CNA Financial Corp

NYSE:CNA

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and welcome to the CNA's discussion of its 2020 Third Quarter Financial Results. CNA's third quarter earnings release, presentation and financial supplements 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 Al Miralles CNA's Chief Financial Officer. Following their prepared remarks, we will open the lines for questions.

Today's call may include forward-looking statements and references to non-GAAP financial measures. Any forward-looking statements involved risks and uncertainties that may cause actual results to differ materially from the statements made during the call. Information concerning those risks is contained in the earnings release and in CNA's most recent SEC filings.

In addition, the forward-looking statements speak only as of today, Monday, November 02, 2020. 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 the financial supplement.

This call is being recorded and webcast. During the next week the call may be accessed on CNA's website. If you are reading a transcript of this call, please note that the transcript may not be reviewed for accuracy, thus it may contain transcription errors that could materially alter the intent or meaning of the statements.

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

[Dino Robusto, Chairman and Chief Executive Officer]

Thank you, Rolando. Good morning. It is very good to be with you today and I hope you and your families are coping well. This is quite unprecedented times. CNA continues to operate effectively as our underlying business performance improved once again this quarter as evidenced by the ongoing acceleration in rate achievement as well as higher overall growth and growth in new business. We also had an improved underlying loss ratio and a lower expense ratio for the quarter.

As we have done in previous years, we completed our annual Life and Group review in the quarter which importantly includes the long term care growth premium evaluation or GPV analysis of our active life reserves. As part of our analysis we took strong action to address the lower interest rate environment we now face compared to a year ago by conservatively modifying our discount rate assumptions.

First we have lowered our expectations for the normative 10 year treasury yield to 2.75%, a reduction of 100 basis points from last year. Second, we extended the time period to grade up to that normative rate from 6 years to 10 years and long term care reserve discounted these changed reflect are ongoing proven approach to reserving in our stead fast results to protect our capital and earnings in an ongoing low interest rate environment. Al will provide you with much more details associated with this year's GPV review.

Turning to P&C our underlying combined ratio of 92.6% for the quarter improved by 2 points from a year ago and is the lowest underlying combined ratio of CNA in the last 10 years. The underlying loss ratio improvement consisted of only a half point benefit due to lower frequency from the ongoing economic downturn. With most of the improvement driven by our international business which had steadily returned to profitability as a result of our re-underwriting efforts in our London operation over the last 18 months.

As I mentioned, the last quarter we expected earlier relatively modest impact from loss frequency benefit because a substantial portion of our portfolio consists of insured essentials industries such as construction, healthcare and manufacturing that we're not subject to shelter in place restrictions. And we continue to assume a potential for higher severity and casualty lines like auto and general liability but the economy is restored over time. So we believe it is still early to react to favorably the short-term trends.

Below our P&C expense ratio of 31.8% largely reflected our growing premium base which contributed approximately 0.7 points of the improvement in our underlying combined ratio. As I have said on prior calls our strategy has been to simultaneously make substantial investments in talent, technology and analytics to position us for sustained success while streamlining our operation in order to keep our overall underwriting expenses flat. Then by growing the company in a disciplined and prudent fashion we would steadily decrease the expense ratio which you can clearly see in this quarter as more of the growth earned in.

Turning to the dynamics of this hard market and starting with pricing rate increases continued to accelerate as we achieved plus 12% in P&C overall up a point from the second quarter, importantly excluding worker's cost, which has slightly negative rate in our very profitable affinity programs which had a small positive rate increase, the rate change was plus 17%, up 2 points from Q2 and 5 points from Q1. Importantly, the increases apart from these two areas were broad-based as each business unit and essentially all product lines achieved higher rates.

The acceleration in our rate increases over the last six quarters has led to four quarters of earned rate increases now at plus 9%. This compares to our long-run loss-cost trend assumptions a slightly more than 4% excluding our affinity book. As mentioned on our last call, we had previously increased our view of long-run loss Facilitatorcost trends in 2020 as we continue to feel the impact of social inflation on our portfolio in particular in our aging services and auto portfolios.

In the quarter, we remained comfortable with our latest view and did not further need to increase them. However as I also mentioned last quarter the impact of the pandemic could be obfuscating the social inflation dynamic. So there still is some uncertainty around future impacts the long-run loss cost trends which is why we remain cautious to acknowledge margin expansion from the earned rate trend being amply above current levels.

