Q3 2023 Loews Corp Earnings Call
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.
With that I'll turn it over to Scott. Thank.
Thank you Dino and good morning, everyone.
I'll 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%.
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 acquisition related catch up adjustment in the international segment, 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.
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 was unfavorable development in professional and management liability.
The P&C paid to incurred ratio was 0.8 Chu 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 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.
And essentially neutral $2 million 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.
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 pre tax unfavorable impact from 30 $39 million.
<unk> 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.
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 <unk> accounting, the net premium ratio can differ favorable or unfavorable results into future periods, depending on the policy year 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.
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.
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.
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.
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 Richard 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 enforce initiatives with policy counts down by 40% since 2015 and stable open claim counts.
We believe the individual LTC reserves have hit 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 compared to the individual blocked 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 20, <unk> and at a significantly lower level relative to the individual block primarily due to the lower benefit features and more appropriate pricing.
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.
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 with 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.
Yeah.
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, the LD Ti single a interest rate adjustment of a liability for future policy benefits served to offset a portion of the unrealized investment loss in the OCI 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 during.
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 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 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 pretax corporate segment impairment charge in the fourth quarter.
Unknown Executive: on a year-to-date basis. Renewal price change was 7% similar to the prior quarter, and retention was strong at 84%.
Unknown Executive: As I've highlighted before, our international operation is consistently contributing profitable growth to CNA.
Scott: And with that, I'll turn it over to Scott. 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%.
Scott: 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 and management liability.
Scott: 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.
Scott: 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 and essentially neutral $2 million 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 LDTI accounting for our long-term care business, which we adopted earlier this year.
Scott: Life and group investment income was up $29 million pre-tax compared to the prior year quarter mostly driven by limited partnership performance 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 and this quarter's policy buyouts, life and group underwriting results are flat compared to prior 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.
Scott: 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 increased 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.
Scott: 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.
Scott: 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 and 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.
Scott: 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 atane age of 81 years, and generally features richer benefits, including inflation riders, on 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% 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.
Scott: On slide 16, looking at the group block characteristics, the attain-a-dage 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 price.
Scott: 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 were 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 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.
Scott: 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 rates continue 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 as an interest rate environment.
Scott: 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 year end 2022 adjusting for dividends. Stockholders' equity including AOCI was $8.6 billion or $31.61 per share.
Scott: 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, 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.
Scott: 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%.
Unknown Executive: Turning briefly to another topic, we expect to take a $24 million pre-tax corporate segment and payment charge in the fourth quarter.