CNA Financial Corp

NYSE:CNA

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, and welcome to CNA's Discussion of its 2019 Third Quarter Financial Results. CNA's third quarter earnings release, presentation and financial supplement were released this morning and are available via its Website, www.cna.com.

Speaking today will be Dino Robusto, CNA's Chairman and Chief Executive Officer; and James Anderson, CNA's Chief Financial Officer. Following their prepared remarks, we will open the lines for questions.

Today's call may include forwarding-looking statements and 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 its earnings release and in CNA's most recent 10-K on file with the SEC.

In addition, the forward-looking statements speak only as of today Monday, October 28, 2019. CNA expressively disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding the 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 may be accessed on CNA's Website.

With that, I will turn the call over to CNA's Chairman and CEO, Dino Robusto. Please go ahead, sir.

[Dino Robusto, Chairman and CEO]

Thank you, Cody. Good morning, everyone. I'm pleased to share our third quarter results with you today, which reflect continued good underwriting performance, accelerated price increases and strong growth across our U.S. operation.

Core income for the third quarter was $102 million or $0.37 per share, inclusive of $170 million or $0.63 per share after tax charge related to the unlocking of our long-term care active life reserves, driven by our decision to reset our assumptions on the discount rate.

James will provide further detail on the unlocking as well as on the favorable $44 million after-tax outcome of our annual long-term care claims reserves review, The fourth year in a row of a favorable claim outcome.

For the quarter, the P&C Underlying Combined Ratio was 94.6%, a slight improvement to last year’s third quarter result. Strong underlying performance in commercial and specialty offset a normal three point deterioration in international.

In International, we remain confident in our belief that we are doing all the right things and have already seen some improvement in our results, including a strong underlying loss ratio of 61.4% through the first three quarters of this year which is in line with our overall company results to 61.1% through three quarters.

In addition, our underwriting efforts have significantly reduced our international catastrophe exposure which allowed us to avoid catastrophe losses in Asia due to the recent events there. The higher underlying loss ratio this quarter is driven by lines of business. We began non-renewing late last year, validating our previous re-underwriting decisions. Obviously during this process the improvement won't be a quarter-over-quarter straight line.

The P&C all in combined ratio of 97.6% included 1.8 points of catastrophes and 1.2 points of unfavorable prior period development principally related to a block of commercial legacy mass-stored accounts we no longer write.

As usual, James will provide more detail on our prior period development. Our expense ratio in the third quarter was 32.5% nearly a full point lower than the second quarter. We are pleased with our net written premium growth of 8% which was fueled by robust growth in the U.S. segments.

Gross written premium, excluding third party captives was up 11% in the U.S. segments, and net written premium was up 9%. In International, gross written premium was down 2% as increases in Canada continue to be offset by re-underwriting actions in our Lloyd's syndicate.

We continue to effectively manage the rate retention dynamic, achieving higher rate increases in each business unit, and doing so with steady retentions, except for specific areas such as aging services and large property, which had lower retention.

We are satisfied with the trade-off as those areas have the highest rate needs, and we continue to walk away when we can't secure adequate terms and conditions. In the third quarter, rate for P&C overall was plus 6% up 2 points from the second quarter. Commercial rate was plus 4% of one point from the second quarter. Specialty was plus 6% up two points from last quarter, and international rate was plus 10% up three points.

Let me drill down on these rate increases to provide more insight into our execution in the marketplace. In our specialty business unit, rate was actually up 13% outside of our professional E&O program business, which we refer to as Affinity. As we have highlighted before, our Affinity business mainly represents longstanding multi-year programs and therefore are less affected by recent price movements.

In our healthcare business, which has experienced higher loss cost trends for more than two years, as we have referenced on several prior calls, rate increased further to 18 points compared with 14 points in the second quarter.

In public company D&O rate was up 42 points in the quarter, a level significantly higher than the 15 points we achieved in the second quarter. While the magnitude of this rate increase was influenced by several large accounts, we had broad increases across the book as reflected by the median of the rate achievement distribution for the third quarter, which was double the median of the second quarter.

