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41: R2 Consolidated Statements of Operations HTML 127K
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53: R4 Consolidated Statements of Comprehensive Income HTML 50K
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38: R32 Investments (Components of other-than-temporary HTML 41K
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21: R33 Investments (Summary of fixed maturity and equity HTML 82K
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62: R34 Investments (Activity related to the pretax fixed HTML 33K
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retained earnings for securities still held for
which a portion of an OTTI loss was recognized in
OCI) (Details)
44: R35 Investments (Securities in a gross unrealized loss HTML 94K
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(Registrant's telephone number, including area code)
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.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [x] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated
filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. General
Basis
of Presentation
The Condensed Consolidated Financial Statements (Unaudited) 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 approximately 90% of the outstanding common stock of CNAF as of June 30, 2015.
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, including certain financial statement notes, prepared in accordance with GAAP, 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 for the year ended December 31, 2014, including the summary of significant accounting policies in Note A. The 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 periods. Actual results may differ from those estimates.
The interim financial data as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 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.
Sale of Continental Assurance Company (CAC)
On August 1, 2014, the Company completed the sale of the common stock of CAC, the Company's former life insurance subsidiary. In the first quarter of 2014, the Company recorded an after-tax impairment loss of $214 million related to the sale. The Company elected to include CAC cash
flow activity in the comparative Condensed Consolidated Statement of Cash Flows. Further information on discontinued operations is provided in Note K to the Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards Update - Disclosures about Short-Duration Contracts
In May of 2015, the Financial Accounting Standards Board issued updated accounting guidance requiring enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The updated guidance is effective for annual financial statements issued for fiscal years beginning after December
15, 2015, and interim periods within the annual periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statement disclosures.
Earnings per share
is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the effect 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.
For the three and six months ended June 30, 2015, approximately 423 thousand and 543 thousand potential shares attributable to exercises under stock-based employee
compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 238 thousand and 208 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three and six months ended June 30, 2014, approximately 622 thousand and 644 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those
same periods, approximately 180 thousand and 110 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. As of June 30, 2015 and December 31, 2014, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $1,022 million and $1,288 million. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred
acquisition costs and/or increase in Insurance reserves are recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).
The following tables present the estimated fair value and gross unrealized losses of fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2015 table above, are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads and other factors. 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 OTTI losses to be recorded as of June 30, 2015.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of June 30, 2015 and 2014 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Periods
ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Beginning balance of credit losses on fixed maturity securities
$
61
$
69
$
62
$
74
Reductions
for securities sold during the period
(2
)
(3
)
(3
)
(5
)
Reductions for securities the
Company intends to sell or more likely than not will be required to sell
—
—
—
(3
)
Ending balance of credit losses on fixed maturity securities
$
59
$
66
$
59
$
66
Contractual
Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
Actual
maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.
Derivative
financial instruments are presented gross in Other invested assets and Other liabilities on the Condensed Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net as of June 30, 2015 and December 31, 2014. The embedded derivative on funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As of June 30, 2015, the
Company had committed approximately $295 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of June 30, 2015, the Company had a mortgage loan commitment of $6 million representing a signed loan application received and accepted.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As
of June 30, 2015, the Company had commitments to purchase or fund additional amounts of $134 million and sell $79 million under the terms of such securities.
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 include i) the review of pricing service or broker pricing methodologies, 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, iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the
Company.
The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Other liabilities - Derivative financial instruments
Net realized investment gains (losses)
Securities
shown on the previous pages 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. During the three and six months ended June 30, 2015 there were no transfers between Level 1 and Level 2. During the three months ended June 30, 2014 there were $1 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During
the six months ended June 30, 2014, there were $24 million of transfers from Level 2 to Level 1 and $1 million from Level 1 to Level 2. The Company's policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Valuation Methodologies and Inputs
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 exchange traded bonds, highly liquid U.S. and foreign government bonds and redeemable preferred stock, 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 generally 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 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 non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.
Level 2 securities primarily include the embedded derivative on funds withheld liability and currency forwards. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs. Currency forwards are valued using observable market forward rates.
Overseas Deposits
Overseas deposits, which can be redeemed at net asset value in 90 days or less, are classified as Level 2.
Short Term Investments
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 commercial paper, 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.
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract
terms that are distinct for each insured, as well as the Company's own assumptions for mortality, premium expense and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
Significant Unobservable Inputs
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 table 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.
For fixed maturity securities, an increase
to the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
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
following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair values of Mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.
The Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.
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. Claim and Claim Adjustment Expense Reserves
The Company's property and casualty insurance 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 such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including 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 all 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. 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 can contribute to material period-to-period fluctuations in the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $60 million and $89 million for the three and six months ended June 30, 2015. Catastrophe losses in 2015 related primarily to U.S. weather-related
events. The Company reported catastrophe losses, net of reinsurance, of $56 million and $130 million for the three and six months ended June 30, 2014.
The following tables and discussion
present net prior year development recorded for Specialty, Commercial, International and Corporate & Other Non-Core segments.
The following table presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the Specialty segment.
