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2: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
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12: R2 Consolidated Statements of Operations HTML 111K
13: R3 Consolidated Statements of Operations - HTML 28K
(Parenthetical)
14: R4 Consolidated Statements of Comprehensive Income HTML 64K
(Loss) (Unaudited)
15: R5 Consolidated Balance Sheets (Unaudited) HTML 139K
16: R6 Consolidated Balance Sheets (Unaudited) - HTML 63K
(Parenthetical)
17: R7 Consolidated Statements of Cash Flows HTML 126K
18: R8 Consolidated Statements of Stockholders' Equity HTML 71K
19: R9 Consolidated Statements of Stockholders' Equity - HTML 28K
(Parenthetical)
20: R10 General HTML 110K
21: R11 Earnings (Loss) Per Share Data HTML 45K
22: R12 Investments HTML 298K
23: R13 Fair Value HTML 211K
24: R14 Claim and Claim Adjustment Expense Reserves HTML 90K
25: R15 Future Policy Benefit Reserves HTML 77K
26: R16 Legal Proceedings, Contingencies and Guarantees HTML 29K
27: R17 Benefit Plans HTML 45K
28: R18 Accumulated Other Comprehensive Income (Loss) by HTML 86K
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29: R19 Business Segments HTML 242K
30: R20 Non-Insurance Revenues from Contracts with HTML 31K
Customers
31: R21 General (Policies) HTML 53K
32: R22 General (Tables) HTML 100K
33: R23 Earnings (Loss) Per Share Data (Tables) HTML 43K
34: R24 Investments (Tables) HTML 309K
35: R25 Fair Value (Tables) HTML 208K
36: R26 Claim and Claim Adjustment Expense Reserves HTML 90K
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37: R27 Future Policy Benefit Reserves (Tables) HTML 69K
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41: R31 General (Narrative) (Details) HTML 52K
42: R32 General (Pre-Transition LFPB to Adjusted Opening HTML 40K
Balance) (Details)
43: R33 General (Effects of Adoption of ASU 2018-12, HTML 58K
Stockholders' Equity) (Details)
44: R34 General (Effects of Adoption of ASU 2018-12, HTML 75K
Operations) (Details)
45: R35 General (Effects of Adoption of ASU 2018-12, HTML 87K
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46: R36 General (Effects of Adoption of ASU 2018-12, HTML 54K
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47: R37 General (Effects of Adoption ASU 2018-12, Cash HTML 52K
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48: R38 General (Effects of Adoption ASU 2018-12, Segment HTML 61K
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50: R40 Earnings (Loss) Per Share Data (Narrative) HTML 31K
(Details)
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52: R42 Investments (Net realized investment gains HTML 44K
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53: R43 Investments (Components of other-than-temporary HTML 33K
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54: R44 Investments (Summary of fixed maturity and equity HTML 94K
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55: R45 Investments (Narrative) (Details) HTML 40K
56: R46 Investments (Securities in a gross unrealized loss HTML 76K
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57: R47 Investments (Securities in a gross unrealized loss HTML 47K
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58: R48 Investments (Allowance on available-for-sale HTML 53K
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59: R49 Investments (Contractual maturity) (Details) HTML 53K
60: R50 Investments (Credit quality indicator) (Details) HTML 79K
61: R51 Fair Value (Assets and liabilities measured at HTML 82K
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62: R52 Fair Value (Table of reconciliation for assets and HTML 94K
liabilities measured at fair value on a recurring
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(Details)
63: R53 Fair Value (Narrative) (Details) HTML 27K
64: R54 Fair Value (Quantitative information about HTML 41K
significant unobservable inputs in the fair value
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65: R55 Fair Value (Carrying amount and estimated fair HTML 52K
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(Details)
66: R56 Claim and Claim Adjustment Expense Reserves HTML 51K
(Narrative) (Details)
67: R57 Claim and Claim Adjustment Expense Reserves HTML 55K
(Reconciliation of claim and claim adjustment
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68: R58 Claim and Claim Adjustment Expense Reserves (Net HTML 37K
prior year development) (Details)
69: R59 Claim and Claim Adjustment Expense Reserves HTML 39K
(Specialty - Net prior year claim and allocated
claim adjustment expense reserve development)
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70: R60 Claim and Claim Adjustment Expense Reserves HTML 37K
(Commercial - Net prior year claim and allocated
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71: R61 Claim and Claim Adjustment Expense Reserves HTML 35K
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72: R62 Future Policy Benefit Reserves - Summary of HTML 89K
Balances and Changes (Details)
73: R63 Future Policy Benefit Reserves - Narrative HTML 40K
(Details)
74: R64 Future Policy Benefit Reserves - Undiscounted HTML 31K
Expected Future Benefit and Expense Payments and
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75: R65 Future Policy Benefit Reserves - Weighted Average HTML 31K
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84: R74 Non-Insurance Revenues from Contracts with HTML 34K
Customers (Narrative) (Details)
85: R75 Non-Insurance Revenues from Contracts with HTML 40K
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(Exact name of registrant as specified in its charter)
iDelaware
i36-6169860
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i151 N. Franklin
i60606
iChicago,
iIllinois
(Zip
Code)
(Address of principal executive offices)
(i312) i822-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former
name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, Par value $2.50
i"CNA"
iNew York Stock Exchange
iChicago
Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes i☐ No ☒
As of April 27, 2023, i270,854,297
shares of common stock were outstanding.
Condensed Consolidated Statements of Operations (Unaudited)
Three months ended March 31
(In
millions, except per share data)
2023
2022 (1)
Revenues
Net earned premiums
$
i2,248
$
i2,059
Net
investment income
i525
i448
Net
investment losses
(i35)
(i11)
Non-insurance
warranty revenue
i407
i382
Other
revenues
i7
i7
Total revenues
i3,152
i2,885
Claims,
Benefits and Expenses
Insurance claims and policyholders’ benefits (re-measurement gain (loss) of $i1 and $i5)
i1,653
i1,478
Amortization
of deferred acquisition costs
i379
i344
Non-insurance
warranty expense
i384
i354
Other
operating expenses
i337
i326
Interest
i28
i28
Total
claims, benefits and expenses
i2,781
i2,530
Income
before income tax
i371
i355
Income
tax expense
(i74)
(i60)
Net
income
$
i297
$
i295
Basic
earnings per share
$
i1.10
$
i1.08
Diluted
earnings per share
$
i1.09
$
i1.08
Weighted
Average Outstanding Common Stock and Common Stock Equivalents
Basic
i271.3
i271.8
Diluted
i272.3
i272.9
(1)
As of January 1, 2023, the Company adopted ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12) using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three months ended March 31
(In millions)
2023
2022 (1)
Comprehensive
Income (Loss)
Net income
$
i297
$
i295
Other
Comprehensive Income (Loss), net of tax
Changes in:
Net unrealized gains and losses on investments with an allowance for credit losses
(i8)
(i4)
Net
unrealized gains and losses on other investments
i670
(i2,643)
Net
unrealized gains and losses on investments
i662
(i2,647)
Impact
of changes in discount rates used to measure long-duration contract liabilities
(i396)
i1,635
Foreign
currency translation adjustment
i17
(i14)
Pension
and postretirement benefits
i7
i6
Other
comprehensive income (loss), net of tax
i290
(i1,020)
Total
comprehensive income (loss)
$
i587
$
(i725)
(1)
As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
Other
assets (includes $i— and $i18 due from Loews Corporation)
i2,467
i2,274
Total
assets
$
i62,055
$
i61,000
Liabilities
Insurance
reserves:
Claim and claim adjustment expenses
$
i22,409
$
i22,120
Unearned
premiums
i6,581
i6,374
Future
policy benefits
i13,976
i13,480
Short
term debt
i243
i243
Long term debt
i2,539
i2,538
Deferred
non-insurance warranty revenue
i4,710
i4,714
Other
liabilities (includes $i32 and $i26 due to Loews Corporation)
i2,930
i2,983
Total
liabilities
i53,388
i52,452
Commitments
and contingencies (Notes B and F)
i
Stockholders' Equity
Common stock ($ii2.50/
par value; ii500,000,000/ shares authorized;
ii273,040,243/ shares issued; i270,852,335
and i270,895,902 shares outstanding)
i683
i683
Additional
paid-in capital
i2,196
i2,220
Retained
earnings
i9,191
i9,336
Accumulated
other comprehensive loss
(i3,308)
(i3,598)
Treasury
