150 million and 6% subordinated debentures due in 2055 at par in November.
Even with the capital transactions in the third quarter AFG had just over $1 billion of excess capital at September Thirtyth 2020. This number includes parent company cash of approximately $580 million.
We expect to have.
To continue to have significant excess capital and liquidity throughout 2020 and beyond specifically our insurance subsidiaries are projected to have capital in excess of the levels expected by rating agencies in order to maintain their high current ratings and we have no required debt maturities before 2026.
Slide 17 provides a view of the components of hfcs excess capital as well as details supporting the pro forma impact of the October annuity block reinsurance agreement in November 2020, scheduled redemption of AMG is 6% subordinated debentures.
Excess capital on a pro forma basis would have been $1.2 billion at September 32020, with consideration of these two transactions are.
Our management team reviews, all opportunities for to appoint a deployment of capital on a regular basis.
Slide 18, as a single page presentation of our updated 2020 core earnings guidance, our guidance assumes an effective tax rate of approximately 20% on core pre tax operating or earnings.
If GE is expected 2020 core operating results exclude non core items, such as realized gains and losses annuity non core earnings or losses, and other significant items that may not be indicative of ongoing operations. We will now open the lines for any questions.
Thank you as a reminder to ask the question you will need to press star one on your telephone.
Joel Your question Brett Rabatin, please standby will with embolic Una roster.
Your first question comes on the line of Mike The gain from Credit Suisse. Your line is now open.
Hey, good afternoon.
Yes first.
A question or two on the la.
The life reinsurance transaction.
Maybe first.
Can kind of help us understand you.
You expect core operating earnings to increased.
Because of the deal are.
Are you able to kind of quantify how.
What the increase run rate is and maybe explain to us.
Bob how that's the case.
Unless the portfolio is on profitable. It's I know there is a lot of moving parts that you you show us in the slides it looks like you're taking some some charges as well which might be part of the answer of why it's kind of lift profitability.
Yes, Mike. This is this is Craig I'll start off by saying we are.
Precluded or restricted from giving some details related to the transaction.
Per our agreement with the reinsurers partner, but.
Since weve been getting a lot of questions on a transaction, let me take a few minutes and kinda give.
Give you that history of.
The whole thing and.
A few more details that I think will help you understand the economics.
So when the pad demick hit we were feel.
Feeling very fortunate to be in the strong financial condition that.
We were in.
Carl and I have met and explored a couple of different options to further bolster the.
Excess capital position.
And and the cash position to the parent just for a couple of reasons kind of given the uncertainties of the pandemic.
And also given what we considered to be a tremendously undervalued.
Stock stock price in American financial group.
So.
We decided to explore.
Explored doing a block reinsurance transaction, which.
If completed successfully would accomplish.
Our objectives of.
Increasing the excess capital increasing the cash and the parrot and frankly also unlock some of the value in our annuity business.
So starting about five months ago, we began discussions with four reinsurers to see if there was a transaction that would make sense to us and makes sense to them.
We ended up choosing global Atlantic too.
Kartik.
Hopefully get to the finish line and do something that made sense for us and something that made sense for them. They were fantastic partners.
The really helped us cut a custom design a transaction that that worked well for us.
And also work for them.
So.
Mike We chose reserves that have a higher GM IR and a higher credited rates than the average of our total reserves. We also chose assets stood at a substantially lower yield than the overall yield on.
Our investment portfolio.
So when you.
Match those two up.
And you also take into consideration the maintenance maintenance expenses that they are going to be reimbursing us for to to oversee this this block of business that business actually produces a small loss and thats why our earnings actually go up by a modest amount is it.
Result of this transaction it was because we picked reserves and assets that had different characteristics than the balance of our block now.
Global Atlantic as a.
Very good company obviously.
Very smart management team there.
They generate excellent returns on their capital they.
Obviously plan to.
To.
Change the mix of investments, we gave them investments that at current more could generate a very low yielding obviously plan to overtime chain.
Change that mix and increase the.
The yield on those investments.
Also are able to create a significant amount of the capital needed to do the transaction from the unrealized gains on the bonds that were giving them and get our assumption is that they are going to do this not a tax advantaged fashion show anyway at the end of the day. It was a it was a transaction that worked at incredibly well for us work.
Worked out well for them.
So I hope that explains a little hotter.
That was helpful.
If I if I'm based on my next.
The next question is going to be.
How we should potentially think about weather.