The great news, however, is that all the dynamics fueling the hard market which we and others have articulated repeatedly should allow us to achieve strong rate increases well into 2021 so that the margin gap all else equal should continue to grow net of any added pressure from long-run loss cost trends in 2021 and as we see this play out over the next couple of quarters we will then be in a better position to incorporate the benefit into our loss ratio picks.

In terms of growth gross written premium ex-captives do 9% on that rate and premium growth was 7% both higher than the second quarter. Exposure continued to be a handwritten to our growth as it was down 3 points compared to the third quarter last year.

As was the case in the second quarter new business growth in the third quarter was again higher than the same period last year which evidences our ability to provide strong service to our agents and brokers in this remote working environment. The investments we made at the end of the first quarter to respond quickly to shorter time frames on submissions that I mentioned on the last call continued to pay dividends this quarter.

Retention declined 1 point from the second quarter to 82% due to our re-underwriting efforts in our London operations which will essentially be completed in the fourth quarter and to our targeted actions in the U.S. to improve the profitability of certain lines within healthcare and manufacturing that I have spoken about previously.

Completing the picture for the quarter overall combined ratio was 100.9% which included 0.4 points of favorable development and 8.7 points of loss activity from a series of natural catastrophe events. Also as indicated in our press release we made no change to our COVID-19 catastrophe loss estimate. In the quarter there were no significant changes in the regulatory environment, the claim notices we received in the third quarter have been modest and very little has been paid out. Of course that was our expectation all along as we knew the claim outcomes from this event would play out slowly over time. As a result our previously established COVID-19 ultimate loss estimate of 195 million remains appropriate for all events that occur to the third quarter from which we believe claims will eventually emerge and our loss estimate is still virtually all in IBNR.

Moving to investments, the overall portfolio fared well in the third quarter with the unrealized gain position increasing once again and net investment income was strong driven by LP positions. Despite this strong quarter, we continue to see a reduction in our net investment income from our fixed income portfolio supporting P&C due to the lower interest rate environment that we believe is unlikely to change meaningfully anytime soon. This is a key dynamic fueling my perspective for a protracted hard market as it will take time for us in the industry to watch to achieve an offsetting increase in underwriting income. Finally, our core income for the third quarter was $193 million or $0.71 per share net income was $213 million or $0.79 per share and with that I'll turn it over to Al.

[Al Miralles, Chief Financial Officer]

Thanks Dino and good morning to everyone. As Dino indicated that I will now provide details of our results by business segment, starting especially the combined ratio was 89.5% this quarter. The combined ratio includes favorable primary development of 2 points and 1 point for catastrophe losses. The favorable prior period development is largely driven by continued strong profitability of maturity business partially offset by unfavorable development in healthcare. The underlying combined ratio especially with 90.5% this quarter 1.6 points of improvement compared to third quarter 2019. The underlying loss ratio was 60% and the expense ratio was 30.5%. The expense ratio has improved by 1.3 points compared to third quarter 2019 due to both growth in net earned premium and lower expenses.

The gross rate and premium growth ex-cap is plus 11% especially for the quarter and was 9% on net written premium. Rates continued to increase at plus 13% up from 11% last quarter. The retention was 86% this quarter which was flat to last quarter. The business volume was strong with growth of 14% over the prior year's quarter. The combined ratio for commercial was 111.5% this quarter which is 9.9 points higher than third quarter 2019 and includes 17 points of catastrophe losses and 0.6 points of un-paidable prior period development.

The cat losses are attributable to severe weather related events in the quarter primarily Hurricanes Laura, Isaias and Sally, and the Midwest derecho. The underlying combined ratio for commercial was 93.9% this quarter 0.1 points higher than third quarter 2019 but 0.9 points improvement on a year-to-date basis versus prior.

The underlying loss ratio was 61% compared to 61.5% in the prior year reflecting a modest benefit from lower frequency in the quarter as Dino mentioned. The expense ratio was 32.3% compared to 31.7% in the third quarter 2019. The prior year expense ratio included a release associated with the state loss assessment fund which is muting the favorable impact of current year net earned premium growth and lower expenses.

Gross written premium growth x-cap was plus 7% commercial for the quarter and net was plus 4 %. The rate change of 11% was up 1 point from last quarter. Retention was 81%. New business growth was down 3% versus prior quarter and up 8% on a year-to-date basis.

The combined ratio for international was 98.1% this quarter compared to 107.4% in the third quarter 2019. The combined ratio includes 3 points of catastrophe losses for the quarter. The underlying combined ratio for international was 95% this quarter; an improvement of 10.3 points compared to prior year quarter. The underlying loss ratio was 60.1 %. The expense ratio was 34.9%. The underlying loss ratio improved 7.2 points due by re-underwriting execution while the expense ratio declined 3.1 points driven by lower acquisition and underwriting expenses.

