We are very pleased to report third quarter core income of $798 million or $3.12 per diluted share, and core return on equity of 13.5%.
Our bottom-line result this quarter reflects strong underlying underwriting income resulting from record net earned premium of $7.4 billion and an underlying combined ratio that improved 2.6 points to a strong 91.5%.
I'll note that the combined and underlying combined ratios were still under 90% generating a solid return in a challenging environment.
Profitability in all three segments continues to reflect the benefit of our strategic focus on productivity and efficiency, resulting in a sub-30% consolidated expense ratio.
Core income for the quarter also included catastrophe losses of $397 million pre-tax, which were meaningfully above the 10-year average per quarter.
Of the 100,000 or so claim notices we received so far this year, arising out of the record number of PCS catastrophes in the US, our claims team has met our objective of closing over the 90% of the claims within 30 days.
This quarter, we again benefited from our well-defined and consistent investment philosophy with our high-quality investment portfolio generating net investment income of $566 million after tax.
Net written premiums in the quarter grew by 3% driven by strong renewal rate change and retention in all three segments.
In Business Insurance, we achieved record renewal rate change of 8.2%, 4 points higher than the prior year quarter, while retention remained strong.
In Bond & Specialty Insurance, net written premiums increased by 4% as renewal premium change in our domestic management liability business rose to 8.1%, including record renewal rate change while retention remained at an historical high.
In Personal Insurance, net written premiums increased by 8%, driven by strong retention and new business in both Agency Auto and Agency Homeowners.
In our Agency Homeowners business, we achieved renewal premium change of 8.2%, its highest level since 2014.
Just as one example, our BOP 2.0 small commercial product, which we launched in 2019 benefits from both.
In the states in which we rolled it out, we've seen about a 15% increase in both submissions and new business premiums.
We rolled this out in nine states during the second and third quarters and have plans to launch in an additional 10 states in the fourth quarter.
We're observing a nearly 30% increase in the rate of adoption for IntelliDrive and have received strong agent feedbacks.
Our core income for the third quarter was $798 million, generating core ROE of 13.5%, both up significantly from core income of $378 million and core ROE of 6.5% that we reported in the prior year quarter.
Our third quarter results include $397 million of pre-tax cat losses compared to $241 million in last year's third quarter.
We have recognized a full recovery under that treaty in our third quarter results with $233 million pre-tax benefit in the cat line and $47 million pre-tax benefiting non-cat weather in our underlying results.
The underlying combined ratio of 91.5%, which excludes the impacts of cats and QID improved by 2.6 points from 94.1% in last year's third quarter.
The underlying loss ratio improved by 2.4 points, and benefited from favorable auto frequency related to COVID-19 and the impact of earned pricing in excess of loss trends, partially offset by an increase in non-cat weather losses including wildfires.
The expense ratio of 29.3% is two-tenths of a point favorable to last year's third quarter results, and reflects our strategic focus over a number of years on improving productivity and efficiency.
Setting aside quarter-to-quarter variability, our year-to-date expense ratio of approximately 30% is a figure we're comfortable with.
Our top-line proved to be resilient with a 3% increase in net written premium, as continued strong renewal rate change and retention, in all three segments, more than offset modestly lower insured exposures in the commercial businesses.
For the quarter, losses directly related to COVID-19 totaled $133 million pre-tax with $92 million in Business Insurance driven primarily by workers' comp and $41 million in our Bond & Specialty business predominantly driven by management liability.
The net impact of the COVID environment on the consolidated underlying combined ratio amounted to a benefit of about 2 points, mostly in Personal Insurance.
Looking at the year-to-date impact of direct COVID losses, net of related frequency benefits and other underwriting items, our underwriting results have benefited by a little more than $100 million pre-tax or about 0.5 point on a consolidated underlying combined ratio, including the impact of premium refunds to policyholders.
As previously disclosed, third quarter includes approximately $400 million of pre-tax benefit from the PG&E subrogation.
About 80% of that benefit is reflected in Personal Insurance, with the remainder reflected in Business Insurance.
In Personal Insurance, net favorable development of $40 million pre-tax was driven by auto results coming in better than expected for recent accident years.
In Business Insurance, we recognized unfavorable development of $295 million pre-tax as a result of our annual asbestos review.
Favorable development in workers' comp was offset by an increase to the reserves from legacy liabilities in our run-off book, related to a single insured arising out of policies issued more than 20 years ago.
After-tax net investment income increased by 7% from the prior year quarter to $566 million.
Fixed income returns decreased by $31 million after tax as the benefit from higher levels of invested assets was more than offset by the decline in interest rates, consistent with our comments on last quarter's call.
Also consistent with our prior commentary, we expect after-tax fixed income NII in the fourth quarter to be down $35 million to $40 million compared to a year ago.
Looking ahead to 2021, our current expectation is for after-tax fixed income NII to be between $420 million and $430 million per quarter.
