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CNA FINANCIAL CORP - Quarter Report: 2019 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
36-6169860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
151 N. Franklin
 
60606
Chicago,
Illinois
 
(Zip Code)
(Address of principal executive offices)
 
 
(312) 822-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, Par value $2.50
 
"CNA"
 
New York Stock Exchange
 
 
 
 
Chicago Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒

Non-accelerated filer
☐

Accelerated filer
☐

Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 24, 2019, 271,478,277 shares of common stock were outstanding.


Item Number
 
Page
Number
 
 
1.
 
 
 
 
 
 
 
2.
3.
4.
 
PART II
 
1.
2.
6.

2
Table of Contents

PART I
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions, except per share data)
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,890

 
$
1,853

 
$
5,517

 
$
5,453

Net investment income
487

 
487

 
1,573

 
1,483

Net investment gains:
 
 
 
 
 
 
 

Other-than-temporary impairment losses
(14
)
 
(3
)
 
(34
)
 
(9
)
Other net investment gains
21

 
17

 
54

 
34

Net investment gains
7

 
14

 
20

 
25

Non-insurance warranty revenue
292

 
258

 
858

 
744

Other revenues
9

 
10

 
22

 
26

Total revenues
2,685

 
2,622

 
7,990

 
7,731

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,614

 
1,312

 
4,323

 
3,978

Amortization of deferred acquisition costs
345

 
337

 
1,025

 
992

Non-insurance warranty expense
278

 
235

 
801

 
676

Other operating expenses
289

 
302

 
853

 
903

Interest
32

 
34

 
100

 
104

Total claims, benefits and expenses
2,558

 
2,220

 
7,102

 
6,653

Income before income tax
127

 
402

 
888

 
1,078

Income tax expense
(20
)
 
(66
)
 
(161
)
 
(181
)
Net income
$
107

 
$
336

 
$
727

 
$
897

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.39

 
$
1.24

 
$
2.68

 
$
3.30

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.39

 
$
1.23

 
$
2.67

 
$
3.29

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
271.6

 
271.6

 
271.6

 
271.5

Diluted
272.6

 
272.5

 
272.5

 
272.4


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


3
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Comprehensive Income
 
 
 
 
 
 
 
Net income
$
107

 
$
336

 
$
727

 
$
897

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
—

 
(1
)
 
4

 
(11
)
Net unrealized gains on other investments
41

 
(158
)
 
1,003

 
(746
)
Net unrealized gains on investments
41

 
(159
)
 
1,007

 
(757
)
Foreign currency translation adjustment
(29
)
 
—

 
(12
)
 
(40
)
Pension and postretirement benefits
7

 
7

 
22

 
24

Other comprehensive income (loss), net of tax
19

 
(152
)
 
1,017

 
(773
)
Total comprehensive income
$
126

 
$
184

 
$
1,744

 
$
124

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

4
Table of Contents

CNA Financial Corporation
Condensed Consolidated Balance Sheets
(In millions, except share data)
September 30, 2019 (Unaudited)
 
December 31,
2018
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $38,258 and $38,085)
$
42,459

 
$
39,546

Equity securities at fair value (cost of $812 and $844)
841

 
780

Limited partnership investments
1,758

 
1,982

Other invested assets
60

 
53

Mortgage loans
923

 
839

Short term investments
1,494

 
1,286

Total investments
47,535

 
44,486

Cash
340

 
310

Reinsurance receivables (less allowance for uncollectible receivables of $29 and $29)
4,063

 
4,426

Insurance receivables (less allowance for uncollectible receivables of $40 and $42)
2,464

 
2,323

Accrued investment income
409

 
391

Deferred acquisition costs
668

 
633

Deferred income taxes
190

 
392

Property and equipment at cost (less accumulated depreciation of $201 and $216)
293

 
324

Goodwill
145

 
146

Deferred non-insurance warranty acquisition expense
2,772

 
2,513

Other assets (includes $- and $8 due from Loews Corporation)
1,571

 
1,208

Total assets
$
60,450

 
$
57,152

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
21,596

 
$
21,984

Unearned premiums
4,608

 
4,183

Future policy benefits
12,305

 
10,597

Long term debt
2,678

 
2,680

Deferred non-insurance warranty revenue
3,707

 
3,402

Other liabilities (includes $47 and $23 due to Loews Corporation)
3,433

 
3,089

Total liabilities
48,327

 
45,935

Commitments and contingencies (Notes C and F)


 


Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,478,277 and 271,456,978 shares outstanding)
683

 
683

Additional paid-in capital
2,197

 
2,192

Retained earnings
9,171

 
9,277

Accumulated other comprehensive income (loss)
139

 
(878
)
Treasury stock (1,561,966 and 1,583,265 shares), at cost
(67
)
 
(57
)
Total stockholders’ equity
12,123

 
11,217

Total liabilities and stockholders' equity
$
60,450

 
$
57,152

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

5
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2019
 
2018
Cash Flows from Operating Activities
 
 
 
Net income
$
727

 
$
897

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax (benefit) expense
(72
)
 
37

Trading portfolio activity
(1
)
 
2

Net investment gains
(20
)
 
(25
)
Equity method investees
48

 
136

Net amortization of investments
(64
)
 
(48
)
Depreciation and amortization
52

 
59

Changes in:
 
 
 
Receivables, net
207

 
(47
)
Accrued investment income
(18
)
 
5

Deferred acquisition costs
(37
)
 
(24
)
Insurance reserves
337

 
108

Other, net
(179
)
 
(232
)
Net cash flows provided by operating activities
980

 
868

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
4,872

 
6,622

Fixed maturity securities - maturities, calls and redemptions
2,116

 
1,838

Equity securities
171

 
69

Limited partnerships
417

 
304

Mortgage loans
109

 
83

Purchases:
 
 
 
Fixed maturity securities
(7,053
)
 
(8,244
)
Equity securities
(140
)
 
(177
)
Limited partnerships
(167
)
 
(380
)
Mortgage loans
(193
)
 
(112
)
Change in other investments
(8
)
 
(10
)
Change in short term investments
(180
)
 
158

Purchases of property and equipment
(20
)
 
(87
)
Other, net
16

 
16

Net cash flows (used) provided by investing activities
(60
)
 
80

Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
(834
)
 
(801
)
Proceeds from the issuance of debt
496

 
—

Repayment of debt
(520
)
 
(180
)
Purchase of treasury stock
(18
)
 
—

Other, net
(11
)
 
(8
)
Net cash flows used by financing activities
(887
)
 
(989
)
Effect of foreign exchange rate changes on cash
(3
)
 
(4
)
Net change in cash
30

 
(45
)
Cash, beginning of year
310

 
355

Cash, end of period
$
340

 
$
310

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

6
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Common Stock
 
 
 
 
 
 
 
Balance, beginning of period
$
683

 
$
683

 
$
683

 
$
683

Balance, end of period
683

 
683

 
683

 
683

Additional Paid-in Capital
 
 
 
 
 
 
 
Balance, beginning of period
2,190

 
2,179

 
2,192

 
2,175

Stock-based compensation
7

 
7

 
5

 
11

Balance, end of period
2,197

 
2,186

 
2,197

 
2,186

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of period
9,159

 
9,216

 
9,277

 
9,364

Dividends to common stockholders ($0.35, $0.35, $3.05 and $2.95 per share)
(95
)
 
(96
)
 
(833
)
 
(805
)
Net income
107

 
336

 
727

 
897

Balance, end of period
9,171

 
9,456

 
9,171

 
9,456

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Balance, beginning of period
120

 
(605
)
 
(878
)
 
16

Other comprehensive income (loss)
19

 
(152
)
 
1,017

 
(773
)
Balance, end of period
139

 
(757
)
 
139

 
(757
)
Treasury Stock
 
 
 
 
 
 
 
Balance, beginning of period
(65
)
 
(58
)
 
(57
)
 
(60
)
Stock-based compensation
—

 
—

 
8

 
2

Purchase of treasury stock
(2
)
 
—

 
(18
)
 
—

Balance, end of period
(67
)
 
(58
)
 
(67
)
 
(58
)
Total stockholders' equity
$
12,123

 
$
11,510

 
$
12,123

 
$
11,510

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


7
Table of Contents

CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 89% of the outstanding common stock of CNAF as of September 30, 2019.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, including certain financial statement notes, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2018, including the summary of significant accounting policies in Note A. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
The interim financial data as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Recently Adopted Accounting Standards Updates (ASU)
ASU 2016-02: In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet assets and liabilities for the rights and obligations created by the majority of leases, including those historically accounted for as operating leases. On January 1, 2019, the Company adopted the updated guidance using a modified retrospective method. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. The Company utilized the package of practical expedients allowing the Company to not reassess whether a contract is or contains a lease, lease classification and initial direct costs. The Company also utilized the practical expedient to not separate lease and non-lease components for all leases.
Adoption of the updated guidance resulted in the following changes to the Condensed Consolidated Balance Sheet on January 1, 2019:
(In millions)
Balance as of December 31, 2018
 
Adjustments Due to Adoption of Topic 842
 
Balance as of January 1, 2019
Property and equipment at cost (less accumulated depreciation)
$
324

 
$
2

 
$
326

Other assets
1,208

 
237

 
1,445

Other liabilities
3,089

 
239

 
3,328


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

8
Table of Contents

Accounting Standards Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The guidance will be applied using a modified retrospective approach with the cumulative effect recognized as an adjustment to retained earnings. A prospective transition approach is required for debt securities that have recognized an other-than-temporary impairment prior to the effective date. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, but does not expect the impact to be material. The primary changes will be the use of the expected credit loss model for mortgage loans, reinsurance and insurance receivables and other financing receivables and the use of the allowance method rather than the write-down method for credit losses within the available-for-sale fixed maturities portfolio. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines.
The Company is currently in the process of evaluating existing impairment methodology, developing models to comply with the new guidance and accumulating all of the necessary internal and external information required to measure credit losses under the expected credit loss model. The Company is implementing changes to the information systems to assist with the accounting, including the recording of the allowance. The Company is also evaluating additional changes to processes to meet the reporting and disclosure requirements of the new guidance.
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.  The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts.  The guidance requires entities to annually update cash flow assumptions, including morbidity and persistency, and update discount rate assumptions quarterly using an upper-medium grade fixed-income instrument yield.  The effect of changes in cash flow assumptions will be recorded in Net income and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2020; however the FASB has approved a one year deferral of the effective date. The guidance requires restatement of prior periods presented. Early adoption is permitted. The Company is currently evaluating the method and timing of adoption and the effect the updated guidance will have on its financial statements. The annual updating of cash flow assumptions is expected to increase income statement volatility. The quarterly change in discount rate is expected to increase volatility in the Company’s stockholders' equity, but that will be somewhat mitigated because Shadow Adjustments are eliminated under the new guidance. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows are unchanged.

9
Table of Contents

Note B. Earnings (Loss) Per Share
Earnings (loss) per share is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For the three and nine months ended September 30, 2019, approximately 1 million and 920 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, less than 1 thousand and approximately 3 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.
For the three and nine months ended September 30, 2018, approximately 900 thousand and 925 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 1 thousand and 3 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.
The Company repurchased 415,695 shares of CNAF common stock at an aggregate cost of $18 million during the nine months ended September 30, 2019. No repurchases were made during 2018.


