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CNA FINANCIAL CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2021 Compared with 2020
This section of this Form 10-K generally discusses 2022 and 2021 results and year-to-year comparisons between 2022 and 2021. A discussion of changes in our results of operations from 2021 to 2020 has been omitted from this Form 10-K, but may be found in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 8, 2022 .
Index to this MD&A
Management's discussion and analysis of financial condition and results of
operations is comprised of the following sections:
Page No.
Overview 20
Critical Accounting Estimates 20
Reserves - Estimates and Uncertainties 23
Catastrophes and Related Reinsurance 29
Consolidated Operations 31
Segment Results 32
Specialty 34
Commercial 37
International 39
Life & Group 41
Corporate & Other 43
Pension Plan Impact on 2023 Results 43
Investments 44
Net Investment Income 44
Net Investment Gains (Losses) 44
Portfolio Quality 45
Duration 46
Liquidity and Capital Resources 47
Cash Flows 47
Liquidity 47
Common Stock Dividends 48
Commitments, Contingencies and Guarantees 48
Ratings 49
Accounting Standards Updates 50
Forward-Looking Statements 50
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OVERVIEW
The following discussion should be read in conjunction with Part I, Item 1A Risk Factors and Part II, Item 8 Financial Statements and Supplementary Data of this Form 10-K. CRITICAL ACCOUNTING ESTIMATES The preparation of 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 Consolidated Financial Statements and the amount of revenues and expenses reported during the period. Actual results may differ from those estimates. Our 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 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 Consolidated Financial Statements as their application places the most significant demands on our judgment. Note A to the Consolidated Financial Statements included under Item 8 should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from our estimates and may have a material adverse impact on our results of operations, financial condition, equity, business, and insurer financial strength and corporate debt ratings.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts are primarily related to long term care policies and are estimated using actuarial estimates about morbidity and persistency as well as assumptions about expected investment returns and future premium rate increases. The reserve for unearned premiums represents the portion of premiums written related to the unexpired terms of coverage. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
Long Term Care Reserves
Future policy benefit reserves for our long term care policies are based on certain assumptions, including morbidity, persistency, inclusive of mortality, discount rates and future premium rate increases. The adequacy of the reserves is contingent upon actual experience and our future expectations related to these key assumptions. If actual or expected future experience differs from these assumptions, the reserves may not be adequate, requiring us to add to reserves. A prolonged period during which investment returns remain at levels lower than those anticipated in our reserving discount rate assumption could result in shortfalls in investment income on assets supporting our obligations under long term care policies, which may require increases to our reserves. In addition, we may not receive regulatory approval for the level of premium rate increases we request. These changes to our reserves could materially adversely impact our results of operations, financial condition and equity. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
Reinsurance and Insurance Receivables
Exposure exists with respect to the collectibility of ceded property and
casualty and life reinsurance to the extent that any reinsurer is unable to meet
its obligations or disputes the liabilities we have ceded under reinsurance
agreements. An allowance for uncollectible reinsurance is recorded on the basis
of periodic evaluations of balances due from reinsurers, reinsurer financial
strength rating and solvency, industry
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experience and current and forecast economic conditions. Further information on
our reinsurance receivables is in Note G to the Consolidated Financial
Statements included under Item 8.
Additionally, exposure exists with respect to the collectibility of amounts due from policyholders related to insurance contracts, including amounts due from insureds under high deductible policies and retrospectively rated policies. An allowance for uncollectible insurance receivables is recorded on the basis of periodic evaluations of balances due from insureds, currently as well as in the future, historical business default data, management's experience and current and forecast economic conditions. If actual experience differs from the estimates made by management in determining the allowances for uncollectible reinsurance and insurance receivables, net receivables as reflected on our Consolidated Balance Sheets may not be collected. Therefore, our results of operations, financial condition or equity could be materially adversely affected. Further information on our process for determining the allowances for uncollectible reinsurance and insurance receivables is in Note A to the Consolidated Financial Statements included under Item 8.
Valuation of Investments and Impairment of Securities
Our fixed maturity and equity securities are carried at fair value on the balance sheet. Fair value represents the price that would be received in a sale of an asset in an orderly transaction between market participants on the measurement date, the determination of which may require us to make a significant number of assumptions and judgments. Securities with the greatest level of subjectivity around valuation are those that rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are based on assumptions consistent with what we believe other market participants would use to price such securities. Further information on our fair value measurements is in Note C to the Consolidated Financial Statements included under Item 8. Our fixed maturity securities are subject to market declines below amortized cost that may result in the recognition of impairment losses in earnings. Factors considered in the determination of whether or not an impairment loss is recognized in earnings include a current intention or need to sell the security or an indication that a credit loss exists. Significant judgment is required in the determination of whether a credit loss has occurred for a security. We consider all available evidence when determining whether a security requires a credit allowance to be recorded, including the financial condition and expected near-term and long-term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions, industry, sector or other specific factors and whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. Our mortgage loan portfolio is subject to the expected credit loss model, which requires immediate recognition of estimated credit losses over the life of the asset and the presentation of the asset at the net amount expected to be collected. Significant judgment is required in the determination of estimated credit losses and any changes in our expectation of the net amount to be collected are recognized in earnings.
Further information on our process for evaluating impairments and expected
credit losses is in Note A to the Consolidated Financial Statements included
under Item 8.
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Income Taxes
We account for income taxes under the asset and liability method. Under this
method, deferred income taxes are recognized for temporary differences between
the financial statement and tax return basis of assets and liabilities. Any
resulting future tax benefits are recognized to the extent that realization of
such benefits is more likely than not, and a valuation allowance is established
for any portion of a deferred tax asset that management believes will not be
realized. The assessment of the need for a valuation allowance requires
management to make estimates and assumptions about future earnings, reversal of
existing temporary differences and available tax planning strategies. If actual
experience differs from these estimates and assumptions, the recorded deferred
tax asset may not be fully realized resulting in an increase to income tax
expense in our results of operations. In addition, the ability to record
deferred tax assets in the future could be limited, resulting in a higher
effective tax rate in that future period. Further information on our income
taxes is in Note D to the Consolidated Financial Statements included under Item
8.
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RESERVES - ESTIMATES AND UNCERTAINTIES
The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain. As noted below, we review our reserves for each segment of our business periodically, and any such review could result in the need to increase reserves in amounts which could be material and could adversely affect our results of operations, equity, business and insurer financial strength and corporate debt ratings. Further information on reserves is provided in Note E to the Consolidated Financial Statements included under Item 8.
Property and Casualty Claim and Claim Adjustment Expense Reserves
We maintain loss reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (IBNR). IBNR includes a provision for development on known cases as well as a provision for late reported incurred claims. Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading "Insurance Reserves." Adjustments to prior year reserve estimates, if necessary, are reflected in results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves as of each balance sheet date are provided in the Segment Results section of this MD&A and in Note E to the Consolidated Financial Statements included under Item 8. As discussed in the Risk Factors discussion within Item 1A, there is a risk that our recorded reserves are insufficient to cover our estimated ultimate unpaid liability for claims and claim adjustment expenses. Unforeseen emerging or potential claims and coverage issues are also difficult to predict and could materially adversely affect the adequacy of our claim and claim adjustment expense reserves and could lead to future reserve additions. In addition, our property and casualty insurance subsidiaries also have actual and potential exposures related to A&EP claims, which could result in material losses. To mitigate the risks posed by our exposure to A&EP claims and claim adjustment expenses, we completed a transaction with NICO under which substantially all of our legacy A&EP liabilities were ceded to NICO effectiveJanuary 1, 2010 . See Note E to the Consolidated Financial Statements included under Item 8 for further discussion about the transaction with NICO, its impact on our results of operations and the deferred retroactive reinsurance gains and the amount of remaining reinsurance limit.