In Commercial, excluding workers compensation, rate was 6% a point higher than the second quarter and included umbrella up 10%, property up 8% and auto up 7%. International rate was 10% compared with 7% in the second quarter, with broadly consistent rate movement in Canada, Europe and in our Lloyd's syndicate.

Before moving on to our new business results, I want to make a few additional comments on rate and lost cost trend and resulting margin in fact given the understandably high level of interest in this interdependent dynamic.

For the six points of written rate in the third quarter, we have achieved slightly more than three points of earned rate against their long run loss cost trends, which are just above two and a half percent. This is a good start, but obviously needs to be sustained before we recognize any meaningful margin expansion, particularly when you consider, that we experienced almost four years of rate changes being lower than long run loss cost trends starting early 2015.

All else equal, we would have to sustain the current rate levels through mid-2021 to make up if you will the lost ground and pricing. Now in terms of the impact to margin, the co-relation is oversimplified. As it would have to assume, a long run loss cost trends are the same as actual loss cost trends during that period, and that our book of business didn't change. In reality, losses have deviated from the long term average quarter-to-quarter and moreover, we have elevated our underwriting focus in the last few years, fully leveraged beyond pricing that positively impact the loss profile of the book.

These two dynamics, along with the fact that some part of exposure increases during that period, also acted like rate increases, explained to a large extent, why the lost ground in pricing during those years didn't equate to a dollar for dollar compression in margin.

Similarly going forward then, even if we sustain the current rate movement, earnings through mid-2021 gaining back the lost ground and pricing, it won't necessarily equate to a dollar for dollar expansion and margin, rather we need to incorporate all the vectors of influence on our accident year loss ratio fits, such as actual claim frequency and severity trend.

As we previously highlighted, a couple of lines have experienced higher lost trends and based on the consistency of the pattern of deviation, led the actuaries to raise their respective long run loss cost trends.

We must also account for portfolio changes, terms and conditions changes, beyond price changes and reinsurance coverage as well as legal, judicial and regulatory dynamics, all of which we do in a disciplined fashion during the quarterly reserve reviews.

Now let me share a detail on actions, we took on certain long run loss cost trends, accident year picks and reserve increases based on the overall puts and takes from the influencing factors.

As we have disclosed over the past several years, and discussed on prior calls, one area that we have consistently seen a more aggressive plaintiff bar has been within our healthcare portfolio especially aging services, where they have been targeting medical malpractice claims.

We began seeing this in 2016, as claims from older accident years accelerated, in both number and cost. We raised our accident year loss ratio in 2016, and began taking underwriting action at the time to mitigate the higher accident year loss ratio. Importantly, we also raised our long run loss cost trends in 2017, because we saw the elevated frequency and severity due to the deteriorating legal climate persist as evidenced by further adverse prior period development we took and previously disclosed.

We continued to review the results in subsequent quarters and determined even more aggressive underwriting action was needed. Last year, we began to substantially increase rate while continuing to re-underwrite the portfolio. Although we have seen some improvement in the frequency trend for aging services this year, our view of long run loss cost trends is 11% though we will continue to push on pricing and other terms and conditions, which as a market leader in the healthcare space, we do have the ability to execute effectively upon.

We are also seeing to a lesser extent the impact of a more aggressive plaintiff's bar in our umbrella book, specifically, the auto exposure in our umbrella book, which we have also commented on during past calls. Beginning in the second quarter of 2018, we began to see consistently higher severity on our auto claims, and the excess layers for accident years 2014 through 2016, as you know umbrella claims take time to develop, and recognize adverse prior period development for those accident years.

We also increased the 2018 accident year loss ratio by eight points in the fourth quarter, and that essentially remains our current accident year loss In addition, we quickly began to take a number of underwriting action, which is raising our attachment points on more auto exposed accounts, and reducing the number of umbrella accounts, with larger underlying auto exposures.

