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CNA FINANCIAL CORP - Quarter Report: 2020 June (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 June 30, 2020
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
☒

Accelerated filer
☐

Non-accelerated filer
☐

Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 30, 2020, 271,381,340 shares of common stock were outstanding.



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

2

PART I
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended June 30
Three Months
 
Six Months
(In millions, except per share data)
2020
 
2019
 
2020
 
2019
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,850

 
$
1,824

 
$
3,719

 
$
3,627

Net investment income
534

 
515

 
863

 
1,086

Net investment gains (losses)
69

 
(18
)
 
(147
)
 
13

Non-insurance warranty revenue
308

 
285

 
609

 
566

Other revenues
5

 
4

 
13

 
13

Total revenues
2,766


2,610


5,057

 
5,305

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,642

 
1,352

 
3,067

 
2,709

Amortization of deferred acquisition costs
342

 
338

 
686

 
680

Non-insurance warranty expense
285

 
263

 
566

 
523

Other operating expenses
284

 
281

 
583

 
564

Interest
31

 
34

 
62

 
68

Total claims, benefits and expenses
2,584

 
2,268

 
4,964

 
4,544

Income before income tax
182

 
342

 
93

 
761

Income tax expense
(31
)
 
(64
)
 
(3
)
 
(141
)
Net income
$
151

 
$
278

 
$
90

 
$
620

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.56

 
$
1.03

 
$
0.33

 
$
2.28

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.55

 
$
1.02

 
$
0.33

 
$
2.28

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
271.5

 
271.6

 
271.5

 
271.6

Diluted
272.0

 
272.4

 
272.3

 
272.5


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


3

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Comprehensive Income
 
 
 
 
 
 
 
Net income
$
151

 
$
278

 
$
90

 
$
620

Other Comprehensive Income, net of tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains and losses on investments with an allowance for credit losses
2

 
—

 
(9
)
 
—

Net unrealized gains and losses on other investments
1,191

 
436

 
147

 
966

Net unrealized gains and losses on investments
1,193

 
436

 
138

 
966

Foreign currency translation adjustment
24

 
—

 
(53
)
 
17

Pension and postretirement benefits
7

 
8

 
18

 
15

Other comprehensive income, net of tax
1,224

 
444

 
103

 
998

Total comprehensive income
$
1,375

 
$
722

 
$
193

 
$
1,618

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

4

CNA Financial Corporation
Condensed Consolidated Balance Sheets
(In millions, except share data)
June 30, 2020 (Unaudited)
 
December 31,
2019
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $38,392 and $38,126, less allowance for credit loss of $51 and $-)
$
42,775

 
$
42,207

Equity securities at fair value (cost of $889 and $820)
859

 
865

Limited partnership investments
1,558

 
1,752

Other invested assets
65

 
65

Mortgage loans (less allowance for uncollectible receivables of $20 and $-)
1,042

 
994

Short term investments
1,458

 
1,861

Total investments
47,757

 
47,744

Cash
586

 
242

Reinsurance receivables (less allowance for uncollectible receivables of $24 and $25)
4,435

 
4,179

Insurance receivables (less allowance for uncollectible receivables of $33 and $32)
2,755

 
2,449

Accrued investment income
382

 
395

Deferred acquisition costs
699

 
662

Deferred income taxes
195

 
199

Property and equipment at cost (less accumulated depreciation of $211 and $215)
264

 
282

Goodwill
145

 
147

Deferred non-insurance warranty acquisition expense
2,916

 
2,840

Other assets (includes $- and $21 due from Loews Corporation)
1,961

 
1,473

Total assets
$
62,095

 
$
60,612

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,270

 
$
21,720

Unearned premiums
4,996

 
4,583

Future policy benefits
12,596

 
12,311

Long term debt
2,680

 
2,679

Deferred non-insurance warranty revenue
3,852

 
3,779

Other liabilities (includes $14 and $21 due to Loews Corporation)
4,056

 
3,325

Total liabilities
50,450

 
48,397

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; 271,377,196 and 271,412,591 shares outstanding)
683

 
683

Additional paid-in capital
2,196

 
2,203

Retained earnings
8,683

 
9,348

Accumulated other comprehensive income
154

 
51

Treasury stock (1,663,047 and 1,627,652 shares), at cost
(71
)
 
(70
)
Total stockholders’ equity
11,645

 
12,215

Total liabilities and stockholders' equity
$
62,095

 
$
60,612

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

5

CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30
 
 
 
(In millions)
2020
 
2019
Cash Flows from Operating Activities
 
 
 
Net income
$
90

 
$
620

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax (benefit) expense
(33
)
 
25

Trading portfolio activity
15

 
4

Net investment losses (gains)
147

 
(13
)
Equity method investees
68

 
39

Net amortization of investments
(32
)
 
(47
)
Depreciation and amortization
31

 
36

Changes in:
 
 
 
Receivables, net
(586
)
 
(135
)
Accrued investment income
11

 
(7
)
Deferred acquisition costs
(41
)
 
(47
)
Insurance reserves
1,181

 
203

Other, net
(201
)
 
(164
)
Net cash flows provided by operating activities
650

 
514

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
3,773

 
3,858

Fixed maturity securities - maturities, calls and redemptions
1,622

 
1,374

Equity securities
230

 
117

Limited partnerships
257

 
297

Mortgage loans
25

 
70

Purchases:
 
