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CNA Financial Corporation (NYSE:CNA)
Q3 2018 Earnings Conference Call
Nov. 5, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to CNA's discussion of its 2018 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 line for questions.

Today's call may include forward-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 the earnings release and is in CNA's most recent 10K on file with the SEC. In addition, the forward-looking statements speak only as of today, Monday, November 5, 2018. CNA expressively 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. With that, I'll turn the call over to CNA's Chairman and CEO, Dino Robusto. Please go ahead, sir.

Dino Robusto -- Chairman and CEO

Good morning, everyone. I'm pleased to share our third quarter results with you today, which reflect our ongoing underwriting improvements.

Core income for the quarter was 317 million, or $1.17 per share, our best result in eight years, and our core return on equity was 10.5%. This brings our year-to-date core earnings per share to $3.19 and year-to-date's core return on equity to 9.5%. We had another good combined ratio, which was 92.4% for the quarter.

Over the past seven quarters, I have described the goal of growing underwriting profits by institutionalizing an enduring expert underwriting culture here at CNA, which would enable CNA to be a top-quartile performer on a sustained basis. Key ingredients I have consistently updated you on are stronger talent in governance, building feedback loops that institutionalize our collective expertise across the value chain, dramatically elevating our engagement with agents and brokers, making additional investments in technology and analytics, and very importantly doing all of this while embedding a disciplined expense management culture throughout the company.

Our journey toward this goal is progressing well. Our expense ratio has improved almost two points in the last two years, even as we continue to invest in talent and technology analytics. Our underlying loss ratio was 61.1% for the third quarter and 60.8% for the first nine months. Although we view this loss ratio as top quartile, our objective is to sustain strong performance over the long term by focusing on consistently improving areas that can generate better results. Indeed, our total P&C underlying loss ratio of 61.1% includes an underlying loss ratio of 66.3% for international.

I mentioned last quarter that we have been reunderwriting the portfolio of our Lloyd's operation, and we are exiting underperforming segments to focus our efforts on writing more of our new business in our long-standing profitable target markets, such as healthcare and professional E&O. Although our actions will decrease our writings in our Lloyd's operation, we will, of course, continue to work to grow our international business in areas with track records of profitability within Canada, Europe, and the UK. However, the growth in other areas of international will likely not upset the runoff of the unprofitable business in our Lloyd's Syndicate in the near term.

P&C's gross written premium, excluding our large warranty captive, grew 3% in the third quarter, but as a result of additional reinsurance purchased that reduced potential volatility in some property areas and in some smaller segments that we are targeting to grow, our net written premium was down 1% in the quarter. Notwithstanding the lower net written premium in the third quarter, for the full nine months of 2018, our net written premium growth is a healthy 5%, a function of strong execution across all of our production metrics.

Specifically in the quarter, rate for P&C operations was plus 2%, up one point from the second quarter. It was driven by commercial, which generated two points of rate compared with plus one in the second quarter as property, liability, and worker's comp all improved one point in the quarter. Our commercial rate, excluding work comp for the quarter, was plus 3%. The rate increases in specialty and international were similar to the second quarter result of 2% and 3%, respectively. Written renewal premium change in the quarter for P&C was plus 4% and plus 3% on an earned basis, which slightly exceeds our long-run loss cost trends.

Retention was 82% for the third quarter, down a point from the second quarter, which is primarily a function of the reunderwriting in our Lloyd's operation, whereas retention for our specialty and commercial US operations were each at 84%. No business in the quarter was up 8% from a year ago, as our disciplined efforts to strengthen relationships with our best brokers and agents continue to pay benefits.

For the third quarter, our net pre-tax catastrophe losses were modest at 46 million, approximately 2.5 points on a loss ratio, with Hurricane Florence losses at 35 million.

