Q3 2020 CNA Financial Corp Earnings Call
Good morning, and welcome to the CNH discussion of its 2023rd quarter financial results seen its third quarter earnings release presentation and financial supplement were released this morning Harvey.
Albeit its website www dot.
Dot com speaking today will be no. We do still see any chairman and Chief Executive Officer, and Al morality, CNH Chief Financial Officer. Following their prepared remarks, we will open the line for questions. Today's call May include forward looking statements in references to non-GAAP financial measures any forward looking statements involve risks.
And uncertainties that may cause actual results to differ materially from the statements made during the call information concerning those risks is contained in the earnings release and in CNH. Most recent FCC filing.
The forward looking statements speak only as of today Monday November 2nd 2020.
C N expressly disclaims any obligation to update or revise any forward looking statements made during this call regarding non-GAAP measures reconciliations to the most comparable GAAP measures and other information have been provided in the financial supplement this call is being recorded and webcast. During the next week the call.
And may be accessed on C.N. <unk> web site <unk>.
If you are reading a transcript of this call. Please note that the transcript may not be reviewed for accuracy. Thus it may contain transcription errors that could materially alter the intent or meaning of the statements with that I will turn the call over to see an ace chairman and CEO Dino Robusto.
Thank you Roland morning.
Very good to be with you today and I Hope you and your families are coping well.
Wake these unprecedented times see and they continue to operate effectively.
As our underlying business performance improved once again this quarter it's evident.
The ongoing acceleration in rate of treatment as.
As well as higher overall growth.
Well said new business.
We also had an improved underlying loss ratio.
And a lower expense ratio for the quarter.
As we have done in previous years we.
We completed our annual like a good review of the quarter.
Which importantly includes the long term care gross premium valuation.
Or GBP analysis of our active life reserves.
It's part of our analysis, we took strong reaction to.
To address the lower interest rate environment, we now face compared to a year ago, I conservatively conservatively modifying our discount rate assumption.
First we have lowered our expectation for the enormity of the 10 year treasury yield to 2.75%.
Actually in a 100 basis points from last year.
Second we extended the time period could bring it up to that normative rate from six years.
The 10 years then.
And long term care reserves are discounted these changes reflect.
Our ongoing prudent approach to reserving.
And our steadfast resolve to protect their capital and earnings and an ongoing low interest rate environment.
Oh, well provide you with much more detail associated with its years GBB review.
Turning to B and C.
Our underlying combined ratio of 92.6% for the quarter.
Improved by two points from a year ago.
And is the lowest underlying combined ratio first DNA in the last 10 years.
The underlying loss ratio improvement consisted of only eight point benefit.
You had a lower frequency from the ongoing economic downturn.
With most of the improvement driven by our international business.
Which has steadily return to profitability as a result of our re underwriting efforts in our London operation over the last 18 months.
As I mentioned last quarter, we expected only a relatively modest impact from lost frequency benefit.
Because a substantial portion of our portfolio consists of insured finished essentially industries such as construction.
Healthcare and manufacturing that were not subject shelter placed restrictions.
And they continue to assume a potential for higher severity in casualty lines like auto in general liability.
The economy is restored overtime. So we believe that it's still early to react to favorably.
The short term trends.
[noise] below our PNC expense ratio of 31.8% largely reflected our growing premium base, which contributed approximately <unk> 0.7 points of the improvement.
In our underlying combined ratio.
As I have said on prior calls.
Strategy has been to simultaneously make substantial investments in talent.
Knowledge and analytics to positioning us for sustained success.
While streamlining our operation in order to keep our overall underwriting expenses flat.
Then by growing the company in a disciplined and prudent fashion.
We will steadily decrease the expense ratio, which you can clearly see in this quarter as more of the growth earn did.
Turning to the dynamics of this hard market and starting with pricing rate increases continued to accelerate as we achieved a plus 12% and PNC overall.
A point from the second quarter.
Fortunately.
Excluding workers comp.
We checked slightly negative rate and our very profitable affinity programs, which had a small positive rate increase the rate change, let's plus 17%.
Two points from Q2 and five points from Q1.
Fortunately the increases apart from these two areas were broad based at each business unit and essentially all product lines.
Higher rate.
Yeah Celleration in our recent rate increases over the last six quarters.
That's right the four quarters of earned rate increases now at plus 9%.
This compares to our long run loss cost trend assumptions, a slightly more than 4%, excluding our affinity book.
As mentioned on our last call. We had previously increased our view of long run loss cost trends in 2020.