stock (i2,187,908 and i2,144,341 shares), at cost
(i95)
(i93)
Total
stockholders’ equity
i8,667
i8,548
Total
liabilities and stockholders' equity
$
i62,055
$
i61,000
(1)
As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31
(In millions)
2023
2022 (1)
Cash
Flows from Operating Activities
Net income
$
i297
$
i295
Adjustments
to reconcile net income to net cash flows provided by operating activities:
Deferred income tax expense
i21
i12
Trading
portfolio activity
(i13)
i—
Net
investment losses
i35
i11
Equity
method investees
i6
i152
Net
amortization of investments
(i46)
(i26)
Depreciation
and amortization
i12
i13
Changes
in:
Receivables, net
(i24)
(i5)
Accrued
investment income
(i13)
(i22)
Deferred
acquisition costs
(i45)
(i31)
Insurance
reserves
i432
i512
Other,
net
(i226)
(i266)
Net
cash flows provided by operating activities
i436
i645
Cash
Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales
i1,414
i803
Fixed
maturity securities - maturities, calls and redemptions
i317
i916
Equity
securities
i62
i77
Limited
partnerships
i28
i80
Mortgage
loans
i39
i55
Purchases:
Fixed
maturity securities
(i2,258)
(i2,547)
Equity
securities
(i82)
(i75)
Limited
partnerships
(i116)
(i85)
Mortgage
loans
(i12)
(i25)
Change
in other investments
(i2)
(i3)
Change
in short term investments
i681
i687
Purchases
of property and equipment
(i20)
(i12)
Net
cash flows provided (used) by investing activities
i51
(i129)
Cash
Flows from Financing Activities
Dividends paid to common stockholders
(i445)
(i657)
Purchase
of treasury stock
(i24)
(i21)
Other,
net
(i11)
(i10)
Net
cash flows used by financing activities
(i480)
(i688)
Effect
of foreign exchange rate changes on cash
i1
(i3)
Net
change in cash
i8
(i175)
Cash,
beginning of year
i475
i536
Cash,
end of period
$
i483
$
i361
(1)
As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Three months ended March 31
(In millions)
2023
2022 (1)
Common
Stock
Balance, beginning of period
$
i683
$
i683
Balance,
end of period
i683
i683
Additional Paid-in Capital
Balance,
beginning of period
i2,220
i2,215
Stock-based
compensation
(i24)
(i20)
Balance,
end of period
i2,196
i2,195
Retained
Earnings
Balance, beginning of period, as previously reported
i9,572
i9,663
Cumulative
effect adjustments from changes in accounting guidance, net of tax
(i236)
(i24)
Balance,
beginning of period, as adjusted
i9,336
i9,639
Dividends
to common stockholders ($i1.62 and $i2.40 per share)
(i442)
(i657)
Net
income
i297
i295
Balance, end of period
i9,191
i9,277
Accumulated
Other Comprehensive (Loss) Income
Balance, beginning of period, as previously reported
(i3,557)
i320
Cumulative
effect adjustments from changes in accounting guidance, net of tax
(i41)
(i1,680)
Balance,
beginning of period, as adjusted
(i3,598)
(i1,360)
Other
comprehensive income (loss)
i290
(i1,020)
Balance,
end of period
(i3,308)
(i2,380)
Treasury
Stock
Balance, beginning of period
(i93)
(i72)
Stock-based
compensation
i22
i16
Purchase
of treasury stock
(i24)
(i21)
Balance,
end of period
(i95)
(i77)
Total
stockholders' equity
$
i8,667
$
i9,698
(1)
As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
Notes to Condensed Consolidated Financial Statements
Note A. iGeneral
Basis of Presentation
iThe
Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned i90% of the outstanding common stock of CNAF as of March 31,
2023./
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, including certain financial statement notes, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2022, including the summary
of significant accounting policies in Note A. iThe preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
The interim financial data as of March 31, 2023 and for the three months ended March 31,
2023 and 2022 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The December 31, 2022 Consolidated Balance Sheet included in this Quarterly Report on Form 10-Q was derived from audited financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC, adjusted for the application of ASU 2018-12,
Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts(ASU 2018-12).
ASU 2018-12: In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-12, which
requires changes to the measurement and disclosure of long-duration contracts. Entities are required to review, and update if there is a change, cash flow assumptions (including morbidity and persistency) used to measure the liability for future policyholder benefits (LFPB) at least annually. The LFPB must also be updated for actual experience at least annually. The LFPB is reflected as Future policyholder benefits reserves on the Condensed Consolidated Balance Sheet. The discount rate assumption used to measure the LFPB must be updated quarterly using an upper-medium grade (low credit risk) fixed-income instrument yield, commonly interpreted as a single-A rate. The effect of changes in cash flow assumptions and actual variances from expected experience are recorded in the Company's results of
operations within Insurance claims and policyholders’ benefits. The effect of changes in discount rate assumptions are recorded in Other comprehensive income (loss). In contrast, under legacy accounting guidance, cash flow and discount rate assumptions were locked-in unless a premium deficiency emerged. The discount rate assumption under legacy accounting guidance was determined using the Company’s internal investment portfolio yield, which was generally higher than a single-A yield.
The new guidance eliminates the need to hold shadow reserves associated with the Company’s long term care reserves. Under legacy accounting guidance, to the extent that unrealized gains on fixed maturity securities supporting long term care reserves would have resulted in a premium
deficiency if realized, a related increase to Insurance reserves was recorded, net of tax, as a reduction of net unrealized gains (losses), through Other comprehensive income (loss) (shadow reserves).
The unit of account is the level at which reserves are measured. Under the new guidance, the unit of account used to measure the LFPB is the cohort. Cohorts are comprised of insurance contracts issued no more than one
year apart, and must be further disaggregated according to policy benefit and insurance
risk characteristics. Under legacy accounting guidance, the LFPB was generally measured at the individual policy level.
Under the new guidance, the Net Premium Ratio (NPR) is capped at 100%. To the extent that NPR would otherwise exceed 100%, the LFPB is increased and a loss is recognized immediately in the Company’s results of operations. The NPR cap is applied at the cohort level each quarter when NPR is updated. In contrast, under legacy accounting guidance, premium deficiency testing was performed annually at the product level. See Note F to the Condensed Consolidated Financial Statements for further explanation of the NPR and LFPB calculations.
The Company adopted the new guidance effective January
1, 2023, using the modified retrospective method applied as of the transition date of January 1, 2021. The Company's run-off long term care business is in scope of the new guidance. All prior periods presented in the financial statements have been adjusted to reflect application of the new guidance. The Company’s original locked in discount rate, utilized for purposes of calculating the NPR under the new guidance, was based on the discount rate assumption used to calculate the LFPB immediately prior to the transition date. While the requirements of the new guidance represent a material change from legacy accounting, the new guidance does not impact capital and surplus under statutory accounting practices, cash flows or the underlying economics of
the business.
In December 2022, the FASB issued ASU 2022-05, Financial Services-Insurance (Topic 944): Transition for Sold Contracts(ASU 2022-05). This guidance permits companies to make an election to exclude from the scope of ASU 2018-12 any insurance contracts that have been de-recognized prior to the effective date of ASU 2018-12, assuming that the company has no significant continuing involvement with the de-recognized contracts. In the fourth quarter of 2022, the
Company novated its block of legacy annuity business, which was fully-ceded prior to novation. The Company has elected the ASU 2022-05 transition relief, and has excluded the novated legacy annuity business from the scope of ASU 2018-12.
Explanation of ASU 2018-12 Transition Impacts:
i
The
following table presents a roll-forward of the pre-transition LFPB balance as of January 1, 2021:
(1) In conjunction with the adoption of ASU 2018-12, at January 1, 2023, the Company reclassified the long term care reserves for policyholders currently receiving benefits
from Claim and claim adjustment expenses to Future policy benefits. This change was applied retrospectively as of January 1, 2021.