Before I hand it over to James, I want to comment on long-term care, which we will be devoting a good part of our prepared remarks today. You will have seen in the materials that we released this morning that we completed our annual gross premium valuation analysis, as well as our long-term claim reserve review in the third quarter this year. Given the increased investor focus on long-term in 2018, we thought it was prudent to address our position now rather than waiting until the fourth quarter. Going forward, you should expect these annual studies to be completed in the third quarter.

James will provide more detail on the results of the GPV analysis, and I believe that the outcome, as well as the additional disclosure provided, reflects the conservativism in our reserving assumptions, as well as the active management of book, which continues to give us confidence in our reserve position. And finally, we are pleased to announce our regular quarterly dividend of 35 cents per share.

And with that, here is James.

James Anderson -- Chief Financial Officer

Good morning, everyone. Our property and casualty operations produced core income of 305 million, up 83% from the prior year quarter. Pretax underwriting profit of 100 million was consistent with recent quarters, driven by a steady underlying combined ratio in 60 million of favorable loss reserve development. Our expense ratio improved to 33.3% and is in line with our current run rate. Moving to each of our P&C segments, specialty's combined ratio was 87% for the quarter, including 7.7 points of favorable development driven by surety, as well as management liability in financial institutions.

You recall that beginning in the first quarter of this year, we began reviewing our surety reserves more frequently than once per year during the third quarter. As a result, our prior period development in specialty is spread throughout 2018 rather than being concentrated in the third quarter. Year-to-date, specialty has generated a little more than six points of favorable reserve development versus 2017's year-to-date of seven points. Specialty's underlying combined ratio in the third quarter was 92.3. Yesterday, specialty's overall combined ratio is 87.1.

Our commercial segment's combined ratio in the third quarter was 97.4%. This result included three points of catastrophe losses, a good result in a quarter that historically has significantly CAT activity. Commercial's third quarter underlying combined ratio was 94.3%. Year-to-date, commercial's all-in combined ratio is 97%.

Our international segment generated a combined ratio of 103.9% in the third quarter, driven by property losses in Hardy. International's year-to-date combined ratio is 101.8%.

Our life and group segment produced $32 million of income this quarter. This marks 11 straight quarters of stable results since unlocking that occurred in the fourth quarter of 2015. Long-term care morbidity experience continues to be consistent with our reserve assumption. Persistency was also favorable. The third quarter results also include the impact of our annual claim reserve review, a review that historically has been completed in the fourth quarter. The results of the claim review indicated favorable morbidity, specifically severity outcomes continuing to be better than expected. The outcome of the claim review added $24 million after tax to the result.

Now, as Dino indicated, I'm gonna spend a few minutes providing additional detail about our long-term care business and will be referencing slides 13 through 18 in our earnings presentation. But first, a few fundamentals regarding the operations. CNA stopped writing new individual policies in 2003 and stopped accepting new groups around the same time. As of the end of the quarter, the book had approximately 161,000 individual active life's and 164,000 group active life's. This is a mature book that has seen over 100,000 claims, a significant number compared with today's number of active life's, providing us with what we believe is very credible claim experience.

Our gap reserves of 11.8 billion have 182 million of embedded margin, a level down slightly from last year, which I'll discuss in a moment, while our statutory reserves are 13.7 billion and include nearly $2 billion of margin. This statutory margin provides significant cushion to our capital positions. We have very actively managed this business, particularly over the last five years, where we have significantly increased our actuarial resources, developed in-depth analytics, actively pursued rate increases, and invested heavily in our claim management and related processes. This proactive approach across all fundamental aspects of the business provides what we believe is a firm basis for the confidence we have in our reserve position, recognizing that we must remain vigilant regarding changes in trends.

On slide 14 of our earnings presentation, you can see the individual block is shrinking, down 15% since 2015, through normal mortality, as well as some policyholders choosing to lapse their policies rather than pay for rate increases. The active life's in our group block have declined 29% since the end of 2015, coinciding with when we stopped allowing groups to add new members and with many policyholders subsequently choosing to convert to a limited-benefit policy. In other words, lapsing their policy, but still retaining a small benefit as a result of subsequent rate increases and other factors.