Establishing Property & Casualty Reserve Estimates
In developing claim and claim adjustment expense (loss or losses) reserve
estimates, our actuaries perform detailed reserve analyses that are staggered
throughout the year. The data is organized at a reserve group level. A reserve
group typically can be a line of business covering a subset of insureds such as
commercial automobile liability for small or middle market customers or it can
be a particular type of claim such as construction defect. Every reserve group
is reviewed at least once during the year, but most are reviewed more
frequently. The analyses generally review losses gross of ceded reinsurance and
apply the ceded reinsurance terms to the gross estimates to establish estimates
net of reinsurance. In addition to the detailed analyses, we review actual loss
emergence for all products each quarter.
Most of our business can be characterized as long-tail. For long-tail business,
it will generally be several years between the time the business is written and
the time when all claims are settled. Our long-tail exposures include commercial
automobile liability, workers' compensation, general liability, medical
professional liability, other professional liability and management liability
coverages, assumed reinsurance run-off and products liability. Short-tail
exposures include property, commercial automobile physical damage, marine,
surety and
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warranty. Specialty, Commercial and International contain both long-tail and
short-tail exposures. Corporate & Other contains run-off long-tail exposures.
Various methods are used to project ultimate losses for both long-tail and
short-tail exposures.
The paid development method estimates ultimate losses by reviewing paid loss
patterns and applying them to accident or policy years with further expected
changes in paid losses. Selection of the paid loss pattern may require
consideration of several factors, including the impact of economic, social and
medical inflation on claim costs, the rate at which claims professionals make
claim payments and close claims, the impact of judicial decisions, the impact of
underwriting changes, the impact of large claim payments and other factors.
Claim cost inflation itself may require evaluation of changes in the cost of
repairing or replacing property, changes in the cost of medical care, changes in
the cost of wage replacement, judicial decisions, legislative changes and other
factors. Because this method assumes that losses are paid at a consistent rate,
changes in any of these factors can affect the results. Since the method does
not rely on case reserves, it is not directly influenced by changes in their
adequacy.
For many reserve groups, paid loss data for recent periods may be too immature
or erratic for accurate predictions. This situation often exists for long-tail
exposures. In addition, changes in the factors described above may result in
inconsistent payment patterns. Finally, estimating the paid loss pattern
subsequent to the most mature point available in the data analyzed often
involves considerable uncertainty for long-tail products such as workers'
compensation.
The incurred development method is similar to the paid development method, but
it uses case incurred losses instead of paid losses. Since the method uses more
data (case reserves in addition to paid losses) than the paid development
method, the incurred development patterns may be less variable than paid
patterns. However, selection of the incurred loss pattern typically requires
analysis of all of the same factors described above. In addition, the inclusion
of case reserves can lead to distortions if changes in case reserving practices
have taken place, and the use of case incurred losses may not eliminate the
issues associated with estimating the incurred loss pattern subsequent to the
most mature point available.
The loss ratio method multiplies earned premiums by an expected loss ratio to
produce ultimate loss estimates for each accident or policy year. This method
may be useful for immature accident or policy periods or if loss development
patterns are inconsistent, losses emerge very slowly or there is relatively
little loss history from which to estimate future losses. The selection of the
expected loss ratio typically requires analysis of loss ratios from earlier
accident or policy years or pricing studies and analysis of inflationary trends,
frequency trends, rate changes, underwriting changes and other applicable
factors.
The Bornhuetter-Ferguson method using paid loss is a combination of the paid
development method and the loss ratio method. This method normally determines
expected loss ratios similar to the approach used to estimate the expected loss
ratio for the loss ratio method and typically requires analysis of the same
factors described above. This method assumes that future losses will develop at
the expected loss ratio level. The percent of paid loss to ultimate loss implied
from the paid development method is used to determine what percentage of
ultimate loss is yet to be paid. The use of the pattern from the paid
development method typically requires consideration of the same factors listed
in the description of the paid development method. The estimate of losses yet to
be paid is added to current paid losses to estimate the ultimate loss for each
year. For long-tail lines, this method will react very slowly if actual ultimate
loss ratios are different from expectations due to changes not accounted for by
the expected loss ratio calculation.
The Bornhuetter-Ferguson method using incurred loss is similar to the
Bornhuetter-Ferguson method using paid loss except that it uses case incurred
losses. The use of case incurred losses instead of paid losses can result in
development patterns that are less variable than paid patterns. However, the
inclusion of case reserves can lead to distortions if changes in case reserving
have taken place, and the method typically requires analysis of the same factors
that need to be reviewed for the loss ratio and incurred development methods.
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The frequency times severity method multiplies a projected number of ultimate
claims by an estimated ultimate average loss for each accident or policy year to
produce ultimate loss estimates. Since projections of the ultimate number of
claims are often less variable than projections of ultimate loss, this method
can provide more reliable results for reserve groups where loss development
patterns are inconsistent or too variable to be relied on exclusively. In
addition, this method can more directly account for changes in coverage that
affect the number and size of claims. However, this method can be difficult to
apply to situations where very large claims or a substantial number of unusual
claims result in volatile average claim sizes. Projecting the ultimate number of
claims may require analysis of several factors, including the rate at which
policyholders report claims to us, the impact of judicial decisions, the impact
of underwriting changes and other factors. Estimating the ultimate average loss
may require analysis of the impact of large losses and claim cost trends based
on changes in the cost of repairing or replacing property, changes in the cost
of medical care, changes in the cost of wage replacement, judicial decisions,
legislative changes and other factors.
Stochastic modeling produces a range of possible outcomes based on varying
assumptions related to the particular reserve group being modeled. For some
reserve groups, we use models which rely on historical development patterns at
an aggregate level, while other reserve groups are modeled using individual
claim variability assumptions supplied by the claims department. In either case,
multiple simulations using varying assumptions are run and the results are
analyzed to produce a range of potential outcomes. The results will typically
include a mean and percentiles of the possible reserve distribution which aid in
the selection of a point estimate.
For many exposures, especially those that can be considered long-tail, a
particular accident or policy year may not have a sufficient volume of paid
losses to produce a statistically reliable estimate of ultimate losses. In such
a case, our actuaries typically assign more weight to the incurred development
method than to the paid development method. As claims continue to settle and the
volume of paid loss increases, the actuaries may assign additional weight to the
paid development method. For most of our products, even the incurred losses for
accident or policy years that are early in the claim settlement process will not
be of sufficient volume to produce a reliable estimate of ultimate losses. In
these cases, we may not assign much, if any, weight to the paid and incurred
development methods. We may use the loss ratio, Bornhuetter-Ferguson and/or
frequency times severity methods. For short-tail exposures, the paid and
incurred development methods can often be relied on sooner, primarily because
our history includes a sufficient number of years to cover the entire period
over which paid and incurred losses are expected to change. However, we may also
use the loss ratio, Bornhuetter-Ferguson and/or frequency times severity methods
for short-tail exposures.