The growth written premium in international increased by 5%, the net increase by 10% both in comparison to the prior year. The net written premium growth comparison in the prior period was impacted by a change in timing of [indiscernible] insurance treaty. Rate change of 16% was up 2 points from prior quarter. Retention was 70% this quarter which is in line with 2019 levels and reflects the progression of the re-underwriting strategy.

Before I review the results of our life and group segment including the impacts from our annual reserve reviews I would ask you to refer to slides 11 through 13 of our earnings presentation as I take a moment to walk through our approach to the long-term care business and the actions we've taken over time.

More than five years ago we commenced efforts focused on the active management of long-term care with the goal of reducing the risk to CNA while also effectively serving our policyholders. This encompasses significant investment in the business and a commitment to proactively and effectively address risks.

We've made considerable progress on these objectives including reducing risk across many dimensions of the block, achieving meaningful rate increases and taking preemptive actions on the reserving assumptions. The actions we have taken for their 2020 annual review of our life and group reserves are reflective of this continued approach and commitment.

As a reminder our annual life and group preserve reviews include the long-term care, Gross Premium Valuation or GPV of our active life reserves as well as the long-term care claim reserve analysis. In addition, we completed the claim reserve review for a structured settlements block which I will also address.

Starting with the long-term care GPV review the most significant change resulting from this review is an update of our discount rate assumptions. These changes associated with the discount rate are detailed in slides 14 and 15. It is important to note that the discount rate is a function of the current investment portfolio yield as well as the reinvestment yields assumed for future investments. The benchmark we use in reference to the risk-free reinvestment yield is the 10-year U.S. treasury. While we project these risk-free rates over the short and intermediate term assume long-term rate or normative rate is of critical importance given the duration of the liabilities.\

In the previous two years reserve reviews, we had reduced our expectations for the normative 10-year treasury yield by 105 basis points with our 2019 review assuming that this benchmark rate would get to 3.75% by 2025.

In light of the current interest rate environment and expectation of these conditions persisting we've taken several critical actions on our discount paid assumptions. First, we have lowered our expectation for the normative rate to 2.75% a reduction of 100 basis points from last year and 205 basis points accumulated over the last three years.

Second, we've extended the time period to grade up to that normative rate from 6 years to now 10 years. This means that it's not until 2030 that we would assume the new 2.75% normative grade. And finally we are using the forward curve for the first three years of the projection and then we'll grade up to the normative rate over the remaining seven years.

You will see on slide 15 we are not assuming the tenure will get back to the 2% level until 2027; a significant change compared to our prior year expectations.

I should also note we did not make any meaningful changes to investment spread assumptions or portfolio credit quality as part of this review. The sum of all the assumption changes on the discount rate resulted in unfavorable pre-tax impacts of $609 million. These discount rate changes including a significant decrease in the normative rate, extended time frame to get to the new normative rate and the use of the forward curve over the next several years reflects our prudent approach to reserving and meaningfully reduces the reinvestment risk assumed in these liabilities.

With that I will move on to other key assumption changes including morbidity, persistency and rate increases all highlighted on slide 16.

With respect to morbidity along with our change in the level of interest rates we also lowered our expectation of inflation. This change impacts our assumption for cost of care, for future claims and together with other morbidity assumptions had a favorable pre-tax impact of $51 million.

With respect to persistency, the key assumption change was an increase in mortality rates, for older age policyholders not on claim and reflective of our experience for this cohort. Persistency changes had a favorable pre-tax impact of $152 million.

Finally, regarding future premium rate increases. As a reminder our approach is to include rate increases that have been approved, filed but not approved or that we plan to file as part of the current rate increase program.

Over the past year, our actual rate achievement has exceeded our prior expectations contributing $200 million of favorable impacts. In addition, we are continuing to file for additional rate increases under existing programs. Updating our assumptions to reflect our actual rate achievement in addition to the updates to existing programs had a total favorable pre-tax impact of $318 million.

I should note that the weighted average duration of future rate increase approvals consumed in the reserves is only 1.5 years. Overall and that's highlighted on slide 17 our annual GPV analysis for long-term care, [indiscernible] reserve deficiency and charged earning of [$74] million on a pre-tax basis. While these changes and notably the change on the discount rate are significant, they reflect our continued approach to prudently and proactively address risk associated with this business.