Moving to our recent claim trends at the bottom part of slide 14, you will note open claim counts in our individual block have been fairly steady in recent years. Because the average age of individual block is approaching the average age of a new claimant, we believe open claims will reach peak levels within the next year or so, another indication of the maturity of the block. As I indicated earlier, our group block has a lower average age, and therefore we expect group claims to continue to increase as the block matures. It is important to remember that while these policies were sold on a group basis, the policyholders themselves are individuals, with claims that we expect to behave the way our individual block experience has. So, our expansive analytics and insights into the 100,000 individual claims will inform claims expectations on our group block, as well.

Slide 15 shows the key characteristics of our long-term care blocks. You'll note that the average age of the individual long-term care block is 79 years old, and the average age of the new claimant is 84, again indicating that this block, which accounts for 90% of our reserves, is very mature. While the group block is less mature with an average age of only 64, it also has a lower average level of benefits. For example, there are very few lifetime benefit policies, and only 15% have inflation protection.

On slide 16 and 17, you can see results of our gross premium valuation analysis, as well as key GPV reserving assumptions, which should give you a better sense of the reserving position. Beginning with morbidity improvement, we now have no future morbidity improvement embedded in our best estimate assumptions. Prior to this year, we had been assuming 1% improvement annually until 2021. While we have seen favorable morbidity in recent years, future uncertainty justifies a more prudent approach, and thus we removed the remaining improvement from our best estimate. This change alone reduced our gap margin by 258 million, which, in addition to other changes in morbidity assumptions based on experience in 2018, resulted in an overall $213 million reduction in margin for morbidity.

Within the category of persistency, we also changed our mortality assumption in a more conservative direction this year. In prior years, we had aligned morbidity and mortality improvement through 2021, after which time we assumed no improvement. This year, in addition to removing morbidity improvement, we extended mortality improvement out to 2024, which reduced gap margin by 86 million. We believe our revised assumptions on morbidity and persistency reflect a measured prudent approach that appropriately reflects the relative uncertainty of such assumptions.

The discount rate used in our reserves did not change much overall, staying just under 6% on a tax equivalent basis, based on a nominal yield of just under 5.7%. But it improved in near-term years based on higher treasury yields in 2018 and a shift in our new money allocation away from tax-exempt municipals toward investment-grade corporate bonds post tax reform. In the out years, we reduced our 10-year treasury yield assumption to 425 in 2025, a level we then hold into the future. The combination of these discount rate changes added 17 million to the gap margin.

Finally, regarding future premium rate increases, as we have previously discussed, we only include rate increases that have either been filed and not yet approved or that we plan to file as part of a current rate increase program. In 2018, we have outperformed our initial rate increase assumptions and are continuing to file for additional rate increases, which combine to add $178 million to our gap margin. Future unapproved rate increases now account for a total of 200 million in our best estimate assumptions. But while we limit the amount of unapproved rating increases in our reserves, make no mistake, we intend to seek rate increases over time, if and when they are justified.

In addition to rate increases, we have given policyholders options to reduce their benefits in lieu of a rate increase, which, in the past, 40% of policyholders have chosen to do when given the option, or even to convert to a limited-benefit policy, which allows them to stop paying premium and keep a modest amount of benefit, an option that many group policyholders have elected in recent years. Both of these policyholder elections meaningfully reduce our exposure. So, overall, after revising our morbidity and mortality assumptions and gaining benefit from achieving higher rate increases than anticipated, the gap margin decreased from 246 million to 182 million.

To conclude on long-term care, our block is mature, well managed, and we continue to have confidence in our long-term care reserves.

Our corporate segment produced a core loss of 20 million in the third quarter. Pretax net investment income was 487 million in the third quarter, compared with 509 million in the prior year quarter. The changes were driven by limited partnership portfolio which produced 23 million of pre-tax income, a 0.9% return, compared with 51 million last year.

