CNA Financial (CNA) 10-Q 2019 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 1-5823

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	36-6169860
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

151 N. Franklin		60606
Chicago,	Illinois	(Zip Code)
(Address of principal executive offices)

(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ 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.

Large accelerated filer ☒
Non-accelerated filer ☐
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 ☒

As of August 1, 2019, 271,507,039 shares of common stock were outstanding.

Item Number		Page Number
	PART I
1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018 (Unaudited)	4
	Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2019 and 2018 (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
3.	Quantitative and Qualitative Disclosures About Market Risk	61
4.	Controls and Procedures	61
	PART II
1.	Legal Proceedings	62
2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
6.	Exhibits	62

2

PART I

Item 1. Condensed Consolidated Financial Statements

CNA Financial Corporation

Condensed Consolidated Statements of Operations (Unaudited)

Periods ended June 30	Three Months						Six Months
(In millions, except per share data)	2019			2018			2019			2018
Revenues
Net earned premiums	$	1,824		$	1,815		$	3,627		$	3,600
Net investment income	515			506			1,086			996
Net investment (losses) gains:
Other-than-temporary impairment losses	(6		)	—			(20		)	(6		)
Other net investment (losses) gains	(12		)	(1		)	33			17
Net investment (losses) gains	(18		)	(1		)	13			11
Non-insurance warranty revenue	285			248			566			486
Other revenues	4			6			13			16
Total revenues	2,610			2,574			5,305			5,109
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits	1,352			1,327			2,709			2,666
Amortization of deferred acquisition costs	338			359			680			655
Non-insurance warranty expense	263			225			523			441
Other operating expenses	281			298			564			601
Interest	34			35			68			70
Total claims, benefits and expenses	2,268			2,244			4,544			4,433
Income before income tax	342			330			761			676
Income tax expense	(64		)	(60		)	(141		)	(115		)
Net income	$	278		$	270		$	620		$	561
Basic earnings per share	$	1.03		$	0.99		$	2.28		$	2.07
Diluted earnings per share	$	1.02		$	0.99		$	2.28		$	2.06
Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic	271.6			271.5			271.6			271.5
Diluted	272.4			272.4			272.5			272.4

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

3

CNA Financial Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Periods ended June 30	Three Months					Six Months
(In millions)	2019		2018			2019		2018
Comprehensive Income (Loss)
Net income	$	278	$	270		$	620	$	561
Other Comprehensive Income (Loss), Net of Tax
Changes in:
Net unrealized gains on investments with other-than-temporary impairments	—		(1		)	4		(10		)
Net unrealized gains on other investments	436		(159		)	962		(588		)
Net unrealized gains on investments	436		(160		)	966		(598		)
Foreign currency translation adjustment	—		(52		)	17		(40		)
Pension and postretirement benefits	8		7			15		17
Other comprehensive income (loss), net of tax	444		(205		)	998		(621		)
Total comprehensive income (loss)	$	722	$	65		$	1,618	$	(60	)

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

4

CNA Financial Corporation

Condensed Consolidated Balance Sheets

(In millions, except share data)	June 30, 2019 (Unaudited)			December 31, 2018
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $38,023 and $38,085)	$	41,639		$	39,546
Equity securities at fair value (cost of $812 and $844)	830			780
Limited partnership investments	1,785			1,982
Other invested assets	58			53
Mortgage loans	916			839
Short term investments	1,519			1,286
Total investments	46,747			44,486
Cash	271			310
Reinsurance receivables (less allowance for uncollectible receivables of $29 and $29)	4,234			4,426
Insurance receivables (less allowance for uncollectible receivables of $39 and $42)	2,651			2,323
Accrued investment income	398			391
Deferred acquisition costs	681			633
Deferred income taxes	106			392
Property and equipment at cost (less accumulated depreciation of $208 and $216)	302			324
Goodwill	146			146
Deferred non-insurance warranty acquisition expense	2,678			2,513
Other assets (includes $- and $8 due from Loews Corporation)	1,749			1,208
Total assets	$	59,963		$	57,152
Liabilities
Insurance reserves:
Claim and claim adjustment expenses	$	21,729		$	21,984
Unearned premiums	4,648			4,183
Future policy benefits	11,537			10,597
Long term debt	2,678			2,680
Deferred non-insurance warranty revenue	3,595			3,402
Other liabilities (includes $48 and $23 due to Loews Corporation)	3,689			3,089
Total liabilities	47,876			45,935
Commitments and contingencies (Notes C and F)
Stockholders' Equity
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,503,818 and 271,456,978 shares outstanding)	683			683
Additional paid-in capital	2,190			2,192
Retained earnings	9,159			9,277
Accumulated other comprehensive income (loss)	120			(878		)
Treasury stock (1,536,425 and 1,583,265 shares), at cost	(65		)	(57		)
Total stockholders’ equity	12,087			11,217
Total liabilities and stockholders' equity	$	59,963		$	57,152

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

5

CNA Financial Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six months ended June 30
(In millions)	2019			2018
Cash Flows from Operating Activities
Net income	$	620		$	561
Adjustments to reconcile net income to net cash flows provided by operating activities:
Deferred income tax expense	25			15
Trading portfolio activity	4			(13		)
Net investment gains	(13		)	(11		)
Equity method investees	39			(15		)
Net amortization of investments	(47		)	(30		)
Depreciation and amortization	36			41
Changes in:
Receivables, net	(135		)	(587		)
Accrued investment income	(7		)	15
Deferred acquisition costs	(47		)	(43		)
Insurance reserves	203			563
Other, net	(164		)	(142		)
Net cash flows provided by operating activities	514			354
Cash Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales	3,858			4,781
Fixed maturity securities - maturities, calls and redemptions	1,374			1,306
Equity securities	117			25
Limited partnerships	297			93
Mortgage loans	70			68
Purchases:
Fixed maturity securities	(4,896		)	(5,608		)
Equity securities	(88		)	(127		)
Limited partnerships	(139		)	(72		)
Mortgage loans	(147		)	(94		)
Change in other investments	(4		)	(6		)
Change in short term investments	(211		)	135
Purchases of property and equipment	(14		)	(76		)
Other, net	16			14
Net cash flows provided by investing activities	233			439
Cash Flows from Financing Activities
Dividends paid to common stockholders	(738		)	(706		)
Proceeds from the issuance of debt	496			—
Repayment of debt	(520		)	(150		)
Purchase of treasury stock	(16		)	—
Other, net	(10		)	1
Net cash flows used by financing activities	(788		)	(855		)
Effect of foreign exchange rate changes on cash	2			(5		)
Net change in cash	(39		)	(67		)
Cash, beginning of year	310			355
Cash, end of period	$	271		$	288

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6

CNA Financial Corporation

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Common Stock
Balance, beginning of period	$	683		$	683		$	683		$	683
Balance, end of period	683			683			683			683
Additional Paid-in Capital
Balance, beginning of period	2,184			2,173			2,192			2,175
Stock-based compensation	6			6			(2		)	4
Balance, end of period	2,190			2,179			2,190			2,179
Retained Earnings
Balance, beginning of period	8,976			9,028			9,277			9,364
Dividends to common stockholders ($0.35, $0.30, $2.70 and $2.60 per share)	(95		)	(82		)	(738		)	(709		)
Net income	278			270			620			561
Balance, end of period	9,159			9,216			9,159			9,216
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	(324		)	(400		)	(878		)	16
Other comprehensive income (loss)	444			(205		)	998			(621		)
Balance, end of period	120			(605		)	120			(605		)
Treasury Stock
Balance, beginning of period	(64		)	(59		)	(57		)	(60		)
Stock-based compensation	1			1			8			2
Purchase of treasury stock	(2		)	—			(16		)	—
Balance, end of period	(65		)	(58		)	(65		)	(58		)
Total stockholders' equity	$	12,087		$	11,415		$	12,087		$	11,415

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

7

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% of the outstanding common stock of CNAF as of June 30, 2019.

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, 2018, 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 June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 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)

ASU 2016-02: In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet assets and liabilities for the rights and obligations created by the majority of leases, including those historically accounted for as operating leases. On January 1, 2019, the Company adopted the updated guidance using a modified retrospective method. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. The Company utilized the package of practical expedients allowing the Company to not reassess whether a contract is or contains a lease, lease classification and initial direct costs. The Company also utilized the practical expedient to not separate lease and non-lease components for all leases.