In addition to the GPV analysis, we have also concluded our annual long-term care plan reserve review which is a review of the sufficiency of our reserves covering our claim operation. The impact from this review is favorable with a $37 million release of reserves driven by lower expected claim severity specifically we observed higher claim closure rates most notably driven by claimed recoveries.

I should note that this is the fifth year in a row, the result of the claim review is favorable which is the validation of a responsible approach to actual assumption setting. Finally, and as indicated on the bottom of slide 17 we had an unfavorable impact associated with the plan reserve review for a structured settlement's block. These structured settlements are agreements to provide fixed periodic payments to claimants associated with historic P&C claims. Total reserves for a structured settlement block were approximately $550 million at the end of the third quarter.

Similar to a long-term care block these reserves are held on our balance sheet on a present value basis and thus are subject to changes in assumed discount rates as well many of these policies have life contingencies and thus are impacted by changes in mortality assumptions. As part of our reserve review this year we made adjustments to both the discount rate and mortality assumptions including a reserve strengthening of $46 million on a pre-tax basis.

Turning to slide 18, overall our Life and Group segment produced a core loss of $35 million in the quarter. With some of the reserve changes covering both the long-term care and structured settlement blocks there is a pre-tax charge of $83 million or $65 million after tax.

Effect from the impacts of these reserve reviews the segment produced core income from current operations of $30 million for third quarter. These results were favorable for expectations and primarily driven by morbidity experience.

Specifically we continue experience lower than usual, new claim frequency, higher claim terminations and more favorable claim severity amid the effects of COVID-19. As referenced in the previous quarter given the uncertainty of these trends we have taken a cautious approach from an income recognition perspective and then holding a higher level of IBNR reserves. In addition as we continue to deem these trends as temporary and short term in nature we did not incorporate this more recent experience into our GPV assumption setting efforts. Our corporate segment produced a core loss of $19 million in the third quarter.

Now let me turn to investments. Pre-tax net investment income is $517 million in the third quarter compared with $487 million in the prior quarter. The results reflected favorable returns from our limited partnership and common equity portfolios which produced pre-tax income of $71 million compared to $18 million during the same period last year.

Pre-tax net investment income from our fixed income portfolio that's $443 million this quarter compared to $462 million in the prior year quarter. The pre-tax effective yield on our fixed income holdings was 4.5% for the period. A decrease is primarily in our P&C portfolio which as Dino mentioned has been impacted by lower reinvestment rates. Pre-tax net investment gains for the quarter were $27 million compared to a gain of $7 million to the prior year quarter. The gain is primarily driven by the continued recovery of the mark-to-market under non-redeemable preferred stock investments and higher net realized investment gains on fixed maturity securities, partially offset by a loss on the redemption of our $400 million of senior notes to august 2021.

Our unrealized game position on our fixed income portfolio stood at $5 billion up from $4.4 billion in second quarter. The change in unrealized during the quarter is driven by the tightening of credit spread across the market while risk-free rates remain low. Fixed income assets that support our P&C liabilities had an effective duration of 4.5 years at quarter-end in line with portfolio targets. The effective duration of the fixed income assets that support our Life and Group liabilities is nine years at quarter-end. Slides 21 and 22 of the earnings presentation will provide you with additional details of the investment results and the composition of the investment portfolio.

The balance sheet continues to be extremely strong. At quarter end shareholders equity is $12 billion or $44.30 per share driven by the increase in our unrealized gain position during the quarter. Shareholders equity excluding accumulated other comprehensive income of $11.6 billion or $42.78 per share.

We continue to maintain a conservative capital structure with a low leverage ratio and a well-balanced debt maturity schedule. As I noted in August, we issued $500 million of senior notes at a record low coupon of 2.05% with tremendous demand for the paper and we subsequently redeemed our 2021 debt the net of which will reduce our annual interest expense by nearly $13 million and at quarter end all of our capital adequacy and credit metrics remain above target levels supporting our credit ratings.

In the third quarter, our operating cash flow was strong at $758 million driven by higher premiums and to a lesser extent lower paid losses. In addition to our positive operating cash flow and continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity holdings to meet obligations and withstand significant business variability. And we are pleased to announce our regular quarterly dividend of $0.37 per share.

With that I will turn it back over to Dino.

[Dino Robusto, Chairman and Chief Executive Officer]

Thanks Al. One last point of emphasis before we move on to the question and answer portion of the call. Each quarter of this year I have developed greater confidence in the strength and duration of the hard market because of the widespread industry awareness and therefore increasing customer awareness of the adverse impact of a protracted low interest rate environment, social inflation dynamics as well as years of depressed pricing and elevated catastrophe activity increasingly it is understood this will take more than a few additional quarters of correction to allow the industry to achieve required levels of return to responsibly protect the customer risks we assume.