Pretax income from our fixed-income security portfolio was 459 million this quarter, which was essentially flat with the prior year quarter. The pre-tax effective yield on the fixed-income portfolio was 4.7% in the quarter, consistent with prior periods. 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 long-duration life and group liabilities was 8.2 years at quarter end.

Our balance sheet continues to be extremely strong. At September 30, 2018, shareholder's equity was 11.5 billion, or $42.41 per share. And shareholder's equity, excluding accumulated other comprehensive income, was 12.3 billion, or $45.20 per share, an increase of 7% from year end 2017 when adjusted for $2.95 of dividend per share paid so far this year. Our investment portfolio's net unrealized gain was 1.6 billion at quarter end. In the third quarter, operating cash flow was 514 million. We continue to maintain a very conservative capital structure. All of our capital adequacy and credit metrics are well above their internal targets and current ratings.

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 briefly leave you with some summary thoughts on our performance. Core income for the third quarter was 317 million, our best result in eight years. We had pre-tax underlying underwriting income of 92 million, giving us 282 million for the first nine months of the year, up 33% over the same period last year.

Our underlying P&C loss ratio was 61.1% for the quarter and 60.8% year-to-date. Total P&C written renewal premium change was plus 4% for the quarter, with the rate up one point from the second quarter at plus 2%. Long-term care produced 32 million of core income for the third quarter, driven by the favorable impact from our annual long-term care claim reserve review. We completed our annual GPV for long-term care, and there is no unlocking, even as we add a conservativism to our morbidity and mortality reserving assumptions.

Our 2018 third quarter core return on equity is 10.5%, and net income return on equity is 11.7%, and we announced our regular quarterly dividend of 35 cents per share.

With that, we'll be glad to take your questions.

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is *1 if you'd like to ask a question.

And we'll take our first question from Josh Shanker with Deutsche Bank.

Josh Shanker -- Deutsche Bank -- Analyst

Good morning, everybody.

Dino Robusto -- Chairman and CEO

Morning, Josh.

Josh Shanker -- Deutsche Bank -- Analyst

My question, of course, long-term care. Just trying to understand a frame of reference for understanding, maybe in layman's terms, the backward-looking morbidity improvement that was posted in 4Q '17 and the cancellation of the assumption of morbidity improvement going forward in this quarter, can you give a frame of reference about how powerful those two things were? Obviously, one had about five times as much impact on your reserves -- or I should say five times as much impact on changing the reserve amount than this recent charge. So, I'm trying understand -- is there a percentage or a number of lives or a duration of claim incident that we can understand in terms of that?

James Anderson -- Chief Financial Officer

Yes, Josh. This is James. Let me try to give you a little bit of perspective there. So, if you think about the morbidity improvement component that we took out this quarter, it was really three years' worth of 1% improvement that we expected to happen. So, it's a very kind of narrow slice of improvement that was left in that assumption. Versus what we did at the end of 2017, was we were reevaluating our overall morbidity assumptions coming out of the 2015 unlocking.

And if you recall last quarter, I talked a little bit about the fact that what we were seeing 2016 and 2017 in morbidity was much better than what we had assumed at the end of 2015. And so, we reevaluated and readjusted the overall morbidity assumption at the end of last year, and that effect will persist for a long period of time versus the change we made this quarter, which was to take it out for the next three years.

Josh Shanker -- Deutsche Bank -- Analyst

Well, if you've seen a steady improvement from the '14-'15 --

James Anderson -- Chief Financial Officer

Did that help?

Josh Shanker -- Deutsche Bank -- Analyst

Yeah. Just a few follow-ups...If you see an improvement from '14 to '15 to last year, what motivated you to take out the improvement going forward? It seems like you see a trend in there. Why would you change that assumption going forward?