Periods ended June 30
Three Months
Six
Months
(In millions)
2015
2014
2015
2014
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Medical
Professional Liability
$
(6
)
$
1
$
8
$
1
Other
Professional Liability and Management Liability
(1
)
(44
)
(4
)
(50
)
Surety
—
—
1
1
Warranty
1
—
1
—
Other
(7
)
2
(17
)
4
Total
pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(13
)
$
(41
)
$
(11
)
$
(44
)
Three
Months
2015
Overall, favorable development in medical professional liability was primarily due to lower than expected severity for individual healthcare professionals and allied facilities in accident years 2009 through 2012. Unfavorable development was recorded related to increased claim frequency in the aging services business in accident years 2009 and 2010.
Favorable development of $38 million was recorded in other professional liability and management liability related to lower than expected severity for professional services primarily in accident years 2010 and prior. Unfavorable development of $37 million was recorded primarily related to increased claim frequency on public company management liability in accident years 2012 through 2014.
Favorable
development for other coverages was primarily due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.
2014
Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was lower than expected severity in accident years 2008 through 2011.
Overall, unfavorable development for medical professional liability was primarily related to increased claim frequency in the aging services business for accident years 2009 through 2014, partially offset by lower than expected severity in accident years 2010 and prior. Additional favorable development was due to lower than expected severity for individual healthcare professionals and allied facilities in accident years 2009 through 2012.
Favorable development of $41 million was recorded in other professional liability and management liability primarily related to lower than expected severity in accident years 2010 and prior for professional services. Unfavorable development of $37 million
was recorded primarily related to increased claim frequency on public company management liability in accident years 2012 through 2014.
Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.
2014
Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was lower than expected severity in accident years 2008 through 2011.
The following table presents further detail of the development recorded for the Commercial segment. The majority of the 2014 unfavorable development relates to business classes which the Company has exited, but also includes Small Business where the Company has taken underwriting actions in an effort to improve profitability.
Periods
ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Pretax (favorable) unfavorable net prior year claim
and allocated claim adjustment expense reserve development:
Commercial Auto
$
7
$
19
$
7
$
39
General
Liability
1
32
5
32
Workers' Compensation
24
39
23
50
Property
and Other
(16
)
—
(24
)
(13
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
16
$
90
$
11
$
108
Three
Months
2015
In the aggregate, the unfavorable loss development of $16 million was driven by an extra contractual obligation loss and losses associated with premium development. The reserve development discussed below was largely offsetting.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2008 through 2013.
Favorable development for property and other was primarily due to better than expected loss emergence from 2012 catastrophe events and better than expected claim frequency of large claims in accident year 2014.
2014
Unfavorable development for commercial
auto was primarily related to increased claim frequency of large losses in accident years 2010 through 2013.
Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013.
In addition to the favorable property development noted in the three month discussion, there was additional favorable development for property related to better than expected loss emergence from 2014 catastrophe events.
2014
Unfavorable development for commercial auto was primarily related to increased claim frequency of large losses in accident years 2010 through 2013. Additionally, unfavorable development was recorded for increased claim frequency in accident years 2012 and 2013 and higher than expected severity in accident years 2010 and 2011.
Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident
year 2013 related to Small Business.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013 and the recognition of losses related to favorable premium development in accident year 2013.
Overall, favorable development for property and other coverages in accident years 2011 and prior primarily related to fewer claims than expected and favorable individual claim settlements. Additionally, there was favorable development due to better than expected loss emergence in catastrophe losses in accident year 2013. Unfavorable development was recorded in accident year 2012 primarily related to higher than expected loss emergence in catastrophe losses.
The following table presents further detail of the development recorded for the International segment.
Periods ended June 30
Three Months
Six Months
(In
millions)
2015
2014
2015
2014
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Medical
Professional Liability
$
—
$
—
$
—
$
1
Other
Professional Liability
(5
)
(14
)
(5
)
(15
)
Liability
(2
)
(4
)
(7
)
(6
)
Property
& Marine
(8
)
(7
)
(14
)
1
Other
7
—
14
(6
)
Commutations
—
—
—
10
Total
pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(8
)
$
(25
)
$
(12
)
$
(15
)
Three
Months
2015
Favorable development in property and marine was due to better than expected emergence in accident years 2012 through 2014.
Unfavorable development in other is due to large losses in financial institutions and political risk primarily in accident year 2014.
2014
Favorable development for other professional liability was primarily related to lower than expected severity in accident years 2011 and prior.
Six Months
2015
Favorable development in property and marine was due to better than expected emergence in accident years 2012 through 2014.
Unfavorable development in
other is due to large losses in financial institutions and political risk primarily in accident year 2014.
2014
Favorable development for other professional liability was primarily related to lower than expected severity in accident years 2011 and prior.
Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for uncollectible reinsurance.
Asbestos
and Environmental Pollution (A&EP) Reserves
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 (Loss Portfolio Transfer or LPT). At the transaction effective date, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under
a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO 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 $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215
million, resulting in total consideration of $2.2 billion.
Through December 31, 2013, the Company recorded $0.9 billion of additional amounts ceded under LPT. As a result, the cumulative amounts ceded under the Loss Portfolio Transfer exceeded the $2.2 billion consideration paid, resulting in a deferred retroactive reinsurance gain. This deferred gain is recognized in earnings in proportion to actual recoveries under the Loss Portfolio Transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within
the limit under the contract. In a period in which the estimate of ceded losses is changed, the required change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the inception of the LPT.