Shadow reserves associated with the Company’s long term care business were de-recognized as of the transition date in Accumulated other comprehensive income (AOCI). The effect of re-measuring the LFPB at the single-A discount rate as of the transition date was similarly recorded in AOCI. The Company did not have any cohorts for which the NPR exceeded 100% at the transition date.
The Company’s practice under legacy accounting guidance was to calculate and
record premium deficiency reserves at the policy level. Accordingly, an allocation methodology was not required to assign historical premium deficiency reserves to cohorts upon transition to ASU 2018-12.
The
effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Operations for the three months ended March 31, 2022 were as follows:
(In millions)
Prior to Adoption
Effect of Adoption
As reported
Insurance
claims and policyholders’ benefits (1)
$
i1,455
$
i23
$
i1,478
Income
(loss) before income tax
i378
(i23)
i355
Income
tax (expense) benefit
(i65)
i5
(i60)
Net
income
i313
(i18)
i295
Basic
earnings (loss) per share
i1.15
(i0.07)
i1.08
Diluted
earnings (loss) per share
i1.15
(i0.07)
i1.08
(1)
The effect of adopting ASU 2018-12 on Insurance claims and policyholders’ benefits is inclusive of the re-measurement gain (loss) of $i5 million, which is presented parenthetically on the Condensed Consolidated Statement of Operations.
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Balance Sheet as of December 31, 2022 were as
follows:
(In millions)
Prior to Adoption
Effect of Adoption
As reported
Deferred income taxes
$
i1,178
$
i73
$
i1,251
Total
assets
i60,927
i73
i61,000
Claim
and claim adjustment expenses (1)
i25,099
(i2,979)
i22,120
Future
policy benefits (1)
i10,151
i3,329
i13,480
Total
liabilities
i52,102
i350
i52,452
Retained
earnings
i9,572
(i236)
i9,336
Accumulated
other comprehensive income (loss)
(i3,557)
(i41)
(i3,598)
Total
stockholders' equity
i8,825
(i277)
i8,548
(1)
In conjunction with the adoption of ASU 2018-12, at January 1, 2023, the Company reclassified the long term care reserves for policyholders currently receiving benefits from Claim and claim adjustment expenses to Future policy benefits. This change was applied retrospectively as of January 1, 2021.
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022 were as follows:
(In
millions)
Prior to Adoption
Effect of Adoption
As reported
Impact of changes in discount rates used to measure long-duration contract liabilities
$
i—
$
i1,635
$
i1,635
Changes
in: Net unrealized gains and losses on other investments
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022 were as follows:
(In millions)
Prior to Adoption
Effect of Adoption
As
reported
Net income
$
i313
$
(i18)
$
i295
Deferred
income tax expense (benefit)
i17
(i5)
i12
Changes
in: Insurance reserves
i489
i23
i512
The
effects of adoption of ASU 2018-12 on segment results of operations of the Life & Group segment for the three months ended March 31, 2022 were as follows:
(In millions)
Prior to Adoption
Effect of Adoption
As reported
Net
incurred claims and benefits (1)
$
i281
$
i23
$
i304
Core
income (loss) before income tax
i16
(i23)
(i7)
Income
tax (expense) benefit on core income (loss)
i7
i5
i12
Core
income (loss)
i23
(i18)
i5
(1)
The effect of adopting ASU 2018-12 on Net incurred claims and benefits is inclusive of the re-measurement gain (loss) of $i5 million, which is presented parenthetically on the Condensed Consolidated Statement of Operations.
The effects of adoption of ASU 2018-12 on segment results for selected balance sheet lines of the Life & Group segment as of December 31,
2022 were as follows:
(In millions)
Prior to Adoption
Effect of Adoption
As reported
Claim and claim adjustment expenses (1)
$
i3,674
$
(i2,979)
$
i695
Future
policy benefits (1)
i10,151
i3,329
i13,480
(1)
In conjunction with the adoption of ASU 2018-12, at January 1, 2023, the Company reclassified the long term care reserves for policyholders currently receiving benefits from Claim and claim adjustment expenses to Future policy benefits. This change was applied retrospectively as of January 1, 2021.
iEarnings (loss) per share is based on weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
i
The
following table presents the income and share data used in the basic and diluted earnings per share computations.
Three months ended March 31
(In millions, except per share data)
2023
2022
Net
income (loss) (1)
$
i297
$
i295
Common
Stock and Common Stock Equivalents
Basic
Weighted average shares outstanding
i271.3
i271.8
Diluted
Weighted
average shares outstanding
i271.3
i271.8
Dilutive
effect of stock-based awards under compensation plans
i1.0
i1.1
Total
i272.3
i272.9
Earnings
(loss) per share (1)
Basic
$
i1.10
$
i1.08
Diluted
$
i1.09
$
i1.08
(1) As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts have been adjusted to reflect application of the new guidance.
/
Excluded from the calculation of diluted earnings (loss) per share is the impact of potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans that would have been antidilutive during the respective periods.
The
Company repurchased i550,000 and i445,000 shares of CNAF common stock at an aggregate cost of $i24 million
and $i21 million during the three months ended March 31, 2023 and 2022.
The components of available-for-sale impairment losses (gains) recognized in earnings by asset type are presented in the following table. The table includes losses (gains) on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date.
Three
months ended March 31
(In millions)
2023
2022
Fixed maturity securities available-for-sale:
Corporate and other bonds
$
i8
$
i8
Asset-backed
i—
i2
Impairment
losses (gains) recognized in earnings
$
i8
$
i10
/
There
were no losses recognized on mortgage loans during the three months ended March 31, 2023 or 2022.
The following tables present the estimated fair value and gross unrealized losses of available-for-sale fixed maturity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by the length of time in which the securities have continuously been in that position.
The following table presents the estimated fair value and gross unrealized losses of available-for-sale fixed maturity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by ratings distribution.
U.S. Government, Government agencies and Government-sponsored enterprises
$
i2,357
$
i302
$
i2,355
$
i337
AAA
i1,424
i260
i1,559
i298
AA
i4,053
i670
i4,327
i817
A
i6,440
i619
i6,615
i749
BBB
i12,651
i1,360
i13,226
i1,621
Non-investment
grade
i1,341
i207
i1,429
i234
Total
$
i28,266
$
i3,418
$
i29,511
$
i4,056
Based
on current facts and circumstances, the Company believes the unrealized losses presented in the March 31, 2023 securities in a gross unrealized loss position tables above are not indicative of the ultimate collectability of the current amortized cost of the securities, but rather are primarily attributable to changes in risk-free interest rates and a general market widening of credit spreads. In reaching this determination, the Company considered the continued volatility in risk-free rates and credit spreads as well as the fact that its unrealized losses are concentrated in investment grade issuers. Additionally, the Company has no current intent to sell securities with unrealized
losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional impairment losses to be recorded as of March 31, 2023.
The following tables present the activity related to the allowance on available-for-sale securities with credit impairments and purchased credit-deteriorated (PCD) assets. iAccrued
interest receivable on available-for-sale fixed maturity securities totaled $i407 million, $i394 million,
and $i389 million as of March 31, 2023, December 31, 2022, and March 31, 2022 and is excluded from the estimate of expected credit losses and the amortized cost basis in the table included within this Note.
Actual
maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
Investment Commitments
As part of its overall investment strategy, the Company invests in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to private placement securities. As of March 31, 2023, the Company had commitments to purchase or
fund approximately $i1,665 million and sell approximately $i125 million under the terms of these
investments.
Mortgage Loans
The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination. The primary credit quality indicators utilized are debt service coverage ratios (DSCR) and loan-to-value ratios (LTV).
Mortgage Loans Amortized Cost Basis by Origination Year (1)
(In millions)
2023
2022
2021
2020
2019
Prior
Total
DSCR ≥1.6x
LTV
less than 55%
$
i—
$
i9
$
i13
$
i112
$
i41
$
i280
$
i455
LTV
55% to 65%
i—
i—
i—
i—
i—
i—
i—
LTV
greater than 65%
i—
i31
i11
i—
i—
i—
i42
DSCR
1.2x - 1.6x
LTV less than 55%
i—
i5
i49
i13
i43
i47
i157
LTV
55% to 65%
i12
i44
i—
i24
i—
i8
i88
LTV
greater than 65%
i—
i58
i—
i—
i—
i—
i58
DSCR
≤1.2
LTV less than 55%
i—
i34
i—
i—
i35
i—
i69
LTV
55% to 65%
i—
i41
i—
i—
i43
i—
i84
LTV
greater than 65%
i—
i27
i21
i—
i22
i7
i77
Total
$
i12
$
i249
$
i94
$
i149
$
i184
$
i342
$
i1,030
(1) The
values in the table above reflect DSCR on a standardized amortization period and LTV based on the most recent appraised values trended forward using changes in a commercial real estate price index.
