Q3 2023 CNA Financial Corporation Earnings Call
Ladies and gentlemen, good day and welcome to the Cna's third quarter 2023 earnings conference call all participants will be in listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
Like to ask a question at the conclusion of prepared remarks, you May press the star key followed by the number one on your telephone keypad.
Your question. Please press Star then two as a reminder, today's conference is being recorded I would now like to turn the call over to release, a total ROFO Vice president of Investor Relations and rating agencies for opening remarks and introduction of today's speakers. Please go ahead.
Thank you Jason Good morning, and welcome to Cna's discussion of our third quarter 2023 financial results, our third quarter earnings press release presentation and financial supplement were released this morning and are available on the Investor Relations section of our website Www Dot C. N. A dotcom speaking today will be Dino Robusto, chairman and Chief Executive.
Officer, and Scotland Quest, Chief Financial Officer, following their prepared remarks, we will open the line for questions. Today's call May include forward looking statements and references non-GAAP financial measures any forward looking statements involve risks and uncertainties that may cause actual results differ materially from the statements made during the call information concerning those.
Risks is contained in the earnings press release and in Cna's. Most recent SEC filings. In addition, the forward looking statements speak only as of today Monday October 30th 2023, CNA expressly disclaims any obligation to update or revise any forward looking statements made during this call.
Regarding non-GAAP measures reconciliations to the most comparable GAAP measures and other information have been provided in our earnings press release financial supplement and other filings with U S. D. C. This call is being recorded and webcast a replay of the call may be accessed on our website. If you are reading a transcript of this call. Please note that the transcript may not be reviewed for accuracy.
IC, thus it may contain transcription errors that could materially alter the intent or meaning of the statement.
With that I will turn the call over to our chairman and CEO Dino Robusto.
Thank you really it's an good morning, all in the third quarter CNA continued to produce very strong results with a significant increase in core income driven by higher investment income.
P&C underlying underwriting gain.
Lower levels of catastrophe loss and improved results in life and group.
Our topline production continues to be driven by our commercial business segment with broad success across our middle market construction and national accounts units.
And as discussed in prior quarters, we have continued to push for appropriate rate in.
And those lines, which have been adversely affected by social inflation.
Last quarter I, specifically address the inflection point that we saw in excess casualty and commercial auto where rate increases accelerated.
In this quarter that trend continued.
We believe higher rates for longer are appropriate in these lines and we are pleased that there is an increasing awareness.
This need in the marketplace.
Drilling down on the details for the quarter.
Core income increased considerably in the third quarter to 289 million from 43 million in the prior year period.
We conducted our annual life and group Reserve assumption review in the quarter, resulting in an essentially neutral change in total.
Last year the reserve assumption review resulted in a loss of 143 million after tax adjusted to reflect L. D T I accounting.
Excluding the impacts of life and group Reserve assumption review in both periods.
Core income was still up 56%.
Net investment income was up 31% with positive income in our alternatives portfolio compared to a loss in the prior year quarter and a higher gain in our fixed income portfolio due to greater yield and a higher volume of invested assets.
Scott will provide more detail on investments in life and group results.
P&C core income was up 35% in the quarter.
Reflecting higher investment income.
Record pretax underlying underwriting gain and lower cat losses.
The P&C all in combined ratio was strong at 94, 3%.
With pre tax catastrophe losses of 94 million or 4.1 points of the combined ratio compared to $114 million or a 5.5 points in the third quarter last year.
Our cat result in the quarter and was also below our 10 year average for third quarter catastrophes.
Favorable development was 0.2 points in the quarter.
The underlying combined ratio was 98.4% generating a record $220 million of pretax P&C underlying underwriting gain.
The underlying loss ratio was 60% and the expense ratio was 31%.
The P&C expense ratio benefited by 0.6 points in the quarter.
From a favorable reinsurance acquisition related catch up adjustment and international.
In the quarter, we achieved 7% growth in gross written premiums ex captives and 6% growth in net written premium.
Renewal premium change in the quarter of 6% reflected a rate change of 5% consistent with the first half of the year.
And included in exposure increase of 1%.
Suppose or change is lower than the prior year quarter because of underwriting actions. We took on certain accounts leveraging the favorable hard market conditions to further improve the loss profile as an example.
We increased the attachments and reduced participation on certain large national accounts.
While these actions had the effect of reducing the exposure metric we report.
It is masking the positive impacts of exposure increase that act like rate, which we continue to experience in the border.
This includes mid single digit exposure increases in work comp and high single digit valuation changes in our property portfolio similar to last quarter.
Rate and exposure that acts like rate is still covering our long run loss cost trends.
Which continue to run at about 6.5% deny corrugate.
Retention was 84% in the quarter.
Down two points compared to the prior year quarter.
And then any given quarter there can be some fluctuation based on the mix of accounts under competition and when we can't get the terms and conditions, we deemed necessary well, let the accounts go.
Year to date, our renewal retention is 85%, which is the same level for the first nine months of 2022 and in line with expectations.
New business was up $20 million in the quarter, or 4% and 127 million or 9% for the first nine months of the year.
Turning to our three business units. The all in combined ratio was 91% for specialty this quarter, which includes 26 points of favorable prior period development.
The underlying combined ratio was 90.7%.
With an underlying loss ratio of 58, 6% and.
And the expense ratio was 31, 8%.
Gross written premiums ex captive growth was down minus one similar to the second quarter and net written premium growth was down minus 2% this quarter.
New business was down 7% and the decrease continues to be driven by the protracted decline in business opportunities. We commented on over the last few quarters.
Such as M&A activity, and our prudent approach to new business on management liability lines.
Within specialty the rate change turned positive to plus 1% in the quarter up two points compared to last quarter.