10
Table of Contents

Note C. Investments
The significant components of Net investment income are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Fixed maturity securities
$
452

 
$
449

 
$
1,362

 
$
1,339

Equity securities
16

 
10

 
62

 
32

Limited partnership investments
12

 
23

 
125

 
93

Mortgage loans
13

 
11

 
37

 
36

Short term investments
8

 
6

 
27

 
18

Trading portfolio
2

 
1

 
6

 
6

Other
—

 
1

 
2

 
4

Gross investment income
503

 
501

 
1,621

 
1,528

Investment expense
(16
)
 
(14
)
 
(48
)
 
(45
)
Net investment income
$
487

 
$
487

 
$
1,573

 
$
1,483


During the three and nine months ended September 30, 2019, $5 million and $26 million of Net investment income was recognized due to the change in fair value of common stock still held as of September 30, 2019. During the three and nine months ended September 30, 2018, Net investment income was reduced by $2 million due to the change in fair value of common stock still held as of September 30, 2018.
Net investment gains (losses) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Net investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross gains
$
34

 
$
42

 
$
98

 
$
148

Gross losses
(31
)
 
(32
)
 
(104
)
 
(116
)
Net investment gains (losses) on fixed maturity securities
3

 
10

 
(6
)
 
32

Equity securities
7

 
2

 
60

 
(23
)
Derivatives
(2
)
 
1

 
(13
)
 
10

Short term investments and other
(1
)
 
1

 
(21
)
 
6

Net investment gains (losses)
$
7

 
$
14

 
$
20

 
$
25


During the three and nine months ended September 30, 2019, $7 million and $60 million of Net investment gains were recognized due to the change in fair value of non-redeemable preferred stock still held as of September 30, 2019. During the three and nine months ended September 30, 2018, $2 million of Net investment gains and $23 million of Net investment losses were recognized due to the change in fair value of non-redeemable preferred stock still held as of September 30, 2018. Net investment gains (losses) for the nine months ended September 30, 2019 included a $21 million loss related to the second quarter 2019 redemption of the Company's $500 million senior notes due August 2020.
The components of Other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
12

 
$
1

 
$
24

 
$
6

Asset-backed
2

 
2

 
10

 
3

OTTI losses recognized in earnings
$
14

 
$
3

 
$
34

 
$
9



11
Table of Contents

The following tables present a summary of fixed maturity securities.
September 30, 2019
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
19,806

 
$
2,263

 
$
42

 
$
22,027

 
$
—

States, municipalities and political subdivisions
9,154

 
1,641

 
—

 
10,795

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,718

 
157

 
1

 
4,874

 
(23
)
Commercial mortgage-backed
2,066

 
117

 
3

 
2,180

 
1

Other asset-backed
1,884

 
46

 
4

 
1,926

 
(3
)
Total asset-backed
8,668

 
320

 
8

 
8,980

 
(25
)
U.S. Treasury and obligations of government-sponsored enterprises
124

 
7

 
—

 
131

 
—

Foreign government
491

 
20

 
—

 
511

 
—

Redeemable preferred stock
10

 
—

 
—

 
10

 
—

Total fixed maturity securities available-for-sale
38,253

 
4,251

 
50

 
42,454

 
$
(25
)
Total fixed maturity securities trading
5

 
—

 
—

 
5

 
 
Total fixed maturity securities
$
38,258

 
$
4,251

 
$
50

 
$
42,459

 
 
December 31, 2018
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
18,764

 
$
791

 
$
395

 
$
19,160

 
$
—

States, municipalities and political subdivisions
9,681

 
1,076

 
9

 
10,748

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,815

 
68

 
57

 
4,826

 
(20
)
Commercial mortgage-backed
2,200

 
28

 
32

 
2,196

 
—

Other asset-backed
1,975

 
11

 
24

 
1,962

 
—

Total asset-backed
8,990

 
107

 
113

 
8,984

 
(20
)
U.S. Treasury and obligations of government-sponsored enterprises
156

 
3

 
—

 
159

 
—

Foreign government
480

 
5

 
4

 
481

 
—

Redeemable preferred stock
10

 
—

 
—

 
10

 
—

Total fixed maturity securities available-for-sale
38,081

 
1,982

 
521

 
39,542

 
$
(20
)
Total fixed maturity securities trading
4

 
—

 
—

 
4

 
 
Total fixed maturity securities
$
38,085

 
$
1,982

 
$
521

 
$
39,546

 
 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group segment would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of September 30, 2019 and December 31, 2018, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2,237 million and $1,078 million.


12
Table of Contents

The following tables present the estimated fair value and gross unrealized losses of fixed maturity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 2019
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
890

 
$
26

 
$
200

 
$
16

 
$
1,090

 
$
42

States, municipalities and political subdivisions
20

 
—

 
2

 
—

 
22

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
150

 
—

 
38

 
1

 
188

 
1

Commercial mortgage-backed
83

 
2

 
26

 
1

 
109

 
3

Other asset-backed
416

 
3

 
6

 
1

 
422

 
4

Total asset-backed
649

 
5

 
70

 
3

 
719

 
8

U.S. Treasury and obligations of government-sponsored enterprises
14

 
—

 
4

 
—

 
18

 
—

Foreign government
17

 
—

 
2

 
—

 
19

 
—

Total
$
1,590

 
$
31

 
$
278

 
$
19

 
$
1,868

 
$
50

 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2018
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
8,543

 
$
340

 
$
825

 
$
55

 
$
9,368

 
$
395

States, municipalities and political subdivisions
517

 
8

 
5

 
1

 
522

 
9

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,932

 
23

 
1,119

 
34

 
3,051

 
57

Commercial mortgage-backed
728

 
10

 
397

 
22

 
1,125

 
32

Other asset-backed
834

 
21

 
125

 
3

 
959

 
24

Total asset-backed
3,494

 
54

 
1,641

 
59

 
5,135

 
113

U.S. Treasury and obligations of government-sponsored enterprises
21

 
—

 
19

 
—

 
40

 
—

Foreign government
114

 
2

 
124

 
2

 
238

 
4

Total
$
12,689

 
$
404

 
$
2,614

 
$
117

 
$
15,303

 
$
521




13
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2019 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of September 30, 2019.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of September 30, 2019 and 2018 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Beginning balance of credit losses on fixed maturity securities
$
16

 
$
21

 
$
18

 
$
27

Reductions for securities sold during the period
—

 
(2
)
 
(2
)
 
(8
)
Ending balance of credit losses on fixed maturity securities
$
16

 
$
19

 
$
16

 
$
19



Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
September 30, 2019
 
December 31, 2018
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,071

 
$
1,091

 
$
1,350

 
$
1,359

Due after one year through five years
10,992

 
11,470

 
7,979

 
8,139

Due after five years through ten years
13,694

 
14,711

 
16,859

 
16,870

Due after ten years
12,496

 
15,182

 
11,893

 
13,174

Total
$
38,253

 
$
42,454

 
$
38,081

 
$
39,542


Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
Derivative Financial Instruments
The Company holds an embedded derivative on a funds withheld liability with a notional value of $170 million and $172 million as of September 30, 2019 and December 31, 2018 and a fair value of $(9) million and $4 million as of September 30, 2019 and December 31, 2018. The embedded derivative on the funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As part of its overall investment strategy, the Company invests in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to privately placed debt securities.  As of September 30, 2019, the Company had commitments to purchase or fund approximately $865 million and sell approximately $90 million under the terms of these investments.


14
Table of Contents

Note D. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are not observable.
Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include i) the review of pricing service methodologies or broker pricing qualifications, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

15
Table of Contents

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are presented in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.
September 30, 2019
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate bonds and other
$
161

 
$
22,095

 
$
428

 
$
22,684

States, municipalities and political subdivisions
—

 
10,795

 
—

 
10,795

Asset-backed
—

 
8,784

 
196

 
8,980

Total fixed maturity securities
161

 
41,674

 
624

 
42,459

Equity securities:
 
 
 
 
 
 
 
Common stock
114

 
—

 
6

 
120

Non-redeemable preferred stock
52

 
653

 
16

 
721

Total equity securities
166

 
653

 
22

 
841

Short term and other
288

 
1,089

 
—

 
1,377

Total assets
$
615

 
$
43,416

 
$
646

 
$
44,677

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
9

 
$
—

 
$
9

Total liabilities
$
—

 
$
9

 
$
—

 
$
9

December 31, 2018
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate bonds and other
$
196

 
$
19,396

 
$
222

 
$
19,814

States, municipalities and political subdivisions
—

 
10,748

 
—

 
10,748

Asset-backed
—

 
8,787

 
197

 
8,984

Total fixed maturity securities
196

 
38,931

 
419

 
39,546

Equity securities:
 
 
 
 
 
 
 
Common stock
144

 
—

 
4

 
148

Non-redeemable preferred stock
48

 
570

 
14

 
632

Total equity securities
192

 
570

 
18

 
780

Short term and other
216

 
949

 
—

 
1,165

Total assets
$
604

 
$
40,450

 
$
437

 
$
41,491

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
(4
)
 
$
—

 
$
(4
)
Total liabilities
$
—

 
$
(4
)
 
$
—

 
$
(4
)



16
Table of Contents

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Level 3
(In millions)
Corporate bonds and other
 
States, municipalities and political subdivisions
 
Asset-backed
 
Equity securities
 
Total
Balance as of July 1, 2019
$
338

 
$
—

 
$
193

 
$
22

 
$
553

Total realized and unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
Reported in Net investment gains (losses)
—

 
—

 
—

 
—

 
—

Reported in Other comprehensive income (loss)
14

 
—

 
1

 
—

 
15

Total realized and unrealized investment gains (losses)
14


—


1


—

 
15

Purchases
79

 
—

 
22

 
—

 
101

Sales
—

 
—

 
—

 
—

 
—

Settlements
(3
)
 
—

 
(4
)
 
—

 
(7
)
Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
(16
)
 
—

 
(16
)
Balance as of September 30, 2019
$
428

 
$
—

 
$
196

 
$
22

 
$
646

Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Net income (loss) in the period
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Other comprehensive income (loss) in the period
14

 
—

 
2

 
—

 
16

Level 3
(In millions)
Corporate bonds and other
 
States, municipalities and political subdivisions
 
Asset-backed
 
Equity securities
 
Total
Balance as of July 1, 2018
$
94

 
$
1

 
$
273

 
$
17

 
$
385

Total realized and unrealized investment gains (losses):
 
 
 
 
 
 
 
 


Reported in Net investment gains (losses)
—

 
—

 
(2
)
 
1

 
(1
)
Reported in Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

Total realized and unrealized investment gains (losses)
—


—


(2
)

1


(1
)
Purchases
67

 
—

 
55

 
—

 
122

Sales
—

 
—

 
—

 
—

 
—

Settlements
(3
)
 
(1
)
 
(25
)
 
—

 
(29
)
Transfers into Level 3
30

 
—

 
29

 
—

 
59

Transfers out of Level 3
—

 
—

 
(32
)
 