Even with these actions, the actuaries felt it was appropriate to raise the long run loss cost trends for umbrella by 100 basis points in this year's third quarter to reflect that higher severity trend. The good news is, we now have higher rate achievement in umbrella, and it is continuing to accelerate. So here we are today, and based on the momentum that currently exists in the overall tone of the market, I now believe it is more likely that rate increases running above our loss cost trends will persist throughout 2020, is quite rational in light of the lost ground, and the pressure on loss cost trends I just highlighted. And the sustainability of price increases is further validated when you place it against the backdrop of an exceedingly protracted low interest rate environment.

Getting back then to our production results. Another important element of price increases we are experiencing is that they extend to new business pricing and that has helped fuel our new business growth, which was up 10% over the same period last year.

This traditional market causes a heightened level of business to be marketed as agents and brokers grapple with significant changes in terms and conditions that they fear may impact even their best performing accounts. Our focus on reenergizing relationships with our distribution partners over the last 24 months along with our talent investments that I discussed on past call has allowed us to capitalize on this dynamic which has contributed to our new business growth.

And so with that, I'll turn it over to James.

[James Anderson, CFO]

Thanks Dino and good morning everyone. Our property and casualty operations produce core income of $241 million in the third quarter. Pre-tax underwriting profit was $42 million and underlying underwriting profit was $95 million.

Moving to each of our P&C business units. Specialty’s third quarter underlying combined ratio was 92.1% and its underlying loss ratio was 60.1% in the quarter, consistent with both the third quarter of 2018, as well as the first half of this year.

Specialty’s overall combined ratio was 89.8% included 2.8 points of favorable prior period development. This favorable development was primarily an accident year’s 2017 and prior, driven by surety and management liability and partially offset by healthcare being adverse.

With a significant rate, we're now achieving in healthcare along with considerable underwriting efforts. We are confident that we're getting this book back under control. Nonetheless, as Dino just highlighted, we will be cautious regarding the recognition of margin improvement until we see the benefits of rate manifest themselves in our actuarial analysis.

Specialties gross written premium ex third-party captives grew a healthy 9% in the quarter. Our commercial segments underlying combined ratio was 93.8% in the quarter, and its underlying loss ratio was 61.5% which is a point higher than the third quarter of last year, but a slight improvement compared with the first half of this year.

The third quarter overall combined ratio was commercial -- in commercial was 101.6% including three points of catastrophe losses and 4.8 points of adverse prior period development.

As Dino mentioned, the majority of the prior period reserved charge in commercial, infact $35 million of the $40 million came from a block of legacy accounts from accident years 2009 and prior, and are unrelated to the New York revival statute legislation.

This adverse change was primarily driven by a re-evaluation of expected reinsurance recoveries on those reserves in addition to an increased case reserves on a handful of accounts.

I highlight the revival statute because there has been a lot of discussion about it. However, it is early in the process for us, because we are primarily in an excess position in the areas where we may have potential exposure. We will continue to evaluate this as we get more information.

Aside from the legacy development, commercial had 5 million of adverse prior period development, driven by umbrella. Commercial’s gross written premium ex third-party captives grew 13% in the quarter.

The underlying combined ratio for our international segment was 105.3% in the third quarter, but as Dino pointed out, the first three quarters of 2019 show an improving picture with an underlying combined ratio of 98.9%.

In the third quarter, the underlying loss ratio was 67.3%, a point higher than the third quarter last year, and several points higher than the first half of 2019, driven by large property losses in our Lloyd's syndicate and in Europe.

As we've noted in previous calls, the improvement in international will not manifest itself in the results overnight. The expense ratio deteriorated 1.7 points year-over-year due to the reduction of earned premium from our re-underwriting efforts.

The all-in combined ratio was 107.4% including 1.7 points of catastrophe losses and minimal prior period developments. Our P&C expense ratio of 32.5% was slightly below our current run rate, as the quarter's results included some favorable items and acquisition expense.

Our Life & Group segment produced a core loss of $122 million in the quarter. This result includes an after tax charge of $170 million related to the unlocking of our long term care active life reserves, partially offset by a $44 million after tax gain resulting from our annual long term care claim reserve review.

The claim reserve review, which is the review of our current claim population was favorable, driven by lower than expected claims severity. As Dino mentioned, this is the fourth year in a row, the results of the claim review was favorable.

