Ladies and gentlemen, good morning and welcome to CNA's discussion of its 2019 first quarter financial results. CNA's first 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 in CNA's most recent 10-K on file with the SEC. The forward-looking statements speak only as of today, Monday, April 29th, 2019.
CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding the non-GAAP measures, reconciliations to the most comparable GAAP measures and other information have been provided in the financial supplement. This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website. With that, I will turn the call over to CNA's Chairman and CEO, Dino Robusto.
Thank you, Abby. Good morning, everyone. I'm pleased to share our first quarter results with you today, which are comparable with the strong performance we were generating prior to the last quarter's outlier result. Core income for the first quarter was $318 million, or $1.17 per share, up 13% over the prior year quarter. Core return on equity was 10.7%, up from 9.3%. This result reflected strong investment performance and a combined ratio of 97.8%, including 3.4 points of catastrophe losses. For the quarter, the underlying combined ratio was 94.9%, which reflects continued underwriting improvement on last year's full-year result of 95.4% and 2017's 95.5%. The P&C underlying loss ratio was 60.7%, one of the lowest levels in a decade, as property losses were at expected levels in the quarter down from the fourth quarter's elevated level, and international's loss ratio was significantly improved.
Our expense ratio in the quarter was 33.8%, slightly higher than our run rate due to the seasonality of our earned premium. We continued to achieve good growth in the U.S. segments with gross written premium up 5%, excluding third-party captives, and net written premium was up 2%. In the quarter, international's net written premium was down 12%, driven by Lloyd's net premium, which was down 29%. This decrease was anticipated, resulting from our re-underwriting efforts in our London-based operations that we have discussed previously. We continue to effectively manage the rate retention dynamic, achieving strong rate increases, and doing so would improve the retentions in the U.S. In the first quarter, rate for P&C overall was up 3%. In our specialty segment, rate was up 3%, and retention was up four points to 89%. Importantly, we achieved incrementally more rate where it is needed most.
For example, both healthcare and public company D&O achieved 11 points of rate in the first quarter, up from plus nine in the fourth quarter. Overall, commercial rate was up 4%, excluding workers' compensation, and 2% all in, while retention was up one point to 85%. Commercial's rate included umbrella up 6%, two points higher than the fourth quarter. Commercial auto was up 8% and property was up 5%. Both of these lines were up an additional point from Q4. International rate was +5% with retention at 71%, again, reflecting our re-underwriting efforts. I continue to be encouraged by our pricing trajectory in recent quarters, and based on what we have seen in April, I am optimistic that we can continue to drive rate above our long-run loss cost trends.
On an earned basis, renewal premium change in the first quarter was up more than three points, which already exceeds our long-run loss cost trends. Of course, that outcome needs to be sustained in order for it to result in margin improvement. The good news is our consistent ability to push for increasingly more rate over the last several quarters in major lines has us encouraged that we are migrating from this outcome being a headwind to a tailwind. While new business in the U.S. was down 5% in the quarter, it was still one of the highest levels of any quarter in recent years. As a result, I continue to be pleased with one of the key tenets of our underwriting strategy, getting access to high-quality new business. We also continue to institutionalize an enduring expert underwriting culture here at CNA.
The more recent example of this effort is our decisive action in re-underwriting our London operation. Our international segment generated an underlying combined ratio of 94.1% in the first quarter. A significant improvement compared with the full year 2018 underlying combined ratio of 103.6%. While our underwriting actions in international are starting to make a difference, this process will be executed throughout the year. Keep in mind, some of the exited lines, like political risk, will have exposures beyond 2019 because of long-term contracts. Finally, our long-term care business is on solid footing and continues to perform as expected. I'll now turn it over to James.
Thank you, Dino, and good morning, everyone. Our property and casualty operations produced core income of $314 million in the first quarter. Pre-tax underwriting profit was $37 million, and underlying underwriting profit was $85 million. Let me just make a point here with regard to the comparisons to the prior year quarter. Traditionally, we would provide commentary regarding 2019's first quarter performance compared with 2018's first quarter, and the press release and earnings presentation provide you with that comparison. However, 2018's first quarter was an outlier in terms of both underlying loss ratio and expense ratio. With regard to the underlying loss ratio, we had two lines, property and umbrella, where the loss ratios were reevaluated upward after the first quarter last year, causing the full year 2018 loss ratio to be higher than the first quarter and more indicative of current performance.