/
As of March 31, 2023, accrued interest receivable on mortgage loans totaled $i4 million
and is excluded from the amortized cost basis disclosed in the table above and the estimate of expected credit losses.
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 - Valuations
derived from valuation techniques in which one or more significant inputs are not observable.
Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the
Company.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include i) the review of pricing service methodologies or broker pricing qualifications, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, and iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used
to price individual securities.
Assets and liabilities measured at fair value on a recurring basis are presented in the
following tables. Corporate bonds and other includes obligations of the United States of America (U.S.) Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.
The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Unrealized
gains (losses) on Level 3 assets and liabilities held as of March 31, 2022 recognized in Net income (loss) in the period
$
i—
$
i—
$
i—
$
i3
$
i3
Unrealized
gains (losses) on Level 3 assets and liabilities held as of March 31, 2022 recognized in Other comprehensive income (loss) in the period
(i72)
(i5)
(i31)
i—
(i108)
/
Securities
may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume.
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments
at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Level 1 securities include highly liquid government securities and exchange traded bonds, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury
or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with some inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily valued using pricing for similar securities, recently executed transactions and other pricing
models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with some inputs that are not market observable.
Short Term and Other Invested Assets
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes non-U.S. government securities for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
As of
March 31, 2023 and December 31, 2022, there were $i73 million and $i72 million of overseas deposits
within Other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.
Other Liabilities
Level 2 securities include currency forward contracts valued using observable market forward rates.
The
following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company. The weighted average rate is calculated based on fair value.
For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
i
The
carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
The
carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Short term investments not carried at fair value, Accrued investment income and certain Other assets and Other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the tables above.
Note E. iClaim
and Claim Adjustment Expense Reserves
Claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to historical patterns such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and economic conditions, economic, medical and social inflation, and public attitudes. All of these factors can affect the estimation of claim
and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Claim and claim adjustment expense
reserves are also maintained for the Company's structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for structured settlement obligations, the Company's actuaries review mortality experience on an annual basis. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations
in our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $i52 million and $i19 million
for the three months ended March 31, 2023 and 2022 primarily related to severe weather related events.
Liability for Unpaid Claim and Claim Adjustment Expenses
i
The
following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves.
Three months ended March 31
(In millions)
2023
2022 (1)
Reserves, beginning of year:
Gross
$
i22,120
$
i21,269
Ceded
i5,191
i4,969
Net
reserves, beginning of year
i16,929
i16,300
Net
incurred claim and claim adjustment expenses:
Provision for insured events of current year
i1,326
i1,188
Increase
(decrease) in provision for insured events of prior years
i13
(i7)
Amortization
of discount
i11
i12
Total
net incurred (2)
i1,350
i1,193
Net
payments attributable to:
Current year events
(i72)
(i68)
Prior
year events
(i1,042)
(i920)
Total
net payments
(i1,114)
(i988)
Foreign
currency translation adjustment and other
i35
(i92)
Net
reserves, end of period
i17,200
i16,413
Ceded
reserves, end of period
i5,209
i5,002
Gross
reserves, end of period
$
i22,409
$
i21,415
(1) In
conjunction with the Company's adoption of ASU 2018-12, at January 1, 2023, long term care reserves for policyholders currently receiving benefits were reclassified from Claim and claim adjustment expenses into Future policy benefits and this change was applied retrospectively as of January 1, 2021. See Note A to the Condensed Consolidated Financial Statements for additional information.
/
(2) Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive
reinsurance deferred gain accounting and uncollectible reinsurance, which are not reflected in the table above.
Net Prior Year Development
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. iThe following
table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.
The following table presents further detail of the development recorded for the Specialty segment.
Three
months ended March 31
(In millions)
2023
2022
Pretax (favorable) unfavorable development:
Medical Professional Liability
$
i9
$
i8
Other
Professional Liability and Management Liability
i—
i—
Surety
i—
(i9)
Warranty
(i9)
(i9)
Other
i—
i—
Total
pretax (favorable) unfavorable development
$
i—
$
(i10)
/
Commercial
i
The
following table presents further detail of the development recorded for the Commercial segment.
Three months ended March 31
(In millions)
2023
2022
Pretax (favorable) unfavorable development:
Commercial
Auto
$
i—
$
i—
General
Liability
i—
i—
Workers'
Compensation
(i2)
(i2)
Property
and Other
i—
i—
Total
pretax (favorable) unfavorable development
$
(i2)
$
(i2)
/
International
i
The
following table presents further detail of the development recorded for the International segment.
Three months ended March 31
(In millions)
2023
2022
Pretax (favorable) unfavorable development:
Commercial
$
(i2)
$
i—
Specialty
i19
i—
Other
(i2)
i—
Total
pretax (favorable) unfavorable development
$
i15
$
i—
/
2023
Unfavorable
development in specialty was due to higher than expected large loss emergence in the Company's professional liability business in accident year 2017.
In 2010, Continental Casualty Company (CCC) together with several of the Company’s insurance subsidiaries
completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, the Company ceded approximately $i1.6 billion of net A&EP claim and allocated claim adjustment
expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $i4 billion. The $i1.6
billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $i1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The
Company paid NICO a reinsurance premium of $i2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $i215
million, resulting in total consideration of $i2.2 billion.
In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $i2.2
billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect
of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits on the Condensed Consolidated Statements of Operations.
The impact of the LPT on the Condensed Consolidated Statements of Operations was the recognition of a retroactive reinsurance benefit of $i8 million and $i12 million
for the three months ended March 31, 2023 and 2022. As of March 31, 2023 and December 31, 2022, the cumulative amounts ceded under the LPT were $ii3.5/ billion. The
unrecognized deferred retroactive reinsurance benefit was $i417 million and $i425 million as of March 31,
2023 and December 31, 2022 and is included within Other liabilities on the Condensed Consolidated Balance Sheets.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $i2.5 billion as of March 31,
2023. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the majority of the Company’s A&EP claims.
Credit Risk for Ceded Reserves
The majority of the Company’s outstanding voluntary reinsurance receivables are due from reinsurers with financial strength ratings of A or higher. Receivables due from reinsurers with lower financial strength
ratings are primarily due from captive reinsurers and are backed by collateral arrangements.
Future policy benefits reserves are related to the Company's run-off long term care business, which is included in the Life & Group segment.
i
The determination of Future policy benefits reserves requires management to make estimates and assumptions about expected policyholder experience over the remaining life of the policy. Since policies may be in force for several decades, these assumptions are subject to significant estimation
risk. As a result of this variability, the Company’s future policy benefits reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.
The LFPB is computed using the net level premium method, which incorporates cash flow assumptions and discount rate assumptions. Under the net level premium method, the LFPB is equal to the present value of future benefits and claim settlement expenses less the present value of future net premiums. Net premiums are equal to gross premiums multiplied by the NPR. The NPR is generally the ratio of the present value of benefits and expense payments to the present value of gross premiums, expected over the lifetime of the policy. As a result of the modified retrospective
adoption of ASU 2018-12, the Company’s NPR calculation incorporates the original locked in discount rate and the reserve balance as of the transition date of January 1, 2021.
The key cash flow assumptions used to estimate the LFPB are morbidity, persistency (inclusive of mortality), anticipated future premium rate increases and expenses. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. Expense assumptions relate to claim adjudication. The
Company has not elected the practical expedient that allows locking in the expense assumption. The discount rate is determined using the upper-medium grade fixed income instrument yield curve.
The Company has elected to update the NPR and the LFPB for actual experience on a quarterly basis. A quarterly assessment is also made as to whether evidence suggests that cash flow assumptions should be updated. Annually in the third quarter, actuarial analysis is performed on policyholder morbidity, persistency, premium rate increases and expense experience. This analysis, combined with judgment, informs the setting of updated cash flow assumptions used to estimate the LFPB. Actuarial analysis includes predictive modeling, actual to expected experience comparisons and trend analysis. Applicable industry research is also considered.