James Anderson -- Chief Financial Officer

I guess I would split it out a little bit. So, the morbidity improvement assumption I think of as kind of a baseline assumption that we put in place at the end of 2012, and we were assuming, for the following 10 years, that we were gonna see this underlying improvement in morbidity. Versus what we saw all-in in morbidity at end of 2017 was a stark difference from what we had assumed in 2015. So, think about morbidity improvement as a small baseline trend that we were assuming versus all of the other factors that go into morbidity that were being adjusted at the end of 2017.

Josh Shanker -- Deutsche Bank -- Analyst

All right. I'll try and digest that. On the P&C side, between specialty and commercial, you're approaching or at a 2% renewal rate pricing comparison to the year ago period. How does that compare with what you think the loss cost trends are? And I know people sometimes say that exposure equals rate or whatnot. Are we losing margin in writing business today?

Dino Robusto -- Chairman and CEO

Okay. So, Josh. Dino. Let me give you a couple of [audio cuts out] ongoing loss cost trends about 2.5% for our P&C portfolio overall. Within it, we have about 2.5% trend on medical inflation. Largely benign cost of goods inflation first party and auto, stable at about 2% to 3%. In terms of legal trends, we've talked about in the past we've seen some higher verdicts, healthcare E&O, hospital and aging services, as well as some casualty lines.

So, the earned renewal premium change, which is about 3%, is slightly higher than cost trends. So, that's good, but obviously you need to have that continue and persist. I think it's safe to assume it's not going to persist indefinitely. The underwritings are keenly aware of the dynamics. So, we have to continue to push for rate across our portfolio, not only to mitigate what might be margin compression if we can't sustain it or of the loss cost trends that have been relatively benign pick up. But also, it's to a certain extent a catch-up, right? If you think about the 10 to 12 quarters starting in 2015, we had negative rates in each of those quarters and loss cost trends were positive. So, I think in general I'd say there's still an awareness in the marketplace across the distribution network, across insureds. That rate is needed by the insurance companies, and that's what we're gonna continue to do. At this particular juncture, if you use the current renewal premium change, as I said, slightly above, and we'll see how that plays out. We'll just keep pushing.

Josh Shanker -- Deutsche Bank -- Analyst

Okay. Well, thank you for all the clarity.

Operator

Thank you. We'll now move on to our next question from Bob Glasspiegel at Janney Montgomery Scott.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Good morning, CNA. Question on what sort of outside actuarial review or sign-off did you have this quarter on the long-term care?

James Anderson -- Chief Financial Officer

Bob, we did not do a third-party review this quarter. The last one we did was at year end of last year.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Okay. How -- what's the regular pace that you do the outside actuarial reviews? Remind me?

James Anderson -- Chief Financial Officer

There's really not a regular pace. We do it basically when we feel like we need a second opinion. So, we have done it, as I mentioned, at end of last year. We've probably done it twice in the two or three years before that. So, it's not quite annually, but it's probably more than every other year.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

To what extent do you use outside actuaries to work through? I mean, a lot of your competitors are doing the same process, and maybe there's more industry numbers to look than just your own company, as well, to augment it.

James Anderson -- Chief Financial Officer

I'm sorry, your question was? Can you repeat the question, Bob?

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Do you have any outside actuaries advising you at all on this I guess is the question?

James Anderson -- Chief Financial Officer

We do, but I would say it's not on a regular basis. It's when we feel like we want a second opinion on the assumptions that we're using. So, like I said, it's more frequently than every other year, but not annually.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Got it. My thought process was that a lot of your competitors are looking at this, too, and you have a lot of data, obviously, to look at. Your own data is the most useful for sure, but I was curious the extent to which your gauging how your assumptions compare with your competitors. As you know, it's hard to get at this improving versus baseline, because you need to know what the baseline and the original assumptions are. So, it's really hard to get -- for us from the outside, to get a sense of how your book is performing relative to others. So, I was just curious how you try to do that?