Last year's first-quarter expense ratio benefited from a low level of technology spend as we prepared for our new outsourcing arrangement, as well as one-time favorable acquisition cost offsets. Given these items, we felt that comparing our first-quarter underwriting results with the full year 2018 underwriting results was more indicative of our current trend. As Dino mentioned, our expense ratio of 33.8% is slightly above our current annual run rate. When we look at the components of the expense ratio, our acquisition ratio is at a normalized level, but our underwriting ratio is three-tenths higher than the full year 2018 13.4%. The numerator of that ratio, dollars of underwriting expense, is on par with 2018's quarterly average, but the denominator of net earned premium has some seasonality to it and is lower in the first and second quarters than it is in the third and fourth.
In addition to this seasonality, an increased level of reinsurance spend this year is muting our net premium growth and therefore affecting the expense ratio. Moving to each of our individual P&C segments, Specialties' underlying combined ratio for the quarter was 93.5%, including an underlying loss ratio of 60.5%. Specialties' overall combined ratio for the quarter was 92.3%, including 1.8 points of catastrophe losses and three points of favorable prior period development, primarily in accident years 2017 and prior, driven by favorable frequency in both surety and financial institutions. Specialties' gross written premium, ex third-party captives, grew 4% in the quarter. Our Commercial segment's underlying combined ratio in the quarter was 96.5. The underlying loss ratio was 62.1, including about a half point of severance expense related to actions taken within the claim department as we reorganized to better manage our loss adjustment expenses.
On a normalized basis, Commercial's underlying loss ratio in the first quarter was slightly above 61%, in line with the full year 2018 results, and materially improved from the fourth quarter. The first quarter overall combined ratio for Commercial was 101.3%, including approximately five points of catastrophe losses and about a half point of favorable reserve development. Commercial's gross written premium, ex third-party captives, grew 6% in the quarter. The underlying combined ratio for our International segment was 94.1 in the first quarter. The all-in combined ratio was 101.9 in the quarter, including a little more than two points of catastrophe losses and five and a half points of unfavorable prior period development, the latter of which equates to $14 million and is entirely related to 2018 catastrophe events. Nearly all of the development came from lines we are exiting, further affirming the re-underwriting strategy that we have implemented.
Our Life and Group segment produced $10 million of core income in the quarter. Long-term care morbidity experience continued to be consistent with our reserve assumptions, while persistency was the driver of our positive results. Our Corporate segment produced a core loss of $6 million in the first quarter, benefiting from amortization of the asbestos and environmental deferred gain. Pre-tax net investment income was $571 million in the first quarter, compared with $490 million in the prior year quarter. The change was driven by our limited partnership and common equity portfolios, which produced pre-tax income of $96 million, a 4.5% return. While this is a welcome result following last quarter, we're still moving down a path to reduce our hedge fund exposure this year. In the first quarter alone, we redeemed $160 million from hedge funds and redeployed it into our fixed income portfolio.
Pre-tax income from our fixed income portfolio was $465 million in the quarter, slightly higher than the prior year quarter. The pre-tax effective yield on the fixed income portfolio was 4.8%, again, slightly higher than prior periods. Fixed income assets that support our P&C liabilities had effective duration of 4.2 years at quarter end, in line with portfolio targets. The effective duration of the fixed income assets that support our life and group liabilities was 8.7 years at quarter end. Our balance sheet continues to be extremely strong. At quarter end, shareholders' equity was $11.5 billion, or $42.19 per share, up from year-end 2018, as an increase in our unrealized gain position more than offsets a large dividend paid in the quarter.