—

 
(32
)
Balance as of September 30, 2018
$
188

 
$
—

 
$
298

 
$
18

 
$
504

Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Net income (loss) in the period
$
—

 
$
—

 
$
(2
)
 
$
1

 
$
(1
)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Other comprehensive income (loss) in the period
—

 
—

 
1

 
—

 
1




17
Table of Contents

Level 3
(In millions)
Corporate bonds and other
 
States, municipalities and political subdivisions
 
Asset-backed
 
Equity securities
 
Total
Balance as of January 1, 2019
$
222

 
$
—

 
$
197

 
$
18

 
$
437

Total realized and unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
Reported in Net investment gains (losses)
—

 
—

 
—

 
2

 
2

Reported in Other comprehensive income (loss)
34

 
—

 
8

 
—

 
42

Total realized and unrealized investment gains (losses)
34

 
—

 
8

 
2

 
44

Purchases
211

 
—

 
42

 
2

 
255

Sales
—

 
—

 
—

 
—

 
—

Settlements
(7
)
 
—

 
(12
)
 
—

 
(19
)
Transfers into Level 3
—

 
—

 
45

 
—

 
45

Transfers out of Level 3
(32
)
 
—

 
(84
)
 
—

 
(116
)
Balance as of September 30, 2019
$
428

 
$
—

 
$
196

 
$
22

 
$
646

Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Net income (loss) in the period
$
—

 
$
—

 
$
—

 
$
2

 
$
2

Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Other comprehensive income (loss) in the period
29

 
—

 
9

 
—

 
38

Level 3
(In millions)
Corporate bonds and other
 
States, municipalities and political subdivisions
 
Asset-backed
 
Equity securities
 
Total
Balance as of January 1, 2018
$
98

 
$
1

 
$
335

 
$
20

 
$
454

Total realized and unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
Reported in Net investment gains (losses)
(1
)
 
—

 
5

 
(2
)
 
2

Reported in Other comprehensive income (loss)
(1
)
 
—

 
(6
)
 
—

 
(7
)
Total realized and unrealized investment gains (losses)
(2
)
 
—

 
(1
)
 
(2
)
 
(5
)
Purchases
69

 
—

 
126

 
—

 
195

Sales
(5
)
 
—

 
(72
)
 
—

 
(77
)
Settlements
(7
)
 
(1
)
 
(37
)
 
—

 
(45
)
Transfers into Level 3
35

 
—

 
42

 
—

 
77

Transfers out of Level 3
—

 
—

 
(95
)
 
—

 
(95
)
Balance as of September 30, 2018
$
188

 
$
—

 
$
298

 
$
18

 
$
504

Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Net income (loss) in the period
$
—

 
$
—

 
$
(2
)
 
$
(2
)
 
$
(4
)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Other comprehensive income (loss) in the period
(2
)
 
—

 
(2
)
 
—

 
(4
)

Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume.

18
Table of Contents

Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Level 1 securities include highly liquid and exchange traded bonds, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.
Short Term and Other Invested Assets
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
As of September 30, 2019 and December 31, 2018, there were approximately $55 million and $48 million of overseas deposits within other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.
Derivative Financial Investments
Level 2 investments primarily include the embedded derivative on the funds withheld liability. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs.

19
Table of Contents

Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company. The weighted average rate is calculated based on fair value.
September 30, 2019
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
496

 
Discounted cash flow
 
Credit spread
 
1% - 6% (2%)
December 31, 2018
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
228

 
Discounted cash flow
 
Credit spread
 
1% - 12% (3%)

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
September 30, 2019
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
923

 
$
—

 
$
—

 
$
950

 
$
950

Note receivable
21

 
—

 
—

 
21

 
21

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,678

 
$
—

 
$
2,905

 
$
—

 
$
2,905

December 31, 2018
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
839

 
$
—

 
$
—

 
$
827

 
$
827

Note receivable
35

 
—

 
—

 
35

 
35

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,680

 
$
—

 
$
2,731

 
$
—

 
$
2,731


The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair value of mortgage loans was based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.
The fair value of the note receivable was based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar notes, adjusted for specific credit risk. The note receivable is included within Other assets on the Condensed Consolidated Balance Sheets.
The Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.
The carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Short term investments not carried at fair value, Accrued investment income and certain Other assets and Other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the tables above.

20
Table of Contents

Note E. Claim, Claim Adjustment Expense and Future Policy Benefit Reserves
Property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to historical patterns such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and economic conditions, including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $32 million and $128 million for the three and nine months ended September 30, 2019. The Company reported catastrophe losses, net of reinsurance, of $46 million and $106 million for the three and nine months ended September 30, 2018. Net catastrophe losses in 2019 and 2018 related primarily to U.S. weather related events.

21
Table of Contents

Liability for Unpaid Claim and Claim Adjustment Expenses
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group segment.
For the nine months ended September 30
 
 
 
(In millions)
2019
 
2018
Reserves, beginning of year:
 
 
 
Gross
$
21,984

 
$
22,004

Ceded
4,019

 
3,934

Net reserves, beginning of year
17,965

 
18,070

Net incurred claim and claim adjustment expenses:
 
 
 
Provision for insured events of current year
3,968

 
3,866

Increase (decrease) in provision for insured events of prior years
(65
)
 
(173
)
Amortization of discount
143

 
136

Total net incurred (1)
4,046

 
3,829

Net payments attributable to:
 
 
 
Current year events
(599
)
 
(658
)
Prior year events
(3,547
)
 
(3,415
)
Total net payments
(4,146
)
 
(4,073
)
Foreign currency translation adjustment and other
29

 
(80
)
Net reserves, end of period
17,894

 
17,746

Ceded reserves, end of period
3,702

 
3,858

Gross reserves, end of period
$
21,596

 
$
21,604


(1)
Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits, which are not reflected in the table above.
Net Prior Year Development
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Specialty
$
(20
)
 
$
(53
)
 
$
(58
)
 
$
(127
)
Commercial
35

 
(5
)
 
15

 
(27
)
International
1

 
(2
)
 
14

 
(4
)
Corporate & Other
—

 
(2
)
 
—

 
(2
)
Total pretax (favorable) unfavorable development
$
16

 
$
(62
)
 
$
(29
)
 
$
(160
)



22
Table of Contents

Specialty
The following table presents further detail of the development recorded for the Specialty segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Medical Professional Liability
$
29

 
$
15

 
$
59

 
$
38

Other Professional Liability and Management Liability
(18
)
 
(45
)
 
(37
)
 
(113
)
Surety
(43
)
 
(20
)
 
(83
)
 
(50
)
Warranty
—

 
(1
)
 
(7
)
 
(7
)
Other
12

 
(2
)
 
10

 
5

Total pretax (favorable) unfavorable development
$
(20
)
 
$
(53
)
 
$
(58
)
 
$
(127
)

Three Months
2019
Unfavorable development in medical professional liability was primarily due to higher than expected indemnity severity in accident years 2016 through 2018 in our aging services business.
Favorable development in other professional liability and management liability was due to lower than expected large claim losses in recent accident years in our public company directors and officers liability (D&O) business.
Favorable development in surety was due to lower than expected frequency for accident years 2015 through 2018.
Unfavorable development in other was primarily due to higher than expected severity in aging services related to auto liability coverages.
2018
Unfavorable development in medical professional liability was primarily driven by higher than expected frequency and severity in aging services in accident years 2014 through 2017.
Favorable development in other professional liability and management liability was primarily driven by favorable outcomes on individual claims in accident years 2013 and prior in financial institutions.
Favorable development in surety was due to continued lower than expected loss emergence for accident years 2017 and prior.

23
Table of Contents

Nine Months
2019
Unfavorable development in medical professional liability was primarily due to higher than expected indemnity severity in accident years 2016 through 2018 in our aging services business, higher than expected severity in accident year 2013 in our allied healthcare business, unfavorable outcomes on individual claims and higher than expected severity in accident year 2017 in our dentists business.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency and favorable outcomes on individual claims in accident years 2017 and prior related to financial institutions and lower than expected large claim losses in recent accident years in our public company D&O business.
Favorable development in surety was due to lower than expected frequency for accident years 2018 and prior.
Unfavorable development in other was primarily due to higher than expected severity in aging services related to auto liability coverages.
2018
Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in our hospitals business and higher than expected frequency and severity in aging services in accident years 2014 through 2017.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency for accident years 2013 through 2017 related to financial institutions and professional liability errors and omissions (E&O), favorable severity for accident years 2012 and prior related to professional liability E&O, and favorable outcomes on individual claims in financial institutions in accident years 2013 and prior.
Favorable development in surety was due to lower than expected loss emergence for accident years 2017 and prior.

24
Table of Contents

Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Commercial Auto
$
(16
)
 
$
1

 
$
(24
)
 
$
—

General Liability
43

 
(5
)
 
36

 
13

Workers' Compensation
7

 
(2
)
 
2

 
(14
)
Property and Other
1

 
1

 
1

 
(26
)
Total pretax (favorable) unfavorable development
$
35

 
$
(5
)
 
$
15

 
$
(27
)

Three Months
2019
Favorable development in commercial auto was primarily due to a decline in bodily injury frequency in accident year 2018 and continued lower than expected severity across accident years 2013 through 2016.
Unfavorable development in general liability was primarily due to higher than expected emergence in mass tort related to accident years 2009 and prior, 2015 and 2016.
Nine Months
2019
Favorable development in commercial auto was primarily due to a decline in bodily injury frequency in accident year 2018 and continued lower than expected severity across accident years 2016 and prior.
Unfavorable development in general liability was primarily due to higher than expected emergence in mass tort as well as higher than expected large loss experience in our excess and umbrella business in accident year 2017.
2018
Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015. 
Favorable development in property and other was driven by lower than expected claim severity in catastrophes in accident year 2017.

25
Table of Contents

International
The following table presents further detail of the development recorded for the International segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Casualty
$
(6
)
 
$
(5
)
 
$
(11
)
 
$
(11
)
Property
3

 
2

 
14

 
14

Energy and Marine
1

 
(5
)
 
9

 
(10
)
Specialty (1)
3

 
6

 
2

 
3

Total pretax (favorable) unfavorable development
$
1

 
$
(2
)
 
$
14

 
$
(4
)

(1) Effective January 1, 2019 the Healthcare and Technology line of business has been absorbed within the Specialty line of business in the International segment. Prior period information has been conformed to the new line of business presentation.
Nine Months
2019
Favorable development in casualty was driven by lower than expected large losses and claim severity in accident years 2014 and prior in Hardy and Europe.
Unfavorable development in property was driven by higher than expected claims in Hardy on 2018 accident year catastrophes.
2018
Favorable development in casualty was primarily driven by better than expected frequency in the liability portion of the package business in Canada and general liability in Europe.
Unfavorable development in property was primarily driven by higher than expected severity in Canada and higher than expected frequency in Hardy, both in accident year 2017.
Favorable development in energy and marine was primarily driven by better than expected large loss frequency in the energy book in recent accident years.
Unfavorable development in specialty was driven by increased severity in accident year 2017 related to professional indemnity, partially offset by favorable development in healthcare in Europe primarily driven by lower than expected frequency in accident years 2015 and prior.