Adoption of the updated guidance resulted in the following changes to the Condensed Consolidated Balance Sheet on January 1, 2019:

(In millions)	Balance as of December 31, 2018		Adjustments Due to Adoption of Topic 842		Balance as of January 1, 2019
Property and equipment at cost (less accumulated depreciation)	$	324	$	2	$	326
Other assets	1,208		237		1,445
Other liabilities	3,089		239		3,328

As of January 1, 2019, operating lease right-of-use (ROU) assets, included within Other assets, were reduced by accrued rent and lease incentives of $75 million previously classified as Other liabilities. The updated guidance did not impact the Condensed Consolidated Statements of Operations. See Note K to the Condensed Consolidated Financial Statements for additional information regarding leases.

8

Accounting Standards Pending Adoption

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement 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 net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The guidance will be applied using a modified retrospective approach with the cumulative effect recognized as an adjustment to retained earnings. A prospective transition approach is required for debt securities that have recognized an other-than-temporary impairment prior to the effective date. The Company is currently evaluating the effect the guidance will have on the Company's financial statements. The primary changes will be the use of the expected credit loss model for its mortgage loan portfolio, reinsurance and insurance receivables and other financing receivables and the use of the allowance method rather than the write-down method for credit losses within the available-for-sale fixed maturities portfolio. The expected credit loss model will require a financial asset to be presented at the ultimate net amount expected to be collected over the term of the asset. 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 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.  The guidance requires entities to annually update cash flow assumptions, including morbidity and persistency, and update discount rate assumptions quarterly using an upper-medium grade fixed-income instrument yield.  The effect of changes in cash flow assumptions will be recorded in Net income and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2020; however the FASB has proposed a one year deferral of the effective date. The guidance requires restatement of the prior periods presented. Early adoption is permitted. The Company is currently evaluating the method and timing of adoption and the effect the updated guidance will have on its financial statements. The annual updating of cash flow assumptions is expected to increase income statement volatility. The quarterly change in discount rate is expected to increase volatility in the Company’s stockholders' equity, but that will be somewhat mitigated because Shadow Adjustments are eliminated under the new guidance. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows are unchanged.

9

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 impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

For the three and six months ended June 30, 2019, approximately 776 thousand and 872 thousand 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 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 effect would have been antidilutive.

For the three and six months ended June 30, 2018, approximately 835 thousand and 929 thousand 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, approximately 445 thousand and 2 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 effect would have been antidilutive.

The Company repurchased 365,695 shares of CNA Financial Corporation common stock at an aggregate cost of $16 million during the six months ended June 30, 2019. No repurchases were made during 2018.

10

Note C. Investments

The significant components of Net investment income are presented in the following table.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Fixed maturity securities	$	455		$	444		$	910		$	890
Equity securities	16			12			46			22
Limited partnership investments	37			40			113			70
Mortgage loans	12			14			24			25
Short term investments	9			6			19			12
Trading portfolio	2			3			4			5
Other	—			3			2			3
Gross investment income	531			522			1,118			1,027
Investment expense	(16		)	(16		)	(32		)	(31		)
Net investment income	$	515		$	506		$	1,086		$	996

During the three and six months ended June 30, 2019, $4 million and $21 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2019. During the three and six months ended June 30, 2018, $2 million and $1 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2018.

Net investment gains (losses) are presented in the following table.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Net investment gains (losses):
Fixed maturity securities:
Gross gains	$	28		$	37		$	64		$	106
Gross losses	(31		)	(33		)	(73		)	(84		)
Net investment gains (losses) on fixed maturity securities	(3		)	4			(9		)	22
Equity securities	11			(10		)	53			(25		)
Derivatives	(6		)	4			(11		)	9
Short term investments and other	(20		)	1			(20		)	5
Net investment gains (losses)	$	(18	)	$	(1	)	$	13		$	11

During the three and six months ended June 30, 2019, $11 million and $53 million of Net investment gains were recognized due to the change in fair value of non-redeemable preferred stock still held as of June 30, 2019. During the three and six months ended June 30, 2018, $10 million and $25 million of Net investment losses were recognized due to the change in fair value of non-redeemable preferred stock still held as of June 30, 2018. Net investment gains (losses) for the three and six months ended June 30, 2019 included a $21 million loss related to the second quarter 2019 redemption of the Company's $500 million senior notes due August 2020.

The components of Other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.

Periods ended June 30	Three Months				Six Months
(In millions)	2019		2018		2019		2018
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	6	$	—	$	12	$	5
Asset-backed	—		—		8		1
OTTI losses recognized in earnings	$	6	$	—	$	20	$	6

11

The following tables present a summary of fixed maturity securities.

June 30, 2019	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	$	19,654	$	1,880	$	44	$	21,490	$	—
States, municipalities and political subdivisions	9,196		1,507		—		10,703		—
Asset-backed:
Residential mortgage-backed	4,668		131		2		4,797		(24		)
Commercial mortgage-backed	2,032		93		4		2,121		—
Other asset-backed	1,865		40		7		1,898		(2		)
Total asset-backed	8,565		264		13		8,816		(26		)
U.S. Treasury and obligations of government-sponsored enterprises	118		5		—		123		—
Foreign government	480		17		—		497		—
Redeemable preferred stock	10		—		—		10		—
Total fixed maturity securities available-for-sale	38,023		3,673		57		41,639		$	(26	)
Total fixed maturity securities trading	—		—		—		—
Total fixed maturity securities	$	38,023	$	3,673	$	57	$	41,639

December 31, 2018	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	$	18,764	$	791	$	395	$	19,160	$	—
States, municipalities and political subdivisions	9,681		1,076		9		10,748		—
Asset-backed:
Residential mortgage-backed	4,815		68		57		4,826		(20		)
Commercial mortgage-backed	2,200		28		32		2,196		—
Other asset-backed	1,975		11		24		1,962		—
Total asset-backed	8,990		107		113		8,984		(20		)
U.S. Treasury and obligations of government-sponsored enterprises	156		3		—		159		—
Foreign government	480		5		4		481		—
Redeemable preferred stock	10		—		—		10		—
Total fixed maturity securities available-for-sale	38,081		1,982		521		39,542		$	(20	)
Total fixed maturity securities trading	4		—		—		4
Total fixed maturity securities	$	38,085	$	1,982	$	521	$	39,546

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group segment would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of June 30, 2019 and December 31, 2018, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,816 million and $1,078 million.

12

The following tables present the estimated fair value and gross unrealized losses of fixed maturity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.

	Less than 12 Months				12 Months or Longer				Total
June 30, 2019	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	$	776	$	22	$	498	$	22	$	1,274	$	44
States, municipalities and political subdivisions	19		—		2		—		21		—
Asset-backed:
Residential mortgage-backed	163		—		134		2		297		2
Commercial mortgage-backed	58		2		69		2		127		4
Other asset-backed	386		5		77		2		463		7
Total asset-backed	607		7		280		6		887		13
U.S. Treasury and obligations of government-sponsored enterprises	—		—		4		—		4		—
Foreign government	3		—		11		—		14		—
Total	$	1,405	$	29	$	795	$	28	$	2,200	$	57

	Less than 12 Months				12 Months or Longer				Total
December 31, 2018	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	$	8,543	$	340	$	825	$	55	$	9,368	$	395
States, municipalities and political subdivisions	517		8		5		1		522		9
Asset-backed:
Residential mortgage-backed	1,932		23		1,119		34		3,051		57
Commercial mortgage-backed	728		10		397		22		1,125		32
Other asset-backed	834		21		125		3		959		24
Total asset-backed	3,494		54		1,641		59		5,135		113
U.S. Treasury and obligations of government-sponsored enterprises	21		—		19		—		40		—
Foreign government	114		2		124		2		238		4
Total	$	12,689	$	404	$	2,614	$	117	$	15,303	$	521

13

Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2019 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of June 30, 2019.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of June 30, 2019 and 2018 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Beginning balance of credit losses on fixed maturity securities	$	17		$	25		$	18		$	27
Reductions for securities sold during the period	(1		)	(4		)	(2		)	(6		)
Ending balance of credit losses on fixed maturity securities	$	16		$	21		$	16		$	21

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity.

	June 30, 2019				December 31, 2018
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,018	$	1,032	$	1,350	$	1,359
Due after one year through five years	8,097		8,476		7,979		8,139
Due after five years through ten years	16,403		17,297		16,859		16,870
Due after ten years	12,505		14,834		11,893		13,174
Total	$	38,023	$	41,639	$	38,081	$	39,542

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 $172 million as of June 30, 2019 and December 31, 2018 and a fair value of $(8) million and $4 million as of June 30, 2019 and December 31, 2018. 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 its overall investment strategy, the Company invests in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to privately placed debt securities.  As of June 30, 2019, the Company had commitments to purchase or fund approximately $875 million and sell approximately $85 million under the terms of these investments.

14

Note 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, 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.

15

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.

