CNA FINANCIAL CORP – 10-Q – Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

OVERVIEW

The following discussion highlights significant factors affecting the Company.
References to "we," "our," "us" or like terms refer to the business of CNA.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements included under Part I, Item 1 of this Form
10-Q, as well as the updates and additions to our Risk Factors disclosed under
Part II, Item 1A of this Form 10-Q. The following discussion should also be read
in conjunction with Item 1A Risk Factors and Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations, which are included in
our Annual Report on Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 2020.
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. See further discussion
regarding how we manage our business in Note I to the Condensed Consolidated
Financial Statements included under Part I, Item 1. For reconciliations of
non-GAAP measures to the most comparable GAAP measures and other information,
please refer herein and/or to CNA's most recent Annual Report on Form 10-K on
file with the Securities and Exchange Commission.
In evaluating the results of our Specialty, Commercial and International
segments, we utilize the loss ratio, the loss ratio excluding catastrophes and
development, the expense ratio, the dividend ratio, the combined ratio and the
combined ratio excluding catastrophes and development. These ratios are
calculated using GAAP financial results. The loss ratio is the percentage of net
incurred claim and claim adjustment expenses to net earned premiums. The loss
ratio excluding catastrophes and development excludes net catastrophes losses
and changes in estimates of claim and claim adjustment expense reserves, net of
reinsurance, for prior years from the loss ratio. The expense ratio is the
percentage of insurance underwriting and acquisition expenses, including the
amortization of deferred acquisition costs, to net earned premiums. The dividend
ratio is the ratio of policyholders' dividends incurred to net earned premiums.
The combined ratio is the sum of the loss, expense and dividend ratios. The
combined ratio excluding catastrophes and development is the sum of the loss
ratio excluding catastrophes and development, the expense ratio and the dividend
ratio. In addition we also utilize renewal premium change, rate, retention and
new business in evaluating operating trends. Renewal premium change represents
the estimated change in average premium on policies that renew, including rate
and exposure changes. Rate represents the average change in price on policies
that renew excluding exposure change. For certain products within Small
Business, where quantifiable, rate includes the influence of new business as
well. Exposure represents the measure of risk used in the pricing of the
insurance product. Retention represents the percentage of premium dollars
renewed 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.
Changes in estimates of claim and claim adjustment expense reserves, net of
reinsurance, for prior years are defined as net prior year loss reserve
development within this MD&A. These changes can be favorable or unfavorable. Net
prior year loss reserve development does not include the effect of any related
acquisition expenses. Further information on our reserves is provided in Note E
to the Condensed Consolidated Financial Statements included under Part I, Item
1.


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CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements in conformity
with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the Condensed Consolidated Financial Statements and
the amount of revenues and expenses reported during the period. Actual results
may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been
prepared in accordance with GAAP applied on a consistent basis. We continually
evaluate the accounting policies and estimates used to prepare the Condensed
Consolidated Financial Statements. In general, our estimates are based on
historical experience, evaluation of current trends, information from
third-party professionals and various other assumptions that are believed to be
reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to
an understanding of our Condensed Consolidated Financial Statements as their
application places the most significant demands on our judgment:
•Insurance Reserves
•Long Term Care Reserves
•Reinsurance and Insurance Receivables
•Valuation of Investments and Impairment of Securities
•Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual
results could differ significantly from our estimates and may have a material
adverse impact on our results of operations, financial condition, equity,
business, and insurer financial strength and corporate debt ratings. See the
Critical Accounting Estimates section of our Management's Discussion and
Analysis of Financial Condition and Results of Operations included under Item 7
of our Annual Report on Form 10-K for the year ended December 31, 2020 for
further information.
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