UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x]
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 20172022
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[ ]
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____ to _____
Commission File Number 1-5823
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | | 36-6169860 |
(State or other jurisdiction of incorporation or organization)
| | 36-6169860
(I.R.S. Employer Identification No.)
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333 S. Wabash
151 N. Franklin | | 60606 |
Chicago, | Illinois | | (Zip Code) |
(Address of principal executive offices) | | 60604
(Zip Code)
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(312) 822-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, Par value $2.50 | | "CNA" | | New York Stock Exchange |
| | | | Chicago Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ filer [x]
| | Accelerated filer [ ] | | Non-accelerated☐
filer [ ](Do not check if a smaller reporting company)
| Non-accelerated filer | ☐
| Smaller reporting company [ ] | ☐ | Emerging growth company [ ] | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [x]☒
Indicate the numberAs of October 27, 2022, 270,893,378 shares outstanding of each of the issuer's classes of common stock aswere outstanding.
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Item Number | | Page Number |
| PART I | |
1. | Condensed Consolidated Financial Statements: | |
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2. | | |
3. | | |
4. | | |
| PART II | |
1. | | |
2. | | |
6. | | |
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Class | | Outstanding at October 26, 2017 |
Common Stock, Par value $2.50 | | 271,176,870 |
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Item Number | | Page Number |
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2. | | |
3. | | |
4. | | |
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1. | | |
6. | | |
PART I. Financial InformationI
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
| | Periods ended September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | (In millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | | | | | | | | Revenues | | | | | | | |
Net earned premiums | $ | 1,806 |
| | $ | 1,767 |
| | $ | 5,185 |
| | $ | 5,196 |
| Net earned premiums | $ | 2,221 | | | $ | 2,059 | | | $ | 6,435 | | | $ | 6,056 | |
Net investment income | 509 |
| | 524 |
| | 1,529 |
| | 1,461 |
| Net investment income | 422 | | | 513 | | | 1,302 | | | 1,608 | |
Net realized investment (losses) gains: | | | | | | | |
| |
Other-than-temporary impairment losses | (5 | ) | | (18 | ) | | (9 | ) | | (56 | ) | |
Other net realized investment (losses) gains | (19 | ) | | 64 |
| | 71 |
| | 82 |
| |
Net realized investment (losses) gains | (24 | ) |
| 46 |
| | 62 |
| | 26 |
| |
Net investment (losses) gains | | Net investment (losses) gains | (96) | | | 22 | | | (166) | | | 117 | |
Non-insurance warranty revenue | | Non-insurance warranty revenue | 399 | | | 357 | | | 1,173 | | | 1,054 | |
Other revenues | 107 |
| | 96 |
| | 318 |
| | 293 |
| Other revenues | 11 | | | 8 | | | 24 | | | 19 | |
Total revenues | 2,398 |
|
| 2,433 |
|
| 7,094 |
| | 6,976 |
| Total revenues | 2,957 | | | 2,959 | | | 8,768 | | | 8,854 | |
Claims, Benefits and Expenses | | | | | | | | Claims, Benefits and Expenses | | | | | | | |
Insurance claims and policyholders’ benefits | 1,480 |
| | 1,202 |
| | 4,053 |
| | 3,949 |
| Insurance claims and policyholders’ benefits | 1,665 | | | 1,632 | | | 4,703 | | | 4,684 | |
Amortization of deferred acquisition costs | 309 |
| | 314 |
| | 926 |
| | 926 |
| Amortization of deferred acquisition costs | 383 | | | 368 | | | 1,101 | | | 1,084 | |
Non-insurance warranty expense | | Non-insurance warranty expense | 371 | | | 330 | | | 1,092 | | | 973 | |
Other operating expenses | 381 |
| | 403 |
| | 1,091 |
| | 1,162 |
| Other operating expenses | 346 | | | 287 | | | 1,001 | | | 874 | |
Interest | 41 |
| | 39 |
| | 124 |
| | 119 |
| Interest | 28 | | | 28 | | | 84 | | | 85 | |
Total claims, benefits and expenses | 2,211 |
|
| 1,958 |
|
| 6,194 |
| | 6,156 |
| Total claims, benefits and expenses | 2,793 | | | 2,645 | | | 7,981 | | | 7,700 | |
Income before income tax | 187 |
| | 475 |
| | 900 |
| | 820 |
| Income before income tax | 164 | | | 314 | | | 787 | | | 1,154 | |
Income tax expense | (43 | ) | | (132 | ) | | (224 | ) | | (202 | ) | Income tax expense | (36) | | | (58) | | | (141) | | | (218) | |
Net income | $ | 144 |
|
| $ | 343 |
|
| $ | 676 |
| | $ | 618 |
| Net income | $ | 128 | | | $ | 256 | | | $ | 646 | | | $ | 936 | |
| | | | | | | | | | | | | | | |
Basic earnings per share | $ | 0.53 |
| | $ | 1.27 |
| | $ | 2.49 |
| | $ | 2.28 |
| Basic earnings per share | $ | 0.47 | | | $ | 0.94 | | | $ | 2.38 | | | $ | 3.44 | |
| | | | | | | | | | | | | | | |
Diluted earnings per share | $ | 0.53 |
| | $ | 1.26 |
| | $ | 2.48 |
| | $ | 2.28 |
| Diluted earnings per share | $ | 0.47 | | | $ | 0.94 | | | $ | 2.37 | | | $ | 3.43 | |
| | | | | | | | | | | | | | | |
Dividends declared per share | $ | 0.30 |
| | $ | 0.25 |
| | $ | 2.80 |
| | $ | 2.75 |
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| | | | | | | | |
Weighted Average Outstanding Common Stock and Common Stock Equivalents | | | | | | | | Weighted Average Outstanding Common Stock and Common Stock Equivalents | |
Basic | 271.2 |
| | 270.5 |
| | 271.1 |
| | 270.4 |
| Basic | 271.4 | | 271.7 | | 271.7 | | 271.8 |
Diluted | 272.1 |
| | 271.2 |
| | 272.0 |
| | 271.0 |
| Diluted | 272.3 | | 272.7 | | 272.6 | | 272.8 |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
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Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Comprehensive Income | | | | | | | |
Net income | $ | 144 |
| | $ | 343 |
| | $ | 676 |
| | $ | 618 |
|
Other Comprehensive Income, Net of Tax | | | | | | | |
Changes in: | | | | | | | |
Net unrealized gains on investments with other-than-temporary impairments | 1 |
| | 3 |
| | (3 | ) | | 7 |
|
Net unrealized gains on other investments | 23 |
| | 42 |
| | 167 |
| | 586 |
|
Net unrealized gains on investments | 24 |
| | 45 |
| | 164 |
| | 593 |
|
Foreign currency translation adjustment | 41 |
| | (24 | ) | | 94 |
| | (58 | ) |
Pension and postretirement benefits | 10 |
| | 6 |
| | 22 |
| | 17 |
|
Other comprehensive income, net of tax | 75 |
| | 27 |
| | 280 |
| | 552 |
|
Total comprehensive income | $ | 219 |
| | $ | 370 |
| | $ | 956 |
| | $ | 1,170 |
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Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Comprehensive (Loss) Income | | | | | | | |
Net income | $ | 128 | | | $ | 256 | | | $ | 646 | | | $ | 936 | |
Other Comprehensive Loss, net of tax | | | | | | | |
Changes in: | | | | | | | |
Net unrealized gains and losses on investments with an allowance for credit losses | (2) | | | — | | | (8) | | | — | |
Net unrealized gains and losses on other investments | (1,327) | | | (138) | | | (4,284) | | | (465) | |
Net unrealized gains and losses on investments | (1,329) | | | (138) | | | (4,292) | | | (465) | |
Foreign currency translation adjustment | (103) | | | (33) | | | (185) | | | (19) | |
Pension and postretirement benefits | 6 | | | 8 | | | 18 | | | 27 | |
Other comprehensive loss, net of tax | (1,426) | | | (163) | | | (4,459) | | | (457) | |
Total comprehensive (loss) income | $ | (1,298) | | | $ | 93 | | | $ | (3,813) | | | $ | 479 | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
CNA Financial Corporation
Condensed Consolidated Balance Sheets
| | (In millions, except share data) | September 30, 2017 (Unaudited) | | December 31, 2016 | (In millions, except share data) | September 30, 2022 (Unaudited) | | December 31, 2021 |
Assets | | | | Assets | | | |
Investments: | | | | Investments: | | | |
Fixed maturity securities at fair value (amortized cost of $38,814 and $38,361) | $ | 42,090 |
| | $ | 40,905 |
| |
Equity securities at fair value (cost of $118 and $106) | 129 |
| | 110 |
| |
Fixed maturity securities at fair value (amortized cost of $41,330 and $39,952, less allowance for credit loss of $3 and $18) | | Fixed maturity securities at fair value (amortized cost of $41,330 and $39,952, less allowance for credit loss of $3 and $18) | $ | 37,251 | | | $ | 44,380 | |
Equity securities at fair value (cost of $989 and $964) | | Equity securities at fair value (cost of $989 and $964) | 891 | | | 1,035 | |
Limited partnership investments | 2,311 |
| | 2,371 |
| Limited partnership investments | 1,895 | | | 1,859 | |
Other invested assets | 42 |
| | 36 |
| Other invested assets | 73 | | | 91 | |
Mortgage loans | 722 |
| | 591 |
| |
Mortgage loans (less allowance for uncollectible receivables of $24 and $16) | | Mortgage loans (less allowance for uncollectible receivables of $24 and $16) | 953 | | | 973 | |
Short term investments | 1,453 |
| | 1,407 |
| Short term investments | 1,074 | | | 1,990 | |
Total investments | 46,747 |
| | 45,420 |
| Total investments | 42,137 | | | 50,328 | |
Cash | 283 |
| | 271 |
| Cash | 503 | | | 536 | |
Reinsurance receivables (less allowance for uncollectible receivables of $37 and $37) | 4,332 |
| | 4,416 |
| |
Insurance receivables (less allowance for uncollectible receivables of $46 and $46) | 2,294 |
| | 2,209 |
| |
Reinsurance receivables (less allowance for uncollectible receivables of $21 and $21) | | Reinsurance receivables (less allowance for uncollectible receivables of $21 and $21) | 5,700 | | | 5,463 | |
Insurance receivables (less allowance for uncollectible receivables of $28 and $29) | | Insurance receivables (less allowance for uncollectible receivables of $28 and $29) | 2,986 | | | 2,945 | |
Accrued investment income | 436 |
| | 405 |
| Accrued investment income | 411 | | | 377 | |
Deferred acquisition costs | 643 |
| | 600 |
| Deferred acquisition costs | 787 | | | 737 | |
Deferred income taxes | 141 |
| | 379 |
| Deferred income taxes | 1,298 | | | 142 | |
Property and equipment at cost (less accumulated depreciation of $275 and $254) | 325 |
| | 310 |
| |
Property and equipment at cost (less accumulated depreciation of $272 and $255) | | Property and equipment at cost (less accumulated depreciation of $272 and $255) | 229 | | | 226 | |
Goodwill | 147 |
| | 145 |
| Goodwill | 142 | | | 148 | |
Other assets | 1,234 |
| | 1,078 |
| |
Deferred non-insurance warranty acquisition expense | | Deferred non-insurance warranty acquisition expense | 3,653 | | | 3,476 | |
Other assets (includes $25 and $— due from Loews Corporation) | | Other assets (includes $25 and $— due from Loews Corporation) | 2,369 | | | 2,261 | |
Total assets | $ | 56,582 |
| | $ | 55,233 |
| Total assets | $ | 60,215 | | | $ | 66,639 | |
Liabilities | |
| | |
| Liabilities | | | |
Insurance reserves: | | | |
| Insurance reserves: | | |
Claim and claim adjustment expenses | $ | 22,209 |
| | $ | 22,343 |
| Claim and claim adjustment expenses | $ | 24,700 | | | $ | 24,174 | |
Unearned premiums | 4,060 |
| | 3,762 |
| Unearned premiums | 6,195 | | | 5,761 | |
Future policy benefits | 11,040 |
| | 10,326 |
| Future policy benefits | 10,454 | | | 13,236 | |
Short term debt | 150 |
| | — |
| |
Long term debt | 2,707 |
| | 2,710 |
| Long term debt | 2,780 | | | 2,779 | |
Other liabilities (includes $25 and $50 due to Loews Corporation) | 4,247 |
| | 4,123 |
| |
Deferred non-insurance warranty revenue | | Deferred non-insurance warranty revenue | 4,706 | | | 4,503 | |
Other liabilities (includes $19 and $56 due to Loews Corporation) | | Other liabilities (includes $19 and $56 due to Loews Corporation) | 3,286 | | | 3,377 | |
Total liabilities | 44,413 |
| | 43,264 |
| Total liabilities | 52,121 | | | 53,830 | |
Commitments and contingencies (Notes C and F) |
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| |
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| Commitments and contingencies (Notes C and F) | | | |
Stockholders' Equity | |
| | |
| Stockholders' Equity | | | |
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,176,870 and 270,495,998 shares outstanding) | 683 |
| | 683 |
| |
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 270,887,022 and 271,363,999 shares outstanding) | | Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 270,887,022 and 271,363,999 shares outstanding) | 683 | | | 683 | |
Additional paid-in capital | 2,167 |
| | 2,173 |
| Additional paid-in capital | 2,211 | | | 2,215 | |
Retained earnings | 9,273 |
| | 9,359 |
| Retained earnings | 9,433 | | | 9,663 | |
Accumulated other comprehensive income (loss) | 107 |
| | (173 | ) | |
Treasury stock (1,863,373 and 2,544,245 shares), at cost | (61 | ) | | (73 | ) | |
Accumulated other comprehensive (loss) income | | Accumulated other comprehensive (loss) income | (4,139) | | | 320 | |
Treasury stock (2,153,221 and 1,676,244 shares), at cost | | Treasury stock (2,153,221 and 1,676,244 shares), at cost | (94) | | | (72) | |
Total stockholders’ equity | 12,169 |
| | 11,969 |
| Total stockholders’ equity | 8,094 | | | 12,809 | |
Total liabilities and stockholders' equity | $ | 56,582 |
| | $ | 55,233 |
| Total liabilities and stockholders' equity | $ | 60,215 | | | $ | 66,639 | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
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| | | | | | | |
Nine months ended September 30 | | | |
(In millions) | 2017 | | 2016 |
Cash Flows from Operating Activities | | | |
Net income | $ | 676 |
| | $ | 618 |
|
Adjustments to reconcile net income to net cash flows provided by operating activities: | | | |
Deferred income tax expense | 125 |
| | 112 |
|
Trading portfolio activity | 8 |
| | — |
|
Net realized investment gains | (62 | ) | | (26 | ) |
Equity method investees | 89 |
| | 265 |
|
Net amortization of investments | (30 | ) | | (17 | ) |
Depreciation and amortization | 66 |
| | 57 |
|
Changes in: | | | |
Receivables, net | 18 |
| | (311 | ) |
Accrued investment income | (31 | ) | | (30 | ) |
Deferred acquisition costs | (34 | ) | | (24 | ) |
Insurance reserves | 248 |
| | 464 |
|
Other assets | (121 | ) | | (96 | ) |
Other liabilities | (106 | ) | | 61 |
|
Other, net | 48 |
| | 47 |
|
Total adjustments | 218 |
| | 502 |
|
Net cash flows provided by operating activities | 894 |
| | 1,120 |
|
Cash Flows from Investing Activities | | | |
Dispositions: | | | |
Fixed maturity securities - sales | 4,167 |
| | 4,234 |
|
Fixed maturity securities - maturities, calls and redemptions | 2,635 |
| | 2,263 |
|
Equity securities | 22 |
| | 79 |
|
Limited partnerships | 160 |
| | 200 |
|
Mortgage loans | 22 |
| | 137 |
|
Purchases: | | | |
Fixed maturity securities | (6,877 | ) | | (7,472 | ) |
Equity securities | (18 | ) | | (1 | ) |
Limited partnerships | (85 | ) | | (222 | ) |
Mortgage loans | (153 | ) | | (88 | ) |
Change in other investments | (2 | ) | | 10 |
|
Change in short term investments | (29 | ) | | 241 |
|
Purchases of property and equipment | (80 | ) | | (94 | ) |
Disposals of property and equipment | — |
| | 107 |
|
Other, net | 20 |
| | 2 |
|
Net cash flows used by investing activities | $ | (218 | ) | | $ | (604 | ) |
| | Nine months ended September 30 | | | | Nine months ended September 30 | |
(In millions) | 2017 | | 2016 | (In millions) | 2022 | | 2021 |
Cash Flows from Operating Activities | | Cash Flows from Operating Activities | | | |
Net income | | Net income | $ | 646 | | | $ | 936 | |
Adjustments to reconcile net income to net cash flows provided by operating activities: | | Adjustments to reconcile net income to net cash flows provided by operating activities: | |
Deferred income tax (benefit) expense | | Deferred income tax (benefit) expense | (18) | | | 46 | |
Trading portfolio activity | | Trading portfolio activity | (5) | | | 13 | |
Net investment losses (gains) | | Net investment losses (gains) | 166 | | | (117) | |
Equity method investees | | Equity method investees | 235 | | | (106) | |
Net amortization of investments | | Net amortization of investments | (89) | | | (58) | |
Depreciation and amortization | | Depreciation and amortization | 38 | | | 41 | |
Changes in: | | Changes in: | |
Receivables, net | | Receivables, net | (390) | | | (1,076) | |
Accrued investment income | | Accrued investment income | (37) | | | (17) | |
Deferred acquisition costs | | Deferred acquisition costs | (66) | | | (15) | |
Insurance reserves | | Insurance reserves | 1,743 | | | 1,891 | |
Other, net | | Other, net | (233) | | | (184) | |
Net cash flows provided by operating activities | | Net cash flows provided by operating activities | 1,990 | | | 1,354 | |
Cash Flows from Investing Activities | | Cash Flows from Investing Activities | | | |
Dispositions: | | Dispositions: | |
Fixed maturity securities - sales | | Fixed maturity securities - sales | 4,885 | | | 2,510 | |
Fixed maturity securities - maturities, calls and redemptions | | Fixed maturity securities - maturities, calls and redemptions | 2,095 | | | 3,360 | |
Equity securities | | Equity securities | 230 | | | 237 | |
Limited partnerships | | Limited partnerships | 124 | | | 178 | |
Mortgage loans | | Mortgage loans | 101 | | | 90 | |
Purchases: | | Purchases: | |
Fixed maturity securities | | Fixed maturity securities | (8,768) | | | (7,127) | |
Equity securities | | Equity securities | (245) | | | (242) | |
Limited partnerships | | Limited partnerships | (265) | | | (281) | |
Mortgage loans | | Mortgage loans | (90) | | | (63) | |
Change in other investments | | Change in other investments | 9 | | | 3 | |
Change in short term investments | | Change in short term investments | 903 | | | 755 | |
Purchases of property and equipment | | Purchases of property and equipment | (41) | | | (16) | |
Other, net | | Other, net | (10) | | | (1) | |
Net cash flows used by investing activities | | Net cash flows used by investing activities | (1,072) | | | (597) | |
Cash Flows from Financing Activities | | | | Cash Flows from Financing Activities | | | |
Dividends paid to common stockholders | $ | (761 | ) | | $ | (746 | ) | Dividends paid to common stockholders | (874) | | | (518) | |
Proceeds from the issuance of debt | 496 |
| | 498 |
| |
Repayment of debt | (391 | ) | | (358 | ) | |
Purchase of treasury stock | | Purchase of treasury stock | (39) | | | (18) | |
Other, net | (17 | ) | | 1 |
| Other, net | (11) | | | (9) | |
Net cash flows used by financing activities | (673 | ) |
| (605 | ) | Net cash flows used by financing activities | (924) | | | (545) | |
Effect of foreign exchange rate changes on cash | 9 |
| | (8 | ) | Effect of foreign exchange rate changes on cash | (27) | | | (6) | |
Net change in cash | 12 |
| | (97 | ) | Net change in cash | (33) | | | 206 | |
Cash, beginning of year | 271 |
| | 387 |
| Cash, beginning of year | 536 | | | 419 | |
Cash, end of period | $ | 283 |
| | $ | 290 |
| Cash, end of period | $ | 503 | | | $ | 625 | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
| | Nine months ended September 30 | | | | |
Periods ended September 30 | | Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Common Stock | | | | Common Stock | | | | | | | |
Balance, beginning of period | $ | 683 |
| | $ | 683 |
| Balance, beginning of period | $ | 683 | | | $ | 683 | | | $ | 683 | | | $ | 683 | |
Balance, end of period | 683 |
| | 683 |
| Balance, end of period | 683 | | | 683 | | | 683 | | | 683 | |
Additional Paid-in Capital | | | | Additional Paid-in Capital | | | | | | | |
Balance, beginning of period | 2,173 |
| | 2,153 |
| Balance, beginning of period | 2,203 | | | 2,201 | | | 2,215 | | | 2,211 | |
Stock-based compensation | (6 | ) | | 10 |
| Stock-based compensation | 8 | | | 7 | | | (4) | | | (3) | |
Balance, end of period | 2,167 |
| | 2,163 |
| Balance, end of period | 2,211 | | | 2,208 | | | 2,211 | | | 2,208 | |
Retained Earnings | | | | Retained Earnings | | | | | | | |
| Balance, beginning of period | 9,359 |
| | 9,313 |
| Balance, beginning of period | 9,415 | | | 9,348 | | | 9,663 | | | 9,081 | |
Dividends paid to common stockholders | (762 | ) | | (746 | ) | |
Dividends to common stockholders ($0.40, $0.38, $3.20, $1.89 per share) | | Dividends to common stockholders ($0.40, $0.38, $3.20, $1.89 per share) | (110) | | | (104) | | | (876) | | | (517) | |
Net income | 676 |
| | 618 |
| Net income | 128 | | | 256 | | | 646 | | | 936 | |
Balance, end of period | 9,273 |
| | 9,185 |
| Balance, end of period | 9,433 | | | 9,500 | | | 9,433 | | | 9,500 | |
Accumulated Other Comprehensive Income (Loss) | | | | |
Accumulated Other Comprehensive (Loss) Income | | Accumulated Other Comprehensive (Loss) Income | | | | | | | |
Balance, beginning of period | (173 | ) | | (315 | ) | Balance, beginning of period | (2,713) | | | 509 | | | 320 | | | 803 | |
Other comprehensive income | 280 |
| | 552 |
| |
| Other comprehensive loss | | Other comprehensive loss | (1,426) | | | (163) | | | (4,459) | | | (457) | |
Balance, end of period | 107 |
| | 237 |
| Balance, end of period | (4,139) | | | 346 | | | (4,139) | | | 346 | |
Treasury Stock | | | | Treasury Stock | | | | | | | |
Balance, beginning of period | (73 | ) | | (78 | ) | Balance, beginning of period | (76) | | | (73) | | | (72) | | | (71) | |
Stock-based compensation | 12 |
| | 5 |
| Stock-based compensation | — | | | — | | | 17 | | | 16 | |
Purchase of treasury stock | | Purchase of treasury stock | (18) | | | — | | | (39) | | | (18) | |
Balance, end of period | (61 | ) | | (73 | ) | Balance, end of period | (94) | | | (73) | | | (94) | | | (73) | |
Total stockholders' equity | $ | 12,169 |
| | $ | 12,195 |
| Total stockholders' equity | $ | 8,094 | | | $ | 12,664 | | | $ | 8,094 | | | $ | 12,664 | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 89%90% of the outstanding common stock of CNAF as of September 30, 2017.2022.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, including certain financial statement notes, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2016,2021, 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 period. Actual results may differ from those estimates.
The interim financial data as of September 30, 20172022 and for the three and nine months ended September 30, 20172022 and 20162021 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.
Recently Adopted Accounting Standards Updates (ASU)
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvementsto Employee Share-Based Payment Accounting. The updated accounting guidance simplifies the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. As of January 1, 2017, the Company adopted the updated accounting guidanceand began recognizing excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense within net income, instead of additional paid-in capital as required under previous guidance. The related cash flows are now classified within operating activities. As a result of this change, excess tax benefits are no longer included in assumed proceeds under the treasury stock method of calculating earnings per share. The impact of the accounting change resulted in a decrease of $2 million and $5 million to income tax expense for the three and nine months ended September 30, 2017.
Accounting Standards Pending Adoption
In May 2014,August 2018, the FASB issued ASU No. 2014-09, Revenue Recognition2018-12, Financial Services-Insurance (Topic 606)944): Revenue from Contracts with Customers. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in an amount that reflects the consideration the entity is entitled to receive for the transfer of the promised goods or services. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. While the Company continues to evaluate the impacts of this new guidance on the Consolidated financial statements, including disclosures, the Company expects that revenue on warranty products and services will be recognized more slowly than under the current revenue recognition pattern. For a significant portion of warranty products, the Company also expects Other revenues and Other operating expenses to increase to reflect the gross amount paid by consumersTargeted Improvements to the auto dealer that acts as the Company's agent. The Company expects to adopt this guidance using the modified retrospective approach. While the cumulative effect of adoption using the modified retrospective approach may be significant, the Company does not expect the impact of the new guidance to be material to its results of operations or financial position.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesAccounting for Long-Duration Contracts. The updated accounting guidance requires changes to the reporting model for financial instruments.measurement and disclosure of long-duration contracts. For the Company, this includes the long term care and fully-ceded single premium immediate annuity business. Entities will be required to review, and update if there is a change, cash flow assumptions (including morbidity and persistency) at least annually, and to update discount rate assumptions quarterly using an upper-medium grade fixed-income instrument yield. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company expects the primary change to be the requirement for equity investments (except those accounted for under the equity methodeffect of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognizedcash flow assumptions will be recorded in net income. Upon adoption, the Company will recognize an adjustment for the cumulative amount of unrealized investment gains and losses related to available-for-sale equity securities within the opening balances of Retained earnings and Accumulated other comprehensive income (loss). The Company does not expect the impact of adopting ASU 2016-01 to have a material effect on the Company’s results of operations or financial position.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statements. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position.
In June 2016,and the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurementeffect of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through netin discount rate assumptions will be recorded in Other comprehensive income. The guidance is effective for interim and annual periods beginning after December 15, 2019. 2022, with early adoption permitted, and may be applied using either a modified retrospective transition method or a full retrospective transition method. Financial statements for prior periods presented shall be adjusted to reflect the effects of applying the new accounting guidance.
The Company is currently evaluatingwill adopt the new guidance effective January 1, 2023, using the modified retrospective method applied as of the transition date of January 1, 2021. The Company will use a published spot rate curve constructed from A+, A and A- rated U.S. dollar denominated corporate bonds matched to the duration of the corresponding insurance liabilities, to calculate discount rates. The Company will group its long-duration contracts into calendar year cohorts based on the contract issue date and product line. Long term care contracts will be grouped separately from the Company’s fully-ceded single premium immediate annuity contracts.