As we continue to feel the impact of social installation on our portfolio in particular in our aging services and auto portfolios.
In the quarter, we remain comfortable with our latest view and did not further need to increase that.
However, as I also mentioned last quarter the impact of the pandemic could be opted scaling the social inflation dynamic.
So there still is some uncertainty around future impacts the long run loss cost trends, which is why we remain cautious.
Do acknowledge margin expansion from the earned rate trend being complete.
Above current levels.
Great News, however is that all the dynamics fueling the hard market, which we got others have articulated repeatedly.
Should allow us to achieve strong rate increases well, let the 2021.
The margin gap all else equal should.
Should continue to grow net of any added pressure for long run loss cost trends in 2021.
And as we see this play out over the next couple of quarters. We will then be in a better position to incorporate the benefit.
And do our loss ratio picks.
In terms of growth gross written premium X captains, 9%.
Net written premium growth was 7% both higher than the second quarter.
Exposure continued to be a headwind to our girl.
They were down three point.
Compared to the third quarter last year.
As was the case in the second quarter, new business growth in the third quarter was again, a higher than the same period last year, which evidences our ability to provide strong service to our agents and brokers in this remote.
Working environment.
The investments we made at the end of the first quarter to respond quickly to shorter time frames on submission.
I mentioned on the last call continued to pay dividends this quarter.
Retention declined to one point from the second quarter to 82% due to our re underwriting efforts in our London operations, which will essentially be completed in the fourth quarter and to our targeted our actions in the U.S. to improve the profitability of certain lines within healthcare and manufacturing that I have spoken about previously.
[music].
Completing the picture for the quarter were overall combined ratio was 100.9%, which included 0.4 points of favorable development.
And 8.7 points of loss activity from a series of natural catastrophe events.
Also as indicated in our press release, we made no change to work over 19 catastrophe loss estimate.
The quarter there were no significant changes in the regulatory environment. The claim notices we received in the third quarter have been modest and very little has been paid out of course that was our expectation all along as we knew the claim outcomes from this event would play out slowly overtime as a result.
Our previously established COVID-19, ultimate loss estimate of 195 million remains appropriate for all events that occurred through the third quarter for which we believe planes will eventually emerge and our loss estimate it's still virtually all when I'd be in our.
Moving to investments the overall portfolio fared well in the third quarter, the unrealized gain position increasing once again the net investment income was strong driven by LP positions.
Despite this strong quarter, we continued to see a reduction in our net investment income from our fixed income portfolio supporting PNC due to the lower interest rate environment.
We believe it is unlikely to change meaningfully anytime soon.
This is a key dynamic fueling my perspective for a protracted hard market as it will take time for us in the industry to offer to achieve an offsetting increase in underwriting income finally.
Finally, our core income for the third quarter was I couldn't 93 million or 71 cents per share net income was 213 million or 79 cents per share.
And with that I'll turn it over to al.
Seattle and good morning, everyone Cateno indicated that will now provide details of our results by business segment starting.
Starting especially combined ratio was 89.5% this quarter.
The combined ratio includes favorable prior period development on two points, one point for catastrophe losses.
Favorable prior period development was largely driven by continued strong profitability.
Surety business, partially offset by unfavorable development in health care.
The underlying combined ratio, especially with 9.5% this quarter.
1.6 points of improvement compared to third quarter 2019.
The underlying loss ratio was 60% in the expense ratio was 30.5%.
The expense ratio has improved by 1.3 points compared to third quarter 2019 to both gross and net earned premium and lower expenses.
Gross written premium growth ex cap is <unk>, plus <unk> percent and specially for the quarter, 9% on written premium.
Rates continue to increase at plus 13% up from 11% last quarter.
Retention was 86% this quarter, which was flat to last quarter.
Yeah listen its volume was strong with growth of 14% over the prior year's quarter.
The combined ratio for commercial was 111.5% this quarter.
Was it 9.9 points higher in third quarter 2019 includes 17 points of catastrophe losses.
<unk> 0.6 points of unfavorable prior period development.
A cat losses are attributable to severe weather related events in the quarter, primarily hurricanes Laura.
Yes, Sally and the Midwest trade show.
The underlying combined ratio for commercial was 93.9% this quarter.
0.1 points higher in third quarter, 2000, 19.9 points improvement on a year to date basis versus prior.
The underlying loss ratio was 61% compared to 61.5% from the prior year.
Reflecting a modest benefit from lower frequency in the quarter.
I mentioned.
The expense ratio was 32.3%.
Compares to 31.7% in the third quarter of 2019.