26
Table of Contents

Asbestos and Environmental Pollution (A&EP) Reserves
In 2010, Continental Casualty Company (CCC) together with several of the Company’s insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.
In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits on the Condensed Consolidated Statements of Operations.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Additional amounts ceded under LPT:
 
 
 
 
 
 
 
Net A&EP adverse development before consideration of LPT
$
—

 
$
—

 
$
—

 
$
113

Provision for uncollectible third-party reinsurance on A&EP
—

 
—

 
—

 
(16
)
Total additional amounts ceded under LPT
—

 
—

 
—

 
97

Retroactive reinsurance benefit recognized
(7
)
 
(12
)
 
(43
)
 
(84
)
Pretax impact of deferred retroactive reinsurance
$
(7
)
 
$
(12
)
 
$
(43
)
 
$
13


The Company intends to complete its annual A&EP reserve review in the fourth quarter of 2019 and maintain this timing for all future annual A&EP reserve reviews. The Company completed A&EP reserve reviews in both the first and fourth quarters of 2018. Based upon the Company's 2018 first quarter A&EP reserve review, net unfavorable prior year development of $113 million was recognized before consideration of cessions to the LPT for the nine months ended September 30, 2018. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos and environmental accounts and paid losses on assumed reinsurance exposures. Additionally, in 2018, the Company released a portion of its provision for uncollectible third-party reinsurance.
As of September 30, 2019 and December 31, 2018, the cumulative amounts ceded under the LPT were $3.1 billion. The unrecognized deferred retroactive reinsurance benefit was $331 million and $374 million as of September 30, 2019 and December 31, 2018 and is included within Other liabilities on the Condensed Consolidated Balance Sheets.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $3.3 billion and $2.7 billion as of September 30, 2019 and December 31, 2018. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the majority of the Company’s A&EP claims.

27
Table of Contents

Life & Group Policyholder Reserves
The Company’s Life & Group segment includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and the Company has the ability to increase policy premiums, subject to state regulatory approval.
The Company maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for the Life & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, the Company’s actuaries perform a detailed claim experience study on an annual basis. The study reviews the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. The Company’s recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent study. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations.
The Company's most recent annual long term care claim experience study was completed in the third quarter of 2019 and resulted in a $56 million pretax reduction in claim and claim adjustment expense reserves primarily due to lower claim severity than anticipated in the reserve estimates. The Company's 2018 annual long term care claim experience study was completed in the third quarter of 2018 and resulted in a $31 million pretax reduction in claim and claim adjustment expense reserves.
Future policy benefit reserves represent the active life reserves related to the Company’s long term care policies which are the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves is fundamental to the Company’s financial results and 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 rate 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 rate is 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. As future premium rate increases are generally subject to regulatory approval, the exact timing and size of the approved rate increases are unknown. As a result of this variability, the Company’s long term care reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.
Annually, 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. Management also uses the GPV process to evaluate the adequacy of its claim and claim adjustment expense reserves for structured settlement obligations. 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 existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in the Company’s results of operations in the period in which the need for such adjustment is determined. Periodically, management engages independent third parties to assess the appropriateness of its best estimate assumptions. The most recent third party assessment, performed earlier this year, validated the assumption setting process and confirmed the best estimate assumptions appropriately reflected the experience data at that time.

28
Table of Contents

In the third quarter of 2019 the Company performed the GPV for the long term care future policy benefit reserves. This GPV indicated a premium deficiency primarily driven by lower discount rate assumptions. Recognition of the premium deficiency resulted in a $216 million pretax increase in policyholders' benefits reflected in the Company's results of operations.

29
Table of Contents

Note F. Legal Proceedings, Contingencies and Guarantees
The Company is a party to various claims and routine litigation incidental to its business, which, based on the facts and circumstances currently known, are not material to the Company's results of operations or financial position.
Guarantees
As of September 30, 2019 and December 31, 2018, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements and management does not believe that any future indemnity claims will be significantly greater than the amounts recorded.
In the course of selling business entities and assets to third parties, the Company indemnified purchasers for certain losses, some of which are not limited by a contractual monetary amount. As of September 30, 2019, the Company had outstanding unlimited indemnifications that included tax liabilities arising prior to a purchaser's ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely, while others survive until the applicable statutes of limitation expire, or until the agreed-upon contract terms expire.
The Company also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of September 30, 2019, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.7 billion, which will be paid over the lifetime of the annuitants. The Company does not believe any payment is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

30
Table of Contents

Note G. Benefit Plans
The components of net periodic pension cost (benefit) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Net periodic pension cost (benefit)
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
—

 
$
—

Non-service cost (benefit):
 
 
 
 
 
 
 
Interest cost on projected benefit obligation
25

 
23

 
75

 
70

Expected return on plan assets
(36
)
 
(40
)
 
(107
)
 
(120
)
Amortization of net actuarial (gain) loss
10

 
10

 
30

 
28

Settlement loss
—

 
—

 
—

 
5

Total non-service cost (benefit)
(1
)
 
(7
)
 
(2
)
 
(17
)
Total net periodic pension cost (benefit)
$
(1
)
 
$
(7
)
 
$
(2
)
 
$
(17
)

For the three and nine months ended September 30, 2019, the Company recognized less than $1 million and $1 million of non-service benefit in Insurance claims and policyholders' benefits and less than $1 million and $1 million of non-service benefit in Other operating expenses.
For the three and nine months ended September 30, 2018, the Company recognized $3 million and $6 million of non-service benefit in Insurance claims and policyholders' benefits and $4 million and $11 million of non-service benefit in Other operating expenses.

31
Table of Contents

Note H. Accumulated Other Comprehensive Income (Loss) by Component
The tables below display the changes in Accumulated other comprehensive income (loss) by component.
(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of July 1, 2019
$
20

 
$
1,023

 
$
(760
)
 
$
(163
)
 
$
120

Other comprehensive income (loss) before reclassifications
—

 
44

 
—

 
(29
)
 
15

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $-, $2, $- and $2
—

 
3

 
(7
)
 
—

 
(4
)
Other comprehensive income (loss) net of tax (expense) benefit of $-, $(11), $(2), $- and $(13)
—

 
41


7

 
(29
)
 
19

Balance as of September 30, 2019
$
20

 
$
1,064

 
$
(753
)
 
$
(192
)
 
$
139

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of July 1, 2018
$
20

 
$
271

 
$
(758
)
 
$
(138
)
 
$
(605
)
Other comprehensive income (loss) before reclassifications
(1
)
 
(148
)
 
—

 
—

 
(149
)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(2), $1, $- and $(1)
—

 
10

 
(7
)
 
—

 
3

Other comprehensive income (loss) net of tax (expense) benefit of $-, $42, $(1), $- and $41
(1
)
 
(158
)
 
7

 
—

 
(152
)
Balance as of September 30, 2018
$
19

 
$
113

 
$
(751
)
 
$
(138
)
 
$
(757
)


32
Table of Contents

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of January 1, 2019
$
16

 
$
61

 
$
(775
)
 
$
(180
)
 
$
(878
)
Other comprehensive income (loss) before reclassifications
3

 
999

 
(1
)
 
(12
)
 
989

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $1, $6, $- and $7
(1
)
 
(4
)
 
(23
)
 
—

 
(28
)
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(266), $(6), $- and $(274)
4

 
1,003

 
22

 
(12
)
 
1,017

Balance as of September 30, 2019
$
20

 
$
1,064

 
$
(753
)
 
$
(192
)
 
$
139

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of January 1, 2018
$
30

 
$
859

 
$
(775
)
 
$
(98
)
 
$
16

Other comprehensive income (loss) before reclassifications
(12
)
 
(718
)
 
—

 
(40
)
 
(770
)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(7), $6, $- and $(1)
(1
)
 
28

 
(24
)
 
—

 
3

Other comprehensive income (loss) net of tax (expense) benefit of $3, $197, $(6), $- and $194
(11
)
 
(746
)
 
24

 
(40
)
 
(773
)
Balance as of September 30, 2018
$
19

 
$
113

 
$
(751
)
 
$
(138
)
 
$
(757
)

Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:
Component of AOCI
 
Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with OTTI losses
 
Net investment gains (losses)
Net unrealized gains (losses) on other investments
 
Net investment gains (losses)
Pension and postretirement benefits
 
Other operating expenses and Insurance claims and policyholders' benefits


33
Table of Contents

Note I. Business Segments
The Company's property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International. These three segments are collectively referred to as Property & Casualty Operations. The Company's operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.
The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2018. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only Insurance and Reinsurance receivables, Insurance reserves, Deferred acquisition costs, Goodwill and Deferred non-insurance warranty acquisition expense and revenue are readily identifiable for individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of Net investment income and Net investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense have been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.
In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio.
The performance of the Company's insurance operations is monitored by management through core income (loss), which is derived from certain income statement amounts. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk.
Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net investment gains (losses), ii) income or loss from discontinued operations, iii) any cumulative effects of changes in accounting guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.

34
Table of Contents

The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
Three months ended September 30, 2019

Specialty
 

Commercial
 
International
 
Life &
Group
 
Corporate
& Other
 
Eliminations
 
Total
(In millions)
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 

Net earned premiums
$
712

 
$
813

 
$
236

 
$
130

 
$
—

 
$
(1
)
 
$
1,890

Net investment income
121

 
136

 
17

 
207

 
6

 
—

 
487

Non-insurance warranty revenue
292

 
—

 
—

 
—

 
—

 
—

 
292

Other revenues
1

 
10

 
(1
)
 
(1
)
 
1

 
(1
)
 
9

Total operating revenues
1,126

 
959

 
252

 
336

 
7

 
(2
)
 
2,678

Claims, benefits and expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
411

 
564

 
163

 
476

 
(7
)
 
—

 
1,607

Policyholders’ dividends
2

 
5

 
—

 
—

 
—

 
—

 
7

Amortization of deferred acquisition costs
155

 
134

 
56

 
—

 
—

 
—

 
345

Non-insurance warranty expense
278

 
—

 
—

 
—

 
—

 
—

 
278

Other insurance related expenses
71

 
123

 
35

 
29

 
—

 
(1
)
 
257

Other expenses
13

 
9

 
7

 
1

 
35

 
(1
)
 
64

Total claims, benefits and expenses
930

 
835

 
261

 
506

 
28

 
(2
)
 
2,558

Core income (loss) before income tax
196

 
124

 
(9
)
 
(170
)
 
(21
)
 
—

 
120

Income tax (expense) benefit on core income (loss)
(43
)
 
(27
)
 
—

 
48

 
4

 
—

 
(18
)
Core income (loss) 
$
153

 
$
97

 
$
(9
)
 
$
(122
)
 
$
(17
)
 
$
—

 
102

Net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
7

Income tax (expense) benefit on net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
(2
)
Net investment gains (losses), after tax
 
 
 
 
 
 
 
 
 
 
 
 
5

Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
107


35
Table of Contents

Three months ended September 30, 2018

Specialty
 

Commercial
 
International
 
Life &
Group
 
Corporate
& Other
 
Eliminations
 
Total
(In millions)
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 

Net earned premiums
$
684

 
$
782

 
$
255

 
$
133

 
$
—

 
$
(1
)
 