For other more complex reserve groups where the above methods may not produce
reliable indications, we use additional methods tailored to the characteristics
of the specific situation.
Periodic Reserve Reviews
The reserve analyses performed by our actuaries result in point estimates. Each
quarter, the results of the detailed reserve reviews are summarized and
discussed with senior management to determine the best estimate of reserves.
Senior management considers many factors in making this decision. Our recorded
reserves reflect our best estimate as of a particular point in time based upon
known facts and circumstances, consideration of the factors cited above and our
judgment. The carried reserve differs from the actuarial point estimate as
discussed further below.
Currently, our recorded reserves are modestly higher than the actuarial point
estimate. For Commercial, Specialty and International, the difference between
our reserves and the actuarial point estimate is primarily driven by uncertainty
with respect to immature accident years, claim cost inflation, changes in claims
handling, changes to the tort environment which may adversely affect claim costs
and the effects from the economy. For Corporate & Other, the difference between
our reserves and the actuarial point estimate is primarily driven by the
potential tail volatility of run-off exposures.
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The key assumptions fundamental to the reserving process are often different for various reserve groups and accident or policy years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the paid development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. As a result, the effect on reserve estimates of a particular change in assumptions typically cannot be specifically quantified, and changes in these assumptions cannot be tracked over time. Our recorded reserves are management's best estimate. In order to provide an indication of the variability associated with our net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in significant factors affecting our reserve estimates for particular types of business. These significant factors are the ones that we believe could most likely materially affect the reserves. This discussion covers the major types of business for which we believe a material deviation to our reserves is reasonably possible. There can be no assurance that actual experience will be consistent with the current assumptions or with the variation indicated by the discussion. In addition, there can be no assurance that other factors and assumptions will not have a material impact on our reserves. The three areas for which we believe a significant deviation to our net reserves is reasonably possible are (i) professional liability, management liability and surety products; (ii) workers' compensation; and (iii) general liability. Professional liability, management liability and surety products include US professional liability coverages provided to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and other professional firms. They also include directors and officers (D&O), errors and omissions (E&O), employment practices, fiduciary, fidelity, cyber and surety coverages, and medical liability. The most significant factor affecting reserve estimates for these liability coverages is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislative changes and other factors. Underwriting and claim handling decisions, such as the classes of business written and individual claim settlement decisions, can also affect claim severity. If the estimated claim severity increases by 9%, we estimate that net reserves would increase by approximately$500 million . If the estimated claim severity decreases by 3%, we estimate that net reserves would decrease by approximately$150 million . Our net reserves for these products were approximately$5.3 billion as ofDecember 31, 2022 . For workers' compensation, since many years will pass from the time the business is written until all claim payments have been made, the most significant factor affecting workers' compensation reserve estimates is claim cost inflation on claim payments. Workers' compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers' compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would increase by approximately$350 million . If estimated workers' compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would decrease by approximately$300 million . Our net reserves for workers' compensation were approximately$3.7 billion as ofDecember 31, 2022 . For general liability, the most significant factor affecting reserve estimates is claim severity. Claim severity is driven by changes in the cost of repairing or replacing property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors. If the estimated claim severity for general liability increases by 6%, we estimate that our net reserves would increase by approximately$200 million . If the estimated claim severity for general liability decreases by 3%, we estimate that our net reserves would decrease by approximately$100 million . Our net reserves for general liability were approximately$3.6 billion as ofDecember 31, 2022 . 26
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Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, we regularly review the adequacy of our reserves and reassess our reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods. In reviewing our reserve estimates, we make adjustments in the period that the need for such adjustments is determined. These reviews have resulted in our identification of information and trends that have caused us to change our reserves in prior periods and could lead to our identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations, equity, business and insurer financial strength and corporate debt ratings positively or negatively. See discussion within Note E to the Consolidated Financial Statements included under Item 8 for additional information about reserve development and the Ratings section of this MD&A for further information regarding our financial strength and corporate debt ratings.
Life & Group Policyholder Reserves
OurLife & Group segment includes our run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and we have the ability to increase policy premiums, subject to state regulatory approval. We maintain both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for ourLife & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for our long term care policies, our actuaries perform a detailed claim reserve review on an annual basis. The review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for our structured settlement obligations, our actuaries monitor mortality experience on an annual basis. Our recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent reviews. Claim and claim adjustment expense reserves for long term care policies and structured settlement obligations are discounted as discussed in Note A to the Consolidated Financial Statements included under Item 8. Future policy benefit reserves consist of the active life reserves related to our long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk. The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency, discount rates and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Discount rates are influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and may also be affected by changes to the Internal Revenue Code. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. As a result of this variability, our long term care reserves may be subject to material increases if actual experience develops adversely to our expectations. Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the 27
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existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in our results of operations in the period in which the need for such adjustment is determined. If the GPV required reserves are less than the existing recorded reserves, assumptions remain locked in and no adjustment is required.
Information regarding ASU 2018-12, which, beginning in 2023, will require
changes in the measurement and disclosure of long-duration contracts, including
our long term care business, is provided in the Accounting Standards Update
section of this MD&A and in Note A to the Consolidated Financial Statements
included under Item 8.
The
margin of approximately
reserve margin is presented in the table below:
Long Term Care Active Life Reserve - Change in estimated reserve margin (In
millions)
$ 72 Changes in underlying economic assumptions(1)
(130)
Changes in underlying morbidity assumptions (30) Changes in underlying persistency assumptions 40 Changes in underlying premium rate action assumptions 190 Changes in underlying expense and other assumptions (17)September 30, 2022 Estimated Margin
$ 125
(1) Economic assumptions include the impact of interest rates and cost of care
inflation.
The increase in the margin in 2022 was primarily driven by changes in discount rate assumptions due to higher near-term expected reinvestment rates and higher than previously estimated rate increases on active rate increase programs. These favorable drivers were partially offset by changes in cost of care inflation assumptions.
We have determined that additional future policy benefit reserves for profits
followed by losses are not currently required based on the most recent
projection.
The table below summarizes the estimated pretax impact on our results of
operations from various hypothetical revisions to our future policy benefit
reserve assumptions. The annual GPV process involves updating all assumptions to
management's then current best estimate, and historically all significant
assumptions have been revised each year. In the table below, we have assumed
that revisions to such assumptions would occur in each policy type, age and
duration within each policy group. The impact of each sensitivity is discrete
and does not reflect the impact one factor may have on another or the mitigating
impact from management actions, which may include additional future premium rate
increases. Although such hypothetical revisions are not currently required or
anticipated, we believe they could occur based on past variances in experience
and our expectations of the ranges of future experience that could reasonably
occur. Any required increase in the recorded reserves resulting from a
hypothetical revision in the table below would first reduce the margin in our
carried reserves before it would affect results from operations. Any actual
adjustment would be dependent on the specific policies affected and, therefore,
may differ from the estimates summarized below. The estimated impacts to results
of operations in the table below are after consideration of the existing margin.