I am optimistic that we will be able to take full advantage of this correction period to achieve stronger pricing, better terms and conditions, growing our top line premium as well as our share of high quality new business and improving both their underlying loss and expense ratios. And with that we'd be happy to take your questions.

[Operator]

[Operator Instructions] We'll take our first question from Joshua Shanker with Bank of America. Please go ahead.

[Joshua Shanker, Bank of America]

Yes. Good morning everyone. I hope you'll indulge me with maybe more than two but you can cut me off if you want. So first question on the expense ratio in the P&C business; absolutely a great number. Anything we need to think about in terms of G&E or COVID related expenses making this a typically low or is that a good number to think about going forward?

[Dino Robusto, Chairman and Chief Executive Officer]

Al you want to take that?

[Al Miralles, Chief Financial Officer]

Yes. Sure. Good morning Joshua. It's a good question. So I would say modest impact from travel right. We are not a huge teeny spend company. So I would say the expenses are modestly benefited from less or very little travel but not a lot really the pickup largely driven by our pickup in our group.

[Joshua Shanker, Bank of America]

And so that might be it obviously just one quarter but might be a useful number if you think about going forward it's not unreasonable.

[Al Miralles, Chief Financial Officer]

I don't think it's unusual. Remember our strategy has been to try to hold underwriting expenses flat while we invest in the business and I think what you saw in the quarter was just that good efforts in holding flat. We continue on our path of investing in talent, technology, analytics but the disciplines showing through on the our expense spends and then again you see the path of our written growth and we're starting to see that really show up in our earnings.

[Joshua Shanker, Bank of America]

And then in terms of long-term care there is a few quickies, one is I just need to understand exactly. I thought that the future rate increases are not included in the assumptions and I guess when I was reading the press release it said that the 2019 rate increases came through better than expected. I'm trying to understand exactly how does that work? The expectations should they were they built into the numbers or what is that $318 million exactly?

[Al Miralles, Chief Financial Officer]

Sure. So just remember this gross premium valuation effectively what it is it takes all of your future cash flows, premiums, claims, expenses and then it discounts it all back on your balance sheet in the form of a reserve. Okay. So that includes your premiums and that's just how it works from a life company perspective. Now what we include from

from a rate increase perspective we would deem to be prudent like I said we take the increases that we've gotten approved already that haven't yet kicked in or come through as actual premium that we've filed but have not yet been approved or that we have a current approved program but has not gone through the filing process yet.

The sum of what is in our reserves pursuant to rate increases is $265 million so that's the balance that is outstanding. Last year that balance was $230 million baked into our reserves okay. So what basically I'm saying with that $318 million is what was the change you had some of the rate increases actually earned in and then you have your updated assumptions.

The bulk of that change that $318 million is purely based on last year's estimates of what we thought we could achieve versus what we actually achieved that is we outperformed, we got greater rate than we would have anticipated.

But our approach and our philosophy is to be proven about what we think we can earn and do not go far out in the future and you will see you hear other long-term carriers speak they all have a little bit different perspective but some will go further out into the future and will have a bit more aggressive expectations in terms of what they achieved because we don't know when there is an uncertainty of what the rate environment will be we've always taken a very important approach on that and then so what you're seeing is basically our ability to outperform on those assumptions.

[Joshua Shanker, Bank of America]

And I was looking over not just yours but some other companies rate increase approvals and whatnot and some of them are quite staggering. Are we at the point where you are ambivalent about whether a policyholder takes the offer of the new rate or cancels the power team gets a compensation in return? You'll still see some rate increase where we're getting to the point where you're happy to have those policyholders on because you're getting the rate that you need? How should we think about that?

[Dino Robusto, Chairman and Chief Executive Officer]

The way you should think about that is where we set the rates is basically the weight that we put out is actuarial equivalent to what options we would give them on benefit reductions. So that if someone says I want to reduce my inflation, I don't want to use my daily benefit then doing so versus accepting the rate is essentially equivalent. Now what we've seen and we can see that –

[Joshua Shanker, Bank of America]

Canceling equivalent as well?

[Dino Robusto, Chairman and Chief Executive Officer]

Well, canceling they're basically giving up all of their benefits. So canceling they're basically forgoing what they would have paid in premiums over the years. So I wouldn't look at that the same.

[Joshua Shanker, Bank of America]

That's not an option I would use the cash benefit return in exchange foregoing your

benefits?

