Good morning and welcome to the CNA's discussion of its 2019 fourth quarter financial results. CNA's fourth quarter earnings release presentation and financial supplement were released this morning and are available via its website, www.cna.com. Speaking today will be CNA's Chairman and Chief Executive Officer, Mr. Dino Robusto, and CNA's Chief Financial Officer, Mr. James Anderson. 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 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 in CNA's most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, February the 10th, 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 next week, the call may be accessed on CNA's website. If you are reading a transcript on 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 now turn the call over to CNA's Chairman and CEO, Dino Robusto.
Thank you Marguerite. Good morning, everyone. I'm pleased to share our fourth quarter and full year results with you today, which reflect continued strong underwriting performance, accelerated price increases, and robust growth across our U.S. operations. Core income for the fourth quarter was $265 million, or $0.97 per share, inclusive of a $48 million or $0.18 per share after-tax non-economic charge related to our annual asbestos and environmental pollution reserve review. I'll provide more context to the quarter in a moment, but first, I'll make a few comments on the full-year results. P&C underlying underwriting profit for the full year was up 15% to $362 million, and the underlying combined ratio came down more than half a point to 94.8%. This is the third consecutive year of improvement in the underlying combined ratio.
We achieved 7% gross written premium growth ex captives, which strengthened as the year progressed as we leveraged the improving market conditions. Rate increases for the full year were two and a half times higher than 2018 and increased each quarter. New business was up 8% as rate increases and overall improved terms and conditions led to more high-quality opportunities. Back to the fourth quarter results. The P&C underlying combined ratio was 94.9%, a significant improvement over last year's fourth quarter results and in line with the full-year 2019 results. Strong underlying performance in both commercial and specialty, combined with improved international performance, drove the strong results. The P&C all-in combined ratio for the fourth quarter was 95.6%, which was nearly 10 points better than the fourth quarter of 2018.
It is fair to point out that I had categorized the 2018 fourth quarter result as an outlier, and improvement in the subsequent quarters proved that out. The 2019 fourth quarter result is also a full point better than the full-year results. Catastrophes in the quarter were 2.9 points or $40 million after tax, and our 2019 full-year cat impact of 2.6 points was well below the prior two years, aided by the reunderwriting executed in the international property book. Prior period development in the quarter was a favorable 2.2 points. Our expense ratio in the quarter was 33.7%, about a half point higher than our current run rate, driven by some year-end true-ups. As usual, James will provide more detail on our prior period development and expense management.
Gross written premiums, ex third-party captives, grew 8% in the quarter, while net written premium growth was 5% in the quarter. This growth came primarily from our U.S. segments, which grew 9% on a gross basis and 6% on a net basis. International gross written premium was up 3%, as growth in Canada and Europe, both fueled by strong rate increases, offset the reunderwriting actions in our Lloyd's syndicate. In the fourth quarter, we continued to achieve higher rate increases. Our P&C overall was plus 7%, up one point from the third quarter. It got better as the quarter progressed. For December, rate overall was 8%. Commercial rate in the quarter was + 5%, up one point from the third quarter. Specialty was + 8%, up two points from the last quarter. International rate was + 13%, up three points.
In addition to greater rate achievement, we are effectively leveraging the market environment to strengthen terms and conditions and raise attachment points where needed. For example, in our Aging Services book, we have continued to introduce large deductibles on medical malpractice coverage, a process that began two years ago and is starting to have a positive impact on frequency trends. In Umbrella, we have meaningfully increased our average attachment points, and we continue to reduce our limits exposure, which in the case of Umbrella, were in response to the severity trends we began to see in 2018, and I discussed in detail during our last earnings call. We believe these underwriting changes not only improve our loss exposure similar to the effect of rate increases, but also result in a longer-term positive impact, as it usually takes years before market pressure reemerges to expand policy terms and conditions.