You would entertain future transactions and I think you you talked about two things one was there was a lot of uncertainty.
During the onset of the pandemic. So maybe it's one of the things we should think about whether you think theres as much uncertainty and the other thing was the undervalued stock price that you probably still think it's undervalued. So are those that are those the two main.
Fair to think about whether you would you would pursue additional deals are those the two main things we should think about.
Yes, Mike they really are I mean, we continue to think that our stock is tremendously undervalued.
Okay.
And as a management team, we have an obligation to.
To look at all the different alternatives to maximize the long term value creation for our shareholders.
Okay.
And next question sticking with.
I know the portfolio in terms of the annual study, resulting in the DAC unlocking charge.
Hey, Thanks for that color he brought the penny.
10 year assumption down to.
Some are two to seven from three five it hit us so.
So if I look at just what the capital markets say, but the 10 year about 110 years.
Sure it's wrong, but the Bloomberg says it's 1.98, so is it a linear directly linear relationship. If you. If you were to had to assume that the 10 year life.
Only went up to 1.98, what would it be kind of double directionally. The charge you took this quarter.
It is a linear projection.
Yes. It is.
And I'm not sure that.
When you look at.
Bloomberg projections or I'm not sure that when you get out past a couple of years that it's.
Terribly meaningful.
You would know better than I, because you follow somebody different insurance companies, but it.
As I have reviewed companies that have reported so far this quarter and.
Given details on their unlockings.
Our assumptions are clearly among the more conservative of.
Companies that have already reported.
Okay, yes that definitely.
Definitely okay, and just lastly, just stepping back thinking more high level on the property casualty operations.
And they are getting a lot more rate than the marketplace part.
Part of Thats due to the assess your business mix, but topline even ex the I think is still kind of shrinking a little bit as you will see our your retention ratios falling a little bit or are they do you expect them to start improving or just kind of want to understand the competitive dynamics.
At a higher level. Thanks.
Yes.
I think.
When you compare us to some of our peers in that.
We have a higher mix of commercial auto and workers comp and lender placed property and crop.
And.
Into the pandemic has impacted the commercial auto lines on the premium side things like school buses passenger transportation.
In a way that's.
Now a bigger impact than than other lines and same with workers comp payrolls.
As workers are laid off and that so I think because our mix.
Those businesses is probably a bit higher I think thats one reason why.
Our premiums not as robust as some of some of my peers in that.
I think.
If there is good news I think in the same way.
As the economy recovers and you.
So.
You have a vaccine and you enter into a post pandemic type of economy. My guess is the opposite starts to happen and you know as the economy picks up probably theres, a little bit more tailwind behind commercial auto and workers comp and and lender placed premiums in particular.
So.
I think that's my that's my take I don't we don't see any big things happening on you know low lower Retentions and.
You know our renewal retentions of business, our businesses and that you know in general on a on an overall basis I hope that helps.
Understood. Thank you for the color.
Thank you. Our next question comes from the line of Greg Peters from Raymond James Your line is now open.
Good afternoon and.
I have to say thank you for all the information in your slide deck.
I find that quite helpful spin.
Especially as it relates to.
The background on the annuity transaction.
If we pivot to the investment side you did provide some color there and obviously you give us a lot of disclosure in your supplement.
Some of your peers.
In the annuity business have identified are called out loans values that are loans that are per.
Possibly in special servicing status or early forbearance and I was wondering if.
If you could take a moment and tell us about any areas of troubled investment portfolios.
Performance you have within your portfolio.
Yes, Greg. This is this is Craig.
Generally very pleased with how our portfolio showed up but I think the.
The unrealized gain.
That number is a pretty good indication of.
How things have held up.
[music].
So let me look at that.
Let me see if I can put my hands on some stats here Greg on.
Some areas that might be considered.
Higher risks so we do have.
Some commercial mortgage loans, we have $250 million of loans on office buildings.
But we have.
Leases with very strong tenants, so that the largest of that 250 as a $75 million alone on an office building with 100% of the building leased to Con Ed.
The second lower just as a $42 million alone.
It's 100% leased to ancestry dot com.
The third biggest is $28 million too.
On a on an office building that is 100% leased to a subsidiary of Verisk analytics analytics. So we.
We actually feel very good about the position that we're in on the office loans.
We do have some hospitality loans and we have given forbearance, Brian do you have the numbers on the.
Forbearance on.
On real estate loans.
It's a it's a fairly even if it's a fairly modest number Greg and we feel very good about the collateral that we have.