Quarterly,
to derive the upper-medium grade fixed income instrument yield discount rate assumption, the Company uses a published spot rate curve constructed from single-A rated U.S. dollar denominated corporate bonds. The Company uses linear interpolation to determine yield assumptions for tenors that fall between points for which observable rates are available. For cash flows that are projected to occur beyond the tenor for which market-observable rates are available, the Company applies judgment to estimate a normative rate which the Company grades to over 10 years.
Quarterly, the updated NPR is used to
derive an updated LFPB as of the beginning of the current quarter measured at the original locked in discount rate. The updated LFPB is then compared to the existing carrying amount of the liability as of the same date (measured at the original locked in discount rate) to determine the re-measurement gain (loss), which is presented parenthetically within the Insurance claims and policyholders’ benefits line on the Condensed Consolidated Statements of Operations.
Insurance contracts are grouped into cohorts according to issue year. Contracts assumed through reinsurance are generally included within the same cohorts as contracts issued directly by the
Company, according to issue year. The issue year for assumed contracts is defined according to the date that the Company’s assumption of insurance risk incepted. For assumed contracts that were reinsured concurrently with the issuance of the underlying direct contract, issue year is defined as the year that the underlying policy was issued. For contracts that were already in-force when assumed by the Company, issue year is defined as the year in
which the reinsurance agreement incepted. For group long term care business, issue year is defined as the year the individual insurance certificate was issued. Long term care is the Company's only long-duration product line, therefore, cohorts are not further disaggregated by product.
The
following table summarizes balances and changes in the LFPB.
(In millions)
2023
2022
Present value of future net premiums
Balance,
January 1
$
i3,993
$
i4,735
Effect
of changes in discount rate
(i74)
(i880)
Balance,
January 1, at original locked in discount rate
i3,919
i3,855
Effect
of changes in cash flow assumptions (1)
i—
i—
Effect
of actual variances from expected experience (1)
(i49)
(i18)
Adjusted
balance, January 1
i3,870
i3,837
Interest
accrual
i52
i53
Net
premiums: earned during period
(i111)
(i112)
Balance,
end of period at original locked in discount rate
i3,811
i3,778
Effect
of changes in discount rate
i154
i525
Balance,
March 31
$
i3,965
$
i4,303
Present
value of future benefits & expenses
Balance, January 1
$
i17,472
$
i22,745
Effect
of changes in discount rate
(i125)
(i5,942)
Balance,
January 1, at original locked in discount rate
i17,347
i16,803
Effect
of changes in cash flow assumptions (1)
i—
i—
Effect
of actual variances from expected experience (1)
(i50)
(i23)
Adjusted
balance, January 1
i17,297
i16,780
Interest
accrual
i242
i241
Benefit
& expense payments
(i302)
(i233)
Balance,
end of period at original locked in discount rate
i17,237
i16,788
Effect
of changes in discount rate
i704
i3,517
Balance,
March 31
$
i17,941
$
i20,305
Net
LFPB
$
i13,976
$
i16,002
(1)
As of March 31, 2023 and 2022, the re-measurement gain (loss) of $i1 million and $i5 million
presented parenthetically on the Condensed Consolidated Statement of Operations is comprised of the effect of changes in cash flow assumptions and the effect of actual variances from expected experience.
Earned premiums associated with the Company's long term care business were $i115 million
and $i120 million for the three months ended March 31, 2023 and 2022.
The following table presents undiscounted expected future benefit and expense payments, and undiscounted expected future gross premiums.
As
of March 31
(In millions)
2023
2022
Expected future benefit and expense payments
$
i33,759
$
i33,674
Expected
future gross premiums
i5,729
i5,969
Discounted
expected future gross premiums at the upper-medium grade fixed income instrument yield discount rate were $i4,046 million and $i4,567 million
as of March 31, 2023 and 2022.
The weighted average effective duration of the LFPB calculated using the original locked in discount rate was ii12/
years as of March 31, 2023 and 2022.
The weighted average interest rates in the table below are calculated based on the rate used to discount all future cash flows.
As of March 31
As of December 31
2023
2022
2022
Original
locked in discount rate
i5.26
%
i5.31
%
i5.27
%
Upper-medium
grade fixed income instrument discount rate
i4.92
i3.67
i5.23
For
the three months ended March 31, 2023, immediate charges to net income resulting from adverse development that caused NPR to exceed 100% were $i13 million. There were ino
such charges for the three months ended March 31, 2022. The portion of losses recognized in a prior period due to NPR exceeding 100% which, due to favorable development, was reversed through net income for the three months ended March 31, 2023 and 2022 was $i11 million and
$i1 million.
Note
G. iLegal Proceedings, Contingencies and Guarantees
The Company is a party to various claims and litigation incidental to its business, which, based on the facts and circumstances currently known, are not material to the Company's results of operations or financial
position.
Guarantees
The Company has provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities issued by a previously owned subsidiary. As of March 31, 2023, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $i1.5
billion, which will be paid over the lifetime of the annuitants. The Company does not believe any payment is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
The components of net periodic pension cost (benefit) are presented in the following table.
Three months ended March 31
(In
millions)
2023
2022
Net periodic pension cost (benefit)
Interest cost on projected benefit obligation
$
i25
$
i17
Expected
return on plan assets
(i30)
(i38)
Amortization
of net actuarial loss
i8
i7
Total
net periodic pension cost (benefit)
$
i3
$
(i14)
The
following table indicates the line items in which the non-service cost (benefit) is presented on the Condensed Consolidated Statements of Operations.
Cumulative
effect adjustment from accounting change for adoption of ASU 2018-12(1) net of tax (expense) benefit of $i—, $i617,
$i—, $(i1,063),
$i— and $(i446)
The Company's property and casualty commercial insurance operations are managed and reported in ithree
business segments: Specialty, Commercial and International. These ithree segments are collectively referred to as Property & Casualty Operations. The Company's operations outside of Property & Casualty Operations are managed and reported in itwo
segments: Life & Group and Corporate & Other.
The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2022. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only Insurance and Reinsurance receivables, Insurance reserves, Deferred acquisition costs, Goodwill and Deferred non-insurance warranty acquisition expense and revenue are readily identifiable for individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion
of Net investment income and Net investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense have been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.
In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio.
The performance of the Company's insurance operations is monitored
by management through core income (loss), which is derived from certain income statement amounts. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk.
Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations.
(1)
As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
Note K. iNon-Insurance Revenues from Contracts with Customers
The Company had deferred non-insurance warranty revenue balances of $ii4.7/
billion reported in Deferred non-insurance warranty revenue as of March 31, 2023 and December 31, 2022. For the three months ended March 31, 2023 and 2022, the Company recognized $ii0.4/
billion of revenues that were included in the deferred revenue balance as of January 1, 2023 and 2022. For the three months ended March 31, 2023 and 2022, Non-insurance warranty revenue recognized from performance obligations related to prior periods due to a change in estimate was not material. The Company expects to recognize approximately $i1.2
billion of the deferred revenue in the remainder of 2023, $i1.1 billion in 2024, $i0.9 billion in 2025 and $i1.5
billion thereafter.
Item 2. Management's Discussion and Analysis (MD&A) of Financial Conditions and Results of Operations
OVERVIEW
The following discussion highlights significant factors affecting the Company. References to “we,”“our,”“us” or like terms refer to the business of CNA.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q and Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2022.
We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic
factors that are not necessarily reflective of our primary operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure and management believes some investors may find this measure useful to evaluate our primary operations. See further discussion regarding how we manage our business in Note J to the Condensed Consolidated Financial Statements included under Part I, Item 1. For reconciliations of non-GAAP measures to the most comparable GAAP measures and other information, please refer herein and/or to CNA's most recent Annual Report on Form 10-K on file with the Securities and Exchange Commission.