June 30, 2019							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate bonds and other	$	152	$	21,630	$	338	$	22,120
States, municipalities and political subdivisions	—		10,703		—		10,703
Asset-backed	—		8,623		193		8,816
Total fixed maturity securities	152		40,956		531		41,639
Equity securities:
Common stock	129		—		6		135
Non-redeemable preferred stock	51		628		16		695
Total equity securities	180		628		22		830
Short term and other	359		1,052		—		1,411
Total assets	$	691	$	42,636	$	553	$	43,880
Liabilities
Other liabilities	$	—	$	8	$	—	$	8
Total liabilities	$	—	$	8	$	—	$	8

December 31, 2018								Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2			Level 3
Assets
Fixed maturity securities:
Corporate bonds and other	$	196	$	19,396		$	222	$	19,814
States, municipalities and political subdivisions	—		10,748			—		10,748
Asset-backed	—		8,787			197		8,984
Total fixed maturity securities	196		38,931			419		39,546
Equity securities:
Common stock	144		—			4		148
Non-redeemable preferred stock	48		570			14		632
Total equity securities	192		570			18		780
Short term and other	216		949			—		1,165
Total assets	$	604	$	40,450		$	437	$	41,491
Liabilities
Other liabilities	$	—	$	(4	)	$	—	$	(4	)
Total liabilities	$	—	$	(4	)	$	—	$	(4	)

16

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 April 1, 2019	$	253		$	—	$	184		$	20	$	457
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—		—			—		—
Reported in Other comprehensive income (loss)	12			—		4			—		16
Total realized and unrealized investment gains (losses)	12			—		4			—		16
Purchases	76			—		—			2		78
Sales	—			—		—			—		—
Settlements	(2		)	—		(4		)	—		(6		)
Transfers into Level 3	—			—		40			—		40
Transfers out of Level 3	(1		)	—		(31		)	—		(32		)
Balance as of June 30, 2019	$	338		$	—	$	193		$	22	$	553
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Net income (loss)	$	—		$	—	$	—		$	—	$	—
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Other comprehensive income (loss)	10			—		5			—		15

Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities			Total
Balance as of April 1, 2018	$	100		$	1	$	279		$	18		$	398
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—		—			(1		)	(1		)
Reported in Other comprehensive income (loss)	(1		)	—		(1		)	—			(2		)
Total realized and unrealized investment gains (losses)	(1		)	—		(1		)	(1		)	(3		)
Purchases	2			—		41			—			43
Sales	(5		)	—		—			—			(5		)
Settlements	(2		)	—		(6		)	—			(8		)
Transfers into Level 3	—			—		13			—			13
Transfers out of Level 3	—			—		(53		)	—			(53		)
Balance as of June 30, 2018	$	94		$	1	$	273		$	17		$	385
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2018 recognized in Net income (loss)	$	—		$	—	$	—		$	(1	)	$	(1	)

17

Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities		Total
Balance as of January 1, 2019	$	222		$	—	$	197		$	18	$	437
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—		—			2		2
Reported in Other comprehensive income (loss)	20			—		7			—		27
Total realized and unrealized investment gains (losses)	20			—		7			2		29
Purchases	132			—		20			2		154
Sales	—			—		—			—		—
Settlements	(4		)	—		(8		)	—		(12		)
Transfers into Level 3	—			—		45			—		45
Transfers out of Level 3	(32		)	—		(68		)	—		(100		)
Balance as of June 30, 2019	$	338		$	—	$	193		$	22	$	553
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Net income (loss)	$	—		$	—	$	—		$	3	$	3
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Other comprehensive income (loss)	17			—		8			—		25

Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities			Total
Balance as of January 1, 2018	$	98		$	1	$	335		$	20		$	454
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	(1		)	—		7			(3		)	3
Reported in Other comprehensive income (loss)	(1		)	—		(6		)	—			(7		)
Total realized and unrealized investment gains (losses)	(2		)	—		1			(3		)	(4		)
Purchases	2			—		71			—			73
Sales	(5		)	—		(72		)	—			(77		)
Settlements	(4		)	—		(12		)	—			(16		)
Transfers into Level 3	5			—		13			—			18
Transfers out of Level 3	—			—		(63		)	—			(63		)
Balance as of June 30, 2018	$	94		$	1	$	273		$	17		$	385
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2018 recognized in Net income (loss)	$	—		$	—	$	—		$	(3	)	$	(3	)

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.

18

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 and exchange traded bonds, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.

Short Term and Other Invested Assets

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

As of June 30, 2019 and December 31, 2018, there were approximately $53 million and $48 million of overseas deposits within other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.

Derivative Financial Investments

Level 2 investments primarily include the embedded derivative on the funds withheld liability. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs.

19

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 weighted average rate is calculated based on fair value.

June 30, 2019	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	381	Discounted cash flow	Credit spread	1% - 5% (2%)

December 31, 2018	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	228	Discounted cash flow	Credit spread	1% - 12% (3%)

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.

June 30, 2019	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	916	$	—	$	—	$	936	$	936
Note receivable	20		—		—		20		20
Liabilities
Long term debt	$	2,678	$	—	$	2,864	$	—	$	2,864

December 31, 2018	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	839	$	—	$	—	$	827	$	827
Note receivable	35		—		—		35		35
Liabilities
Long term debt	$	2,680	$	—	$	2,731	$	—	$	2,731

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 note receivable is included within Other assets on the Condensed Consolidated Balance Sheets.

The Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.

The carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Short term investments not carried at fair value, Accrued investment income and certain Other assets and Other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the tables above.

20

Note E. Claim and Claim Adjustment Expense Reserves

Property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to 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 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 our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $38 million and $96 million for the three and six months ended June 30, 2019. The Company reported catastrophe losses, net of reinsurance, of $26 million and $60 million for the three and six months ended June 30, 2018. Net catastrophe losses in 2019 and 2018 related primarily to U.S. weather related events.

21

Liability for Unpaid Claim and Claim Adjustment Expenses

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 segment.

For the six months ended June 30
(In millions)	2019			2018
Reserves, beginning of year:
Gross	$	21,984		$	22,004
Ceded	4,019			3,934
Net reserves, beginning of year	17,965			18,070
Net incurred claim and claim adjustment expenses:
Provision for insured events of current year	2,615			2,552
Increase (decrease) in provision for insured events of prior years	(36		)	(112		)
Amortization of discount	98			92
Total net incurred (1)	2,677			2,532
Net payments attributable to:
Current year events	(315		)	(312		)
Prior year events	(2,519		)	(2,387		)
Total net payments	(2,834		)	(2,699		)
Foreign currency translation adjustment and other	55			(70		)
Net reserves, end of period	17,863			17,833
Ceded reserves, end of period	3,866			4,157
Gross reserves, end of period	$	21,729		$	21,990

(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 claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Specialty	$	(18	)	$	(44	)	$	(38	)	$	(74	)
Commercial	(12		)	(13		)	(20		)	(22		)
International	(1		)	(2		)	13			(2		)
Corporate & Other	—			—			—			—
Total pretax (favorable) unfavorable development	$	(31	)	$	(59	)	$	(45	)	$	(98	)

22

Specialty

The following table presents further detail of the development recorded for the Specialty segment.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Medical Professional Liability	$	15		$	3		$	30		$	23
Other Professional Liability and Management Liability	(7		)	(34		)	(19		)	(68		)
Surety	(15		)	(15		)	(40		)	(30		)
Warranty	(7		)	(6		)	(7		)	(6		)
Other	(4		)	8			(2		)	7
Total pretax (favorable) unfavorable development	$	(18	)	$	(44	)	$	(38	)	$	(74	)

Three Months

2019

Favorable development in surety was due to lower than expected frequency for accident years 2015 and 2016.

Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in our dentists business.

2018

Favorable development in other professional liability and management liability was primarily in professional liability errors and omissions (E&O) reflecting lower than expected claim frequency in accident years 2014 through 2016 and favorable severity for accident years 2012 and prior.

Favorable development in surety was driven by continued lower than expected loss emergence on accident years 2015 and prior. 

Six Months

2019

Favorable development in surety was due to lower than expected frequency for accident years 2016 and prior.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency and favorable outcomes on individual claims in accident years 2017 and prior related to financial institutions.

Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident year 2013 in our allied healthcare business, unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in our dentists business.

2018

Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in our hospitals business.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency for accident years 2013 through 2017 related to financial institutions. Additional favorable development was in professional liability errors and omissions (E&O) reflecting lower than expected claim frequency in accident years 2014 through 2016 and favorable severity for accident years 2012 and prior.

Favorable development in surety was due to continued lower than expected loss emergence for accident years 2015 and prior.