The following table displays the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Periods
ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Net A&EP adverse development before consideration of
LPT
$
150
$
—
$
150
$
—
Provision
for uncollectible third-party reinsurance on A&EP
—
—
—
—
Additional amounts ceded under LPT
150
—
150
—
Retroactive
reinsurance benefit recognized
(66
)
(1
)
(71
)
(5
)
Pretax impact of unrecognized deferred retroactive reinsurance benefit
$
84
$
(1
)
$
79
$
(5
)
The
fourth quarter of 2014 A&EP reserve review was not completed in 2014 because additional information and analysis on inuring third-party reinsurance recoveries were needed to finalize the review. The review was finalized in the second quarter of 2015. Unfavorable development was due to a decrease in anticipated future reinsurance recoveries related to asbestos claims and higher than expected severity on pollution claims. The effect of the unrecognized deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.
As of June 30, 2015 and December 31, 2014, the cumulative amounts ceded under the
LPT were $2.6 billion and $2.5 billion. The unrecognized deferred retroactive reinsurance benefit was $255 million and $176 million as of June 30, 2015 and December 31, 2014.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $3.1 billion and $3.4 billion as of June 30,
2015 and December 31, 2014. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full 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 Company’s A&EP claims.
Note F. Legal Proceedings and Contingent Liabilities
The Company is a party to routine litigation incidental to its business, which, based on the facts and circumstances currently known, is not material to the Condensed Consolidated Financial Statements.
Note G. Benefit Plans
The components of net periodic cost (benefit) are presented in the following table.
Periods
ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Pension cost (benefit)
Service
cost
$
2
$
1
$
4
$
4
Interest
cost on projected benefit obligation
28
33
56
66
Expected return on plan assets
(44
)
(48
)
(87
)
(96
)
Amortization
of net actuarial loss
10
7
19
13
Net periodic pension cost (benefit)
$
(4
)
$
(7
)
$
(8
)
$
(13
)
Postretirement
cost (benefit)
Interest cost on projected benefit obligation
$
—
$
1
$
—
$
1
Amortization
of prior service credit
(1
)
(5
)
(1
)
(9
)
Amortization of net actuarial loss
1
—
1
—
Curtailment
gain
—
(86
)
—
(86
)
Net periodic postretirement cost (benefit)
$
—
$
(90
)
$
—
$
(94
)
In
the second quarter of 2015, the Company eliminated future benefit accruals associated with the CNA Retirement Plan (Plan) effective June 30, 2015. Employees who were continuing to accrue under this Plan up until that date are entitled to an accrued benefit payable based on their eligible compensation and accrued service through June 30, 2015, in accordance with the terms of the Plan. Starting with the first pay period after July 1, 2015, affected employees began receiving enhanced employer contributions in the CNA Savings and Capital Accumulation Plan similar to employees who elected to cease accruals
effective December 31, 1999. Employees who elected to cease accruals effective December 31, 1999 are not affected by this curtailment. This curtailment resulted in a $55 million decrease in the plan benefit obligation liability and a reduction of the unrecognized actuarial losses included in AOCI. In connection with the curtailment, the Company remeasured the plan benefit obligation which resulted in an increase in the discount rate used to determine the benefit obligation from 3.85% to 4.00%.
In the second quarter of 2014, the
Company eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change was a negative plan amendment that resulted in an $86 million curtailment gain which was included in Other operating expenses within the Corporate & Other Non-Core segment. In connection with the plan amendment, the Company remeasured the plan benefit obligation which resulted in a decrease in the discount rate used to determine the benefit obligation from 3.60% to 3.10%.
The Company holds an investment in a real estate joint venture. In the normal course of business, the Company, on a joint and several basis with other unrelated insurance company shareholders, has committed to continue funding the operating deficits of this joint venture. Additionally, the Company and the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016. The
guarantee of the operating lease is a parallel guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as long as the joint venture continues to be funded by its shareholders which provide liquidity to make its annual lease payments.
In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, the Company would be required to assume the obligation for the entire office building operating lease. The Company does not believe it is likely that it will be required to do so. However, as of June 30, 2015, the
maximum potential future lease payments and other related costs that the Company could be required to pay under this guarantee, in excess of amounts already recorded, were approximately $37 million. If the Company were required to assume the entire lease obligation, the Company would have the right to pursue reimbursement from the other shareholders and the right to all sublease revenues.
Guarantees
As of June 30, 2015 and December 31,
2014, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements. Management believes that it is not likely that any future indemnity claims will be significantly greater than the amounts recorded.
In the course of selling business entities and assets to third parties, the Company agreed to guarantee the performance of certain obligations of a previously owned subsidiary and to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee
and indemnification agreements in effect for sales of business entities, assets and third-party loans may include provisions that survive indefinitely. As of June 30, 2015, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $260 million. Should the Company be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of a previously owned subsidiary.
In addition, the Company has agreed to provide indemnification to third-party
purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of June 30, 2015, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser's ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire or until the agreed-upon contract
terms expire.
In the normal course of business, the Company also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary, which are estimated to mature through 2120. The potential amount of future payments the Company could be required to pay under these guarantees was approximately $2.0 billion as of June 30, 2015. The Company does not believe a payable 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 Company's core property and casualty commercial insurance operations are aggregated and reported in three business segments: Specialty, Commercial and International. The Company's non-core operations are managed in two segments: Life & Group Non-Core and Corporate & Other Non-Core.