James Anderson -- Chief Financial Officer

I think that's a fair comment, Bob. I guess what I would say with our particular book, given that we unlocked our GAAP assumptions in 2015, I think our periodic or quarterly results are going to be the easiest way for you to see how we're performing against our expectations or assumptions that were set in 2015. So, we continue to talk about the fact that we've had 11 quarters of stable results. Basically what you should take from that is that means our actuals are performing at expectations.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

I get it. It's encouraging that you're encouraged by the trends. The extent to which we can see how your trends are consistent with how others are interpreting it is the big challenge to us.

Switching gears here, on a little bit of a meltdown in Q4 in some of the macro investment vehicles and Michael, anything that you could comment on what you're seeing to date in Q4? Have you survived those two shocks?

James Anderson -- Chief Financial Officer

You know, look, with regard to Michael, we don't expect that to be a major catastrophe for us. We do expect that it will be larger than Florence. So, that's a little bit what we're seeing early on here for Michael.

In terms of investment performance, clearly October was not a great month for the stock market. We would expect that that's going to have an impact on our LP portfolio, but there's still two more months remaining in the investment markets that we're gonna have to see play out. So, it's certainly too early to see how Q4 may look from an investment standpoint.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Last question. Remind me -- you're not exposed to leverage loans in the partnership portfolio are you? To a material extent?

James Anderson -- Chief Financial Officer

Not to a...The majority of our LP portfolio, 70% of it, is hedge funds, which is primarily equity related. We do have -- the rest is private equity, some of which would be credit related, but not a lot of exposure to leverage loans.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Thank you.

Operator

Thank you. We'll now move on to our next question from Jay Cohen with Bank of America/Merrill Lynch.

Jay Cohen -- Bank of America/Merrill Lynch -- Analyst

Thank you. A couple long-term care. The first is, you obviously describe the book as having favorable characteristics. This review gave you even more confidence. How realistic is it to have some sort of risk transfer here, given the favorability of the book that you describe?

James Anderson -- Chief Financial Officer

Jay, that's a great question. I think that is going to continue to be an evolving story. I think as interest rates continue -- hopefully they continue to increase, we may see more asset manager-like folks trying to find ways to accumulate long-duration assets, which clearly long-term care falls into that category. And so, that risk transfer market, if you will, will likely continue to develop. It's certainly right now at it's -- I would call it at an infancy. We've seen a couple of transactions, but I would not call it a robust market at this point. So, we'll continue to look at it, but most importantly, we're gonna continue to try to manage this book so that, should those opportunities come around, we're gonna be positioned such that we're gonna be the belle of the ball.

Jay Cohen -- Bank of America/Merrill Lynch -- Analyst

Got it. And then secondly, on a stat side, is it fair to say your...Maybe I'll just ask the question. What are the assumptions you have for things like morbidity and mortality in your stat reserves versus your gap reserves?

James Anderson -- Chief Financial Officer

So, our state reserves have never unlocked. So, they include no improvements for morbidity or mortality.

Jay Cohen -- Bank of America/Merrill Lynch -- Analyst

Got it. Thus the difference in the cushion there, I assume?

James Anderson -- Chief Financial Officer

I think that's part of the difference, but really the biggest difference is the discount rate, Jay. So, on a statutory basis, we don't set our own discount rates. The discount rates are regulatory prescribed. And the discount rate is about 200 basis points lower on the stat side that it is on the GAAP side, even though it's the same asset base and they're producing the same income.

Jay Cohen -- Bank of America/Merrill Lynch -- Analyst

Got it. That's helpful. Thank you.

James Anderson -- Chief Financial Officer

Sure.

Operator

Thank you. We'll take our next question from Meyer Shields with KBW.

Meyer Shields -- KBW -- Analyst

Thanks. One quick one on long-term care because I just want to make sure I understand it. So, is it safe to assume that your current morbidity expectation for 2019 is the same as 2018, but it's lower than it was before the year end '17 review?