 
 
Fixed maturity securities
(5,356
)
 
(4,896
)
Equity securities
(312
)
 
(88
)
Limited partnerships
(90
)
 
(139
)
Mortgage loans
(91
)
 
(147
)
Change in other investments
(2
)
 
(4
)
Change in short term investments
409

 
(211
)
Purchases of property and equipment
(10
)
 
(14
)
Other, net
20

 
16

Net cash flows provided by investing activities
475

 
233

Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
(750
)
 
(738
)
Proceeds from the issuance of debt
—

 
496

Repayment of debt
—

 
(520
)
Purchase of treasury stock
(18
)
 
(16
)
Other, net
(8
)
 
(10
)
Net cash flows used by financing activities
(776
)
 
(788
)
Effect of foreign exchange rate changes on cash
(5
)
 
2

Net change in cash
344

 
(39
)
Cash, beginning of year
242

 
310

Cash, end of period
$
586

 
$
271

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

6

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
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
2,187

 
2,184

 
2,203

 
2,192

Stock-based compensation
9

 
6

 
(7
)
 
(2
)
Balance, end of period
2,196

 
2,190

 
2,196

 
2,190

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of period, as previously reported
8,634

 
8,976

 
9,348

 
9,277

Cumulative effect adjustments from changes in accounting guidance, net of tax
—

 
—

 
(5
)
 
—

Balance, beginning of period, as adjusted
8,634

 
8,976

 
9,343

 
9,277

Dividends to common stockholders ($0.37, $0.35, $2.74 and $2.70 per share)
(102
)
 
(95
)
 
(750
)
 
(738
)
Net income
151

 
278

 
90

 
620

Balance, end of period
8,683

 
9,159

 
8,683

 
9,159

Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance, beginning of period
(1,070
)
 
(324
)
 
51

 
(878
)
Other comprehensive income
1,224

 
444

 
103

 
998

Balance, end of period
154

 
120

 
154

 
120

Treasury Stock
 
 
 
 
 
 
 
Balance, beginning of period
(72
)
 
(64
)
 
(70
)
 
(57
)
Stock-based compensation
1

 
1

 
17

 
8

Purchase of treasury stock
—

 
(2
)
 
(18
)
 
(16
)
Balance, end of period
(71
)
 
(65
)
 
(71
)
 
(65
)
Total stockholders' equity
$
11,645

 
$
12,087

 
$
11,645

 
$
12,087

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


7

CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 89.6% of the outstanding common stock of CNAF as of June 30, 2020.
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, 2019, including the summary of significant accounting policies in Note A. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
The interim financial data as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 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 2016-13: In June 2016 the Financial Accounting Standards Board (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 the Company’s results of operations. For financial assets measured at cost, the expected credit loss model requires immediate recognition of estimated credit losses over the life of the asset and presentation of the asset at the net amount expected to be collected. This new guidance applies to mortgage loan investments, reinsurance and insurance receivables and other financing receivables. For available-for-sale fixed maturity securities carried at fair value, estimated credit losses will continue to be measured at the present value of expected cash flows, however, the other than temporary impairment (OTTI) concept has been eliminated. Under the previous guidance, estimated credit impairments resulted in a write-down of amortized cost. Under the new guidance, estimated credit losses are recognized through an allowance and reversals of the allowance are permitted if the estimate of credit losses declines. For available-for-sale fixed maturity securities where the Company has an intent to sell, impairment will continue to result in a write-down of amortized cost.
On January 1, 2020, the Company adopted the updated guidance using a modified retrospective method with a cumulative effect adjustment recorded to beginning Retained earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. A prospective transition approach is required for available-for-sale fixed maturity securities that were purchased with credit deterioration (PCD assets) or have recognized an OTTI write-down prior to the effective date. The cumulative effect of the accounting change resulted in a $5 million decrease in Retained earnings, with a corresponding $7 million allowance for credit losses recorded for Mortgage loans partially offset by a $2 million tax impact.

8

The allowance for uncollectible insurance and reinsurance receivables was unchanged as a result of adopting the new guidance. At adoption, an allowance for credit losses of $6 million was established for available-for-sale fixed maturity securities that were PCD assets, with a corresponding increase to amortized cost, resulting in no adjustment to the carrying value of the securities. Below is a summary of the significant accounting policies impacted by the adoption of ASU 2016-13.
The allowance for credit losses is a valuation account that is reported as a reduction of a financial asset’s cost basis and is measured on a pool basis when similar risk characteristics exist. Management estimates the allowance using relevant available information from both internal and external sources. Historical credit loss experience provides the basis for the estimation of expected credit losses and adjustments may be made to reflect current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made for any additional factors that come to the Company’s attention. This could include significant shifts in counterparty financial strength ratings, aging of past due receivables, amounts sent to collection agencies, or other underlying portfolio changes. Amounts are considered past due when payments have not been received according to contractual terms. The Company also considers current and forecast economic conditions, using a variety of economic metrics and forecast indices. The sensitivity of expected credit losses relative to changes to these forecast economic conditions can vary by financial asset class. The Company considers a reasonable and supportable forecast period to be up to 24 months from the balance sheet date. After the forecast period, the Company reverts to historical credit experience. The Company uses collateral arrangements such as letters of credit and amounts held in beneficiary trusts to mitigate credit risk, which are considered in the estimate of net amount expected to be collected.
The Company has made a policy election to present accrued interest balances separately from the amortized cost basis of assets and has elected the practical expedient to exclude the accrued interest from the tabular disclosures for mortgage loans and available-for-sale securities. The Company has elected not to estimate an allowance for credit losses on accrued interest receivable. The accrual of interest income is discontinued and the asset is placed on nonaccrual status within 90 days of the interest becoming delinquent. Interest accrued but not received for assets on nonaccrual status is reversed through investment income. Interest received for assets that are on nonaccrual status is recognized as payment is received. The asset is returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are expected. Interest receivable is presented as a component of accrued investment income on the Condensed Consolidated Balance Sheet.
See Note C and Note K to the Condensed Consolidated Financial Statements for additional information regarding credit losses.
Accounting Standards Pending Adoption
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 the Company's results of operations 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, 2021, however the FASB has proposed a one year deferral of the effective date. Early adoption is permitted. The Company may elect to apply the guidance using either a modified retrospective transition method or a full retrospective transition method. The guidance requires restatement of prior periods presented. The Company plans to adopt using the modified retrospective transition method and is currently evaluating the effect the updated guidance will have on its financial statements, including the increased disclosure requirements. The annual updating of cash flow assumptions is expected to increase income statement volatility. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows will be unchanged.