New business in the quarter grew 27%, and we are right where we want to be, in that submissions are up as the transitioning P&C environment pushes more opportunities into the market. As well, we are benefiting from stronger new business pricing, which has been increasing at the same rate as our renewal pricing. Our quote and bind ratios are down slightly in the quarter, which is appropriate, as we only reach for high-quality opportunities within our target segments. We will continue to be similarly opportunistic throughout 2020. Last quarter, I commented in detail on rate and loss cost trends and described the actions we took over the last several years, both in terms of our actuarial picks and our underwriting actions in the two areas experiencing meaningful loss pressure, namely Aging Services medical malpractice, and portions of our Umbrella book, specifically where there are auto exposures.
Based on the reserve reviews we completed in the fourth quarter, we remain comfortable that our current accident year loss ratios and long-run loss cost trend assumptions continue to appropriately account for the loss patterns in our portfolio. Since I remain confident that rate increases will continue running above our loss cost trends throughout 2020, I expect that all else equal, we will see some margin improvement in the latter part of 2020. We started off this year in good shape with respect to pricing momentum, as we achieved an additional point of overall rate increase for the month of January compared with the fourth quarter. With that, I'll now turn it over to James.
Thanks Dino. Good morning everyone. Our property and casualty operations produced core income of $337 million in the fourth quarter and $1.2 billion for the full year. Pre-tax underlying underwriting profit for the fourth quarter was $87 million. For the full year, pre-tax underlying underwriting profit was $362 million, a 15% increase over 2018. Our P&C expense ratio was 33.7% in the fourth quarter and 33.5% for the full year. It's worth noting that our U.S. expense ratio for the full year 2019 was 32.8%. As we head into the new year, we expect our 2020 P&C expense ratio to be at or below 33% as the benefit of premium growth becomes more significant on an earned basis, particularly in the latter half of the year.
Prior period loss development was favorable 2.2 points in the quarter, which reflects the outcomes of the reserve studies completed in the fourth quarter. For the full year, prior period development was favorable 0.7 points, and we remain confident in the strength of our reserve position. Moving to each of our individual P&C business units. Specialty's underlying combined ratio in the fourth quarter was 93.3%, an improvement of one point compared with the fourth quarter of 2018. Specialty's overall combined ratio for the quarter was 88.2%, including 4.9 points of favorable prior period development. This favorable development was primarily in accident years 2017 and prior, driven by professional liability within our Affinity segment. For the year, Specialty's underlying combined ratio was 93%, and the overall combined was 90.2%, including 3.3 points of favorable prior period development.
Specialty's gross written premium, excluding third-party captives, grew 7% in the quarter, with strong rates and new business growth more than offsetting a lower retention level, which was driven by underwriting actions within healthcare. Our Commercial segment's underlying combined ratio was 95.4% in the quarter, which includes an underlying loss ratio of 61.4%, both substantially better than the fourth quarter of 2018. The fourth quarter overall combined ratio for Commercial was 100.6%, including 6.5 points of catastrophe losses, primarily driven by isolated tornado events in Texas and in the Southeast. 1.3 points of favorable prior period development driven by workers' compensation as well as property. Commercial's full year underwriting, excuse me, underlying combined ratio was 95.2%. The overall combined ratio for the year was 100.8%, a 0.3% Improvement to 2018.
Commercial's gross written premium, excluding third-party captives, grew 11% in the quarter, driven by strong new business growth, increasing rates, and stable retention. The underlying combined ratio for our international segment was 97.7% in the fourth quarter, a significant improvement from the fourth quarter of 2018 and approximately a point better than the first three quarters of 2019. In the fourth quarter, the underlying loss ratio was 59.7%. As we have noted in previous calls, the improvement in international will take time, but we're encouraged by the progress made in 2019. The expense ratio in the quarter deteriorated by 2 points year-over-year due to the reduction of earned premium from our re-underwriting efforts. International's all-in combined ratio in the fourth quarter was 100.3%, including 2.6 points of adverse prior period development. Catastrophe losses were negligible.