Shareholders' equity, excluding accumulated other comprehensive income, was $11.8 billion or $43.38 per share, an increase of 3% from year-end 2018, when adjusted for the $2.35 of dividends per share paid during the quarter. Our investment portfolio's net unrealized gain was $2.6 billion at quarter end. In the first quarter, operating cash flow was $287 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. We are pleased to announce our regular quarterly dividend of $0.35 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 where we are in our pursuit of being a top quartile underwriter. The foundation of underwriting excellence is the loss ratio, particularly the underlying loss ratio, and it has been our top priority over the last two years. This quarter's 60.7% underlying loss ratio is squarely top quartile performance and reflects the quality of our execution. Moreover, the rate we are achieving today is offsetting our long-run loss cost trends, which is starting to mitigate the headwind that has faced us in recent years. I remain encouraged by the trajectory of pricing and the overall terms and conditions we can achieve in the market.
Of course, sustained top quartile performance requires us to further improve our expense ratio beyond the roughly two-point improvement we have achieved over the past two years. There is more improvement to be had as we continue to grow our book while managing the numerator by balancing continued investment in talent and technologies with finding operational efficiencies. Indeed, our U.S. gross written premium grew 5%, both last year and in the first quarter of this year, while our underwriting expenses were down over that time period. Although our incremental reinsurance spend is currently muting additional improvement in the expense ratio by lowering the earned premium growth, this is temporary and a trade we are willing to make at this time to support expanding new growth segments and to reduce potential volatility.
Bottom line, our very strong underlying loss ratio, together with our demonstrated ability to grow profitably while improving the expense ratio, we feel confident in our ability to achieve top quartile performance on a sustained basis. With that, we'll be glad to take your questions.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is *1 if you would like to ask a question. We will take our first question from Jay Cohen with Bank of America Merrill Lynch.
Yes, thank you. Everything was pretty straightforward. I just wanted to ask, I guess, on the corporate segment, do you view the 1Q number as a reasonable basis going forward? Is that fairly normalized at this point?
I would say, Jay, this is James. Thanks for the question. That's probably a little bit better than the normal run rate, but not significantly.
Okay. That's good. Thank you.
Sure.
We will take our next question from Joshua Shanker with Deutsche Bank.
Yeah. Good morning, everybody. I wonder, you don't have to worry about CNA in particular, but maybe the industry or you can speak about CNA. If we look at some of the price improvements that you're having, particularly in property lines, how much of that potentially would be given back in a higher cost of reinsurance? I realize we haven't seen many of your renewals yet, but maybe you have some thoughts there.
I think, Josh, we have not renewed our property reinsurance yet. We would expect that there's going to be pressure there. I don't think it will overwhelm the amount of rate that we're getting on a primary basis. Maybe on the margin, it has a muting effect, but overall, it won't.
On commercial auto, I feel like we're in year three of material price increases. Where are we in terms of getting that line? Again, it can be at CNA or it can be the industry. Where are we in terms of sort of triaging what's happened there?
I think, Josh, where we're getting rate now, we're well ahead of our loss cost trend. We were starting from a spot where the combined ratio was too high. We are making progress on it, but we still have a way to go before we're comfortable getting the appropriate return on that business.
Do you think by year-end, commercial auto rate increases will stabilize, or it's going to be strong for a while?
I suspect that it's going to continue, Josh. I don't think we're the only ones thinking that we need to get the combined ratio down further than where it is today. That's certainly where we're pushing at the moment.
Okay. Well, thank you.
It's progressively increasing, Josh, right? It was seven in the fourth quarter. It's eight in the first quarter. That's a good sign. Early read in April is the momentum continues.
Okay. Well, thank you very much for the answers.
You bet.
We will take our next question from Gary Ransom with Dowling and Partners.
Yes, good morning. I had a question on the rates also. Just trying to think through your comments about the rate being ahead of loss trend. At this point on the loss trend side, are you seeing that still remain relatively consistent with where it's been?
Yes, Gary, I think overall, loss cost trends are very stable. We're not seeing any change there. We focus on the long-run loss cost trends. We do see variation in the shorter term, but long-run loss cost trends remain stable.
When we think about the rates where you gave several examples of accelerating rates, yet the overall number is still relatively flat, is that just because of the workers' comp declining?