9

Note B. Earnings (Loss) Per Share
Earnings (loss) per share is based on weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For the three and six months ended June 30, 2020, approximately 445 thousand and 778 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, 915 thousand and 13 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.
For the three and six months ended June 30, 2019, approximately 776 thousand and 872 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, less than 1 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.
The Company repurchased 435,376 and 365,695 shares of CNAF common stock at an aggregate cost of $18 million and $16 million during the six months ended June 30, 2020 and 2019.

10

Note C. Investments
The significant components of Net investment income are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Fixed maturity securities
$
430

 
$
455

 
$
868

 
$
910

Equity securities
50

 
16

 
6

 
46

Limited partnership investments
44

 
37

 
(26
)
 
113

Mortgage loans
14

 
12

 
28

 
24

Short term investments
1

 
9

 
8

 
19

Trading portfolio
8

 
2

 
9

 
4

Other
2

 
—

 
2

 
2

Gross investment income
549

 
531

 
895

 
1,118

Investment expense
(15
)
 
(16
)
 
(32
)
 
(32
)
Net investment income
$
534

 
$
515

 
$
863

 
$
1,086


During the three and six months ended June 30, 2020, $23 million and $10 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2020. During the three and six months ended June 30, 2019, $4 million and $21 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2019.
Net investment gains (losses) are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Net investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross gains
$
102

 
$
28

 
$
131

 
$
64

Gross losses
(85
)
 
(31
)
 
(189
)
 
(73
)
Net investment gains (losses) on fixed maturity securities
17

 
(3
)
 
(58
)
 
(9
)
Equity securities
63

 
11

 
(70
)
 
53

Derivatives
(10
)
 
(6
)
 
(5
)
 
(11
)
Mortgage loans
—

 
—

 
(13
)
 
—

Short term investments and other
(1
)
 
(20
)
 
(1
)
 
(20
)
Net investment gains (losses)
$
69

 
$
(18
)
 
$
(147
)
 
$
13


During the three and six months ended June 30, 2020, $63 million of gains and $(70) million of losses were recognized in Net investment gains (losses) due to the change in fair value of non-redeemable preferred stock still held as of June 30, 2020. During the three and six months ended June 30, 2019, $11 million and $53 million of gains were recognized in Net investment gains (losses) due to the change in fair value of non-redeemable preferred stock still held as of June 30, 2019. Net investment gains (losses) for the three and six months ended June 30, 2019 included a $21 million loss related to the second quarter 2019 redemption of the Company's $500 million senior notes due August 2020.
For available-for-sale fixed maturity securities, a credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis. The allowance for credit loss related to available-for-sale fixed maturity securities is the difference between present value of cash flows expected to be collected and the amortized cost basis, limited by the amount that the fair value is less than the amortized cost basis. The Company considers all available evidence when determining whether an investment requires a credit loss write-down or allowance to be recorded. Examples of such evidence may include the financial condition and near term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions and industry, sector or other specific factors and whether it is likely that the Company will recover its amortized cost through the collection of cash flows. Changes in the allowance since

11

acquisition are presented as a component of Net investment gains (losses) on the Condensed Consolidated Statements of Operations.
The following tables present the activity related to the allowance on available-for-sale securities with credit impairments and PCD assets. Accrued interest receivable on available-for-sale fixed maturity securities totaled $373 million and is excluded from the estimate of expected credit losses and the amortized cost basis in the tables included within this Note.
Three months ended June 30
 
 
 
 
 
(in millions)
Corporate and other bonds
 
Asset-backed
 
Total
Allowance for credit losses:
 
 
 
 
 
Beginning balance
$
49

 
$
—

 
$
49

Additions to the allowance for credit losses:
 
 
 
 
 
For securities for which credit losses were not previously recorded
10

 
12

 
22

For available-for-sale securities accounted for as PCD assets
1

 
—

 
1

 
 
 
 
 
 
Reductions to the allowance for credit losses:
 
 
 
 
 
Securities sold during the period (realized)
1

 
—

 
1

Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis
—

 
—

 
—

Write-offs charged against the allowance
—

 
—

 
—

Recoveries of amounts previously written off
—

 
—

 
—

 
 