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, 2014. 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 and Goodwill are readily identifiable for all 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 Realized investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense has 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. Net operating income (loss), which is derived from certain income statement amounts, is used by management to monitor performance of the Company's insurance operations. 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. Based on such
analyses, the Company may recognize an OTTI loss on an investment security in accordance with its policy, or sell a security, which may produce realized gains and losses.
Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains (losses) because net realized investment gains (losses) are largely discretionary, except for some losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance and are therefore not considered an indication of trends in insurance operations.
The following table presents revenue by line of business for each reportable segment. Revenues are comprised of Operating revenues and Net realized investment gains and losses.
Item 2. Management's Discussion and Analysis (MD&A) of Financial Condition 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. Based on 2013 statutory net written premiums, we are the eighth largest commercial insurance writer and the 13th largest property and casualty insurance organization in the United States of America.
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, 2014.
We utilize the net operating income financial measure to monitor our operations. Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note J
to the Condensed Consolidated Financial Statements included under Part I, Item 1. In the evaluation of the results of our core Specialty, Commercial and International segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the 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 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.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year
development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the effect of 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 following table presents the consolidated results of our operations. For more detailed components of our business operations and the net
operating income financial measure, see the segment discussions within this MD&A.
Periods ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Operating
Revenues
Net earned premiums
$
1,735
$
1,811
$
3,422
$
3,617
Net
investment income
500
550
1,058
1,076
Other revenues
92
93
189
178
Total
operating revenues
2,327
2,454
4,669
4,871
Claims, Benefits and Expenses
Net
incurred claims and benefits
1,466
1,437
2,801
2,880
Policyholders' dividends
3
4
7
7
Amortization
of deferred acquisition costs
314
335
617
664
Other insurance related expenses
259
259
527
521
Other
expenses
121
41
250
169
Total claims, benefits and expenses
2,163
2,076
4,202
4,241
Operating
income before income tax
164
378
467
630
Income tax expense on operating income
(32
)
(106
)
(110
)
(168
)
Net
operating income
132
272
357
462
Net realized investment gains (losses)
—
(14
)
10
32
Income
tax (expense) benefit on net realized investment gains (losses)
6
3
4
(13
)
Net realized investment gains (losses), after tax
6
(11
)
14
19
Income
from continuing operations
138
261
371
481
Income (loss) from discontinued operations, net of tax
—
6
—
(201
)
Net
income
$
138
$
267
$
371
$
280
Three
Month Comparison
Income from continuing operations decreased $123 million for the three months ended June 30, 2015 as compared with the same period in 2014. The decrease was driven by lower net operating income, partially offset by improved net realized investment results.
Net realized investment results, after tax, improved $17 million for the three months ended June 30, 2015 as compared with the same period in 2014. See the Investments section of this MD&A for further discussion of Net investment income
and Net realized investment results.
Net operating income decreased $140 million for the three months ended June 30, 2015 as compared with the same period in 2014. Net operating results for each period were affected by significant items in our Corporate and Other Non-Core segment. Results in 2015 were negatively affected by a $54 million after-tax charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer, as further discussed in Note E to the Condensed Consolidated Financial Statements included under Part 1, Item 1. Results in 2014
benefited from a $56 million after-tax curtailment gain related to a change in postretirement benefits, as further discussed in Note G to the Condensed Consolidated Financial Statements included under Part 1, Item 1. Excluding the effect of these two significant items, net operating income decreased $30 million for the three months ended June 30, 2015 as compared with the same period in 2014. Improved underwriting results in our core property and casualty segments were more than offset by lower investment income and decreased results in our long term care business. Catastrophe losses were $39 million after tax for the three months ended June
30, 2015 as compared to $37 million after tax for the same period in 2014.
Favorable net prior year development of $20 million was recorded for the three months ended June 30, 2015 as compared with unfavorable net prior year development of $22 million in our
core Specialty, Commercial and International segments for the three months ended June 30, 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Six Month Comparison
Income from continuing operations decreased $110 million for the six months ended June 30, 2015 as compared with the same period in 2014. The decrease was primarily due to lower net operating income.
Loss from discontinued operations, net of tax, for the six
months ended June 30, 2014 included an impairment loss of $214 million related to the sale of CAC.
Net operating income decreased $105 million for the six months ended June 30, 2015 as compared with the same period in 2014. Excluding the effect of the two significant items discussed in the three month comparison, net operating income increased $5 million. Net operating income increased $46 million for our core segments. The increase was primarily driven by improved underwriting results. Catastrophe losses were $58 million after
tax for the six months ended June 30, 2015 as compared to $85 million after tax for the same period in 2014.
Favorable net prior year development of $18 million was recorded for the six months ended June 30, 2015 as compared with unfavorable net prior year development of $16 million for the six months ended June 30, 2014 related to our core Specialty, Commercial and International segments. Further information on net prior year development is in Note E
to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The preparation of the Condensed Consolidated Financial Statements (Unaudited) 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 amounts 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 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
•
Reinsurance and Insurance Receivables
•
Valuation of Investments and Impairment of Securities
•
Long Term Care Policies
•
Pension
and Postretirement Benefit Obligations
•
Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations or equity. 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, 2014 for further information.