The prior your expense ratio included the release associated with this state lots assessment fun, which is muting the favorable impact of current year net earned premium growth and lower expenses.
Gross written premium growth ex captives plus 7% in commercial for the quarter and that was plus 4%.
A rate change of 11% was up one point from last quarter.
Tension was 81%.
New business growth was down 3% versus prior quarter and up 8% on a year to date basis.
The combined ratio for international was 98.1% this quarter compared to 107.4% in the third quarter 2019.
The combined ratio includes three points of catastrophe losses for the quarter.
The underlying combined ratio for international was 95% this quarter, an improvement of 10.3 points compared the prior year quarter.
The underlying loss ratio was 60.1%.
Expense ratio was 34.9%.
The underlying loss ratio improved 7.2 points, you're buying a re underwriting execution. All the expense ratio declined 3.1 points driven by lower acquisition and underwriting expenses.
The gross written premium in international increased by 5% net increased by 10% growth in comparison to the prior year.
The net written premium growth comparison to the prior period was impacted by a change in timing of the reinsurance treaty.
Great change of 16% with up two points from prior quarter.
10, she was 70% this quarter, which is in line with 2019 levels are you.
Flux the progression of the re underwriting strategy.
Before I review the results of life <unk> group segment, including impacts from our annual reserve reviews, I would ask you to refer to slides 11 through 13 of our earnings presentation as I take a moment to.
Walker our approach to the long term care business.
The actions we've taken over time.
More than five years ago, we commenced efforts focused on the active management of long term care with the goal of reducing the risk CNN, while also effectively serving our policyholders.
They say comp is significant investment in the business and a commitment to proactively and effectively address risks.
We've made considerable progress on these objectives.
In reducing risk across many dimensions of the block.
Cheating meaningful rate increases taking.
Taking preemptive actions on the reserving assumptions.
The actions, we have taken with our 2020 annual review of their life and group deserves a reflective of this continued approach and commitment.
As a reminder, our annual life <unk> Group Reserve reviews include the long term care gross premium valuation or G.P.B.
Our active life reserves as well as the long term care claim reserve analysis.
Yes.
We completed the claim reserve report a structured settlements block, which I'll also address.
Starting with the long term care DPP your view.
The most significant change resulting from this review that's an update of our discount rate assumptions.
These changes associated with the discount rate are detailed in the slides 14 and 15.
It is important to note that the discount rate.
Function of the current investment portfolio yield as well as the reinvestment yield to assume for future investments.
Benchmark, we use in reference to the risk free reinvestment yield the tenure U.S. treasury.
We project interest free weights over the short and intermediate term.
It's too long term rate or normative rate with a critical importance given the duration of the liabilities.
In the previous two years reserve reviews, we have reduced our expectations that normally that 10 year treasury yield.
I'm sure it and five basis points there.
Our 2019 are you assuming that this benchmark rate to get to 3.75% by 2025.
In light of the current interesting rate interest rate environment.
An expectation these conditions persist going we've taken several critical actions owner discount rate assumptions.
First we have lowered our expectation for the normative rate to 2.75% reduction of a 100 basis points from last year.
205 basis points cumulatively over the last three years.
Second yeah.
We've extended the time period, the grade up tick up in a normative rate six years to now 10 years.
This means that it's not until 2030, we will assume the new 2.75% normative rate.
Finally, we are using the foreign corrupt for the first three years of the projection.
Great up to the normative rate over the remaining seven years.
You will see on slide 15, you're not assuming the tenure, we'll get back to the 2% level.
2027 so.
Nipigon change compared to the prior year expectations.
I should also note that we did not make any meaningful changes to investment spread assumptions more portfolio credit quality is probably this review.
The sum of all these assumption changes on the discount rate resulted in unfavorable pre tax impact of $609 million.
He's discount rate changes, including the significant decrease in the normative rate.
Extended timeframe to get to the new normative rate and use of the forward curve is over the next several years reflects our prudent approach to reserving meaningfully reduces the reinvestment risk assumed that these liabilities.
With that I will move on to other key assumption changes, including morbidity persistency and rate increases.
All highlighted on slide 16.
With respect to morbidity along with their change in the level of interest rates, we also lowered our expectation of inflation.
This change impacts our assumption for cost of care for future claims it together with other morbidity assumptions had a favorable pre tax impact of $51 million.
With respect to persistency, we can't sub assumption changes and increased the mortality rates older age policyholders not on claim and reflective of our experience for this cohort.
Persistency changes had a favorable pre tax impact $152 million.