F I M L pricing improved five points, driven by DNO price decreases, which moderated in the quarter and we believe that as rational as the third quarter reflects the start of a second round of price decreases.
Although encouraged by the moderation it is too early to know if this is a hard inflection as the result in any one quarter as I just mentioned can be impacted by the mix of individual accounts renewing in the quarter.
We were also successful in raising rates by an additional two points in the quarter to 7% in our health care Med Mal business.
And our affinity programs continue to produce stable rate increases in the low to mid single digits.
Retention in specialty remained very strong at 87% in the quarter and 88%.
On a year to date basis up two points compared to 86% in the same nine month period last year.
Turning to commercial the all in combined ratio was 98, 9%, which includes 7.4 points of cat loss in the third quarter.
The underlying combined ratio was 91.5% 0.4 points lower than last year and the lowest on record.
Underlying loss ratio of 61.5% was stable year over year and.
And the expense ratio improved by <unk> four points to 29, 5% in the quarter, representing the lowest quarterly expense ratio in 15 years.
We had another strong double digit growth quarter in commercial.
Gross written premiums ex captives grew by 13% and net written premium grew by 11% in part fueled by continued excellent new business growth of 19% in the quarter.
Renewal premium change was plus 9% in the quarter down two points from the second quarter due mainly to the exposure decline from underwriting actions that I mentioned earlier.
The commercial rate change was plus 8% in the quarter comparable to the prior quarter casualty rates continue to improve with commercial auto rates at low double digit in the quarter, one point higher than the prior quarter and rates for excess casualty are now double digit above.
A couple of points from last quarter.
Property pricing continues to be very strong.
And national accounts rate increases in the quarter were in the mid twenties and middle market property rate increases are at their highest levels. During this hard market at low double digit levels.
Work comp rates were a couple of points lower than the prior quarter.
<unk> of the quarterly fluctuation, we have seen in the pricing between slightly positive and slightly negative over the last three years.
Additionally, renewal price change in the quarter remained positive.
As we continue to benefit from exposure increases as payrolls rice.
Audit premiums continued to favorably impact growth as well.
And medical trends continue to be below our long run loss cost trend assumptions.
Which we have not lowered the despite the favorable trends over the last several years.
Commercial retention was solid at 83% down a few points in national accounts in middle market I.
Operator: Ladies and gentlemen, good day and welcome to the CNA 3rd quarter 2023 earnings conference call. Our participants will be in listen only mode. Should you need assistance please signal conference specialists by pressing the start key followed by zero.
I am very comfortable with the rate retention decisions. The underwriters are making as they focus on leveraging this hard market the right quality new business, while increasingly optimizing the portfolio.
Operator: If you would like to ask a question at the conclusion of prepared remarks, you may press the start key followed by the number one on your telephone key pet. Which are your questions please press star and then to as reminder today's conference is being recorded.
The evidence of this can be seen across the commercial portfolio.
The continued very strong pricing on property as well as the rate improvement we are achieving in the casualty lines.
Ralitza Todorova: I would now like to turn the call over to Ralitza Todorova vice president of investor relations and rating agencies for opening remarks and introduction of today's speakers. Please go ahead. Thank you Jason. Good morning and welcome to CNA's discussion of our third quarter 2023 financial results. Our third quarter earnings press release presentation and financial supplement will release this morning and are available on the investor relations section of our website, www.cna.com speaking today will be Dino Robusto chairman and chief executive officer and Scott Lindquist chief financial officer following the prepared remarks.
Consistently lower catastrophe results against our 10 year average and our record underlying profitability.
For international the all in combined ratio was 88, 3% and the underlying combined ratio was 86% the underlying loss ratio of 57, 9%.
His points seven points lower than last year and the expense ratio was 28, 1%.
As I mentioned earlier, our international segment benefited from a favorable reinsurance acquisition related catch up adjustment and excluding this benefit.
Ralitza Todorova: We will open the line for questions today's call may include forward looking statements and references to non-gap financial measures. Any forward looking statements involve risks and uncertainties that may cause actual results differ materially from the statements made during the call. Information concerning those risks is contained in the earnings press release and in CNA's most recent SEC filings. In addition, the forward looking statements speak only as of today, Monday, October 30, 2023.
The international expense ratio would be 32 point, 0.8% in the quarter.
International gross written premium growth was 6%.
Net written premium growth was consistent with last quarter and 9%.
New business of 62 million was down in the quarter, but in line with last year on a year to date basis.
Ralitza Todorova: CNA expressly disclaims any obligation to update or revise any forward looking statements made during this call. Regarding non-gap measures, recommendations to the most comparable gap measures and other information have been provided in our earnings press release financial supplement and other filings with the SEC. This call is being recorded and webcast, a replay of the call may be accessed on our website.
Renewal price change was 7% similar to the prior quarter and retention was strong at 84%.
As I've highlighted before.
Our international Operation is consistently contributing profitable growth to CNA.
Operator: 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 statement.
And with that I'll turn it over to Scott. Thank.
Thank you Dino and good morning, everyone I will provide some additional information on our results as Gino indicated.
Core income of $289 million in the quarter compares to $43 million last year and our core return on equity was nine 4%.
Dino Robusto: With that, I will turn the call over to our chairman and CEO, Gina Robisto. Thank you, really, thank you. Good morning, all. In the third quarter, CNA continued to produce very strong results with a significant increase in core income driven by higher investment income, record PNC underlying underwriting gain, lower levels of catastrophe loss and improved results in life in group. Our top line production continues to be driven by our commercial business segment with broad success across our middle market construction and national accounts units.
On a year to date basis core income of $922 million is a record high.
Our third quarter P&C expense ratio was 31%, which is a decrease when compared to last year's third quarter expense ratio of 38%.