23

Commercial

The following table presents further detail of the development recorded for the Commercial segment.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Commercial Auto	$	(3	)	$	—		$	(8	)	$	(1	)
General Liability	13			26			(7		)	18
Workers' Compensation	(7		)	(6		)	(5		)	(12		)
Property and Other	(15		)	(33		)	—			(27		)
Total pretax (favorable) unfavorable development	$	(12	)	$	(13	)	$	(20	)	$	(22	)

Three Months

2019

Favorable development in property and other was primarily due to continued lower than expected claim severity from catastrophes in accident year 2017.

Unfavorable development in general liability was primarily due to higher than expected large loss experience in our excess and umbrella business in accident year 2017.

2018

Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015. 

Favorable development in property and other was driven by lower than expected claim severity from catastrophes in accident year 2017.

Six Months

2019

Favorable development in general liability was primarily due to lower than expected frequency on latent construction defect claims across multiple accident years. This was partially offset by unfavorable development due to higher than expected large loss experience in our excess and umbrella business in accident year 2017.

2018

Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015. 

Favorable development in property and other was driven by lower than expected claim severity from catastrophes in accident year 2017.

24

International

The following table presents further detail of the development recorded for the International segment.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Casualty	$	(5	)	$	(6	)	$	(5	)	$	(6	)
Property	(4		)	13			11			12
Energy and Marine	9			(5		)	8			(5		)
Specialty (1)	(1		)	(4		)	(1		)	(3		)
Total pretax (favorable) unfavorable development	$	(1	)	$	(2	)	$	13		$	(2	)

(1) Effective January 1, 2019 the Healthcare and Technology line of business has been absorbed within the Specialty line of business in the International segment. Prior period information has been conformed to the new line of business presentation.

Three Months

2019

Unfavorable development in energy and marine was primarily due to adverse attritional experience and increased frequency of large losses in accident year 2018.

2018

Unfavorable development in property was primarily driven by higher than expected severity in Canada and higher than expected frequency in Hardy, both in accident year 2017.

Favorable development in specialty was primarily driven by lower than expected frequency in accident years 2015 and prior related to healthcare in Europe, partially offset by unfavorable development arising from increased severity for professional indemnity in accident year 2017.

Six Months

2019

Unfavorable development in property was driven by higher than expected claims in Hardy on 2018 accident year catastrophes.

2018

The drivers of development for the six month period were consistent with the three month summary above.

25

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.

In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $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 affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits on the Condensed Consolidated Statements of Operations.

The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Additional amounts ceded under LPT:
Net A&EP adverse development before consideration of LPT	$	—		$	—		$	—		$	113
Provision for uncollectible third-party reinsurance on A&EP	—			—			—			(16		)
Total additional amounts ceded under LPT	—			—			—			97
Retroactive reinsurance benefit recognized	(14		)	(15		)	(36		)	(72		)
Pretax impact of deferred retroactive reinsurance	$	(14	)	$	(15	)	$	(36	)	$	25

The Company intends to complete its annual A&EP reserve review in the fourth quarter of 2019 and maintain this timing for all future annual A&EP reserve reviews. The Company completed A&EP reserve reviews in both the first and fourth quarters of 2018. Based upon the Company's 2018 first quarter A&EP reserve review, net unfavorable prior year development of $113 million was recognized before consideration of cessions to the LPT for the six months ended June 30, 2018. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos and environmental accounts and paid losses on assumed reinsurance exposures. Additionally, in 2018, the Company released a portion of its provision for uncollectible third-party reinsurance.

As of June 30, 2019 and December 31, 2018, the cumulative amounts ceded under the LPT were $3.1 billion. The unrecognized deferred retroactive reinsurance benefit was $338 million and $374 million as of June 30, 2019 and December 31, 2018 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 $3.1 billion and $2.7 billion as of June 30, 2019 and December 31, 2018. 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.

26

Note F. Legal Proceedings, Contingencies and Guarantees

The Company is a party to various claims and routine litigation incidental to its business, which, based on the facts and circumstances currently known, are not material to the Company's results of operations or financial position.

Guarantees

As of June 30, 2019 and December 31, 2018, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements and management does not believe 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 indemnified purchasers for certain losses, some of which are not limited by a contractual monetary amount. As of June 30, 2019, the Company had outstanding unlimited indemnifications 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 also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of June 30, 2019, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.7 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.

27

Note G. Benefit Plans

The components of net periodic pension cost (benefit) are presented in the following table.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Net periodic pension cost (benefit)
Service cost	$	—		$	—		$	—		$	—
Non-service cost (benefit):
Interest cost on projected benefit obligation	25			24			50			47
Expected return on plan assets	(35		)	(40		)	(71		)	(80		)
Amortization of net actuarial (gain) loss	10			9			20			18
Settlement loss	—			1			—			5
Total non-service cost (benefit)	—			(6		)	(1		)	(10		)
Total net periodic pension cost (benefit)	$	—		$	(6	)	$	(1	)	$	(10	)

For the three and six months ended June 30, 2019, the Company recognized less than $1 million of non-service benefit in Insurance claims and policyholders' benefits and less than $1 million and $1 million of non-service benefit in Other operating expenses.

For the three and six months ended June 30, 2018, the Company recognized $2 million and $3 million of non-service cost in Insurance claims and policyholders' benefits and $4 million and $7 million of non-service cost in Other operating expenses.

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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 OTTI losses			Net unrealized gains (losses) on other investments			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance as of April 1, 2019	$	20		$	587		$	(768	)	$	(163	)	$	(324	)
Other comprehensive income (loss) before reclassifications	(1		)	434			—			—			433
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $-, $2, $- and $2	(1		)	(2		)	(8		)	—			(11		)
Other comprehensive income (loss) net of tax (expense) benefit of $(1), $(114), $(2), $- and $(117)	—			436			8			—			444
Balance as of June 30, 2019	$	20		$	1,023		$	(760	)	$	(163	)	$	120

(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 April 1, 2018	$	21		$	430		$	(765	)	$	(86	)	$	(400	)
Other comprehensive income (loss) before reclassifications	(1		)	(156		)	—			(52		)	(209		)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(1), $2, $- and $1	—			3			(7		)	—			(4		)
Other comprehensive income (loss) net of tax (expense) benefit of $1, $46, $(2), $- and $45	(1		)	(159		)	7			(52		)	(205		)
Balance as of June 30, 2018	$	20		$	271		$	(758	)	$	(138	)	$	(605	)

29

(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, 2019	$	16		$	61		$	(775	)	$	(180	)	$	(878	)
Other comprehensive income (loss) before reclassifications	3			955			(1		)	17			974
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $1, $4, $- and $5	(1		)	(7		)	(16		)	—			(24		)
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(255), $(4), $- and $(261)	4			962			15			17			998
Balance as of June 30, 2019	$	20		$	1,023		$	(760	)	$	(163	)	$	120

(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, 2018	$	30		$	859		$	(775	)	$	(98	)	$	16
Other comprehensive income (loss) before reclassifications	(11		)	(570		)	—			(40		)	(621		)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(5), $5, $- and $-	(1		)	18			(17		)	—			—
Other comprehensive income (loss) net of tax (expense) benefit of $3, $155, $(5), $- and $153	(10		)	(588		)	17			(40		)	(621		)
Balance as of June 30, 2018	$	20		$	271		$	(758	)	$	(138	)	$	(605	)

Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:

Component of AOCI	Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with OTTI losses	Net investment gains (losses)
Net unrealized gains (losses) on other investments	Net investment gains (losses)
Pension and postretirement benefits	Other operating expenses and Insurance claims and policyholders' benefits

30

Note I. Business Segments

The Company's 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 operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.

The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2018. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only Insurance and Reinsurance receivables, Insurance reserves, Deferred acquisition costs, Goodwill and Deferred non-insurance warranty acquisition expense and revenue are readily identifiable for individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of Net investment income and Net investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense have been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.

In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio.

The performance of the Company's insurance operations is monitored by management through core income (loss), which is derived from certain income statement amounts. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk.

Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net investment gains (losses), ii) income or loss from discontinued operations, iii) any cumulative effects of changes in accounting guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.

31

The Company's results of operations and selected balance sheet items by segment are presented in the following tables.