2022 GPV
Estimated
reduction to
Hypothetical revisions (In millions) pretax income
Morbidity:(1)
2.5% increase in morbidity $ 200
5% increase in morbidity 500
Persistency:
5% decrease in active life mortality and lapse $ 100
10% decrease in active life mortality and lapse
300
Discount Rates: 25 basis point decline in new money interest rates $ - 50 basis point decline in new money interest rates
100
(1) Represents a sensitivity in future paid claims.
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CATASTROPHES AND RELATED REINSURANCE
Various events can cause catastrophe losses. These events can be natural or man-made, including hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil unrest, cyber-attacks, pandemics and acts of terrorism that produce unusually large aggregate losses. In most, but not all cases, our catastrophe losses from these events in theU.S. are defined consistent with the definition of the Property Claims Service (PCS). PCS defines a catastrophe as an event that causes damage of$25 million or more in direct insured losses to property and affects a significant number of policyholders and insurers. For events outside of theU.S. , we define a catastrophe as an industry recognized event that generates an accumulation of claims amounting to more than$1 million for the International segment. 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. We reported catastrophe losses, net of reinsurance, of$247 million and$397 million for the years endedDecember 31, 2022 and 2021. Catastrophe losses for the years endedDecember 31, 2022 and 2021 were driven by severe weather related events, primarily Winter Storm Elliott and Hurricane Ian for 2022 and Hurricane Ida andWinter Storms Uri and Viola for 2021. We use various analyses and methods, including using one of the industry standard natural catastrophe models to estimate hurricane and earthquake losses at various return periods, to inform underwriting and reinsurance decisions designed to manage our exposure to catastrophic events. We generally seek to manage our exposure through the purchase of catastrophe reinsurance and have catastrophe reinsurance treaties that cover property and workers' compensation losses. We conduct an ongoing review of our risk and catastrophe reinsurance coverages and from time to time make changes as we deem appropriate. In 2021, we added a quota share treaty to our property reinsurance program, which covers policies written during the treaty term and in-force as ofJune 1, 2021 . As a result of the coverage of in-force policies, net written premiums were reduced by$122 million during the second quarter of 2021 for the one-time catch-up under the treaty of unearned premium on policies previously written as of the treaty inception. The treaty was renewed for a term ofJune 1, 2022 toJune 1, 2023 .
The following discussion summarizes our most significant catastrophe reinsurance
coverage at
Group North American Property Treaty
We purchased corporate catastrophe excess-of-loss treaty reinsurance covering ourU.S. states and territories and Canadian property exposures underwritten in our North American and European companies. Exposures underwritten through Hardy are excluded and covered under a separate treaty. The treaty has a term ofJune 1, 2022 toJune 1, 2023 and provides coverage for the accumulation of covered losses from catastrophe occurrences above our per occurrence retention of$190 million up to$900 million for all losses other than earthquakes. Earthquakes are covered up to$1.0 billion . Losses stemming from terrorism events are covered unless they are due to a nuclear, biological or chemical attack. All layers of the treaty provide for one full reinstatement.
We also purchased corporate Workers' Compensation catastrophe excess-of-loss treaty reinsurance for the periodJanuary 1, 2023 toJanuary 1, 2024 providing$275 million of coverage for the accumulation of covered losses related to natural catastrophes above our per occurrence retention of$25 million . The treaty also provides$600 million of coverage for the accumulation of covered losses related to terrorism events above our retention of$25 million . Of this$600 million in Terrorism coverage,$200 million is provided for nuclear, biological chemical and radiation events. One full reinstatement is available for the first$275 million above the retention, regardless of the covered peril.
Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA)
Our principal reinsurance protection against large-scale terrorist attacks, including nuclear, biological, chemical or radiological attacks, is the coverage currently provided through TRIPRA which runs through the end of 2027. TRIPRA provides aU.S. government backstop for insurance-related losses resulting from any "act of 29
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terrorism," which is certified by the Secretary ofTreasury in consultation with the Secretary ofHomeland Security for losses that exceed a threshold of$200 million industry-wide for the calendar year 2023. Under the current provisions of the program, in 2023, the federal government will reimburse 80% of our covered losses in excess of our applicable deductible up to a total industry program cap of$100 billion . Our deductible is based on eligible commercial property and casualty earned premiums for the preceding calendar year. Based on 2022 earned premiums, our estimated deductible under the program is$1 billion for 2023. If an act of terrorism or acts of terrorism result in covered losses exceeding the$100 billion annual industry aggregate limit,Congress would be responsible for determining how additional losses in excess of$100 billion will be paid. 30
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Table of Con tents CONSOLIDATED OPERATIONS Results of Operations The following table includes the consolidated results of our operations including our financial measure, core income (loss). For more detailed components of our business operations and a discussion of the core income (loss) financial measure, see the Segment Results section within this MD&A. For further discussion of Net investment income and Net investment gains or losses, see the Investments section of this MD&A. Years endedDecember 31 (In millions) 2022 2021 Operating Revenues Net earned premiums$ 8,667 $ 8,175 Net investment income 1,805 2,159 Non-insurance warranty revenue 1,574 1,430 Other revenues 32 24 Total operating revenues 12,078 11,788 Claims, Benefits and Expenses Net incurred claims and benefits 6,361
6,327
Policyholders' dividends 25
22
Amortization of deferred acquisition costs 1,490
1,443
Non-insurance warranty expense 1,471
1,328
Other insurance related expenses 1,160
1,062
Other expenses 291
242
Total claims, benefits and expenses 10,798
10,424
Core income before income tax 1,280
1,364
Income tax expense on core income (232) (258) Core income 1,048 1,106 Net investment (losses) gains (199) 120
Income tax benefit (expense) on net investment gains (losses) 45
(24)
Net investment (losses) gains, after tax (154) 96 Net income$ 894 $ 1,202 2022 Compared with 2021 Core income decreased$58 million in 2022 as compared with 2021. Core income for our Property & Casualty Operations increased$56 million primarily due to improved underwriting results and higher net investment income from fixed income securities partially offset by lower investment income from limited partnership and common stock results. Core results for ourLife & Group segment decreased$135 million , while core loss for our Corporate & Other segment improved$21 million . Catastrophe losses were$247 million in 2022 as compared with$397 million in 2021. Catastrophe losses for the years endedDecember 31, 2022 and 2021 were driven by severe weather related events, primarily Winter Storm Elliott and Hurricane Ian for 2022 and Hurricane Ida andWinter Storms Uri and Viola for 2021. Favorable net prior year loss reserve development of$32 million was recorded in 2022 as compared with unfavorable net prior year loss reserve development of$11 million in 2021 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 Consolidated Financial Statements included under Item 8. 31
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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. Specialty provides management and professional liability and other coverages through property and casualty products and services using a network of brokers, independent agencies and managing general underwriters. Commercial works with a network of brokers and independent agents to market a broad range of property and casualty insurance products to all types of insureds targeting small business, construction, middle markets and other commercial customers. The International segment underwrites property and casualty coverages on a global basis through a branch operation inCanada , a European business consisting of insurance companies based in theU.K. and Luxembourg and Hardy, our Lloyd's syndicate. Our operations outside of Property & Casualty Operations are managed and reported in two segments:Life & Group and Corporate & Other.Life & Group primarily includes the results of our long term care business that is in run-off. Corporate & Other primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty businesses in run-off, including CNA Re, A&EP, a legacy portfolio of excess workers' compensation (EWC) policies and certain legacy mass tort reserves. Intersegment eliminations are also included in this segment. We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses and any cumulative effects of changes in accounting guidance. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure and management believes some investors may find this measure useful to evaluate our primary operations. See further discussion regarding how we manage our business and reconciliations of non-GAAP measures to the most comparable GAAP measures and other information in Note O to the Consolidated Financial Statements included under Item 8. In evaluating the results of our Specialty, Commercial and International segments, we utilize the loss ratio, the underlying loss ratio, the expense ratio, the dividend ratio, the combined ratio and the underlying combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The underlying loss ratio excludes the impact of catastrophes losses and net prior year loss reserve and premium development from the loss ratio. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The underlying combined ratio is the sum of the underlying loss ratio, the expense ratio and the dividend ratio. In addition, we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed, excluding rate and exposure changes, in comparison to the expiring premium dollars from policies available to renew. 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. Gross written premiums, excluding third-party captives, excludes business which is ceded to third-party captives, including business related to large warranty programs. We use underwriting gain (loss) to monitor our insurance operations. Underwriting gain (loss) is pretax and is calculated as net earned premiums less total insurance expenses, which includes insurance claims and policyholders' benefits, amortization of deferred acquisition costs and other insurance related expenses. Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition 32
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expenses. Further information on our reserves is provided in Note E to the
Consolidated Financial Statements included under Item 8.