$
1,853

Net investment income
124

 
144

 
14

 
200

 
5

 
—

 
487

Non-insurance warranty revenue
258

 
—

 
—

 
—

 
—

 
—

 
258

Other revenues
—

 
8

 
1

 
(1
)
 
2

 
—

 
10

Total operating revenues
1,066

 
934

 
270

 
332

 
7

 
(1
)
 
2,608

Claims, benefits and expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
373

 
496

 
172

 
277

 
(12
)
 
—

 
1,306

Policyholders’ dividends
1

 
5

 
—

 
—

 
—

 
—

 
6

Amortization of deferred acquisition costs
153

 
127

 
57

 
—

 
—

 
—

 
337

Non-insurance warranty expense
235

 
—

 
—

 
—

 
—

 
—

 
235

Other insurance related expenses
68

 
133

 
36

 
31

 
(1
)
 
(1
)
 
266

Other expenses
11

 
10

 
3

 
2

 
44

 
—

 
70

Total claims, benefits and expenses
841

 
771

 
268

 
310

 
31

 
(1
)
 
2,220

Core income (loss) before income tax
225

 
163

 
2

 
22

 
(24
)
 
—

 
388

Income tax (expense) benefit on core income (loss)
(48
)
 
(36
)
 
(1
)
 
10

 
4

 
—

 
(71
)
Core income (loss) 
$
177

 
$
127

 
$
1

 
$
32

 
$
(20
)
 
$
—

 
317

Net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
14

Income tax (expense) benefit on net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
Net investment gains (losses), after tax
 
 
 
 
 
 
 
 
 
 
 
 
13

Net deferred tax asset remeasurement
 
 
 
 
 
 
 
 
 
 
 
 
6

Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
336



36
Table of Contents

Nine months ended September 30, 2019

Specialty
 

Commercial
 
International
 
Life &
Group
 
Corporate
& Other
 
Eliminations
 
Total
(In millions)
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 

Net earned premiums
$
2,061

 
$
2,339

 
$
729

 
$
390

 
$
—

 
$
(2
)
 
$
5,517

Net investment income
410

 
480

 
47

 
616

 
20

 
—

 
1,573

Non-insurance warranty revenue
858

 
—

 
—

 
—

 
—

 
—

 
858

Other revenues
1

 
20

 
—

 
—

 
5

 
(4
)
 
22

Total operating revenues
3,330

 
2,839

 
776

 
1,006

 
25

 
(6
)
 
7,970

Claims, benefits and expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
1,198

 
1,581

 
472

 
1,093

 
(40
)
 
—

 
4,304

Policyholders’ dividends
4

 
15

 
—

 
—

 
—

 
—

 
19

Amortization of deferred acquisition costs
454

 
391

 
180

 
—

 
—

 
—

 
1,025

Non-insurance warranty expense
801

 
—

 
—

 
—

 
—

 
—

 
801

Other insurance related expenses
217

 
372

 
94

 
87

 
(2
)
 
(2
)
 
766

Other expenses
37

 
27

 
14

 
5

 
108

 
(4
)
 
187

Total claims, benefits and expenses
2,711

 
2,386

 
760

 
1,185

 
66

 
(6
)
 
7,102

Core income (loss) before income tax
619

 
453

 
16

 
(179
)
 
(41
)
 
—

 
868

Income tax (expense) benefit on core income (loss)
(136
)
 
(97
)
 
(2
)
 
74

 
7

 
—

 
(154
)
Core income (loss) 
$
483

 
$
356

 
$
14

 
$
(105
)
 
$
(34
)
 
$
—

 
714

Net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
20

Income tax (expense) benefit on net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
(7
)
Net investment gains (losses), after tax
 
 
 
 
 
 
 
 
 
 
 
 
13

Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
727

September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
599

 
$
759

 
$
242

 
$
394

 
$
2,098

 
$
—

 
$
4,092

Insurance receivables
992

 
1,243

 
260

 
8

 
1

 
—

 
2,504

Deferred acquisition costs
314

 
264

 
90

 
—

 
—

 
—

 
668

Goodwill
117

 
—

 
28

 
—

 
—

 
—

 
145

Deferred non-insurance warranty acquisition expense
2,772

 
—

 
—

 
—

 
—

 
—

 
2,772

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
5,285

 
8,610

 
1,802

 
3,707

 
2,192

 
—

 
21,596

Unearned premiums
2,329

 
1,679

 
475

 
126

 
—

 
(1
)
 
4,608

Future policy benefits
—

 
—

 
—

 
12,305

 
—

 
—

 
12,305

Deferred non-insurance warranty revenue
3,707

 
—

 
—

 
—

 
—

 
—

 
3,707


37
Table of Contents

Nine months ended September 30, 2018

Specialty
 

Commercial
 
International
 
Life &
Group
 
Corporate
& Other
 
Eliminations
 
Total
(In millions)
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 

Net earned premiums
$
2,039

 
$
2,278

 
$
739

 
$
398

 
$
—

 
$
(1
)
 
$
5,453

Net investment income
376

 
450

 
43

 
598

 
16

 
—

 
1,483

Non-insurance warranty revenue
744

 
—

 
—

 
—

 
—

 
—

 
744

Other revenues
1

 
24

 
—

 
—

 
2

 
(1
)
 
26

Total operating revenues
3,160

 
2,752

 
782

 
996

 
18

 
(2
)
 
7,706

Claims, benefits and expenses
 

 
 
 
 
 
 

 
 
 
 

 
 

Net incurred claims and benefits
1,124

 
1,434

 
480

 
907

 
15

 
—

 
3,960

Policyholders’ dividends
3

 
15

 
—

 
—

 
—

 
—

 
18

Amortization of deferred acquisition costs
447

 
375

 
170

 
—

 
—

 
—

 
992

Non-insurance warranty expense
676

 
—

 
—

 
—

 
—

 
—

 
676

Other insurance related expenses
202

 
386

 
102

 
91

 
(1
)
 
(1
)
 
779

Other expenses
34

 
31

 
6

 
5

 
153

 
(1
)
 
228

Total claims, benefits and expenses
2,486

 
2,241

 
758

 
1,003

 
167

 
(2
)
 
6,653

Core income (loss) before income tax
674

 
511

 
24

 
(7
)
 
(149
)
 
—

 
1,053

Income tax (expense) benefit on core income (loss)
(143
)
 
(108
)
 
(7
)
 
43

 
30

 
—

 
(185
)
Core income (loss)
$
531

 
$
403

 
$
17

 
$
36

 
$
(119
)
 
$
—

 
868

Net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
25

Income tax (expense) benefit on net investment gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
(2
)
Net investment gains (losses), after tax
 
 
 
 
 
 
 
 
 
 
 
 
23

Net deferred tax asset remeasurement
 
 
 
 
 
 
 
 
 
 
 
 
6

Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
897


December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
649

 
$
795

 
$
250

 
$
414

 
$
2,347

 
$
—

 
$
4,455

Insurance receivables
947

 
1,277

 
284

 
9

 
(152
)
 
—

 
2,365

Deferred acquisition costs
308

 
230

 
95

 
—

 
—

 
—

 
633

Goodwill
117

 
—

 
29

 
—

 
—

 
—

 
146

Deferred non-insurance warranty acquisition expense
2,513

 
—

 
—

 
—

 
—

 
—

 
2,513

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
5,465

 
8,743

 
1,750

 
3,601

 
2,425

 
—

 
21,984

Unearned premiums
2,132

 
1,454

 
475

 
122

 
—

 
—

 
4,183

Future policy benefits
—

 
—

 
—

 
10,597

 
—

 
—

 
10,597

Deferred non-insurance warranty revenue
3,402

 
—

 
—

 
—

 
—

 
—

 
3,402




38
Table of Contents

The following table presents operating revenue by line of business for each reportable segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Specialty
 
 
 
 
 
 
 
Management & Professional Liability
$
638

 
$
616

 
$
1,903

 
$
1,867

Surety
156

 
153

 
446

 
427

Warranty & Alternative Risks
332

 
297

 
981

 
866

Specialty revenues
1,126

 
1,066

 
3,330

 
3,160

Commercial
 
 


 
 
 
 
Middle Market
560

 
530

 
1,652

 
1,555

Small Business
115

 
125

 
351

 
364

Other Commercial Insurance
284

 
279

 
836

 
833

Commercial revenues
959

 
934

 
2,839

 
2,752

International


 


 
 
 
 
Canada
70

 
66

 
204

 
187

Europe
91

 
94

 
270

 
273

Hardy
91

 
110

 
302

 
322

International revenues
252

 
270

 
776

 
782

Life & Group revenues
336

 
332

 
1,006

 
996

Corporate & Other revenues
7

 
7

 
25

 
18

Eliminations
(2
)
 
(1
)
 
(6
)
 
(2
)
Total operating revenues
2,678

 
2,608

 
7,970

 
7,706

Net investment gains (losses)
7

 
14

 
20

 
25

Total revenues
$
2,685

 
$
2,622

 
$
7,990

 
$
7,731




39
Table of Contents

Note J. Non-Insurance Revenues from Contracts with Customers
The Company had deferred non-insurance warranty revenue balances of $3.7 billion and $3.4 billion reported in Deferred non-insurance warranty revenue as of September 30, 2019 and December 31, 2018. For the three and nine months ended September 30, 2019, the Company recognized $236 million and $747 million of revenues that were included in the deferred revenue balance as of January 1, 2019. For the three and nine months ended September 30, 2018, the Company recognized $200 million and $635 million of revenues that were included in the deferred revenue balance as of January 1, 2018. For the three and nine months ended September 30, 2019 and 2018, Non-insurance warranty revenue recognized from performance obligations related to prior periods due to a change in estimate was not material. The Company expects to recognize approximately $278 million of the deferred revenue in the remainder of 2019, $1.0 billion in 2020, $0.8 billion in 2021 and $1.6 billion thereafter.


40
Table of Contents

Note K. Leases
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease ROU assets and lease liabilities are included in Other assets and Other liabilities on the Company's Condensed Consolidated Balance Sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. Certain leases contain options to terminate before maturity. The lease term used to calculate the ROU asset includes any renewal options or lease termination that the Company expects to exercise. The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company's lease agreements do not contain significant residual value guarantees, restrictions or covenants.
The Company occupies office facilities under lease agreements that expire at various dates. In addition, data processing, office and transportation equipment is leased under agreements that expire at various dates. The Company’s leases generally include lease and non-lease components, which the Company has elected to account for as a single lease component. Variable lease costs not based on an index or rate consist of non-lease components, which are being accounted for as lease components, and represent charges for services provided by the landlord and our reimbursement for the landlord’s costs, including real estate taxes and insurance. The Company does not have any significant finance leases.
Operating lease cost was $9 million and $28 million for the three and nine months ended September 30, 2019. Variable lease cost was $5 million and $13 million for the three and nine months ended September 30, 2019. Cash paid for amounts included in operating lease liabilities was $8 million and $25 million for the three and nine months ended September 30, 2019. Operating lease ROU assets obtained in exchange for lease obligations was $11 million for the nine months ended September 30, 2019.
The following table presents operating lease ROU assets and lease liabilities.
(In millions)
September 30, 2019
Operating lease ROU assets
$
223

Operating lease liabilities
304


The following table presents the maturities of operating lease liabilities as of September 30, 2019.
(In millions)
Operating Leases
2019 (Excluding the nine months ended September 30, 2019)
$
6

2020
39

2021
42

2022
39

2023
34

Thereafter
213

Total lease payments
373

Less: Discount
(69
)
Total operating lease liabilities
$
304



41
Table of Contents

The following table presents the weighted average remaining lease term for operating leases and weighted average discount rate used in calculating operating lease right-of-use assets.
 