Three months ended June 30, 2019	Specialty			Commercial			International			Life & Group			Corporate & Other			Eliminations			Total
(In millions)
Operating revenues
Net earned premiums	$	688		$	763		$	243		$	130		$	—		$	—		$	1,824
Net investment income	134			154			15			205			7			—			515
Non-insurance warranty revenue	285			—			—			—			—			—			285
Other revenues	(1		)	3			1			—			2			(1		)	4
Total operating revenues	1,106			920			259			335			9			(1		)	2,628
Claims, benefits and expenses
Net incurred claims and benefits	395			507			147			309			(12		)	—			1,346
Policyholders’ dividends	1			5			—			—			—			—			6
Amortization of deferred acquisition costs	152			130			56			—			—			—			338
Non-insurance warranty expense	263			—			—			—			—			—			263
Other insurance related expenses	76			119			34			30			(1		)	—			258
Other expenses	12			7			3			2			34			(1		)	57
Total claims, benefits and expenses	899			768			240			341			21			(1		)	2,268
Core income (loss) before income tax	207			152			19			(6		)	(12		)	—			360
Income tax (expense) benefit on core income (loss)	(46		)	(32		)	(2		)	13			1			—			(66		)
Core income (loss)	$	161		$	120		$	17		$	7		$	(11	)	$	—		294
Net investment gains (losses)																			(18		)
Income tax (expense) benefit on net investment gains (losses)																			2
Net investment gains (losses), after tax																			(16		)
Net income																			$	278

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Three months ended June 30, 2018	Specialty			Commercial			International			Life & Group			Corporate & Other			Eliminations		Total
(In millions)
Operating revenues
Net earned premiums	$	683		$	753		$	248		$	131		$	—		$	—	$	1,815
Net investment income	130			157			15			198			6			—		506
Non-insurance warranty revenue	248			—			—			—			—			—		248
Other revenues	—			8			(1		)	—			(1		)	—		6
Total operating revenues	1,061			918			262			329			5			—		2,575
Claims, benefits and expenses
Net incurred claims and benefits	372			470			166			327			(14		)	—		1,321
Policyholders’ dividends	1			5			—			—			—			—		6
Amortization of deferred acquisition costs	149			127			83			—			—			—		359
Non-insurance warranty expense	225			—			—			—			—			—		225
Other insurance related expenses	70			126			10			30			—			—		236
Other expenses	12			10			7			1			67			—		97
Total claims, benefits and expenses	829			738			266			358			53			—		2,244
Core income (loss) before income tax	232			180			(4		)	(29		)	(48		)	—		331
Income tax (expense) benefit on core income (loss)	(49		)	(37		)	(3		)	19			9			—		(61		)
Core income (loss)	$	183		$	143		$	(7	)	$	(10	)	$	(39	)	$	—	270
Net investment gains (losses)																		(1		)
Income tax (expense) benefit on net investment gains (losses)																		1
Net investment gains (losses), after tax																		—
Net income																		$	270

33

Six months ended June 30, 2019	Specialty			Commercial			International			Life & Group			Corporate & Other			Eliminations			Total
(In millions)
Operating revenues
Net earned premiums	$	1,349		$	1,526		$	493		$	260		$	—		$	(1	)	$	3,627
Net investment income	289			344			30			409			14			—			1,086
Non-insurance warranty revenue	566			—			—			—			—			—			566
Other revenues	—			10			1			1			4			(3		)	13
Total operating revenues	2,204			1,880			524			670			18			(4		)	5,292
Claims, benefits and expenses
Net incurred claims and benefits	787			1,017			309			617			(33		)	—			2,697
Policyholders’ dividends	2			10			—			—			—			—			12
Amortization of deferred acquisition costs	299			257			124			—			—			—			680
Non-insurance warranty expense	523			—			—			—			—			—			523
Other insurance related expenses	146			249			59			58			(2		)	(1		)	509
Other expenses	24			18			7			4			73			(3		)	123
Total claims, benefits and expenses	1,781			1,551			499			679			38			(4		)	4,544
Core income (loss) before income tax	423			329			25			(9		)	(20		)	—			748
Income tax (expense) benefit on core income (loss)	(93		)	(70		)	(2		)	26			3			—			(136		)
Core income (loss)	$	330		$	259		$	23		$	17		$	(17	)	$	—		612
Net investment gains (losses)																			13
Income tax (expense) benefit on net investment gains (losses)																			(5		)
Net investment gains (losses), after tax																			8
Net income																			$	620

June 30, 2019
(In millions)
Reinsurance receivables	$	696	$	766	$	242	$	399	$	2,160	$	—		$	4,263
Insurance receivables	1,002		1,362		318		7		1		—			2,690
Deferred acquisition costs	316		264		101		—		—		—			681
Goodwill	117		—		29		—		—		—			146
Deferred non-insurance warranty acquisition expense	2,678		—		—		—		—		—			2,678
Insurance reserves
Claim and claim adjustment expenses	5,396		8,580		1,800		3,710		2,243		—			21,729
Unearned premiums	2,261		1,721		534		133		—		(1		)	4,648
Future policy benefits	—		—		—		11,537		—		—			11,537
Deferred non-insurance warranty revenue	3,595		—		—		—		—		—			3,595

34

Six months ended June 30, 2018	Specialty			Commercial			International			Life & Group			Corporate & Other			Eliminations			Total
(In millions)
Operating revenues
Net earned premiums	$	1,355		$	1,496		$	484		$	265		$	—		$	—		$	3,600
Net investment income	252			306			29			398			11			—			996
Non-insurance warranty revenue	486			—			—			—			—			—			486
Other revenues	1			16			(1		)	1			—			(1		)	16
Total operating revenues	2,094			1,818			512			664			11			(1		)	5,098
Claims, benefits and expenses
Net incurred claims and benefits	751			938			308			630			27			—			2,654
Policyholders’ dividends	2			10			—			—			—			—			12
Amortization of deferred acquisition costs	294			248			113			—			—			—			655
Non-insurance warranty expense	441			—			—			—			—			—			441
Other insurance related expenses	134			253			66			60			—			—			513
Other expenses	23			21			3			3			109			(1		)	158
Total claims, benefits and expenses	1,645			1,470			490			693			136			(1		)	4,433
Core income (loss) before income tax	449			348			22			(29		)	(125		)	—			665
Income tax (expense) benefit on core income (loss)	(95		)	(72		)	(6		)	33			26			—			(114		)
Core income (loss)	$	354		$	276		$	16		$	4		$	(99	)	$	—		551
Net investment gains (losses)																			11
Income tax (expense) benefit on net investment gains (losses)																			(1		)
Net investment gains (losses), after tax																			10
Net income																			$	561

December 31, 2018
(In millions)
Reinsurance receivables	$	649	$	795	$	250	$	414	$	2,347		$	—	$	4,455
Insurance receivables	947		1,277		284		9		(152		)	—		2,365
Deferred acquisition costs	308		230		95		—		—			—		633
Goodwill	117		—		29		—		—			—		146
Deferred non-insurance warranty acquisition expense	2,513		—		—		—		—			—		2,513
Insurance reserves
Claim and claim adjustment expenses	5,465		8,743		1,750		3,601		2,425			—		21,984
Unearned premiums	2,132		1,454		475		122		—			—		4,183
Future policy benefits	—		—		—		10,597		—			—		10,597
Deferred non-insurance warranty revenue	3,402		—		—		—		—			—		3,402

35

The following table presents operating revenue by line of business for each reportable segment.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Specialty
Management & Professional Liability	$	629		$	627		$	1,265		$	1,251
Surety	151			145			290			274
Warranty & Alternative Risks	326			289			649			569
Specialty revenues	1,106			1,061			2,204			2,094
Commercial
Middle Market	545			521			1,092			1,025
Small Business	115			120			236			239
Other Commercial Insurance	260			277			552			554
Commercial revenues	920			918			1,880			1,818
International
Canada	68			63			134			121
Europe	88			91			179			179
Hardy	103			108			211			212
International revenues	259			262			524			512
Life & Group revenues	335			329			670			664
Corporate & Other revenues	9			5			18			11
Eliminations	(1		)	—			(4		)	(1		)
Total operating revenues	2,628			2,575			5,292			5,098
Net investment gains (losses)	(18		)	(1		)	13			11
Total revenues	$	2,610		$	2,574		$	5,305		$	5,109

36

Note J. Non-Insurance Revenues from Contracts with Customers

The Company had deferred non-insurance warranty revenue balances of $3.6 billion and $3.4 billion reported in Deferred non-insurance warranty revenue as of June 30, 2019 and December 31, 2018. For the three and six months ended June 30, 2019, the Company recognized $246 million and $511 million of revenues that were included in the deferred revenue balance as of January 1, 2019. For the three and six months ended June 30, 2018, the Company recognized $213 million and $435 million of revenues that were included in the deferred revenue balance as of January 1, 2018. For the three and six months ended June 30, 2019 and 2018, 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 $530 million of the deferred revenue in the remainder of 2019, $927 million in 2020, $746 million in 2021 and $1.4 billion thereafter.