 
 
 
 
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period
(20
)
 
—

 
(20
)
Ending balance as of June 30, 2020
$
39

 
$
12

 
$
51

Six months ended June 30
 
 
 
 
 
(in millions)
Corporate and other bonds
 
Asset-backed
 
Total
Allowance for credit losses:
 
 
 
 
 
Beginning balance
$
—

 
$
—

 
$
—

Additions to the allowance for credit losses:
 
 
 
 
 
Impact of adopting ASC 326
6

 
—

 
6

For securities for which credit losses were not previously recorded
58

 
12

 
70

For available-for-sale securities accounted for as PCD assets
2

 
—

 
2

 
 
 
 
 
 
Reductions to the allowance for credit losses:
 
 
 
 
 
Securities sold during the period (realized)
6

 
—

 
6

Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis
1

 
—

 
1

Write-offs charged against the allowance
—

 
—

 
—

Recoveries of amounts previously written off
—

 
—

 
—

 
 
 
 
 
 
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period
(20
)
 
—

 
(20
)
Ending balance as of June 30, 2020
$
39

 
$
12

 
$
51





12

The components of available-for-sale impairment losses recognized in earnings by asset type are presented in the following table. The table includes losses on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
(1
)
 
$
6

 
$
90

 
$
12

Asset-backed
12

 
—

 
13

 
8

Impairment losses recognized in earnings
$
11

 
$
6

 
$
103

 
$
20



13

The following tables present a summary of fixed maturity securities.
June 30, 2020
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Allowance for Credit Losses(1)
 
Estimated
Fair
Value
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
20,305

 
$
2,680

 
$
143

 
$
39

 
$
22,803

States, municipalities and political subdivisions
9,426

 
1,702

 
1

 
—

 
11,127

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
3,617

 
169

 
2

 
—

 
3,784

Commercial mortgage-backed
2,151

 
70

 
93

 
12

 
2,116

Other asset-backed
1,940

 
52

 
33

 
—

 
1,959

Total asset-backed
7,708

 
291

 
128

 
12

 
7,859

U.S. Treasury and obligations of government-sponsored enterprises
491

 
7

 
—

 
—

 
498

Foreign government
457

 
26

 
—

 
—

 
483

Redeemable preferred stock
—

 
—

 
—

 
—

 
—

Total fixed maturity securities available-for-sale
38,387

 
4,706

 
272

 
51

 
42,770

Total fixed maturity securities trading
5

 
—

 
—

 
—

 
5

Total fixed maturity securities
$
38,392

 
$
4,706

 
$
272

 
$
51

 
$
42,775

(1) As of January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Unrealized OTTI Losses (Gains) column that tracked subsequent valuation changes on securities for which a credit loss had previously been recorded has been replaced with the Allowance for Credit Losses column.
December 31, 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
$
19,789

 
$
2,292

 
$
32

 
$
22,049

 
$
—

States, municipalities and political subdivisions
9,093

 
1,559

 
—

 
10,652

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,387

 
133

 
1

 
4,519

 
(17
)
Commercial mortgage-backed
2,265

 
86

 
5

 
2,346

 
1

Other asset-backed
1,925

 
41

 
4

 
1,962

 
(3
)
Total asset-backed
8,577

 
260

 
10

 
8,827

 
(19
)
U.S. Treasury and obligations of government-sponsored enterprises
146

 
1

 
2

 
145

 
—

Foreign government
491

 
14

 
1

 
504

 
—

Redeemable preferred stock
10

 
—

 
—

 
10

 
—

Total fixed maturity securities available-for-sale
38,106

 
4,126

 
45

 
42,187

 
$
(19
)
Total fixed maturity securities trading
20

 
—

 
—

 
20

 
 
Total fixed maturity securities
$
38,126

 
$
4,126

 
$
45

 
$
42,207

 
 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group segment would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of June 30, 2020 and December 31, 2019, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2,342 million and $2,198 million.

14

The following tables present the estimated fair value and gross unrealized losses of fixed maturity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by the length of time in which the securities have continuously been in that position.
 
Less than 12 Months
 
12 Months or Longer
 
Total
June 30, 2020
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
2,095

 
$
137

 
$
56

 
$
6

 
$
2,151

 
$
143

States, municipalities and political subdivisions
94

 
1

 
—

 
—

 
94

 
1

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
53

 
1

 
21

 
1

 
74

 
2

Commercial mortgage-backed
971

 
92

 
14

 
1

 
985

 
93

Other asset-backed
746

 
32


14


1

 
760

 
33

Total asset-backed
1,770

 
125

 
49

 
3

 
1,819

 
128

U.S. Treasury and obligations of government-sponsored enterprises
4

 
—

 
—

 
—

 
4

 
—

Foreign government
4

 
—

 
—

 
—

 
4

 
—

Total
$
3,967


$
263


$
105


$
9


$
4,072


$
272

 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 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
$
914

 
$
21

 
$
186

 
$
11

 
$
1,100

 
$
32

States, municipalities and political subdivisions
34

 
—

 
—

 
—

 
34

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
249

 
1

 
30

 
—

 
279

 
1

Commercial mortgage-backed
381

 
3

 
20

 
2

 
401

 
5

Other asset-backed
449

 
3

 
33

 
1

 
482

 
4

Total asset-backed
1,079

 
7

 
83

 
3

 
1,162

 
10

U.S. Treasury and obligations of government-sponsored enterprises
62

 
2

 
2

 
—

 
64

 
2

   Foreign government
59

 
1

 
1

 
—

 
60

 
1

Total
$
2,148

 
$
31

 
$
272

 
$
14

 
$
2,420

 
$
45


Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2020 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 impairment losses to be recorded as of June 30, 2020.