September 30, 2019
Weighted average remaining lease term
10.9 years

Weighted average discount rate
3.4
%

The following table presents the expected future minimum lease payments to be made under non-cancelable operating leases as of December 31, 2018.
(In millions)
Future Minimum Lease Payments
2019
$
35

2020
39

2021
41

2022
38

2023
32

Thereafter
200

Total
$
385




42
Table of Contents

Item 2. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
OVERVIEW
The following discussion highlights significant factors affecting the Company. References to “we,” “our,” “us” or like terms refer to the business of CNA.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q and Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2018.
We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net investment gains or losses, ii) income or loss from discontinued operations, iii) any cumulative effects of changes in accounting guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure. See further discussion regarding how we manage our business in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1. For reconciliations of non-GAAP measures to the most comparable GAAP measures and other information, please refer herein and/or to CNA's most recent Annual Report on Form 10-K on file with the Securities and Exchange Commission.
In evaluating the results of our Specialty, Commercial and International segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third party captives, excludes business which is mostly 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.

43
Table of Contents

CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the amount of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment:
•
Insurance Reserves
•
Reinsurance and Insurance Receivables
•
Valuation of Investments and Impairment of Securities
•
Long Term Care Policies
•
Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from our estimates and may have a material adverse impact on our results of operations, equity, business, and insurer financial strength and corporate debt ratings. See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 for further information.

44
Table of Contents

CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations including our financial measure, core income (loss). For more detailed components of our business operations and a discussion of the core income (loss) financial measure, see the segment sections within this MD&A. For further discussion of Net investment income and Net investment results, see the Investments section of this MD&A.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Operating Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,890

 
$
1,853

 
$
5,517

 
$
5,453

Net investment income
487

 
487

 
1,573

 
1,483

Non-insurance warranty revenue
292

 
258

 
858

 
744

Other revenues
9

 
10

 
22

 
26

Total operating revenues
2,678

 
2,608

 
7,970

 
7,706

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Net incurred claims and benefits
1,607

 
1,306

 
4,304

 
3,960

Policyholders' dividends
7

 
6

 
19

 
18

Amortization of deferred acquisition costs
345

 
337

 
1,025

 
992

Non-insurance warranty expense
278

 
235

 
801

 
676

Other insurance related expenses
257

 
266

 
766

 
779

Other expenses
64

 
70

 
187

 
228

Total claims, benefits and expenses
2,558

 
2,220

 
7,102

 
6,653

Core income before income tax
120

 
388

 
868

 
1,053

Income tax expense on core income
(18
)
 
(71
)
 
(154
)
 
(185
)
Core income
102

 
317

 
714


868

Net investment gains
7

 
14

 
20

 
25

Income tax expense on net investment gains
(2
)
 
(1
)
 
(7
)
 
(2
)
Net investment gains, after tax
5

 
13

 
13

 
23

Net deferred tax asset remeasurement
—

 
6

 
—

 
6

Net income
$
107

 
$
336

 
$
727

 
$
897

Three Month Comparison
Core income decreased $215 million for the three months ended September 30, 2019 as compared with the same period in 2018. Core income for our Property & Casualty Operations decreased $64 million primarily due to unfavorable net prior year loss reserve development in the current year period. Core results for our Life & Group segment decreased $154 million driven by a $170 million charge related to recognition of a premium deficiency as a result of the third quarter 2019 GPV. Core loss for our Corporate & Other segment improved $3 million.
Net catastrophe losses were $32 million and $46 million for the three months ended September 30, 2019 and 2018. Unfavorable net prior year loss reserve development of $16 million and favorable net prior year loss reserve development of $62 million was recorded in the three months ended September 30, 2019 and 2018 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

45
Table of Contents

Nine Month Comparison
Core income decreased $154 million for the nine months ended September 30, 2019 as compared with the same period in 2018. Core income for our Property & Casualty Operations decreased $98 million primarily due to lower favorable net prior year loss reserve development partially offset by higher net investment income driven by limited partnership and common stock returns. Core results for our Life & Group segment decreased $141 million driven by a $170 million charge related to recognition of a premium deficiency as a result of the third quarter 2019 GPV. Core loss for our Corporate & Other segment improved $85 million.
Net catastrophe losses were $128 million and $106 million for the nine months ended September 30, 2019 and 2018. Favorable net prior year loss reserve development of $29 million and $160 million was recorded in the nine months ended September 30, 2019 and 2018 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.


46
Table of Contents

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

47
Table of Contents

Specialty
The following table details the results of operations for Specialty.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios, rate, renewal premium change and retention)
2019
 
2018
 
2019
 
2018
Gross written premiums
$
1,766

 
$
1,715

 
$
5,191

 
$
5,222

Gross written premiums excluding third party captives
778

 
714

 
2,263

 
2,130

Net written premiums
732

 
688

 
2,143

 
2,062

Net earned premiums
712

 
684

 
2,061

 
2,039

Net investment income
121

 
124

 
410

 
376

Core income
153

 
177

 
483

 
531

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
57.8
%
 
54.5
%
 
58.1
%
 
55.1
%
Expense ratio
31.8

 
32.3

 
32.6

 
31.8

Dividend ratio
0.2

 
0.2

 
0.2

 
0.2

Combined ratio
89.8
%
 
87.0
%
 
90.9
%
 
87.1
%
 
 
 
 
 
 
 
 
Rate
6
%
 
2
%
 
4
%
 
2
%
Renewal premium change
8

 
5

 
6

 
5

Retention
87

 
85

 
88

 
84

New business
$
91

 
$
93

 
$
274

 
$
266

Three Month Comparison
Gross written premiums, excluding third party captives, for Specialty increased $64 million for the three months ended September 30, 2019 as compared with the same period in 2018 driven by strong retention and rate. Net written premiums for Specialty increased $44 million for the three months ended September 30, 2019 as compared with the same period in 2018. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Core income decreased $24 million for the three months ended September 30, 2019 as compared with the same period in 2018, driven by lower favorable net prior year loss reserve development partially offset by lower net catastrophe losses.
The combined ratio of 89.8% increased 2.8 points for the three months ended September 30, 2019 as compared with the same period in 2018. The loss ratio increased 3.3 points primarily due to lower favorable net prior year loss reserve development. Net catastrophe losses were $3 million, or 0.5 points of the loss ratio, for the three months ended September 30, 2019, as compared to $16 million, or 2.4 points of the loss ratio, for the three months ended September 30, 2018. The expense ratio improved 0.5 points for the three months ended September 30, 2019 as compared with the same period in 2018 driven by a favorable acquisition ratio.
Favorable net prior year loss reserve development of $20 million and $53 million was recorded for the three months ended September 30, 2019 and 2018. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison
Gross written premiums, excluding third party captives, for Specialty increased $133 million for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by higher new business, strong retention and rate. Net written premiums for Specialty increased $81 million for the nine months ended September 30, 2019 as compared with the same period in 2018. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Core income decreased $48 million for the nine months ended September 30, 2019 as compared with the same period in 2018, driven by lower favorable net prior year loss reserve development partially offset by higher net investment income driven by limited partnership and common stock returns.
The combined ratio of 90.9% increased 3.8 points for the nine months ended September 30, 2019 as compared with the same period in 2018. The loss ratio increased 3.0 points primarily due to lower favorable net prior year loss reserve development. Net catastrophe losses were $16 million, or 0.8 points of the loss ratio, for the nine months ended September 30, 2019, as compared to $22 million, or 1.1 points of the loss ratio, for the nine months ended September 30, 2018. The expense ratio increased 0.8 points for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by higher employee costs.
Favorable net prior year loss reserve development of $58 million and $127 million was recorded for the nine months ended September 30, 2019 and 2018. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves for Specialty.
(In millions)
September 30, 2019
 
December 31, 2018
Gross case reserves
$
1,491

 
$
1,623

Gross IBNR reserves
3,794

 
3,842

Total gross carried claim and claim adjustment expense reserves
$
5,285

 
$
5,465

Net case reserves
$
1,338

 
$
1,483

Net IBNR reserves
3,367

 
3,348

Total net carried claim and claim adjustment expense reserves
$
4,705

 
$
4,831



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Table of Contents

Commercial
The following table details the results of operations for Commercial.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios, rate, renewal premium change and retention)
2019
 
2018
 
2019
 
2018
Gross written premiums
$
860

 
$
758

 
$
2,825

 
$
2,563

Gross written premiums excluding third party captives
852

 
756

 
2,742

 
2,483

Net written premiums
775

 
697

 
2,536

 
2,339

Net earned premiums
813

 
782

 
2,339

 
2,278

Net investment income
136

 
144

 
480

 
450

Core income
97

 
127

 
356

 
403

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
69.3
%
 
63.5
%
 
67.6
%
 
63.0
%
Expense ratio
31.7

 
33.2

 
32.7

 
33.3

Dividend ratio
0.6

 
0.7

 
0.6

 
0.7

Combined ratio
101.6
%
 
97.4
%
 
100.9
%
 
97.0
%
 
 
 
 
 
 
 
 
Rate
4
%
 
2
%
 
3
%
 
1
%
Renewal premium change
5

 
4

 
4

 
5

Retention
84

 
84

 
86

 
85

New business
$
173

 
$
122

 
$
522

 
$
462

Three Month Comparison
Gross written premiums for Commercial increased $102 million for the three months ended September 30, 2019 as compared with the same period in 2018 driven by higher new business and rate. Net written premiums for Commercial increased $78 million for the three months ended September 30, 2019 as compared with the same period in 2018. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Core income decreased $30 million for the three months ended September 30, 2019 as compared with the same period in 2018, primarily due to unfavorable net prior year loss reserve development in the current year period.
The combined ratio of 101.6% increased 4.2 points for the three months ended September 30, 2019 as compared with the same period in 2018. The loss ratio increased 5.8 points primarily due to unfavorable net prior year loss reserve development in the current year period. Net catastrophe losses were $25 million, or 3.0 points of the loss ratio, for the three months ended September 30, 2019, as compared with $25 million, or 3.1 points of the loss ratio, for the three months ended September 30, 2018. The expense ratio improved 1.5 points for the three months ended September 30, 2019 as compared with the same period in 2018 driven by a favorable acquisition ratio.
Unfavorable net prior year loss reserve development of $35 million was recorded for the three months ended September 30, 2019 as compared with favorable development of $5 million recorded for the three months ended September 30, 2018. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison
Gross written premiums for Commercial increased $262 million for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by higher new business and rate. Net written premiums for Commercial increased $197 million for the nine months ended September 30, 2019 as compared with the same period in 2018.  The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Core income decreased $47 million for the nine months ended September 30, 2019 as compared with the same period in 2018, due to unfavorable underwriting results partially offset by higher net investment income driven by limited partnership and common stock returns.
The combined ratio of 100.9% increased 3.9 points for the nine months ended September 30, 2019 as compared with the same period in 2018. The loss ratio increased 4.6 points driven by the current accident year and unfavorable net prior year loss reserve development in the current year period. Net catastrophe losses were $102 million, or 4.3 points of the loss ratio, for the nine months ended September 30, 2019, as compared to $73 million, or 3.1 points of the loss ratio, for the nine months ended September 30, 2018. The expense ratio improved 0.6 points for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by a favorable acquisition ratio partially offset by higher employee costs.
Unfavorable net prior year loss reserve development of $15 million was recorded for the nine months ended September 30, 2019 as compared with favorable development of $27 million recorded for the nine months ended September 30, 2018. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves for Commercial.
(In millions)
September 30, 2019
 