The lower expense ratio in the current year is the result of higher net earned premium as well as a favorable reinsurance to acquisition related catch up adjustment in the international segment.
Dino Robusto: And as discussed in prior quarters, we have continued to push for appropriate rate in those lines which have been adversely affected by social inflation. Last quarter, I specifically addressed the inflection point that we saw in excess casualty and commercial auto where rate increases accelerated and this quarter that trend continued. We believe higher rates for longer are appropriate in these lines and we are pleased that there is an increasing awareness for this need in the marketplace.
Which reduced the total P&C expense ratio by 0.6 points.
We continue to believe that a 31% expense ratio is a reasonable run rate going forward.
Yeah.
The P&C net prior period development impact on the combined ratio was favorable by 0.2 points.
In the specialty segment favorable development in surety was partially offset with unfavorable development in professional and management liability.
The P&C paid to incurred ratio was zero point, a true for both the current quarter and on a year to date basis.
Dino Robusto: Drilling down on the details for the quarter, core income increased considerably in the third quarter to 289 million from 43 million in the prior year period. We conducted our annual Life in Group Reserve Assumption Review in the quarter, resulting in an essentially neutral change in total. Last year, the Reserve Assumption Review resulted in a loss of $143 million after tax adjusted to reflect LDTI accounting, excluding the impacts of Life in Group Reserve Assumption Review in both periods, core income was still up 56%.
Our corporate segment produced a core loss of $33 million in the third quarter compared to a 25 million loss in the prior year quarter.
Our corporate segment results include a $16 million after tax charge related to unfavorable prior period development largely associated with legacy mass tort abuse claims.
As a reminder, our asbestos and environmental reserves are reviewed every fourth quarter.
In life and group, we had a core loss of $29 million compared to a 192 million core loss last year.
Both periods were impacted by our annual reserve assumption update.
Dino Robusto: Net investment income was up 31%, with positive income in our alternatives portfolio, compared to a loss in the prior year quarter, and a higher gain in our fixed income portfolio, due to greater yield and a higher volume of invested assets.
And essentially neutral 2 million dollar unfavorable after tax impact for the third quarter of 2023.
And a $143 million unfavorable impact for Q3 2022.
As we have noted in earlier calls this year 2022 results have been adjusted to reflect the adoption of L. D. G. I accounting for our long term care business, which we adopted earlier this year.
Dino Robusto: Scott will provide more detail on investments and Life in Group Results. BNC core income was up 35% in the quarter, reflecting higher investment income, record pre-tax underlying underwriting gain, and lower cat losses. The PNC all-in combined ratio was strong at 94.3%, with pre-tax catastrophe losses of 94 million, or 4.1 points of the combined ratio, compared to 114 million, or 5.5 points, in the third quarter last year. Our cat resolved in the quarter, and was also below our 10-year average for third-quarter catastrophes, favorable development was 0.2 points in the quarter.
Life and group investment income was up $29 million pretax compared to the prior year quarter, mostly driven by limited partnership performance, while underwriting results for the quarter include an estimated $4 million pretax unfavorable impact from 30 $39 million.
Of cash policy buyouts during the quarter.
Excluding the impact of the reserve assumption updates and this quarter's policy buyouts life and group underwriting results are flat compared to prior year.
Each year in the third quarter, we undertake our reserve reviews for life and group.
Which includes the analysis of reserving assumptions underlying our long term care and structured settlement reserves.
Dino Robusto: The underlying combined ratio was 90.4% generating a record 220 million of pre-tax PNC underlying underwriting gain. The underlying loss ratio was 60%, and the expense ratio was 30.1%. The PNC expense ratio benefited by 0.6 points in the quarter, from a favorable reinsurance acquisition-related catch-up adjustment in international. In the quarter, we achieved 7% growth in growth written premiums tax captive, and 6% growth in net written premium. Renault premium change in the quarter of 6% reflected a rate change of 5%, consistent with the first half of the year, and included an exposure increase of 1%.
The key result of this year's update as essentially a neutral impact to life and group GAAP reserves.
The results of that review are highlighted on slide 13 of our earnings presentation.
Our analysis involves a thorough review of all of our reserving assumptions, including cost of care inflation morbidity persistency and rate increase assumptions.
Note that under L. E T I accounting the net premium ratio can differ favorable or unfavorable results into future periods, depending on the policy your cohort impacted.
The 2023 assumption updates lowered our net premium ratio, which defers some of the favorability into future periods.
The result was an $8 million unfavorable adjustment to long term care reserves.
After the deferral of $78 million of favorability into future periods.
Dino Robusto: Exposure change is lower than the prior quarter, because of underwriting actions we took on certain accounts, leveraging the favorable hard-market conditions to further improve the loss profile. As an example, we increased attachments and reduced participation on certain large national accounts. While these actions had the effect of reducing the exposure metric we report, it is masking the positive impacts of exposure increase that act like rate, which we continue to experience in the quarter.
Finally, we have a $6 million favorable adjustment to structured settlement reserves, mostly due to more favorable interest rate assumptions.
Okay.
And while on the topic of long term care I would like to point you to slide 14 of our earnings presentation, where we will provide a business update on our long term care block.
We believe our proactive approach to managing this block combined with the higher combined with the current higher interest rate environment over the last 18 months has considerably improved the outlook for this business.
As a reminder, our individual block has been closed since 2004 and our group business has been fully closed since 2016.
Dino Robusto: This includes mid-single-digit exposure increases in work comp, and high single-digit valuation changes in our property portfolio similar to last quarter. Rate and exposure that acts like rate is still covering our long run loss cost trends, which continue to run at about 6.5% in aggregate. Potention was 84% in the quarter, down two points compared to the prior quarter, and in any given quarter there can be some fluctuation based on the mix of accounts under competition, and when we can't get the terms and conditions we deem necessary will let the account go.