[Dino Robusto, Chairman and Chief Executive Officer]

These policies do not have cash value.

[Joshua Shanker, Bank of America]

Okay.

[Dino Robusto, Chairman and Chief Executive Officer]

So there is not on the render value.

[Joshua Shanker, Bank of America]

Some of them did have that okay and one last question, can you partially how much COVID mortality, there is in the persistency benefit you had in the quarter?

[Dino Robusto, Chairman and Chief Executive Officer]

You mean current operations as opposed to in our reserve use?

[Joshua Shanker, Bank of America]

There was I think $150 million in persistency benefit it was mortality related I assume some of that is COVID mortality.

[Dino Robusto, Chairman and Chief Executive Officer]

In our current operations that is the operating result we have $30 million, there is some mortality benefit which you should think of as what came through the results would be kind of more of more permanent impacts of the business that is that we had a lower level of paid claims and really more severity and as well you would have some mortality coming through there both in our what we call healthy lives as well as our claimed population. And what we are holding and being more cautious about is more of the claim frequency component.

[Joshua Shanker, Bank of America]

Okay. well thank you for all the detailed answers. I appreciate it.

[Dino Robusto, Chairman and Chief Executive Officer]

You're welcome.

[Operator]

And up next we'll hear from Gary Ransom with Dowling & Partners. Please go ahead.

[Gary Ransom, Dowling & Partners]

Yes. Good morning. I wanted to ask a little bit about expenses as well. I'd like to hear your thoughts on how the COVID experience might cause permanent changes in expense levels and I'm thinking maybe there is some rejiggering of real estate and yes travel and entertainment maybe some processes work just as well with people at home and I wanted to ask the question is how do you make the best of what you might have learned over the past seven months? Is there some changes you can make?

[Dino Robusto, Chairman and Chief Executive Officer]

I'll start Al and then you can you can jump in. I think maybe starting a little bit with the second part Gary. There are things that we are clearly learning in the process and the ability for us to work in this remote environment does generate an ability for us to say well going forward I think there is probably going to be less overall travel and expenses. You will continue to do that.

We have branch operations. We'll go with them to those locations. We will obviously meet with our agents and brokers across all of those locations but our agents and brokers are also valuing the calls that we make in a virtual environment. Our clients are also everyone is generating some efficiency gains from that process. So I think there will be some potential benefit.

Now I want to be a little bit careful just on the point that as Al had mentioned that travel expenses not a large component of our numerator can easily get consumed by our decisions that we continue to make on talent and in particular analytics and technology but there are some definitive positives that have been generated from a process standpoint a work standpoint that we anticipate from the talent standpoint as you can secure talent from a remote environment and find them work effectively.

Of course we're all looking forward to getting for a large extent getting back in offices but there are clearly some benefits. I don't want to suggest that that has a big impact on the numerator at this particular juncture because travel and expenses a little bit less of an issue for all of the other components but nevertheless as I'll point it out because of the earned premium growth that's going to continue going into 2021. It'll continue to have a benefit.

[Gary Ransom, Dowling & Partners]

So I guess I was trying to fare it out if there was a way to reduce expenses but it sounds like this is really more part and parcel of your keeping expense dollars flat and just letting the premium grow. Is that fair?

[Dino Robusto, Chairman and Chief Executive Officer]

Yes. I think that's a that's a fair way where we stand today. We're always to keep it flat as you make investments in all the other areas you are having to gain operational efficiencies in other areas and I'm sure the COVID related circumstance will also provide some operational efficiencies. I just wanted to put it in context as not being a big driver of our numerator within underwriting expenses Gary.

[Gary Ransom, Dowling & Partners]

All right. Thank you and my other question was on terms and conditions. So shifting gears a little bit and how you've been tightening those either in international or in segments that need it here. You've had experience with past cycles so you might have a view of how that terms and conditions change contributes to the overall improvement and how the timing might flow through? I'm just trying to get a sense of how big of an increment on top of the rates might be coming from the terms and conditions changes?

[Dino Robusto, Chairman and Chief Executive Officer]

Yes. So it's clear that as this market continues to harden you get a lot of benefits within a construct of terms and conditions beyond the pricing. You get policy terms. They get a lot more restrictive. You get better deductibles. The exclusions that you can add in certain components of exposure that have gotten expanded in a softer market. Clearly this is an opportunity to take advantage of these changes in terms and conditions and we're clearly -- clearly doing that and I do think the way that I think about it having seen the 85, the 86 hard mark at 87 and then right after 2001 is that the terms and conditions tend to persist very beyond when the rates, the rate increases start to subside.