We do have some loans on hotel properties, but they are great properties. The largest one is.
A property that we used to own its chatham bars in.
And we have a loan when the loan was made it was probably a 55 or 60% loan to value.
It's a it's a great property I think that our loan amounts on that property is.
Something like.
60% of what we sold the property for.
Some.
10, 12 years ago, So we actually feel very good about the.
There was a collateral position that we have in the in the hospitality loans that that.
That we have.
The number you will incur.
Im on the mortgage loans, there is $124 million that are under forbearance agreement, so not not a large percentage of our $58 billion investment exactly immaterial right.
Relative to your total portfolio.
Yes.
So I mean, I guess I need to.
The questions before about consideration of other reinsurance transactions.
One of your competitors is out there.
Gauging in similar.
Reinsurance transactions it seems like the ultimate goal is to turn the bis the annuity business model more into a fee based structure more than anything else and.
You know.
Is there do you get a sense that the appetite and the reinsurance market for this for for your deposits is growing or just trying to understand why.
There's all this interest in the annuity.
Market right now from a reinsurance standpoint.
Greg there's no doubt about it the interest has grown tremendously I can't tell you the number of contacts that we've gotten since we announced our reinsurance deal of a substantial companies that are asking us if we would consider them.
If we would decide to do another reinsurance transaction, it's a market as very very robust and I can tell you. We were incredibly pleased with the economics of the transaction that we just closed.
Right.
It it does look compelling.
I wanted to pivot back to the property casualty operations I guess.
You know.
Carl I'm always trying to I'm always trying to get information more information about your.
Crop business and you're willing to provide.
And in your comments you said you expect this year to be normal to slightly below normal.
And then in the context, when we think about last year I think last year was a bad year.
Does this mean that when we think about the earnings for from crop for the first half of next year, you will see a positive variance because of this year's results.
I can't predict that but theres always a part a portion of the crop business that you until.
You know things like citrus or you know different types of products or.
And that that you don't know what the answer is until you get into.
December January et cetera, et cetera. So there always is a piece there always is some unknown on part of the crop year. So there is always a potential.
With that.
And estimate could change upwards its.
As you know the same mini estimate can stay the same so usually we correct that for the for the accident year.
Last year in the first quarter January.
But.
We don't have you know, we're generating more conservative in how we report.
We never we know we take very little in a current crop accident year take very little generally.
Well almost.
Usually nothing for the current crop year and the first half of it of a year and then we look at in the third quarter and then the fourth quarter is generally the main quarter that.
We report most of the crop income in.
Got it and then I, just I guess I wanted to try and get one question and around just the outlook.
I know you've provided the 2020 outlook for specialty PCC, you know and I guess, what I'm what I'm interested in is you know.
Does 2021 look to be from a revenue and net written premium basis does that look to be a back to normal where you're actually growing the topline or do you expect some spillover effect across your businesses to linger and through the first quarter and possibly the second quarter next year. That's my.
Last question.
I mean, Greg we're currently.
You know in into the fourth quarter, we generally give guidance early in the next year.
I think part of that answer has to do with what you what each person. Thanks.
On.
What happens with the pandemic in when you get a vaccine and those types of questions, particularly as it relates to.
Workers comp or you know some.
Some of those lines.
I can't be I can't overall from a big picture standpoint, with the pricing trends, we have and the.
The growth that we're seeing in some businesses like excess liability and de Novo and.
And different pockets of our business I'm very excited about how we're how.
Our posture in that.
And as I said before I think when you do get to a more normal.
Non pandemic type economy in the same way that workers comp and.
Commercial auto may have gotten hurt more than usual or lender placed property the opposite might happen at the point.
You know that you you reach that so.
I'm very excited about.
How were positioned the businesses were in.
Our prospects the pricing.
We're positioned very well to take advantage of the opportunities that they will.
Present themselves and have plenty of excess capital also so.
Thank you for your answers.
Thank you. Our next question comes from the line of Paul Newsome from Piper. Your line is now open.
Pardon me Paul Please check your line may be on mute. Your line is now open.
Paul Newsome from Piper Your line is now open. Please proceed.
TJ lets proceed to the next caller and will allow time for Puerto Rico.
Our next question comes from the line of Meyer Shields from KBW. Your line is now open.
Great. Thanks, so much like coming to.
Yes, we can do that okay.
So I want to talk a little bit about loss trends I saw the acceleration and the expected pricing, which is I think youd positive.