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Specialty
Specialty provides management and professional liability and other coverages through property and casualty products and services using a network of brokers, independent agencies and managing general underwriters. Specialty includes the following business groups:
Management & Professional Liability consists of the following coverages and
products:
•Professional liability coverages and risk management services to various
professional firms, including architects, real estate agents, accounting firms
and law firms.
•D&O, E&O, employment practices, fiduciary, fidelity and cyber coverages.
Specific areas of focus include small and mid-size firms, public as well as
privately held firms and not-for-profit organizations.
•Insurance products to serve the healthcare industry, including professional and general liability as well as associated casualty coverages. Key customer groups include aging services, allied medical facilities, dentists, physicians, nurses and other medical practitioners.
Surety offers small, medium and large contract and commercial surety bonds.
Surety provides surety and fidelity bonds in all 50 states.
Warranty and Alternative Risks provides extended service contracts and insurance products that provide protection from the financial burden associated with mechanical breakdown and other related losses, primarily for vehicles, portable electronic communication devices and other consumer goods. Service contracts are generally distributed by commission-based independent representatives and sold by auto dealerships and retailers inNorth America to customers in conjunction with the purchase of a new or used vehicle or new consumer goods. Additionally, our insurance companies may issue contractual liability insurance policies or guaranteed asset protection reimbursement insurance policies to cover the liabilities of these service contracts issued by affiliated entities or third parties. 34
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The following table details the results of operations for Specialty.
Years endedDecember 31 (In millions, except ratios, rate, renewal premium change and retention) 2022 2021 Gross written premiums$ 7,514 $ 7,665 Gross written premiums excluding third-party captives 3,814 3,672 Net written premiums 3,306 3,225 Net earned premiums 3,203 3,076 Underwriting gain 366 347 Net investment income 431 497 Core income 668 704 Other performance metrics: Loss ratio excluding catastrophes and development 58.6 % 59.1 % Effect of catastrophe impacts 0.1 0.4 Effect of development-related items (1.3) (1.4) Loss ratio 57.4 58.1 Expense ratio 31.0 30.5 Dividend ratio 0.2 0.1 Combined ratio 88.6 % 88.7 % Combined ratio excluding catastrophes and development 89.8 % 89.7 % Rate 6 % 11 % Renewal premium change 7 12 Retention 86 83 New business$ 548 $ 551 2022 Compared with 2021 Gross written premiums, excluding third-party captives, for Specialty increased$142 million in 2022 as compared with 2021 driven by retention and rate. Net written premiums for Specialty increased$81 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income decreased
lower net investment income driven by limited partnership and common stock
results partially offset by improved current accident year underwriting results.
The combined ratio of 88.6% improved 0.1 point in 2022 as compared with 2021 primarily due to a 0.7 point improvement in the loss ratio largely offset by a 0.5 point increase in the expense ratio. The improvement in the loss ratio was largely due to improved current accident year underwriting results. Catastrophe losses were$2 million , or 0.1 points of the loss ratio, for 2022, as compared with$12 million , or 0.4 points of the loss ratio, for 2021. The increase in the expense ratio was primarily due to an increase in underwriting expenses driven by investments in technology and talent.
Favorable net prior year loss reserve development of
was recorded in 2022 and 2021. Further information on net prior year loss
reserve development is in Note E to the Consolidated Financial Statements
included under Item 8.
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The following table summarizes the gross and net carried reserves for Specialty.December 31 (In millions) 2022 2021 Gross case reserves$ 1,529 $ 1,578 Gross IBNR reserves 5,349 4,855
Total gross carried claim and claim adjustment expense reserves
$ 6,433 Net case reserves$ 1,310 $ 1,338 Net IBNR reserves 4,253 3,927
Total net carried claim and claim adjustment expense reserves
$ 5,265 36
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Commercial
Commercial works with a network of brokers and independent agents to market a broad range of property and casualty insurance products to all types of insureds targeting small business, construction, middle markets and other commercial customers. Property products include standard and excess property, marine and boiler and machinery coverages. Casualty products include standard casualty insurance products such as workers' compensation, general and product liability, commercial auto, umbrella, and excess and surplus coverages. Most insurance programs are provided on a guaranteed cost basis; however, we also offer specialized loss-sensitive insurance programs and total risk management services relating to claim and information services to the large commercial insurance marketplace.
The following table details the results of operations for Commercial.
Years endedDecember 31 (In millions, except ratios, rate, renewal premium change and retention) 2022 2021 Gross written premiums$ 5,170 $ 4,445 Gross written premiums excluding third-party captives 5,056 4,334 Net written premiums 4,193 3,595 Net earned premiums 3,923 3,552 Underwriting gain (loss) 106 (112) Net investment income 488 624 Core income 466 394 Other performance metrics: Loss ratio excluding catastrophes and development 61.5 % 61.0 % Effect of catastrophe impacts 5.6 10.0 Effect of development-related items (0.7) 0.5 Loss ratio 66.4 71.5 Expense ratio 30.4 31.1 Dividend ratio 0.5 0.5 Combined ratio 97.3 % 103.1 % Combined ratio excluding catastrophes and development 92.4 % 92.6 % Rate 5 % 7 % Renewal premium change 8 11 Retention 86 82 New business$ 1,009 $ 843 2022 Compared with 2021 Gross written premiums for Commercial increased$725 million in 2022 as compared with 2021 driven by higher new business and retention. Net written premiums for Commercial increased$598 million in 2022 as compared with 2021. The prior period included a one-time written premium catch-up resulting from the addition of a quota share treaty to our property reinsurance program. Excluding the impact of the prior period written premium catch-up, net written premiums increased$486 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums. Core income increased$72 million in 2022 as compared with 2021, driven by lower catastrophe losses and improved non-catastrophe underwriting results partially offset by lower net investment income driven by limited partnerships and common stock results. The combined ratio of 97.3% improved 5.8 points in 2022 as compared with 2021 primarily due to a 5.1 improvement in the loss ratio and a 0.7 point improvement in the expense ratio. The improvement in the loss ratio was driven by lower catastrophe losses and higher favorable net prior year loss reserve development. Catastrophe losses were$222 million , or 5.6 points of the loss ratio, for 2022, as compared with$358 million , 37
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or 10.0 points of the loss ratio, for 2021. The combined ratio excluding catastrophes and development improved 0.2 points in 2022 as compared with 2021. The improvement in the expense ratio of 0.7 points was driven by higher net earned premiums and lower acquisition costs partially offset by an increase in underwriting expenses. The loss ratio excluding catastrophes and development increased 0.5 points primarily driven by a shift in mix of business associated with the property quota share treaty purchased during June of 2021. Our property coverages, which have a lower underlying loss ratio than most other commercial coverages, now represent a smaller proportion of net earned premiums.