The following discusses the results of continuing operations for our operating segments.
Specialty
The following table presents the results of operations.
Periods ended June 30
Three
Months
Six Months
(In millions, except ratios)
2015
2014
2015
2014
Net written premiums
$
672
$
701
$
1,370
$
1,414
Net
earned premiums
689
709
1,369
1,401
Net investment income
134
153
289
297
Net
operating income
137
167
272
296
Net realized investment gains (losses), after tax
—
(4
)
3
4
Net
income
137
163
275
300
Ratios
Loss
and loss adjustment expense
60.3
%
57.0
%
61.7
%
60.4
%
Expense
30.7
30.3
31.0
30.2
Dividend
0.2
0.2
0.2
0.2
Combined
91.2
%
87.5
%
92.9
%
90.8
%
Three
Month Comparison
Net written premiums for Specialty for the three months ended June 30, 2015 decreased $29 million from the prior year period, primarily due to lower retention and new business. The decrease in net earned premiums was consistent with the trend in net written premiums.
Average rate increased 1% for the three months ended June 30, 2015, as compared with an increase of 3% for the three months ended June 30, 2014 for the policies that renewed in each
period. Retention of 85% and 87% was achieved in each period.
Net income decreased $26 million for the three months ended June 30, 2015 as compared with the same period in 2014, due to lower net operating income.
Net operating income decreased $30 million for the three months ended June 30, 2015 as compared with the same period in 2014, driven by less favorable net prior year development and lower net investment income.
The
combined ratio increased 3.7 points for the three months ended June 30, 2015 as compared with the same period in 2014. The loss ratio increased 3.3 points due to less favorable net prior year development, which more than offset an improved current accident year loss ratio. Catastrophe losses were $5 million, or 0.7 points of the loss ratio for the three months ended June 30, 2015, as compared to $5 million, or 0.6 points of the loss ratio for the three
months ended June 30, 2014. The expense ratio increased 0.4 points for the three months ended June 30, 2015, as compared with the same period in 2014, due to the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $15 million and $43 million was recorded for the three months ended June 30, 2015 and 2014. Further information on net prior year development
is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net written premiums for Specialty for the six months ended June 30, 2015 decreased $44 million from the prior year period, primarily due to lower retention and new business. The decrease in net earned premiums was consistent with the trend in net written premiums.
Average
rate increased 1% for the six months ended June 30, 2015, as compared with an increase of 3% for the six months ended June 30, 2014 for the policies that renewed in each period. Retention of 86% and 87% was achieved in each period.
Net income decreased $25 million for the six months ended June 30, 2015 as compared with the same period in 2014, due to lower net operating
income.
Net operating income decreased $24 million for the six months ended June 30, 2015 as compared with the same period in 2014, primarily due to less favorable net prior year development and lower net investment income.
The combined ratio increased 2.1 points for the six months ended June 30, 2015 as compared with the same period in 2014. The loss ratio increased 1.3 points due to less favorable net prior year development, partially offset by an improved current accident
year loss ratio. Catastrophe losses were $12 million, or 0.9 points of the loss ratio for the six months ended June 30, 2015, as compared to $16 million, or 1.2 points of the loss ratio for the six months ended June 30, 2014. The expense ratio increased 0.8 points for the six months ended June 30, 2015 as compared with the same period in 2014, primarily driven by increased underwriting expenses and the unfavorable
effect of lower net earned premiums.
Favorable net prior year development of $19 million and $52 million was recorded for the six months ended June 30, 2015 and 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
The
following table presents the results of operations.
Periods ended June 30
Three Months
Six Months
(In millions, except ratios)
2015
2014
2015
2014
Net
written premiums
$
717
$
692
$
1,476
$
1,499
Net
earned premiums
703
732
1,381
1,467
Net investment income
169
201
373
392
Net
operating income
78
49
198
123
Net realized investment gains (losses), after tax
4
(7
)
5
1
Net
income
82
42
203
124
Ratios
Loss
and loss adjustment expense
72.1
%
83.7
%
69.6
%
80.4
%
Expense
34.9
34.1
35.4
34.0
Dividend
0.2
0.3
0.3
0.3
Combined
107.2
%
118.1
%
105.3
%
114.7
%
Three
Month Comparison
Net written premiums for Commercial increased $25 million for the three months ended June 30, 2015 as compared with the same period in 2014. This increase was driven by higher retention and new business, partially offset by underwriting actions taken in certain business classes. Net earned premiums decreased $29 million for the three months ended June 30, 2015 as compared with the same period 2014, consistent with the trend in net written premiums in recent quarters.
Average rate increased 2%
for the three months ended June 30, 2015, as compared with an increase of 5% for the three months ended June 30, 2014 for the policies that renewed in each period. Retention of 79% and 69% was achieved in each period.
Net income increased $40 million for the three months ended June 30, 2015 as compared with the same period in 2014, driven by higher net operating income.
Net
operating income increased $29 million for the three months ended June 30, 2015 as compared with the same period in 2014, due to improved underwriting results, partially offset by lower net investment income.