Finally regarding crane future premium rate increases as a reminder, our approaches to include rate increases that have been approved by.
Filed but not approved by that we plan to file as part of the current rate increase program.
Over the past year.
Actual rate achievement has exceeded our prior expectations contributing $200 million favorable impacts.
In addition, we are continuing to file for additional rate increases under existing programs.
Updating our assumptions to reflect their actual rate achievement. In addition to the updates to existing programs had a total favorable pre tax impact of $318 million.
I should note that the weighted average duration of future rate increase approvals soon in the reserves is only 1.5 years.
Overall and as highlighted on slide 17, our annual GPV analysis for long term care.
To live in a reserve deficiency in charge to earnings of $74 million on a pre tax basis.
While these changes a notable change on the discount rates are significant there.
They reflect our continued approach to prudently, we proactively address risk associated with this business.
Yeah.
In addition to the GP. The analysis. We've also concluded our annual long term care claim Reserve review.
Which is a review of the sufficiency of our reserves Katrina claim operation.
In fact I missed this review is favorable with a $37 million release of reserves driven by lower expected claim severity.
Specifically, we observed higher claim closure rates, most notably driven by claim recoveries actually.
I should note that this the 15 year in a row, where there's hope, but the claim or gave was favorable which the validation of our responsible approach to actual assumption setting.
Finally.
And I've indicated on the bottom of slide 17, we had an unfavorable impact.
Pat to associate with the claim reserve review for a structured settlements block.
He structured settlements agreement to a bike fixed periodic payments to claimants associated with the Stewart PNC claims.
Total reserves for our structured settlement block were approximately $550 million.
And the third quarter.
Similar to our long term care block. These reserves are held on our balance sheet on a present value basis, and thus are subject to changes in assumed discount rates.
As well many of these policies that unlike contingencies.
They are impacted by changes in mortality assumptions.
As part of our Reserve review this year, we made adjustments to both the discount rate and mortality assumptions, so what I'm going to reserve strengthening $46 million on a pre tax basis.
Turning to slide 18 overall, our lighting group segment produced a core loss of $35 million in the quarter.
If some of the reserve changes coming but the long term care and structured settlement blocs was a pre tax charge of $83 million or $65 million aftertax.
I heard from the impacts of these reserve reviews. The segment produced core income from current operations.
$30 million for the third quarter.
These results were favorable to our expectations, primarily driven by morbidity experience.
Specifically, we continue to experience lower than usual new claim frequency higher.
Higher claim terminations more favorable claims severity and they'd be effects because the 19.
As referenced in the previous quarter given the uncertainty of these trends we are taking a cautious approach from the income recognition perspective and.
And then holding a higher level of IB in our reserves.
In addition, as you continue to gain these trends as temporary and short term in nature did not incorporate this more recent experience into our GPV assumption setting efforts.
Our corporate segment produced a core loss of $19 million in the quarter.
Now, let me turn to investments.
Pretax net investment income.
$517 million in that third quarter, compared with $487 million in the prior quarter.
The results reflected favorable returns from our limited partnership and common equity portfolios, which produced pre tax income of $71 million compared to $18 million during the same period last year.
Pre tax net investment income from our fixed income portfolio, that's $443 million this quarter compared to $462 million in the prior year quarter, but.
The pre tax effective yield on our fixed income holdings, that's 4.5% for the period.
The decrease was primarily in our PNC portfolio, which as Deno mentioned has been impacted by lower reinvestment rates.
Pre tax net investment gains for the quarter were $27 million compared to a gain of 7 million in the prior year quarter.
The game was primarily driven by the continued recovery of the mark to market on our non redeemable preferred stock investments.
And higher net realized investment gains on fixed maturity securities, partially offset by a loss on the redemption about $400 million of senior notes due August 2021.
Our unrealized gain position on our fixed income portfolio stood at $5 billion up from $4.4 billion at second quarter.
The change in unrealized during a quarter, that's driven by the tightening of credit spreads across the market.
While the risk free rates remain low.
Fixed income assets that support our PNC liabilities had an effective duration of 4.5 years at quarter end in.
In line with portfolio targets.
The effective duration of the fixed income assets that support our life and group liabilities. It's.
Nine years at quarter end.
Slides 21, and 22 of the earnings presentation will provide you with additional details on the investment results and the composition of the investment portfolio.
Our balance sheet continues to be extremely strong at quarter end shareholders equity was $12 billion or $44.30 per share true.
Driven by the increase in our unrealized gain position during the quarter.
Shareholders equity excluding accumulated other comprehensive income was $11.6 billion worth putting $2 and 78% per share.