Favorable net prior year loss reserve development of
was recorded in 2022 and 2021. Further information on net prior year loss
reserve development is in Note E to the Consolidated Financial Statements
included under Item 8.
The following table summarizes the gross and net carried reserves for Commercial.December 31 (In millions) 2022 2021 Gross case reserves$ 3,156 $ 3,184 Gross IBNR reserves 6,239 5,706
Total gross carried claim and claim adjustment expense reserves
$ 8,890 Net case reserves$ 2,809 $ 2,850 Net IBNR reserves 5,621 5,215
Total net carried claim and claim adjustment expense reserves
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International
The International segment underwrites property and casualty coverages on a
global basis through a branch operation in
consisting of insurance companies based in the
our Lloyd's syndicate.
in the marine, oil & gas, construction, manufacturing and life science
industries.
Europe provides a diverse range of specialty products as well as commercial insurance products primarily in the marine, property, financial services and healthcare & technology industries in theU.K. and Continental Europe on both a domestic and cross-border basis.
Hardy operates through Lloyd's Syndicate 382 underwriting energy, marine,
property, casualty and specialty lines with risks located in many countries
around the world. The capacity of, and results from the syndicate, are 100%
attributable to CNA.
The following table details the results of operations for International.
Years endedDecember 31 (In millions, except ratios, rate, renewal premium change and retention) 2022 2021 Gross written premiums$ 1,394 $ 1,297 Net written premiums 1,164 1,101 Net earned premiums 1,070 1,057 Underwriting gain 87 55 Net investment income 63 57 Core income 106 86 Other performance metrics: Loss ratio excluding catastrophes and development 58.5 % 59.0 % Effect of catastrophe impacts 2.2 2.6 Effect of development-related items (1.2) 0.1 Loss ratio 59.5 61.7 Expense ratio 32.3 33.1 Combined ratio 91.8 % 94.8 % Combined ratio excluding catastrophes and development 90.8 % 92.1 % Rate 6 % 13 % Renewal premium change 11 13 Retention 81 78 New business$ 319 $ 274 2022 Compared with 2021 Gross written premiums for International increased$97 million in 2022 as compared with 2021. Excluding the effect of foreign currency exchange rates, gross written premiums increased$176 million driven by higher new business, rate and retention. Net written premiums for International increased$63 million in 2022 as compared with 2021. Excluding the effect of foreign currency exchange rates, net written premiums increased$137 million as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums. Core income increased$20 million in 2022 as compared with 2021 largely driven by improved underwriting results partially offset by an unfavorable impact from changes in foreign currency exchange rates. The combined ratio of 91.8% improved 3.0 points in 2022 as compared with 2021 due to a 2.2 point improvement in the loss ratio and a 0.8 point improvement in the expense ratio. Catastrophe losses were$23 39
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million, or 2.2 points of the loss ratio, for 2022, as compared with
million
expense ratio was primarily driven by lower acquisition costs.
Favorable net prior year loss reserve development of$13 million was recorded in 2022 as compared with unfavorable net prior year loss reserve development of$2 million in 2021. Further information on net prior year loss reserve development is in Note E to the Consolidated Financial Statements included under Item 8. The following table summarizes the gross and net carried reserves for International.December 31 (In millions) 2022 2021 Gross case reserves$ 817 $ 859 Gross IBNR reserves 1,586 1,421
Total gross carried claim and claim adjustment expense reserves
$ 2,280 Net case reserves$ 686 $ 744 Net IBNR reserves 1,317 1,196
Total net carried claim and claim adjustment expense reserves
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The Life & Group segment includes our run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies were sold on both an individual and group basis.
The following table summarizes the results of operations for
Years endedDecember 31 (In millions) 2022 2021 Net earned premiums$ 473 $ 491 Net investment income 804 966
Core (loss) income before income tax (53) 105
Income tax benefit on core income 44 21
Core (loss) income
(9) 126 2022 Compared with 2021
Core results decreased
to
partnerships.
Life & Group results for 2022 include a$25 million pretax favorable impact from the reduction in long term care claim reserves and a$5 million pretax favorable impact from the reduction in structured settlement claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2022. Core income for 2021 included a$40 million pretax favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2021. 41
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The following tables summarize policyholder reserves for
December 31, 2022 Claim and claim adjustment Future policy (In millions) expenses benefits Total Long term care$ 2,979 $ 10,151 $ 13,130 Structured settlement obligations 508 - 508 Other 9 - 9 Total 3,496 10,151 13,647
Shadow adjustments (1) 77 - 77 Ceded reserves (2) 101 - 101 Total gross reserves$ 3,674
$ 10,151 $ 13,825 December 31, 2021 Claim and claim adjustment Future policy (In millions) expenses benefits Total Long term care$ 2,905 $ 10,012 $ 12,917 Structured settlement obligations 526 - 526 Other 10 - 10 Total 3,441 10,012 13,453 Shadow adjustments (1) 200 2,936 3,136 Ceded reserves (2) 113 288 401 Total gross reserves$ 3,754 $ 13,236 $ 16,990 (1) To the extent that unrealized gains on fixed maturity securities supporting long term care reserves 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 (losses), through Other comprehensive income (loss). To the extent that unrealized gains or losses on fixed maturity securities supporting structured settlements not funded by annuities would impact the reserve balance if realized, a related increase or decrease in Insurance reserves is recorded, net of tax, as a reduction or increase of net unrealized gains (losses), through Other comprehensive income (Shadow Adjustments).
(2) Ceded reserves relate to claim or policy reserves fully reinsured in
connection with a sale or exit from the underlying business. In the fourth
quarter of 2022, we novated our block of legacy annuity business resulting in
the reduction of all associated gross and ceded future policy benefit reserves.
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Corporate & Other
Corporate & Other primarily includes certain corporate expenses, including
interest on corporate debt and the results of certain property and casualty
business in run-off, including CNA Re, A&EP, a legacy portfolio of EWC policies
and certain legacy mass tort reserves.
The following table summarizes the results of operations for the Corporate &
Other segment, including intersegment eliminations.