We have achieved substantial reduction in policy counts since then while achieving meaningful rate increases and benefit reductions.
And on the investment side, the favorable interest rate environment. Since early 2022 has improved the underlying economics of this business as we have been able to lock in high quality longer duration securities at attractive coupons to support the liability duration of the business.
Yeah.
Turning to slide 15 of the earnings presentation, we drill into the individual block characteristics.
This block is more mature with an average age and average attained age of 81 years and generally features richer benefits, including inflation riders on the majority of policies and lifetime benefits on some policies.
Dino Robusto: Year to date, our renewal retention is 85%, which is the same level for the first nine months of 2022 and in line with expectations. New business was up 20 million in the quarter, or 4%, and 127 million, or 9% for the first nine months of the year. Turning to our three business units, the all-in combined ratio was 90.1% for specialty this quarter, which includes 0.6 points of favorable prior period development. The underlying combined ratio was 90.7%, with an underlying loss ratio of 58.6%, and the expense ratio was 31.8%. Gross-written premiums X-capitive growth was down minus 1, similar to the second quarter, and net-written premium growth was down minus 2% this quarter.
The Derisking of this block is well underway through enforced initiatives with policy counts down by 40% since 2015 and stable open claim counts.
We believe the individual LTC reserves have hitting an inflection point and have begun to decline using locked and discount rate assumptions.
On slide 16, looking at the group block characteristics. The attained age the 68 years and compare it to the individual block the group block features less rich policy benefits.
Only 1% of group policies feature lifetime benefits the block has a relatively modest exposure to inflation.
And as more appropriately priced.
We currently believe group reserves will peak in the mid twenties thirties and at a significantly lower level relative to the individual block primarily due to the lower benefit features and more appropriate pricing.
Dino Robusto: New business was down 7%, and the decrease continues to be driven by the protracted decline and business opportunities we commented on over the last few quarters, such as M&A activity, and our prudent approach to new business on management liability lines. Within specialty, the rate change turned positive, the plus 1% in the quarter, up two points compared to the last quarter. FiML pricing improved five points, driven by DNO price decreases, which moderated in the quarter, and we believe that is rational, as the third quarter reflects the start of a second round of price decreases.
Turning to investments total pre tax net investment income increased 31% to $553 million in the third quarter.
The increase was driven by our limited partnership and common stock portfolios, which returned a $28 million gain in the third quarter compared to a $44 million loss in the prior year quarter.
Additionally income from fixed income and other investments was $59 million favorable compared to the prior year quarter.
Our fixed income portfolio continues to produce consistent income, which has been steadily increasing as a result of favorable interest rates and strong cash flow from operations.
Dino Robusto: Although encouraged by the moderation, it is too early to know if this is a hard inflection, as the result in any one quarter, as I just mentioned, can be impacted by the mix of individual accounts renewing in the quarter. We were also successful in raising rates by an additional two points in the quarter, to 7% in our healthcare med malbusiness, and our affinity programs continue to produce stable rate increases in the low to mid-single digits. Retention and specialty remained very strong at 87% in the quarter, and 88% on a year-to-date basis, up two points compared to 86% in the same nine-month period last year.
The effective income yield of our consolidated portfolio was four 7% in the third quarter compared to four 6% in the second quarter and four 4% in the prior year quarter.
As of the end of the third quarter reinvestment rates continue to be significantly above our P&C effective income yield and have now surpassed our life and group portfolio effective income yield which has a longer duration portfolio was embedded yields more comparable to today's interest rate environment.
Okay.
Net investment losses were $31 million in the quarter and included modest losses in our fixed maturity securities portfolio, which were largely reflective of a modest amount of portfolio repositioning.
Dino Robusto: Turning to commercial, the all-in combined ratio was 98.9%, which includes 7.4 points of cat loss in the third quarter. The underlying combined ratio was 91.5%, 0.4 points lower than last year, and the lowest on record. The underlying loss ratio of 61.5% was stable year over year, and the expense ratio improved by 0.4 points to 29.5% in the quarter, representing the lowest quarterly expense ratio in 15 years. We had another strong double digit growth quarter in commercial.
[laughter].
At quarter end, our balance sheet continues to be very solid with stockholders equity, excluding OCI of $12 $3 billion or $45.43 per share an increase of 7% from year end 2022 adjusting for dividends.
Stockholders equity, including a OCI was $8 $6 billion or $31 61 per share.
With the increase in interest rates during the third quarter. The net unrealized investment loss in our fixed income portfolio stood at about $4 $5 billion at quarter end. However.
However, the L. D T I single a interest rate adjustment of a liability for future policy benefits served to offset a portion of the unrealized investment loss in a OCI income by $807 million.
Dino Robusto: Gross written premiums X captives grew by 13% and net written premium grew by 11% in part fueled by continued excellent new business growth of 19% in the quarter. Reno premium change was plus 9% in the quarter down two points from the second quarter due mainly to the exposure decline from underwriting actions that I mentioned earlier. The commercial rate change was plus 8% in the quarter, comparable to the prior quarter. Casualty rates continue to improve with commercial auto rates at low double digit in the quarter, one point higher than the prior quarter, and rates for excess casualty are now double digit up a couple of points from last quarter.
At quarter end.
Yes.
We continue to maintain a conservative capital structure with a low leverage ratio and a well balanced debt maturity schedule.
During the year, we have successfully issued $500 million of senior notes to help position US ahead of the upcoming debt maturities in November 2023.
In May 2024.
Operating cash flow remains very strong in fact, the highest operating cash flow quarter since 2011.
During the third quarter cash flow from operations was $828 million up.