In evaluating the results of our Specialty, Commercial and International segments, we utilize the loss ratio, the underlying loss ratio, theexpense
ratio, the dividend ratio, the combined ratio and the underlying combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The underlying loss ratio excludes the impact of catastrophe losses and development-related items from the loss ratio. Development-related items represents net prior year loss reserve and premium development, and includes the effects of interest accretion and change in allowance for uncollectible reinsurance and deductible amounts. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The underlying combined ratio is the sum of the underlying
loss ratio, the expense ratio and the dividend ratio. In addition, we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. The change in exposure represents the change in premium dollars on policies that renew as a result of the change in risk of the policy. Retention represents the percentage of premium dollars renewed, excluding rate and exposure changes, in comparison to the expiring premium dollars from policies available to renew. New business represents premiums from policies written
with new customers and additional policies written with existing customers. Gross written premiums, excluding third-party captives, excludes business which is ceded to third-party captives, including business related to large warranty programs. We use underwriting gain (loss), calculated using GAAP financial results, to monitor our insurance operations. Underwriting gain (loss) is pretax and is calculated as net earned premiums less total insurance expenses, which includes insurance claims and policyholders' benefits, amortization of deferred acquisition costs and other insurance related expenses.
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition expenses. Further
information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed
Consolidated Financial Statements and the amount of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment:
•Insurance
Reserves
•Long Term Care Reserves
•Reinsurance and Insurance Receivables
•Valuation of Investments and Impairment of Securities
•Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from our estimates and may have a material adverse impact on our results of operations, financial condition, equity, business, and insurer financial strength and corporate debt ratings.
See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2022 for further information on the accounting estimates related to Reinsurance and Insurance Receivables, Valuation of Investments and Impairment of Securities and Income Taxes.
The information presented below restates in their entirety, as a result of the adoption of ASU 2018-12 and its impact on long term care reserves, the accounting estimates related to Insurance Reserves and Long Term Care Reservesincluded under the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. Further information on the long term care reserving process under the new guidance
is included in Note A and Note F to the Condensed Consolidated Financial Statements included under Part I, Item I.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts are primarily related to long term care policies and the reserves are recorded as Future policy benefits reserves as discussed below. The reserve for
unearned premiums represents the portion of premiums written related to the unexpired terms of coverage. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section of our Annual Report on Form 10-K for the year ended December 31, 2022.
Long Term Care Reserves
Future policy benefits reserves for our long term care policies are based on certain assumptions, including morbidity, persistency (inclusive of mortality), future premium rate increases, and expenses. The adequacy of the reserves is contingent upon actual experience and our future expectations related to these key assumptions. If actual or expected future experience differs from these assumptions, the reserves may not be adequate, requiring us to increase reserves. The reserves are discounted using upper-medium grade fixed
income instrument yields as of each reporting date. In addition, we may not receive regulatory approval for the level of premium rate increases we request.
The following table includes the consolidated results of our operations including our financial measure, core income (loss). For more detailed components of our business operations and a discussion of the core income (loss) financial measure, see the Segment Results section within this MD&A. For further discussion of Net investment income and Net investment gains or losses, see the Investments section of this MD&A.
Three months
ended March 31
(In millions)
2023
2022 (1)
Operating Revenues
Net earned premiums
$
2,248
$
2,059
Net investment income
525
448
Non-insurance
warranty revenue
407
382
Other revenues
7
7
Total operating revenues
3,187
2,896
Claims, Benefits and Expenses
Net
incurred claims and benefits (re-measurement gain (loss) of $1 and $5)
1,646
1,472
Policyholders' dividends
7
6
Amortization of deferred acquisition costs
379
344
Non-insurance warranty expense
384
354
Other
insurance related expenses
305
291
Other expenses
60
63
Total claims, benefits and expenses
2,781
2,530
Core income before income tax
406
366
Income
tax expense on core income
(81)
(68)
Core income
325
298
Net investment losses
(35)
(11)
Income tax benefit on net investment losses
7
8
Net
investment losses, after tax
(28)
(3)
Net income
$
297
$
295
(1) As of January 1, 2023, we adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts presented in the financial statements have been adjusted to reflect application of the new guidance. See Note A to
the Condensed Consolidated Financial Statements for additional information.
Core income increased $27 million for the three months ended March 31, 2023 as compared with the same period in 2022. Core income for our Property & Casualty Operations increased $25 million primarily due to higher net investment income and improved non-catastrophe current accident year underwriting results partially offset by higher catastrophe losses and unfavorable net prior year loss reserve development. Core results for our Life & Group segment decreased $8 million, while core loss for our Corporate & Other segment improved $10 million.
Catastrophe losses were $52 million and $19 million for the three months ended March 31, 2023 and 2022. Unfavorable
net prior year loss reserve development of $13 million was recorded for the three months ended March 31, 2023 as compared with favorable net prior year loss reserve development of $12 million recorded for the three months ended March 31, 2022 related to our Specialty, Commercial and International segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Results for the three months ended March 31, 2023 were impacted by unfavorable net pension costs related to our legacy United States of America (U.S.) pension plan primarily due to higher interest cost on projected benefit obligations as a result of an increase in discount rates year over year, as well as a lower expected
return on plan assets as a result of a lower plan asset base given actual asset returns in 2022. A portion of this additional cost has resulted in an unfavorable impact on our expense ratio for the three months ended March 31, 2023. The components of our net periodic pension cost (benefit) are presented in Note H to the Condensed Consolidated Financial Statements included under Part I, Item I.
The following discusses
the results of operations for our business segments. Our property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Our operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.
The following table details the results of operations
for Specialty.
Three months ended March 31
(In millions, except ratios, rate, renewal premium change and retention)
2023
2022
Gross written premiums
$
1,780
$
1,846
Gross
written premiums excluding third-party captives
886
885
Net written premiums
788
771
Net earned premiums
797
772
Underwriting gain
80
88
Net
investment income
129
103
Core income
171
163
Other performance metrics:
Loss ratio excluding catastrophes and development
58.4
%
58.9
%
Effect
of catastrophe impacts
—
—
Effect of development-related items
—
(1.3)
Loss ratio
58.4
57.6
Expense ratio
31.4
30.9
Dividend
ratio
0.2
0.2
Combined ratio
90.0
%
88.7
%
Combined ratio excluding catastrophes and development
90.0
%
90.0
%
Rate
2
%
10
%
Renewal
premium change
4
11
Retention
88
84
New business
$
108
$
145
Gross written premiums, excluding third-party captives, for Specialty for the three months ended March
31, 2023 were largely consistent with the same period in 2022. Net written premiums for Specialty increased $17 million for the three months ended March 31, 2023 as compared with the same period in 2022. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income increased $8 million for the three months ended March 31, 2023 as compared with the same period in 2022 primarily due to higher net investment income partially offset by no net prior year loss reserve development recorded for the three months ended March 31, 2023 as compared with favorable net prior year loss reserve development recorded for the three months ended March 31, 2022.
The
combined ratio of 90.0% increased 1.3 points for the three months ended March 31, 2023 as compared with the same period in 2022 due to a 0.8 point increase in the loss ratio and a 0.5 point increase in the expense ratio. The increase in the loss ratio was primarily driven by no net prior year loss reserve development recorded for the three months ended March 31, 2023 as compared with $10 million of favorable net prior year loss reserve development recorded for the three months ended March 31, 2022, partially offset by improved current accident year underwriting results. There were no catastrophe losses for the three months ended March 31, 2023 and 2022. The increase in the expense ratio was primarily driven by employee
related costs.
Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table details the results of operations for Commercial.
Three months ended March 31
(In millions, except ratios, rate, renewal premium change and retention)
2023
2022
Gross
written premiums
$
1,442
$
1,208
Gross written premiums excluding third-party captives
1,440
1,206
Net written premiums
1,188
1,001
Net earned premiums
1,046
904
Underwriting
gain
41
48
Net investment income
149
118
Core income
151
132
Other performance metrics:
Loss
ratio excluding catastrophes and development
61.5
%
61.5
%
Effect of catastrophe impacts
4.2
1.8
Effect of development-related items
—
—
Loss ratio
65.7
63.3
Expense
ratio
29.8
30.7
Dividend ratio
0.5
0.5
Combined ratio
96.0
%
94.5
%
Combined ratio excluding catastrophes and development
91.8
%
92.7
%
Rate
7
%
5
%
Renewal
premium change
9
8
Retention
86
87
New business
$
310
$
228
Gross written premiums for Commercial increased $234 million for the three months ended March 31,
2023 as compared with the same period in 2022 driven by higher new business and rate. Net written premiums for Commercial increased $187 million for the three months ended March 31, 2023 as compared with the same period in 2022. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income increased $19 million for the three months ended March 31, 2023 as compared with the same period in 2022, driven by higher net investment income and improved non-catastrophe underwriting results partially offset by higher catastrophe losses.