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Note K. Leases

A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease ROU assets and lease liabilities are included in Other assets and Other liabilities on the Company's Condensed Consolidated Balance Sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. Certain leases contain options to terminate before maturity. The lease term used to calculate the ROU asset includes any renewal options or lease termination that the Company expects to exercise. The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company's lease agreements do not contain significant residual value guarantees, restrictions or covenants.

The Company occupies office facilities under lease agreements that expire at various dates. In addition, data processing, office and transportation equipment is leased under agreements that expire at various dates. The Company’s leases generally include lease and non-lease components, which the Company has elected to account for as a single lease component. Variable lease costs not based on an index or rate consist of non-lease components, which are being accounted for as lease components, and represent charges for services provided by the landlord and our reimbursement for the landlord’s costs, including real estate taxes and insurance. The Company does not have any significant finance leases.

Operating lease cost was $9 million and $19 million for the three and six months ended June 30, 2019. Variable lease cost was $4 million and $8 million for the three and six months ended June 30, 2019. Cash paid for amounts included in operating lease liabilities was $9 million and $17 million for the three and six months ended June 30, 2019.

The following table presents operating lease ROU assets and lease liabilities.

(In millions)	June 30, 2019
Operating lease ROU assets	$	223
Operating lease liabilities	301

The following table presents the maturities of operating lease liabilities as of June 30, 2019.

(In millions)	Operating Leases
2019 (Excluding the six months ended June 30, 2019)	$	15
2020	39
2021	42
2022	38
2023	33
Thereafter	202
Total lease payments	369
Less: Discount	(68		)
Total operating lease liabilities	$	301

38

The following table presents the weighted average remaining lease term for operating leases and weighted average discount rate used in calculating operating lease right-of-use assets.

	June 30, 2019
Weighted average remaining lease term	10.8 years
Weighted average discount rate	3.4	%

The following table presents the expected future minimum lease payments to be made under non-cancelable operating leases as of December 31, 2018.

(In millions)	Future Minimum Lease Payments
2019	$	35
2020	39
2021	41
2022	38
2023	32
Thereafter	200
Total	$	385

39

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.

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, 2018.

We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net investment gains or losses, ii) income or loss from discontinued operations, iii) any cumulative effects of changes in accounting guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure. 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 Specialty, Commercial and International segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. 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 in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are 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.

Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

40

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 amount of revenues and expenses reported during the period. Actual results may differ from those estimates.

Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.

The accounting estimates discussed below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment:

• Insurance Reserves

• Reinsurance and Insurance Receivables

• Valuation of Investments and Impairment of Securities

• Long Term Care Policies

• 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, 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, 2018 for further information.

41

CONSOLIDATED OPERATIONS

Results of Operations

The following table includes the consolidated results of our operations including our financial measure, core income (loss). For more detailed components of our business operations and a discussion of the core income (loss) financial measure, see the segment sections within this MD&A. For further discussion of Net investment income and Net investment results, see the Investments section of this MD&A.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Operating Revenues
Net earned premiums	$	1,824		$	1,815		$	3,627		$	3,600
Net investment income	515			506			1,086			996
Non-insurance warranty revenue	285			248			566			486
Other revenues	4			6			13			16
Total operating revenues	2,628			2,575			5,292			5,098
Claims, Benefits and Expenses
Net incurred claims and benefits	1,346			1,321			2,697			2,654
Policyholders' dividends	6			6			12			12
Amortization of deferred acquisition costs	338			359			680			655
Non-insurance warranty expense	263			225			523			441
Other insurance related expenses	258			236			509			513
Other expenses	57			97			123			158
Total claims, benefits and expenses	2,268			2,244			4,544			4,433
Core income before income tax	360			331			748			665
Income tax expense on core income	(66		)	(61		)	(136		)	(114		)
Core income	294			270			612			551
Net investment (losses) gains	(18		)	(1		)	13			11
Income tax benefit (expense) on net investment (losses) gains	2			1			(5		)	(1		)
Net investment (losses) gains, after tax	(16		)	—			8			10
Net income	$	278		$	270		$	620		$	561

Three Month Comparison

Core income increased $24 million for the three months ended June 30, 2019 as compared with the same period in 2018. Core income for our Property & Casualty Operations decreased $21 million primarily due to lower favorable net prior year loss reserve development. Core results for our Life & Group segment improved $17 million while core loss for our Corporate & Other segment improved $28 million.

Net catastrophe losses were $38 million and $26 million for the three months ended June 30, 2019 and 2018. Favorable net prior year loss reserve development of $31 million and $59 million was recorded in the three months ended June 30, 2019 and 2018 related to our Specialty, Commercial, International and Corporate & 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.

42

Six Month Comparison

Core income increased $61 million for the six months ended June 30, 2019 as compared with the same period in 2018. Core income for our Property & Casualty Operations decreased $34 million primarily due to lower underwriting income partially offset by higher net investment income driven by limited partnership and common stock returns. Core income for our Life & Group segment increased $13 million while core loss for our Corporate & Other segment improved $82 million.

Net catastrophe losses were $96 million and $60 million for the six months ended June 30, 2019 and 2018. Favorable net prior year loss reserve development of $45 million and $98 million was recorded in the six months ended June 30, 2019 and 2018 related to our Specialty, Commercial, International and Corporate & 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.

43

SEGMENT RESULTS

The following discusses the results of operations for our business segments. Our property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Our operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.

44

Specialty

The following table details the results of operations for Specialty.

Periods ended June 30	Three Months						Six Months
(In millions, except ratios, rate, renewal premium change and retention)	2019			2018			2019			2018
Net written premiums	$	713		$	688		$	1,411		$	1,374
Net earned premiums	688			683			1,349			1,355
Net investment income	134			130			289			252
Core income	161			183			330			354
Other performance metrics:
Loss and loss adjustment expense ratio	57.4		%	54.6		%	58.3		%	55.4		%
Expense ratio	33.1			32.0			33.0			31.6
Dividend ratio	0.2			0.2			0.2			0.2
Combined ratio	90.7		%	86.8		%	91.5		%	87.2		%
Rate	4		%	2		%	4		%	2		%
Renewal premium change	5			5			4			5
Retention	88			83			89			84
New business	$	97		$	93		$	183		$	173

Three Month Comparison

Net written premiums for Specialty increased $25 million for the three months ended June 30, 2019 as compared with the same period in 2018 driven by higher new business, strong retention and favorable rate. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $22 million for the three months ended June 30, 2019 as compared with the same period in 2018, driven by lower favorable net prior year loss reserve development.

The combined ratio of 90.7% increased 3.9 points for the three months ended June 30, 2019 as compared with the same period in 2018. The loss ratio increased 2.8 points primarily due to lower favorable net prior year loss reserve development. Net catastrophe losses were $1 million, or 0.1 points of the loss ratio, for the three months ended June 30, 2019, as compared to $3 million, or 0.5 points of the loss ratio, for the three months ended June 30, 2018. The expense ratio increased 1.1 points for the three months ended June 30, 2019 as compared with the same period in 2018 driven by higher employee costs and acquisition expenses.

Favorable net prior year loss reserve development of $18 million and $44 million was recorded for the three months ended June 30, 2019 and 2018. 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.

45

Six Month Comparison

Net written premiums for Specialty increased $37 million for the six months ended June 30, 2019 as compared with the same period in 2018 driven by higher new business, strong retention and favorable rate. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $24 million for the six months ended June 30, 2019 as compared with the same period in 2018, driven by lower favorable net prior year loss reserve development partially offset by higher net investment income driven by limited partnership and common stock returns.

The combined ratio of 91.5% increased 4.3 points for the six months ended June 30, 2019 as compared with the same period in 2018. The loss ratio increased 2.9 points primarily due to lower favorable net prior year loss reserve development. Net catastrophe losses were $13 million, or 1.0 points of the loss ratio, for the six months ended June 30, 2019, as compared to $6 million, or 0.5 points of the loss ratio, for the six months ended June 30, 2018. The expense ratio increased 1.4 points for the six months ended June 30, 2019 as compared with the same period in 2018 driven by higher employee costs and acquisition expenses.

Favorable net prior year loss reserve development of $38 million and $74 million was recorded for the six months ended June 30, 2019 and 2018. 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 Specialty.

(In millions)	June 30, 2019		December 31, 2018
Gross case reserves	$	1,527	$	1,623
Gross IBNR reserves	3,869		3,842
Total gross carried claim and claim adjustment expense reserves	$	5,396	$	5,465
Net case reserves	$	1,364	$	1,483
Net IBNR reserves	3,356		3,348
Total net carried claim and claim adjustment expense reserves	$	4,720	$	4,831

46

Commercial

The following table details the results of operations for Commercial.