James Anderson -- Chief Financial Officer

I think when you look at it from a morbidity improvement standpoint, Meyer, that's exactly right.

Meyer Shields -- KBW -- Analyst

Okay, thanks. I was just trying to balance the two things. So, two really small questions. One, the acquisition expense ratio has been climbing a little bit in specialty and commercial. Is that noise, or is there any underlying increase in acquisition costs?

James Anderson -- Chief Financial Officer

I mean, it's a little bit of both. That is going to move around a bit. We do have some -- I would say a little bit of noise this particular quarter, but partly we do pay some contingence, and it's based around our performance. So, as our loss ratios have improved, we've paid out a little bit more to our agents and brokers.

Meyer Shields -- KBW -- Analyst

Okay. Is that improvement evaluated on a quarterly basis?

James Anderson -- Chief Financial Officer

It is, yeah.

Meyer Shields -- KBW -- Analyst

Okay. And then, Dino, I was hoping you'd talk a little bit about what you're actually seeing in terms of, I guess, worker's compensation and general liability where we're hearing some chatter about emerging differences in loss trend compared to what we've seen over the last couple of years?

Dino Robusto -- Chairman and CEO

Yeah, fair question. So, I make these observations about work comp, but we've been seeing now negative sort of mid-single-digit frequency trends over the past several quarters, which is less negative than a year ago. Now, while we've seen some pockets where frequency has increased, the negative frequency trend overall is still favorable to our long-run trend assumptions, because we did not lower our long-run frequency assumptions despite the actual frequency consistently more negative than our assumption. Severity, which shows a little bit more fluctuation quarter to quarter than frequency, as you'd expect, has over the past 18 to 24 months been slightly below our long-run severity assumption. So, work comp continues to perform o better than expected, which is giving us that headwind in pricing. Our rate in the third quarter was minus 3%.

But look, I mean at the end of the day, we feel good about where we are with comp. We closely monitor this line of business, and I think we're comfortable with the level of analytics we have to sort of react to changes in severity and frequency early and accordingly. But we're conservative in how react to those things.

You know, the trend we've talked that we were explicit about because we have a meaningful portfolio of healthcare business was that we clearly, for over a year now, have been seeing some larger verdicts that have been impacting hospital and aging services E&O. So, what we've been trying to do is improve our terms and conditions. We have been pushing, and we have been achieving some significant rate increases. We've been raising deductibles. When we haven't been successful in doing that, we've walked away from accounts. We've talked on prior quarters and showed you some of the rate and retention results.

I think today what we'd say, if you were to just take a look at that book, which is really where we've seen the increased trends, we think our actions improve the bottom line. We have a book of solid insurance. But look, it's still not at required returns because of some of these legal trends, these larger verdicts that we're seeing. We're cognizant of that. And so, we're just gonna continue to push for rate and deductibles.

I mean, I think when you look at how it impacts our healthcare portfolio, the good news, to a certain extent for us, is we have a strong market position in healthcare because of the years of experience, and we can swiftly and appropriately, and we're seeing some progress. But look, there's clearly more to do given some of those trends, to your question. That's our view on that.

Meyer Shields -- KBW -- Analyst

Okay, thank you. Thank you very much.

Operator

Thank you. We'll now take our final question from Gary Ransom with Dowling and Partners.

Gary Ransom -- Dowling & Partners -- Analyst

Yes, good morning. I wanted to talk a little bit more about the expense ratio. Maybe you could remind us on where you're trying to get. We've seen some improvement, but I think you're looking for even more. And maybe within that, you can talk a little bit about the technology investments that you mentioned. What's on the table? What's left to be done, or what more are you doing on that front?

Dino Robusto -- Chairman and CEO

Gary, it's Dino. So, a couple of observations. We didn't target a specific expense ratio. It had more to do with -- you know, you have to balance on one hand the efficiencies we're gonna gain and where in particular I felt we needed to continue to make investments in things like technology analytics, but also in the talent that we've talked about.