On slide 13 of our earnings presentation, you can see the results of our gross premium valuation analysis. The most significant change in the analysis was the discount rates. Given current investment yields, we reduced our near-term expectation for new money yields, in addition to lowering our expectation of normalized new money yields for 2025 and beyond.

Last year's analysis assumed the 10-year treasury yield would get to a normalized level of 4.25%. This year we reduced that expectation to 3.75%. This 50 basis points drop in new money yield expectations reduced the all-in discount rate to 5.50% on a nominal basis and 5.76% on a tax equivalent basis.

This was the driver of the $280 million reduction in GAAP margin due to discount rate. Consistent with the results of the Claim reserve review, morbidity provided a $32 million favorable change to GAAP margin.

Moving to persistency, there are two dynamics to note. First, margin improvement was reduced by $166 million over the course of the year, driven by policyholder response to rate action, which has resulted in our earning a portion of last year's margin. In other words, benefit reductions in lapses over the past year, at a current earnings contribution, and reduced future expected earnings, which is what margin is.

Ofcourse, a reduction of active policies also reduces the risk over the long term. In addition to this dynamic, mortality rates for policyholders not on claim have been slightly lower than expected, which we reacted to in this analysis.

Lowering the expected mortality going forward was the primary driver in the remaining $68 million reduction to GAAP margin from persistency. Finally, regarding future premium rate increases as we've previously discussed, we only include rate increases that have been filed and not yet approved, or that we plan to file as part of a current rate increase program.

Over the past year, we've outperformed our previous rate increase assumption and are continuing to file for additional rate increases, which combined to add 58 million to our GAAP margin.

Our best estimate assumptions currently reflect $230 million of future unapproved rate increases. And while we limit the amount of unapproved rate increases anticipated in our reserve, we will continue to seek rate increases over time if and when they are justified.

So summarizing our annual premium -- gross premium valuation analysis, every year there is movement in each of these variables driving the margin. In this year's analysis, a low interest rate environment drove the GAAP margin below zero causing an unlocking of the active life reserves and a charge to earnings.

Before moving on, I'd like to give you a few important statistics that I think lend credibility to function setting process. There's been nearly four years since our assumptions were last unlocked.

Over the course of that time, our active policy count is 5% lower now than we expected it would be. Our open claim count is slightly lower than expected and the total dollar amount of paid claims is 2% lower than expected.

So three broad and important metric; how many policies remain, the number of open claims and the total amount paid over the last four years were all better than the assumption set in 2015.

On slide 15 of our earnings presentation, we've updated the data that we first provided during last year's third quarter earnings call. The active lives in both the individual and group blocks continue to decline, down 21% and 33% respectively since 2015.

On the bottom left of slide 15, you'll note open claim counts in our individual block have been fairly steady in recent years. We believe open claim on the individual block were essentially plateaued, another indication of the maturity of this block.

To conclude on long-term care, slide 16 shows the key characteristics of our long-term care block. You'll note that the average age of our individual block is 79 years old and the average age of a new claimant is 84, again indicating that this block which accounts for 85% of our reserves is very mature.

While the group block is less mature, but the average attained age of 65 it has a lower level of benefits. For example there are very few lifetime benefit policies and only 15% have inflation protection.

Overall, our block is matured, well-managed and we continue to have confidence in our long-term care reserves. Our corporate segment produced the core loss of $17 million in the third quarter.

Pretax net investment income was $487 million, the same amount as the prior year quarter. Our limited partnership in common equity portfolios produce pretax income of $18 million, a 0.9% return and the result is roughly half of our quarterly average.

Pretax income from our fixed income portfolio was $462 million, slightly higher than the prior year quarter. A pretax effective yield on the fixed income portfolio was 4.8% in line with prior period.

Fixed income asset that support our P&C liabilities had an effective duration of 4.1-year at quarter end in line with portfolio targets. The effective duration of the fixed income assets that support our life and group liabilities with nine years at quarter end.

Our balance sheet continues to be extremely strong. At quarter end shareholders equity was $12.1 billion or $44.66 per share and our unrealized gain position increase to $4.2 billion due the decline in interest rates.