Periods ended June 30	Three Months						Six Months
(In millions, except ratios, rate, renewal premium change and retention)	2019			2018			2019			2018
Net written premiums	$	912		$	810		$	1,761		$	1,642
Net earned premiums	763			753			1,526			1,496
Net investment income	154			157			344			306
Core income	120			143			259			276
Other performance metrics:
Loss and loss adjustment expense ratio	66.5		%	62.4		%	66.7		%	62.7		%
Expense ratio	32.6			33.5			33.2			33.4
Dividend ratio	0.6			0.7			0.6			0.7
Combined ratio	99.7		%	96.6		%	100.5		%	96.8		%
Rate	3		%	1		%	2		%	1		%
Renewal premium change	5			4			4			5
Retention	85			86			85			85
New business	$	186		$	157		$	350		$	339

Three Month Comparison

Net written premiums for Commercial increased $102 million for the three months ended June 30, 2019 as compared with the same period in 2018 driven by higher new business and favorable rate.  The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $23 million for the three months ended June 30, 2019 as compared with the same period in 2018, primarily due to higher net catastrophe losses.

The combined ratio of 99.7% increased 3.1 points for the three months ended June 30, 2019 as compared with the same period in 2018. The loss ratio increased 4.1 points driven by higher net catastrophe losses and unfavorable retrospective premium development. Net catastrophe losses were $37 million, or 4.9 points of the loss ratio, for the three months ended June 30, 2019, as compared with $19 million, or 2.5 points of the loss ratio, for the three months ended June 30, 2018. The expense ratio for the three months ended June 30, 2019 improved 0.9 points as compared with the same period in 2018 driven by lower acquisition expenses.

Favorable net prior year loss reserve development of $12 million and $13 million was recorded for the three months ended June 30, 2019 and 2018. 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.

47

Six Month Comparison

Net written premiums for Commercial increased $119 million for the six months ended June 30, 2019 as compared with the same period in 2018 driven by higher new business partially offset by a higher level of ceded reinsurance.  The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $17 million for the six months ended June 30, 2019 as compared with the same period in 2018, primarily due to unfavorable underwriting results partially offset by higher net investment income driven by limited partnership and common stock returns.

The combined ratio of 100.5% increased 3.7 points for the six months ended June 30, 2019 as compared with the same period in 2018. The loss ratio increased 4.0 points driven by the current accident year. Net catastrophe losses were $77 million, or 5.1 points of the loss ratio, for the six months ended June 30, 2019, as compared to $48 million, or 3.2 points of the loss ratio, for the six months ended June 30, 2018. The expense ratio for the six months ended June 30, 2019 improved 0.2 points as compared with the same period in 2018.

Favorable net prior year loss reserve development of $20 million and $22 million was recorded for the six months ended June 30, 2019 and 2018. 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 Commercial.

(In millions)	June 30, 2019		December 31, 2018
Gross case reserves	$	3,979	$	4,181
Gross IBNR reserves	4,601		4,562
Total gross carried claim and claim adjustment expense reserves	$	8,580	$	8,743
Net case reserves	$	3,645	$	3,831
Net IBNR reserves	4,211		4,167
Total net carried claim and claim adjustment expense reserves	$	7,856	$	7,998

48

International

The following table details the results of operations for International.

Periods ended June 30	Three Months						Six Months
(In millions, except ratios, rate, renewal premium change and retention)	2019			2018			2019			2018
Net written premiums	$	249		$	271		$	508		$	566
Net earned premiums	243			248			493			484
Net investment income	15			15			30			29
Core income (loss)	17			(7		)	23			16
Other performance metrics:
Loss and loss adjustment expense ratio	60.2		%	66.8		%	62.5		%	63.7		%
Expense ratio	37.3			37.9			37.2			37.1
Combined ratio	97.5		%	104.7		%	99.7		%	100.8		%
Rate	7		%	3		%	6		%	3		%
Renewal premium change	8			5			3			5
Retention	67			77			67			81
New business	$	75		$	82		$	155		$	175

Three Month Comparison

Net written premiums for International decreased $22 million for the three months ended June 30, 2019 as compared with the same period in 2018. Excluding the effect of foreign currency exchange rates, net written premiums decreased $11 million or 4% for the three months ended June 30, 2019 as compared with the same period in 2018 driven by the strategic exit from certain Hardy business classes in the fourth quarter of 2018. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income increased $24 million for the three months ended June 30, 2019 as compared with the same period in 2018 driven by improved underwriting results.

The combined ratio of 97.5% improved 7.2 points for the three months ended June 30, 2019 as compared with the same period in 2018. The loss ratio improved 6.6 points, primarily driven by a lower number of large property losses, mainly in Canada, and lower net catastrophe losses. Net catastrophe losses were less than $1 million, or 0.2 points of the loss ratio, for the three months ended June 30, 2019, as compared with $4 million, or 1.6 points of the loss ratio, for the three months ended June 30, 2018. The expense ratio improved 0.6 points for the three months ended June 30, 2019 as compared with the same period in 2018 driven by lower employee costs.

Favorable net prior year loss reserve development was $1 million and $2 million for the three months ended June 30, 2019 and 2018. 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.

49

Six Month Comparison

Net written premiums for International decreased $58 million for the six months ended June 30, 2019 as compared with the same period in 2018. Excluding the effect of foreign currency exchange rates, net written premiums decreased $34 million or 6% for the six months ended June 30, 2019 as compared with the same period in 2018 driven by the strategic exit from certain Hardy business classes in the fourth quarter of 2018. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income increased $7 million for the six months ended June 30, 2019 as compared with the same period in 2018 driven by improved current accident year underwriting results partially offset by unfavorable net prior year loss reserve development in the current year period.

The combined ratio of 99.7% improved 1.1 points for the six months ended June 30, 2019 as compared with the same period in 2018. The loss ratio improved 1.2 points, driven by a lower number of large property losses, mainly in Canada, partially offset by unfavorable net prior year loss reserve development in the current year period. Net catastrophe losses were $6 million, or 1.3 points of the loss ratio, for the six months ended June 30, 2019 and 2018. The expense ratio was largely consistent with the same period in 2018.

Unfavorable net prior year loss reserve development of $13 million was recorded for the six months ended June 30, 2019 as compared with favorable development of $2 million for the six months ended June 30, 2018. 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)	June 30, 2019		December 31, 2018
Gross case reserves	$	839	$	867
Gross IBNR reserves	961		883
Total gross carried claim and claim adjustment expense reserves	$	1,800	$	1,750
Net case reserves	$	736	$	749
Net IBNR reserves	830		775
Total net carried claim and claim adjustment expense reserves	$	1,566	$	1,524

50

Life & Group

The following table details the results of operations for Life & Group.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Net earned premiums	$	130		$	131		$	260		$	265
Net investment income	205			198			409			398
Core (loss) before income tax	(6		)	(29		)	(9		)	(29		)
Income tax benefit on core loss	13			19			26			33
Core income (loss)	7			(10		)	17			4

Three Month Comparison

Core results improved $17 million for the three months ended June 30, 2019 as compared with the same period in 2018. Persistency continues to benefit from a higher than expected number of policyholders choosing to lapse coverage or reduce benefits in lieu of premium rate increases. The favorable persistency trend in the prior year period was offset when a significant number of policies converted to a fully paid-up status with modest future benefits following the termination of a large group account. The reserves associated with these converted policies were, on average, slightly higher than the previously recorded carried reserves, resulting in a negative financial impact for the three months ended June 30, 2018. Morbidity continues to trend in line with expectations.

Six Month Comparison

Core income increased $13 million for the six months ended June 30, 2019 as compared with the same period in 2018. The drivers of core income for the six month period were generally consistent with the three month summary noted above.

51

Corporate & Other

The following table details the results of operations for the Corporate & Other segment, including intersegment eliminations.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Net investment income	$	7		$	6		$	14		$	11
Interest expense	34			34			68			68
Core (loss)	(11		)	(39		)	(17		)	(99		)

Three Month Comparison

Core loss improved $28 million for the three months ended June 30, 2019 as compared with the same period in 2018. The prior period included $23 million of non-recurring costs associated with the transition to a new IT infrastructure service provider.

Six Month Comparison

Core loss improved $82 million for the six months ended June 30, 2019 as compared with the same period in 2018. The prior period included adverse net prior year reserve development for A&EP under the LPT and $23 million of non-recurring costs associated with the transition to a new IT infrastructure service provider. The LPT is further discussed 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 Corporate & Other.