So the rates moderate first the terms and conditions persist a little bit longer and then as you get deeper into a softer cycle you get the pressure on terms and conditions. So we are clearly taking advantage of the ability to do that in all areas. In particular in areas we've been re-underwriting like our healthcare portfolio in the United States. Some of our large property clearly some of the property from an international standpoint and this is going to serve us well beyond even when rates start to moderate again which in and of itself is going to be a little bit of a ways out there.

[Gary Ransom, Dowling & Partners]

So do you think we're already seeing a meaningful benefit from terms and conditions changes?

[Dino Robusto, Chairman and Chief Executive Officer]

I mean I would say to you that our re-underwriting efforts in the aggregate are clearly providing a benefit, a good example Gary that I would use is the international calendar year combined ratio which was under a hundred in the third quarter notwithstanding the catastrophes in the United States and I point that out only because in the past prior to our international re-underwriting we would evidence considerable catastrophe activity emanating out of our London operation on U.S. catastrophes and we clearly saw a benefit in this quarter in the last 18 months has gone a really, has made has made a big impact.

So I put it within the broader umbrella of the underwriting initiative where you can already start to see it. I think you see it also in areas like healthcare where we've been able to get considerable deductibles on our professional liability; something that you have not seen before. So those are the part of the broader re-underwriting that we've been focused on for a while. Yes, I do think it's having a meaningful impact.

[Gary Ransom, Dowling & Partners]

Thank you for all your thoughts Dino. I appreciate it.

[Dino Robusto, Chairman and Chief Executive Officer]

Yes, you're welcome.

[Operator]

And up next we'll hear from Meyer Shields with KBW. Please go ahead.

[Meyer Shields, KBW]

Thanks. Good morning. I guess it's a question for Al. The fixed income portfolio within P&C seems to be risen, I don't know somewhat abruptly from the second quarter to the third quarter. I was hoping you can talk to what's driving that?

[Al Miralles, Chief Financial Officer]

Sure Meyer and you mean the value of the portfolio?

[Meyer Shields, KBW]

No, the portfolio duration.

[Al Miralles, Chief Financial Officer]

Duration. Yes correct. Yes, the duration is up that is not a function of any changes in the portfolio. What you're seeing there Meyer is with our current low rate environment rate staying low a lot of the modeling companies basically recalibrated their scenario modeling to reflect that rates could go lower prior to more recently they had floors in that would say rates aren't going to go any lower than this level they basically reduced those floors and now have the potential that you could drop to zero and so basically with that sensitivity now into the duration modeling with lower rates, lower -- the potential of lower rates and lower coupons the durations are higher but that has nothing to do with us changing anything in the portfolio.

[Meyer Shields, KBW]

Okay. So there is no incremental risk or anything like that.?

[Dino Robusto, Chairman and Chief Executive Officer]

Correct.

[Al Miralles, Chief Financial Officer]

Correct. We would essentially would have been a flat quarter-over-quarter in duration but for that modeling change.

[Meyer Shields, KBW]

Okay. Thank you. Within specialty I guess I was hoping you could quantify the offsetting

reserve development patterns from surety and healthcare?

[Dino Robusto, Chairman and Chief Executive Officer]

Okay. I'm not sure I understood that all. Can you just repeat that? Do you mind?

[Meyer Shields, KBW]

Yes. No mind at all. So Al talks about offsetting if I understood correctly offsetting

reserve developments within a specialty segment where I think boiled down you have releases within surety and some charges within medical or with or healthcare those would be you could quantify that?

[Dino Robusto, Chairman and Chief Executive Officer]

Al do you want to jump in there?

[Al Miralles, Chief Financial Officer]

Sure. Meyer you're going to see that obviously as the queue comes out, so you have about $40 million of benefit from the shortly business and that's really a continuation of the exceptional profitability we see in that business and then healthcare, some adverse development really driven by some large loss activity and again kind of a bit of the kind of the trend that we've been seeing and obviously we would expect that will dissipate as we conclude the re-underwriting of that book.

[Meyer Shields, KBW]

Okay. That's helpful and then just finally on reserves but within commercial, the last few quarters of that or maybe more than few have had favorable workers compensation reserve development. That's something you could talk through how that played out in the third quarter?

[Dino Robusto, Chairman and Chief Executive Officer]

Al the favorable and on work comp do you have those numbers?

[Al Miralles, Chief Financial Officer]

Yes. So and work comp again you've hey you've got a couple puts and takes on

commercial. On workers comp you're going to see favorable development there really reflective of continuation of favorable medical trends that we've been experiencing.