December 31, 2018
Gross case reserves
$
3,928

 
$
4,181

Gross IBNR reserves
4,682

 
4,562

Total gross carried claim and claim adjustment expense reserves
$
8,610

 
$
8,743

Net case reserves
$
3,565

 
$
3,831

Net IBNR reserves
4,340

 
4,167

Total net carried claim and claim adjustment expense reserves
$
7,905

 
$
7,998


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Table of Contents

International
The following table details the results of operations for International.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios, rate, renewal premium change and retention)
2019
 
2018
 
2019
 
2018
Gross written premiums
$
226

 
$
230

 
$
837

 
$
884

Net written premiums
201

 
196

 
709

 
762

Net earned premiums
236

 
255

 
729

 
739

Net investment income
17

 
14

 
47

 
43

Core (loss) income
(9
)
 
1

 
14

 
17

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
69.4
%
 
67.6
%
 
64.7
%
 
65.0
%
Expense ratio
38.0

 
36.3

 
37.5

 
36.8

Combined ratio
107.4
%
 
103.9
%
 
102.2
%
 
101.8
%
 
 
 
 
 
 
 
 
Rate
10
%
 
4
%
 
7
%
 
3
%
Renewal premium change
6

 
8

 
5

 
6

Retention
71

 
72

 
69

 
79

New business
$
52

 
$
71

 
$
207

 
$
247

Three Month Comparison
Gross written premiums for International decreased $4 million for the three months ended September 30, 2019 as compared with the same period in 2018. Excluding the effect of foreign currency exchange rates, gross written premiums increased $1 million or 1% driven by growth in Canada largely offset by the premium reduction from Hardy's strategic exit from certain business classes announced in the fourth quarter of 2018. Net written premiums for International increased $5 million for the three months ended September 30, 2019 as compared with the same period in 2018. Excluding the effect of foreign currency exchange rates, net written premiums increased $10 million or 5% for the three months ended September 30, 2019 as compared with the same period in 2018 driven by a change in the timing of ceded reinsurance contract renewals. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Core results decreased $10 million for the three months ended September 30, 2019 as compared with the same period in 2018 primarily due to unfavorable underwriting results.
The combined ratio of 107.4% increased 3.5 points for the three months ended September 30, 2019 as compared with the same period in 2018. The loss ratio increased 1.8 points, driven by unfavorable net prior year loss reserve development in the current year period as compared with favorable development in the prior year period and an increase in large property losses in Hardy and Europe. Net catastrophe losses were $4 million, or 1.7 points of the loss ratio, for the three months ended September 30, 2019, as compared with $5 million, or 2.1 points of the loss ratio, for the three months ended September 30, 2018. The expense ratio increased 1.7 points for the three months ended September 30, 2019 as compared with the same period in 2018 driven by lower net earned premiums.
Unfavorable net prior year loss reserve development of $1 million was recorded for the three months ended September 30, 2019 as compared with favorable development of $2 million for the three months ended September 30, 2018. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison
Gross written premiums for International decreased $47 million for the nine months ended September 30, 2019 as compared with the same period in 2018. Excluding the effect of foreign currency exchange rates, gross written premiums decreased $17 million or 2% for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by the premium reduction from Hardy's strategic exit from certain business classes announced in the fourth quarter of 2018. Net written premiums for International decreased $53 million for the nine months ended September 30, 2019 as compared with the same period in 2018. Excluding the effect of foreign currency exchange rates, net written premiums decreased $25 million or 3% for the nine months ended September 30, 2019 as compared with the same period in 2018. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Core income decreased $3 million for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by unfavorable net prior year loss reserve development in the current year partially offset by improved current accident year underwriting results.
The combined ratio of 102.2% increased 0.4 points for the nine months ended September 30, 2019 as compared with the same period in 2018. The loss ratio improved 0.3 points, driven by improved current accident year underwriting results largely offset by unfavorable net prior year loss reserve development in the current year period. Net catastrophe losses were $10 million, or 1.4 points of the loss ratio, for the nine months ended September 30, 2019, as compared to $11 million, or 1.5 points of the loss ratio, for the nine months ended September 30, 2018. The expense ratio increased 0.7 points for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by lower net earned premiums.
Unfavorable net prior year loss reserve development of $14 million was recorded for the nine months ended September 30, 2019 as compared with favorable development of $4 million for the nine months ended September 30, 2018. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves for International.
(In millions)
September 30, 2019
 
December 31, 2018
Gross case reserves
$
822

 
$
867

Gross IBNR reserves
980

 
883

Total gross carried claim and claim adjustment expense reserves
$
1,802

 
$
1,750

Net case reserves
$
728

 
$
749

Net IBNR reserves
834

 
775

Total net carried claim and claim adjustment expense reserves
$
1,562

 
$
1,524



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Table of Contents

Life & Group
The following table details the results of operations for Life & Group.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Net earned premiums
$
130

 
$
133

 
$
390

 
$
398

Net investment income
207

 
200

 
616

 
598

Core (loss) income before income tax
(170
)
 
22

 
(179
)
 
(7
)
Income tax benefit on core loss
48

 
10

 
74

 
43

Core (loss) income
(122
)
 
32

 
(105
)
 
36

Three Month Comparison
Core results decreased $154 million for the three months ended September 30, 2019 as compared with the same period in 2018. The decrease was driven by a $170 million charge related to recognition of an active life reserve premium deficiency partially offset by a $44 million reduction in long term care claim reserves resulting from the annual claim experience study. The favorable claim reserve development was primarily due to lower claim severity than anticipated in the reserve estimates. Core income for the three months ended September 30, 2018 included a $24 million reduction in long term care claim reserves resulting from the 2018 annual claim experience study.
Nine Month Comparison
Core results decreased $141 million for the nine months ended September 30, 2019 as compared with the same period in 2018. The drivers of core results for the nine month period were generally consistent with the three month summary noted above.
Life & Group Policyholder Reserves
Annually, management assesses the adequacy of its long term care future policy benefit reserves by performing a GPV to determine if there is a premium deficiency. See Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1 for further information on the reserving process.

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Table of Contents

Prior to September 30, 2019, the active life reserves for long term care were based on the actuarial best estimate assumptions established at December 31, 2015 as a result of a reserve unlocking. The September 30, 2018 GPV indicated the carried reserves included a margin of approximately $182 million. The September 30, 2019 GPV indicated a premium deficiency of $216 million and future policy benefit reserves were increased accordingly. As a result, the long term care active life reserves carried as of September 30, 2019 represent management's best estimate assumptions at that date with no margin for adverse deviation. A summary of the changes in the GPV results is presented in the table below:
Long Term Care Active Life Reserve - Change in estimated reserve margin (In millions)
 
September 30, 2018 Estimated Margin
$
182

Changes in underlying discount rate assumptions
(280
)
Changes in underlying morbidity assumptions
32

Changes in underlying persistency assumptions and inforce policy inventory
(234
)
Changes in underlying premium rate action assumptions
58

Changes in underlying expense and other assumptions
26

September 30, 2019 Premium Deficiency
$
(216
)
The premium deficiency was primarily driven by changes in discount rate assumptions driven by lower expected reinvestment rates, contemplating both near-term market indications and long-term normative assumptions. The premium deficiency was also adversely affected by the recognition of margin in earnings in recent quarters and changes in persistency assumptions, primarily from lower projected active life mortality rates. These unfavorable drivers were partially offset by higher than expected rate increases on active rate increase programs, new planned rate increase filings and favorable changes to the underlying morbidity and expense assumptions.
As a result of the premium deficiency, our projections no longer indicate a pattern of expected profits in earlier future years followed by expected losses in later future years. As such, we will no longer establish additional future policy benefit reserves for profits followed by losses in periods where the long term care business generates core income. The need for these additional future policy benefit reserves will be re-evaluated in connection with the next GPV, which is expected to be completed in the third quarter of 2020.
The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our active life reserve assumptions. The annual GPV process involves updating all assumptions to the then current best estimate, and historically all significant assumptions have been revised each year. In the Hypothetical revisions table below, we have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group and would occur absent any changes, mitigating or otherwise, in the other assumptions. 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 actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below.
September 30, 2019
 
 
Estimated reduction to pretax income
Hypothetical revisions (In millions)
Morbidity:
 
5% increase in morbidity
$
664

10% increase in morbidity
1,329

Persistency:
 
5% decrease in active life mortality and lapse
$
208

10% decrease in active life mortality and lapse
427

Discount Rates:
 
50 basis point decline in new money interest rates
$
309

100 basis point decline in new money interest rates
675

Premium Rate Actions:
 
25% decrease in anticipated future premium rate increases
$
58

50% decrease in anticipated future premium rate increases
115


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Table of Contents

The following table summarizes policyholder reserves for Life & Group.
September 30, 2019
 
 
 
 
 
(In millions)
Claim and claim adjustment expenses
 
Future policy benefits
 
Total
Long term care
$
2,840

 
$
9,415

 
$
12,255

Structured settlement annuities
519

 
—

 
519

Other
13

 
—

 
13

Total
3,372

 
9,415

 
12,787

Shadow adjustments (1)
168

 
2,664

 
2,832

Ceded reserves (2)
167

 
226

 
393

Total gross reserves
$
3,707

 
$
12,305

 
$
16,012

December 31, 2018
 
 
 
 
 
(In millions)
Claim and claim adjustment expenses
 
Future policy benefits
 
Total
Long term care
$
2,761

 
$
9,113

 
$
11,874

Structured settlement annuities
530

 
—

 
530

Other
14

 
—

 
14

Total
3,305

 
9,113

 
12,418

Shadow adjustments (1)
115

 
1,250

 
1,365

Ceded reserves (2)
181

 
234

 
415

Total gross reserves
$
3,601

 
$
10,597

 
$
14,198

(1)
To the extent that unrealized gains on fixed income securities supporting long term care products and annuity contracts would result in a premium deficiency if those gains were realized, an increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).
(2)
Ceded reserves relate to claim or policy reserves fully reinsured in connection with a sale or exit from the underlying business.