Yeah, Gary. It's a good question. When you look at it at that level, it masks what's happening underneath. You really have to take a look at our portfolio, and the various segments. If you look at, let's take specialty as an example. Within specialty, as you probably know, there's a very large program book of professional E&O that's been very profitable for us for decades. These programs are actuarially priced, experience-based. They also have multi-year parameters in them. They don't undulate lockstep with market pricing on individual accounts. Because of its size, it can mask the movements quarter to quarter in other lines of business in specialty, particularly in this case, as they've been going up. You have to sort of put that aside.
If you put our affinity programs aside in specialty, pricing's up 6% in the first quarter, up from plus 5 in the fourth quarter. The other lines are going up, we gave you some of the examples of healthcare and public D&O. On the specialty side, it really is a function of our portfolio, and in particular, the very large program book. On commercial, it's like you say, Gary, a lot of it is work comp, which has been negative. The good news on the work comp, when you take a look at the NCCI rates filing, the decreases are peaking at mid-year and then should start to improve. You need to take a look at that. In the commercial ex work comp, it's also got a little bit of the rounding. It's up a couple of tenths of a point.
Within there also, small business is different. It too doesn't really undulate like individual accounts. Those are more based on the filings that we do by state and the mix that comes up in any one quarter. You really do need to take a look a few layers down, and there's some really good trends in there, and it's why we're feeling pretty good about the execution.
Within specialty, your retention also moved up quite a bit in the first quarter, or at least it's been higher than it's been in a while. Was there something unusual affecting that, or was that a normal trend?
Yeah, there is in that in the first quarter of 2018, we had lost a large program that had depressed the retention from its historically high levels. The first quarter this year against that quarter has got it back at its normal levels now.
Okay, great. Thank you. Just one more, too, on the pricing. I think in the last quarter, you had a similar level of optimism in about January, looking ahead into the first quarter as you seem to have now, April, looking into the second quarter. Can you tell us how that worked out in the first quarter? Was your optimism more or less fulfilled?
Yeah, definitely
what you were thinking in January?
Yeah. Definitely, Gary. Again, you take what I said earlier, put aside affinity programs, put aside the work comp, which had the negative, and you look at the other lines, whether it's umbrella, it's property, it's auto, or as I said, healthcare. Even D&O overall, including private, it's up 5 points. In the first quarter, it was 4 points. That's up. I highlighted the public D&O because you see a lot more volatility in public D&O, and that one had the double digits. Even on the broader. It did end up playing out as we had anticipated. Notwithstanding the drag that you get from the negative rate on work comp. There again, we got to put it in perspective, right? It's very profitable. The trends continue to be relatively benign, and in particular, benign relative to our embedded loss cost trends within work comp.
Thank you very much for those answers.
You're welcome.
As a reminder, it is star one if you would like to ask a question. We will take our next question from Meyer Shields with KBW.
Great. Thank you. Good morning. Two or three real quick questions. Is there any way of quantifying the savings associated with the severance in claims in the first quarter? In other words, expenses that we should take out for the next three quarters?
Yeah. I would say it's probably a couple of million quarterly run rate, Meyer.
Okay. Sorry. We saw, again, the duration of the fixed income portfolio in life extend, and I was hoping you could talk about that, just given the broadly flat yield curve. First, is that coming from the hedge fund sale proceeds? Second of all, if you could take us through the thought process for the longer duration.
Yeah. First, it's not coming from the hedge fund portfolio. The hedge fund portfolio is all on the P&C side. What we're looking at there is we've been relatively short against our liability duration in the life and group portfolio for quite some time as rates have been coming down. We're just now trying to position ourselves for the future. We're not going to move up this duration incredibly quickly. In fact, it's very difficult to do even if we wanted to. It's just more a move in that direction based on anticipating getting, hopefully, rates to turn in the right direction here.
Okay. Yeah. That will happen hopefully at some point in time. The only part of the rate story that surprised us, or surprised me I should say, was the 3% decrease in small commercial. Is that workers' compensation or is there something else in that?
Yeah.
Yeah. It's primarily workers' comp that's driving that.
Okay, perfect. Thank you so much.
You bet.
Thank you.
We have no additional phone questions at this time, so I would like to turn the conference back to Mr. Dino Robusto for any additional or closing remarks.
No, that's great. Thank you for joining us, and we'll talk to you again in a quarter. Thanks very much.
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.