Dino Robusto: Property pricing continues to be very strong. In national accounts, rate increases in the quarter were in the mid 20s, and middle market property rate increases are at their highest levels during the third market at low double digit levels. Work comp rates were a couple of points lower than the prior quarter. A continuation of the quarterly fluctuation we have seen in the pricing between slightly positive and slightly negative over the last three years.
Up from $737 million in last year's third quarter.
Turning to taxes, the effective rate on core income was 26% for the quarter.
And as and as I have noted in recent calls looking forward, we expect an effective tax rate to be about 21%.
Turning briefly to another topic, we expect to take a $24 million pre tax corporate segment impairment charge in the fourth quarter related to opportunities to optimize some of our real estate footprint in the post pandemic work environment, we expect.
Dino Robusto: Additionally, renewal price change in the quarter remained positive as we continue to benefit from exposure increases as payrolls rise. Audit premiums continue to favorably impact growth as well. And medical trends continue to be below our long run loss cost trend assumptions, which we have not lowered despite the favorable trends over the last several years. Commercial retention was solid at 83%, down a few points in national accounts in middle market. I am very comfortable with the rate retention decisions, the underwriters are making, as they focus on leveraging this hard market to write quality new business while increasingly optimizing the portfolio.
To continue to evaluate our own use real estate portfolio for further optimization opportunities, which will allow us to utilize future savings to make additional investments in technology talent and analytics.
Finally, we are pleased to announce our regular quarterly dividend of 42 cents per share to be paid on November 30th 2023 to.
<unk> of record on November 13th 2023.
And with that I will turn it back to Dino. Thanks, Scott the recap CNA had an excellent quarter with strong levels of core and net income driven by increased levels of net investment income, which will continue to be a tailwind going into 2020 for continued improvement in our core P&C underlying underwriting.
Dino Robusto: The evidence of this can be seen across the commercial portfolio through the continued very strong pricing on property as well as the rate improvement we are achieving in the casualty lines, the consistently lower catastrophe results against their 10 year average and our record underlying profitability.
Writing income and prudent cash management.
We experienced continued pricing improvement in the quarter in the areas, we believe need to stay higher for a longer.
Property pricing remains historically high and large national accounts.
Dino Robusto: For international, the all in combined ratio was 88.3%, and the underlying combined ratio was 86%. The underlying loss ratio of 57.9%, is 0.7 points lower than last year, and the expense ratio was 28.1%. As I mentioned earlier, our international segment benefited from a favorable reinsurance acquisition related catch-up adjustment, and excluding this benefit, the international expense ratio would be 32.8% in the quarter. International Growth's written premium growth was 6%, and net written premium growth was consistent with last quarter at 9%.
And at a high watermark in our package business, which is rational given the persistent elevated levels of industry cat losses.
Casualty lines, most impacted by social inflation improved further in the quarter and overall specialty pricing turned back positive on the pricing improvements in management liability and med Mal.
And finally, the dedicated focus to Derisk, our run off long term care portfolio has had a major impact. This policy counts are down more than 40% since the block was closed to new participants.
And with that we'd be happy to take your questions.
We will now begin the question and answer session.
Dino Robusto: New business of 62 million was down in the quarter, but in line with last year on a year-to-date basis. Renewal price change was 7% similar to the prior quarter, and retention was strong at 84%. As I've highlighted before, our international operation is consistently contributing profitable growth to CNA.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Josh Shanker from Bank of America. Please go ahead.
Yeah. Thank you for taking my question. Good morning, everybody. Good morning. Good morning. So you know look the combined ratio results are excellent in the P&C industry, you've been doing this a long time or can you frame for us now.
Scott Lindquist: And with that, I'll turn it over to Scott.
Scott Lindquist: Thank you, Dino, and good morning, everyone. I will provide some additional information on our results as Dino indicated. Core income of $289 million in the quarter compares to $43 million last year, and our core return on equity was 9.4%. On a year-to-date basis, core income of $922 million is a record high. Our third quarter P&T expense ratio was 30.1%, which is a decrease when compared to last year's third quarter expense ratio of 30.8%.
30, 40 years of experience on you know and in markets or we have to bottom Kim combined ratios get better 10 years from now five years from now three years from now how should we be thinking about what this business can underwrite two compared with where we are right now.
Okay. There's a heck of a start of a question Josh Thanks for the question.
Scott Lindquist: The lower expense ratio in the current year is the result of higher net earn premium, as well as a favorable re-insurance acquisition related catch-up adjustment in the international segment, which reduced the total P&T expense ratio by 0.6 points. We continue to believe that a 31% expense ratio is a reasonable run rate going forward. The P&T net prior period development impact on the combined ratio was favorable by 0.2 points. In the specialty segment, favorable development and surety was partially offset with unfavorable development and professional in management liability.
Josh All I can say is you know after the financial crisis. There was a lot of concern about whether the insurance industry faced with lower interest rates for longer could actually continue to generate.
No similar strong return on equities, you know that it would require a considerable decrease in in combined ratios and I think there was some skepticism back then.
No seven Oh wait and I think the industry.
And in particular, the best players have clearly responded and I guess.
As we look over the last few years, one of the things that clearly surprised us was the impact of social inflation that we started to see in 2017 and literally doubled.
Scott Lindquist: The P&T paid to incurred ratio was 0.82 for both the current quarter and on a year-to-date basis. Our corporate segment produced a core loss of $33 million in the third quarter compared to a $25 million loss in the prior year quarter. The corporate segment results include a $16 million after tax charge related to unfavorable prior period development largely associated with legacy, mass-tort abuse claims. As a reminder, our species and environmental reserves are reviewed every fourth quarter.
Our long run loss cost trends in the last.
Three or four years in the industry along with its elevated cats responded.