The combined ratio improved 10.9 points for the three months ended June 30, 2015 as compared with the same period in 2014. The loss ratio improved 11.6 points, due to less unfavorable net prior year development coupled with an improved current accident year loss ratio. Catastrophe losses were $54
million, or 7.7 points of the loss ratio for the three months ended June 30, 2015, as compared to $47 million, or 6.4 points of the loss ratio for the three months ended June 30, 2014. The expense ratio increased 0.8 points for the three months ended June 30, 2015 as compared with the same period in 2014, driven by the unfavorable effect of lower net earned premiums.
Unfavorable net prior year
development of $5 million and $84 million was recorded for the three months ended June 30, 2015 and 2014. The majority of the 2014 unfavorable development relates to business classes which we have exited, but also includes Small Business where we are taking underwriting actions in an effort to improve profitability. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net written premiums for Commercial decreased $23 million for the six months ended June 30, 2015 as compared with the same period in 2014, driven by underwriting actions taken in certain business classes, partially offset by positive rate and higher retention. Net earned premiums decreased $86 million for the six months ended June 30, 2015 as compared with the same period 2014, consistent with the trend in net written premiums.
Average
rate increased 2% for the six months ended June 30, 2015, as compared with an increase of 5% for the six months ended June 30, 2014 for the policies that renewed in each period. Retention of 77% and 72% was achieved in each period.
Net income increased $79 million for the six months ended June 30, 2015 as compared with the same period in 2014, driven by higher net operating
income.
Net operating income increased $75 million for the six months ended June 30, 2015 as compared with the same period in 2014, due to improved underwriting results, partially offset by lower net investment income.
The combined ratio improved 9.4 points for the six months ended June 30, 2015 as compared with the same period in 2014. The loss ratio improved 10.8 points, primarily due to the absence of unfavorable net prior year development and an improved current accident
year loss ratio. Catastrophe losses were $73 million, or 5.3 points of the loss ratio for the six months ended June 30, 2015, as compared to $107 million, or 7.4 points of the loss ratio for the six months ended June 30, 2014. The expense ratio increased 1.4 points for the six months ended June 30, 2015 as compared with the same period in 2014, primarily due to the unfavorable effect of lower net earned premiums.
Favorable
net prior year development of $1 million was recorded for the six months ended June 30, 2015, as compared with unfavorable net prior year development of $84 million for the six months ended June 30, 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
The
following table presents the results of operations.
Periods ended June 30
Three Months
Six Months
(In millions, except ratios)
2015
2014
2015
2014
Net
written premiums
$
249
$
261
$
461
$
508
Net
earned premiums
207
231
398
472
Net investment income
13
16
27
31
Net
operating income
22
20
31
36
Net realized investment gains, after tax
—
1
1
1
Net
income
22
21
32
37
Ratios
Loss
and loss adjustment expense
55.0
%
50.8
%
57.7
%
52.5
%
Expense
37.2
39.1
37.4
39.2
Dividend
—
—
—
—
Combined
92.2
%
89.9
%
95.1
%
91.7
%
Three
Month Comparison
Net written premiums for International decreased $12 million for the three months ended June 30, 2015 as compared with the same period in 2014. The decrease was driven by the unfavorable effect of foreign currency exchange rates. Excluding the effect of foreign currency exchange rates, net written premiums increased 5% for the three months ended June 30, 2015 as compared with the same period in 2014. Net earned premiums decreased $24 million for the three months ended June
30, 2015 as compared with the same period in 2014, consistent with the trend in net written premiums.
Average rate decreased 1% for the three months ended June 30, 2015, as compared with a decrease of 3% for the three months ended June 30, 2014 for the policies that renewed in each period. Retention of 71% and 74% was achieved in each period.
The combined ratio increased 2.3 points for the three
months ended June 30, 2015 as compared with the same period in 2014. The loss ratio increased 4.2 points, primarily due to less favorable net prior year development. Catastrophe losses were $1 million, or 0.8 points of the loss ratio for the three months ended June 30, 2015, as compared to $4 million, or 1.8 points of the loss ratio for the three months ended June 30, 2014. The expense ratio improved 1.9
points for the three months ended June 30, 2015 as compared with the same period in 2014 due to decreased expenses, partially offset by the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $10 million and $19 million was recorded for the three months ended June 30, 2015 and 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net written premiums for International decreased $47 million for the six months ended June 30, 2015 as compared with the same period in 2014. The decrease was driven by the unfavorable effect of foreign currency exchange rates, unfavorable premium development at Hardy and the 2014 termination of a specialty product managing general underwriter relationship in Canada. Net earned premiums decreased $74 million for the six months ended June 30, 2015 as compared with the same period in 2014,
consistent with the trend in net written premiums.
Average rate decreased 1% for the six months ended June 30, 2015 and 2014 for the policies that renewed in each respective period. Retention of 74% and 78% was achieved in each period.
The combined ratio increased 3.4 points for the six months ended June 30, 2015 as compared with the same period in 2014. The loss ratio increased
5.2 points, primarily due to the unfavorable effect of net prior year development. Catastrophe losses were $4 million, or 1.0 points of the loss ratio for the six months ended June 30, 2015, as compared to $7 million, or 1.6 points of the loss ratio for the six months ended June 30, 2014. The expense ratio improved 1.8 points for the six months ended June 30, 2015 as compared with the same period in 2014
due to decreased expenses, partially offset by the unfavorable effect of lower earned premiums.