Shareholders equity excluding accumulated other comprehensive income was $12.0 billion or $44.14 per share, an increase of 6% from year end 2018 when adjusted for the $3.05 of dividend per share paid during the first three quarters of this year.

In the third quarter operating cash flow was $466 million. We continue to maintain a very conservative capital structure and all of our capital adequacy metrics, as well as credit metrics are well above their internal targets and current ratings. Finally, we're pleased to announce our quarterly dividend of $0.35 per share.

With that, I'll turn it back to Dino.

[Dino Robusto, Chairman and CEO]

Thanks James. Before we move to the question-and-answer portion of the call, let me leave you with some more arching thoughts on the quarter. Our actions on long-term care reflect our continued prudent management of this portfolio.

Underlying P&L loss ratio was 61.7% for the quarter and 61.1% year to-date, while expense ratio improved to 32.5%. U.S net written premium grew 9%. We achieved six points of rate in the quarter, two points higher than the second quarter. And based on the current momentum we believe rate increases will persist above our long-run loss cost trends throughout 2020.

And with that, we'd be glad to take your questions.

[Operator]

Thank you. [Operator Instructions]. And we'll take our first question from Jay Cohen with Bank of America.

[Jay Cohen, Bank of America]

Yes. Thank you. A couple of questions. I guess first on the international side. When would you expect the earned premium to kind of fully reflect the actions you took to get out of certain lines of business, when will that stuff be kind of off your books?

[Dino Robusto, Chairman and CEO]

Well, so we started the non-renewal, Jay, it's Dino, sort on late 2018, and so you non-renew them as their renewal dates come out, that plays out the course of the year, but as we indicate in some of the prepared remarks, it's a dynamic process and there's some additional business that were non-renewing and which is normal for the process when we see something and we don't think we're going to get the right terms and conditions. We’re going to non-renew it. So we think the non-renewal of account is going to take through sort of the end of the second quarter of next year and that obviously has to earn it itself which is probably sometime through 2021.

And then just keep in mind; we've mentioned that before there are certain lines we exited like; political risk and large project construction engineering risks that have a multiyear tail. So some of those, Jay, effectively can stay on the portfolio. So, I think you're looking at 2021.

[Jay Cohen, Bank of America]

Yes. That makes sense. Okay. And the second question, I think I know the answer to this, but just to double-check. The accident year loss ratio, was there any material, current year catch-up that you reassess the first half results in any segment that might have influenced the current quarter reported accident year loss ratio?

[Dino Robusto, Chairman and CEO]

No. Jay, when you look at accident year commercial, underlying loss ratio and you're comparing it Q3 to Q3, keep in mind that in Q4 of last year we increased the international – we increase the umbrella and we also increase the property and that's obviously played itself up because it was in the Q4. So you're seeing it elevated against Q3 which was a quarter before we made those changes.

[Jay Cohen, Bank of America]

That makes sense.

[James Anderson, CFO]

We made this in specialty, Jay just around aging services as you know, it's reflecting there earlier.

[Jay Cohen, Bank of America]

Got it. Got it. Now that makes sense. Great. Thanks for pointing that out.

[Operator]

Thank you. We'll now take our next question from Josh Shanker with Deutsche Bank.

[Josh Shanker, Deutsche Bank]

Good morning everybody.

[Dino Robusto, Chairman and CEO]

Good morning.

[Josh Shanker, Deutsche Bank]

I want to go back some of the Dino's prepared remarks. First of all, on the 2.5% loss cost -- long-term loss cost for an estimation. If I look over the past decade, obviously it's been a decade of lower than long-term loss cost trend. How does that 2.5% stack up against history, I guess?

[Dino Robusto, Chairman and CEO]

Pretty consistently, keep in mind and I think we went through it or James did on the last calls, keeping in mind, because overall it can see below that 2.5, but we have a large portfolio, the professional E&O Affinity portfolio that had run probably over the full decade, a long run loss cost trend that were slightly under 1%, it might be little slightly higher than history because of work comp which had been particularly lower in the recent years. But you put those two things together and you got some pretty consistent long run loss cost trends.

[Josh Shanker, Deutsche Bank]

Is the last decade a good decade to use as the base of assumption?