The most significant impact at the transition date will be the effect of updating the discount rate assumption to reflect an upper-medium grade fixed-income instrument yield, which will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The Company expects the net impact of these changes will be a decrease of approximately $2.3 billion in Accumulated other comprehensive income (AOCI) as of the transition date of January 1, 2021. There is a minimal transition impact expected to retained earnings.
The requirement to review, and update if there is a change, cash flow assumptions at least annually is expected to change the pattern of earnings being recognized.Adoption will also significantly expand the Company’s disclosures, and will impact systems, processes, and controls.While the requirements of the new guidance represent a material change from existing GAAP, the new guidance will have onnot impact capital and surplus under statutory accounting practices, cash flows, or the Company's financial statements, but expects the primary changes to be the useunderlying economics of the expected credit loss model for its mortgage loan portfoliobusiness.
The Company continues to make progress in connection with these matters and reinsurance receivablesis in process of refining key accounting policy decisions, technology solutions and the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial assetupdates to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines.
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes to the presentationinternal controls associated with adoption of the componentsnew guidance.These in-progress activities include modifications of net periodic benefit cost on the income statement by requiring service cost to be presented with other employee compensation costsactuarial valuation systems, data sourcing, analytical procedures and other componentsreporting processes.
Note B. Earnings (Loss) Per Share
Earnings (loss) per share is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the effectimpact 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.
ForThe following table presents the threeincome and nine months ended September 30, 2017, approximately 907 thousandshare data used in the basic and 916 thousanddiluted earnings per share computations.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | 128 | | | $ | 256 | | | $ | 646 | | | $ | 936 | |
| | | | | | | |
Common Stock and Common Stock Equivalents | | | | | | | |
Basic | | | | | | | |
Weighted average shares outstanding | 271.4 | | | 271.7 | | | 271.7 | | | 271.8 | |
Diluted | | | | | | | |
Weighted average shares outstanding | 271.4 | | | 271.7 | | | 271.7 | | | 271.8 | |
Dilutive effect of stock-based awards under compensation plans | 0.9 | | | 1.0 | | | 0.9 | | | 1.0 | |
Total | 272.3 | | | 272.7 | | | 272.6 | | | 272.8 | |
| | | | | | | |
Earnings (loss) per share | | | | | | | |
Basic | $ | 0.47 | | | $ | 0.94 | | | $ | 2.38 | | | $ | 3.44 | |
Diluted | $ | 0.47 | | | $ | 0.94 | | | $ | 2.37 | | | $ | 3.43 | |
Excluded from the calculation of diluted earnings (loss) per share is the impact of potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, less than 1 thousand and approximately 4 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effectthat would have been antidilutive.antidilutive during the respective periods.
ForThe Company repurchased 890,000 and 377,615 shares of CNAF common stock at an aggregate cost of $39 million and $18 million during the three and nine months ended September 30, 2016, approximately 707 thousand2022 and 549 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation2021.
Note C.C. Investments
The significant components of Net investment income are presented in the following table.
| | Periods ended September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Fixed maturity securities | $ | 455 |
| | $ | 457 |
| | $ | 1,367 |
| | $ | 1,352 |
| Fixed maturity securities | $ | 454 | | | $ | 425 | | | $ | 1,324 | | | $ | 1,278 | |
Equity securities | 1 |
| | 1 |
| | 4 |
| | 8 |
| Equity securities | 2 | | | 4 | | | (7) | | | 53 | |
Limited partnership investments | 51 |
| | 65 |
| | 157 |
| | 97 |
| Limited partnership investments | (35) | | | 85 | | | (11) | | | 274 | |
Mortgage loans | 9 |
| | 8 |
| | 24 |
| | 30 |
| Mortgage loans | 13 | | | 13 | | | 40 | | | 42 | |
Short term investments | 4 |
| | 2 |
| | 10 |
| | 6 |
| Short term investments | 4 | | | 1 | | | 6 | | | 1 | |
Trading portfolio | 3 |
| | 1 |
| | 9 |
| | 7 |
| Trading portfolio | 1 | | | 1 | | | 2 | | | 8 | |
Other | 1 |
| | 4 |
| | 2 |
| | 4 |
| Other | 1 | | | (1) | | | 1 | | | — | |
Gross investment income | 524 |
| | 538 |
| | 1,573 |
| | 1,504 |
| Gross investment income | 440 | | | 528 | | | 1,355 | | | 1,656 | |
Investment expense | (15 | ) | | (14 | ) | | (44 | ) | | (43 | ) | Investment expense | (18) | | | (15) | | | (53) | | | (48) | |
Net investment income | $ | 509 |
| | $ | 524 |
| | $ | 1,529 |
| | $ | 1,461 |
| Net investment income | $ | 422 | | | $ | 513 | | | $ | 1,302 | | | $ | 1,608 | |
Net investment income (loss) recognized due to the change in fair value of common stock held as of September 30, 2022 and 2021 | | Net investment income (loss) recognized due to the change in fair value of common stock held as of September 30, 2022 and 2021 | $ | (18) | | | $ | (7) | | | $ | (38) | | | $ | 11 | |
Net realized investment gains (losses) are presented in the following table.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net realized investment gains (losses): | | | | | | | |
Fixed maturity securities: | | | | | | | |
Gross realized gains | $ | 34 |
| | $ | 67 |
| | $ | 139 |
| | $ | 152 |
|
Gross realized losses | (18 | ) | | (20 | ) | | (47 | ) | | (106 | ) |
Net realized investment gains (losses) on fixed maturity securities | 16 |
|
| 47 |
|
| 92 |
|
| 46 |
|
Equity securities: | | | | | | | |
|
Gross realized gains | — |
| | 1 |
| | 1 |
| | 5 |
|
Gross realized losses | — |
| | (4 | ) | | (1 | ) | | (10 | ) |
Net realized investment gains (losses) on equity securities | — |
|
| (3 | ) |
| — |
|
| (5 | ) |
Derivatives | (1 | ) | | 1 |
| | (3 | ) | | (12 | ) |
Short term investments and other | (39 | ) | | 1 |
| | (27 | ) | | (3 | ) |
Net realized investment gains (losses) | $ | (24 | ) |
| $ | 46 |
|
| $ | 62 |
| | $ | 26 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net investment gains (losses): | | | | | | | |
Fixed maturity securities: | | | | | | | |
Gross gains | $ | 23 | | | $ | 50 | | | $ | 94 | | | $ | 159 | |
Gross losses | (134) | | | (28) | | | (222) | | | (68) | |
Net investment gains (losses) on fixed maturity securities | (111) | | | 22 | | | (128) | | | 91 | |
Equity securities | (2) | | | (2) | | | (111) | | | 17 | |
Derivatives | 24 | | | 2 | | | 79 | | | 7 | |
Mortgage loans | (8) | | | — | | | (8) | | | — | |
Short term investments and other | 1 | | | — | | | 2 | | | 2 | |
Net investment gains (losses) | $ | (96) | | | $ | 22 | | | $ | (166) | | | $ | 117 | |
Net investment gains (losses) recognized due to the change in fair value of non-redeemable preferred stock held as of September 30, 2022 and 2021 | $ | (2) | | | $ | (2) | | | $ | (109) | | | $ | 15 | |
Net realized investment gains (losses) for the three and nine months ended September 30, 2017 included2022 in the table above include a $42$35 million net loss related to the redemptionexpected novation of a coinsurance agreement on the Company’s legacy annuity business, which was transacted on a funds withheld basis and gave rise to an embedded derivative. The net loss of $35 million is comprised of a $59 million loss on the fixed maturity securities supporting the funds withheld liability to recognize unrealized losses which had been included in AOCI since the inception of the Company's $350coinsurance agreement, partially offset by a $24 million senior notes due November 2019. Net realizedgain on the associated embedded derivative. Taken together, this net loss is the final recognition of changes in the valuation of the funds held assets and offsets previously recognized net investment gains (losses) foron the nine months ended September 30, 2016 included a $8 million loss related to the first quarter 2016 redemptionassociated embedded derivative.
The components of Other-than-temporaryavailable-for-sale impairment (OTTI) losses (gains) recognized in earnings by asset type are presented in the following table. The table includes losses (gains) on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Fixed maturity securities available-for-sale: | | | | | | | |
Corporate and other bonds | $ | 24 | | | $ | — | | | $ | 53 | | | $ | 5 | |
Asset-backed | 1 | | | 11 | | | 2 | | | 11 | |
Impairment losses (gains) recognized in earnings | $ | 25 | | | $ | 11 | | | $ | 55 | | | $ | 16 | |
The Company also recognized $8 million of losses on mortgage loans during the three and nine months ended September 30, 2022 primarily due to changes in expected credit losses. There were no losses recognized on mortgage loans during the three and nine months ended September 30, 2021.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Fixed maturity securities available-for-sale: | | | | |
| | |
Corporate and other bonds | $ | 4 |
| | $ | 14 |
| | $ | 8 |
| | $ | 43 |
|
Asset-backed: | | | | | | | |
|
Residential mortgage-backed | 1 |
| | — |
| | 1 |
| | 1 |
|
Other asset-backed | — |
| | — |
| | — |
| | 3 |
|
Total asset-backed | 1 |
|
| — |
|
| 1 |
| | 4 |
|
Total fixed maturity securities available-for-sale | 5 |
|
| 14 |
|
| 9 |
| | 47 |
|
Equity securities available-for-sale -- Common stock | — |
| | 4 |
| | — |
| | 9 |
|
OTTI losses recognized in earnings | $ | 5 |
|
| $ | 18 |
|
| $ | 9 |
| | $ | 56 |
|
The following tables present a summary of fixed maturity and equity securities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Estimated Fair Value |
(In millions) | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | |
Corporate and other bonds | $ | 23,082 | | | $ | 231 | | | $ | 2,398 | | | $ | — | | | $ | 20,915 | |
States, municipalities and political subdivisions | 9,244 | | | 259 | | | 1,080 | | | — | | | 8,423 | |
Asset-backed: | | | | | | | | | |
Residential mortgage-backed | 3,153 | | | 6 | | | 470 | | | — | | | 2,689 | |
Commercial mortgage-backed | 1,921 | | | 4 | | | 237 | | | — | | | 1,688 | |
Other asset-backed | 3,264 | | | 2 | | | 349 | | | 3 | | | 2,914 | |
Total asset-backed | 8,338 | | | 12 | | | 1,056 | | | 3 | | | 7,291 | |
U.S. Treasury and obligations of government-sponsored enterprises | 107 | | | 3 | | | 1 | | | — | | | 109 | |
Foreign government | 544 | | | 2 | | | 48 | | | — | | | 498 | |
Redeemable preferred stock | 3 | | | — | | | — | | | — | | | 3 | |
Total fixed maturity securities available-for-sale | 41,318 | | | 507 | | | 4,583 | | | 3 | | | 37,239 | |
Total fixed maturity securities trading | 12 | | | — | | | — | | | — | | | 12 | |
Total fixed maturity securities | $ | 41,330 | | | $ | 507 | | | $ | 4,583 | | | $ | 3 | | | $ | 37,251 | |
|
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Unrealized OTTI Losses (Gains) |
(In millions) | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | |
Corporate and other bonds | $ | 17,965 |
| | $ | 1,645 |
| | $ | 26 |
| | $ | 19,584 |
| | $ | — |
|
States, municipalities and political subdivisions | 12,462 |
| | 1,501 |
| | 7 |
| | 13,956 |
| | (14 | ) |
Asset-backed: | | | | | | | | | |
Residential mortgage-backed | 4,906 |
| | 127 |
| | 28 |
| | 5,005 |
| | (28 | ) |
Commercial mortgage-backed | 1,858 |
| | 55 |
| | 13 |
| | 1,900 |
| | — |
|
Other asset-backed | 1,047 |
| | 18 |
| | 4 |
| | 1,061 |
| | — |
|
Total asset-backed | 7,811 |
| | 200 |
| | 45 |
| | 7,966 |
| | (28 | ) |
U.S. Treasury and obligations of government-sponsored enterprises | 115 |
| | 3 |
| | 3 |
| | 115 |
| | — |
|
Foreign government | 439 |
| | 10 |
| | 4 |
| | 445 |
| | — |
|
Redeemable preferred stock | 18 |
| | 2 |
| | — |
| | 20 |
| | — |
|
Total fixed maturity securities available-for-sale | 38,810 |
| | 3,361 |
| | 85 |
| | 42,086 |
| | $ | (42 | ) |
Total fixed maturity securities trading | 4 |
| |
|
| |
|
| | 4 |
| | |
Equity securities available-for-sale: | | | | | | | | | |
Common stock | 16 |
| | 7 |
| | 1 |
| | 22 |
| | |
Preferred stock | 102 |
| | 5 |
| | — |
| | 107 |
| | |
Total equity securities available-for-sale | 118 |
| | 12 |
| | 1 |
| | 129 |
| | |
Total | $ | 38,932 |
| | $ | 3,373 |
| | $ | 86 |
| | $ | 42,219 |
| | |
| | December 31, 2016 | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Unrealized OTTI Losses (Gains) | |
December 31, 2021 | | December 31, 2021 | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Estimated Fair Value |
(In millions) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Unrealized OTTI Losses (Gains) | (In millions) | |
Fixed maturity securities available-for-sale: | | Fixed maturity securities available-for-sale: | | | | | | | | | |
Corporate and other bonds | $ | 17,711 |
| | $ | 1,323 |
| | $ | 76 |
| | $ | 18,958 |
| | $ | (1 | ) | Corporate and other bonds | $ | 21,444 | | | $ | 2,755 | | | $ | 56 | | | $ | 11 | | | $ | 24,132 | |
States, municipalities and political subdivisions | 12,060 |
| | 1,213 |
| | 33 |
| | 13,240 |
| | (16 | ) | States, municipalities and political subdivisions | 10,358 | | | 1,599 | | | 14 | | | — | | | 11,943 | |
Asset-backed: | | | | | | | | | | Asset-backed: | |
Residential mortgage-backed | 5,004 |
| | 120 |
| | 51 |
| | 5,073 |
| | (28 | ) | Residential mortgage-backed | 2,893 | | | 71 | | | 8 | | | — | | | 2,956 | |
Commercial mortgage-backed | 2,016 |
| | 48 |
| | 24 |
| | 2,040 |
| | — |
| Commercial mortgage-backed | 1,987 | | | 63 | | | 19 | | | — | | | 2,031 | |
Other asset-backed | 1,022 |
| | 8 |
| | 5 |
| | 1,025 |
| | — |
| Other asset-backed | 2,561 | | | 54 | | | 10 | | | 7 | | | 2,598 | |
Total asset-backed | 8,042 |
| | 176 |
| | 80 |
| | 8,138 |
| | (28 | ) | Total asset-backed | 7,441 | | | 188 | | | 37 | | | 7 | | | 7,585 | |
U.S. Treasury and obligations of government-sponsored enterprises | 83 |
| | 10 |
| | — |
| | 93 |
| | — |
| U.S. Treasury and obligations of government-sponsored enterprises | 132 | | | 1 | | | 3 | | | — | | | 130 | |
Foreign government | 435 |
| | 13 |
| | 3 |
| | 445 |
| | — |
| Foreign government | 570 | | | 15 | | | 2 | | | — | | | 583 | |
Redeemable preferred stock | 18 |
| | 1 |
| | — |
| | 19 |
| | — |
| Redeemable preferred stock | — | | | — | | | — | | | — | | | — | |
Total fixed maturity securities available-for-sale | 38,349 |
| | 2,736 |
| | 192 |
| | 40,893 |
| | $ | (45 | ) | Total fixed maturity securities available-for-sale | 39,945 | | | 4,558 | | | 112 | | | 18 | | | 44,373 | |
Total fixed maturity securities trading | 12 |
| |
|
| |
|
| | 12 |
| | | Total fixed maturity securities trading | 7 | | | — | | | — | | | — | | | 7 | |
Equity securities available-for-sale: | | | | | | | | | | |
Common stock | 13 |
| | 6 |
| | — |
| | 19 |
| | | |
Preferred stock | 93 |
| | 2 |
| | 4 |
| | 91 |
| | | |
Total equity securities available-for-sale | 106 |
| | 8 |
| | 4 |
| | 110 |
| | | |
Total | $ | 38,467 |
| | $ | 2,744 |
| | $ | 196 |
| | $ | 41,015 |
| | | |
Total fixed maturity securities | | Total fixed maturity securities | $ | 39,952 | | | $ | 4,558 | | | $ | 112 | | | $ | 18 | | | $ | 44,380 | |
The net unrealized gains and losses on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI).AOCI. When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent thatthere are unrealized gains on fixed income securities supporting the reserves of certain products within the Life & Group Non-Core segment that would result in a premium deficiency, or would impact the reserve balance if realized, a related increase in Insurance reserves is recorded net of tax, as a reduction of net unrealized gains (losses), net of tax, through Other comprehensive income (loss) (Shadow Adjustments). As of September 30, 20172022 and December 31, 2016,2021, the net unrealized gains and losses on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,321$46 million and $1,014$2,477 million.
The following tables present the estimated fair value and gross unrealized losses of fixed maturity and equity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by the length of time in which the securities have continuously been in that position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
September 30, 2022 | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
(In millions) | | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | | | |
Corporate and other bonds | $ | 16,707 | | | $ | 2,117 | | | $ | 914 | | | $ | 281 | | | $ | 17,621 | | | $ | 2,398 | |
States, municipalities and political subdivisions | 4,793 | | | 1,029 | | | 128 | | | 51 | | | 4,921 | | | 1,080 | |
Asset-backed: | | | | | | | | | | | |
Residential mortgage-backed | 2,582 | | | 462 | | | 17 | | | 8 | | | 2,599 | | | 470 | |
Commercial mortgage-backed | 1,372 | | | 194 | | | 233 | | | 43 | | | 1,605 | | | 237 | |
Other asset-backed | 2,433 | | | 307 | | | 233 | | | 42 | | | 2,666 | | | 349 | |
Total asset-backed | 6,387 | | | 963 | | | 483 | | | 93 | | | 6,870 | | | 1,056 | |
U.S. Treasury and obligations of government-sponsored enterprises | 61 | | | 1 | | | — | | | — | | | 61 | | | 1 | |
Foreign government | 446 | | | 42 | | | 25 | | | 6 | | | 471 | | | 48 | |
Total | $ | 28,394 | | | $ | 4,152 | | | $ | 1,550 | | | $ | 431 | | | $ | 29,944 | | | $ | 4,583 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2021 | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
(In millions) | | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | | | |
Corporate and other bonds | $ | 2,389 | | | $ | 48 | | | $ | 136 | | | $ | 8 | | | $ | 2,525 | | | $ | 56 | |
States, municipalities and political subdivisions | 730 | | | 14 | | | — | | | — | | | 730 | | | 14 | |
Asset-backed: | | | | | | | | | | | |
Residential mortgage-backed | 1,043 | | | 8 | | | — | | | — | | | 1,043 | | | 8 | |
Commercial mortgage-backed | 527 | | | 7 | | | 167 | | | 12 | | | 694 | | | 19 | |
Other asset-backed | 840 | | | 10 | | | 62 | | | — | | | 902 | | | 10 | |
Total asset-backed | 2,410 | | | 25 | | | 229 | | | 12 | | | 2,639 | | | 37 | |
U.S. Treasury and obligations of government-sponsored enterprises | 69 | | | 3 | | | 5 | | | — | | | 74 | | | 3 | |
Foreign government | 97 | | | 2 | | | — | | | — | | | 97 | | | 2 | |
Total | $ | 5,695 | | | $ | 92 | | | $ | 370 | | | $ | 20 | | | $ | 6,065 | | | $ | 112 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
September 30, 2017 | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
(In millions) | | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | | | |
Corporate and other bonds | $ | 1,216 |
| | $ | 21 |
| | $ | 91 |
| | $ | 5 |
| | $ | 1,307 |
| | $ | 26 |
|
States, municipalities and political subdivisions | 583 |
| | 6 |
| | 56 |
| | 1 |
| | 639 |
| | 7 |
|
Asset-backed: | | | | | | | | | | | |
Residential mortgage-backed | 1,522 |
| | 25 |
| | 106 |
| | 3 |
| | 1,628 |
| | 28 |
|
Commercial mortgage-backed | 378 |
| | 6 |
| | 138 |
| | 7 |
| | 516 |
| | 13 |
|
Other asset-backed | 129 |
| | 4 |
| | 10 |
| | — |
| | 139 |
| | 4 |
|
Total asset-backed | 2,029 |
| | 35 |
| | 254 |
| | 10 |
| | 2,283 |
| | 45 |
|
U.S. Treasury and obligations of government-sponsored enterprises | 67 |
| | 3 |
| | 6 |
| | — |
| | 73 |
| | 3 |
|
Foreign government | 191 |
| | 4 |
| | 5 |
| | — |
| | 196 |
| | 4 |
|
Total fixed maturity securities available-for-sale | 4,086 |
| | 69 |
| | 412 |
| | 16 |
| | 4,498 |
| | 85 |
|
Equity securities available-for-sale: | | | | | | | | |
|
| |
|
|
Common stock | 2 |
| | 1 |
| | — |
| | — |
| | 2 |
| | 1 |
|
Preferred stock | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
|
Total equity securities available-for-sale | 18 |
| | 1 |
| | — |
| | — |
| | 18 |
| | 1 |
|
Total | $ | 4,104 |
|
| $ | 70 |
|
| $ | 412 |
|
| $ | 16 |
|
| $ | 4,516 |
|
| $ | 86 |
|
The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by ratings distribution.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2016 | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
(In millions) | | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | | | |
Corporate and other bonds | $ | 2,615 |
| | $ | 61 |
| | $ | 254 |
| | $ | 15 |
| | $ | 2,869 |
| | $ | 76 |
|
States, municipalities and political subdivisions | 959 |
| | 32 |
| | 23 |
| | 1 |
| | 982 |
| | 33 |
|
Asset-backed: | | | | | | | | | | | |
Residential mortgage-backed | 2,136 |
| | 44 |
| | 201 |
| | 7 |
| | 2,337 |
| | 51 |
|
Commercial mortgage-backed | 756 |
| | 22 |
| | 69 |
| | 2 |
| | 825 |
| | 24 |
|
Other asset-backed | 398 |
| | 5 |
| | 24 |
| | — |
| | 422 |
| | 5 |
|
Total asset-backed | 3,290 |
| | 71 |
| | 294 |
| | 9 |
| | 3,584 |
| | 80 |
|
U.S. Treasury and obligations of government-sponsored enterprises | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
|
Foreign government | 108 |
| | 3 |
| | — |
| | — |
| | 108 |
| | 3 |
|
Total fixed maturity securities available-for-sale | 6,977 |
| | 167 |
| | 571 |
| | 25 |
| | 7,548 |
| | 192 |
|
Equity securities available-for-sale -- Preferred stock | 12 |
| | — |
| | 13 |
| | 4 |
| | 25 |
| | 4 |
|
Total | $ | 6,989 |
| | $ | 167 |
| | $ | 584 |
| | $ | 29 |
| | $ | 7,573 |
| | $ | 196 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(In millions) | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,360 | | | $ | 360 | | | $ | 898 | | | $ | 8 | |
AAA | 1,566 | | | 318 | | | 368 | | | 6 | |
AA | 4,430 | | | 917 | | | 875 | | | 17 | |
A | 6,548 | | | 838 | | | 1,516 | | | 23 | |
BBB | 13,394 | | | 1,902 | | | 1,812 | | | 42 | |
Non-investment grade | 1,646 | | | 248 | | | 596 | | | 16 | |
Total | $ | 29,944 | | | $ | 4,583 | | | $ | 6,065 | | | $ | 112 | |
Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 20172022 securities in a gross unrealized loss position tabletables above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in risk-free interest rates and a general market widening of credit spreads. In reaching this determination, the Company considered the recent volatility in risk-free rates and credit spreads and other factors. Theas well as the fact that its unrealized losses are concentrated in investment grade issuers. Additionally, the Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTIimpairment losses to be recorded as of September 30, 2017.2022.