I think effectively and pushing for better pricing and better terms and conditions that doesn't specifically tell you what's going to happen in five or 10 years from now Josh, but I think it reflects the resiliency of this industry it's increased discipline.
Scott Lindquist: In life and group, we had a core loss of $29 million compared to a $192 million core loss last year. Both periods were impacted by our annual reserve assumption update, an essentially neutral $2 million unfavorable after a tax impact for the third quarter of 2023, and a $143 million unfavorable impact for Q3 2022. As we have noted in earlier calls this year, 2022 results have been adjusted to reflect the adoption of LDTI accounting for our long-term care business, which we adopted earlier this year. Life and group investment income was up $29 million per tax compared to the prior year quarter, mostly driven by limited partnership performance.
To do what it needs to do to.
To maintain a reasonable returns and I.
I guess, that's the best I can offer you.
Okay.
Switching gears I know.
P&C results were great.
And maybe a lot of long term care in the past, but when I'm looking at the long term care book with the third quarter reserve ongoing.
What extent are the policies in that Ah I guess, maybe as a percentage or maybe as a as a roadblock or are they being offered alternatives in terms of changing the terms of the policy and what's the take up rates.
Scott Lindquist: Funds. While underwriting results for the quarter include an estimated $4 million pre-tax unfavorable impact from $39 million of cash policy buyouts during the quarter, excluding the impact of the reserve assumption updates in this quarter's policy buyouts, life and group underwriting results are flat compared to prior year. Each year in the third quarter, we undertake our reserve reviews for life and group, which includes the analysis of reserving assumptions underlying our long-term care and structured settlement reserves.
Are those who are offered changes in terms.
Hey, Josh its Scott here. Thanks for the question. So we really started the policy buyouts late last year, we do those in conjunction with rate increases same with the benefit reduction options. We started those a few years back actually.
And again they they they are offered in connection with with rate actions right rate increases. So it's going to vary state by state we had significant amount of activity in our group business for several large states earlier this year.
Scott Lindquist: The key result of this year's update is essentially a neutral impact to life and group gap reserves. The results of that review are highlighted on slide 13 of our earnings presentation. Our analysis involves a thorough review of all of our reserving assumptions, including cost of care, inflation, morbidity, persistency, and rate increase assumptions. Note that under LDTI accounting, the net premium ratio can defer favorable or unfavorable results into future periods, depending on the policy your cohort impacted.
It's still early days as far as take rates go I would say just off the top of the head individual we've seen two 2% to 4% take rates on the group business somewhat higher.
5% to 8%, but we're still very much in the midst of of these offer some of these numbers are still developing I would say right now it's been a relatively small proportion of policies that have been offered benefit reductions and policy buyouts again, the buyout piece, we really just started right about a year ago ourselves. So.
We still have some runway to go on that where our rate increase programs are ongoing we were fairly successful this year in achieving rate increases and we expect that to continue going forward and expect to continue at all for those those buyout options going forward.
Scott Lindquist: The 2023 assumption updates lowered our net premium ratio, which defers some of the favorability into future periods. The result was an $8 million unfavorable adjustment to long-term care reserves after the deferral of $78 million of favorability into future periods. Finally, we have a $6 million favorable adjustment to structured settlement reserves, mostly due to more favorable interest rate assumptions. And while on the topic of long-term care, I would like to point you to slide 14 of our earnings presentation where we will provide a business update on our long-term care block.
So only a small percentage of households, with an offer these options and when I look at the amount taken up in a single digit percentage of the powerful either.
Or a benefit.
That's correct that's correct.
And.
When someone takes a benefit reduction is it immediately beneficial to your capital position or what are the economics for CNA.
Scott Lindquist: We believe our proactive approach to managing this block, combined with the current higher interest rate environment over the last 18 months, has considerably improved the outlook for this business. As a reminder, our individual block has been closed since 2004, and our group business has been fully closed since 2016. We have achieved substantial reduction in policy counts since then, while achieving meaningful rate increases in benefit reductions. In on the investment side, the favorable interest rate environment since early 2022 has improved the underlying economics of this business, as we have been able to lock in high-quality, longer-duration securities at attractive coupons to support the liability duration of the business.
When somebody says Oh, I'll I'll limit the number of years of of payout or I'll I'll I'll cap my benefit well what happened to your balance sheet your capital position when the Max Medicare's. So that's an improvement I mean, thats a reduction in our reserves, both statutory and GAAP.
So, it's obviously reflective of the lower risk.
That policy going forward and that's reflected in our in our in our results when that when that happens.
Premium goes down but capital goes up I guess is that right and in fact, correct because the reserve will come down.
Reserves may come down to yeah sure. Thanks for the question.
Yep.
Yeah.
Again, if you have a question. Please press Star then one.
Scott Lindquist: Turning to slide 15 of the earnings presentation, we drill into the individual block characteristics. This block is more mature with an average age, an average attain age of 81 years, and generally features richer benefits, including inflation riders, on the majority of policies and lifetime benefits on some policies. The de-risking of this block is well underway through enforced initiatives, with policy counts down by 40 percent since 2015, and stable open claim counts. We believe that individual LTC reserves have hit an inflection point, and have begun to decline using locked-in discount rate assumptions.
Our next question comes from Meyer Shields from K B W. Please go ahead.
Great Thanks and.
Good morning.
Good morning question on long term care, if I can so slide 14 notes that premium rates of 45% higher than 2015.
What's the corresponding number for loss trend over that period.
I'm, sorry can you just repeat that corresponding and loss trend.
Yes.
Laughter and that corresponds to the 45% Yeah. My I don't have that number on the top of my head. We can take that offline follow up or you can get that for you yes.
Yes will do.
A couple of other small questions.