We continue to maintain a conservative capital structure with a low leverage ratio.
Well balanced debt maturity schedule.
As I noted in August we issued 15 $500 million of senior notes at a record low coupon of 2.05%.
The tremendous demand for the paper.
He was subsequently be redeemed our 2021 debt.
And many of which will reduce our annual interest expense by nearly $13 million.
And at quarter end, all of our capital adequacy and credit metrics remain above target levels supporting our credit ratings.
In the third quarter, our operating cash flow was strong at $758 million driven by higher premiums and to a lesser extent lower paid losses.
In addition to our positive operating cash flow.
Turning to maintain liquidity in the form of cash and short term investments.
It has sufficient liquidity holdings to meet obligations and the stat and significant business variability.
And we are pleased to announce our regular quarterly dividend of 37 cents per share.
With that I will turn it back over to Dino.
Thanks, John One last point about this is before we move onto the question and answer portion of the call each.
Each quarter this year I have developed greater confidence in the strength the duration of the hard market.
Because of the widespread industry awareness and therefore, increasing customer awareness.
The adverse impact of a protracted low interest rate environment.
So inflation dynamics.
Well as years of the breast breaking and elevated catastrophe active activity increasingly is understood. This will take more than a few additional quarters of direction to allow the industry to achieve.
Wired levels, the return to responsibly protective customer risks.
I still am.
I am optimistic that we will be able to take full advantage of this direction period to.
To achieve stronger pricing better terms and conditions.
Growing our top line treating them as well as our share of high quality new business.
And improving both our underlying loss and expense ratio then with that.
I'd be happy to take your questions.
[noise].
Well.
Yes.
And as an additional reminder to ask a question. Please press star one on your telephone keypad, if using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again, everyone. Please press star one on your telephone keypad. If you would like to ask a question, we'll pause for just.
At the moment to assemble the queue.
And just a reminder that is star one to ask a question we'll take our first question from Josh Shanker with Bank of America. Please go ahead.
Yeah, good morning, everyone.
I hope, you'll indulge me with maybe more than two but it can you.
If you want.
So first question on the expense ratio in the PMC business absolutely.
Number.
Anything we need to think about in terms of kidney or corporate related.
Expenses, making this a typically wrong or is that a good number to think about going forward.
Oh, you want to take that I guess.
Yeah, sure Darren and Josh a it's a good question. So I would say a modest impact from travel right, we're not a huge TV spend.
The company. So I would say the expenses are modestly benefited from less or very little travel on that but not a lot really the pick up largely driven by our pickup and on growth.
And so so that.
Yes.
It's just one quarter, but might be a useful number going forward, it's not unreasonable.
I don't think it's something we should all remember our strategy and to try to hold underwriting expenses flat, while we invest in the business.
I think what you saw in the quarter was just that I'm good efforts and holding flat. We continue on our path of investing in talent technology analytics, and but you know the disciplined showing through on a our expense spend and then again or you see that pass the bar written growth and Mercer.
See that really show up in arms.
And then in terms of long term care you Quickies one is.
Yeah, I understand exactly.
Hi.
That the future rate increases are not included in the assumptions and I guess when I was when I was reading.
The press release, it said that the V. 2019 or rate increases came through better than expected I'm trying to understand exactly how does that work if it be expectations should be where they built into the numbers or what does that $318 million exactly.
Sure. So just remember this gross premium valuation effectively what it is is it takes all of your future cash flows premiums.
Claims expenses.
And then it gets campus it all back on.
On your balance sheet in the form of a reserve.
Okay. So that includes Ukrainians and that's just how it works from a life company perspective.
Now.
What we include a from a rate increase perspective, we would deem to be prudent like I said, we take.
Rate increases that we've gotten approved already but haven't yet kicked in or come through is actual premium.
That we filed but have not yet been approved or that we have a current approved program Bucks has not gone through the filing process yet.
That's some of what is in our reserves.
Pursuant to rate increases its $265 million. So that's the balance that that is outstanding.
Last year that balance was $230 million baked into our reserves okay.
So what basically I'm, saying, what that $318 million or is is what was the change you had some of the rate increases actually earned in and then you have your updated assumptions, but.
The bulk of that change that $318 million was pure.
Purely based on last year's estimates of what we thought we could achieve.
This is what we actually achieve that as we outperformed we've got greater rate than we would have anticipated.
But okay, our our approach and our philosophy is to be prudent about what we think we can earn and do not go far out in the future you will see here other long term carriers speak they all have a little bit different perspective, but some will go further out into the future.