The following table presentstables present the activity related to the pretaxallowance on available-for-sale securities with credit loss component reflected in Retained earningsimpairments and purchased credit-deteriorated (PCD) assets. Accrued interest receivable on available-for-sale fixed maturity securities still heldtotaled $401 million, $369 million and $387 million as of September 30, 20172022, December 31, 2021 and 2016 for which a portionSeptember 30, 2021 and is excluded from the estimate of an OTTI loss was recognizedexpected credit losses and the amortized cost basis in Other comprehensive income (loss).the tables included within this Note.
| | | | | | | | | | | | | | | | | |
(In millions) | Corporate and other bonds | | Asset-backed | | Total |
Allowance for credit losses: | | | | | |
Balance as of July 1, 2022 | $ | — | | | $ | 5 | | | $ | 5 | |
Additions to the allowance for credit losses: | | | | | |
Securities for which credit losses were not previously recorded | — | | | — | | | — | |
Available-for-sale securities accounted for as PCD assets | — | | | — | | | — | |
| | | | | |
Reductions to the allowance for credit losses: | | | | | |
Securities sold during the period (realized) | — | | | — | | | — | |
| | | | | |
Write-offs charged against the allowance | — | | | — | | | — | |
| | | | | |
| | | | | |
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | — | | | (2) | | | (2) | |
Balance as of September 30, 2022 | $ | — | | | $ | 3 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | |
(In millions) | Corporate and other bonds | | Asset-backed | | Total |
Allowance for credit losses: | | | | | |
Balance as of July 1, 2021 | $ | 24 | | | $ | 21 | | | $ | 45 | |
Additions to the allowance for credit losses: | | | | | |
Securities for which credit losses were not previously recorded | — | | | — | | | — | |
Available-for-sale securities accounted for as PCD assets | 2 | | | — | | | 2 | |
| | | | | |
Reductions to the allowance for credit losses: | | | | | |
Securities sold during the period (realized) | — | | | — | | | — | |
| | | | | |
Write-offs charged against the allowance | 16 | | | — | | | 16 | |
| | | | | |
| | | | | |
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | — | | | — | | | — | |
Balance as of September 30, 2021 | $ | 10 | | | $ | 21 | | | $ | 31 | |
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Beginning balance of credit losses on fixed maturity securities | $ | 30 |
| | $ | 41 |
| | $ | 36 |
| | $ | 53 |
|
Reductions for securities sold during the period | (2 | ) | | (2 | ) | | (8 | ) | | (14 | ) |
Reductions for securities the Company intends to sell or more likely than not will be required to sell | — |
| | (1 | ) | | — |
| | (1 | ) |
Ending balance of credit losses on fixed maturity securities | $ | 28 |
|
| $ | 38 |
|
| $ | 28 |
| | $ | 38 |
|
| | | | | | | | | | | | | | | | | |
(In millions) | Corporate and other bonds | | Asset-backed | | Total |
Allowance for credit losses: | | | | | |
Balance as of January 1, 2022 | $ | 11 | | | $ | 7 | | | $ | 18 | |
Additions to the allowance for credit losses: | | | | | |
Securities for which credit losses were not previously recorded | — | | | — | | | — | |
Available-for-sale securities accounted for as PCD assets | — | | | 3 | | | 3 | |
| | | | | |
Reductions to the allowance for credit losses: | | | | | |
Securities sold during the period (realized) | — | | | — | | | — | |
| | | | | |
Write-offs charged against the allowance | 12 | | | — | | | 12 | |
| | | | | |
| | | | | |
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | 1 | | | (7) | | | (6) | |
Balance as of September 30, 2022 | $ | — | | | $ | 3 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | |
(In millions) | Corporate and other bonds | | Asset-backed | | Total |
Allowance for credit losses: | | | | | |
Balance as of January 1, 2021 | $ | 23 | | | $ | 17 | | | $ | 40 | |
Additions to the allowance for credit losses: | | | | | |
Securities for which credit losses were not previously recorded | 14 | | | — | | | 14 | |
Available-for-sale securities accounted for as PCD assets | 4 | | | 4 | | | 8 | |
| | | | | |
Reductions to the allowance for credit losses: | | | | | |
Securities sold during the period (realized) | 6 | | | — | | | 6 | |
| | | | | |
Write-offs charged against the allowance | 16 | | | — | | | 16 | |
| | | | | |
| | | | | |
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | (9) | | | — | | | (9) | |
Balance as of September 30, 2021 | $ | 10 | | | $ | 21 | | | $ | 31 | |
Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
(In millions) | Cost or Amortized Cost | | Estimated Fair Value | | Cost or Amortized Cost | | Estimated Fair Value | (In millions) | Cost or Amortized Cost | | Estimated Fair Value | | Cost or Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 1,374 |
| | $ | 1,404 |
| | $ | 1,779 |
| | $ | 1,828 |
| Due in one year or less | $ | 952 | | | $ | 948 | | | $ | 1,603 | | | $ | 1,624 | |
Due after one year through five years | 7,931 |
| | 8,293 |
| | 7,566 |
| | 7,955 |
| Due after one year through five years | 9,487 | | | 9,000 | | | 10,637 | | | 11,229 | |
Due after five years through ten years | 15,853 |
| | 16,574 |
| | 15,892 |
| | 16,332 |
| Due after five years through ten years | 14,323 | | | 12,765 | | | 13,294 | | | 14,338 | |
Due after ten years | 13,652 |
| | 15,815 |
| | 13,112 |
| | 14,778 |
| Due after ten years | 16,556 | | | 14,526 | | | 14,411 | | | 17,182 | |
Total | $ | 38,810 |
| | $ | 42,086 |
| | $ | 38,349 |
| | $ | 40,893 |
| Total | $ | 41,318 | | | $ | 37,239 | | | $ | 39,945 | | | $ | 44,373 | |
Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
Derivative Financial Instruments
The Company holds an embedded derivative on a funds withheld liability with a notional value of $170$220 million and $174$270 million and a fair value of $1 million and $(12) million as of September 30, 20172022 and December 31, 2016 and a fair value of $(1) million and $3 million as of September 30, 2017 and December 31, 2016.2021. The embedded derivative on the 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 part of September 30, 2017,its overall investment strategy, the Company had committed approximately $405 million toinvests in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnership investments in exchange for an ownership interest in thepartnerships, signed and accepted mortgage loan applications, and obligations related partnerships.
to private placement securities. As of September 30, 2017, the Company had mortgage loan commitments of $68 million representing signed loan applications 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. Purchases and sales of privately placed debt securities are recorded once funded. As of September 30, 2017,2022, the Company had commitments to purchase or fund additional amounts of $205approximately $1,595 million and sell $185approximately $100 million under the terms of such securities.these investments.
Mortgage Loans
The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination. The primary credit quality indicators utilized are debt service coverage ratios (DSCR) and loan-to-value ratios (LTV).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | Mortgage Loans Amortized Cost Basis by Origination Year (1) |
(In millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
DSCR ≥1.6x | | | | | | | | | | | | | |
LTV less than 55% | $ | 9 | | | $ | 13 | | | $ | 112 | | | $ | 29 | | | $ | 54 | | | $ | 275 | | | $ | 492 | |
LTV 55% to 65% | — | | | — | | | — | | | — | | | — | | | — | | | — | |
LTV greater than 65% | 18 | | | 11 | | | — | | | — | | | — | | | — | | | 29 |
DSCR 1.2x - 1.6x | | | | | | | | | | | | | |
LTV less than 55% | 5 | | | 49 | | | 18 | | | 56 | | | 10 | | | 42 | | | 180 |
LTV 55% to 65% | 87 | | | — | | | 20 | | | — | | | — | | | 8 | | | 115 |
LTV greater than 65% | — | | | — | | | — | | | — | | | — | | | — | | | — | |
DSCR ≤1.2 | | | | | | | | | | | | | |
LTV less than 55% | — | | | — | | | — | | | 57 | | | — | | | — | | | 57 |
LTV 55% to 65% | — | | | 21 | | | — | | | 44 | | | — | | | — | | | 65 |
LTV greater than 65% | 10 | | | — | | | — | | | 22 | | | — | | | 7 | | | 39 |
Total | $ | 129 | | | $ | 94 | | | $ | 150 | | | $ | 208 | | | $ | 64 | | | $ | 332 | | | $ | 977 | |
(1) The values in the table above reflect DSCR on a standardized amortization period and LTV based on the most recent appraised values trended forward using changes in a commercial real estate price index.
As of September 30, 2022, accrued interest receivable on mortgage loans totaled $3 million and is excluded from the amortized cost basis disclosed in the table above and the estimate of expected credit losses.
Note D.D. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are not observable.
Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include i) the review of pricing service methodologies or broker pricing qualifications, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, and iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.securities.
Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are presented in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.
| | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | | | | | | | Total Assets/Liabilities at Fair Value |
(In millions) | Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
Corporate bonds and other | $ | 118 | | | $ | 20,617 | | | $ | 802 | | | $ | 21,537 | |
States, municipalities and political subdivisions | — | | | 8,381 | | | 42 | | | 8,423 | |
Asset-backed | — | | | 6,575 | | | 716 | | | 7,291 | |
Total fixed maturity securities | 118 | | | 35,573 | | | 1,560 | | | 37,251 | |
Equity securities: | | | | | | | |
Common stock | 180 | | | — | | | 30 | | | 210 | |
Non-redeemable preferred stock | 56 | | | 625 | | | — | | | 681 | |
Total equity securities | 236 | | | 625 | | | 30 | | | 891 | |
Short term and other | 895 | | | 34 | | | — | | | 929 | |
Total assets | $ | 1,249 | | | $ | 36,232 | | | $ | 1,590 | | | $ | 39,071 | |
Liabilities | | | | | | | |
Other liabilities | $ | — | | | $ | (1) | | | $ | — | | | $ | (1) | |
Total liabilities | $ | — | | | $ | (1) | | | $ | — | | | $ | (1) | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | Total Assets/Liabilities at Fair Value |
(In millions) | Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
Corporate bonds and other | $ | 140 | | | $ | 23,775 | | | $ | 937 | | | $ | 24,852 | |
States, municipalities and political subdivisions | — | | | 11,887 | | | 56 | | | 11,943 | |
Asset-backed | — | | | 7,029 | | | 556 | | | 7,585 | |
Total fixed maturity securities | 140 | | | 42,691 | | | 1,549 | | | 44,380 | |
Equity securities: | | | | | | | |
Common stock | 220 | | | — | | | 13 | | | 233 | |
Non-redeemable preferred stock | 65 | | | 721 | | | 16 | | | 802 | |
Total equity securities | 285 | | | 721 | | | 29 | | | 1,035 | |
Short term and other | 1,798 | | | 74 | | | — | | | 1,872 | |
Total assets | $ | 2,223 | | | $ | 43,486 | | | $ | 1,578 | | | $ | 47,287 | |
Liabilities | | | | | | | |
Other liabilities | $ | — | | | $ | 12 | | | $ | — | | | $ | 12 | |
Total liabilities | $ | — | | | $ | 12 | | | $ | — | | | $ | 12 | |
|
| | | | | | | | | | | | | | | |
September 30, 2017 | | | | | | | Total Assets/Liabilities at Fair Value |
(In millions) | Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
Corporate and other bonds | $ | — |
| | $ | 19,469 |
| | $ | 119 |
| | $ | 19,588 |
|
States, municipalities and political subdivisions | — |
| | 13,955 |
| | 1 |
| | 13,956 |
|
Asset-backed: | | | | | | | |
Residential mortgage-backed | — |
| | 4,829 |
| | 176 |
| | 5,005 |
|
Commercial mortgage-backed | — |
| | 1,876 |
| | 24 |
| | 1,900 |
|
Other asset-backed | — |
| | 915 |
| | 146 |
| | 1,061 |
|
Total asset-backed | — |
| | 7,620 |
| | 346 |
| | 7,966 |
|
U.S. Treasury and obligations of government-sponsored enterprises | 115 |
| | — |
| | — |
| | 115 |
|
Foreign government | — |
| | 445 |
| | — |
| | 445 |
|
Redeemable preferred stock | 20 |
| | — |
| | — |
| | 20 |
|
Total fixed maturity securities | 135 |
| | 41,489 |
| | 466 |
| | 42,090 |
|
Equity securities | 110 |
| | — |
| | 19 |
| | 129 |
|
Other invested assets | — |
| | 5 |
| | — |
| | 5 |
|
Short term investments | 479 |
| | 876 |
| | — |
| | 1,355 |
|
Total assets | $ | 724 |
| | $ | 42,370 |
| | $ | 485 |
| | $ | 43,579 |
|
Liabilities | | | | | |
| | |
|
Other liabilities | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Total liabilities | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | Total Assets/Liabilities at Fair Value |
(In millions) | Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
Corporate and other bonds | $ | — |
| | $ | 18,840 |
| | $ | 130 |
| | $ | 18,970 |
|
States, municipalities and political subdivisions | — |
| | 13,239 |
| | 1 |
| | 13,240 |
|
Asset-backed: | | | | | | | |
|
Residential mortgage-backed | — |
| | 4,944 |
| | 129 |
| | 5,073 |
|
Commercial mortgage-backed | — |
| | 2,027 |
| | 13 |
| | 2,040 |
|
Other asset-backed | — |
| | 968 |
| | 57 |
| | 1,025 |
|
Total asset-backed | — |
| | 7,939 |
| | 199 |
| | 8,138 |
|
U.S. Treasury and obligations of government-sponsored enterprises | 93 |
| | — |
| | — |
| | 93 |
|
Foreign government | — |
| | 445 |
| | — |
| | 445 |
|
Redeemable preferred stock | 19 |
| | — |
| | — |
| | 19 |
|
Total fixed maturity securities | 112 |
| | 40,463 |
| | 330 |
| | 40,905 |
|
Equity securities | 91 |
| | — |
| | 19 |
| | 110 |
|
Other invested assets | — |
| | 5 |
| | — |
| | 5 |
|
Short term investments | 475 |
| | 853 |
| | — |
| | 1,328 |
|
Life settlement contracts, included in Other assets | — |
| | — |
| | 58 |
| | 58 |
|
Total assets | $ | 678 |
| | $ | 41,321 |
| | $ | 407 |
| | $ | 42,406 |
|
Liabilities | | | | | |
| | |
|
Other liabilities | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | (3 | ) |
Total liabilities | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | (3 | ) |
The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Corporate bonds and other | | States, municipalities and political subdivisions | | Asset-backed | | Equity securities | | Total |
Balance as of July 1, 2022 | $ | 846 | | | $ | 46 | | | $ | 641 | | | $ | 47 | | | $ | 1,580 | |
Total realized and unrealized investment gains (losses): | | | | | | | | | |
Reported in Net investment gains (losses) | — | | | — | | | 2 | | | (3) | | | (1) | |
Reported in Net investment income | 1 | | | — | | | 5 | | | (4) | | | 2 | |
Reported in Other comprehensive income (loss) | (50) | | | (4) | | | (38) | | — | | | (92) | |
Total realized and unrealized investment gains (losses) | (49) | | | (4) | | | (31) | | | (7) | | | (91) | |
Purchases | 9 | | | — | | | 116 | | — | | | 125 | |
Sales | — | | | — | | | — | | | — | | | — | |
Settlements | (4) | | | — | | | (14) | | | — | | (18) | |
Transfers into Level 3 | — | | | — | | | 47 | | | — | | | 47 | |
Transfers out of Level 3 | — | | | — | | | (43) | | | (10) | | | (53) | |
Balance as of September 30, 2022 | $ | 802 | | | $ | 42 | | | $ | 716 | | | $ | 30 | | | $ | 1,590 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2022 recognized in Net income (loss) in the period | $ | — | | | $ | — | | | $ | — | | | $ | (7) | | | $ | (7) | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2022 recognized in Other comprehensive income (loss) in the period | (51) | | | (4) | | | (38) | | | — | | | (93) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Corporate bonds and other | | States, municipalities and political subdivisions | | Asset-backed | | Equity securities | | Total |
Balance as of July 1, 2021 | $ | 883 | | | $ | 57 | | | $ | 410 | | | $ | 25 | | | $ | 1,375 | |
Total realized and unrealized investment gains (losses): | | | | | | | | | |
Reported in Net investment gains (losses) | 1 | | | — | | | — | | | (3) | | | (2) | |
Reported in Net investment income | — | | | — | | | 1 | | | 1 | | | 2 | |
Reported in Other comprehensive income (loss) | 1 | | | — | | | 1 | | | — | | | 2 | |
Total realized and unrealized investment gains (losses) | 2 | | | — | | | 2 | | | (2) | | | 2 | |
Purchases | 55 | | | — | | | 83 | | | 1 | | | 139 | |
Sales | — | | | — | | | (9) | | | (11) | | | (20) | |
Settlements | (11) | | | — | | | (11) | | | — | | | (22) | |
Transfers into Level 3 | — | | | — | | | 41 | | | 11 | | | 52 | |
Transfers out of Level 3 | (52) | | | — | | | (38) | | | — | | | (90) | |
Balance as of September 30, 2021 | $ | 877 | | | $ | 57 | | | $ | 478 | | | $ | 24 | | | $ | 1,436 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2021 recognized in Net income (loss) in the period | $ | — | | | $ | — | | | $ | — | | | $ | (3) | | | $ | (3) | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2021 recognized in Other comprehensive income (loss) in the period | 2 | | | — | | | — | | | — | | | 2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Balance as of July 1, 2017 | | Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* | | Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Balance as of September 30, 2017 | | Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)* |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | |
Corporate and other bonds | $ | 100 |
| | $ | 1 |
| | $ | 1 |
| | $ | 13 |
| | $ | — |
| | $ | (11 | ) | | $ | 15 |
| | $ | — |
| | $ | 119 |
| | $ | — |
|
States, municipalities and political subdivisions | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Asset-backed: | | | | | | | | | | | | | | | | | |
| | |
Residential mortgage-backed | 123 |
| | 1 |
| | 1 |
| | — |
| | — |
| | (7 | ) | | 58 |
| | — |
| | 176 |
| | — |
|
Commercial mortgage-backed | 13 |
| | — |
| | (1 | ) | | 12 |
| | — |
| | (2 | ) | | 2 |
| | — |
| | 24 |
| | — |
|
Other asset-backed | 82 |
| | (1 | ) | | 1 |
| | 27 |
| | — |
| | (4 | ) | | 41 |
| | — |
| | 146 |
| | — |
|
Total asset-backed | 218 |
| | — |
| | 1 |
| | 39 |
| | — |
| | (13 | ) | | 101 |
| | — |
| | 346 |
| | — |
|
Total fixed maturity securities | 319 |
| | 1 |
| | 2 |
| | 52 |
| | — |
| | (24 | ) | | 116 |
| | — |
| | 466 |
| | — |
|
Equity securities | 19 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | — |
|
Life settlement contracts | 1 |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 339 |
| | $ | 1 |
| | $ | 2 |
| | $ | 52 |
| | $ | (1 | ) | | $ | (24 | ) | | $ | 116 |
| | $ | — |
| | $ | 485 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Corporate bonds and other | | States, municipalities and political subdivisions | | Asset-backed | | Equity securities | | Total |
Balance as of January 1, 2022 | $ | 937 | | | $ | 56 | | | $ | 556 | | | $ | 29 | | | $ | 1,578 | |
Total realized and unrealized investment gains (losses): | | | | | | | | | |
Reported in Net investment gains (losses) | (2) | | | — | | | 7 | | | (6) | | | (1) | |
Reported in Net investment income | 1 | | | — | | | 11 | | | (1) | | | 11 | |
Reported in Other comprehensive income (loss) | (203) | | | (14) | | | (122) | | | — | | | (339) | |
Total realized and unrealized investment gains (losses) | (204) | | | (14) | | | (104) | | | (7) | | | (329) | |
Purchases | 127 | | | — | | | 348 | | | 12 | | | 487 | |
Sales | (5) | | | — | | | (2) | | | (3) | | | (10) | |
Settlements | (63) | | | — | | | (54) | | | 9 | | | (108) | |
Transfers into Level 3 | 10 | | | — | | | 66 | | | — | | | 76 | |
Transfers out of Level 3 | — | | | — | | | (94) | | | (10) | | | (104) | |
Balance as of September 30, 2022 | $ | 802 | | | $ | 42 | | | $ | 716 | | | $ | 30 | | | $ | 1,590 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2022 recognized in Net income (loss) in the period | $ | — | | | $ | — | | | $ | — | | | $ | (8) | | | $ | (8) | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2022 recognized in Other comprehensive income (loss) in the period | (203) | | | (14) | | | (121) | | | — | | | (338) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Balance as of July 1, 2016 | | Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* | | Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Balance as of September 30, 2016 | | Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)* |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | |
Corporate and other bonds | $ | 242 |
| | $ | 1 |
| | $ | 7 |
| | $ | 16 |
| | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | — |
| | $ | 261 |
| | $ | — |
|
States, municipalities and political subdivisions | 2 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 1 |
| | — |
|
Asset-backed: | | | | | | | | | | | | | | | | | |
| | |
Residential mortgage-backed | 134 |
| | — |
| | (1 | ) | | 5 |
| | — |
| | (1 | ) | | — |
| | (58 | ) | | 79 |
| | — |
|
Commercial mortgage-backed | 11 |
| | — |
| | — |
| | 23 |
| | — |
| | (8 | ) | | — |
| | (2 | ) | | 24 |
| | — |
|
Other asset-backed | 45 |
| | — |
| | — |
| | 34 |
| | — |
| | — |
| | — |
| | (36 | ) | | 43 |
| | — |
|
Total asset-backed | 190 |
| | — |
| | (1 | ) | | 62 |
| | — |
| | (9 | ) | | — |
| | (96 | ) | | 146 |
| | — |
|
Total fixed maturity securities | 434 |
| | 1 |
| | 6 |
| | 78 |
| | — |
| | (15 | ) | | — |
| | (96 | ) | | 408 |
| | — |
|
Equity securities | 19 |
| | (1 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | (2 | ) |
Life settlement contracts | 67 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 67 |
| | — |
|
Total | $ | 520 |
| | $ | — |
| | $ | 7 |
| | $ | 78 |
| | $ | — |
| | $ | (15 | ) | | $ | — |
| | $ | (96 | ) | | $ | 494 |
| | $ | (2 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Balance as of January 1, 2017 | | Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* | | Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Balance as of September 30, 2017 | | Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)* |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | |
Corporate and other bonds | $ | 130 |
| | $ | 1 |
| | $ | 2 |
| | $ | 18 |
| | $ | (1 | ) | | $ | (36 | ) | | $ | 15 |
| | $ | (10 | ) | | $ | 119 |
| | $ | — |
|
States, municipalities and political subdivisions | 1 |
| | — |
| | — |
| — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Asset-backed: | | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed | 129 |
| | 3 |
| | 4 |
| — |
| — |
| | — |
| | (18 | ) | | 58 |
| | — |
| | 176 |
| | — |
|
Commercial mortgage-backed | 13 |
| | — |
| | (1 | ) | — |
| 12 |
| | — |
| | (2 | ) | | 2 |
| | — |
| | 24 |
| | — |
|
Other asset-backed | 57 |
| | (2 | ) | | 1 |
| — |
| 78 |
| | — |
| | (6 | ) | | 93 |
| | (75 | ) | | 146 |
| | — |
|
Total asset-backed | 199 |
| | 1 |
| | 4 |
| | 90 |
| | — |
| | (26 | ) | | 153 |
| | (75 | ) | | 346 |
| | — |
|
Total fixed maturity securities | 330 |
| | 2 |
| | 6 |
| | 108 |
| | (1 | ) | | (62 | ) | | 168 |
| | (85 | ) | | 466 |
| | — |
|
Equity securities | 19 |
| | — |
| | 2 |
| — |
| 1 |
| | (3 | ) | | — |
| | — |
| | — |
| | 19 |
| | — |
|
Derivative financial instruments | — |
| | 1 |
| | — |
| — |
| — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Life settlement contracts | 58 |
| | 6 |
| | — |
| | — |
| | (59 | ) | | (5 | ) | | — |
| | — |
| | — |
| | — |
|
Total | $ | 407 |
| | $ | 9 |
| | $ | 8 |
| | $ | 109 |
| | $ | (64 | ) | | $ | (67 | ) | | $ | 168 |
| | $ | (85 | ) | | $ | 485 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Balance as of January 1, 2016 | | Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* | | Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Balance as of September 30, 2016 | | Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)* |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | |
Corporate and other bonds | $ | 168 |
| | $ | 1 |
| | $ | 14 |
| | $ | 163 |
| | $ | (36 | ) | | $ | (15 | ) | | $ | — |
| | $ | (34 | ) | | $ | 261 |
| | $ | — |
|
States, municipalities and political subdivisions | 2 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 1 |
| | — |
|
Asset-backed: | | | | | | | | | | | | | | | | | |
| | |
Residential mortgage-backed | 134 |
| | 2 |
| | (2 | ) | | 15 |
| | — |
| | (10 | ) | | — |
| | (60 | ) | | 79 |
| | — |
|
Commercial mortgage-backed | 22 |
| | — |
| | — |
| | 32 |
| | — |
| | (17 | ) | | 3 |
| | (16 | ) | | 24 |
| | — |
|
Other asset-backed | 53 |
| | — |
| | 2 |
| | 69 |
| | (25 | ) | | (1 | ) | | 2 |
| | (57 | ) | | 43 |
| | — |
|
Total asset-backed | 209 |
| | 2 |
| | — |
| | 116 |
| | (25 | ) | | (28 | ) | | 5 |
| | (133 | ) | | 146 |
| | — |
|
Total fixed maturity securities | 379 |
| | 3 |
| | 14 |
| | 279 |
| | (61 | ) | | (44 | ) | | 5 |
| | (167 | ) | | 408 |
| | — |
|
Equity securities | 20 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | (2 | ) |
Life settlement contracts | 74 |
| | 10 |
| | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | 67 |
| | 2 |
|
Total | $ | 473 |
| | $ | 12 |
| | $ | 14 |
| | $ | 279 |
| | $ | (61 | ) | | $ | (61 | ) | | $ | 5 |
| | $ | (167 | ) | | $ | 494 |
| | $ | — |
|
*Net realized and unrealized gains and losses from Level 3 securities and derivatives are reported in Net income (loss) as follows:
|
| | |
Major Category of Assets and Liabilities | | Condensed Consolidated Statements of Operations Line Items |
Fixed maturity securities available-for-sale (1)
| | Net realized investment gains (losses) |
Fixed maturity securities trading | | Net investment income |
Equity securities (1)
| | Net realized investment gains (losses) |
Other invested assets - Derivative financial instruments held in a trading portfolio | | Net investment income |
Other invested assets - Derivative financial instruments not held in a trading portfolio | | Net realized investment gains (losses) |
Life settlement contracts | | Other revenues |
Other liabilities - Derivative financial instruments | | Net realized investment gains (losses) |
(1) Unrealized gains and losses are reported within AOCI. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Corporate bonds and other | | States, municipalities and political subdivisions | | Asset-backed | | Equity securities | | Total |
Balance as of January 1, 2021 | $ | 770 | | | $ | 46 | | | $ | 308 | | | $ | 27 | | | $ | 1,151 | |
Total realized and unrealized investment gains (losses): | | | | | | | | | |
Reported in Net investment gains (losses) | (9) | | | — | | | — | | | (2) | | | (11) | |
Reported in Net investment income | — | | | — | | | 4 | | | 2 | | | 6 | |
Reported in Other comprehensive income (loss) | (23) | | | — | | | (4) | | | — | | | (27) | |
Total realized and unrealized investment gains (losses) | (32) | | | — | | | — | | | — | | | (32) | |
Purchases | 219 | | | 12 | | | 197 | | | 1 | | | 429 | |
Sales | (3) | | | — | | | (9) | | | (15) | | | (27) | |
Settlements | (35) | | | (1) | | | (38) | | | — | | | (74) | |
Transfers into Level 3 | 10 | | | — | | | 71 | | | 11 | | | 92 | |
Transfers out of Level 3 | (52) | | | — | | | (51) | | | — | | | (103) | |
Balance as of September 30, 2021 | $ | 877 | | | $ | 57 | | | $ | 478 | | | $ | 24 | | | $ | 1,436 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2021 recognized in Net income (loss) in the period | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2021 recognized in Other comprehensive income (loss) in the period | (22) | | | — | | | (5) | | | — | | | (27) | |
Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended September 30, 2017 and 2016, there were no transfers between Level 1 and Level 2. The Company's policy is to recognize transfers between levels at the beginning
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 highly liquid government securities and exchange traded 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 primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with some inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with some inputs that are not market observable.
Short Term and Other Invested Assets
The fair value of Federal Home Loan Bank of Chicago (FHLBC) stock is equal to par because it can only be redeemed by the FHLBC at par or sold to another member of the FHLBC at par and is classified as Level 2.
As of September 30, 2017 and December 31, 2016, there were approximately $37 million and $31 million respectively of overseas deposits within other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy, because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.
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,non-U.S. government securities, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
Life Settlement Contracts
The Company accounts for its investmentAs of September 30, 2022 and December 31, 2021, there were $65 million and $74 million of overseas deposits within Other invested assets, which can be redeemed at net asset value in life settlement contracts using90 days or less. Overseas deposits are excluded from the fair value method. Historically, thehierarchy because their fair value of life settlement contracts was determined asis recorded using the presentnet asset 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.