[Meyer Shields, KBW]

Okay. Thank you very much. I appreciate.

[Operator]

And up next we'll hear from Ron Bobman with Capital Returns. Please go ahead.

[Ron Bobman, Capital Returns]

Hi good morning. Dino, you have a specialty in the healthcare area and I'm wondering if you might give us a little bit more sort of color as to what's going on in the various sort of sub segments sort of loss activity or claims activity underwriting sort of the underwriting environment sort of some more info would be interesting. Please.

[Dino Robusto, Chairman and Chief Executive Officer]

Okay. And just to make sure, I got all of that related to healthcare sub segments related to the COVID or just in general?

[Ron Bobman, Capital Returns]

Yes. Really I guess really the COVID impact on the various segments whether it's doctors, nursing facilities, hospitals, other specialties obviously it's got to be create a lot of upheaval and challenges and be interesting to hear about what you're seeing, what you're learning. Thanks.

[Dino Robusto, Chairman and Chief Executive Officer]

Yes. So the healthcare as we had indicated when we put up our ultimate loss reserve we had indicated that a good portion of or the larger portion of the ultimate loss Rob was indeed medical malpractice and in particular aging services. And now what we did at the time to try to set an ultimate since we didn't have actual much claim activity we took a look at what came in from a claim notice standpoint and although that was relatively limited we then also just took some of the public information and looked at the number of decks within aging services facilities that we insure and what we did this took an estimate of what percentage overtime might turn in to claims.

And then what we did was in the third quarter as I indicated in my prepare remarks not much changed. We've got even fewer additional claims on the healthcare aging services side than we did in the second quarter. So as I had indicated it was possible that when we put up that ultimate it might end up subsuming activity that we see in the third quarter which is essentially what it has but again I just want to caution, we indicated this is going to be slow moving. These things will take some time. So notwithstanding a relatively limited a plain notice activity at this juncture, I think we feel that the ultimate we did put up of which again the larger portion was medical malpractices is it's still appropriate. Does that answer your question?

[Ron Bobman, Capital Returns]

Yes. And to be obviously know, how do you handle renewals? You obviously have a lot of accounts, I presume with like light claim count maybe no claim count but you do face renewals come due and what's the underwriting approach to writing those would be very interesting. Thanks.

[Dino Robusto, Chairman and Chief Executive Officer]

Yes. Sure. And as you know we had embarked early on and I think can comfortably say we led the market in the turn on healthcare because we are a major player and we are respected we started to get rate increases and have had double digit rate increases for multiple years now and what we have said is we're going to get or achieve the terms and conditions and the rate increases we need or we're going to let it go and what you saw over the course of the last several quarters was the willingness to drop the retention ratio and we have in particular on aging services.

It had dropped considerably below the overall retention ratios we drive at CNA but that was fine. We decided we were going to do that. Now we're getting substantial rate increases going into the third quarter. We had aging services alone was up 56% in rate increases about 13 points higher than it was.

In the second quarter if you take all of healthcare combined about 32 versus 28 in the second quarter and so we continue to drive this in the right direction. What is particularly comforting to us is over the course of the last couple of quarters maybe as I say that proverbial straw that broke the camel's back was COVID you're seeing other players really take follow our lead and so we actually have been able to generate some substantial rate increases while actually increasing our retention; the implication simply being that others are following suit.

So yes it's been substantial and what we and our position remains the same if we can't get the terms and conditions we deem appropriate and after 20 plus years of experience we think we know what it is, what they should be then we are prepared to walk away in the sub segments that have been problematic and that have had a higher longer loss constraint. Does that give you the color you needed?

[Ron Bobman, Capital Returns]

Yes. It's very helpful and I assume those rates that you mentioned which are, they're significant that's separate and apart from the benefits of terms and condition changes I presume.

[Dino Robusto, Chairman and Chief Executive Officer]

Correct. Because you get deductibles, you get kind of policy language migration, although the vast majority of claims made of continuing to move that and so that's over and above and quite frankly in our opinion needed.

[Ron Bobman, Capital Returns]

Okay. Thanks a lot. That's helpful. Interesting. Good luck. Hope it continues.

[Operator]

And there are no further questions in queue. I'll turn the call back over to CEO Dino Robusto for additional or closing remarks.

[Dino Robusto, Chairman and Chief Executive Officer]

Okay. Thank you very much and we look forward to chatting with you next quarter. Thank you.

[Operator]

And ladies and gentlemen this concludes today's call. We thank you for your participation and you may now disconnect.