Years endedDecember 31 (In millions) 2022 2021 Net investment income$ 19 $ 15 Insurance claims and policyholders' benefits 76 109 Interest expense 112 112 Core loss (183) (204) 2022 Compared with 2021 Core loss improved$21 million for 2022 as compared with 2021 driven by favorability related to the A&EP Loss Portfolio Transfer (LPT) and the prior period recognition of a$12 million after-tax loss resulting from the legacy EWC LPT. These results were partially offset by an increase in expenses as result of continued investments in technology infrastructure and security. The application of retroactive reinsurance accounting to additional cessions to the A&EP LPT resulted in an after-tax benefit of$3 million in 2022 compared to an after-tax charge of$25 million in 2021, both of which have no economic impact. The A&EP LPT and EWC LPT are further discussed in Note E to the Condensed Consolidated Financial Statements included under Item 8. The following table summarizes the gross and net carried reserves for Corporate & Other. December 31 (In millions) 2022 2021 Gross case reserves$ 1,428 $ 1,551 Gross IBNR reserves 1,321 1,266
Total gross carried claim and claim adjustment expense reserves
$ 2,817 Net case reserves$ 137 $ 146 Net IBNR reserves 202 148
Total net carried claim and claim adjustment expense reserves
PENSION PLAN IMPACT ON 2023 RESULTS
We anticipate a net pension cost of approximately$12 million in 2023 as compared with a benefit of$55 million in 2022. The change is primarily due to higher interest cost on projected benefit obligations as a result of an increase in discount rates year over year, as well as a lower expected return on plan assets as a result of a lower plan asset base given actual asset returns in 2022. A portion of this additional cost will result in an unfavorable impact on our expense ratio in 2023.
Our legacy pension plan is further discussed in Note I to the Condensed
Financial Statements included under Item 8.
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Table of Con tents INVESTMENTS Net Investment Income
The significant components of Net investment income are presented in the
following table. Fixed income securities, as presented, include both fixed
maturity securities and non-redeemable preferred stock.
Years endedDecember 31 (In millions) 2022 2021 Fixed income securities: Taxable fixed income securities$ 1,585 $ 1,439 Tax-exempt fixed income securities 244 311 Total fixed income securities 1,829 1,750 Limited partnership and common stock investments (31) 402 Other, net of investment expense 7 7 Net investment income$ 1,805
Effective income yield for the fixed income securities portfolio 4.4
% 4.3 % Limited partnership and common stock return (1.4) % 22.3 %
Net investment income decreased
driven by unfavorable limited partnership and common stock results partially
offset by higher income from fixed income securities.
Net Investment (Losses) Gains
The components of Net investment (losses) gains are presented in the following table. Years endedDecember 31 (In millions) 2022 2021 Fixed maturity securities (1): Corporate bonds and other$ (89) $ 134 States, municipalities and political subdivisions 26
-
Asset-backed (34)
(38)
Total fixed maturity securities (97)
96
Non-redeemable preferred stock (116)
4
Derivatives, short term and other 22 10 Mortgage loans (8) 10 Net investment (losses) gains (199) 120
Income tax benefit (expense) on net investment gains (losses) 45
(24)
Net investment (losses) gains, after tax$ (154)
(1) Excludes the loss in 2022 on the assets supporting the funds withheld
liability, which is reflected in the Derivatives, short term and other line.
Pretax net investment results decreased
2021 driven by net losses on fixed maturity securities and the unfavorable
change in fair value of non-redeemable preferred stock.
Additionally, Derivatives, short term and other for 2022 includes an$18 million non-economic net gain related to the coinsurance agreement on our legacy annuity business in ourLife & Group segment and the associated funds withheld embedded derivative, which was novated in 2022.
Further information on our investment gains and losses as well as on our
derivative financial instruments is set forth in Notes A and B to the
Consolidated Financial Statements included under Item 8.
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Portfolio Quality
The following table presents the estimated fair value and net unrealized gains
(losses) of our fixed maturity securities by rating distribution.
December 31 2022 2021
Estimated Net Unrealized Estimated Net Unrealized
(In millions) Fair Value
Gains (Losses) Fair Value Gains (Losses)
Government-sponsored enterprises
$ 2,419 $ (336) $ 2,600 $ 42 AAA 2,398 (208) 3,784 360 AA 6,342 (663) 7,665 823 A 9,043 (531) 9,511 1,087 BBB 15,651 (1,447) 18,458 2,043 Non-investment grade 1,774 (219) 2,362 91 Total$ 37,627 $ (3,404) $ 44,380 $ 4,446
As of
internally. AAA rated securities included
prefunded municipal bonds as of
The following table presents available-for-sale fixed maturity securities in a
gross unrealized loss position by ratings distribution.
Estimated Fair Gross Unrealized
(In millions) Value Losses
U.S. Government , Government agencies and Government-sponsored
enterprises $ 2,355 $ 337
AAA 1,559 298
AA 4,327 817
A 6,615 749
BBB 13,226 1,621
Non-investment grade 1,429 234
Total $ 29,511 $ 4,056
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.
December 31, 2022
Estimated Fair Gross Unrealized
(In millions) Value Losses
Due in one year or less $ 774 $ 16
Due after one year through five years 7,799 539
Due after five years through ten years 10,367 1,515
Due after ten years 10,571 1,986
Total $ 29,511 $ 4,056
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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 theLife & 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. December 31 2022 2021 Effective Effective Estimated Duration Estimated Duration (In millions) Fair Value (In years) Fair Value (In years) Investments supporting Life & Group$ 14,511 9.9$ 18,458 9.2 Other investments 25,445 4.7 28,915 4.9 Total$ 39,956 6.6$ 47,373 6.6 The effective duration of Investments supportingLife & Group liabilities atDecember 31, 2022 lengthened as compared withDecember 31, 2021 , reflecting strategic repositioning to capitalize on higher rates and reduce reinvestment risk. The investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A. 46
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For 2022, net cash provided by operating activities was
compared with
operating activities was driven by the prior year payment of the EWC LPT
premium. The EWC LPT is further discussed in Note E to the Consolidated
Financial Statements included under Part II, Item 8.
Cash flows from investing activities include the purchase and disposition of financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, equipment and other assets not generally held for resale. For 2022, net cash used by investing activities was$1,512 million as compared with$1,228 million for 2021. Net cash used or provided by investing activities is primarily driven by cash available from operations and by other factors, such as financing activities. Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, and outflows for stockholder dividends, repayment of debt and purchases of our common stock.
For 2022, net cash used by financing activities was
with
include:
•In 2022, we paid dividends of
our common stock at an aggregate cost of
•In 2021, we paid dividends of
our common stock at an aggregate cost of
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 theFederal Home Loan Bank of Chicago (FHLBC).
CCC paid dividends of
2021.
We have an effective automatic shelf registration statement on file with the
unspecified amount of debt, equity or hybrid securities from time to time.
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Common Stock Dividends
Cash dividends of$3.60 per share on our common stock, including a special cash dividend of$2.00 per share, were declared and paid in 2022. OnFebruary 3, 2023 , our Board of Directors declared a quarterly cash dividend of$0.42 per share and a special cash dividend of$1.20 per share, payableMarch 9, 2023 to stockholders of record onFebruary 21, 2023 . The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints. Our ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from our subsidiaries. The payment of dividends to us by our insurance subsidiaries without prior approval of the insurance department of each subsidiary's domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.