The combined ratio of 96.0% increased 1.5 points for the three months ended March 31, 2023 as compared with the same period in 2022 due to a 2.4 increase in the
loss ratio partially offset by a 0.9 point improvement in the expense ratio. The increase in the loss ratio was driven by higher catastrophe losses. Catastrophe losses were $44 million, or 4.2 points of the loss ratio, for the three months ended March 31, 2023, as compared with $16 million, or 1.8 points of the loss ratio, for the three months ended March 31, 2022. The improvement in the expense ratio was driven by higher net earned premiums partially offset by employee related costs.
Favorable net prior year loss reserve development of $2 million was recorded for the three months ended March 31, 2023 and 2022. Further information on net prior year loss reserve development is in Note E to the Condensed
Consolidated Financial Statements included under Part I, Item 1.
The following table details the results of operations for International.
Three months ended March 31
(In millions, except ratios, rate, renewal premium change and retention)
2023
2022
Gross
written premiums
$
398
$
363
Net written premiums
271
251
Net earned premiums
290
264
Underwriting gain
9
20
Net
investment income
23
14
Core income
24
26
Other performance metrics:
Loss ratio excluding catastrophes and development
57.5
%
58.6
%
Effect
of catastrophe impacts
2.8
1.2
Effect of development-related items
5.1
—
Loss ratio
65.4
59.8
Expense ratio
31.8
32.6
Combined
ratio
97.2
%
92.4
%
Combined ratio excluding catastrophes and development
89.3
%
91.2
%
Rate
4
%
9
%
Renewal
premium change
8
12
Retention
83
73
New business
$
85
$
78
Gross written premiums for International increased $35 million for the three months ended March 31,
2023 as compared with the same period in 2022. Excluding the effect of foreign currency exchange rates, gross written premiums increased $55 million driven by retention and higher new business. Net written premiums for International increased $20 million for the three months ended March 31, 2023 as compared with the same period in 2022. Excluding the effect of foreign currency exchange rates, net written premiums increased $35 million for the three months ended March 31, 2023 as compared with the same period in 2022. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income for the three months ended March 31, 2023 was largely consistent with the same period in 2022.
The combined
ratio of 97.2% increased 4.8 points for the three months ended March 31, 2023 as compared with the same period in 2022 due to a 5.6 point increase in the loss ratio partially offset by a 0.8 point improvement in the expense ratio. The increase in the loss ratio was largely driven by unfavorable net prior period loss reserve development. Catastrophe losses were $8 million, or 2.8 points of the loss ratio, for the three months ended March 31, 2023, as compared with $3 million, or 1.2 points of the loss ratio, for the three months ended March 31, 2022. The improvement in the expense ratio was largely driven by higher net earned premiums.
Unfavorable net prior year loss reserve development of $15 million was recorded for the three months ended March
31, 2023 as compared with no net prior year loss reserve development for the three months ended March 31, 2022. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the results of operations for Life & Group.
Three
months ended March 31
(In millions)
2023
2022 (1)
Net earned premiums
$
115
$
120
Net investment income
214
212
Core
loss before income tax
(12)
(7)
Income tax benefit on core loss
9
12
Core (loss) income
(3)
5
(1) As of January 1, 2023, we adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January
1, 2021. Prior period amounts presented in the financial statements have been adjusted to reflect application of the new guidance. See Note A and Note F to the Condensed Consolidated Financial Statements for additional information.
Core results decreased $8 million for the three months ended March 31, 2023 as compared with the same period in 2022 primarily due to long term care policy buyouts.
The
following table summarizes the results of operations for the Corporate & Other segment, including intersegment eliminations.
Three months ended March 31
(In millions)
2023
2022
Net
investment income
$
10
$
1
Insurance claims and policyholders' benefits
(7)
(8)
Interest expense
28
28
Core
loss
(18)
(28)
Core loss decreased $10 million for the three months ended March 31, 2023 as compared with the same period in 2022 driven by higher net investment income.
The following table summarizes the gross and net carried reserves for Corporate & Other.
The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
Three Months Ended March 31
(In
millions)
2023
2022
Fixed income securities:
Taxable fixed income securities
$
430
$
368
Tax-exempt fixed income securities
49
73
Total
fixed income securities
479
441
Limited partnership and common stock investments
28
8
Other, net of investment expense
18
(1)
Net investment income
$
525
$
448
Effective
income yield for the fixed income securities portfolio
4.6
%
4.3
%
Limited partnership and common stock return
1.3
%
0.4
%
Net investment income increased $77 million for the three months ended March 31, 2023 as compared with the same period in 2022 driven by higher income from fixed income securities and other, and higher limited partnership and common stock returns.
Net
Investment (Losses) Gains
The components of Net investment (losses) gains are presented in the following table.
Three Months Ended March 31
(In millions)
2023
2022
Fixed maturity securities:
Corporate
bonds and other
$
(23)
$
3
States, municipalities and political subdivisions
10
3
Asset-backed
(9)
(8)
Total fixed maturity securities
(22)
(2)
Non-redeemable
preferred stock
(14)
(38)
Derivatives, short term and other
1
29
Net investment losses
(35)
(11)
Income tax benefit on net investment losses
i7
8
Net
investment losses, after tax
$
(28)
$
(3)
Pretax net investment results decreased $24 million for three months ended March 31, 2023 as compared with the same period in 2022. The decrease was driven by higher net losses on fixed maturity securities partially offset by the favorable relative change in fair value of non-redeemable preferred stock in the three months ended March 31, 2023 as compared with the same period in 2022. The three months ended March 31, 2022 also included gains on a funds withheld embedded derivative
which related to a coinsurance agreement on our legacy annuity business that was novated in the fourth quarter of 2022.
Further information on our investment gains and losses is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.
U.S. Government, Government agencies and Government-sponsored enterprises
$
2,357
$
302
AAA
1,424
260
AA
4,053
670
A
6,440
619
BBB
12,651
1,360
Non-investment
grade
1,341
207
Total
$
28,266
$
3,418
The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.
Our investment portfolio has exposure to the commercial real estate sector primarily through our fixed maturity securities and mortgage loan portfolios. The performance of these assets is dependent on a number of factors, including the performance of the underlying collateral (which is influenced by cash flows from underlying property leases), changes in the fair value of collateral, refinancing risk, and the creditworthiness of tenants of credit tenant loan properties (where lease payments directly service the loan).
Within our fixed maturity securities portfolio, our exposure is primarily through our commercial mortgage-backed securities portfolio and our corporate and other bonds portfolio, which contains obligations of real estate investment trust (REIT) issuers. Commercial mortgage-backed securities include both single asset, single borrower collateral that is
securitized independently and conduit collateral that is securitized in diversified pools.
The following tables present the estimated fair value and net unrealized gains (losses) of our commercial mortgage-backed securities by property type and by ratings distribution.
The following tables present the estimated fair value
and net unrealized gains (losses) of the REIT issuer exposure within our corporate and other bonds portfolio by property type and by ratings distribution.
Mortgage loans are commercial in nature and are carried at unpaid principal balance, net of unamortized fees and an allowance for expected credit losses. The allowance for expected credit losses is developed by assessing the credit quality of pools of mortgage loans in good standing using debt service coverage ratios (DSCR) and loan-to-value ratios (LTV). This assessment
utilizes historical credit loss experience adjusted to reflect current conditions and reasonable and supportable forecasts. As of March 31, 2023 the allowance for expected credit losses on our mortgage portfolio was $24 million, or 2% of our amortized cost basis.
The following table presents the amortized cost basis of mortgage loans by property type.
In addition to our mortgage loan portfolio, we invest in
securitized credit tenant loans and ground lease financings that are classified as fixed maturity securities, all of which are investment grade quality. As of March 31, 2023, these holdings had an estimated fair value of $484 million and net unrealized losses of $82 million.