The entire portfolio of life settlement contracts, which is included within the Life and Group Non-Core segment, was determined to be held for sale as of December 31, 2016 as the Company reached an agreement on terms to sell the portfolio. As such, the Company adjusted the fair value to the estimated sales proceeds less cost to sell. The definitive Purchase and Sale Agreement (PSA) related to the portfolio was executed on March 7, 2017 (sale date). In connection therewith, the life settlement contracts and related sale proceeds were placed in escrow until the buyer was recognized as the owner and beneficiary of each individual life settlement contract by the life insurance company that issued the policy. All of the contracts have been released from escrow as of September 30, 2017. The Company derecognized the released contracts and recorded the consideration, including a note receivable, which is payable over three years and is carried at amortized cost less any valuation allowance. The note receivable of $45 million is included within Other assets on the September 30, 2017 Condensed Consolidated Balance Sheet and interest income is accreted to the principal balance of the note.
The fair value of the Company's investments in life settlement contracts were $0 million and $58 million as of September 30, 2017 and December 31, 2016, and are included in Other assets on the Condensed Consolidated Balance Sheets. Despite the sale, the contracts were classified as Level 3 as there is not an active market for life settlement contracts. The cash receipts and payments related to the life settlement contracts prior to the sale date are included in Cash Flows from operating activities on the Condensed Consolidated Statements of Cash Flows. Cash receipts related to the sale of the life settlement contracts, as well as principal payments on the note receivable, are included in Cash Flows from investing activities.per share (or equivalent) practical expedient.
Derivative Financial Investments
Level 2 securities primarily include the embedded derivative on the funds withheld liability. The embedded derivative on funds withheld liability is valued usingbased on the change in fair valueunrealized gain or loss position of the assets supporting the funds withheld liability, which are fixed maturity securities primarily valued with observable inputs.
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 tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company. The valuation of life settlement contracts wasweighted average rate is calculated based on the terms of the sale of the contracts to a third party; therefore, the contracts are not included in the table below.fair value.
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September 30, 2022 | Estimated Fair Value (In millions) | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
Fixed maturity securities | $ | 1,111 | | | Discounted cash flow | | Credit spread | | 1% - 11% (3%) |
|
| | | | | | | | | |
September 30, 2017 | Estimated Fair Value (In millions) | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
Fixed maturity securities | $ | 139 |
| | Discounted cash flow | | Credit spread | | 1% - 12% (3%) |
|
| | | | | | | | | |
December 31, 2016 | Estimated Fair Value (In millions) | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
Fixed maturity securities | $ | 106 |
| | Discounted cash flow | | Credit spread | | 2% - 40% (4%) |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Estimated Fair Value (In millions) | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
Fixed maturity securities | $ | 1,225 | | | Discounted cash flow | | Credit spread | | 1% - 7% (2%) |
For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
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.
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September 30, 2022 | Carrying Amount | | Estimated Fair Value |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | |
Mortgage loans | $ | 953 | | | $ | — | | | $ | — | | | $ | 880 | | | $ | 880 | |
Liabilities | | | | | | | | | |
Long term debt | $ | 2,780 | | | $ | — | | | $ | 2,563 | | | $ | — | | | $ | 2,563 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | Carrying Amount | | Estimated Fair Value |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | |
Mortgage loans | $ | 722 |
| | $ | — |
| | $ | — |
| | $ | 731 |
| | $ | 731 |
|
Note receivable | 45 |
| — |
| — |
| | — |
| — |
| 46 |
| | 46 |
|
Liabilities | | | | | | | | | |
Short term debt | $ | 150 |
| | $ | — |
| | $ | 152 |
| | $ | — |
| | $ | 152 |
|
Long term debt | 2,707 |
| | — |
| | 2,916 |
| | — |
| | 2,916 |
|
|
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December 31, 2016 | Carrying Amount | | Estimated Fair Value |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | |
Mortgage loans | $ | 591 |
| | $ | — |
| | $ | — |
| | $ | 594 |
| | $ | 594 |
|
Liabilities | | | | | | | | | |
Long term debt | $ | 2,710 |
| | $ | — |
| | $ | 2,952 |
| | $ | — |
| | $ | 2,952 |
|
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 fair value of the note receivable was based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar notes, adjusted for specific credit 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Carrying Amount | | Estimated Fair Value |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | |
Mortgage loans | $ | 973 | | | $ | — | | | $ | — | | | $ | 1,018 | | | $ | 1,018 | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Long term debt | $ | 2,779 | | | $ | — | | | $ | 2,978 | | | $ | — | | | $ | 2,978 | |
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.E. Claim and Claim Adjustment Expense Reserves and Future Policy Benefit Reserves
The Company's propertyProperty 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 such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and economic conditions, 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 have contributed to material period-to-period fluctuations in the Company'sour results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $269$114 million and $342$171 million for the three and nine months ended September 30, 2017. Net catastrophe2022 primarily related to severe weather related events. Catastrophe losses for the three and nine months ended September 30, 20172022 included $149$87 million related tofor Hurricane Harvey, $95 million related to Hurricane Irma and $20 million related to Hurricane Maria.Ian. The remainingCompany reported catastrophe losses, in 2017 resulted primarily from U.S. weather-related events. Catastrophe-relatednet of reinsurance, reinstatement premium was $6of $178 million and $357 million for the three and nine months ended September 30, 2017. The Company reported catastrophe2021. Catastrophe losses net of reinsurance, of $16 million and $137 million for the three andmonths ended September 30, 2021 included $114 million for Hurricane Ida. Catastrophe losses for the nine months ended September 30, 2016. Catastrophe losses in 2016 resulted2021 were driven by severe weather related events, primarily from U.S. weather-related eventsHurricane Ida and the Fort McMurray wildfires.Winter Storms Uri and Viola.
Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group Non-Core segment.
| | | | | | | | | | | |
For the nine months ended September 30 | | | |
(In millions) | 2022 | | 2021 |
Reserves, beginning of year: | | | |
Gross | $ | 24,174 | | | $ | 22,706 | |
Ceded | 4,969 | | | 4,005 | |
Net reserves, beginning of year | 19,205 | | | 18,701 | |
Reduction of net reserves due to Excess Workers' Compensation Loss Portfolio Transfer | — | | | (632) | |
Net incurred claim and claim adjustment expenses: | | | |
Provision for insured events of current year | 4,638 | | | 4,474 | |
Increase (decrease) in provision for insured events of prior years | (144) | | | (130) | |
Amortization of discount | 131 | | | 137 | |
Total net incurred (1) | 4,625 | | | 4,481 | |
Net payments attributable to: | | | |
Current year events | (523) | | | (629) | |
Prior year events | (3,371) | | | (2,874) | |
Total net payments | (3,894) | | | (3,503) | |
Foreign currency translation adjustment and other | (383) | | | (51) | |
Net reserves, end of period | 19,553 | | | 18,996 | |
Ceded reserves, end of period | 5,147 | | | 4,836 | |
Gross reserves, end of period | $ | 24,700 | | | $ | 23,832 | |
|
| | | | | | | |
For the nine months ended September 30 | |
(In millions) | 2017 | | 2016 |
Reserves, beginning of year: | | | |
Gross | $ | 22,343 |
| | $ | 22,663 |
|
Ceded | 4,094 |
| | 4,087 |
|
Net reserves, beginning of year | 18,249 |
| | 18,576 |
|
Net incurred claim and claim adjustment expenses: | | | |
Provision for insured events of current year | 3,949 |
| | 3,799 |
|
Decrease in provision for insured events of prior years | (284 | ) | | (332 | ) |
Amortization of discount | 138 |
| | 134 |
|
Total net incurred (1) | 3,803 |
|
| 3,601 |
|
Net payments attributable to: | | | |
Current year events | (560 | ) | | (591 | ) |
Prior year events | (3,401 | ) | | (3,209 | ) |
Total net payments | (3,961 | ) |
| (3,800 | ) |
Foreign currency translation adjustment and other | 110 |
| | 39 |
|
Net reserves, end of period | 18,201 |
| | 18,416 |
|
Ceded reserves, end of period | 4,008 |
| | 4,256 |
|
Gross reserves, end of period | $ | 22,209 |
|
| $ | 22,672 |
|
(1) Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, the loss on the Excess Workers' Compensation Loss Portfolio Transfer, uncollectible reinsurance and benefit expenses related to future policy benefits, which are not reflected in the table above. | |
(1) | Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits, which are not reflected in the table above. |
Net Prior Year Development
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.loss reserve development (development). These changes can be favorable or unfavorable. The following tables and discussion present the net prior yeartable presents development recorded for the Specialty, Commercial, International and Corporate & Other Non-Core segments.
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| | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2017 | | | | | | | | | |
(In millions) |
Specialty | | Commercial | | International | | Corporate & Other Non-Core | | Total |
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (109 | ) | | $ | (7 | ) | | $ | 1 |
| | $ | — |
| | $ | (115 | ) |
Pretax (favorable) unfavorable premium development | (3 | ) | | (11 | ) | | (5 | ) | | — |
| | (19 | ) |
Total pretax (favorable) unfavorable net prior year development | $ | (112 | ) | | $ | (18 | ) | | $ | (4 | ) | | $ | — |
| | $ | (134 | ) |
|
| | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2016 | | | | | | | | | |
(In millions) |
Specialty | | Commercial | | International | | Corporate & Other Non-Core | | Total |
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (112 | ) | | $ | (5 | ) | | $ | (15 | ) | | $ | — |
| | $ | (132 | ) |
Pretax (favorable) unfavorable premium development | — |
| | (3 | ) | | (2 | ) | | — |
| | (5 | ) |
Total pretax (favorable) unfavorable net prior year development | $ | (112 | ) | | $ | (8 | ) | | $ | (17 | ) | | $ | — |
| | $ | (137 | ) |
|
| | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2017 | | | | | | | | | |
(In millions) |
Specialty | | Commercial | | International | | Corporate & Other Non-Core | | Total |
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (163 | ) | | $ | (65 | ) | | $ | 1 |
| | $ | — |
| | $ | (227 | ) |
Pretax (favorable) unfavorable premium development | (13 | ) | | 27 |
| | (16 | ) | | — |
| | (2 | ) |
Total pretax (favorable) unfavorable net prior year development | $ | (176 | ) | | $ | (38 | ) | | $ | (15 | ) | | $ | — |
| | $ | (229 | ) |
|
| | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | |
(In millions) |
Specialty | | Commercial | | International | | Corporate & Other Non-Core | | Total |
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (211 | ) | | $ | (37 | ) | | $ | (34 | ) | | $ | — |
| | $ | (282 | ) |
Pretax (favorable) unfavorable premium development | (18 | ) | | (7 | ) | | (2 | ) | | — |
| | (27 | ) |
Total pretax (favorable) unfavorable net prior year development | $ | (229 | ) | | $ | (44 | ) | | $ | (36 | ) | | $ | — |
| | $ | (309 | ) |
Premium | | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Pretax (favorable) unfavorable development: | | | | | | | |
Specialty | $ | (15) | | | $ | (15) | | | $ | (35) | | | $ | (40) | |
Commercial | (2) | | | 2 | | | (26) | | | 2 | |
International | — | | | 3 | | | (5) | | | 2 | |
Corporate & Other | — | | | — | | | 64 | | | 40 | |
Total pretax (favorable) unfavorable development | $ | (17) | | | $ | (10) | | | $ | (2) | | | $ | 4 | |
Unfavorable development can occur inof $64 million was recorded within the property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium. Audits on policies usually occur in a period after the expiration date of the policy. See further information on the premium development in the CommercialCorporate & Other segment for the three and nine months ended September 30, 20172022 largely associated with legacy mass tort abuse claims, including the recent Diocese of Rochester proposed settlement. Unfavorable development of $40 million was recorded within the Small Business discussion in Note F.Corporate & Other segment for the nine months ended September 30, 2021 due to legacy mass tort exposures, primarily related to abuse.
Specialty
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 September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Pretax (favorable) unfavorable development: | | | | | | | | Pretax (favorable) unfavorable development: | | | | | | | |
Medical Professional Liability | $ | 1 |
| | $ | 13 |
| | $ | 5 |
| | $ | (17 | ) | Medical Professional Liability | $ | 8 | | | $ | 8 | | | $ | 17 | | | $ | 16 | |
Other Professional Liability and Management Liability | (27 | ) | | (48 | ) | | (96 | ) | | (98 | ) | Other Professional Liability and Management Liability | 9 | | | — | | | 22 | | | 10 | |
Surety | (82 | ) | | (63 | ) | | (82 | ) | | (63 | ) | Surety | (20) | | | (15) | | | (48) | | | (53) | |
Warranty | (1 | ) | | 2 |
| | 5 |
| | 7 |
| Warranty | (13) | | | (6) | | | (22) | | | (14) | |
Other | — |
| | (16 | ) | | 5 |
| | (40 | ) | Other | 1 | | | (2) | | | (4) | | | 1 | |
Total pretax (favorable) unfavorable development | $ | (109 | ) | | $ | (112 | ) | | $ | (163 | ) | | $ | (211 | ) | Total pretax (favorable) unfavorable development | $ | (15) | | | $ | (15) | | | $ | (35) | | | $ | (40) | |
Three Months
20172022
Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years.
Favorable development in warranty was due to lower than expected loss emergence in a recent accident year.
2021
Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years.
Nine Months
2022
Unfavorable development in medical professional liability was due to higher than expected large loss activity in recent accident years.
Unfavorable development in other professional liability and management liability was primarily due to lowerhigher than expected claim severity and frequency in the Company’s cyber and professional errors and omissions businesses in multiple accident years 2012 through 2015, primarily for professional liability products.years.
Favorable development in surety coverages was primarily due to lower than expected frequency and lack of large lossessystemic activity in recent accident years 2015 and prior.years.
2016Favorable development in warranty was due to lower than expected loss emergence in a recent accident year.
2021
Unfavorable development forin medical professional liability was largely due to higher than expected frequency of large losses in recent accident years 2014 and 2015 in aging services. Increased claims on a specific hospital policy in accident years 2014 and 2015 was also an unfavorable contributor although more than offset by favorable development relative to expectations in accident years 2013 and prior.years.
FavorableUnfavorable development in other professional liability and management liability was primarily relateddue to lowerhigher than expected claim severity and frequency of claims and favorable outcomes on specific claims forin the Company’s cyber business in recent accident years 2010 through 2014.years.
Favorable development in surety coverages was primarily due to lower than expected frequency and lack of large lossessystemic activity in recent accident years 2014 and prior.
Favorable development for other coverages was due to better than expected claim frequency in commercial lines coverages provided to Specialty customers in accident years 2010 through 2015.
Nine Months
2017years.
Favorable development in other professional liability and management liabilitywarranty was primarily due to favorable settlements on closed claims and a lower frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2012 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.
2016
Favorable development for medical professional liability was primarily due to lower than expected severities for individual healthcare professionals, allied facilities and hospitals in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected frequency and severity ina recent accident years 2014 and 2015 in our aging services business.year.
Favorable development in other professional liability and management liability was primarily related to favorable settlements on closed claims in accident years 2011 through 2013 in professional services. Additional favorable development related to lower than expected frequency
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.
Favorable development for other coverages provided to Specialty customers was due to better than expected claim frequency in property coverages in accident year 2015 and commercial lines coverages in accident years 2010 through 2015.
Commercial
The following table presents further detail of the development recorded for the Commercial segment. | | Periods ended September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Pretax (favorable) unfavorable development: | | | | | | | | Pretax (favorable) unfavorable development: | | | | | | | |
Commercial Auto | $ | (14 | ) | | $ | (12 | ) | | $ | (40 | ) | | $ | (47 | ) | Commercial Auto | $ | — | | | $ | — | | | $ | 21 | | | $ | 30 | |
General Liability | 7 |
| | 14 |
| | 6 |
| | (38 | ) | General Liability | — | | | — | | | 41 | | | — | |
Workers' Compensation | 7 |
| | (6 | ) | | (39 | ) | | 48 |
| Workers' Compensation | (2) | | | 2 | | | (86) | | | (40) | |
Property and Other | (7 | ) | | (1 | ) | | 8 |
| | — |
| Property and Other | — | | | — | | | (2) | | | 12 | |
Total pretax (favorable) unfavorable development | $ | (7 | ) | | $ | (5 | ) | | $ | (65 | ) | | $ | (37 | ) | Total pretax (favorable) unfavorable development | $ | (2) | | | $ | 2 | | | $ | (26) | | | $ | 2 | |
ThreeNine Months
20172022
Unfavorable development in commercial auto was due to higher than expected claim severity in the Company’s construction business in multiple accident years.
Unfavorable development in general liability was due to higher than expected claim severity in construction, middle market and small business across multiple accident years.
Favorable development for commercial autoin workers’ compensation was primarily due to favorable medical trends driving lower than expected severity in multiple accident years 2015 and 2016, as well as a large favorable recovery on a claim in accident year 2012.years.
2021
Unfavorable development in workers' compensation reflectscommercial auto was due to higher than expected claim severity in the recognition of loss estimates related to favorable premium development as well as an adverse arbitration ruling related to reinsurance recoverables from olderCompany’s construction and middle market businesses in recent accident years.
2016
Favorable development for commercial autoin workers’ compensation was primarily due to lower than expected severities in accident years 2012 through 2015.
Unfavorable development for general liability was primarily due to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.
Favorable development for workers' compensation was primarily driven by lower than expected frequencies in accident years 2009 through 2014, partially offset by the estimated impact of recent Florida court rulings in accident years 2008 through 2015.
Nine Months
2017
Favorable development for commercial auto was primarily due tofavorable medical trends driving lower than expected severity in multiple accident years 2013 through 2016, as well as a large favorable recovery on a claim in accident year 2012.
Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs. This was partially offset by unfavorable development related to an adverse arbitration ruling on reinsurance recoverables from older accident years as well as the recognition of loss estimates associated with favorable premium development.years.
Unfavorable development forin property and other was primarily due to higher than expected severitylarge loss activity in the Company’s marine business in multiple accident year 2016.years.
2016
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014 and lower than expected severities in accident years 2012 through 2015.Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013. This was partially offset by unfavorable development related to an increase in reported claims prior to the closing
Unfavorable development for workers' compensation was primarily due to higher than expected severity for Defense Base Act contractors and the estimated impact of recent Florida court rulings in accident years 2008 through 2015. This was partially offset by favorable development related to lower than expected frequencies related to accident years 2009 through 2014.
Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event. This was offset by favorable development primarily due to better than expected loss frequency in accident years 2013 through 2015.
International
The following table presents further detail of the development recorded for the International segment. | | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 (1) | | 2022 | | 2021 (1) |
Pretax (favorable) unfavorable development: | | | | | | | |
Commercial | $ | — | | | $ | (21) | | | $ | (4) | | | $ | (24) | |
Specialty | — | | | 23 | | | (1) | | | 25 | |
Other | — | | | 1 | | | — | | | 1 | |
Total pretax (favorable) unfavorable development | $ | — | | | $ | 3 | | | $ | (5) | | | $ | 2 | |
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Pretax (favorable) unfavorable development: | | | | | | | |
Medical Professional Liability | $ | 4 |
| | $ | (2 | ) | | $ | (1 | ) | | $ | (3 | ) |
Other Professional Liability | (8 | ) | | (1 | ) | | 1 |
| | 16 |
|
Liability | 4 |
| | (2 | ) | | (1 | ) | | (21 | ) |
Property & Marine | (4 | ) | | (9 | ) | | (15 | ) | | (16 | ) |
Other | 5 |
| | (1 | ) | | 17 |
| | (10 | ) |
Total pretax (favorable) unfavorable development | $ | 1 |
| | $ | (15 | ) | | $ | 1 |
| | $ | (34 | ) |
(1) Effective December 31, 2021 the International lines of business were consolidated to align with domestic operations. Prior period information has been conformed to the new line of business presentation.Three Months
20172021
Favorable development in other professional liability was primarily due to better than expected emergence in the Canadian run-off business in accident years 2014 and prior.
2016
Favorable development for other professional liability was primarily due to favorable settlements on claims in accident years 2013 and prior. This was largely offset by higher than expected unfavorable large loss emergence in accident years 2014 and 2015.
Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 United Kingdom (UK) floods.
Nine Months
2017
Favorable development for other professional liability was primarily due to better than expected emergence in the Canadian run-off business in accident years 2014 and prior, as well as several favorable settlements relating to large claims in the Europe Professional Indemnity portfolio. This was partially offset by higher than expected severity in accident year 2015 arising from the management liability business.
Favorable development for property and marinecommercial was due to betterlower than expected frequency inloss emergence across multiple accident years 2014 through 2016.years.
Unfavorable development for other coveragesin specialty was primarily due to adverse large claims experience in the Hardy Political Risks portfolio, relating largely to accident year 2016.
2016
Unfavorable development for other professional liability was primarily due to higher than expected large loss emergenceclaim severity in accident years 2011 through 2015, partially offset by favorable settlements on claims in accident years 2013 and prior.the Company’s medical treatment business.
Nine Months
2021
Favorable development for liabilityin commercial was primarily due to betterlower than expected loss emergence across multiple accident years.
Unfavorable development in specialty was due to higher than expected claim severity in accident years 2013 and prior.the Company’s medical treatment business.
Favorable development for property and marine was primarily due to favorable emergence
Favorable development for other coverages was primarily due to better than expected severity in auto liability in accident years 2011 through 2015.
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 through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, 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 LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $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.
SubsequentIn years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves which resultedresulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is impactedaffected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net A&EP adverse development before consideration of LPT | $ | — |
| | $ | — |
| | $ | 60 |
| | $ | 200 |
|
Retroactive reinsurance benefit recognized | (17 | ) | | (12 | ) | | (60 | ) | | (94 | ) |
Pretax impact of A&EP reserve development and the LPT | $ | (17 | ) | | $ | (12 | ) | | $ | — |
| | $ | 106 |
|
Based uponThe impact of the Company's annual A&EP reserve review, net unfavorable prior year developmentLPT on the Condensed Consolidated Statements of $60Operations was the recognition of a retroactive reinsurance benefit of $17 million and $200$8 million was recognized before consideration of cessions tofor the LPTthree months ended September 30, 2022 and 2021 and $40 million and $30 million for the nine months ended September 30, 20172022 and 2016. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The 2016 unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. While this unfavorable development was ceded to NICO under the LPT, the Company’s Net income in both periods was negatively affected due to the application of retroactive reinsurance accounting.
2021. As of September 30, 20172022 and December 31, 2016,2021, the cumulative amounts ceded under the LPT were $2.9 billion and $2.8$3.4 billion. The unrecognized deferred retroactive reinsurance benefit was $334$389 million and $429 million as of September 30, 20172022 and December 31, 2016.2021 and is included within Other liabilities on the Condensed Consolidated Balance Sheets.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $2.9 billion and $2.8$2.3 billion as of September 30, 2017 and December 31, 2016.2022. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the majority of the Company’s A&EP claims.
Note F. Legal Proceedings and GuaranteesCredit Risk for Ceded Reserves
CNA 401(k) Plus Plan Litigation
In September 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (CAC) (a former subsidiary of CCC), CNAF, the Investment CommitteeThe majority of the CNA 401(k) Plus Plan (Plan), Company’s outstanding voluntary reinsurance receivables are due from reinsurers with financial strength ratings of A- or higher. Receivables due from reinsurers with lower financial strength ratings are primarily due from captive reinsurers and are backed by collateral arrangements.
Life & Group Policyholder Reserves
The Northern TrustCompany’s Life & Group segment includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and the Company has the ability to increase policy premiums, subject to state regulatory approval.
The Company maintains both claim and John Does 1-10 (collectively Defendants)claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for the Life & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, the Company’s actuaries perform a detailed claim reserve review on an annual basis. The review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for structured settlement obligations, the Company's actuaries review mortality experience on an annual basis. The Company’s recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent reviews.
The Company's most recent annual claim reserve reviews were completed in the third quarter of 2022. The long term care claim reserve review resulted in a $25 million pretax reduction in reserves driven by a $107 million favorable impact from the release of all remaining IBNR reserves established during 2020 and 2021 in response to the COVID-19 pandemic partially offset by an $82 million unfavorable impact from higher claim severity, including utilization and cost of care inflation, than anticipated in the reserve estimates. The structured settlement claim reserve review resulted in a $5 million pretax reduction in reserves due to discount rate assumption changes. The Company's 2021 annual claim reserve reviews were completed in the third quarter of 2021 resulting in a $40 million pretax reduction in long term care reserves primarily due to lower claim severity than anticipated in the reserve estimates and a $2 million pretax increase in the structured settlement claim reserves primarily due to lower discount rate assumptions and mortality assumption changes.
Future policy benefit reserves consist of active life reserves related to the Plan.Company’s long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The complaint allegesdetermination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.
The actuarial assumptions that Defendants breached fiduciary dutiesmanagement believes are subject to the Planmost variability are morbidity, persistency, discount rates and caused prohibited transactionsanticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in violationforce and can be affected by policy lapses, benefit reductions and death. Discount rates are influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and may also be affected by changes to the Internal Revenue Code. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the Employee Retirement Income Security Actapproved rate increases are unknown. As a result of 1974 whenthis variability, the Plan's Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of Plan participants who had investedCompany’s long term care reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.
Annually, in the Fixed Income Fund suffered lower returns in their Plan investmentsthird quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as a consequence of these alleged violations and seeks relief on behalf of the putative class. CCC and the other defendants are contesting the case, and no class has been certified. The Plan trustees have provided notice to their fiduciary coverage insurance carriers. Progress on the litigation has been limited as the parties are currently in mediation.
Based on information currently available and our assessmentdate of the mediation, management hasassessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded its best estimate of probable loss; however, itreserves. If the GPV required reserves are greater than the existing recorded reserves, the existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reasonably possible that the ultimate liability may differ from that amount given the inherent uncertainty involvedreflected in this matter. After consideration of available insurance coverage, management does not believe that the ultimate resolution of this matter will have a material impact on the Company’s results of operations or financial position thoughin the timingperiod in which the need for such
adjustment is determined. If the GPV required reserves are less than the existing recorded reserves, assumptions remain locked in and insurance recovery, if any, may differ.no adjustment is made.
Small Business Premium Rate Adjustment
In prior quarters, the Company identified rating errors related to its multi-peril package product and workers' compensation policies within its Small Business unit, and the Company determined that it would voluntarily issue premium refunds along with interest on affected policies. After the rating errors were identified, written and earned premium have been reported net of any impact from the premium rate adjustments. There was no premium development impactThe GPV for the three months ended September 30, 2017long term care future policy benefit reserves, performed in the third quarters of 2022 and $37 million2021, indicated recorded reserves included a pretax margin of adverse premium development was recognized as a result of the rating errors for the nine months ended September 30, 2017. Pretax operating income was reduced by $1approximately $125 million and $7$72 million for the three and nine months ended September 30, 2017 for interest due to policyholders on the premium rate adjustments.
The policyholder refunds for the multi-package product were issued in the current quarter. The estimated refund liability for the workers' compensation policies as of September 30, 2017 was $61 million including interest. Any fines or penalties related to the foregoing are reasonably possible, but are not expected to be material to the Company's results2022 and 2021.