15

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
June 30, 2020
 
December 31, 2019
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,472

 
$
1,469

 
$
1,334

 
$
1,356

Due after one year through five years
11,040

 
11,622

 
9,746

 
10,186

Due after five years through ten years
13,335

 
14,414

 
14,892

 
15,931

Due after ten years
12,540

 
15,265

 
12,134

 
14,714

Total
$
38,387

 
$
42,770

 
$
38,106

 
$
42,187


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 $197 million and $182 million as of June 30, 2020 and December 31, 2019 and a fair value of $(12) million and $(7) million as of June 30, 2020 and December 31, 2019. The embedded derivative on the funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As part of its overall investment strategy, the Company invests in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to privately placed debt securities. As of June 30, 2020, the Company had commitments to purchase or fund approximately $1,205 million and sell approximately $50 million under the terms of these investments.
Mortgage Loans
The allowance for expected credit losses is developed by assessing the credit quality of pools of mortgage loans in good standing using debt service coverage ratios (DSCR) and loan-to-value ratios (LTV). The DSCR compares a property’s net operating income to its debt service payments, including principal and interest. The LTV ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. The pools developed to measure the credit loss allowance use increments of DSCR and LTV to draw distinctions between risk levels. Changes in the allowance for mortgage loans are presented as a component of Net investment gains (losses) on the Condensed Consolidated Statements of Operations.

16

The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination.
 
Mortgage Loans Amortized Cost Basis by Origination Year (1)
June 30, 2020
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
DSCR ≥1.6x
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV less than 55%
$
60

 
$
33

 
$
19

 
$
100

 
$
41

 
$
129

 
$
382

LTV 55% to 65%
—

 
32

 
29

 
41

 
4

 
—

 
106

LTV greater than 65%
—

 
5

 
—

 
—

 
—

 
—

 
5

DSCR 1.2x - 1.6x
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV less than 55%
—

 
32

 
10

 
13

 
16

 
125

 
196

LTV 55% to 65%
—

 
83

 
32

 
32

 
—

 
—

 
147

LTV greater than 65%
19

 
74

 
—

 
—

 
—

 
—

 
93

DSCR ≤1.2
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV less than 55%
—

 
2

 
11

 
—

 
—

 
9

 
22

LTV 55% to 65%
—

 
14

 
14

 
—

 
—

 
—

 
28

LTV greater than 65%
—

 
22

 
—

 
37

 
24

 
—

 
83

Total
$
79

 
$
297

 
$
115

 
$
223

 
$
85

 
$
263

 
$
1,062


(1)
The values in the table above reflect DSCR on a standardized amortization period and LTV based on the most recent appraised values trended forward using changes in a commercial real estate price index.
As of June 30, 2020, accrued interest receivable on mortgage loans totaled $4 million and is excluded from the amortized cost basis disclosed in the table above and the estimate of expected credit losses. The Company had loans with an amortized cost of $22 million that were less than 90 days past due as of June 30, 2020, none of which were placed on nonaccrual status. No interest income was written off for the period ended June 30, 2020.


17

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, and iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities.

18

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are presented in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.
June 30, 2020
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate bonds and other
$
519

 
$
22,715

 
$
555

 
$
23,789

States, municipalities and political subdivisions
—

 
11,127

 
—

 
11,127

Asset-backed
—

 
7,637

 
222

 
7,859

Total fixed maturity securities
519

 
41,479

 
777

 
42,775

Equity securities:
 
 
 
 
 
 
 
Common stock
150

 
—

 
4

 
154

Non-redeemable preferred stock
62

 
636

 
7

 
705

Total equity securities
212

 
636

 
11

 
859

Short term and other
1,313

 
21

 
—

 
1,334

Total assets
$
2,044

 
$
42,136


$
788


$
44,968

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
12

 
$
—

 
$
12

Total liabilities
$
—

 
$
12

 
$
—

 
$
12

December 31, 2019
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate bonds and other
$
175

 
$
22,085

 
$
468

 
$
22,728

States, municipalities and political subdivisions
—

 
10,652

 
—

 
10,652

Asset-backed
—

 
8,662

 
165

 
8,827

Total fixed maturity securities
175

 
41,399

 
633

 
42,207

Equity securities:
 
 
 
 
 
 
 
Common stock
135

 
—

 
7

 
142

Non-redeemable preferred stock
54

 
658

 
11

 
723

Total equity securities
189

 
658

 
18

 
865

Short term and other
397

 
1,344

 
—

 
1,741

Total assets
$
761


$
43,401


$
651


$
44,813

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
7

 
$
—

 
$
7

Total liabilities
$
—

 
$
7

 
$
—

 
$
7



19

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
 
Asset-backed
 
Equity securities
 
Total
Balance as of April 1, 2020
$
496

 
$
197

 
$
15

 
$
708

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

 
—

 
(4
)
 
(4
)
Reported in Net investment income
—

 
—

 
—

 
—

Reported in Other comprehensive income (loss)
59

 
18

 
—

 
77

Total realized and unrealized investment gains (losses)
59

 
18

 
(4
)
 