As we've mentioned previously, we have significantly reduced our international catastrophe exposure over the past 18 months, and therefore were not exposed to the international catastrophe events that occurred in the fourth quarter. For the full year, international's underlying combined ratio was 98.6% and the all-in combined ratio was 101.8%, a nearly 5 point improvement in each compared with 2018. International's gross written premium grew 3% in the quarter, driven by 13 points of rates. Our life and group segment produced a core loss of $4 million in the quarter. Coming out of the unlocking in the third quarter, we'd expect close to break-even results going forward, with some natural variability from quarter to quarter. Our corporate segment produced a core loss of $68 million in the fourth quarter. This loss was driven by our annual asbestos and environmental reserve review.
The result of the review was a noneconomic charge after tax of $48 million. Following this review, we have incurred losses of $3.2 billion within the $4 billion limit that we purchased in 2010, while paid losses are now at $1.9 billion. Pre-tax net investment income was $545 million in the quarter, a significant improvement to the prior year quarter. Our limited partnership and common equity portfolios produced pre-tax income of $69 million, a 3.7% return. For the full year, the LP and common equity portfolio generated an 11.7% return. Pre-tax income from our fixed income portfolio was $464 million. The pre-tax effective yield on the fixed income portfolio was 4.7%. For the full year, the fixed income portfolio generated a 4.8% pre-tax effective yield, slightly better than 2018. However, given the current interest rate environment, we expect the level of performance to be difficult to maintain going forward.
Fixed income assets that support our P&C liabilities had an effective duration of 4.1 years at quarter end, in line with portfolio targets. The effective duration of the fixed income assets that support our life in group liabilities was 8.9 years at quarter end. Our balance sheet continues to be extremely strong. At quarter end, shareholders' equity was $12.2 billion, or $44-$45 per share. And our unrealized gain position decreased slightly to $4.1 billion. Shareholders' equity excluding accumulated other comprehensive income was also $12.2 billion, or $44.81 per share, an increase of 8% from year-end 2018 when adjusted for the $3.40 per share of dividends paid during the course of the year. In the fourth quarter, operating cash flow was $160 million. We continue to maintain a very conservative capital structure. All of our capital adequacy and credit metrics are well above our internal targets and current ratings.
I'd be remiss if I didn't mention that CNA was upgraded by Standard & Poor's to a financial strength rating of A+ during the fourth quarter. Finally, our capital management philosophy continues to be that we will look for opportunities to invest capital back into the business if we believe we can achieve appropriate returns. Otherwise, we will return the capital to shareholders. In 2019, we returned $946 million of capital, or 95% of net income to shareholders, primarily in the form of dividends. As we begin 2020, we're pleased to announce a special dividend of $2 per share. In addition, we're raising our quarterly dividend to $0.37 per share. With that, I'll turn it back to Dino.
Thanks, James. Before we move to the question and answer portion of the call, let me leave you with some overarching thoughts on our performance. The full year underlying combined ratio of 94.8% improved for the third straight year. It is the best in a decade. Our underlying P&C loss ratio was 60.9% for the quarter and 61% for the year. U.S. gross written premium ex-captives grew 9%, while net written premium grew 6% for the year. We achieved seven points of rate in the fourth quarter, 1 point higher than the third quarter. I am encouraged by our pricing trajectory in recent quarters and based on what we have seen in January, I am optimistic that we can continue to drive rate above our long-run loss cost trends through 2020.
We increased our regular quarterly dividend to $0.37 per share. We once again declared a special dividend of $2 per share. With that, we'll be glad to take your questions.
Thank you. If you would like to ask a question on today's call, please signal now by pressing star one on your telephone keypad. That's star one to ask a question. We will pause for one moment to allow everyone to signal. We can now take our first question from Jeff Smith from William Blair. Please go ahead.
Hi. Good morning everyone.
Morning.
Looking at the international book, obviously had a pretty good quarter, but could you give us an update on where that sort of property book stands? Is that largely repaired or is there additional work that needs to be done there?