Other LitigationNote F. Legal Proceedings, Contingencies and Guarantees
The Company is a party to other routinevarious claims and litigation incidental to its business, which, based on the facts and circumstances currently known, isare not material to the Company's results of operations or financial position.
Guarantees
As of September 30, 2017 and December 31, 2016, 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 previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets 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 September 30, 2017, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to quantifiable indemnification agreements was $254 million. In certain cases, should the Company be required to make payments under any such guarantee, it would have the right to seek reimbursement 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 September 30, 2017, 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.
The Company alsohas provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities providedissued by a previously owned subsidiary. As of September 30, 2017,2022, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.8$1.6 billion, which will be paid over the lifetime of the annuitants. The Company does not believe any payment is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
Note G.G. Benefit Plans
The components of net periodic pension cost (benefit) are presented in the following table.
| | Periods ended September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Pension cost (benefit) | | | | | | | | |
Net periodic pension cost (benefit) | | Net periodic pension cost (benefit) | | | | | | | |
Interest cost on projected benefit obligation | $ | 25 |
| | $ | 29 |
| | $ | 77 |
| | $ | 85 |
| Interest cost on projected benefit obligation | $ | 17 | | | $ | 15 | | | $ | 50 | | | $ | 46 | |
Expected return on plan assets | (38 | ) | | (41 | ) | | (116 | ) | | (121 | ) | Expected return on plan assets | (38) | | | (38) | | | (114) | | | (115) | |
Amortization of net actuarial loss | 9 |
| | 9 |
| | 27 |
| | 28 |
| |
Amortization of net actuarial (gain) loss | | Amortization of net actuarial (gain) loss | 8 | | | 12 | | | 23 | | | 35 | |
Settlement loss | 6 |
| | — |
| | 8 |
| | — |
| Settlement loss | — | | | — | | | — | | | 1 | |
Net periodic pension cost (benefit) | $ | 2 |
| | $ | (3 | ) | | $ | (4 | ) | | $ | (8 | ) | |
Total net periodic pension cost (benefit) | | Total net periodic pension cost (benefit) | $ | (13) | | | $ | (11) | | | $ | (41) | | | $ | (33) | |
The Company contributed $26 million to its pension plans forfollowing table indicates the nine months ended September 30, 2017 and expects to contribute an additional $2 million to its pension plans before December 31, 2017.line items in which the non-service cost (benefit) is presented in the Condensed Consolidated Statements of Operations.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Non-Service Cost (Benefit): | | | | | | | |
Insurance claims and policyholders' benefits | $ | (3) | | | $ | (3) | | | $ | (11) | | | $ | (9) | |
Other operating expenses | (10) | | | (8) | | | (30) | | | (24) | |
Total net periodic pension cost (benefit) | $ | (13) | | | $ | (11) | | | $ | (41) | | | $ | (33) | |
Note H. Accumulated Other Comprehensive Income (Loss) by Component
The tables below display the changes in Accumulated other comprehensive income (loss) by component.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of July 1, 2022 | $ | (8) | | | $ | (1,918) | | | $ | (592) | | | $ | (195) | | | $ | (2,713) | |
Other comprehensive income (loss) before reclassifications | — | | | (1,429) | | | — | | | (103) | | | (1,532) | |
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $—, $11, $2, $— and $13 | 2 | | | (102) | | | (6) | | | — | | | (106) | |
Other comprehensive income (loss) net of tax (expense) benefit of $1, $370, $(2), $— and $369 | (2) | | | (1,327) | | | 6 | | | (103) | | | (1,426) | |
Balance as of September 30, 2022 | $ | (10) | | | $ | (3,245) | | | $ | (586) | | | $ | (298) | | | $ | (4,139) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of July 1, 2021 | $ | — | | | $ | 1,418 | | | $ | (829) | | | $ | (80) | | | $ | 509 | |
Other comprehensive income (loss) before reclassifications | — | | | (121) | | | (1) | | | (33) | | | (155) | |
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $—, $(5), $2, $— and $(3) | — | | | 17 | | | (9) | | | — | | | 8 | |
Other comprehensive income (loss) net of tax (expense) benefit of $—, $37, $(2), $— and $35 | — | | | (138) | | | 8 | | | (33) | | | (163) | |
Balance as of September 30, 2021 | $ | — | | | $ | 1,280 | | | $ | (821) | | | $ | (113) | | | $ | 346 | |
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with OTTI losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of July 1, 2017 | $ | 26 |
| | $ | 786 |
| | $ | (635 | ) | | $ | (145 | ) | | $ | 32 |
|
Other comprehensive income (loss) before reclassifications | 1 |
| | 35 |
| | — |
| | 41 |
| | 77 |
|
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(4), $5, $- and $1 | — |
| | 12 |
| | (10 | ) | | — |
| | 2 |
|
Other comprehensive income (loss) net of tax (expense) benefit of $-, $(16), $(5), $- and $(21) | 1 |
| | 23 |
| | 10 |
| | 41 |
| | 75 |
|
Balance as of September 30, 2017 | $ | 27 |
| | $ | 809 |
| | $ | (625 | ) | | $ | (104 | ) | | $ | 107 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of January 1, 2022 | $ | (2) | | | $ | 1,039 | | | $ | (604) | | | $ | (113) | | | $ | 320 | |
Other comprehensive income (loss) before reclassifications | (5) | | | (4,401) | | | — | | | (185) | | | (4,591) | |
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(1), $15, $5, $— and $19 | 3 | | | (117) | | | (18) | | | — | | | (132) | |
Other comprehensive income (loss) net of tax (expense) benefit of $2, $1,150, $(5), $— and $1,147 | (8) | | | (4,284) | | | 18 | | | (185) | | | (4,459) | |
Balance as of September 30, 2022 | $ | (10) | | | $ | (3,245) | | | $ | (586) | | | $ | (298) | | | $ | (4,139) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of January 1, 2021 | $ | — | | | $ | 1,745 | | | $ | (848) | | | $ | (94) | | | $ | 803 | |
Other comprehensive income (loss) before reclassifications | (2) | | | (391) | | | (1) | | | (19) | | | (413) | |
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(20), $7, $— and $(12) | (2) | | | 74 | | | (28) | | | — | | | 44 | |
Other comprehensive income (loss) net of tax (expense) benefit of $—, $124, $(7), $— and $117 | — | | | (465) | | | 27 | | | (19) | | | (457) | |
Balance as of September 30, 2021 | $ | — | | | $ | 1,280 | | | $ | (821) | | | $ | (113) | | | $ | 346 | |
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with OTTI losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of July 1, 2016 | $ | 31 |
| | $ | 934 |
| | $ | (637 | ) | | $ | (118 | ) | | $ | 210 |
|
Other comprehensive income (loss) before reclassifications | 7 |
| | 69 |
| | — |
| | (24 | ) | | 52 |
|
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(2), $(13), $3, $- and $(12) | 4 |
| | 27 |
| | (6 | ) | | — |
| | 25 |
|
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(19), $(3), $- and $(24) | 3 |
| | 42 |
| | 6 |
| | (24 | ) | | 27 |
|
Balance as of September 30, 2016 | $ | 34 |
| | $ | 976 |
| | $ | (631 | ) | | $ | (142 | ) | | $ | 237 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with OTTI losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of January 1, 2017 | $ | 30 |
| | $ | 642 |
| | $ | (647 | ) | | $ | (198 | ) | | $ | (173 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 228 |
| | — |
| | 94 |
| | 322 |
|
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(1), $(28), $12, $- and $(17) | 3 |
| | 61 |
| | (22 | ) | | — |
| | 42 |
|
Other comprehensive income (loss) net of tax (expense) benefit of $1, $(102), $(12), $- and $(113) | (3 | ) | | 167 |
| | 22 |
| | 94 |
| | 280 |
|
Balance as of September 30, 2017 | $ | 27 |
| | $ | 809 |
| | $ | (625 | ) | | $ | (104 | ) | | $ | 107 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with OTTI losses | | Net unrealized gains (losses) on other investments | | Pension and postretirement benefits | | Cumulative foreign currency translation adjustment | | Total |
Balance as of January 1, 2016 | $ | 27 |
| | $ | 390 |
| | $ | (648 | ) | | $ | (84 | ) | | $ | (315 | ) |
Other comprehensive income (loss) before reclassifications | 9 |
| | 615 |
| | — |
| | (58 | ) | | 566 |
|
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(1), $(12), $9, $- and $(4) | 2 |
| | 29 |
| | (17 | ) | | — |
| | 14 |
|
Other comprehensive income (loss) net of tax (expense) benefit of $(4), $(292), $(9), $- and $(305) | 7 |
| | 586 |
| | 17 |
| | (58 | ) | | 552 |
|
Balance as of September 30, 2016 | $ | 34 |
| | $ | 976 |
| | $ | (631 | ) | | $ | (142 | ) | | $ | 237 |
|
Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:
|
| | | | | | | |
Component of AOCI | | Condensed Consolidated Statements of Operations Line Item Affected by Reclassifications |
Net unrealized gains (losses) on investments with OTTIan allowance for credit losses | | Net realized investment gains (losses) |
and Net unrealized gains (losses) on other investments | | Net realized investment gains (losses) |
Pension and postretirement benefits | | Other operating expenses and Insurance claims and policyholders' benefits |
Note I.I. Business Segments
The Company's core property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International. These three segments are collectively referred to as Property & Casualty Operations. The Company's non-core operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group Non-Core and Corporate & Other Non-Core.Other.
The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2016.2021. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only Insurance and Reinsurance receivables, Insurance reserves, Deferred acquisition costs, Goodwill and GoodwillDeferred non-insurance warranty acquisition expense and revenue 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 RealizedNet investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense hashave 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
The performance of the Company's insurance operations is monitored by management through core income (loss), which is derived from certain income statement amounts, is used by management to monitor performance of the Company's insurance operations.amounts. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk. 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 operatingCore income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net realized investment gains (losses) ii) income or loss from discontinued operationslosses and iii) any cumulative effects of changes in accounting guidance. The calculation of net operatingcore income (loss) excludes net realized investment gains (losses)or losses because net realized investment gains (losses) are largely discretionary, except for someor losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key driversreflective of underwriting performance, and are therefore not considered an indicationour primary operations.
The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2022 | Specialty | | Commercial | | International | | Life & Group | | Corporate & Other | | | | |
(In millions) | | | | | | Eliminations | | Total |
Operating revenues | | | | | | | | | | | | | |
Net earned premiums | $ | 810 | | | $ | 1,023 | | | $ | 270 | | | $ | 118 | | | $ | — | | | $ | — | | | $ | 2,221 | |
Net investment income | 102 | | | 112 | | | 16 | | | 187 | | | 5 | | | — | | | 422 | |
Non-insurance warranty revenue | 399 | | | — | | | — | | | — | | | — | | | — | | | 399 | |
Other revenues | (1) | | | 13 | | | — | | | — | | | 1 | | | (2) | | | 11 | |
Total operating revenues | 1,310 | | | 1,148 | | | 286 | | | 305 | | | 6 | | | (2) | | | 3,053 | |
Claims, benefits and expenses | | | | | | | | | | | | | |
Net incurred claims and benefits | 459 | | | 733 | | | 169 | | | 310 | | | (13) | | | — | | | 1,658 | |
Policyholders’ dividends | 2 | | | 5 | | | — | | | — | | | — | | | — | | | 7 | |
Amortization of deferred acquisition costs | 169 | | | 163 | | | 51 | | | — | | | — | | | — | | | 383 | |
Non-insurance warranty expense | 371 | | | — | | | — | | | — | | | — | | | — | | | 371 | |
Other insurance related expenses | 88 | | | 145 | | | 35 | | | 29 | | | 1 | | | (1) | | | 297 | |
Other expenses | 15 | | | 3 | | | 11 | | | 2 | | | 47 | | | (1) | | | 77 | |
Total claims, benefits and expenses | 1,104 | | | 1,049 | | | 266 | | | 341 | | | 35 | | | (2) | | | 2,793 | |
Core income (loss) before income tax | 206 | | | 99 | | | 20 | | | (36) | | | (29) | | | — | | | 260 | |
Income tax (expense) benefit on core income (loss) | (45) | | | (19) | | | (1) | | | 14 | | | 4 | | | — | | | (47) | |
Core income (loss) | $ | 161 | | | $ | 80 | | | $ | 19 | | | $ | (22) | | | $ | (25) | | | $ | — | | | 213 | |
Net investment gains (losses) | | | | | | | | | | | | | (96) | |
Income tax (expense) benefit on net investment gains (losses) | | | | | | | | | | | | | 11 | |
Net investment gains (losses), after tax | | | | | | | | | | | | | (85) | |
Net income (loss) | | | | | | | | | | | | | $ | 128 | |
| | Three months ended September 30, 2017 |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | | | | |
Three months ended September 30, 2021 | | Three months ended September 30, 2021 | Specialty | | Commercial | | International | | Life & Group | | Corporate & Other | | | | |
(In millions) |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | Eliminations | | Total | (In millions) | | Eliminations | | Total |
Operating revenues | | |
| | |
| Operating revenues | | | | | | | | | | | | | |
Net earned premiums | $ | 703 |
| | $ | 741 |
| | $ | 226 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 1,806 |
| Net earned premiums | $ | 773 | | | $ | 893 | | | $ | 271 | | | $ | 123 | | | $ | — | | | $ | (1) | | | $ | 2,059 | |
Net investment income | 134 |
| | 161 |
| | 13 |
| | 195 |
| | 6 |
| | — |
| | 509 |
| Net investment income | 116 | | | 141 | | | 14 | | | 240 | | | 2 | | | — | | | 513 | |
Non-insurance warranty revenue | | Non-insurance warranty revenue | 357 | | | — | | | — | | | — | | | — | | | — | | | 357 | |
Other revenues | 99 |
| | 7 |
| | 1 |
| | — |
| | — |
| | — |
| | 107 |
| Other revenues | 1 | | | 7 | | | — | | | (1) | | | 2 | | | (1) | | | 8 | |
Total operating revenues | 936 |
| | 909 |
| | 240 |
| | 331 |
| | 6 |
| | — |
| | 2,422 |
| Total operating revenues | 1,247 | | | 1,041 | | | 285 | | | 362 | | | 4 | | | (2) | | | 2,937 | |
Claims, Benefits and Expenses | |
| | |
| | | | |
| | |
| | |
| | |
| |
Claims, benefits and expenses | | Claims, benefits and expenses | | | | | | | | | | | | | |
Net incurred claims and benefits | 357 |
| | 611 |
| | 200 |
| | 322 |
| | (15 | ) | | — |
| | 1,475 |
| Net incurred claims and benefits | 446 | | | 720 | | | 171 | | | 296 | | | (6) | | | — | | | 1,627 | |
Policyholders’ dividends | 1 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| Policyholders’ dividends | — | | | 5 | | | — | | | — | | | — | | | — | | | 5 | |
Amortization of deferred acquisition costs | 153 |
| | 120 |
| | 36 |
| | — |
| | — |
| | — |
| | 309 |
| Amortization of deferred acquisition costs | 165 | | | 148 | | | 55 | | | — | | | — | | | — | | | 368 | |
Non-insurance warranty expense | | Non-insurance warranty expense | 330 | | | — | | | — | | | — | | | — | | | — | | | 330 | |
Other insurance related expenses | 68 |
| | 133 |
| | 48 |
| | 32 |
| | — |
| | — |
| | 281 |
| Other insurance related expenses | 71 | | | 125 | | | 32 | | | 27 | | | (1) | | | (1) | | | 253 | |
Other expenses | 85 |
| | 6 |
| | (4 | ) | | 2 |
| | 52 |
| | — |
| | 141 |
| Other expenses | 13 | | | 8 | | | 4 | | | 1 | | | 37 | | | (1) | | | 62 | |
Total claims, benefits and expenses | 664 |
| | 874 |
| | 280 |
| | 356 |
| | 37 |
| | — |
| | 2,211 |
| Total claims, benefits and expenses | 1,025 | | | 1,006 | | | 262 | | | 324 | | | 30 | | | (2) | | | 2,645 | |
Operating income (loss) before income tax | 272 |
| | 35 |
| | (40 | ) | | (25 | ) | | (31 | ) | | — |
| | 211 |
| |
Income tax (expense) benefit on operating income (loss) | (92 | ) | | (10 | ) | | 2 |
| | 35 |
| | 13 |
| | — |
| | (52 | ) | |
Net operating income (loss) | 180 |
| | 25 |
| | (38 | ) | | 10 |
| | (18 | ) | | — |
| | 159 |
| |
Net realized investment gains (losses) | 4 |
| | 6 |
| | 4 |
| | 3 |
| | (41 | ) | | — |
| | (24 | ) | |
Income tax (expense) benefit on net realized investment gains (losses) | (1 | ) | | (3 | ) | | (1 | ) | | (1 | ) | | 15 |
| | — |
| | 9 |
| |
Net realized investment gains (losses), after tax | 3 |
| | 3 |
| | 3 |
| | 2 |
| | (26 | ) | | — |
| | (15 | ) | |
Core income (loss) before income tax | | Core income (loss) before income tax | 222 | | | 35 | | | 23 | | | 38 | | | (26) | | | — | | | 292 | |
Income tax (expense) benefit on core income (loss) | | Income tax (expense) benefit on core income (loss) | (49) | | | (8) | | | (6) | | | 3 | | | 5 | | | — | | | (55) | |
Core income (loss) | | Core income (loss) | $ | 173 | | | $ | 27 | | | $ | 17 | | | $ | 41 | | | $ | (21) | | | $ | — | | | 237 | |
Net investment gains (losses) | | Net investment gains (losses) | | | | | | | | | | | | | 22 | |
Income tax (expense) benefit on net investment gains (losses) | | Income tax (expense) benefit on net investment gains (losses) | | (3) | |
Net investment gains (losses), after tax | | Net investment gains (losses), after tax | | 19 | |
Net income (loss) | $ | 183 |
| | $ | 28 |
| | $ | (35 | ) | | $ | 12 |
| | $ | (44 | ) | | $ | — |
| | $ | 144 |
| Net income (loss) | | $ | 256 | |
| | Three months ended September 30, 2016 |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | | | | |
Nine months ended September 30, 2022 | | Nine months ended September 30, 2022 | Specialty | | Commercial | | International | | Life & Group | | Corporate & Other | | | | |
(In millions) |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | Eliminations | | Total | (In millions) | | Eliminations | | Total |
Operating revenues | | |
| | |
| Operating revenues | | | | | | | | | | | | | |
Net earned premiums | $ | 704 |
| | $ | 719 |
| | $ | 210 |
| | $ | 134 |
| | $ | — |
| | $ | — |
| | $ | 1,767 |
| Net earned premiums | $ | 2,376 | | | $ | 2,901 | | | $ | 803 | | | $ | 356 | | | $ | (1) | | | $ | — | | | $ | 6,435 | |
Net investment income | 140 |
| | 175 |
| | 13 |
| | 192 |
| | 4 |
| | — |
| | 524 |
| Net investment income | 305 | | | 343 | | | 44 | | | 600 | | | 10 | | | — | | | 1,302 | |
Non-insurance warranty revenue | | Non-insurance warranty revenue | 1,173 | | | — | | | — | | | — | | | — | | | — | | | 1,173 | |
Other revenues | 93 |
| | 7 |
| | — |
| | (4 | ) | | — |
| | — |
| | 96 |
| Other revenues | — | | | 25 | | | — | | | — | | | 4 | | | (5) | | | 24 | |
Total operating revenues | 937 |
| | 901 |
| | 223 |
| | 322 |
| | 4 |
| | — |
| | 2,387 |
| Total operating revenues | 3,854 | | | 3,269 | | | 847 | | | 956 | | | 13 | | | (5) | | | 8,934 | |
Claims, Benefits and Expenses | |
| | |
| | | | |
| | |
| | |
| | |
| |
Claims, benefits and expenses | | Claims, benefits and expenses | | | | | | | | | | | | | |
Net incurred claims and benefits | 330 |
| | 446 |
| | 117 |
| | 313 |
| | (11 | ) | | — |
| | 1,195 |
| Net incurred claims and benefits | 1,360 | | | 1,916 | | | 487 | | | 884 | | | 36 | | | — | | | 4,683 | |
Policyholders’ dividends | 4 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| Policyholders’ dividends | 5 | | | 15 | | | — | | | — | | | — | | | — | | | 20 | |
Amortization of deferred acquisition costs | 151 |
| | 118 |
| | 45 |
| | — |
| | — |
| | — |
| | 314 |
| Amortization of deferred acquisition costs | 488 | | | 467 | | | 146 | | | — | | | — | | | — | | | 1,101 | |
Non-insurance warranty expense | | Non-insurance warranty expense | 1,092 | | | — | | | — | | | — | | | — | | | — | | | 1,092 | |
Other insurance related expenses | 77 |
| | 151 |
| | 33 |
| | 37 |
| | (3 | ) | | — |
| | 295 |
| Other insurance related expenses | 250 | | | 409 | | | 112 | | | 89 | | | 4 | | | (1) | | | 863 | |
Other expenses | 78 |
| | 9 |
| | 1 |
| | 2 |
| | 57 |
| | — |
| | 147 |
| Other expenses | 40 | | | 21 | | | 25 | | | 7 | | | 133 | | | (4) | | | 222 | |
Total claims, benefits and expenses | 640 |
| | 727 |
| | 196 |
| | 352 |
| | 43 |
| | — |
| | 1,958 |
| Total claims, benefits and expenses | 3,235 | | | 2,828 | | | 770 | | | 980 | | | 173 | | | (5) | | | 7,981 | |
Operating income (loss) before income tax | 297 |
| | 174 |
| | 27 |
| | (30 | ) | | (39 | ) | | — |
| | 429 |
| |
Income tax (expense) benefit on operating income (loss) | (102 | ) | | (60 | ) | | (7 | ) | | 36 |
| | 15 |
| | — |
| | (118 | ) | |
Net operating income (loss) | 195 |
| | 114 |
| | 20 |
| | 6 |
| | (24 | ) | | — |
| | 311 |
| |
Net realized investment gains (losses) | 9 |
| | 12 |
| | 6 |
| | 17 |
| | 2 |
| | — |
| | 46 |
| |
Income tax (expense) benefit on net realized investment gains (losses) | (3 | ) | | (3 | ) | | (1 | ) | | (6 | ) | | (1 | ) | | — |
| | (14 | ) | |
Net realized investment gains (losses), after tax | 6 |
| | 9 |
| | 5 |
| | 11 |
| | 1 |
| | — |
| | 32 |
| |
Core income (loss) before income tax | | Core income (loss) before income tax | 619 | | | 441 | | | 77 | | | (24) | | | (160) | | | — | | | 953 | |
Income tax (expense) benefit on core income (loss) | | Income tax (expense) benefit on core income (loss) | (134) | | | (91) | | | (14) | | | 31 | | | 29 | | | — | | | (179) | |
Core income (loss) | | Core income (loss) | $ | 485 | | | $ | 350 | | | $ | 63 | | | $ | 7 | | | $ | (131) | | | $ | — | | | 774 | |
Net investment gains (losses) | | Net investment gains (losses) | | | | | | | | | | | | | (166) | |
Income tax (expense) benefit on net investment gains (losses) | | Income tax (expense) benefit on net investment gains (losses) | | 38 | |
Net investment gains (losses), after tax | | Net investment gains (losses), after tax | | (128) | |
Net income (loss) | $ | 201 |
| | $ | 123 |
| | $ | 25 |
| | $ | 17 |
| | $ | (23 | ) | | $ | — |
| | $ | 343 |
| Net income (loss) | | $ | 646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
Reinsurance receivables | $ | 1,511 | | | $ | 952 | | | $ | 385 | | | $ | 453 | | | $ | 2,420 | | | $ | — | | | $ | 5,721 | |
Insurance receivables | 1,061 | | | 1,640 | | | 309 | | | 4 | | | — | | | — | | | 3,014 | |
Deferred acquisition costs | 379 | | | 315 | | | 93 | | | — | | | — | | | — | | | 787 | |
Goodwill | 117 | | | — | | | 25 | | | — | | | — | | | — | | | 142 | |
Deferred non-insurance warranty acquisition expense | 3,653 | | | — | | | — | | | — | | | — | | | — | | | 3,653 | |
Insurance reserves | | | | | | | | | | | | | |
Claim and claim adjustment expenses | 6,925 | | | 9,172 | | | 2,262 | | | 3,645 | | | 2,696 | | | — | | | 24,700 | |
Unearned premiums | 3,144 | | | 2,364 | | | 576 | | | 111 | | | — | | | — | | | 6,195 | |
Future policy benefits | — | | | — | | | — | | | 10,454 | | | — | | | — | | | 10,454 | |
Deferred non-insurance warranty revenue | 4,706 | | | — | | | — | | | — | | | — | | | — | | | 4,706 | |
| | Nine months ended September 30, 2017 |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | | | | |
Nine months ended September 30, 2021 | | Nine months ended September 30, 2021 | Specialty | | Commercial | | International | | Life & Group | | Corporate & Other | | | | |
(In millions) |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | Eliminations | | Total | (In millions) | | Eliminations | | Total |
Operating revenues | | |
| | |
| Operating revenues | | | | | | | | | | | | | |
Net earned premiums | $ | 2,056 |
| | $ | 2,097 |
| | $ | 629 |
| | $ | 404 |
| | $ | — |
| | $ | (1 | ) | | $ | 5,185 |
| Net earned premiums | $ | 2,270 | | | $ | 2,629 | | | $ | 789 | | | $ | 369 | | | $ | — | | | $ | (1) | | | $ | 6,056 | |
Net investment income | 407 |
| | 482 |
| | 38 |
| | 587 |
| | 15 |
| | — |
| | 1,529 |
| Net investment income | 367 | | | 463 | | | 42 | | | 724 | | | 12 | | | — | | | 1,608 | |
Non-insurance warranty revenue | | Non-insurance warranty revenue | 1,054 | | | — | | | — | | | — | | | — | | | — | | | 1,054 | |
Other revenues | 291 |
| | 25 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 318 |
| Other revenues | 1 | | | 17 | | | 1 | | | (1) | | | 5 | | | (4) | | | 19 | |
Total operating revenues | 2,754 |
| | 2,604 |
| | 667 |
| | 992 |
| | 16 |
| | (1 | ) | | 7,032 |
| Total operating revenues | 3,692 | | | 3,109 | | | 832 | | | 1,092 | | | 17 | | | (5) | | | 8,737 | |
Claims, Benefits and Expenses | |
| | | | | | |
| | |
| | |
| | |
| |
Claims, benefits and expenses | | Claims, benefits and expenses | | | | | | | | | | | | | |
Net incurred claims and benefits | 1,141 |
| | 1,470 |
| | 444 |
| | 980 |
| | 4 |
| | — |
| | 4,039 |
| Net incurred claims and benefits | 1,312 | | | 1,947 | | | 485 | | | 899 | | | 23 | | | — | | | 4,666 | |
Policyholders’ dividends | 3 |
| | 11 |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| Policyholders’ dividends | 2 | | | 16 | | | — | | | — | | | — | | | — | | | 18 | |
Amortization of deferred acquisition costs | 445 |
| | 354 |
| | 127 |
| | — |
| | — |
| | — |
| | 926 |
| Amortization of deferred acquisition costs | 478 | | | 449 | | | 157 | | | — | | | — | | | — | | | 1,084 | |
Non-insurance warranty expense | | Non-insurance warranty expense | 973 | | | — | | | — | | | — | | | — | | | — | | | 973 | |
Other insurance related expenses | 209 |