73

Purchases
4

 
35

 
—

 
39

Sales
—

 
(9
)
 
—

 
(9
)
Settlements
(4
)
 
(5
)
 
—

 
(9
)
Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
(14
)
 
—

 
(14
)
Balance as of June 30, 2020
$
555

 
$
222

 
$
11

 
$
788

Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Net income (loss) in the period
$
—

 
$
—

 
$
(4
)
 
$
(4
)
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Other comprehensive income (loss) in the period
58

 
18

 
—

 
76


Level 3
(In millions)
Corporate bonds and other
 
Asset-backed
 
Equity securities
 
Total
Balance as of April 1, 2019
$
253

 
$
184

 
$
20

 
$
457

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

 
—

 
—

 
—

Reported in Net investment income
—

 
—

 
—

 
—

Reported in Other comprehensive income (loss)
12

 
4

 
—

 
16

Total realized and unrealized investment gains (losses)
12

 
4

 
—

 
16

Purchases
76

 
—

 
2

 
78

Sales
—

 
—

 
—

 
—

Settlements
(2
)
 
(4
)
 
—

 
(6
)
Transfers into Level 3
—

 
40

 
—

 
40

Transfers out of Level 3
(1
)
 
(31
)
 
—

 
(32
)
Balance as of June 30, 2019
$
338

 
$
193

 
$
22

 
$
553

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

 
$
—

 
$
—

 
$
—

Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Other comprehensive income (loss) in the period
10

 
5

 
—

 
15



20

Level 3
(In millions)
Corporate bonds and other
 
Asset-backed
 
Equity securities
 
Total
Balance as of January 1, 2020
$
468

 
$
165

 
$
18

 
$
651

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

 
—

 
(4
)
 
(4
)
Reported in Net investment income
—

 
—

 
(3
)
 
(3
)
Reported in Other comprehensive income (loss)
22

 
10

 
—

 
32

Total realized and unrealized investment gains (losses)
22

 
10

 
(7
)
 
25

Purchases
71

 
80

 
—

 
151

Sales
—

 
(9
)
 
—

 
(9
)
Settlements
(6
)
 
(9
)
 
—

 
(15
)
Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
(15
)
 
—

 
(15
)
Balance as of June 30, 2020
$
555

 
$
222

 
$
11

 
$
788

Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Net income (loss) in the period
$
—

 
$
—

 
$
(7
)
 
$
(7
)
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Other comprehensive income (loss) in the period
24

 
10

 
—

 
34


Level 3
(In millions)
Corporate bonds and other
 
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 Net investment income
—

 
—

 
—

 
—

Reported in Other comprehensive income (loss)
20

 
7

 
—

 
27

Total realized and unrealized investment gains (losses)
20

 
7

 
2

 
29

Purchases
132

 
20

 
2

 
154

Sales
—

 
—

 
—

 
—

Settlements
(4
)
 
(8
)
 
—

 
(12
)
Transfers into Level 3
—

 
45

 
—

 
45

Transfers out of Level 3
(32
)
 
(68
)
 
—

 
(100
)
Balance as of June 30, 2019
$
338

 
$
193

 
$
22

 
$
553

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

 
$
—

 
$
3

 
$
3

Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Other comprehensive income (loss) in the period
17

 
8

 
—

 
25


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.

21

Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Level 1 securities include highly liquid government securities and exchange traded bonds, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with some inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with some inputs that are not market observable.
Short Term and Other Invested Assets
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 Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
As of June 30, 2020 and December 31, 2019, there were $60 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
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 primarily valued with observable inputs.

22

Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company. The weighted average rate is calculated based on fair value.
June 30, 2020
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
693

 
Discounted cash flow
 
Credit spread
 
1% - 9% (3%)
December 31, 2019
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
525

 
Discounted cash flow
 
Credit spread
 
1% - 6% (2%)

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
June 30, 2020
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
1,042

 
$
—

 
$
—

 
$
1,104

 
$
1,104

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,680

 
$
—

 
$
2,953

 
$
—

 
$
2,953

December 31, 2019
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
994

 
$
—

 
$
—

 
$
1,025

 
$
1,025

Note receivable
21

 
—

 
—

 
21

 
21

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,679

 
$
—

 
$
2,906

 
$
—

 
$
2,906


In the first quarter of 2020, the note receivable was repaid in full. As of December 31, 2019, the note receivable was included within Other assets on the Condensed Consolidated Balance Sheets.
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.

23

Note E. Claim and Claim Adjustment Expense Reserves
Property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to historical patterns such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and economic conditions, including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $301 million and $376 million for the three and six months ended June 30, 2020. Net catastrophe losses for the three months ended June 30, 2020 included $182 million related to the COVID-19 pandemic, $61 million related to civil unrest and $58 million related primarily to severe weather related events. Net catastrophe losses for the six months ended June 30, 2020 included $195 million related to the COVID-19 pandemic, $61 million related to civil unrest and $120 million related primarily to severe weather related events. The Company reported catastrophe losses, net of reinsurance, of $38 million and $96 million for the three and six months ended June 30, 2019 related primarily to U.S. weather related events.