Scott Lindquist: Solutions. On slide 16, looking at the group block characteristics, the attained age of the 68 years, and compared to the individual block, the group block features less rich policy benefits. Only 1% of group policies feature lifetime benefits. The block has a relatively modest exposure to inflation, and is more appropriately priced. We currently believe group reserves will peak in the mid-2030s, and add a significantly lower level relative to the individual block, primarily due to the lower benefit features and more appropriate pricing.
First third party captives gross written premium has been declining for almost.
Two years.
And I understand that had limited impact on underwriting results.
Just trying to understand what's going on there.
Yeah, it's really.
And the captives is with respect to the cell phone.
Business and theirs.
Been a merger there and so we lost.
Some premium on on the telephone Capex, that's all it is Mike.
Okay. That's helpful. And then final question and this is definitely not CNA centric, but the industry has been struggling with commercial auto for a long time and it's great to hear that rate increases are accelerating.
Scott Lindquist: Turning to investment, total pre-tax net investment income increased 31% to $553 million in the third quarter. The increase was driven by our limited partnership and common stock portfolios, which returned a $28 million gain in the third quarter, compared to a $44 million loss in the prior year quarter. Additionally, income from fixed income in other investments was $59 million dollars favorable compared to the prior year quarter. Our fixed income portfolio continues to produce consistent income, which has been steadily increasing as a result of favorable interest rates and strong cash flow from operations.
What are you wouldn't see any need to do differently. So that the perpetual problem with not being able to catch up with loss trends is no longer initiative.
No.
Yeah, it's clearly been a catch up game on on on commercial auto it seems to be even though we don't we don't have it seems to be some similar trends in personal auto and.
I think.
It is the issue really around.
The same thing Thats impacting all you know sort of excess casualty lines.
The social inflation impacts at a big big impact, but but on commercial auto you tend to see it impact the results quicker.
Scott Lindquist: The effective income yield of our consolidated portfolio was 4.7% in the third quarter, compared to 4.6% in the second quarter, and 4.4% in the prior year quarter. As of the end of the third quarter, reinvestment rate continued to be significantly above our P&C effective income yield, and it now surpassed our life and group portfolio effective income yield, which is a longer duration portfolio with embedded yields more comparable to today's interest rate environment.
Then on complex sort of be our losses and so it's just it's too.
You know a catch up game and I think.
It started off slowly.
But it seems to be picking up momentum and I really do think.
This is going to be this is going to be a continuing trend for a longer and really that's what you have to do it just the needs are more pricing and that's why we've been particularly focused on it and whenever you do something like that we highlighted to you and and.
Scott Lindquist: Net investment losses were $31 million in the quarter, and included modest losses in our fixed maturity security portfolio, which were largely reflective of a modest amount of portfolio repositioning. At quarter end, our balance sheet continues to be very solid with stockholders' equity excluding AOCI of $12.3 billion, or $45.43 per share, an increase of 7% from your end 2022, adjusting for dividends. Stockholders' equity, including AOCI, was $8.6 billion, and $31.61 per share.
And we've seen an increase in in in this third quarter and in the second quarter and we just got to keep pushing because the social inflation I think impacts it quicker.
Okay, No thats perfect. Thank you so much.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Dino Robusto for any closing remarks, no. That's great. Thank you everyone for joining us today, and we'll talk to you in a quarter.
Scott Lindquist: With the increase in interest rates during the third quarter, the net unrealized investment loss in our fixed income portfolio stood at about $4.5 billion a quarter end. However, the LDTI single-A interest rate adjustment of reliability for future policy benefits served to offset a portion of the unrealized investment loss in AOCI, income by $807 million at quarter end. We continue to maintain a conservative capital structure with a low leverage ratio and a well-balanced debt maturity schedule.
Yes.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Scott Lindquist: During the year, we have successfully issued $500 million of senior notes to help position us ahead of the upcoming debt maturities in November 2023 and May 2024. Operating cash flow remains very strong. In fact, the highest operating cash flow quarter since 2011. During the third quarter, cash flow from operations was $828 million up from $737 million in last year's third quarter. Turning to taxes, the effective rate on core income was 20.6% for the quarter. And as I have noted in recent calls, looking forward, we expect an effective tax rate to be about 21%.
Scott Lindquist: Turning briefly to another topic, we expect to take a $24 million pre-tax corporate segment impairment charge in the fourth quarter related to opportunities to optimize some of our real estate footprint in the post-pandemic work environment. We expect to continue to evaluate our own use real estate portfolio for further optimization opportunities, which will allow us to utilize future savings to make additional investments in technology, talent, and analytics.
Scott Lindquist: Finally, we are pleased to announce our regular quarterly dividend of 42 cents per share to be paid on November 30, 2023 to shareholders of record on November 13, 2023. And with that, I will turn it back to Dino. Thanks, Scott.
Dino Robusto: The recap, CNA had an excellent quarter. The strong levels of core and net income, driven by increased levels of net investment income, which will continue to be a tailwind going into 2024, continued improvement in our core PNC underlying underwriting income, and prudent cat management. We experienced continued pricing improvement in the quarter in the areas we believe need to stay higher for longer. Property pricing remains historically high in large national accounts, and at a high watermark in our package business, which is rational, given the persistent elevated levels of industry cat losses.
Dino Robusto: Commercial casualty lines, most impacted by social inflation improved further in the quarter, and overall specialty pricing turned back positive on the pricing improvements in management liability and met Mao. And finally, the dedicated focus to the risk are runoff long-term care portfolio, as had a major impact as policy counts are down more than 40 percent since the block was closed to new participants.
Operator: And with that, we'd be happy to take your questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble a roster.