| | 387 |
| | 106 |
| | 96 |
| | (1 | ) | | (1 | ) | | 796 |
| Other insurance related expenses | 212 | | | 376 | | | 106 | | | 77 | | | 9 | | | (1) | | | 779 | |
Other expenses | 248 |
| | 31 |
| | (11 | ) | | 5 |
| | 146 |
| | — |
| | 419 |
| Other expenses | 36 | | | 28 | | | (4) | | | 5 | | | 119 | | | (4) | | | 180 | |
Total claims, benefits and expenses | 2,046 |
| | 2,253 |
| | 666 |
| | 1,081 |
| | 149 |
| | (1 | ) | | 6,194 |
| Total claims, benefits and expenses | 3,013 | | | 2,816 | | | 744 | | | 981 | | | 151 | | | (5) | | | 7,700 | |
Operating income (loss) before income tax | 708 |
| | 351 |
| | 1 |
| | (89 | ) | | (133 | ) | | — |
| | 838 |
| |
Income tax (expense) benefit on operating income (loss) | (238 | ) | | (117 | ) | | (9 | ) | | 108 |
| | 51 |
| | — |
| | (205 | ) | |
Net operating income (loss) | 470 |
| | 234 |
| | (8 | ) | | 19 |
| | (82 | ) | | — |
| | 633 |
| |
Net realized investment gains (losses) | 25 |
| | 36 |
| | 17 |
| | 20 |
| | (36 | ) | | — |
| | 62 |
| |
Income tax (expense) benefit on net realized investment gains (losses) | (9 | ) | | (12 | ) | | (3 | ) | | (8 | ) | | 13 |
| | — |
| | (19 | ) | |
Net realized investment gains (losses), after tax | 16 |
| | 24 |
| | 14 |
| | 12 |
| | (23 | ) | | — |
| | 43 |
| |
Core income (loss) before income tax | | Core income (loss) before income tax | 679 | | | 293 | | | 88 | | | 111 | | | (134) | | | — | | | 1,037 | |
Income tax (expense) benefit on core income (loss) | | Income tax (expense) benefit on core income (loss) | (148) | | | (60) | | | (21) | | | 9 | | | 24 | | | — | | | (196) | |
Core income (loss) | | Core income (loss) | $ | 531 | | | $ | 233 | | | $ | 67 | | | $ | 120 | | | $ | (110) | | | $ | — | | | 841 | |
Net investment gains (losses) | | Net investment gains (losses) | | | | | | | | | | | | | 117 | |
Income tax (expense) benefit on net investment gains (losses) | | Income tax (expense) benefit on net investment gains (losses) | | (22) | |
Net investment gains (losses), after tax | | Net investment gains (losses), after tax | | 95 | |
Net income (loss) | $ | 486 |
| | $ | 258 |
| | $ | 6 |
| | $ | 31 |
| | $ | (105 | ) | | $ | — |
| | $ | 676 |
| Net income (loss) | | $ | 936 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
Reinsurance receivables | $ | 1,200 | | | $ | 923 | | | $ | 381 | | | $ | 401 | | | $ | 2,579 | | | $ | — | | | $ | 5,484 | |
Insurance receivables | 1,136 | | | 1,488 | | | 340 | | | 6 | | | 4 | | | — | | | 2,974 | |
Deferred acquisition costs | 363 | | | 278 | | | 96 | | | — | | | — | | | — | | | 737 | |
Goodwill | 117 | | | — | | | 31 | | | — | | | — | | | — | | | 148 | |
Deferred non-insurance warranty acquisition expense | 3,476 | | | — | | | — | | | — | | | — | | | — | | | 3,476 | |
Insurance reserves | | | | | | | | | | | | | |
Claim and claim adjustment expenses | 6,433 | | | 8,890 | | | 2,280 | | | 3,754 | | | 2,817 | | | — | | | 24,174 | |
Unearned premiums | 3,001 | | | 2,066 | | | 585 | | | 109 | | | — | | | — | | | 5,761 | |
Future policy benefits | — | | | — | | | — | | | 13,236 | | | — | | | — | | | 13,236 | |
Deferred non-insurance warranty revenue | 4,503 | | | — | | | — | | | — | | | — | | | — | | | 4,503 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
Reinsurance receivables | $ | 819 |
| | $ | 590 |
| | $ | 227 |
| | $ | 453 |
| | $ | 2,280 |
| | $ | — |
| | $ | 4,369 |
|
Insurance receivables | 984 |
| | 1,087 |
| | 256 |
| | 11 |
| | 2 |
| | — |
| | 2,340 |
|
Deferred acquisition costs | 318 |
| | 230 |
| | 95 |
| | — |
| | — |
| | — |
| | 643 |
|
Goodwill | 117 |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | 147 |
|
Insurance reserves | | | | | | | | | | | | | |
|
Claim and claim adjustment expenses | 6,063 |
| | 8,630 |
| | 1,640 |
| | 3,468 |
| | 2,408 |
| | — |
| | 22,209 |
|
Unearned premiums | 2,010 |
| | 1,426 |
| | 490 |
| | 134 |
| | — |
| | — |
| | 4,060 |
|
Future policy benefits | — |
| | — |
| | — |
| | 11,040 |
| | — |
| | — |
| | 11,040 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2016 |
Specialty | |
Commercial | | International | | Life & Group Non-Core | | Corporate & Other Non-Core | | | | |
(In millions) | | | | | Eliminations | | Total |
Operating revenues | |
| | |
| | | | |
| | |
| | |
| | |
|
Net earned premiums | $ | 2,088 |
| | $ | 2,103 |
| | $ | 605 |
| | $ | 401 |
| | $ | — |
| | $ | (1 | ) | | $ | 5,196 |
|
Net investment income | 380 |
| | 465 |
| | 38 |
| | 567 |
| | 11 |
| | — |
| | 1,461 |
|
Other revenues | 269 |
| | 21 |
| | 1 |
| | (1 | ) | | 3 |
| | — |
| �� | 293 |
|
Total operating revenues | 2,737 |
| | 2,589 |
| | 644 |
| | 967 |
| | 14 |
| | (1 | ) | | 6,950 |
|
Claims, Benefits and Expenses | |
| | | | | | |
| | |
| | |
| | |
|
Net incurred claims and benefits | 1,097 |
| | 1,357 |
| | 395 |
| | 976 |
| | 109 |
| | — |
| | 3,934 |
|
Policyholders’ dividends | 6 |
| | 9 |
| | — |
| | — |
| | — |
| | — |
| | 15 |
|
Amortization of deferred acquisition costs | 443 |
| | 351 |
| | 132 |
| | — |
| | — |
| | — |
| | 926 |
|
Other insurance related expenses | 225 |
| | 422 |
| | 98 |
| | 101 |
| | (3 | ) | | (1 | ) | | 842 |
|
Other expenses | 232 |
| | 25 |
| | 17 |
| | 7 |
| | 158 |
| | — |
| | 439 |
|
Total claims, benefits and expenses | 2,003 |
| | 2,164 |
| | 642 |
| | 1,084 |
| | 264 |
| | (1 | ) | | 6,156 |
|
Operating income (loss) before income tax | 734 |
| | 425 |
| | 2 |
| | (117 | ) | | (250 | ) | | — |
| | 794 |
|
Income tax (expense) benefit on operating income (loss) | (248 | ) | | (145 | ) | | (3 | ) | | 117 |
| | 88 |
| | — |
| | (191 | ) |
Net operating income (loss) | 486 |
| | 280 |
| | (1 | ) | | — |
| | (162 | ) | | — |
| | 603 |
|
Net realized investment gains (losses) | 2 |
| | 2 |
| | 14 |
| | 12 |
| | (4 | ) | | — |
| | 26 |
|
Income tax (expense) benefit on net realized investment gains (losses) | (1 | ) | | — |
| | (3 | ) | | (9 | ) | | 2 |
| | — |
| | (11 | ) |
Net realized investment gains (losses), after tax | 1 |
| | 2 |
| | 11 |
| | 3 |
| | (2 | ) | | — |
| | 15 |
|
Net income (loss) | $ | 487 |
| | $ | 282 |
| | $ | 10 |
| | $ | 3 |
| | $ | (164 | ) | | $ | — |
| | $ | 618 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
Reinsurance receivables | $ | 760 |
| | $ | 621 |
| | $ | 131 |
| | $ | 462 |
| | $ | 2,479 |
| | $ | — |
| | $ | 4,453 |
|
Insurance receivables | 982 |
| | 1,021 |
| | 233 |
| | 17 |
| | 2 |
| | — |
| | 2,255 |
|
Deferred acquisition costs | 310 |
| | 214 |
| | 76 |
| | — |
| | — |
| | — |
| | 600 |
|
Goodwill | 117 |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | 145 |
|
Insurance reserves | | | | | | | | | | | | | |
|
Claim and claim adjustment expenses | 6,149 |
| | 8,894 |
| | 1,328 |
| | 3,358 |
| | 2,614 |
| | — |
| | 22,343 |
|
Unearned premiums | 1,911 |
| | 1,323 |
| | 396 |
| | 132 |
| | — |
| | — |
| | 3,762 |
|
Future policy benefits | — |
| | — |
| | — |
| | 10,326 |
| | — |
| | — |
| | 10,326 |
|
The following table presents revenueoperating revenues by line of business for each reportable segment.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Specialty | | | | | | | |
Management & Professional Liability | $ | 688 | | | $ | 684 | | | $ | 2,041 | | | $ | 2,044 | |
Surety | 171 | | | 157 | | | 481 | | | 454 | |
Warranty & Alternative Risks | 451 | | | 406 | | | 1,332 | | | 1,194 | |
Specialty revenues | 1,310 | | | 1,247 | | | 3,854 | | | 3,692 | |
Commercial | | | | | | | |
Middle Market | 397 | | | 363 | | | 1,133 | | | 1,119 | |
Construction | 372 | | | 345 | | | 1,046 | | | 978 | |
Small Business | 149 | | | 144 | | | 430 | | | 413 | |
Other Commercial | 230 | | | 189 | | | 660 | | | 599 | |
Commercial revenues | 1,148 | | | 1,041 | | | 3,269 | | | 3,109 | |
International | | | | | | | |
Canada | 93 | | | 87 | | | 272 | | | 253 | |
Europe | 112 | | | 123 | | | 350 | | | 349 | |
Hardy | 81 | | | 75 | | | 225 | | | 230 | |
International revenues | 286 | | | 285 | | | 847 | | | 832 | |
Life & Group revenues | 305 | | | 362 | | | 956 | | | 1,092 | |
Corporate & Other revenues | 6 | | | 4 | | | 13 | | | 17 | |
Eliminations | (2) | | | (2) | | | (5) | | | (5) | |
Total operating revenues | 3,053 | | | 2,937 | | | 8,934 | | | 8,737 | |
Net investment gains (losses) | (96) | | | 22 | | | (166) | | | 117 | |
Total revenues | $ | 2,957 | | | $ | 2,959 | | | $ | 8,768 | | | $ | 8,854 | |
Note J. Non-Insurance Revenues are comprisedfrom Contracts with Customers
The Company had deferred non-insurance warranty revenue balances of operating$4.7 billion and $4.5 billion reported in Deferred non-insurance warranty revenue as of September 30, 2022 and December 31, 2021. For the three and nine months ended September 30, 2022, the Company recognized $0.3 billion and $1.0 billion of revenues that were included in the deferred revenue balance as of January 1, 2022. For the three and net realized investment gainsnine months ended September 30, 2021, the Company recognized $0.3 billion and losses.$0.9 billion of revenues that were included in the deferred revenue balance as of January 1, 2021. For the three and nine months ended September 30, 2022 and 2021, Non-insurance warranty revenue recognized from performance obligations related to prior periods due to a change in estimate was not material. The Company expects to recognize approximately $0.5 billion of the deferred revenue in the remainder of 2022, $1.5 billion in 2023, $1.2 billion in 2024 and $1.5 billion thereafter.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Specialty | | | | | | | |
Management & Professional Liability | $ | 656 |
| | $ | 677 |
| | $ | 1,963 |
| | $ | 1,954 |
|
Surety | 144 |
| | 139 |
| | 404 |
| | 399 |
|
Warranty & Alternative Risks | 140 |
| | 130 |
| | 412 |
| | 386 |
|
Specialty revenues | 940 |
| | 946 |
|
| 2,779 |
|
| 2,739 |
|
Commercial | |
| | |
| | | | |
Middle Market | 501 |
| | 463 |
| | 1,421 |
| | 1,298 |
|
Small Business | 131 |
| | 154 |
| | 357 |
| | 448 |
|
Other Commercial Insurance | 283 |
| | 296 |
| | 862 |
| | 845 |
|
Commercial revenues | 915 |
| | 913 |
|
| 2,640 |
|
| 2,591 |
|
International |
|
| |
|
| | | | |
Canada | 60 |
| | 51 |
| | 164 |
| | 152 |
|
CNA Europe | 87 |
| | 82 |
| | 239 |
| | 241 |
|
Hardy | 97 |
| | 96 |
| | 281 |
| | 265 |
|
International revenues | 244 |
| | 229 |
|
| 684 |
|
| 658 |
|
Life & Group Non-Core revenues | 334 |
| | 339 |
| | 1,012 |
| | 979 |
|
Corporate & Other Non-Core revenues | (35 | ) | | 6 |
| | (20 | ) | | 10 |
|
Eliminations | — |
| | — |
| | (1 | ) | | (1 | ) |
Total revenues | $ | 2,398 |
| | $ | 2,433 |
|
| $ | 7,094 |
|
| $ | 6,976 |
|
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 2016 statutory net written premiums, we are the eighth largest commercial insurer 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, 2016.2021.
We utilize the net operatingcore income (loss) financial measure to monitor our operations. Net operatingCore income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net realized investment gains or losses ii) income or loss from discontinued operations and iii) any cumulative effects of changes in accounting guidance. The calculation of net operatingcore income (loss) excludes net realized investment gains or losses because net realized investment gains or 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 driversreflective of underwriting performance, and are therefore not considered an indication of trends in insuranceour primary operations. Management monitors net operatingcore income (loss) for each business segment to assess segment performance. Presentation of consolidated net operatingcore income (loss) is deemed to be a non-GAAP financial measure.measure and management believes some investors may find this measure useful to evaluate our primary operations. See further discussion regarding how we manage our business in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1. For reconciliations of non-GAAP measures to the most comparable GAAP measures and other information, please refer herein and/or to CNA's most recent Annual Report on Form 10-K on file with the Securities and Exchange Commission.
In evaluating the results of our core Specialty, Commercial and International segments, we utilize the loss ratio, the loss ratio excluding catastrophes and development, the expense ratio, the dividend ratio, the combined ratio and the combined ratio.ratio excluding catastrophes and development. 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 loss ratio excluding catastrophes and development excludes catastrophes losses and changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years from the loss ratio. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The combined ratio excluding catastrophes and development is the sum of the loss ratio excluding catastrophes and development, the expense ratio and the dividend ratio. In addition we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed, excluding rate and exposure changes, in comparison to the expiring premium dollars from policies available to renew. Rate, renewalRenewal premium change, rate and retention presented for the prior year isare updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third party captives, excludes business which is ceded to third party captives, including business related to large warranty programs.
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 loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the amountsamount of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment:
•Insurance Reserves
•Long Term Care Reserves
•Reinsurance and Insurance Receivables
•Valuation of Investments and Impairment of Securities
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 our estimates and may have a material adverse impact on our results of operations, financial condition, equity, business, and insurer financial strength and corporate debt ratings. See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20162021 for further information.
CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations.operations including our financial measure, core income (loss). For more detailed components of our business operations and a discussion of the net operatingcore income (loss) financial measure, see the segment discussionsSegment Results section within this MD&A. For further discussion of Net investment income and Net realized investment results,gains or losses, see the Investments section of this MD&A.
| | Periods ended September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Operating Revenues | | | | | | | | Operating Revenues | | | | | | | |
Net earned premiums | $ | 1,806 |
| | $ | 1,767 |
| | $ | 5,185 |
| | $ | 5,196 |
| Net earned premiums | $ | 2,221 | | | $ | 2,059 | | | $ | 6,435 | | | $ | 6,056 | |
Net investment income | 509 |
| | 524 |
| | 1,529 |
| | 1,461 |
| Net investment income | 422 | | | 513 | | | 1,302 | | | 1,608 | |
Non-insurance warranty revenue | | Non-insurance warranty revenue | 399 | | | 357 | | | 1,173 | | | 1,054 | |
Other revenues | 107 |
| | 96 |
| | 318 |
| | 293 |
| Other revenues | 11 | | | 8 | | | 24 | | | 19 | |
Total operating revenues | 2,422 |
| | 2,387 |
| | 7,032 |
| | 6,950 |
| Total operating revenues | 3,053 | | | 2,937 | | | 8,934 | | | 8,737 | |
Claims, Benefits and Expenses | | | | | | | | Claims, Benefits and Expenses | | | | | | | |
Net incurred claims and benefits | 1,475 |
| | 1,195 |
| | 4,039 |
| | 3,934 |
| Net incurred claims and benefits | 1,658 | | | 1,627 | | | 4,683 | | | 4,666 | |
Policyholders' dividends | 5 |
| | 7 |
| | 14 |
| | 15 |
| Policyholders' dividends | 7 | | | 5 | | | 20 | | | 18 | |
Amortization of deferred acquisition costs | 309 |
| | 314 |
| | 926 |
| | 926 |
| Amortization of deferred acquisition costs | 383 | | | 368 | | | 1,101 | | | 1,084 | |
Non-insurance warranty expense | | Non-insurance warranty expense | 371 | | | 330 | | | 1,092 | | | 973 | |
Other insurance related expenses | 281 |
| | 295 |
| | 796 |
| | 842 |
| Other insurance related expenses | 297 | | | 253 | | | 863 | | | 779 | |
Other expenses | 141 |
| | 147 |
| | 419 |
| | 439 |
| Other expenses | 77 | | | 62 | | | 222 | | | 180 | |
Total claims, benefits and expenses | 2,211 |
| | 1,958 |
| | 6,194 |
| | 6,156 |
| Total claims, benefits and expenses | 2,793 | | | 2,645 | | | 7,981 | | | 7,700 | |
Operating income before income tax | 211 |
| | 429 |
| | 838 |
| | 794 |
| |
Income tax expense on operating income | (52 | ) | | (118 | ) | | (205 | ) | | (191 | ) | |
Net operating income | 159 |
| | 311 |
| | 633 |
| | 603 |
| |
Net realized investment (losses) gains | (24 | ) | | 46 |
| | 62 |
| | 26 |
| |
Income tax benefit (expense) on net realized investment (losses) gains | 9 |
| | (14 | ) | | (19 | ) | | (11 | ) | |
Net realized investment (losses) gains, after tax | (15 | ) | | 32 |
| | 43 |
| | 15 |
| |
Core income before income tax | | Core income before income tax | 260 | | | 292 | | | 953 | | | 1,037 | |
Income tax expense on core income | | Income tax expense on core income | (47) | | | (55) | | | (179) | | | (196) | |
Core income | | Core income | 213 | | | 237 | | | 774 | | | 841 | |
Net investment (losses) gains | | Net investment (losses) gains | (96) | | | 22 | | | (166) | | | 117 | |
Income tax benefit (expense) on net investment (losses) gains | | Income tax benefit (expense) on net investment (losses) gains | 11 | | | (3) | | | 38 | | | (22) | |
Net investment (losses) gains, after tax | | Net investment (losses) gains, after tax | (85) | | | 19 | | | (128) | | | 95 | |
Net income | $ | 144 |
| | $ | 343 |
| | $ | 676 |
| | $ | 618 |
| Net income | $ | 128 | | | $ | 256 | | | $ | 646 | | | $ | 936 | |
Three Month Comparison
Net operatingCore income decreased $152$24 million for the three months ended September 30, 20172022 as compared with the same period in 2016. Net operating2021. Core income decreased $162 million for our core segments driven by significantlyProperty & Casualty Operations increased $43 million primarily due to improved underwriting results and higher net catastrophe losses in the current year periodinvestment income from fixed income securities partially offset by improved non-catastrophe current accident year underwritinglower net investment income from limited partnerships and common stock results. Net operatingCore results improved $10 million for our non-core segments. The after-tax impact of catastrophes was $191Life & Group segment decreased $63 million includingwhile core loss for our Corporate & Other segment increased $4 million.
Catastrophe losses were $114 million for reinsurance reinstatement premium,and $178 million for the three months ended September 30, 2017 as compared to $11 million2022 and 2021. Catastrophe losses for the same period in 2016.
Favorable net prior year development of $134 million and $137 million was recorded in the three months ended September 30, 20172022 were related to severe weather related events, including $87 million for Hurricane Ian. Catastrophe losses for the three months ended September 30, 2021 included $114 million for Hurricane Ida. Favorable net prior year loss reserve development of $17 million and 2016$10 million was recorded for the three months ended September 30, 2022 and 2021 related to our Specialty, Commercial and International segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Comparison
Net operatingCore income increased $30decreased $67 million for the nine months ended September 30, 20172022 as compared with the same period in 2016. Net operating2021. Core income decreased $69 million for our core segmentsProperty & Casualty Operations increased $67 million primarily due to significantly higher net catastrophe losses in the current year period and lower favorable net prior year loss reserve development partially offset by improved non-catastrophe current accident year underwriting results and higher net investment income. Net operating results improved $99 millionincome from fixed income securities partially offset by lower net investment income from limited partnerships and common stock results. Core income for our non-core segments primarily driven by lower adverse prior year reserve development recorded in the nine months ended September 30, 2017 as compared to the same period in 2016 under the A&EP Loss Portfolio Transfer. The after-tax impact of catastrophes was $239Life & Group segment decreased $113 million including $4while core loss for our Corporate & Other segment increased $21 million.
Catastrophe losses were $171 million from reinsurance reinstatement premium,and $357 million for the nine months ended September 30, 2017 as compared to $93 million2022 and 2021. Catastrophe losses for the same period in 2016.
Favorable net prior year development of $229 million and $309 million was recorded in the nine months ended September 30, 20172022 were primarily related to severe weather related events, including $87 million for Hurricane Ian. Catastrophe losses for the nine months ended September 30, 2021 were driven by severe weather related events, primarily Hurricane Ida and 2016Winter Storms Uri and Viola. Favorable net prior year loss reserve development of $2 million was recorded for the nine months ended September 30, 2022 as compared with unfavorable net prior year loss reserve development of $4 million for the nine months ended September 30, 2021 related to our Specialty, Commercial, International and InternationalCorporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
SEGMENT RESULTS
The following discusses the results of operations for our reportingbusiness segments. Our core property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International.International, which we refer to collectively as Property & Casualty Operations. Our non-core operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group Non-Core and Corporate & Other Non-Core.Other.
Specialty
The following table presentsdetails the results of operations.operations for Specialty.
| | Periods ended September 30 | Three Months |
| Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions, except ratios, rate and retention) | 2017 | | 2016 |
| 2017 |
| 2016 | |
(In millions, except ratios, rate, renewal premium change and retention) | | (In millions, except ratios, rate, renewal premium change and retention) | 2022 | | 2021 | | 2022 | | 2021 |
Gross written premiums | | Gross written premiums | $ | 1,890 | | | $ | 1,953 | | | $ | 5,640 | | | $ | 5,650 | |
Gross written premiums excluding third-party captives | | Gross written premiums excluding third-party captives | 958 | | | 943 | | | 2,816 | | | 2,656 | |
Net written premiums | $ | 705 |
| | $ | 733 |
| | $ | 2,100 |
| | $ | 2,108 |
| Net written premiums | 840 | | | 822 | | | 2,443 | | | 2,350 | |
Net earned premiums | 703 |
| | 704 |
| | 2,056 |
| | 2,088 |
| Net earned premiums | 810 | | | 773 | | | 2,376 | | | 2,270 | |
Net investment income | 134 |
| | 140 |
| | 407 |
| | 380 |
| Net investment income | 102 | | | 116 | | | 305 | | | 367 | |
Net operating income | 180 |
| | 195 |
| | 470 |
| | 486 |
| |
Net realized investment gains, after tax | 3 |
| | 6 |
| | 16 |
| | 1 |
| |
Net income | 183 |
| | 201 |
| | 486 |
| | 487 |
| |
Core income | | Core income | 161 | | | 173 | | | 485 | | | 531 | |
| | | | | | | | |
Other performance metrics: | | | | | | | | Other performance metrics: | | |
Loss and loss adjustment expense ratio | 50.8 | % | | 46.8 | % | | 55.5 | % | | 52.6 | % | |
Loss ratio excluding catastrophes and development | | Loss ratio excluding catastrophes and development | 58.4 | % | | 59.1 | % | | 58.6 | % | | 59.1 | % |
Effect of catastrophe impacts | | Effect of catastrophe impacts | 0.2 | | | 0.4 | | | 0.1 | | | 0.4 | |
Effect of development-related items | | Effect of development-related items | (1.9) | | | (1.8) | | | (1.4) | | | (1.7) | |
Loss ratio | | Loss ratio | 56.7 | | | 57.7 | | | 57.3 | | | 57.8 | |
Expense ratio | 31.3 |
| | 32.5 |
| | 31.8 |
| | 32.0 |
| Expense ratio | 31.7 | | | 30.6 | | | 31.0 | | | 30.4 | |
Dividend ratio | 0.2 |
| | 0.6 |
| | 0.1 |
| | 0.3 |
| Dividend ratio | 0.3 | | | (0.1) | | | 0.2 | | | 0.1 | |
Combined ratio | 82.3 | % | | 79.9 | % | | 87.4 | % | | 84.9 | % | Combined ratio | 88.7 | % | | 88.2 | % | | 88.5 | % | | 88.3 | % |
Combined ratio excluding catastrophes and development | | Combined ratio excluding catastrophes and development | 90.4 | % | | 89.6 | % | | 89.8 | % | | 89.6 | % |
| | | | | | | | |
Rate | (1 | )% | | 0 | % | | 0 | % | | 1 | % | Rate | 5 | % | | 10 | % | | 7 | % | | 11 | % |
Renewal premium change | 0 |
| | 2 |
| | 2 |
| | 2 |
| Renewal premium change | 6 | | | 11 | | | 8 | | | 12 | |
Retention | 89 |
| | 88 |
| | 89 |
| | 88 |
| Retention | 87 | | | 80 | | | 86 | | | 84 | |
New business | $ | 64 |
| | $ | 66 |
| | $ | 187 |
| | $ | 192 |
| New business | $ | 130 | | | $ | 147 | | | $ | 407 | | | $ | 370 | |
Three Month Comparison
NetGross written premiums, excluding third-party captives, for Specialty decreased $28increased $15 million for the three months ended September 30, 20172022 as compared with the same period in 2016 largely2021 driven by retention and rate. Net written premiums for Specialty increased $18 million for the timing of certain renewals. Renewal premium change was flat. Retention remained strong at 89% and new business was at relatively consistent levels.three months ended September 30, 2022 as compared with the same period in 2021. The decreaseincrease in net earned premiums was consistent with the trend in net written premiums.