And we'll have a bit more aggressive expectations in terms of what the achieves because we don't know and because its uncertainty of what the rate environment will be we've always taken a very prudent approach on that men. So what you're saying is basically are really outperform on those assumptions.
Kim I was looking over not just yours, some other companies rate increase approvals and whatnot.
Some of them are quite staggering.
Yeah.
Where you are ambivalent about whether its policyholder takes the the offer of the new rate or or cancel the policy. Even gets a compensation return are you know you'll get some rate increases are we getting to the point where.
Or you are happy to have those policyholders on because you're getting the right you need it.
How should we think about that.
So the way you should think about that is where we set the rates is basically oh.
The weight that we put out its actuarial equivalent to what options, we give them on benefit reductions.
Right. So that if someone says I want to reduce my inflation I don't want to do is my daily benefit.
And then doing so versus accepting the rate is essentially equivalent quicker than what we've seen in north sea that element of it.
It can't be equivalent as well.
Well canceling their basically they're basically giving up all of their benefits. So cancel anything basically from going what they would have paid in premiums over the years. So I wouldn't look at that the same that's some optionality was a cash the cash the cash benefit return and exchange for for growing your benefits.
These policies do not have cash value.
Okay, all right. So it's not that they're undervalued.
Some of them do that.
And one last question can you parse free how much coal mortality there is in the persistency benefit you had in the quarter.
You mean current operations as opposed to in our reserve reviews.
There was there was I think I got.
$150 million and persistency benefit it was mortality related I assume some of that is covert mortality.
Yes, our current operations that is the that operating result, we had a $30 million. There's a there's some mortality benefit but you should think of is what came to the results are would be kind of some more of that more permanent impacts of.
Of the business that is that we had a lower level of paid claims.
And really more severity and then as well you would had some mortality coming through there both in our what we call healthy lives as well as our claim population.
And what we are holding in being more cautious about is more of the claim frequency component.
Okay, well. Thank you for all the detailed answers I appreciate it.
You're welcome.
And up next we'll hear from Gary Ransom with Dowling and partners. Please go ahead.
Yes, good morning, I wanted to ask a little bit about expenses as well I'd like to hear your thoughts on how the coal that experience like cause permanent changes in expense levels like I'm thinking yeah.
Maybe there's some rejiggering of real estate or their travel and entertainment.
Processes work, just as well with people at home.
I wanted to ask the question is how do you make the best of what you might have learned.
Over the past several months is or two there are some changes you can make.
Oh, Sorry, Ireland and then you can you can you can jump in.
I think maybe starting a.
A little bit with the second bars, Gary as you know.
There are things that we are clearly learning in the process and.
The ability for us to work in this remote environment does generate.
On ability for us to say well.
Going forward I think there's probably going to be less overall I travel and expenses you will continue to do that we have branch operations. We'll go with that to those locations. We will obviously meet with our agents and broker.
As well across all of those locations but.
Our agents and brokers are also valuing.
The calls that we make in a virtual environment. Our clients are also every one is generating.
So the efficiency gains from that process. So I think there will be a potential benefit now I want to be a little bit careful just on the point that that's.
As I have mentioned like travel expenses, not a large component.
Our new marine or can easily get fulfilled by our decision that we continue to make on talent then in particular analytics, a and technology, but there are some definitive positive that have been.
Being generated from a process standpoint, a work standpoint.
That we anticipate a from a talent standpoint, and you can secure talent from their <unk> remote environments and find them worked effectively.
Of course, we're all looking forward to getting it to a large extent getting back at offices, but there are clearly some benefit.
I don't.
And I don't want to suggest that that has a big impact on the numerator at this particular juncture because travel and expenses.
Less of an issue for us all of the other component, but nevertheless, as al pointed out in club of the earned premium growth that's going to continue.
Going in at 2021 that will continue to have a benefit.
So I guess I was trying to ferret out or if there was a way to reduce expenses, but it sounds like this is really more.
Part and parcel of you're keeping expense dollars flat interest letting the premium grow is that fair.
Yes, I think that's a that's a fair way, where we stand today, we're always.
You know to keep it flat as you make investments in all the other areas you are having to gain operational efficiencies in other areas and I'm sure a the cobas related circumstance will also provide some operational efficiencies I just wanted to put it in context as not being a big.
Driver of our numerate or within underwriting expenses Gary.
All right. Thank you.
My other question was on the terms and conditions, so shifting gears a little bit in how you've been tightening those either in international or segments that need it here.
You've had a curious with past cycles. So you might have a view of how how's that.