How have your expectations for loss trends across the PNC portfolio changed over.
Over the course of the year and I guess, maybe some particular focus on your discussion of general liability reserve strengthening in the third quarter.
Hey, Mark this Carl.
Amazingly, our overall loss ratio trend continues to be right around 1.7%.
If you exclude comp.
That moves up to about 3.2% so.
Still a reasonable type a number the.
The loss.
The areas where loss cost increases.
Our loss ratio trends are above that for in the ones that you've you read about in the industry.
In commercial the commercial auto liability side, our commercial auto.
And.
Parts, the public Dino, particularly and you know that that part of our business and because of the commercial auto claims bumping up into excess liability and umbrella.
For that reason you know the loss ratio trends, you know would be a little over 4% loss ratio trend be a little over four 4%.
Or in our Great American custom business, which is more geared towards.
Fortune thousand you know that.
You see those loss loss ratio trends you know.
More in the 8% to 9% so kind of tracks with what.
Our other peers have been saying as far as where the hot spots are.
And that now that the good news in those areas, where the loss ratio trends.
For US you know are higher than our average they also have to be in areas that were getting continue to get pretty significant rate.
So commercial auto the third quarter commercial auto liability, we got 10%.
10% rate increase in DNA no lines like the you know, we got 16% increase in renewal rate price in the quarter.
So and then when you look at.
Excess liability.
We're getting.
Our really major.
Pricing.
You know in those in those businesses in that.
And.
And that so.
I think the good news is the areas, we're seeing higher loss ratio trends were getting pretty significant rate.
I think also in our case.
No different than some of our competitors, we're already making great returns.
In our excess liability business, we're making solid returns in or do you know business.
Which has generally been more focused towards.
Private and.
Non public.
And other than the public company type of sector in that so well.
Were already earning good returns in some of the businesses, where theres lots of activity and for that reason that means we're also growing in some of those businesses.
At a healthy rate, which I'm very excited about.
So I've mentioned before commercial auto we're meeting our return objectives and our commercial auto business.
Commercial auto liability were making a small underwriting profit and we're continuing to take rate because we'd like to.
Have that underwriting profit be larger, but we're really positioned well.
Considering we're already making money and I think you know.
I think with the rate and with the market conditions.
I'm very excited about how we're positioned in the prospects as we look forward.
Okay, No that's great that's very helpful.
I have right I mean in in the quarter, but I think there's probably a record number of catastrophes that I saw in the quarter compared to any other time my career here and with the cobot uncertainties some of the social inflation.
I can't tell you how excited.
Yes that we were able to have a 92 combined ratio.
For our group and a quarter that's pretty messy.
No absolutely, yes definitely through the same conclusion.
Right and also if you wanted to ask a question or two on the annuity side.
Thank you mayor.
Yes, I did.
You talked about your current crediting rate strategy for the annuity business and how that will play out over the next few quarters. I guess my question is as we look beyond that assuming interest rates remain very low would you expect or to continue to be pretty.
Pretty active lowering future crediting rates beyond the current program.
Do you think you can maintain.
Spread level that that pretty constant rate going forward.
So this is this is craig.
So because of our model, we have not needed to make significant adjustments to credited rate on enforce.
Up until very recently with the huge drop in and investment rates and.
The result of that is the difference between our current credited rates and our GM I ours.
Our very very wide.
If you look.
Post the reinsurance deal that we just announced.
We have a we could lower credited rates and other hundred and 808 basis points on $25.9 billion of reserves. So that gives us tremendous flexibility to make adjustments if needed we want to be fair to our customers and.
So my hope is that we don't need to make a lot of additional adjustments beyond what we have already.
Started to implement.
But it's going to be a function of what interest rates do is going to be a function of where we have the ability to.
To manage the credited rate on in force to hit our targeted return. So it's a balancing act. We're in this for the long term I think we get a lot of credit from our distribution partners for being very fair with our customers.
And in not being overly aggressive in reducing credited rates, but we have the margin there and we have the ability to.
Continue to get targeted rates of return even if we stay in a low interest rate environment for a prolonged period of time.
Understood. Thank you.
Thank you at this time I am showing no further questions I would like to turn the call back over to Diane Weidner for closing remarks.
Thank you all for joining us this morning, and we look forward to talking with you again next quarter have a great day.
Ladies and gentlemen, today's conference.
Ladies and gentlemen, todays conference is now over you may all disconnect.
[music].
Yeah.
[music].