Hi, Jeff, it's Dino. What I say is, look, we're doing the right things in international, and I think it's showing up in the results. The underlying combined ratio, as we indicated, was down 5 points. We also had lower cat losses, which we had expected because the Lloyd's book, the syndicate, was down 17% even with the strong rate increases. Clearly, we've done a lot of work on that portfolio. There's still some work that continues, and there could be some volatility quarter- for- quarter. I think what I would say, if you think about it in terms of the premium base, I think you should expect the reunderwriting to probably affect our premium base for a few more quarters.
There's a little bit more work to do, but a lot of it has already been done, and we expect to go into 2021 with a really great portfolio.
Okay. Thinking about the Commercial book, you had mentioned a number of times loss cost or rates in excess of loss cost trends. You plan on keeping that through 2020. And I guess with rate accelerating, it suggests the loss cost trends are accelerating. Do you, as you look ahead and you think about rate, are you expecting that loss cost trends to continue accelerating? If you're going to stay out ahead of that on rate, are you foreseeing a potential impact on retention if that's the case?
Sure, Jeff, that's a good question, obviously. Look, I think our long-run loss cost trend assumptions incorporate all that we know and we see now. As that evolves, we'll continue to incorporate the new information. What I'd highlight is that we have a conservative bias in how we set those loss fixes, and we tend to jump on bad news rather quickly. I think our track record bears it out if you look at our historical record of favorable development. We work really hard to react early on our underwriting actions. Depending on the overall market environment, to your point, we either get what we need or we let retention drop, which is evidenced clearly in our Aging Services book, and we've been detailing that for you over the course of the last year.
As I said, based on the quarter's reserve reviews, we feel our picks, our long-run trend assumptions incorporate our loss patterns, and we feel comfortable with the position, and we'll just keep reacting both internally, actuarially, externally in underwriting actions quarter- for- quarter.
I would just add one thing to that, Jeff. I think just because rate is going up does not mean that loss cost trends are going up. Rate is going to be a factor of what we think we need, and it's also going to be a factor of what the market bears. We're going to do exactly what Dino said with loss cost trends, and we're going to continue to push hard for rate.
Okay. Thank you for the answers.
Thank you. We can now take our next question from Gary Ransom, from Dowling & Partners. Please go ahead.
Yes, good morning. I wanted to zero in on that healthcare retention of 66%. I think it's one of the lowest ones that's been there for a long time.
Yeah.
I know you're pushing rate, you're losing customers, but it just seems like it's a lot more significant this quarter. Can you comment on that?
Yeah. It has been double-digit rate- on- rate. There's no question, Gary. When you start to compound double-digit rate increases, it's a little bit more difficult. We're also being very aggressive on what it is that we need, and we have been increasing it. The fourth quarter rate was 25%. What we do is, we put out the terms and conditions, and if we don't get it, then the message to all the underwriters, and they do know it, is you let it go. I think, it always depends on a mix- for- mix. You'll see if you were to go back, there was some other quarters where the retention was in the low 60s, then it rebounds a little bit. It depends a little bit on the mix, but we continue to push this very aggressively.
Of course, you compound it with the terms and conditions. We're putting larger deductibles on medical malpractice. We pretty well doubled, actually, the amount of policies that now have $25,000 medical mal deductible. A few years back, medical mal had virtually no deductibles or very low. You put all of that together, and we try to get those terms and conditions. If we don't, we'll lose it. It's going to fluctuate quarter- for- quarter. What isn't going to fluctuate is our pattern of rate increases and terms and conditions. We're going to keep pushing that hard.
What's surprising to me is just what it says about the industry, that here's a problem that seems well-established, and yet others are taking it at a lower price. I don't know if that's surprising to you?
Well, I mean it's hard, yes . As always, Gary, you look at it across the industry, and I understand that. For us, I can only tell you, we've been ripped quite transparent on our healthcare, not only actions, our loss fix, our loss cost trends. We do what we think is the right thing. We think we're doing the right thing. Do you get it right on every deal? Of course not. Difficult to say how some others may view it, in particular, when they take what we let go.
All right. Thank you. Just flipping to the other extreme, where there's a small business where rates are still down, can you remind us how much is workers' comp or what the mix is there that's causing that?