[James Anderson, CFO]

I guess, Josh, I would say, the last decade is the best decade that we have to use for assumptions. Going back further than that the market was quite a bit different than it is today.

[Dino Robusto, Chairman and CEO]

And so was our book.

[James Anderson, CFO]

Yes.

[Dino Robusto, Chairman and CEO]

That's more of the part of the issue.

[James Anderson, CFO]

So I think we're going to consistently look at this every quarter to see if there's anything that's changing and as reflecting in this remarks we're going to tweak specific line items and specific lines of business as we see them change, but certainly the trend has been holding for quite some time.

[Josh Shanker, Deutsche Bank]

And that was the other part of my question. So you talk about that the fact that the negative pricing over the past few years had not resulted in deterioration, but it’s a combination of the exposure action like rate and I guess the remanicuring or I don't know what you want to call, the changing of the mix in your portfolio. And is it going forward those things will still be an issue, so you won't have a dollar-for-dollar impact. Are you saying that you expect the GAAP between rate and loss cost trend will be reflected by even higher loss ratio – even lower loss ratios because then you'll layer on top of that business mix and exposure? I was just trying to understand the dollar-for-dollar. You can get more than your bang for the buck for these rate increases?

[James Anderson, CFO]

So, the comments on go forward was a comment on symmetry that, it hadn't necessarily been and loss cost trends are going to be what they're going to be actual. And so you might not end up with exactly the dollar-for-dollar, but the point being that often on these calls there is a lot of conversation of the -- what I consider to be the oversimplified correlation of rate and long run loss cost trends and I was just simply suggesting that there are so many vectors that influences including judicial regulatory and you know you play all of that out. And so we're going to be cautious in how we move the margin. It is in that vein that I was referring to it.

[Josh Shanker, Deutsche Bank]

And look long-term you're always improving the portfolio and you're always hopefully getting exposure increases that act like rate. Over the long run should you always expect to have better margin than the rate over loss cost trend would indicate?

[Dino Robusto, Chairman and CEO]

I'm not sure if I'm following that exactly, Josh.

[James Anderson, CFO]

Josh, I don't think that we would expect that per se. I think and just going back to the first part of the question, I think part of what we were trying to get across in that messaging and on the dollar-for-dollar margin is that -- with all the moving pieces we're actually going to be cautious just as Dino said. And so we're not going to take margin improvement as soon as we see sustained rate above, our earned rate above our loss cost trend. So it's actually likely to play out slower in terms of margin improvement rather than faster.

[Josh Shanker, Deutsche Bank]

Okay, okay. That answers my question. Thank you very much.

[James Anderson, CFO]

Sure.

[Operator]

Thank you. Now we'll hear now from Gary Ransom with Dowling & Partners.

[Gary Ransom, Dowling & Partners]

Yes. Good morning. I wanted to dig in on some of the loss cost trends also. You mentioned in healthcare the number is something like 11%. And I -- and we've heard a lot of anecdotes about how aggressive the plaintiff bar's been. I wonder if you have any thoughts specifically about how some of the external effects like litigation funding and medical financing companies may have been at least a partial driver of those trends? And that's all part of a question of you think its 11 today; but maybe it's 15, and that's a sort of what I'm kind of driving at what gives us -- we see all these things, but what gives us comfort that we're kind of in the right place on these loss trends?

[Dino Robusto, Chairman and CEO]

Gary, it's Dino and then I'll start and James may want to jump in also. So, we're not really seeing in the portfolio the effects of legal funding. But let -- you do see its impact from a few different areas. First of all, the plaintiff bar has really targeted this industry. You can see it in the sort of ad campaigns and the marketing. And so inviting, if you will, more claimants to come forward and that is happening. Keep in mind, Gary, we been there for over two decades, so we can see the difference.

Also there have been some larger jury awards, and although a lot of the cases never make it to court. What it does is embolden the plaintiff bar based on what they seen in some of these jury awards not to settle upfront for what was potentially a lower amount for a similar type case in the past. And intriguingly it also affects the adjusters and the defense attorneys who are also going to incorporate if you will the higher verdicts into their settlement calculus. And so, as I indicated we're seeing a little bit of less frequency, but we're going to wait. Some of that is a function of obviously all that we underwriting that we have done.