Further information on our dividends from subsidiaries is provided in Note M to
the Consolidated Financial Statements included under Item 8.
Commitments, Contingencies and Guarantees
We have various commitments, contingencies and guarantees which arose in the ordinary course of business. The impact of these commitments, contingencies and guarantees should be considered when evaluating our liquidity and capital resources.
A summary of our commitments is presented in the following table.
December 31, 2022 Less than 1 More than 5 (In millions) Total year 1-3 years 3-5 years years Debt (1)$ 3,191 $ 350 $ 697 $ 1,091 $ 1,053 Lease obligations (2) 261 39 59 45 118 Claim and claim adjustment expense reserves (3) 26,151 6,239 7,139 3,596 9,177 Future policy benefit reserves (4) 25,478 (318) 169 979 24,648 Total (5)$ 55,081 $ 6,310 $ 8,064 $ 5,711 $ 34,996 (1) Includes estimated future interest payments. (2) The lease obligations reflected above are not discounted. (3) The Claim and claim adjustment expense reserves reflected above are not discounted and represent our estimate of the amount and timing of the ultimate settlement and administration of gross claims based on our assessment of facts and circumstances known as ofDecember 31, 2022 . See the Reserves - Estimates and Uncertainties section of this MD&A for further information. (4) The Future policy benefit reserves reflected above are not discounted and represent our estimate of the ultimate amount and timing of the settlement of benefits net of expected premiums, and are based on our assessment of facts and circumstances known as ofDecember 31, 2022 . See the Reserves - Estimates and Uncertainties section of this MD&A for further information. (5) Does not include investment commitments of approximately$1,455 million related to future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to private placement securities. Further information on our commitments, contingencies and guarantees is provided in Notes A, B, E, F, H and L to the Consolidated Financial Statements included under Item 8. 48
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Ratings
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by major rating agencies and these ratings reflect the rating agency's opinion of the insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security and may be revised or withdrawn at any time by the issuing organization. Each agency's rating should be evaluated independently of any other agency's rating. One or more of these agencies could take action in the future to change the ratings of our insurance subsidiaries.
The table below reflects the Insurer Financial Strength Ratings of CNA's
insurance company subsidiaries issued by
table also includes the ratings for CNAF's senior debt.
December 31, 2022 Insurer Financial Strength Ratings Senior Debt Ratings A.M. Best A bbb+ Moody's A2 Baa2 S&P A+ A- Fitch A+ BBB+
Financial Strength and Senior Debt Ratings.
included within S&P's Insurer Financial Strength Rating for the Company.
Syndicate 382 benefits from the Financial Strength Rating of Lloyd's, which is
rated A+ by S&P and A by
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ACCOUNTING STANDARDS UPDATE
InAugust 2018 , the FASB issued ASU 2018-12,Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. For the Company, this includes the long term care business. The Company will adopt the new guidance effectiveJanuary 1, 2023 , using the modified retrospective method applied as of the transition date ofJanuary 1, 2021 . The most significant impact will be the effect of updating the discount rate assumption quarterly to reflect an upper-medium grade fixed-income instrument yield, rather than CNA's expected investment portfolio yield. This will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The Company expects the net impact of these changes will be a decrease of approximately$2.3 billion in Accumulated other comprehensive income (AOCI) as of the transition date ofJanuary 1, 2021 . To illustrate the sensitivity of this adjustment, had the Company used interest rates in effect as ofDecember 31, 2022 in its calculation, the transition impact to AOCI would have been a decrease of approximately$250 million . The requirement to review, and update if there is a change, cash flow assumptions at least annually is expected to change the pattern of earnings being recognized. Under current accounting guidance, the Company's third quarter 2022 gross premium valuation assessment indicated a pretax reserve margin of$125 million , with no unlocking event. However under the new guidance, the effect of changes in cash flow assumptions from the Company's assessment would be recorded in the Company's results of operations (except for discount rate changes which would be recorded quarterly through AOCI).
For a discussion of Accounting Standards, see Note A to the Consolidated
Financial Statements included under Item 8.
FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as "believes," "expects," "intends," "anticipates," "estimates" and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves (note that loss reserves for long term care, A&EP and other mass tort claims are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures); the impact of routine ongoing insurance reserve reviews we conduct; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statements. These risks and uncertainties are addressed in Part I, Item IA Risk Factors and 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 this report, including the sufficiency of the reserves
and the possibility for future increases, which would be reflected in the
results of operations in the period that the need for such adjustment is
determined;
•the risk that the other parties to the transactions in which, subject to
certain limitations, we ceded our legacy A&EP and EWC liabilities, respectively,
will not fully perform their respective obligations to CNA, the uncertainty in
estimating loss reserves for A&EP and EWC liabilities and the possible continued
exposure of CNA to liabilities for A&EP and EWC claims that are not covered
under the terms of the respective transactions;
•the performance of reinsurance companies under reinsurance contracts with us;
and
•the risks and uncertainties associated with potential acquisitions and
divestitures, including the consummation of such transactions, the successful
integration of acquired operations and the potential for subsequent impairment
of goodwill or intangible assets.
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Industry and General Market Factors
•the COVID-19 pandemic and measures to mitigate the spread of the virus may continue to result in increased claims and related litigation risk across our enterprise; •the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business; •product and policy availability and demand and market responses, including the level of ability to obtain rate increases; •general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create losses to our lines of business and inflationary pressures on medical care costs, construction costs and other economic sectors, as well as social inflation, 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.
Regulatory and Legal Factors
•regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, which are increasing in complexity and number, change frequently, sometimes conflict, and could expose us to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions, including regulations related to cyber security protocols (which continue to evolve in breadth, sophistication and maturity in response to an ever-evolving threat landscape), legal inquiries by state authorities, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, including those revising applicability of statutes of limitations, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations; •regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies; •regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards; and •regulatory and legal implications relating to the sophisticated cyber incident sustained by the Company inMarch 2021 that may arise.
Impact of Natural and Man-Made Disasters and Mass Tort Claims
•weather and other natural physical events, including the severity and frequency
of storms, hail, snowfall and other winter conditions, natural disasters such as
hurricanes, tornados and earthquakes, as well as climate change, including
effects on global weather patterns, greenhouse gases, sea, land and air
temperatures, sea levels, wildfires, rain, hail and snow;
•regulatory requirements imposed by coastal state regulators in the wake of
hurricanes or other natural disasters, including limitations on the ability to
exit markets or to non-renew, cancel or change terms and conditions in policies,
as well as mandatory assessments to fund any shortfalls arising from the
inability of quasi-governmental insurers to pay claims;
•man-made disasters, including the possible occurrence of terrorist attacks, the
unpredictability of the nature, targets, severity or frequency of such events,
and the effect of the absence or insufficiency of applicable terrorism
legislation on coverages;
•the occurrence of epidemics and pandemics; and
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•mass tort claims, including those related to exposure to potentially harmful
products or substances such as glyphosate, lead paint, PFAS and opioids; and
claims arising from changes that repeal or weaken tort reforms, such as those
related to abuse reviver statutes.
Our forward-looking statements speak only as of the date of the filing of this
Annual Report on Form 10-K 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 filing of this Annual Report on Form 10-K, even if our
expectations or any related events or circumstances change.
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