24

Liability for Unpaid Claim and Claim Adjustment Expenses
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group segment.
For the six months ended June 30
 
 
 
(In millions)
2020
 
2019
Reserves, beginning of year:
 
 
 
Gross
$
21,720

 
$
21,984

Ceded
3,835

 
4,019

Net reserves, beginning of year
17,885

 
17,965

Net incurred claim and claim adjustment expenses:
 
 
 
Provision for insured events of current year
2,899

 
2,615

Increase (decrease) in provision for insured events of prior years
19

 
(36
)
Amortization of discount
98

 
98

Total net incurred (1)
3,016

 
2,677

Net payments attributable to:
 
 
 
Current year events
(256
)
 
(315
)
Prior year events
(2,342
)
 
(2,519
)
Total net payments
(2,598
)
 
(2,834
)
Foreign currency translation adjustment and other
(35
)
 
55

Net reserves, end of period
18,268

 
17,863

Ceded reserves, end of period
4,002

 
3,866

Gross reserves, end of period
$
22,270

 
$
21,729


(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 benefit expenses related to future policy benefits, which are not reflected in the table above.
Net Prior Year Development
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Specialty
$
(20
)
 
$
(18
)
 
$
(31
)
 
$
(38
)
Commercial
45

 
(12
)
 
41

 
(20
)
International
(3
)
 
(1
)
 
(3
)
 
13

Corporate & Other
—

 
—

 
—

 
—

Total pretax (favorable) unfavorable development
$
22

 
$
(31
)
 
$
7

 
$
(45
)


25

Specialty
The following table presents further detail of the development recorded for the Specialty segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Medical Professional Liability
$
—

 
$
15

 
$
10

 
$
30

Other Professional Liability and Management Liability
(9
)
 
(7
)
 
(6
)
 
(19
)
Surety
—

 
(15
)
 
(30
)
 
(40
)
Warranty
(3
)
 
(7
)
 
(3
)
 
(7
)
Other
(8
)
 
(4
)
 
(2
)
 
(2
)
Total pretax (favorable) unfavorable development
$
(20
)
 
$
(18
)
 
$
(31
)
 
$
(38
)

Three Months
2019
Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in the Company's dentists business.
Favorable development in surety was due to lower than expected frequency for accident years 2015 and 2016.
Six Months
2020
Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on specific claims in accident years 2015 and 2016 in the Company's aging services business.
Favorable development in surety was primarily due to lower than expected frequency for accident years 2017 and prior.
2019
Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident year 2013 in the Company's allied healthcare business, unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in the Company's 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.
Favorable development in surety was due to lower than expected frequency for accident years 2016 and prior.

26

Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Commercial Auto
$
15

 
$
(3
)
 
$
24

 
$
(8
)
General Liability
50

 
13

 
50

 
(7
)
Workers' Compensation
(61
)
 
(7
)
 
(74
)
 
(5
)
Property and Other
41

 
(15
)
 
41

 
—

Total pretax (favorable) unfavorable development
$
45

 
$
(12
)
 
$
41

 
$
(20
)

Three Months
2020
Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction business in accident years 2017 through 2019.
Unfavorable development in general liability was driven by higher than expected emergence in mass tort exposures, primarily due to New York reviver statute-related claims from accident years prior to 2010.
Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.
Unfavorable development in property and other was primarily due to higher than expected large loss activity in accident year 2019 in the Company's middle market, national accounts, and marine business units.
2019
Unfavorable development in general liability was primarily due to higher than expected large loss experience in the Company's excess and umbrella business in accident year 2017.
Favorable development in property and other was primarily due to continued lower than expected claim severity from catastrophes in accident year 2017.
Six Months
2020
Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction business in accident years 2017 through 2019.
Unfavorable development in general liability was driven by higher than expected emergence in mass tort exposures, primarily due to New York reviver statute-related claims from accident years prior to 2010.
Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.
Unfavorable development in property and other was primarily due to higher than expected large loss activity in accident year 2019 in the Company's middle market, national accounts, and marine business units.


27

International
The following table presents further detail of the development recorded for the International segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Casualty
$
(6
)
 
$
(5
)
 
$
(6
)
 
$
(5
)
Property, Energy and Marine(1)
1

 
5

 
1

 
19

Specialty
2

 
(1
)
 
2

 
(1
)
Total pretax (favorable) unfavorable development
$
(3
)
 
$
(1
)
 
$
(3
)
 
$
13


(1)
Effective January 1, 2020 the Property and Energy and Marine lines of business have been combined in the International segment. Prior period information has been conformed to the new line of business presentation.
Six Months
2019
Unfavorable development in property, energy and marine was driven by higher than expected claims in Hardy on 2018 accident year catastrophes.


28

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 in the Condensed Consolidated Statements of Operations.
The impact of the LPT on the Condensed Consolidated Statements of Operations was the recognition of a retroactive reinsurance benefit of $20 million and $14 million for the three months ended June 30, 2020 and 2019 and $34 million and $36 million for the six months ended June 30, 2020 and 2019. As of June 30, 2020 and December 31, 2019, the cumulative amounts ceded under the LPT were $3.2 billion. The unrecognized deferred retroactive reinsurance benefit was $358 million and $392 million as of June 30, 2020 and December 31, 2019 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 $3.7 billion as of June 30, 2020 and December 31, 2019. 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.