And then, we'll watch to see how the long-run lost cost trend and whether that's sustain itself, so slight improvement we're seeing on frequency. But keep in mind; you've got some very significant rate increases which eventually will be also sort of factored in. And so we feel good about the actions we are taking. How we're leading the market. It's combination of underwriting actions, the deductibles, wording changes, tightening wording and then also getting a lot of rate. And then you play this forward and quarter-for-quarter we take a look at this thing. And as I tried to suggest we've acted consistently and we will act up and down as this moves forward. But I'm not really sure what also I could sort of add to give even more clarity.

[Gary Ransom, Dowling & Partners]

That's helpful. I realize it's mostly anecdotal. Another question on the legacy reserve charge, I'm not sure I understood James what you're saying about the -- it was a reinsurance recoverable that you had somehow taken down? Is that – did I say that right?

[James Anderson, CFO]

That's right, Gary. So, as part of the reserve review not only we're look at our open claim inventory, but we're also looking at the ceded recoverables that we had on older claims. And it turned out. We just overestimated those ceded recoverables on some of the older claims. That's what came through.

[Gary Ransom, Dowling & Partners]

Was there anything about these – was there anything consistent about these claims? Were they from some class of business that was similar? Or were they just scattered randomly?

[Dino Robusto, Chairman and CEO]

No. They were – I mean, these were all -- the review was really old product liability cases with multi-claimants involved, things like public nuisance and food additive, which is really what's in that bucket of claims. The reserve review focused around as I said both the claim reserves as well as the recoverables.

[Gary Ransom, Dowling & Partners]

Okay. And is there any – I can't remember if you do an A&E charges well at this point that might affect the accounting with…?

[James Anderson, CFO]

No. We will do at our annual asbestos and environmental review next quarter.

[Gary Ransom, Dowling & Partners]

Next quarter, okay. Thanks.

[Dino Robusto, Chairman and CEO]

We look at fourth [ph] quarter from the first quarter.

[Gary Ransom, Dowling & Partners]

All right. Thank you very much.

[James Anderson, CFO]

Thanks.

[Operator]

[Operator Instructions] We'll hear now from Meyer Shields with KBW.

[Meyer Shields, KBW]

Great. Thank you very much. Good morning and thank you for all the detail you've provided loss trends. That was very helpful. Can you walk us through what you're seeing now in terms of rates and loss trends for workers' compensation?

[James Anderson, CFO]

So, I would say, it's been pretty steady. The rates in worker's comp continues to be kind of mid single digit negative. It was slightly better in the third quarter but not materially. When we look at trends, severity trends continue to be benign and stable as we mentioned last quarter, and frequency flattened comparative to what it was during the last several years which again the same as it was last quarter, so no real change quarter over quarter.

[Meyer Shields, KBW]

Okay. Perfect. And I was hoping you could sort of outline the exposure that the Affinity book has to these worsening trends. It sounds like you're not seeing anything deteriorate. But is there exposure if the trial bar settles on sort of this E&O pocket?

[James Anderson, CFO]

Our Affinity book really is not -- I mean there's kinds of risks that are inside there are much smaller. Those are -- they tend to be in a pretty homogeneous account, but many, many small accounts and don't fall into the types of coverages where we've seen the plaintiff bar attack [ph].

[Dino Robusto, Chairman and CEO]

And also our risk control, I mean, it's by six decades as we've indicated before, and all that makes a difference. Also it doesn't have because of the professionally at the medical costs exposures that you would see on comps, some of the auto-related umbrella. So that makes a difference given the medical undertones and some of the others, Meyer.

[Meyer Shields, KBW]

Okay, perfect. Thank you so much.

[Operator]

Thank you. And that does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Robusto for any additional or closing remarks.

[Dino Robusto, Chairman and CEO]

Great. Thank you very much for attending, and thanks for your questions.

[Operator]

Thank you. And that does conclude today's conference. Thank you all for your participation. You may now disconnect.