<unk> terms and conditions change contributes to the overall improvement and how the timing might flow through just trying to get a sense of.
How big of an increment on top of the rate might be coming from the terms and conditions changes.
Yeah. So oh, it's clear that as this market continues to hard and you get a lot of benefits within a bunch of stuff of terms and conditions.
Beyond the pricing you get you know a policy terms they get a lot more of a strict you get better deductible.
If solutions that you can.
Adding certain components of exposure that have gotten a expanded in a softer market clearly this is an opportunity to.
To take advantage of these Ah changes in terms and conditions and we're clearly and we're clearly doing that and I do think there's a way I think about it having seen me you know 80 580, the 86 hard market 87 and then.
Right. After a 2001 is that the terms and you know the terms and conditions tend to persist yeah. It would be on a when the rates are the rate increases.
Sorry, that's upside so the.
The rates moderate first the terms and conditions persist a little bit longer and ER and then as you get deeper into a softer cycle you get a the pressure on terms and conditions. So we are clearly taking advantage of the ability to do that in all areas.
In particular in areas, we've been re underwriting or like our health care portfolio in the United States. Some of our large property clearly a property from an international standpoint, and a this is going to serve us well beyond even when rates.
Start to moderate again, which ended up itself is going to be a little bit of a a ways out there.
So do you think we're already seeing a meaningful benefit from terms and conditions changes.
I mean I would say.
Say to you is that our re underwriting efforts in the aggregate are clearly providing a benefit a good example.
Gary that I would use is the international calendar year combined.
Ratio, which was under 100 or in the third quarter notwithstanding the catastrophes.
The United States, and I point that out only because in the past apply it to our international re underwriting we would have any considerable catastrophe activity emanating out of our London operation on U.S. catastrophe and Oh, we clearly saw a benefit.
In this quarter in the last 18 months has done a really you know I'd say it has made a big impact so I put it within the broader umbrella of the re underwriting initiatives.
Initiatives, where you can already start to see it I think you see it also in areas like health care, where we've been able to get considerable deductibles on our professional liability is something that you had not seen before so those all are.
You know the E part of the broader.
Re underwriting that we've been focused on for a while yes, I do think it's having a meaningful impact.
Thank you for all your thoughts Dino I appreciate it.
You're welcome.
And up next we'll hear from Meyer Shields with KBW. Please go ahead.
Oh. Thanks, Good morning, I guess, it's a question for out of the fixed income portfolio within PMC.
It seems to have risen I don't know somewhat abruptly from the second quarter to the third quarter I was hoping you could talk through what's driving that.
Sure, Mike and you mean, the value the value of the portfolio.
No the portfolio duration.
Tuition yeah correct. Yeah. The duration is up that is not a function of any changes in the portfolio, what you're seeing there Meyer is a with you know our current low rate environment rates staying low a lot of the modeling companies basically recalibrated their scenario.
Modeling to reflect a that rates could go lower prior to a more recently they had floors in a that would say rates aren't gonna go any lower than this level, but they basically reduce those floors and now have the potential that you could drop to zero and so basically with that sensitivity now.
Into the duration modeling.
With lower rates lower coupon potentially lower rates lower coupons.
Durations are higher but that has nothing to do with us changing anything in the portfolio.
Okay. So there's no incremental risk or anything like that correct correct. We would essentially would have been a flat quarter over quarter and duration, but for that modeling change.
Okay Uh huh.
With it within specialty I guess I was hoping you could quantify the the offsetting reserve development patterns from surety and and okay.
Okay kick Uh huh.
I'm not sure I understood that Oh can you can you just repeat that might you might yeah no not at all so Alan talked about offsetting if I understood correctly operating reserve development for the specialty segment, where Ah I think boil down you had releases and surety and some charges with the medical or with it or.
Health care those will be you could quantify that.
Oh can you you want to just do you want to jump in there.
Sure on your mind, you're going to see that obviously as the Q comes out so.
How about 40.
$40 million of benefit from the surety business and that's really a continuation of the exceptional.
Exceptional profitability, we've seen that business and then health care you some adverse development really driven by Uh huh.
Some large loss activity and again kind of but just kind of a trend that we've been saying and obviously, we would expect that will dissipate as we conclude the re underwriting of that book.
Okay. That's helpful. And then just finally on the sort of sit within commercial last few quarter that little more than a few with had favorable workers' compensation Reserve development I was hoping you could talk through how that played out in the quarter.
[noise] Oh, the the favorable item on work off you have those numbers.