Joshua Shanker: Our first question comes from Josh Shanker from Bank of America. Please go ahead. Yeah, thank you for taking my question. Good morning, everybody. Morning. So, if you know, look, the combined ratio results are excellent in the PNC industry. You've been doing this a long time. Can you frame for us? You know, 30, 40 years experience on, you know, in markets. Are we at the bottom? Can mind ratios get better? 10 years from now, 5 years from now, 3 years from now? How should we be thinking about what this business can underrate to compared with where we are right now?
Dino Robusto: Okay, there's a heck of a start of a question, Josh. Thanks for the question. I mean, Josh, all I can say is, you know, after the financial crisis, there was a lot of concern about whether the insurance industry faced with lower interest rates for longer could actually continue to generate, you know, similar, strong return on equities, you know, that it would require a considerable decrease in, in combined ratios. And I think there was some skepticism back then.
Dino Robusto: And, you know, 708, and I think the industry, and in particular, the best players have clearly respect. And I guess, as we look over the last few years, one of the things that clearly surprised us was the impact of social inflation that we started to see in 2017, and literally doubled our long run loss cost trends in the last, you know, three or four years. And the industry, along with its elevated chats responded.
Dino Robusto: I think, effectively, in pushing for better pricing and better terms and conditions. It doesn't specifically tell you what's going to happen in five or 10 years from now, Josh, but I think it reflects the resiliency of this industry. It's increased discipline to do what it needs to do to maintain reasonable returns. And I guess that's the best I can offer you.
Joshua Shanker: Okay, switching gears, I know the PNC results are great, and maybe a lot of long-term cares in the past, but I'm looking at the long-term care book with the third quarter reserve view ongoing. To what extent are the policies in that? I guess maybe as a percentage, or maybe as sort of a block? Are they being offered alternatives in terms of changing the terms of the policy? And what's the take-up rate on those who are offered changes in terms?
Scott Lindquist: Hey, Josh, it's got here. Thanks for the question. So we really started the policy buyouts late last year. We do those in conjunction with rate increases, same with the benefit reduction options. We started those a few years back, actually. And again, they they're offered in connection with with rate actions rate rate increases. So it's going to vary state by state. We had significant amount of activity in our group business for several large states earlier this year.
Scott Lindquist: It's still early days as far as take rates go. I would say just off the top of the head individual, we've seen two to four percent take rates on the group business somewhat higher, five to eight percent. But you know, we're still very much in the midst of of these offers. Some of these numbers are still developing. I would say right now it's been a relatively small proportion of policies that have been offered benefit reductions and policy buyouts again.
Scott Lindquist: In the buyout piece, we really just started right about a year ago or so. So, you know, we still have some runaway to go on that where our rate increase programs are ongoing. We were fairly successful this year in achieving rate increases. And we expect that to continue going forward and expect to continue to offer those buyout options going forward.
Scott Lindquist: Just in a sense, so only a small percentage of the policymakers have been offered these options and when I look at the amount taken up it's in a single digit percentage of the economics for CNA, when somebody says I'll limit the number of years of payout or I'll cap my benefit. What happens to your balance sheet or capital position when the next medicare? So that's an improvement, I mean that's a reduction in our reserves, both statutory and gap.
Scott Lindquist: So it's obviously reflective of the lower risk in that policy going forward and that's reflected in our results when that happens. And premium goes down but capital goes up, I guess. Is that right? In effect, correct, because the reserve will come down. Okay, reserves will come down too. Yep, sure. Thanks for the question. Yep. Again, if you have a question, please press star then one.
Meyer Shields: Our next question comes from Meyer Shields from KBW, please go ahead. Great, thanks. Good morning.
Meyer Shields: Question on long-term care if I can. So slide 14 notes that premium rates are 45% higher than 2016. What's the corresponding number for law trend over that period? I'm sorry, could you just repeat that corresponding in law trend? Yeah, the law trend, the corresponds to the 45%. Yeah, you know, I don't have that number on the top of my head, but can I take that offline follow-up phrase and get that for you? Yeah, perfect. We'll do.
Meyer Shields: And then a couple of other small questions. First, they're probably captives, go straight and premiums have been declining, you know, from almost two years. And I understand that that has limited effect on on underwriting results, but I'm just trying to understand what's going on there. Yeah, it's really. And the captives, it is with respect to the cell phone business and there's been a merger there. And so we lost some premium on the cell phone. That's all it is. Meyer. Okay, that's helpful.
Meyer Shields: And then final question. And this is definitely not CNA centric, but the industry's been struggling with commercial auto for a long time. And it's great to hear that rate increases are accelerating. What do you, what does CNA need to do differently so that this perpetual problem of not being able to cast up with lost trends is no longer an issue? Yeah. Yeah, it's clearly been a catch up game on commercial auto.
Meyer Shields: It seems to be even though we don't, we don't have it. It seems to be some similar trends in in personal auto. And I think it is the issue really around the same thing that's impacting all, you know, sort of excess casualty lines. It's, you know, the social inflation impacts had a big impact, but on commercial auto, you tend to see it impact the results quicker than on complex sort of BI losses.
Meyer Shields: And so it's just a, you know, a catch up game. And I think it started off slowly, but it seems to be picking up momentum. And I really do think this is going to be, this is going to be a continuing trend for longer. And really, that's what you have to do. It just needs more pricing. And that's why we've been particularly focused on it. And whenever we do something like that, we highlight it to you. And we've seen an increase in in in this third quarter and in the second quarter. And we just got to keep pushing up because the social inflation, I think, impacts it quicker. Thank you so much.
Operator: Again, if you have a question, please press star then one. There are no more questions in the queue.
Dino Robusto: This concludes our question and answer session. I would like to turn the conference back over to Dino Robusto for any closing remarks. No, that's great.
Operator: Thank you everyone for joining us today and we'll talk to you in a quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.