We own other fixed maturity securities which have exposure to cell towers, data centers and other collateral types that could be viewed as having real estate characteristics. We view these securities to have risks more akin to operating enterprises that do not share the same risks as the broader commercial real estate market.
We do not hold any direct investments in commercial real estate. Additionally, we do not have significant exposure through our limited partnership portfolio to funds whose primary strategy is real estate focused.
Duration
A
primary objective in the management of the investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level
of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group segment.
The effective durations of fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
The
investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022.
Our primary operating cash flow sources are premiums and investment income. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For the three months ended March 31, 2023, net cash provided by operating activities was $436 million as compared with $645 million for the same period in 2022. The decrease in cash provided by operating activities was driven by higher net claim payments, including long term care
policy buyouts, and lower distributions from limited partnerships partially offset by an increase in premiums collected.
Cash flows from investing activities include the purchase and disposition of financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, equipment and other assets not generally held for resale.
For the three months ended March 31, 2023, net cash provided by investing activities was $51 million as compared with net cash used by investing activities of $129 million for the same period in 2022. Net cash used or provided by investing activities is primarily driven by cash available from operations and by other factors, such as financing activities.
Cash flows from financing activities may include proceeds from the issuance
of debt and equity securities, and outflows for stockholder dividends, repayment of debt and purchases of our common stock.
For the three months ended March 31, 2023, net cash used by financing activities was $480 million as compared with $688 million for the same period in 2022. In the first quarter of 2023, we paid dividends of $445 million and repurchased 550,000 shares of our common stock at an aggregate cost of $24 million. In the first quarter of 2022, we paid dividends of $657 million and repurchased 445,000 shares of our common stock at an aggregate cost of $21 million.
Cash dividends of $i1.62 per share on our common stock, including a special cash dividend of $1.20 per share, were declared and paid during the three months ended March 31, 2023. On April 28, 2023, our Board of Directors declared a quarterly cash dividend of $0.42 per share, payable June 1, 2023
to stockholders of record on May 15, 2023. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.
Liquidity
We believe that our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home
Loan Bank of Chicago (FHLBC).
Dividends from Continental Casualty Company (CCC) are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of March 31, 2023, CCC was in a positive earned surplus position. CCC paid dividends of $475 million and $535 million during the three months ended March
31, 2023 and 2022. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
We have an effective automatic shelf registration statement on file with the Securities and Exchange Commission under which we may publicly issue an unspecified amount of debt, equity or hybrid securities from time to time.
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts(ASU 2018-12). The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. For us, this includes our long term care business in the Life & Group segment. For a discussion of Accounting Standards, see Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the effect of adoption of ASU 2018-12
on selected 2022 and 2021 financial data.
2022
2021
(In
millions, except per share data)
Q1
Q2
Q3
Q4
Full Year
Full Year
Components of Income (Loss)
Core
income (loss)
Prior to adoption
$
316
$
245
$
213
$
274
$
1,048
$
1,106
Effect
of adoption
(18)
(15)
(170)
(9)
(212)
(18)
As reported
$
298
$
230
$
43
$
265
$
836
$
1,088
Net
income (Loss)
Prior to adoption
$
313
$
205
$
128
$
248
$
894
$
1,202
Effect
of adoption
(18)
(15)
(170)
(9)
(212)
(18)
As reported
$
295
$
190
$
(42)
$
239
$
682
$
1,184
Other
comprehensive (loss) income, net of tax
Prior to adoption
$
(1,623)
$
(1,410)
$
(1,426)
$
582
$
(3,877)
$
(483)
Effect
of adoption
603
627
586
(177)
1,639
660
As reported
$
(1,020)
$
(783)
$
(840)
$
405
$
(2,238)
$
177
Diluted
Earnings (Loss) Per Common Share
Core income (loss)
Prior
to adoption
$
1.16
$
0.90
$
0.78
$
1.01
$
3.84
$
4.06
Effect of adoption
(0.07)
(0.06)
(0.62)
(0.04)
(0.77)
(0.07)
As
reported
$
1.09
$
0.84
$
0.16
$
0.97
$
3.07
$
3.99
Net income (loss)
Prior
to adoption
$
1.15
$
0.75
$
0.47
$
0.91
$
3.28
$
4.41
Effect of adoption
(0.07)
(0.06)
(0.62)
(0.04)
(0.77)
(0.07)
As
reported
$
1.08
$
0.69
$
(0.15)
$
0.87
$
2.51
$
4.34
Core income for 2022 decreased from what was previously reported generally driven by the
cumulative effect of assumption differences and differences in reserving methodologies between legacy and new accounting guidance.
Core income for the third quarter of 2022 decreased $170 million from what was previously reported under legacy accounting guidance, primarily related to our third quarter 2022 annual review of cash flow reserving assumptions. Under legacy accounting guidance, the third quarter 2022 gross premium valuation assessment indicated a pretax margin of $125 million and no unlocking event occurred. Under the new guidance favorable changes to the upper-medium grade fixed income instrument discount rate were recorded through Accumulated other comprehensive income quarterly, while the net unfavorable impact of increased cost of care inflation offset by favorable premium rate action assumptions was recorded in income.
Other comprehensive loss decreased from what
was previously reported driven by increases in the upper-medium grade fixed-income instrument yield beginning in 2021 and through 2022, which was used as the discount rate to re-measure the LFPB.
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These
statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,”“expects,”“intends,”“anticipates,”“estimates” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves (note that loss reserves for long term care, A&EP and other mass tort claims are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures); the impact of routine ongoing insurance reserve reviews we conduct; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety
of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statements. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following as well as those risks contained in the Risk Factors section of our 2022 Annual Report on Form 10-K:
Company-Specific Factors
•the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates sections of our 2022 Annual Report on Form 10-K and this report, and the Reserves - Estimates
and Uncertainties section of our 2022 Annual Report on Form 10-K, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;
•the risk that the other parties to the transactions in which, subject to certain limitations, we ceded our legacy A&EP and excess workers' compensation (EWC) liabilities, respectively, will not fully perform their respective obligations to CNA, the uncertainty in estimating loss reserves for A&EP and EWC liabilities and the possible continued exposure of CNA to liabilities for A&EP and EWC claims that are not covered under the terms of the respective transactions;
•the performance of reinsurance
companies under reinsurance contracts with us; and
•the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.
Industry and General Market Factors
•general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create losses to our lines of business and inflationary pressures on medical care costs, construction costs and other economic sectors;
•the effects
of social inflation, including frequency of nuclear verdicts and increased litigation activity, on the severity of claims;
•the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;
•product and policy availability and demand and market responses, including the level of ability to obtain rate increases;
•the COVID-19 pandemic and measures to mitigate the spread of the virus may continue to result in increased claims and related litigation risk across our enterprise;
•conditions in the capital and credit markets, including uncertainty and instability in these markets, as well as the overall economy, and
their impact on the returns, types, liquidity and valuation of our investments;
•conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms; and
•the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.
Regulatory and Legal Factors
•regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, which are increasing in complexity and number, change frequently, sometimes conflict, and
could expose us to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions, including regulations related to cyber security protocols (which continue to evolve in breadth, sophistication and maturity in response to an ever-evolving threat landscape), legal inquiries by state authorities, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, including those revising applicability of statutes of limitations, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations;
•regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments
and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies;
•regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards; and
•regulatory and legal implications relating to the sophisticated cyber incident sustained by the Company in March 2021 that may arise.
Impact of Natural and Man-Made Disasters and Mass Tort Claims
•weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes, tornados and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, wildfires, rain, hail and snow;
•regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers
to pay claims;
•man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;
•the occurrence of epidemics and pandemics; and
•mass tort claims, including those related to exposure to potentially harmful products or substances such as glyphosate, lead paint, per- and polyfluoroalkyl substances (PFAS) and opioids; and claims arising from changes that repeal or weaken tort reforms, such as those related to abuse reviver statutes.
Our forward-looking statements speak only as of the date of the filing of this Quarterly Report on Form
10-Q and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the three months ended March 31, 2023. See the Quantitative and
Qualitative Disclosures About Market Risk included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company
in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.
As of March 31, 2023, the Company's management, including the Company's Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of March 31, 2023.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter
ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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