Yeah, Gary. When you look at rate ex work comp, it's up about 2 points. Work comp is the largest single line in that segment.
Okay, great. Thank you.
But it continues to grow, and we got good policy retention, and so we're happy with the-- and the profitability is good. We're happy with the small business.
Right. All right. On A&E, I wanted to just ask if there was something that, I know it's economically nothing to you, but you were seeing some trends beneath the surface, and I just wondered if you'd give us a little more detail about what it was you saw that caused the adverse development there.
Sure. Yeah, what we saw in the quarter, and really for the year, was an increase in defense costs primarily, but also some indemnity costs, all on known accounts for asbestos and environmental. That in combination with reviewing our expectation for reinsurance recoverables were the two pieces that drove the change there.
Okay.
Well, I can just maybe add one thing to that, Gary. What we're not seeing is increase in mesothelioma claims. That trend is actually on its way down.
Okay. Helpful. Just one last question or broader question on the whole social inflation issue. I see your numbers. You've actually improved for the full year-over-year on an underlying basis. Everyone's been talking about the social inflation, and yet you're sort of keeping up with whatever it is. I just wonder if you have any comments on anything new you're seeing in that area.
Look, Gary, it's clearly been a big topic for everyone. I think it depends when you start to see the trends, how you react, and how conservative you are. As I said, we don't get it right all the time, but I do think the conservative bias has played out. I guess one comment, there's a lot of using as a benchmark sort of attorney involvement on cases. I can just tell you from our portfolio, there actually has not been a significant change, and we track it by all the lines of business. We've actually seen slightly lower level of attorney involvement in primary auto, a little slighter uptick in primary general liability, and it's actually been flat now for several years in Aging Services. When you sort of put it all together on the third-party lines, it really hasn't changed.
I don't know if that helps at all, but it's sometimes commented on, so I just thought I'd share with you what we have in our claim patterns.
Thank you for that. That's very helpful. That's all I have.
Thank you. Just as a reminder, if you would like to ask a question, please press star one. I will now take the next question from Meyer Shields from KBW.
Great, thanks. Two quick questions, if I can. First, is it fair to assume that Affinity growth should accelerate in 2020, given what the, I'll call it, same loss trends that you're still seeing?
Meyer, I don't think we heard that whole question. Could you repeat it?
I'm sorry. It sounds, based on Dino's last comments, like overall loss trends remain under control, and I'm assuming that that's true in the Affinity book as well. Given the concerns that we're hearing from other companies there, is it fair to expect top-line growth to pick up in Affinity because of that?
On the Affinity, as we've talked about, Meyer, these are programs. They're multi-year. They're long-term. We happened to write a large program. We added one large program in 2019, but 2018, actually, which played out throughout the quarters of 2019. All four of the quarters, actually, which made some of the growth comparison on Specialty seem less because of this program. You don't write those every quarter, right? We go after them. We clearly have an expertise over the last several decades. We're always looking for them, but it's got to fit. It's got to be the right type of program with the right profitability in all of its component parts. They're harder to come by, but clearly, we have a team that's always focused on it, and we'll keep our eyes open to continue to grow it because it is very profitable for us.
Okay. Thank you. Second question, I just want to make sure I understood your response to Jeff. It sounded like there's still some work coming in the international segment, in the fourth quarter, I guess it looks like the upside of rate outpaced the exposure reduction. Is that a fair expectation for 2020?
I think what Dino's comments were primarily around the Lloyd's portfolio. Remember, we also have a Canadian business which is not undergoing the kind of re-underwriting that's happening in London, and that's growing quite nicely, as well as the continental business is actually growing as well based on significant rates that they're getting there. You have really two of the three components of that international business are growing more organically and offsetting what's happening in the Lloyd's portfolio.
Okay. Understood. Thanks so much.
Again, if you would like to ask a question, please press star one. Final reminder to ask a question, please press star one. There are no further questions on the line at this time. I would now like to turn the call back to the host for any additional or closing remarks.
No, that's great. Thank you and we'll chat next quarter.
Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.