Net operatingCore income decreased $15$12 million for the three months ended September 30, 20172022 as compared with the same period in 2016,2021 primarily due to higherlower net catastrophe losses partially offsetinvestment income driven by improved non-catastrophe current accident year underwritinglimited partnership and common stock results.
The combined ratio of 88.7% increased 2.40.5 points for the three months ended September 30, 20172022 as compared with the same period in 2016.2021 primarily due to a 1.1 point increase in the expense ratio largely offset by a 1.0 point improvement in the loss ratio. The lossincrease in the expense ratio increased 4.0 pointswas largely due to higher underwriting expenses driven by higher net catastrophe losses which were $38 million, or 5.4 points ofinvestments in technology and talent. The improvement in the loss ratio for the three months ended September 30, 2017 as compared towas primarily driven by improved current accident year underwriting results. Catastrophe losses were $1 million, or 0.2 points of the loss ratio, for the three months ended September 30, 2016. The2022, as compared with $3 million, or 0.4 points of the loss ratio, excluding catastrophes and development improved 1.3 points. The expense ratio improved 1.2 points for the three months ended September 30, 2017 as compared with the same period in 2016 reflecting both our ongoing efforts to improve productivity and the actions undertaken in last year's third and fourth quarters to reduce expenses.2021.
Favorable net prior year loss reserve development of $112$15 million was recorded infor each of the three months ended September 30, 20172022 and 2016.2021. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Comparison
NetGross written premiums, excluding third-party captives, for Specialty decreased $8increased $160 million for the nine months ended September 30, 20172022 as compared with the same period in 20162021 driven by lowerretention and higher new business. Net written premiums for Specialty increased $93 million for the nine months ended September 30, 2022 as compared with the same period in 2021. The decreaseincrease in net earned premiums was consistent with the trend in net written premiums.
Net operatingCore income decreased $16$46 million for the nine months ended September 30, 20172022 as compared with the same period in 20162021 primarily due to lower favorable net prior year loss reserve development and higher net catastrophe losses partially offset by higher net investment income.income driven by limited partnership and common stock results.
The combined ratio of 88.5% increased 2.50.2 points for the nine months ended September 30, 20172022 as compared with the same period in 2016. The loss ratio increased 2.9 points,2021 primarily due to lower favorable net priora 0.6 point increase in the expense ratio largely offset by a 0.5 point improvement in the loss ratio. The increase in the expense ratio was largely due to higher underwriting expenses driven by investments in technology and talent. The improvement in the loss ratio was primarily driven by improved current accident year loss reserve development and higher net catastrophe losses. Net catastropheunderwriting results. Catastrophe losses were $47$2 million, or 2.30.1 point of the loss ratio, for the nine months ended September 30, 2022, as compared with $9 million, or 0.4 points of the loss ratio, for the nine months ended September 30, 2017 as compared to $142021.
Favorable net prior year loss reserve development of $35 million or 0.7 points of the loss ratio,and $40 million was recorded for the nine months ended September 30, 2016. The loss ratio excluding catastrophes2022 and development improved 1.0 point. The expense ratio improved 0.2 points for the nine months ended September 30, 2017 as compared with the same period in 2016.
Favorable net prior year development of $176 million and $229 million was recorded in the nine months ended September 30, 2017 and 2016.2021. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presentssummarizes the gross and net carried reserves.reserves for Specialty.
| | | | | | | | | | | |
| | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Gross case reserves | $ | 1,482 | | | $ | 1,578 | |
Gross IBNR reserves | 5,443 | | | 4,855 | |
Total gross carried claim and claim adjustment expense reserves | $ | 6,925 | | | $ | 6,433 | |
Net case reserves | $ | 1,268 | | | $ | 1,338 | |
Net IBNR reserves | 4,217 | | | 3,927 | |
Total net carried claim and claim adjustment expense reserves | $ | 5,485 | | | $ | 5,265 | |
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Gross case reserves | $ | 1,808 |
| | $ | 1,871 |
|
Gross IBNR reserves | 4,255 |
| | 4,278 |
|
Total gross carried claim and claim adjustment expense reserves | $ | 6,063 |
| | $ | 6,149 |
|
Net case reserves | $ | 1,645 |
| | $ | 1,681 |
|
Net IBNR reserves | 3,607 |
| | 3,723 |
|
Total net carried claim and claim adjustment expense reserves | $ | 5,252 |
| | $ | 5,404 |
|
Commercial
The following table presentsdetails the results of operations.operations for Commercial.
| | Periods ended September 30 | Three Months | | Nine Months | Periods ended September 30 | Three Months | | Nine Months |
(In millions, except ratios, rate and retention) | 2017 | | 2016 | | 2017 | | 2016 | |
(In millions, except ratios, rate, renewal premium change and retention) | | (In millions, except ratios, rate, renewal premium change and retention) | 2022 | | 2021 | | 2022 | | 2021 |
Gross written premiums | | Gross written premiums | $ | 1,187 | | | $ | 1,010 | | | $ | 3,824 | | | $ | 3,284 | |
Gross written premiums excluding third-party captives | | Gross written premiums excluding third-party captives | 1,184 | | | 1,005 | | | 3,711 | | | 3,176 | |
Net written premiums | $ | 687 |
| | $ | 684 |
| | $ | 2,169 |
| | $ | 2,172 |
| Net written premiums | 962 | | | 831 | | | 3,097 | | | 2,622 | |
Net earned premiums | 741 |
| | 719 |
| | 2,097 |
| | 2,103 |
| Net earned premiums | 1,023 | | | 893 | | | 2,901 | | | 2,629 | |
Net investment income | 161 |
| | 175 |
| | 482 |
| | 465 |
| Net investment income | 112 | | | 141 | | | 343 | | | 463 | |
Net operating income | 25 |
| | 114 |
| | 234 |
| | 280 |
| |
Net realized investment gains, after tax | 3 |
| | 9 |
| | 24 |
| | 2 |
| |
Net income | 28 |
| | 123 |
| | 258 |
| | 282 |
| |
Core income | | Core income | 80 | | | 27 | | | 350 | | | 233 | |
| | | | | | | |
| |
Other performance metrics: | | | | | | | | Other performance metrics: | | |
Loss and loss adjustment expense ratio | 82.4 | % | | 62.2 | % | | 70.1 | % | | 64.6 | % | |
Loss ratio excluding catastrophes and development | | Loss ratio excluding catastrophes and development | 61.5 | % | | 61.5 | % | | 61.5 | % | | 60.8 | % |
Effect of catastrophe impacts | | Effect of catastrophe impacts | 10.0 | | | 18.6 | | | 5.0 | | | 12.6 | |
Effect of development-related items | | Effect of development-related items | — | | | 0.5 | | | (0.5) | | | 0.6 | |
Loss ratio | | Loss ratio | 71.5 | | | 80.6 | | | 66.0 | | | 74.0 | |
Expense ratio | 34.3 |
| | 37.1 |
| | 35.3 |
| | 36.7 |
| Expense ratio | 29.9 | | | 30.4 | | | 30.1 | | | 31.4 | |
Dividend ratio | 0.5 |
| | 0.5 |
| | 0.5 |
| | 0.4 |
| Dividend ratio | 0.5 | | | 0.6 | | | 0.5 | | | 0.6 | |
Combined ratio | 117.2 | % | | 99.8 | % | | 105.9 | % | | 101.7 | % | Combined ratio | 101.9 | % | | 111.6 | % | | 96.6 | % | | 106.0 | % |
Combined ratio excluding catastrophes and development | | Combined ratio excluding catastrophes and development | 91.9 | % | | 92.5 | % | | 92.1 | % | | 92.8 | % |
| | | | | | | | |
Rate | 0 | % | | (3 | )% | | 0 | % | | (2 | )% | Rate | 4 | % | | 6 | % | | 5 | % | | 8 | % |
Renewal premium change | 2 |
| | 5 |
| | 1 |
| | 4 |
| Renewal premium change | 8 | | | 9 | | | 8 | | | 11 | |
Retention | 85 |
| | 84 |
| | 86 |
| | 84 |
| Retention | 84 | | | 83 | | | 86 | | | 82 | |
New business | $ | 137 |
| | $ | 135 |
| | $ | 429 |
| | $ | 418 |
| New business | $ | 246 | | | $ | 204 | | | $ | 754 | | | $ | 615 | |
Three Month Comparison
NetGross written premiums for Commercial increased $3$177 million for the three months ended September 30, 20172022 as compared with the same period in 2016. The increase was2021 driven by higher new business within Middle Markets,and rate. Net written premiums for Commercial increased $131 million for the three months ended September 30, 2022 as well as strong retention and positive renewal premium change.compared with the same period in 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Net operatingCore income decreased $89increased $53 million for the three months ended September 30, 20172022 as compared with the same period in 20162021, driven by higherlower catastrophe losses and improved non-catastrophe current accident year underwriting results partially offset by lower net catastrophe losses.investment income driven by limited partnership and common stock results.
The combined ratio increased 17.4of 101.9% improved 9.7 points for the three months ended September 30, 20172022 as compared with the same period in 2016. The2021 primarily due to a 9.1 point improvement in the loss ratio increased 20.2 pointsand a 0.5 point improvement in the expense ratio. The improvement in the loss ratio was primarily driven by higher netlower catastrophe losses partially offset by improved non-catastrophe current accident year underwriting results. Net catastrophelosses. Catastrophe losses were $173$103 million, or 23.910.0 points of the loss ratio, for the three months ended September 30, 2017,2022, as compared to $12with $166 million, or 1.618.6 points of the loss ratio, for the three months ended September 30, 2016. Catastrophe-related reinsurance reinstatement premium was $1 million for2021. The improvement in the three months ended September 30, 2017. The loss ratio excluding catastrophes and development improved 1.2 points. The expense ratio improved 2.8of 0.5 points for the three months ended September 30, 2017 as compared with the same period in 2016 reflecting both our ongoing efforts to improve productivity and the actions undertaken in last year's third and fourth quarters to reduce expenses.
Favorable net prior year development of $18 million and $8 million was recorded in the three months ended September 30, 2017 and 2016. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Comparison
Net written premiums for Commercial decreased $3 million for the nine months ended September 30, 2017 as compared with the same period in 2016 due to unfavorable premium development driven by a premium rate adjustment within Small Business that is more fully discussed in Note F to the Condensed Consolidated Financial Statements under Part I, Item 1. This was partially offset by higher new business within Middle Markets, strong retention and positive renewal premium change. The decrease in net earned premiums was consistent with the trend in net written premiums.
Net operating income decreased $46 million for the nine months ended September 30, 2017 as compared with the same period in 2016 due to higher net catastrophe losses partially offset by improved non-catastrophe current accident year underwriting results.
The combined ratio increased 4.2 points for the nine months ended September 30, 2017 as compared with the same period in 2016. The loss ratio increased 5.5 points driven by higher net catastrophe losses which were $235 million, or 11.1 points of the loss ratio, for the nine months ended September 30, 2017, as compared to $95 million, or 4.6 points of the loss ratio, for the nine months ended September 30, 2016. Catastrophe-related reinsurance reinstatement premium was $1 million for the nine months ended September 30, 2017. The loss ratio excluding catastrophesearned premiums and development improved 0.9 points. Excluding the impact of the Small Business premium rate adjustment, the expense ratio improved 2.6 points reflecting both our ongoing efforts to improve productivity and the actions undertakenlower acquisition costs partially offset by an increase in last year's third and fourth quarters to reduceunderwriting expenses.
Favorable net prior year loss reserve development of $65 million and unfavorable premium development of $27 million was recorded for the nine months ended September 30, 2017 as compared with favorable net prior year loss reserve development of $37 million and favorable premium development of $7 million for the nine months ended September 30, 2016. 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. |
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Gross case reserves | $ | 4,307 |
| | $ | 4,661 |
|
Gross IBNR reserves | 4,323 |
| | 4,233 |
|
Total gross carried claim and claim adjustment expense reserves | $ | 8,630 |
| | $ | 8,894 |
|
Net case reserves | $ | 4,029 |
| | $ | 4,353 |
|
Net IBNR reserves | 4,030 |
| | 3,952 |
|
Total net carried claim and claim adjustment expense reserves | $ | 8,059 |
| | $ | 8,305 |
|
International
The following table presents the results of operations.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months |
| Nine Months |
(In millions, except ratios, rate and retention) | 2017 |
| 2016 |
| 2017 |
| 2016 |
Net written premiums | $ | 207 |
| | $ | 207 |
| | $ | 664 |
| | $ | 637 |
|
Net earned premiums | 226 |
| | 210 |
| | 629 |
| | 605 |
|
Net investment income | 13 |
| | 13 |
| | 38 |
| | 38 |
|
Net operating (loss) income | (38 | ) | | 20 |
| | (8 | ) | | (1 | ) |
Net realized investment gains, after tax | 3 |
| | 5 |
| | 14 |
| | 11 |
|
Net (loss) income | (35 | ) | | 25 |
| | 6 |
| | 10 |
|
| | | | | | | |
Other performance metrics: | | | | | | | |
Loss and loss adjustment expense ratio | 88.4 | % | | 55.4 | % | | 70.6 | % | | 65.2 | % |
Expense ratio | 37.5 |
| | 37.8 |
| | 37.2 |
| | 38.2 |
|
Combined ratio | 125.9 | % | | 93.2 | % | | 107.8 | % | | 103.4 | % |
| | | | | | | |
Rate | 1 | % | | (1 | )% | | 0 | % | | (1 | )% |
Renewal premium change | 4 |
| | (1 | ) | | 1 |
| | (1 | ) |
Retention | 73 |
| | 74 |
| | 78 |
| | 78 |
|
New business | $ | 69 |
| | $ | 67 |
| | $ | 207 |
| | $ | 189 |
|
Three Month Comparison
Net written premiums for International for the three months ended September 30, 2017 were consistent with the same period in 2016. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Net operating results decreased $58 million for the three months ended September 30, 2017 as compared with the same period in 2016 driven by higher net catastrophe losses and lower favorable net prior year loss reserve development.
The combined ratio increased 32.7 points for the three months ended September 30, 2017 as compared with the same period in 2016. The loss ratio increased 33.0 points driven by higher net catastrophe losses and lower favorable net prior year loss reserve development. Net catastrophe losses were $58 million, or 27.5 points of the loss ratio for the three months ended September 30, 2017 as compared to $3 million, or 1.5 points of the loss ratio, for the three months ended September 30, 2016. Catastrophe-related reinsurance reinstatement premium was $5 million for the three months ended September 30, 2017. The loss ratio excluding catastrophes and development was 0.5 points higher than the prior year period. The expense ratio improved 0.3 points for the three months ended September 30, 2017 as compared with the same period in 2016.
Favorable net prior year development of $4 million and $17$2 million was recorded for the three months ended September 30, 2017 and 2016.2022 as compared with unfavorable net prior year loss reserve development of $2 million for the three months ended September 30, 2021. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Comparison
NetGross written premiums for InternationalCommercial increased $27$540 million for the nine months ended September 30, 20172022 as compared with the same period in 2016 due to2021 driven by higher new business and positive renewalretention. Net written premiums for Commercial increased $475 million for the nine months ended September 30, 2022 as compared with the same period in 2021. The prior period included a one-time written premium change.catch-up resulting from the addition of a quota share treaty to our property reinsurance program. Excluding the impact of the prior period written premium catch-up, net written premiums increased $363 million for the nine months ended September 30, 2022 as compared with the same period in 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Net operating results decreased $7Core income increased $117 million for the nine months ended September 30, 20172022 as compared with the same period in 20162021 driven by lower favorable net prior year loss reserve developmentcatastrophe losses and higher net catastrophe lossesimproved non-catastrophe underwriting results partially offset by favorable period over period foreign currency exchangelower net investment income driven by limited partnership and common stock results.
The combined ratio increased 4.4of 96.6% improved 9.4 points for the nine months ended September 30, 20172022 as compared with the same period in 2016. The loss ratio increased 5.4 points,2021 primarily due to a 8.0 point improvement in the loss ratio and a 1.3 point improvement in the expense ratio. The improvement in the loss ratio was driven by lower catastrophe losses and favorable net prior year loss reserve development and higher net catastrophe losses. Net catastrophedevelopment. Catastrophe losses were $60$148 million, or 10.35.0 points of the loss ratio, for the nine months ended September 30, 20172022, as compared to $28with $332 million, or 4.712.6 points of the loss ratio, for the nine months ended September 30, 2016. Catastrophe-related reinsurance reinstatement premium was $5 million2021. The combined ratio excluding catastrophes and development improved 0.7 points for the nine months ended September 30, 2017.2022 as compared with the same period in 2021. The improvement in the expense ratio of 1.3 points was driven by higher net earned premiums and lower acquisition costs partially offset by an increase in underwriting expenses. The loss ratio excluding catastrophes and development improved 4.5 points. The expense ratio improved 1.0 point for the nine months ended September 30, 2017 as comparedincreased 0.7 points primarily driven by a shift in mix of business associated with the same period in 2016, primarily due to higherproperty quota share treaty purchased during June of 2021. Our property coverages, which have a lower underlying loss ratio than most other commercial coverages, now represent a smaller proportion of net earned premiums.
Favorable net prior year loss reserve development of $15 million and $36$26 million was recorded for the nine months ended September 30, 2017 and 2016.2022 as compared with unfavorable net prior year loss reserve development of $2 million for the nine months ended September 30, 2021. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presentssummarizes the gross and net carried reserves.reserves for Commercial.
| | | | | | | | | | | |
| | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Gross case reserves | $ | 3,074 | | | $ | 3,184 | |
Gross IBNR reserves | 6,098 | | | 5,706 | |
Total gross carried claim and claim adjustment expense reserves | $ | 9,172 | | | $ | 8,890 | |
Net case reserves | $ | 2,748 | | | $ | 2,850 | |
Net IBNR reserves | 5,557 | | | 5,215 | |
Total net carried claim and claim adjustment expense reserves | $ | 8,305 | | | $ | 8,065 | |
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Gross case reserves | $ | 716 |
| | $ | 632 |
|
Gross IBNR reserves | 924 |
| | 696 |
|
Total gross carried claim and claim adjustment expense reserves | $ | 1,640 |
| | $ | 1,328 |
|
Net case reserves | $ | 617 |
| | $ | 548 |
|
Net IBNR reserves | 807 |
| | 653 |
|
Total net carried claim and claim adjustment expense reserves | $ | 1,424 |
| | $ | 1,201 |
|
Life & Group Non-CoreInternational
The following table presentsdetails the results of operations.operations for International.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months |
| Nine Months |
(In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
Net earned premiums | $ | 136 |
| | $ | 134 |
| | $ | 404 |
| | $ | 401 |
|
Net investment income | 195 |
| | 192 |
| | 587 |
| | 567 |
|
Net operating income | 10 |
| | 6 |
| | 19 |
| | — |
|
Net realized investment gains, after tax | 2 |
| | 11 |
| | 12 |
| | 3 |
|
Net income | 12 |
| | 17 |
| | 31 |
| | 3 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions, except ratios, rate, renewal premium change and retention) | 2022 | | 2021 | | 2022 | | 2021 |
Gross written premiums | $ | 288 | | | $ | 276 | | | $ | 1,033 | | | $ | 958 | |
Net written premiums | 258 | | | 256 | | | 839 | | | 783 | |
Net earned premiums | 270 | | | 271 | | | 803 | | | 789 | |
Net investment income | 16 | | | 14 | | | 44 | | | 42 | |
Core income | 19 | | | 17 | | | 63 | | | 67 | |
| | | | | | | |
Other performance metrics: | | | | | | | |
Loss ratio excluding catastrophes and development | 58.6 | % | | 58.9 | % | | 58.6 | % | | 59.2 | % |
Effect of catastrophe impacts | 4.1 | | | 3.4 | | | 2.7 | | | 2.0 | |
Effect of development-related items | — | | | 1.1 | | | (0.6) | | | 0.3 | |
Loss ratio | 62.7 | | | 63.4 | | | 60.7 | | | 61.5 | |
Expense ratio | 31.7 | | | 32.1 | | | 32.1 | | | 33.3 | |
Combined ratio | 94.4 | % | | 95.5 | % | | 92.8 | % | | 94.8 | % |
Combined ratio excluding catastrophes and development | 90.3 | % | | 91.0 | % | | 90.7 | % | | 92.5 | % |
| | | | | | | |
Rate | 6 | % | | 13 | % | | 7 | % | | 14 | % |
Renewal premium change | 12 | | | 13 | | | 11 | | | 13 | |
Retention | 82 | | | 79 | | | 79 | | | 77 | |
New business | $ | 79 | | | $ | 54 | | | $ | 245 | | | $ | 204 | |
Three Month Comparison
Gross written premiums for International increased $12 million for the three months ended September 30, 2022 as compared with the same period in 2021. Excluding the effect of foreign currency exchange rates, gross written premiums increased $31 million driven by higher new business and rate. Net operatingwritten premiums for International increased $2 million for the three months ended September 30, 2022 as compared with the same period in 2021. Excluding the effect of foreign currency exchange rates, net written premiums increased $19 million for the three months ended September 30, 2022 as compared with the same period in 2021. Net earned premiums were consistent with the same period in 2021.
Core income improved $2 million for the three months ended September 30, 2022 as compared with the same period in 2021 driven by improved underwriting results partially offset by an unfavorable impact from changes in foreign currency exchange rates.
The combined ratio of 94.4% improved 1.1 points for the three months ended September 30, 2022 as compared with the same period in 2021 due to a 0.7 point improvement in the loss ratio and a 0.4 point improvement in the expense ratio. The improvement in the loss ratio was primarily due to improved non-catastrophe underwriting results. Catastrophe losses were $10 million, or 4.1 points of the loss ratio, for the three months ended September 30, 2022, as compared with $9 million, or 3.4 points of the loss ratio, for the three months ended September 30, 2021. The improvement in the expense ratio of 0.4 points was primarily driven by lower acquisition costs partially offset by an increase in underwriting expenses.
There was no net prior year loss reserve development recorded for the three months ended September 30, 2022 as compared with unfavorable net prior year loss reserve development of $3 million for the three months ended September 30, 2021. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Comparison
Gross written premiums for International increased $75 million for the nine months ended September 30, 2022 as compared with the same period in 2021. Excluding the effect of foreign currency exchange rates, gross written premiums increased $121 million driven by higher new business and retention. Net written premiums for International increased $56 million for the nine months ended September 30, 2022 as compared with the same period in 2021. Excluding the effect of foreign currency exchange rates, net written premiums increased $97 million for the nine months ended September 30, 2022 as compared with the same period in 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income decreased $4 million for the nine months ended September 30, 2022 as compared with the same period in 2021 driven by an unfavorable impact from changes in foreign currency exchange rates partially offset by improved underwriting results.
The combined ratio of 92.8% improved 2.0 points for the nine months ended September 30, 2022 as compared with the same period in 2021 due to a 1.2 point improvement in the expense ratio and a 0.8 point improvement in the loss ratio. The improvement in the expense ratio was primarily driven by lower acquisition costs. The improvement in the loss ratio was driven by improved non-catastrophe underwriting results partially offset by higher net catastrophe losses. Catastrophe losses were $21 million, or 2.7 points of the loss ratio, for the nine months ended September 30, 2022, as compared with $16 million, or 2.0 points of the loss ratio, for the nine months ended September 30, 2021.
Favorable net prior year loss reserve development of $5 million was recorded for the nine months ended September 30, 2022 as compared with unfavorable net prior year loss reserve development of $2 million for the nine months ended September 30, 2021. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves for International.
| | | | | | | | | | | |
| | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Gross case reserves | $ | 802 | | | $ | 859 | |
Gross IBNR reserves | 1,460 | | | 1,421 | |
Total gross carried claim and claim adjustment expense reserves | $ | 2,262 | | | $ | 2,280 | |
Net case reserves | $ | 692 | | | $ | 744 | |
Net IBNR reserves | 1,192 | | | 1,196 | |
Total net carried claim and claim adjustment expense reserves | $ | 1,884 | | | $ | 1,940 | |
Life & Group
The following table summarizes the results of operations for Life & Group.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net earned premiums | $ | 118 | | | $ | 123 | | | $ | 356 | | | $ | 369 | |
Net investment income | 187 | | | 240 | | | 600 | | | 724 | |
Core (loss) income before income tax | (36) | | | 38 | | | (24) | | | 111 | |
Income tax benefit on core income | 14 | | | 3 | | | 31 | | | 9 | |
Core (loss) income | (22) | | | 41 | | | 7 | | | 120 | |
Three Month Comparison
Core results decreased $63 million for the three months ended September 30, 2022 as compared with the same period in 2021 primarily due to a $54 million pretax decline in net investment income from limited partnerships.
Life & Group results for the three months ended September 30, 2022 and 2021 included no unlocking event for future policy benefit reserves as a result of the gross premium valuation (GPV). Core loss for the three months ended September 30, 2022 included a $25 million pretax favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve review in the third quarter of 2022. The favorable impact was driven by a $107 million release of all remaining incurred but not reported (IBNR) reserves established during 2020 and 2021 in response to the COVID-19 pandemic partially offset by an $82 million unfavorable impact from higher claim severity, including utilization and cost of care inflation, than anticipated in the reserve estimates. The annual structured settlement claim reserve review resulted in a $5 million pretax favorable impact from the reduction in reserves due to discount rate assumption changes. Core income for the three months ended September 30, 2021 included a $40 million pretax favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2021.
Nine Month Comparison
Results for the nine months ended September 30, 2022 were generally consistent with the three month summary above.
Life & Group Policyholder Reserves
Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a GPV to determine if there is a premium deficiency. See Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1 for further information on the reserving process.