Unfavorable net prior year development of $2 million was recorded for the six months ended June 30, 2015 as compared with favorable net prior year development of $16 million the six months ended June 30, 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
The following table presents the results of operations.
Periods ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Net
earned premiums
$
137
$
139
$
275
$
278
Net
investment income
179
173
358
344
Net operating income (loss)
(24
)
9
(41
)
7
Net
realized investment gains (losses), after tax
1
(3
)
4
7
Net income (loss)
(23
)
6
(37
)
14
Three
Month Comparison
Net earned premiums for Life & Group Non-Core were unchanged for the three months ended June 30, 2015 as compared with the same period in 2014, as the effect of policy lapses was substantially offset by rate increases.
Net results decreased $29 million for the three months ended June 30, 2015 as compared with the same period in 2014, driven by an increase in the net operating loss.
Net operating results decreased $33 million for the three
months ended June 30, 2015 as compared with the same period in 2014. Results in 2014 benefited from unusually favorable morbidity and persistency experience in our long term care business as compared to modestly unfavorable morbidity experience in the current year period.
Six Month Comparison
Net earned premiums for Life & Group Non-Core were unchanged for the six months ended June 30, 2015 as compared with the same period in 2014, primarily due to the same reasons discussed above in the three month comparison.
Net results decreased $51 million
for the six months ended June 30, 2015 as compared with the same period in 2014, primarily due to an increase in the net operating loss.
Net operating results decreased $48 million for the six months ended June 30, 2015 as compared with the same period in 2014, due to the same reasons discussed above in the three month comparison.
The following table presents the results of operations.
Periods ended June 30
Three Months
Six Months
(In
millions)
2015
2014
2015
2014
Net investment income
$
5
$
7
$
11
$
12
Interest
expense
39
46
78
90
Net operating income (loss)
(81
)
27
(103
)
—
Net
realized investment gains (losses), after tax
1
2
1
6
Net income (loss)
(80
)
29
(102
)
6
Three
Month Comparison
Net results decreased $109 million for the three months ended June 30, 2015 as compared with the same period in 2014. Results in 2015 were negatively affected by a $54 million after-tax charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer, as further discussed in Note E to the Condensed Consolidated Financial Statements included under Part 1, Item 1. Results in 2014 benefited from a $56 million after-tax curtailment gain related to a change in postretirement benefits, as further discussed in Note G to the Condensed Consolidated Financial Statements included under Part 1, Item
1. Additionally, 2015 benefited from lower interest expense due to the maturity of higher coupon debt in the fourth quarter of 2014.
No net prior year development was recorded for the three months ended June 30, 2015 and 2014.
Six Month Comparison
Net results decreased $108 million for the six months ended June 30, 2015 as compared with the same period in 2014, primarily due to the same reasons discussed above in the three
month comparison.
No net prior year development was recorded for the six months ended June 30, 2015 and 2014.
The following table presents the gross and net carried reserves.
The significant components of Net investment income are presented in the following table.
Periods ended June 30
Three Months
Six
Months
(In millions, except yields)
2015
2014
2015
2014
Fixed maturity securities:
Taxable
$
352
$
350
$
694
$
702
Tax-Exempt
100
101
201
201
Total
fixed maturity securities
452
451
895
903
Limited partnership investments
48
97
162
170
Other,
net of investment expense
—
2
1
3
Pretax net investment income
$
500
$
550
$
1,058
$
1,076
After-tax
net investment income
$
356
$
391
$
750
$
762
Effective
income yield for the fixed maturity securities portfolio, pretax
4.9
%
4.9
%
4.8
%
4.9
%
Effective income yield for the fixed maturity securities portfolio,
after tax
3.5
%
3.5
%
3.5
%
3.5
%
After-tax net investment income for the three months ended June
30, 2015 decreased $35 million as compared with the same period in 2014. The decrease was driven by limited partnerships, which returned 1.6% as compared with 3.5% in the prior year period. Income for the quarter from fixed maturity securities was favorably affected by changes in estimates for prepayments for asset-backed securities, offset by a decline in the effective income yield excluding these changes.
After-tax net investment income for the six months ended June 30, 2015 decreased $12 million as compared with the same period in 2014. The decrease was primarily driven by limited partnerships, which returned 5.5% as
compared with 6.3% in the prior year period.
The components of Net realized investment gains (losses) are presented in the following table.
Periods
ended June 30
Three Months
Six Months
(In millions)
2015
2014
2015
2014
Fixed maturity securities:
Corporate
and other bonds
$
3
$
8
$
16
$
22
States,
municipalities and political subdivisions
(16
)
(5
)
(20
)
18
Asset-backed
—
(24
)
3
(23
)
Foreign
government
1
2
1
2
Total fixed maturity securities
(12
)
(19
)
—
19
Equity
securities
(1
)
—
(1
)
5
Derivative financial instruments
11
1
10
1
Short
term investments and other
2
4
1
7
Net realized investment gains (losses)
—
(14
)
10
32
Income
tax (expense) benefit on net realized investment gains (losses)
6
3
4
(13
)
Net realized investment gains (losses), after tax
$
6
$
(11
)
$
14
$
19
Net
realized investment results, after tax, improved $17 million for the three months ended June 30, 2015 as compared with the same period in 2014. This improvement was driven by higher net realized investment gains, including gains on sales of securities and derivative gains, partially offset by higher OTTI losses recognized in earnings.