(In millions)	June 30, 2019		December 31, 2018
Gross case reserves	$	1,176	$	1,208
Gross IBNR reserves	1,067		1,217
Total gross carried claim and claim adjustment expense reserves	$	2,243	$	2,425
Net case reserves	$	93	$	96
Net IBNR reserves	89		96
Total net carried claim and claim adjustment expense reserves	$	182	$	192

52

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 June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Fixed income securities:
Taxable fixed income securities	$	385		$	354		$	768		$	704
Tax-exempt fixed income securities	80			100			162			205
Total fixed income securities	465			454			930			909
Limited partnership and common stock investments	43			42			139			73
Other, net of investment expense	7			10			17			14
Pretax net investment income	$	515		$	506		$	1,086		$	996
Fixed income securities, after tax	$	382		$	375		$	762		$	752
Net investment income, after tax	420			416			885			821
Effective income yield for the fixed income securities portfolio, pretax	4.8		%	4.7		%	4.8		%	4.7		%
Effective income yield for the fixed income securities portfolio, after tax	3.9		%	3.9		%	3.9		%	3.9		%
Limited partnership and common stock return	2.1		%	1.8		%	6.8		%	3.0		%

Net investment income, after tax, increased $4 million for the three months ended June 30, 2019 as compared with the same period in 2018 driven by fixed income securities.

Net investment income, after tax, increased $64 million for the six months ended June 30, 2019 as compared with the same period in 2018 driven by limited partnership and common stock returns.

53

Net Investment Gains (Losses)

The components of Net investment gains (losses) are presented in the following table.

Periods ended June 30	Three Months						Six Months
(In millions)	2019			2018			2019			2018
Fixed maturity securities:
Corporate and other bonds	$	(7	)	$	9		$	(7	)	$	28
States, municipalities and political subdivisions	4			6			12			26
Asset-backed	—			(11		)	(14		)	(32		)
Total fixed maturity securities	(3		)	4			(9		)	22
Non-redeemable preferred stock	11			(10		)	53			(25		)
Short term and other	(26		)	5			(31		)	14
Net investment (losses) gains	(18		)	(1		)	13			11
Income tax benefit (expense) on net investment (losses) gains	2			1			(5		)	(1		)
Net investment (losses) gains, after tax	$	(16	)	$	—		$	8		$	10

Net investment gains (losses), after tax, decreased $16 million for the three months ended June 30, 2019 as compared with the same period in 2018. The decrease was driven by a $16 million loss, after tax, related to the redemption of our $500 million senior notes due August 2020, as well as higher OTTI losses recognized in earnings. This was partially offset by the favorable change in fair value of non-redeemable preferred stock.

Net investment gains (losses), after tax, decreased $2 million for the six months ended June 30, 2019 as compared with the same period in 2018. The decrease was driven by lower net realized investment gains on sales of securities, higher OTTI losses recognized in earnings and a $16 million loss, after tax, related to the redemption of our $500 million senior notes due August 2020. This was offset by the favorable change in fair value of non-redeemable preferred stock.

Further information on our investment gains and losses, including our OTTI losses, is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.

54

Portfolio Quality

The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.

	June 30, 2019				December 31, 2018
(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	$	4,336	$	84	$	4,334	$	(24	)
AAA	3,014		338		3,027		245
AA	6,697		775		6,510		512
A	8,843		961		8,768		527
BBB	15,984		1,374		14,205		274
Non-investment grade	2,765		84		2,702		(73		)
Total	$	41,639	$	3,616	$	39,546	$	1,461

As of June 30, 2019 and December 31, 2018, 1% of our fixed maturity portfolio was rated internally. AAA rated securities included $1.2 billion and $1.3 billion of pre-refunded municipal bonds as of June 30, 2019 and December 31, 2018.

The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.

	June 30, 2019
(In millions)	Estimated Fair Value		Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises	$	256	$	1
AAA	22		1
AA	52		—
A	526		8
BBB	591		18
Non-investment grade	753		29
Total	$	2,200	$	57

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.

	June 30, 2019
(In millions)	Estimated Fair Value		Gross Unrealized Losses
Due in one year or less	$	45	$	1
Due after one year through five years	444		12
Due after five years through ten years	1,477		27
Due after ten years	234		17
Total	$	2,200	$	57

55

Duration

A primary objective in the management of the investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.

A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group segment.

The effective durations of fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.

	June 30, 2019			December 31, 2018
(In millions)	Estimated Fair Value		Effective Duration (In years)	Estimated Fair Value		Effective Duration (In years)
Investments supporting Life & Group	$	17,541	8.9	$	16,212	8.4
Other investments	26,253		4.1	25,428		4.4
Total	$	43,794	6.0	$	41,640	6.0

The investment portfolio is periodically analyzed for changes in duration and related price risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018.

Short Term Investments

The carrying value of the components of the Short term investments are presented in the following table.

(In millions)	June 30, 2019		December 31, 2018
Short term investments:
Commercial paper	$	920	$	705
U.S. Treasury securities	295		185
Other	304		396
Total short term investments	$	1,519	$	1,286

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.

For the six months ended June 30, 2019, net cash provided by operating activities was $514 million as compared with $354 million for the same period in 2018. The increase in cash provided by operating activities was driven by a higher level of distributions on limited partnerships and lower income taxes paid.

Cash flows from investing activities include the purchase and disposition of financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.

Net cash provided by investing activities was $233 million for the six months ended June 30, 2019, as compared with $439 million for the same period in 2018. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.

Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity securities.

For the six months ended June 30, 2019, net cash used by financing activities was $788 million, as compared with $855 million for the same period in 2018. Financing activities for the periods presented include:

• During the six months ended June 30, 2019, we repurchased 365,695 shares of our common stock at an aggregate cost of $16 million.

• In the second quarter of 2019, we issued $500 million of 3.90% senior notes due May 1, 2029 and redeemed the $500 million outstanding aggregate principal balances of our 5.875% senior notes due August 15, 2020.

• In the first quarter of 2018, we redeemed the $150 million outstanding aggregate principal balance of our 6.950% senior notes due January 15, 2018.

Common Stock Dividends

Dividends of $2.70 per share on our common stock, including a special dividend of $2.00 per share, were declared and paid during the six months ended June 30, 2019. On August 2, 2019, our Board of Directors declared a quarterly dividend of $0.35 per share, payable September 5, 2019 to stockholders of record on August 19, 2019. 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.

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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).

We have an effective shelf registration statement under which we may publicly issue debt, equity or hybrid securities from time to time.

Dividends from 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 June 30, 2019, CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2019 that would not be subject to the Department's prior approval is $1,383 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $256 million during the six months ended December 31, 2018 and $805 million during the six months ended June 30, 2019. As of June 30, 2019, CCC is able to pay approximately $322 million of dividends that would not be subject to prior approval of the Department. 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.

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ACCOUNTING STANDARDS UPDATE

For a discussion of Accounting Standards Updates adopted in the current period 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 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; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; expected cost savings and other results from our expense reduction activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:

Company-Specific Factors

• the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our Annual Report on Form 10-K, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;

• the risk that the other parties to the transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;

• the performance of reinsurance companies under reinsurance contracts with us; and

• the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.

Industry and General Market Factors

• the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;

• product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;

• general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;

• conditions in the capital and credit markets, including 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.

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Regulatory 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; and

• regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards.

Impact of Catastrophic Events and Related Developments

• weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow;

• regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;

• man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; and

• the occurrence of epidemics.

Referendum on the United Kingdom's Membership in the European Union

• in 2016, the U.K. approved an exit from the E.U., commonly referred to as "Brexit.” Brexit remains scheduled to be completed in 2019, although the formal exit has been delayed twice. Effective January 1, 2019, we write business in the E.U. through our recently established European subsidiary in Luxembourg and not through our U.K.-domiciled subsidiary. As a result, the complexity and cost of regulatory compliance of our European business has increased and will likely continue to result in elevated expenses.

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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in our market risk components for the six months ended June 30, 2019. 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, 2018 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.

As of June 30, 2019, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of June 30, 2019.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 repurchases of our common stock made during the three months ended June 30, 2019.

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)
May 1, 2019 - May 31, 2019	48,187	$	44.88	N/A	N/A
Total	48,187	44.88		N/A	N/A

Item 6. Exhibits

See Exhibit Index.

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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
Dated: August 5, 2019	By	/s/ James M. Anderson
		James M. Anderson Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial and accounting officer)

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EXHIBIT INDEX

Description of Exhibit	Exhibit Number
Certification of Chief Executive Officer	31.1
Certification of Chief Financial Officer	31.2
Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.1
Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.2
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document	101.INS
Inline XBRL Taxonomy Extension Schema	101.SCH
Inline XBRL Taxonomy Extension Calculation Linkbase	101.CAL
Inline XBRL Taxonomy Extension Definition Linkbase	101.DEF
Inline XBRL Taxonomy Label Linkbase	101.LAB
Inline XBRL Taxonomy Extension Presentation Linkbase	101.PRE

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