The September 30, 2022 GPV indicated that our recorded reserves included a margin of approximately $125 million. A summary of the changes in the estimated reserve margin is presented in the table below:
| | | | | |
Long Term Care Active Life Reserve - Change in estimated reserve margin (In millions) | |
September 30, 2021 Estimated Margin | $ | 72 | |
Changes in underlying economic assumptions (1) | (130) | |
Changes in underlying morbidity assumptions | (30) | |
Changes in underlying persistency assumptions | 40 | |
Changes in underlying premium rate action assumptions | 190 | |
Changes in underlying expense and other assumptions | (17) | |
September 30, 2022 Estimated Margin | $ | 125 | |
(1) Economic assumptions include the impact of interest rates and cost of care inflation
The increase in the margin in 2022 was primarily driven by changes in discount rate assumptions due to higher near-term expected reinvestment rates and higher than previously estimated rate increases on active rate increase programs. These favorable drivers were partially offset by changes in cost of care inflation assumptions.
The Company has determined that additional future policy benefit reserves for profits followed by losses are not currently required based on the most recent projection.
The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our future policy benefit reserve assumptions. The annual GPV process involves updating all assumptions to management's then current best estimate, and historically all significant assumptions have been revised each year. In the table below, we have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group. The impact of each sensitivity is discrete and does not reflect the impact one factor may have on another or the mitigating impact from management actions, which may include additional future premium rate increases. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. Any required increase in the recorded reserves resulting from a hypothetical revision in the table below would first reduce the margin in our carried reserves before it would affect results from operations. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
| | | | | |
September 30, 2022 | |
| Estimated reduction to pretax income |
Hypothetical revisions (In millions) |
Morbidity:(1) | |
2.5% increase in morbidity | $ | 200 | |
5% increase in morbidity | 500 | |
Persistency: | |
5% decrease in active life mortality and lapse | $ | 100 | |
10% decrease in active life mortality and lapse | 300 | |
Discount Rates: | |
25 basis point decline in new money interest rates | $ | — | |
50 basis point decline in new money interest rates | 100 | |
| |
| |
| |
(1) Represents a sensitivity in future paid claims.
The following table summarizes policyholder reserves for Life & Group.
| | | | | | | | | | | | | | | | | |
September 30, 2022 | | | | | |
(In millions) | Claim and claim adjustment expenses | | Future policy benefits | | Total |
Long term care | $ | 2,959 | | | $ | 10,109 | | | $ | 13,068 | |
Structured settlement annuities | 512 | | | — | | | 512 | |
Other | 9 | | | — | | | 9 | |
Total | 3,480 | | | 10,109 | | | 13,589 | |
Shadow adjustments (1) | 59 | | — | | 59 | |
Ceded reserves (2) | 106 | | | 346 | | | 452 | |
Total gross reserves | $ | 3,645 | | | $ | 10,455 | | | $ | 14,100 | |
| | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | |
(In millions) | Claim and claim adjustment expenses | | Future policy benefits | | Total |
Long term care | $ | 2,905 | | | $ | 10,012 | | | $ | 12,917 | |
Structured settlement annuities | 526 | | | — | | | 526 | |
Other | 10 | | | — | | | 10 | |
Total | 3,441 | | | 10,012 | | | 13,453 | |
Shadow adjustments (1) | 200 | | 2,936 | | 3,136 | |
Ceded reserves (2) | 113 | | | 288 | | | 401 | |
Total gross reserves | $ | 3,754 | | | $ | 13,236 | | | $ | 16,990 | |
(1) To the extent there are unrealized gains on fixed income securities supporting the reserves of certain products within the Life & Group segment that would result in a premium deficiency, or would impact the reserve balance, if realized, a related increase in Insurance reserves is recorded as a reduction of net unrealized gains (losses), net of tax, through Other comprehensive income (loss) (Shadow Adjustments).
(2) Ceded reserves relate to claim or policy reserves fully reinsured in connection with a sale or exit from the underlying business.
Corporate & Other
The following table summarizes the results of operations for the Corporate & Other segment, including intersegment eliminations.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net investment income | $ | 5 | | | $ | 2 | | | $ | 10 | | | $ | 12 | |
Insurance claims and policyholders' benefits | (13) | | | (6) | | | 36 | | | 23 | |
Interest expense | 28 | | | 28 | | | 84 | | | 84 | |
Core loss | (25) | | | (21) | | | (131) | | | (110) | |
Three Month Comparison
Core loss increased $4 million for the three months ended September 30, 20172022 as compared with the same period in 2016. Our long term care business continued to produce results generally in line with our 2015 reset assumptions.2021.
Nine Month Comparison
Net operating income improved $19Core loss increased $21 million for the nine months ended September 30, 20172022 as compared with the same
period in 2016. The improvement was2021 driven by favorable morbidityhigher net prior year loss reserve development associated with legacy mass tort abuse claims and an increase in expenses as a result of continued investments in technology infrastructure and security. These results were partially offset by unfavorable persistencythe prior period recognition of a $12 million after-tax loss resulting from the legacy Excess Workers' Compensation (EWC) Loss Portfolio Transfer (LPT). Net prior year loss reserve development is further discussed in Note E to the long term care business.
Corporate & Other Non-CoreCondensed Consolidated Financial Statements included under Part I, Item I.
The following table presents the results of operations.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net investment income | $ | 6 |
| | $ | 4 |
| | $ | 15 |
| | $ | 11 |
|
Interest expense | 39 |
| | 39 |
| | 116 |
| | 119 |
|
Net operating loss | (18 | ) | | (24 | ) | | (82 | ) | | (162 | ) |
Net realized investment (losses) gains, after tax | (26 | ) | | 1 |
| | (23 | ) | | (2 | ) |
Net loss | (44 | ) | | (23 | ) | | (105 | ) | | (164 | ) |
Three Month Comparison
Net operating loss improved $6 million for the three months ended September 30, 2017 as compared with the same period in 2016. The after-tax net realized investment loss in the current period included a $27 million loss on the early redemption of the Company's $350 million senior notes.
Nine Month Comparison
Net operating loss improved $80 million for the nine months ended September 30, 2017, as compared with the same period in 2016, driven by lower adverse prior year reserve development recorded in 2017 for A&EP under the Loss Portfolio Transfer. The after-tax net realized investment loss in the current period included a $27 million loss on the early redemption of the Company's $350 million senior notes.
The following table presentssummarizes the gross and net carried reserves.reserves for Corporate & Other.
| | | | | | | | | | | |
| | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Gross case reserves | $ | 1,479 | | | $ | 1,551 | |
Gross IBNR reserves | 1,217 | | | 1,266 | |
Total gross carried claim and claim adjustment expense reserves | $ | 2,696 | | | $ | 2,817 | |
Net case reserves | $ | 139 | | | $ | 146 | |
Net IBNR reserves | 201 | | | 148 | |
Total net carried claim and claim adjustment expense reserves | $ | 340 | | | $ | 294 | |
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Gross case reserves | $ | 1,397 |
| | $ | 1,524 |
|
Gross IBNR reserves | 1,011 |
| | 1,090 |
|
Total gross carried claim and claim adjustment expense reserves | $ | 2,408 |
| | $ | 2,614 |
|
Net case reserves | $ | 97 |
| | $ | 94 |
|
Net IBNR reserves | 123 |
| | 136 |
|
Total net carried claim and claim adjustment expense reserves | $ | 220 |
| | $ | 230 |
|
INVESTMENTS
Net Investment Income
The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months |
| Nine Months |
(In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
Fixed maturity securities: | | | | | | | |
Taxable | $ | 349 |
| | $ | 354 |
| | $ | 1,047 |
| | $ | 1,048 |
|
Tax-Exempt | 106 |
| | 103 |
| | 320 |
| | 304 |
|
Total fixed maturity securities | 455 |
|
| 457 |
|
| 1,367 |
| | 1,352 |
|
Limited partnership investments | 51 |
| | 65 |
| | 157 |
| | 97 |
|
Other, net of investment expense | 3 |
| | 2 |
| | 5 |
| | 12 |
|
Net investment income | $ | 509 |
|
| $ | 524 |
|
| $ | 1,529 |
| | $ | 1,461 |
|
Net investment income, after tax | $ | 363 |
| | $ | 371 |
| | $ | 1,096 |
| | $ | 1,048 |
|
| | | | | | | |
Effective income yield for the fixed maturity securities portfolio, pretax | 4.7 | % | | 4.8 | % | | 4.7 | % | | 4.8 | % |
Effective income yield for the fixed maturity securities portfolio, after tax | 3.4 | % | | 3.4 | % | | 3.4 | % | | 3.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Fixed income securities: | | | | | | | |
Taxable fixed income securities | $ | 410 | | | $ | 360 | | | $ | 1,163 | | | $ | 1,075 | |
Tax-exempt fixed income securities | 55 | | | 77 | | | 194 | | | 236 | |
Total fixed income securities | 465 | | | 437 | | | 1,357 | | | 1,311 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Limited partnership and common stock investments | (44) | | | 77 | | | (51) | | | 294 | |
Other, net of investment expense | 1 | | | (1) | | | (4) | | | 3 | |
Net investment income | $ | 422 | | | $ | 513 | | | $ | 1,302 | | | $ | 1,608 | |
| | | | | | | |
Effective income yield for the fixed income securities portfolio | 4.4 | % | | 4.3 | % | | 4.3 | % | | 4.3 | % |
Limited partnership and common stock return | (2.1) | % | | 3.8 | % | | (2.4) | % | | 16.4 | % |
Net investment income after tax,decreased $91 million and $306 million for the three and nine months ended September 30, 2017 decreased $8 million2022 as compared with the same periodperiods in 2016. The decrease was2021 driven by unfavorable limited partnership investments, which returned 2.2% in 2017 as compared with 2.6% in the prior year period. Incomeand common stock results partially offset by higher income from fixed maturity securities, after tax, for the three months ended September 30, 2017 increased $2 million as compared with the same period in 2016, primarily due to an increase in the invested asset base.income securities.
Net investment income, after tax, for the nine months ended September 30, 2017 increased $48 million as compared with the same period in 2016. The increase was driven by limited partnership investments, which returned 6.8% in 2017 as compared with 3.8% in the prior year period. Income from fixed maturity securities, after tax, for the nine months ended September 30, 2017 increased $14 million as compared with the same period in 2016, primarily due to an increase in the invested asset base.
Net Realized Investment Gains (Losses)
The components of Net realized investment resultsgains (losses) are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Fixed maturity securities: (1) | | | | | | | |
Corporate and other bonds | $ | (41) | | | $ | 36 | | | $ | (68) | | | $ | 115 | |
States, municipalities and political subdivisions | 6 | | | 1 | | | 28 | | | — | |
Asset-backed | (17) | | | (15) | | | (29) | | | (24) | |
Total fixed maturity securities | (52) | | | 22 | | | (69) | | | 91 | |
Non-redeemable preferred stock | (2) | | | (2) | | | (111) | | | 17 | |
Derivatives, short term and other | (34) | | | 2 | | | 22 | | | 9 | |
Mortgage loans | (8) | | | — | | | (8) | | | — | |
Net investment (losses) gains | (96) | | | 22 | | | (166) | | | 117 | |
Income tax benefit (expense) on net investment (losses) gains | 11 | | | (3) | | | 38 | | | (22) | |
Net investment (losses) gains, after tax | $ | (85) | | | $ | 19 | | | $ | (128) | | | $ | 95 | |
|
| | | | | | | | | | | | | | | |
Periods ended September 30 | Three Months | | Nine Months |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Fixed maturity securities: | | | | | | | |
Corporate and other bonds | $ | 13 |
| | $ | 18 |
| | $ | 81 |
| | $ | 10 |
|
States, municipalities and political subdivisions | 4 |
| | 20 |
| | 14 |
| | 23 |
|
Asset-backed | (2 | ) | | 5 |
| | (7 | ) | | 5 |
|
U.S. Treasury and obligations of government-sponsored enterprises | — |
| | 3 |
| | 3 |
| | 5 |
|
Foreign government | 1 |
| | 1 |
| | 1 |
| | 3 |
|
Total fixed maturity securities | 16 |
|
| 47 |
|
| 92 |
|
| 46 |
|
Equity securities | — |
| | (3 | ) | | — |
| | (5 | ) |
Derivative financial securities | (1 | ) | | 1 |
| | (3 | ) | | (12 | ) |
Short term investments and other | (39 | ) | | 1 |
| | (27 | ) | | (3 | ) |
Net realized investment (losses) gains | (24 | ) |
| 46 |
|
| 62 |
| | 26 |
|
Income tax benefit (expense) on net realized investment (losses) gains | 9 |
| | (14 | ) | | (19 | ) | | (11 | ) |
Net realized investment (losses) gains, after tax | $ | (15 | ) |
| $ | 32 |
|
| $ | 43 |
| | $ | 15 |
|
(1) Excludes the loss in the third quarter of 2022 on the assets supporting the funds withheld liability, which is reflected in the Derivatives, short term and other line.Net realizedPretax net investment results after tax, decreased $47$118 million for the three months ended September 30, 20172022 as compared with the same period in 20162021. The decrease was driven by lower net realizedlosses on fixed maturity securities in the three months ended September 30, 2022 as compared to net gains on sales of securities partially offset by lower OTTI losses recognized in earnings. the same period in 2021.
Additionally, Derivatives, short term and other for the current period Net realized investment losses includethree months ended September 30, 2022 includes a loss of $27$35 million after taxnon-economic net loss related to the redemptionexpected novation of a coinsurance agreement on our $350 million senior notes due November 2019.legacy annuity business in our Life & Group segment and the associated funds withheld embedded derivative.
Net realizedPretax net investment gains, after tax, improved $28results decreased $283 million for the nine months ended September 30, 20172022 as compared with the same period in 20162021. The decrease was driven by lower OTTIthe unfavorable change in fair value of
non-redeemable preferred stock and net losses recognizedon fixed maturity securities in earnings. Additionally, the currentnine months ended September 30, 2022 as compared to net gains in the same period Net realized investment gains include a loss of $27 million after tax related to the redemption of our $350 million senior notes due November 2019.in 2021.
Further information on our realizedinvestment gains and losses includingas well as on our OTTI losses,derivative financial instruments is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
(In millions) | Estimated Fair Value | | Net Unrealized Gains (Losses) | | Estimated Fair Value | | Net Unrealized Gains (Losses) | (In millions) | Estimated Fair Value | | Net Unrealized Gains (Losses) | | Estimated Fair Value | | Net Unrealized Gains (Losses) |
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 4,386 |
| | $ | 43 |
| | $ | 4,212 |
| | $ | 32 |
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,452 | | | $ | (357) | | | $ | 2,600 | | | $ | 42 | |
AAA | 1,899 |
| | 143 |
| | 1,881 |
| | 110 |
| AAA | 2,374 | | | (250) | | | 3,784 | | | 360 | |
AA | 9,136 |
| | 911 |
| | 8,911 |
| | 750 |
| AA | 6,387 | | | (792) | | | 7,665 | | | 823 | |
A | 9,876 |
| | 957 |
| | 9,866 |
| | 832 |
| A | 8,739 | | | (667) | | | 9,511 | | | 1,087 | |
BBB | 13,730 |
| | 1,051 |
| | 12,802 |
| | 664 |
| BBB | 15,267 | | | (1,776) | | | 18,458 | | | 2,043 | |
Non-investment grade | 3,063 |
| | 171 |
| | 3,233 |
| | 156 |
| Non-investment grade | 2,032 | | | (234) | | | 2,362 | | | 91 | |
Total | $ | 42,090 |
| | $ | 3,276 |
| | $ | 40,905 |
| | $ | 2,544 |
| Total | $ | 37,251 | | | $ | (4,076) | | | $ | 44,380 | | | $ | 4,446 | |
As of September 30, 20172022 and December 31, 2016, only 2%2021, 1% of our fixed maturity portfolio was rated internally. AAA rated securities included $0.4 billion and $1.7 billion of pre-refunded municipal bonds as of September 30, 2022 and December 31, 2021.
The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.
| | | September 30, 2017 | | September 30, 2022 |
(In millions) | Estimated Fair Value | | Gross Unrealized Losses | (In millions) | Estimated Fair Value | | Gross Unrealized Losses |
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 1,531 |
| | $ | 27 |
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,360 | | | $ | 360 | |
AAA | 277 |
| | 7 |
| AAA | 1,566 | | | 318 | |
AA | 665 |
| | 10 |
| AA | 4,430 | | | 917 | |
A | 562 |
| | 10 |
| A | 6,548 | | | 838 | |
BBB | 1,015 |
| | 21 |
| BBB | 13,394 | | | 1,902 | |
Non-investment grade | 448 |
| | 10 |
| Non-investment grade | 1,646 | | | 248 | |
Total | $ | 4,498 |
| | $ | 85 |
| Total | $ | 29,944 | | | $ | 4,583 | |
|
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.
| | | | | | | | | | | |
| September 30, 2022 |
(In millions) | Estimated Fair Value | | Gross Unrealized Losses |
Due in one year or less | $ | 699 | | | $ | 11 | |
Due after one year through five years | 7,492 | | | 541 | |
Due after five years through ten years | 10,701 | | | 1,705 | |
Due after ten years | 11,052 | | | 2,326 | |
Total | $ | 29,944 | | | $ | 4,583 | |
|
| | | | | | | |
| September 30, 2017 |
(In millions) | Estimated Fair Value | | Gross Unrealized Losses |
Due in one year or less | $ | 53 |
| | $ | 2 |
|
Due after one year through five years | 742 |
| | 16 |
|
Due after five years through ten years | 2,812 |
| | 53 |
|
Due after ten years | 891 |
| | 14 |
|
Total | $ | 4,498 |
| | $ | 85 |
|
Duration
A primary objective in the management of the investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions andas well as domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group Non-Core segment.
The effective durations of fixed maturityincome 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(In millions) | Estimated Fair Value | | Effective Duration (In years) | | Estimated Fair Value | | Effective Duration (In years) |
Investments supporting Life & Group | $ | 14,253 | | | 9.8 | | | $ | 18,458 | | | 9.2 | |
Other investments | 24,739 | | | 4.8 | | | 28,915 | | | 4.9 | |
Total | $ | 38,992 | | | 6.7 | | | $ | 47,373 | | | 6.6 | |
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(In millions) | Estimated Fair Value | | Effective Duration (In years) | | Estimated Fair Value | | Effective Duration (In years) |
Investments supporting Life & Group Non-Core | $ | 16,580 |
| | 8.6 |
| | $ | 15,724 |
| | 8.7 |
|
Other interest sensitive investments | 26,849 |
| | 4.4 |
| | 26,669 |
| | 4.6 |
|
Total | $ | 43,429 |
| | 6.0 |
| | $ | 42,393 |
| | 6.1 |
|
The effective duration of Investments supporting Life & Group liabilities at September 30, 2022 lengthened as compared with December 31, 2021, reflecting strategic repositioning to capitalize on higher rates and reduce reinvestment risk.The investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.
Short Term Investments
The carrying value of the components of the Short term investments are presented in the following table.2021.
|
| | | | | | | |
| | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Short term investments: | | | |
Commercial paper | $ | 658 |
| | $ | 733 |
|
U.S. Treasury securities | 436 |
| | 433 |
|
Money market funds | 44 |
| | 44 |
|
Other | 315 |
| | 197 |
|
Total short term investments | $ | 1,453 |
| | $ | 1,407 |
|
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries.income. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For the nine months ended September 30, 2017,2022, net cash provided by operating activities was $894$1,990 million as compared with $1,120$1,354 million for the same period in 2016. Cash2021. The increase in cash provided by operating activities reflected higher net claim payments and a lower levelwas driven by the prior year payment of distributions on limited partnerships partially offset by an increase in premiums collected and lower salaries and related expenses paid.the EWC LPT premium.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
NetFor the nine months ended September 30, 2022, net cash used by investing activities was $218$1,072 million for the nine months ended September 30, 2017 as compared with net cash used of $604$597 million for the same period in 2016. The2021. Net cash flow fromused or provided by investing activities is affectedprimarily driven by variouscash available from operations and by other 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. In the first quarter of 2016, we sold the principal executive offices of CNAF for $107 million.activities.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, and outflows for stockholder dividends, or repayment of debt and outlays to reacquire equity securities.purchases of our common stock.
For the nine months ended September 30, 2017,2022, net cash used by financing activities was $673$924 million as compared with $605$545 million for the same period in 2016. In2021. Financing activities for the third quarterperiods presented include:
•During the nine months ended September 30, 2022, we paid dividends of 2017,$874 million and repurchased 890,000 shares of common stock at an aggregate cost of $39 million.
•During the nine months ended September 30, 2021, we issued $500paid dividends of $518 million of 3.45% senior notes due August 15, 2027 and redeemed the $350 million outstanding aggregate principal balancesrepurchased 377,615 shares of our 7.35% senior notes due November 15, 2019. In the first quartercommon stock at an aggregate cost of 2016, we issued $500 million of 4.50% senior notes due March 1, 2026 and redeemed the $350 million outstanding aggregate principal balance of our 6.50% senior notes due August 15, 2016.$18 million.
Common Stock Dividends
DividendsCash dividends of $2.80$3.20 per share on our common stock, including a special cash dividend of $2.00 per share, were declared and paid during the nine months ended September 30, 2017.2022. On October 27, 2017,28, 2022, our Board of Directors declared a quarterly cash dividend of $0.30$0.40 per share, on our common stock, payable November 29, 2017December 1, 2022 to stockholders of record on November 13, 2017.15, 2022. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.
Liquidity
We believe that our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home Loan Bank of Chicago (FHLBC).
Dividends from CCCContinental Casualty Company (CCC) are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of September 30, 20172022, CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2017 that would not be subject to the Department's prior approval is $1,075 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $100$845 million during the three months ended December 31, 2016 and $855$600 million during the nine months ended September 30, 2017. As of September 30, 2017 CCC is able to pay approximately $120 million of dividends that would not be subject to prior approval of the Department.2022 and 2021. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
We have an effective automatic shelf registration statement on file with the Securities and Exchange Commission under which we may publicly issue an unspecified amount of debt, equity or hybrid securities from time to time.
ACCOUNTING STANDARDS UPDATE
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. For the Company, this includes the long term care and fully-ceded single premium immediate annuity business.
The most significant impact will be the effect of updating the discount rate assumption quarterly to reflect an upper-medium grade fixed-income instrument yield, rather than CNA’s expected investment portfolio yield. This will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The Company expects the net impact of these changes will be a decrease of approximately $2.3 billion in Accumulated other comprehensive income as of the transition date of January 1, 2021. To illustrate the sensitivity of this adjustment, had the Company used interest rates in effect as of September 30, 2022 in its calculation, the transition impact to Accumulated other comprehensive income would have been approximately zero.
The requirement to review, and update if there is a change, cash flow assumptions at least annually is expected to change the pattern of earnings being recognized. Under current accounting guidance, the Company’s third quarter 2022 gross premium valuation assessment indicated a pretax reserve margin of $125 million, with no unlocking event. However under the new guidance, the effect of changes in cash flow assumptions from the Company’s assessment would be recorded in the Company’s results of operations (except for discount rate changes which would be recorded quarterly through AOCI).
For a discussion of Accounting Standards Updates, adopted as of January 1, 2017 and that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1.
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 (note that loss reserves for long term care, 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;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:following as well as those risks contained in the Risk Factors section of our 2021 Annual Report on Form 10-K:
Company-Specific Factors
•the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our 2021 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 transactiontransactions in which, subject to certain limitations, we ceded our legacy A&EP and EWC liabilities, respectively, will not fully perform their respective obligations to CNA, the uncertainty in estimating loss reserves for A&EP and EWC liabilities and the possible continued exposure of CNA to liabilities for A&EP and EWC claims that are not covered under the terms of the transaction;respective transactions;
•the performance of reinsurance companies under reinsurance contracts with us; and
•the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.
Industry and General Market Factors
•the COVID-19 pandemic and measures to mitigate the spread of the virus may continue to result in increased claims and related litigation or regulatory risk across our enterprise;
•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 and Legal Factors
•regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, including with respect to cyber security protocols, legal inquiries by state authorities, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, including those revising applicability of statutes of limitations, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations;
•regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies; andcompanies
•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.adequacy; and
•regulatory and legal implications relating to the sophisticated cyber incident sustained by the Company in March 2021 that may arise.
Impact of Catastrophic EventsNatural and Related DevelopmentsMan-Made Disasters and Mass Tort Claims
•weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, wildfires, rain, hail and snow;
•regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
•man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; and
•the occurrence of epidemics.epidemics and pandemics; and
Referendum on the United Kingdom's Membership in the European Union
in 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit•mass tort claims, including those related to exposure to potentially harmful products or substances such as glyphosate, lead paint and opioids; and claims arising from the European Union (E.U.), commonly referredchanges that repeal or weaken tort reforms, such as those related to as "Brexit." As a result of the referendum, in 2017 the British government formally commenced the process to leave the E.U. and began negotiating the terms of treaties that will govern the U.K.'s future relationship with the E.U. Although the terms of any future treaties are unknown, we believe changes in our international operating platform will be required to allow us to continue to write business in the E.U. after the completion of Brexit, therefore we have begun the process of establishing a new European subsidiary in Luxembourg. As a result of these changes, the complexity and cost of regulatory compliance of our European business is likely to increase.abuse reviver statutes.
Our forward-looking statements speak only as of the date of the filing of this Quarterly Report on Form 10-Q and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the ninethree months ended September 30, 2017.2022. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20162021 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 September 30, 2017,2022, 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 September 30, 2017.2022.
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 September 30, 20172022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
Information on our legal proceedings is set forth in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2 (a) and (b) are not applicable.
(c) The table below details the repurchases of our common stock made during the three months ended September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | (a) Total number of shares purchased | | (b) Average price paid per share | | | (c) Total number of shares purchased as part of publicly announced plans or programs | | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in millions) |
| | | | | | | | | | | |
August 1, 2022 - August 31, 2022 | | 445,000 | | | $ | 41.03 | | | | | N/A | | N/A |
| | | | | | | | | | | |
Total | | 445,000 | | | | | | N/A | | N/A |
Item 6. Exhibits
See Exhibit Index.
SIGNATURES
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 Financial Corporation |
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Dated: October 31, 2022 | By | CNA Financial Corporation/s/ Scott R. Lindquist |
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Dated: October 30, 2017 | By | /s/ D. Craig Mense |
| | D. Craig Mense
Scott R. Lindquist Executive Vice President and Chief Financial Officer
(Duly authorized officer and principal financial officer) |
EXHIBIT INDEX
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Description of Exhibit | Exhibit Number |
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| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | 101.INS |
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Inline XBRL Taxonomy Extension Schema | 101.SCH |
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Inline XBRL Taxonomy Extension Calculation Linkbase | 101.CAL |
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Inline XBRL Taxonomy Extension Definition Linkbase | 101.DEF |
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Inline XBRL Taxonomy Label Linkbase | 101.LAB |
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Inline XBRL Taxonomy Extension Presentation Linkbase | 101.PRE |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | 104.1 |