As I said in the prepared remarks, it's down about two points. Our run rate is sitting at around 33.5. But we still think there's operational efficiencies that can be achieved as we adopt more of technology analytics. And also, just the classic sort of division of labor processes that you can use across your supply chain.

So, I think it'll help the numerator. Or at the very least, Gary, it's gonna keep the numerator stable while we continue to grow the business. In which case the denominator, in turn, will help us out. So, I think it isn't gonna be a straight line down. Things impact the denominator. And we do have to look at those investments.

We talked about on technology, the Atos investment and the use of Atos on the infrastructure, which obviously had some of the heavier costs upfront, and it's gonna continue through the fourth quarter. But at end of the day, it is then gonna probably generate 10 plus million of savings.

In terms of what specifically technology analytics -- it's clear to us. Our recent hire with Michael Costonis for technology analytics, we continue to invest in the people. We continue to invest in...This is just evolving tremendously quickly. So, I just think it...I'll say it today that we're gonna continue to make those investments. I'll say it three months from now. I'll say it three years from now and for however long you'll be asking, because it just continues to evolve.

The question in some of that technology like we talked about Atos is can you find new operating models, consumption models that allow you to upgrade the capabilities and the per unit cost, if you will, of managing a bit of information actually goes down. And some of our applications that we're migrating to the cloud will, over time, confidently bring that unit cost down. But there's clearly investments we have to continue to make, and we're gonna continue to do it.

I think a lot of focus on operational efficiencies and even if we can keep that numerator stable. We have been growing the business. As I said in the prepared remarks, we're up five points net written premium at nine months, and so we anticipate it's gonna continue to improve. And look we'll continue to be transparent and give you our progress reports on the expense ratio in the upcoming quarters.

Gary Ransom -- Dowling & Partners -- Analyst

Do you have any sense where you stand right now if you tried to compare how good your systems and technologies are stacked up against other peers? In the same way you're trying to get to top quartile on performance, I just wondered if you had a sense on where you stand on that?

Dino Robusto -- Chairman and CEO

We hear a lot of companies and carriers talking about their investments that they're making and presuming those are all improving. I would say there is isn't a consultant that you can't approach that deals and works in this industry that doesn't repeat consistently the tremendous legacy-laden platforms. This big infrastructure change with Atos was obviously a big foundational piece at evolving that legacy over time.

So, I suspect what you'd find is, if you take a broad definition of technology and analytics, digital, some people are gonna be more advanced in a certain area for a certain line of business. We might be a little bit better on some of this infrastructure we recently did or maybe some of our pricing analytical models. Some people might be a little bit more advanced on claims. But I think there's clearly enough evidence based on all the consultants working to help the insurance industry, and the interest by the InsureTech firms that there's still a lot of legacy-laden platforms.

So, I don't know. I just think where are we? Where do we have to go? We have to continue to advance. There's just no question about it. But we're highly focused on it, and we spend a lot of time talking to, be it InsureTech firms and other people capable in this area, including several of the very large tech firms, to find out they can help us together, how can we evolve this. And we've got a ways to go. And we'll keep you posted as we make more significant or bring more significant developments to technology and analytics.

Gary Ransom -- Dowling & Partners -- Analyst

Thank you very much for those answers.

Operator

Thank you. That does conclude today's question and answer session. I'd like to turn the conference back over to CNA for any additional or closing remarks.

Dino Robusto -- Chairman and CEO

Thank you very much, and we'll talk to you in a quarter.

Operator

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

Duration: 49 minutes

Call participants:

Dino Robusto -- Chairman and CEO

James Anderson -- Chief Financial Officer

Josh Shanker -- Deutsche Bank -- Analyst

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Jay Cohen -- Bank of America/Merrill Lynch -- Analyst

Meyer Shields -- KBW -- Analyst

Gary Ransom -- Dowling & Partners -- Analyst

More CNA analysis

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