Net realized investment gains, after tax, decreased $5 million for the six months ended June 30, 2015 as compared with the same period in 2014. This decrease was driven by higher OTTI losses recognized in earnings, partially
offset by higher net realized investment gains, including derivative gains and gains on sales of securities.
Further information on our realized gains and losses, including our OTTI losses and derivative gains, is included in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Our fixed
maturity portfolio consists primarily of high quality bonds, 92% and 93% of which were rated as investment grade (rated BBB- or higher) as of June 30, 2015 and December 31, 2014. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody's), in that order of preference. If a security is not rated by these agencies, we formulate an internal rating. As of June 30, 2015 and December 31, 2014, approximately 98% and 99% of the fixed maturity
portfolio was rated by S&P or Moody's, or was issued or guaranteed by the U.S. Government, Government agencies or Government-sponsored enterprises.
The following table presents the ratings of our fixed maturity portfolio at fair value.
U.S. Government, Government agencies and Government-sponsored enterprises
$
126
2
%
$
2
1
%
AAA
384
6
11
7
AA
1,289
20
29
18
A
1,096
17
25
16
BBB
2,577
40
59
38
Non-Investment
Grade
960
15
31
20
Total
$
6,432
100
%
$
157
100
%
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.
A primary objective in the management of the investment portfolio is to optimize return relative to 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 and the 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 Non-Core segment.
The effective durations of fixed maturity 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. 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 in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014.
Short Term Investments
The carrying values of the components of Short term investments are presented in the following table.
Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Cash receipts and cash payments resulting from purchases and sales of trading securities are reported as cash flows related to operating activities. Additionally, cash may be paid or received for income taxes.
For the six months ended June 30, 2015, net cash provided by operating activities was $540 million as compared with $587 million for the same
period in 2014. This reduction reflected lower premiums collected and decreased receipts relating to returns on limited partnerships, partially offset by lower net claim payments.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale. Net cash provided by investing activities was $87 million for the six months ended June 30, 2015, as compared with net cash used of $734 million for the same period in 2014. The cash flow from investing activities is affected by
various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity instruments. For the six months ended June 30, 2015, net cash used by financing activities was $670 million as compared with net cash provided of $163 million for the same period in 2014. Cash used by financing activities reflected an increased special stockholder dividend in the first quarter of 2015
as compared to the same period in 2014. Additionally, in the first quarter of 2014, we issued $550 million of senior notes.
Common Stock Dividends
Dividends of $2.50 per share of our common stock, including a special dividend of $2.00 per share, were declared and paid during the six months ended June 30, 2015. On July 31, 2015, our Board of Directors declared a quarterly dividend of $0.25 per share, payable September 2, 2015 to stockholders
of record on August 17, 2015. 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.
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 Illinois Department of Insurance (the Department), are determined based on statutory net income and surplus as well as timing of dividends paid in the preceding twelve months. Ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. During the six months ended June 30, 2015, CCC paid a dividend of $700 million to its parent. As of June 30, 2015, CCC is able to pay approximately $216 million
of dividends that would not be subject to the prior approval of the Department.
We have an effective automatic shelf registration statement under which we may issue debt, equity or hybrid securities.
For discussion of accounting standards update that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements.
FORWARD-LOOKING
STATEMENTS
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 for A&EP and other mass tort claims which 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 are conducting; our expectations concerning our revenues, earnings, expenses
and investment activities; volatility in investment returns; expected cost savings and other results from our expense reduction activities; 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 statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:
Company-Specific Factors
•
the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates
and Uncertainties sections of our 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 transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;
•
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
•
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 and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;
•
general economic and business conditions, including recessionary conditions that may decrease the size and number of
our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
•
conditions in the capital and credit markets, including continuing 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 initiatives and compliance with governmental regulations, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, 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; and
•
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.
Impact of Catastrophic Events and Related Developments
•
weather
and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, 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; and
•
the occurrence of epidemics.
Our forward-looking statements speak only as of the date on which they are made 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 six months ended June 30, 2015. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A on our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2014 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 June 30, 2015, 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 Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of June 30,
2015.
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 June 30, 2015 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.
CNA Supplemental Executive Retirement Plan, restated as of January 1, 2015
10.5
CNA
Supplemental Executive Savings and Capital Accumulation Plan, restated as of January 1, 2014
10.6
First Amendment to the CNA Supplemental Executive Savings and Capital Accumulation Plan, dated May 28, 2015
10.6.1
Certification of Chief Executive Officer
31.1
Certification
of Chief Financial Officer
31.2
Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
32.1
Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
32.2
XBRL
Instance Document
101.INS
XBRL Taxonomy Extension Schema
101.SCH
XBRL Taxonomy Extension Calculation Linkbase
101.CAL
XBRL Taxonomy Extension Definition Linkbase
101.DEF
XBRL
Taxonomy Label Linkbase
101.LAB
XBRL Taxonomy Extension Presentation Linkbase
101.PRE
68
Dates Referenced Herein and Documents Incorporated by Reference