Operating cash flows for the quarter of $2.3 billion were again very strong, all our capital ratios were at or better than target levels and we ended the quarter with holding company liquidity of approximately $2.3 billion, well above our target level.
Recall that in April we pre-funded the $500 million of debt coming due in November with a new 30-year $500 million debt issuance.
Investment yields decreased as credit spreads tightened during the third quarter, and accordingly, our net unrealized investment gain increased from $3.6 billion after tax as of June 30 to $3.8 billion after tax at September 30.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $94.89 at quarter end, up 2% from year-end of 2019 and up 5% year-over-year.
We returned $218 million of capital to our shareholders this quarter via dividends.
Business Insurance produced $365 million of segment income for the quarter, a significant increase over the prior year quarter with prior year development, underlying underwriting income and net investment income, all contributing to the year-over-year increase.
The underlying combined ratio of 94% improved by almost 2 points, driven by more than 1 point of earned rate in excess of loss trend.
A modest favorable net impact from the pandemic contributed about 0.5 point to the improvement.
As for the top-line, net written premiums were 1% lower than the prior year quarter, with strong rate and high retentions mostly offsetting modestly lower insured exposures and lower levels of new business.
We achieved record renewal rate change of 8.2%, up 4 points from the third quarter of last year and almost 1 point from the second quarter of this year, while retention remained high at 83%.
New business of $505 million was 9% lower than the prior year quarter.
As for the individual businesses, in select, renewal rate change increased to 2.9%, marking the seventh consecutive quarter in which renewal rate change was higher than the corresponding prior-year quarter.
Retention of 80% was down a couple of points from recent periods, largely driven by policy cancellations that were deferred to the second quarter due to our pandemic-related billing relief program.
In middle market, renewal rate change increased to 8.3%, while retention remained strong at 85%.
The 8.3% was up by more than 4.5 points from the third quarter of 2019, and we achieved positive rate of more than 80% of our accounts this quarter, up from about two-thirds in the third quarter of last year.
Segment income was $115 million, a $24 million decrease from the prior year quarter as the benefit of higher volumes was more than offset by a higher underlying combined ratio.
The underlying combined ratio of 89% increased 5.4 points, primarily driven by estimated losses from COVID-19 and related economic conditions.
Net written premiums grew 4% for the quarter, reflecting strong growth, driven by improved pricing in our management liability business, partially offset by lower surety production due to the continued economic impact of COVID-19 on public project procurement and related bond demand.
In our domestic management liability business, we are pleased that the renewal premium increased to 8.1%, driven by record rate.
Retention remained at a historically high 90%.
Domestic management liability new business for the quarter decreased $14 million, primarily reflecting our thoughtful underwriting in this elevated risk environment.
In Personal Insurance, this quarter, we are very pleased with our continued execution in the marketplace as we delivered excellent profitability and grew net written premiums by 8%, achieving record levels of domestic policies in force.
Personal Insurance segment income for the third quarter was $392 million, up $261 million from the prior year quarter, driven by the pre-tax impacts of an improvement of $163 million in the underlying underwriting gain, and $343 million of higher net favorable prior year reserve development, partially offset by $174 million of higher catastrophe losses, net of reinsurance.
Our combined ratio for the quarter was 86.4%, an improvement of 11.6 points from the prior year quarter, driven primarily by the increase in net favorable prior year reserve development.
Agency Automobile profitability was very strong with a combined ratio of approximately 80% for the quarter.
The underlying combined ratio of 81% improved nearly 12 points, continuing to reflect favorable frequency levels.
Approximately 8 of the 12 points of improvement relate to current quarter favorability.
For the third quarter, data from our IntelliDrive program indicates that miles driven increased relative to last quarter, but continue to be down from pre-COVID- 19 levels.
In Agency Homeowners and Other, the third quarter combined ratio was 92.8%, an improvement of 9.2 points from the prior year quarter, resulting from 26 points of higher net favorable prior year reserve development, mostly from the PG&E subrogation recoveries, partially offset by elevated levels of catastrophe losses and an increase in the underlying combined ratio, driven by higher non-catastrophe weather-related losses.
Our catastrophe and non-catastrophe experience reflects a very active quarter with a record 31 PCS events.
Agency Automobile retention was 84% and new business increased 9% from the prior year quarter, both contributing to accelerating growth in policies-in-force.
Agency Homeowners and Other delivered another very strong quarter with retention of 86% and a 22% increase in new business.
Renewal premium change increased to 8.2% as we remain focused on improving returns and property while growing the business.
And after reaching our goal of planting 1 million trees for customer enrollment and paperless billing, we extended our partnership with American Forests to plant an additional 500,000 trees by Earth Day 2021.

Summary:
We are very pleased to report third quarter core income of $798 million or $3.12 per diluted share, and core return on equity of 13.5%.
Our third quarter results include $397 million of pre-tax cat losses compared to $241 million in last year's third quarter.