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Table of Contents

Corporate & Other
The following table details the results of operations for the Corporate & Other segment, including intersegment eliminations.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Net investment income
$
6

 
$
5

 
$
20

 
$
16

Interest expense
31

 
33

 
99

 
101

Core loss
(17
)
 
(20
)
 
(34
)
 
(119
)
Three Month Comparison
Core loss improved $3 million for the three months ended September 30, 2019 as compared with the same period in 2018. The prior period included $4 million of non-recurring costs associated with the transition to a new IT infrastructure service provider.
Nine Month Comparison
Core loss improved $85 million for the nine months ended September 30, 2019 as compared with the same period in 2018. The prior period included adverse net prior year reserve development for A&EP under the LPT and $27 million of non-recurring costs associated with the transition to a new IT infrastructure service provider. The LPT is further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves for Corporate & Other.
(In millions)
September 30, 2019
 
December 31, 2018
Gross case reserves
$
1,153

 
$
1,208

Gross IBNR reserves
1,039

 
1,217

Total gross carried claim and claim adjustment expense reserves
$
2,192

 
$
2,425

Net case reserves
$
96

 
$
96

Net IBNR reserves
86

 
96

Total net carried claim and claim adjustment expense reserves
$
182

 
$
192


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Table of Contents

INVESTMENTS
Net Investment Income
The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Fixed income securities:
 
 
 
 
 
 
 
Taxable fixed income securities
$
383

 
$
366

 
$
1,151

 
$
1,070

Tax-exempt fixed income securities
79

 
93

 
241

 
298

Total fixed income securities
462

 
459

 
1,392

 
1,368

Limited partnership and common stock investments
18

 
23

 
157

 
96

Other, net of investment expense
7

 
5

 
24

 
19

Pretax net investment income
$
487

 
$
487

 
$
1,573

 
$
1,483

Fixed income securities, after tax
$
378

 
$
378

 
$
1,140

 
$
1,130

Net investment income, after tax
399

 
400

 
1,284

 
1,221

 
 
 
 
 
 
 
 
Effective income yield for the fixed income securities portfolio, pretax
4.8
%
 
4.7
%
 
4.8
%
 
4.7
%
Effective income yield for the fixed income securities portfolio, after tax
3.9
%
 
3.9
%
 
3.9
%
 
3.9
%
Limited partnership and common stock return
0.9
%
 
0.9
%
 
7.7
%
 
4.0
%
Net investment income, after tax, decreased $1 million for the three months ended September 30, 2019 as compared with the same period in 2018.
Net investment income, after tax, increased $63 million for the nine months ended September 30, 2019 as compared with the same period in 2018 driven by limited partnership and common stock returns.


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Table of Contents

Net Investment Gains (Losses)
The components of Net investment gains (losses) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2019
 
2018
 
2019
 
2018
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
7

 
$
8

 
$
—

 
$
36

States, municipalities and political subdivisions
1

 
9

 
13

 
35

Asset-backed
(5
)
 
(7
)
 
(19
)
 
(39
)
Total fixed maturity securities
3

 
10

 
(6
)
 
32

Non-redeemable preferred stock
7

 
2

 
60

 
(23
)
Short term and other
(3
)
 
2

 
(34
)
 
16

Net investment gains
7

 
14

 
20

 
25

Income tax expense on net investment gains
(2
)
 
(1
)
 
(7
)
 
(2
)
Net investment gains, after tax
$
5

 
$
13

 
$
13

 
$
23

Net investment gains, after tax, decreased $8 million for the three months ended September 30, 2019 as compared with the same period in 2018. The decrease was driven by higher OTTI losses recognized in earnings.
Net investment gains, after tax, decreased $10 million for the nine months ended September 30, 2019 as compared with the same period in 2018. The decrease was driven by higher OTTI losses recognized in earnings and a $16 million after tax loss related to the redemption of our $500 million senior notes due August 2020. This was offset by the favorable change in fair value of non-redeemable preferred stock.
Further information on our investment gains and losses, including our OTTI losses, is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.


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Table of Contents

Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.
 
September 30, 2019
 
December 31, 2018

(In millions)
Estimated Fair Value
 
Net Unrealized Gains (Losses)
 
Estimated Fair Value
 
Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises
$
4,432

 
$
114

 
$
4,334

 
$
(24
)
AAA
3,057

 
360

 
3,027

 
245

AA
6,731

 
860

 
6,510

 
512

A
9,040

 
1,112

 
8,768

 
527

BBB
16,718

 
1,670

 
14,205

 
274

Non-investment grade
2,481

 
85

 
2,702

 
(73
)
Total
$
42,459

 
$
4,201

 
$
39,546

 
$
1,461

As of September 30, 2019 and December 31, 2018, 1% of our fixed maturity portfolio was rated internally. AAA rated securities included $1.3 billion of pre-refunded municipal bonds as of September 30, 2019 and December 31, 2018.
The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.
 
September 30, 2019
(In millions)
Estimated Fair Value
 
Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises
$
171

 
$
1

AAA
35

 
1

AA
29

 
—

A
456

 
4

BBB
568

 
12

Non-investment grade
609

 
32

Total
$
1,868

 
$
50

The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.
 
September 30, 2019
(In millions)
Estimated Fair Value
 
Gross Unrealized Losses
Due in one year or less
$
27

 
$
—

Due after one year through five years
377

 
12

Due after five years through ten years
1,127

 
22

Due after ten years
337

 
16

Total
$
1,868

 
$
50



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Table of Contents

Duration
A primary objective in the management of the investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group segment.
The effective durations of fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
 
September 30, 2019
 
December 31, 2018
(In millions)
Estimated Fair Value
 
Effective
Duration
(In years)
 
Estimated Fair Value
 
Effective
Duration
(In years)
Investments supporting Life & Group
$
18,003

 
9.0

 
$
16,212

 
8.4

Other investments
26,655

 
4.1

 
25,428

 
4.4

Total
$
44,658

 
6.0

 
$
41,640

 
6.0

The investment portfolio is periodically analyzed for changes in duration and related price risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Short Term Investments
The carrying value of the components of the Short term investments are presented in the following table.
(In millions)
September 30, 2019
 
December 31, 2018
Short term investments:
 
 
 
Commercial paper
$
1,004

 
$
705

U.S. Treasury securities
256

 
185

Other
234

 
396

Total short term investments
$
1,494

 
$
1,286


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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For the nine months ended September 30, 2019, net cash provided by operating activities was $980 million as compared with $868 million for the same period in 2018. The increase in cash provided by operating activities was driven by an increase in premiums collected and lower income taxes paid.
Cash flows from investing activities include the purchase and disposition of financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
Net cash used by investing activities was $60 million for the nine months ended September 30, 2019, as compared with net cash provided of $80 million for the same period in 2018. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, and outflows for stockholder dividends, repayment of debt and purchases of treasury stock.
For the nine months ended September 30, 2019, net cash used by financing activities was $887 million, as compared with $989 million for the same period in 2018. Financing activities for the periods presented include:
•
During the nine months ended September 30, 2019, we repurchased 415,695 shares of our common stock at an aggregate cost of $18 million.
•
In the second quarter of 2019, we issued $500 million of 3.90% senior notes due May 1, 2029 and redeemed the $500 million outstanding aggregate principal balances of our 5.875% senior notes due August 15, 2020.
•
In the first quarter of 2018, we redeemed the $150 million outstanding aggregate principal balance of our 6.950% senior notes due January 15, 2018.
•
In the third quarter of 2018, we redeemed the $30 million of subordinated variable rate debt of CNA Hardy due September 15, 2036.
Common Stock Dividends
Dividends of $3.05 per share on our common stock, including a special dividend of $2.00 per share, were declared and paid during the nine months ended September 30, 2019. On October 25, 2019, our Board of Directors declared a quarterly dividend of $0.35 per share, payable December 2, 2019 to stockholders of record on November 11, 2019. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.

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Liquidity
We believe that our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home Loan Bank of Chicago (FHLBC).
We have an effective shelf registration statement under which we may publicly issue debt, equity or hybrid securities from time to time.
Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of September 30, 2019, CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2019 that would not be subject to the Department's prior approval is $1,383 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $116 million during the three months ended December 31, 2018 and $940 million during the nine months ended September 30, 2019. As of September 30, 2019, CCC is able to pay approximately $327 million of dividends that would not be subject to prior approval of the Department. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

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ACCOUNTING STANDARDS UPDATE
For a discussion of Accounting Standards Updates adopted in the current period and that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1.
FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for long term care, A&EP and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; expected cost savings and other results from our expense reduction activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:
Company-Specific Factors
•
the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our Annual Report on Form 10-K, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;
•
the risk that the other parties to the transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;
•
the performance of reinsurance companies under reinsurance contracts with us; and
•
the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.
Industry and General Market Factors
•
the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;
•
product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;
•
general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
•
conditions in the capital and credit markets, including uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;
•
conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms; and
•
the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.

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Regulatory Factors
•
regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, including with respect to cyber security protocols, legal inquiries by state authorities, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, including those revising applicability of statutes of limitations, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations;
•
regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies; and
•
regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards.
Impact of Catastrophic Events and Related Developments
•
weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow;
•
regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
•
man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; and
•
the occurrence of epidemics.
Referendum on the United Kingdom's Membership in the European Union
•
in 2016, the U.K. approved an exit from the E.U., commonly referred to as "Brexit.” Brexit remains scheduled to be completed in 2019, although the formal exit has been delayed twice. Effective January 1, 2019, we write business in the E.U. through our recently established European subsidiary in Luxembourg and not through our U.K.-domiciled subsidiary. As a result, the complexity and cost of regulatory compliance of our European business has increased and will likely continue to result in elevated expenses.
Our forward-looking statements speak only as of the date of the filing of this Quarterly Report on Form 10-Q and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the nine months ended September 30, 2019. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.
As of September 30, 2019, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2019.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II. Other Information
Item 1. Legal Proceedings
Information on our legal proceedings is set forth in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2 (a) and (b) are not applicable.
(c) The table below details repurchases of our common stock made during the three months ended September 30, 2019.
Period
 
(a) Total number of shares purchased
 
(b) Average price paid per share
 
(c) Total number of shares purchased as part of publicly announced plans or programs
 
(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in millions)
August 1, 2019 - August 31, 2019
 
50,000

 
$
46.47

 
N/A
 
N/A
Total
 
50,000

 
46.47

 
N/A
 
N/A
Item 6. Exhibits
See Exhibit Index.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CNA Financial Corporation
 
 
 
Dated: October 28, 2019
By
/s/ James M. Anderson
 
 
James M. Anderson
Executive Vice President and
Chief Financial Officer
(Duly authorized officer and principal financial and accounting officer)

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EXHIBIT INDEX
Description of Exhibit
Exhibit Number
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.INS
 
 
Inline XBRL Taxonomy Extension Schema
101.SCH
 
 
Inline XBRL Taxonomy Extension Calculation Linkbase
101.CAL
 
 
Inline XBRL Taxonomy Extension Definition Linkbase
101.DEF
 
 
Inline XBRL Taxonomy Label Linkbase
101.LAB
 
 
Inline XBRL Taxonomy Extension Presentation Linkbase
101.PRE
 
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
104

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