29

Note F. Legal Proceedings, Contingencies and Guarantees
The Company is a party to various claims and litigation incidental to its business, which, based on the facts and circumstances currently known, are not material to the Company's results of operations or financial position.
Guarantees
As of June 30, 2020 and December 31, 2019, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements. Management does not believe that any future indemnity claims will be significantly greater than the amounts recorded.
The Company has provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities issued by a previously owned subsidiary. As of June 30, 2020, 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

Note G. Benefit Plans
The components of net periodic pension cost (benefit) are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Net periodic pension cost (benefit)
 
 
 
 
 
 
 
Interest cost on projected benefit obligation
$
20

 
$
25

 
$
40

 
$
50

Expected return on plan assets
(39
)
 
(35
)
 
(78
)
 
(71
)
Amortization of net actuarial (gain) loss
11

 
10

 
22

 
20

Settlement loss
1

 
—

 
2

 
—

Total net periodic pension cost (benefit)
$
(7
)
 
$
—

 
$
(14
)
 
$
(1
)

For the three and six months ended June 30, 2020, the Company recognized $2 million and $4 million of non-service benefit in Insurance claims and policyholders' benefits and $5 million and $10 million of non-service benefit in Other operating expenses. For the three and six months ended June 30, 2019, the Company recognized less than $1 million of non-service benefit in Insurance claims and policyholders' benefits and less than $1 million and $1 million of non-service benefit in Other operating expenses.


31

Note H. Accumulated Other Comprehensive Income (Loss) by Component
The tables below display the changes in Accumulated other comprehensive income (loss) by component.
(In millions)
Net unrealized gains (losses) on investments with an allowance for credit losses(1)
 
Net unrealized gains (losses) on other investments(1)
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of April 1, 2020
$
(11
)
 
$
(19
)
 
$
(822
)
 
$
(218
)
 
$
(1,070
)
Other comprehensive income (loss) before reclassifications
(2
)
 
1,209

 
(2
)
 
24

 
1,229

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(4), $2, $- and $(1)
(4
)
 
18

 
(9
)
 
—

 
5

Other comprehensive income (loss) net of tax (expense) benefit of $(1), $(317), $(1), $- and $(319)
2

 
1,191

 
7

 
24

 
1,224

Balance as of June 30, 2020
$
(9
)
 
$
1,172

 
$
(815
)
 
$
(194
)
 
$
154

(In millions)
Net unrealized gains (losses) on investments with OTTI losses(1)
 
Net unrealized gains (losses) on other investments(1)
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of April 1, 2019
$
20

 
$
587

 
$
(768
)
 
$
(163
)
 
$
(324
)
Other comprehensive income (loss) before reclassifications
(1
)
 
434

 
—

 
—

 
433

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $-, $2, $- and $2
(1
)
 
(2
)
 
(8
)
 
—

 
(11
)
Other comprehensive income (loss) net of tax (expense) benefit of $(1), $(114), $(2), $- and $(117)
—

 
436

 
8

 
—

 
444

Balance as of June 30, 2019
$
20

 
$
1,023

 
$
(760
)
 
$
(163
)
 
$
120


(1)
As of January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Net unrealized gains (losses) on investments with OTTI losses column that tracked the change in unrealized gains (losses) on investments with OTTI losses has been replaced with the Net unrealized gains (losses) on investments with an allowance for credit losses column. The balances previously reported in the Net unrealized gains (losses) on investments with OTTI losses column are now reported in the Net unrealized gains (losses) on other investments column.






32

(In millions)
Net unrealized gains (losses) on investments with an allowance for credit losses(1)
 
Net unrealized gains (losses) on other investments(1)
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of January 1, 2020
$
—

 
$
1,025

 
$
(833
)
 
$
(141
)
 
$
51

Other comprehensive income (loss) before reclassifications
(50
)
 
143

 
(1
)
 
(53
)
 
39

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $11, $2, $5, $- and $18
(41
)
 
(4
)
 
(19
)
 
—

 
(64
)
Other comprehensive income (loss) net of tax (expense) benefit of $2, $(36), $(4), $- and $(38)
(9
)
 
147

 
18

 
(53
)
 
103

Balance as of June 30, 2020
$
(9
)
 
$
1,172

 
$
(815
)
 
$
(194
)
 
$
154

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

 
$
61

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

 
955

 
(1
)
 
17

 
974

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $1, $4, $- and $5
(1
)
 
(7
)
 
(16
)
 
—

 
(24
)
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(255), $(4), $- and $(261)
4

 
962

 
15

 
17

 
998

Balance as of June 30, 2019
$
20

 
$
1,023

 
$
(760
)
 
$
(163
)
 
$
120

(1)
As of January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Net unrealized gains (losses) on investments with OTTI losses column that tracked the change in unrealized gains (losses) on investments with OTTI losses has been replaced with the Net unrealized gains (losses) on investments with an allowance for credit losses column. The balances previously reported in the Net unrealized gains (losses) on investments with OTTI losses column are now reported in the Net unrealized gains (losses) on other investments column.

Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:
Component of AOCI
 
Condensed Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with an allowance for credit losses, Net unrealized gains (losses) on investments with OTTI losses and 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

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, 2019. 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 net investment gains or losses and any cumulative effects of changes in accounting guidance. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations.


34

The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
Three months ended June 30, 2020

Specialty
 

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

Net earned premiums
$
705

 
$
795

 
$
224

 
$
126

 
$
—

 
$
—

 
$
1,850

Net investment income
133

 
177

 
14

 
206

 
4

 
—

 
534

Non-insurance warranty revenue
308

 
—