Yes, so on workers comp and work comp again, you've got you've got a couple of puts and takes on commercial on on workers comp you're going to see a favorable development there really reflective of continuation of the favorable medical trends that we've been experiencing.
Okay. Thank you very much.
And up next we'll hear from Ron Bobman with capital returns. Please go ahead.
Hi, good morning.
Deal should have a a specialty in the health care area and I'm wondering if you might give us a little bit more sort of color as to what's going on in the various I'm sort of sucks subsegments sort of loss activity or claims activity.
Underwriting some of the underwriting environment, just sort of a some some more info would be interesting. Please.
Okay, and just to make sure.
I got all of that related to health care sub segments related to the Covidien origin. Just in general Yeah, really I guess really the cobot impact on the various segments, whether its doctors are nursing facilities hospitals. Other specialties, obviously, it's it's got to be crew.
And a lot of upheaval and challenge is going to be interesting to hear about you know what you're seeing what you're learning. Thanks.
Yeah. So you know the health care as we had indicated a when we put up our ultimate loss reserve.
We had indicated or a good for sharing.
Or the larger portion of the ultimate loss, Rob was indeed, a medical malpractice.
And in particular are aging services and are now what we did at the time to try to set an ultimate since we didnt have actual much claim activity.
So if I look at what came in from a claim notice standpoint, and although that was relatively limited. We've had also just talk about some of the public information and looked at the number of deaths within aging services facility that we insure and what we did this.
Took an estimate of what percentage over time.
Might turn in to playing.
And then what.
What we did.
Well I was in the third quarter as I indicated in my prepared remarks, not much changed Weve got even fewer.
Additional claims on the.
Health care aging seriously sorry, then we did in the second quarter. So as I indicated it was possible that well, we put up that ultimate you know it might end up subsuming.
Activity that we see in the third quarter, which is essentially a watergate what what it has but again I just want to caution right. We indicated this is going to be slow moving these things will take some time.
So notwithstanding a relatively limited.
I play notice activity at this juncture.
I think you know we feel that the ultimate we did put up of which.
But again the larger portion was the medical malpractice is is is still appropriate.
So that does that answer your question.
Yeah, and and <unk>, how do you handle renewals or you know you obviously have a lot of.
A lot of accounts I presume, it's like <unk> might claim count maybe no claim count, but you do face renewals come due and whats the ongoing approach to writing there was a very interesting. That's yes, that's yeah and as you know we have embarked early on and I think can comfortably say, we let them.
Market in the churn on health care, because we are a major player and we are respected we started to get rate increases and have had double digit rate increases.
For multiple.
Years, now and what we have said is we're going to get or achieved the terms and conditions and the rate increases we need all we're going to let it go and what you saw over the course of the last several quarters well their willingness to drop the retention ratio.
So and we have in particular on the aging services. It had a dropped considerably below the overall retention ratios. We we try that DNA, but that was fine. We decided we were going to do that now were getting substantial.
Rate increases going into.
The third <unk>, the third quarter, we had aging services alone.
Was.
Up 56% in.
In rate increase its about 30, 30 13 points higher than it was in the second quarter. If you take all of healthcare combined about 32.
ER versus 28 in the second quarter and so we continue to drive this in the right direction what age.
Particularly comforting to US is over the course of the last couple of quarters may be a as I say that proverbially straw that broke the camel's back to school that Youre seeing.
Other players really take a follow our lead and so.
We actually have been able to generate some substantial rate increases while actually increasing our retention the implication simply being a.
That others are following suit so yes, it's been substantial.
And what we and our position remains the same if we can't get the terms and conditions, we deem appropriate in after 20 plus years of experience. We think we know what it is what they should be a then we are prepared.
ER to walk away into sub segments.
That had been a problematic and that I've had a higher long run loss cost trends.
Does that give you the color you need it yeah.
Yeah, it's very helpful and I assume those rates, but you mentioned, which as you know there there's significant that's separate and apart from the benefits of terms and condition changes I I presume.
Correct.
[laughter] 'cause you bet deductibles, you get tighter policy language migration, although the vast majority of claims made.
But continuing to move that and so.
That's that's over Ah, that's over and above ER and quite frankly in our opinion a.
Needed.
Okay. Thanks, a lot that's helpful interesting good luck, but continues.
And there are no further questions in queue I will turn the call back over to CEO Dino Robusto for additional or closing remarks.
Okay. Thank you very much and we look forward to chatting with you next quarter. Thank you.
And ladies and gentlemen. This concludes today's call. We thank you for your participation and you may now disconnect.
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