CNA FINANCIAL CORP - Quarter Report: 2021 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, 2021
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 29, 2021, 271,352,510 shares of common stock were outstanding.
| Item Number | Page Number | |||||||
PART I | ||||||||
| 1. | ||||||||
| 2. | ||||||||
| 3. | ||||||||
| 4. | ||||||||
| PART II | ||||||||
| 1. | ||||||||
| 1A. | ||||||||
| 2. | ||||||||
| 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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Net earned premiums | $ | 2,035 | $ | 1,850 | $ | 3,997 | $ | 3,719 | |||||||||||||||
| Net investment income | 591 | 534 | 1,095 | 863 | |||||||||||||||||||
| Net investment gains (losses) | 38 | 69 | 95 | (147) | |||||||||||||||||||
| Non-insurance warranty revenue | 359 | 308 | 697 | 609 | |||||||||||||||||||
| Other revenues | 6 | 5 | 11 | 13 | |||||||||||||||||||
| Total revenues | 3,029 | 2,766 | 5,895 | 5,057 | |||||||||||||||||||
| Claims, Benefits and Expenses | |||||||||||||||||||||||
| Insurance claims and policyholders’ benefits | 1,546 | 1,642 | 3,052 | 3,067 | |||||||||||||||||||
| Amortization of deferred acquisition costs | 357 | 342 | 716 | 686 | |||||||||||||||||||
| Non-insurance warranty expense | 332 | 285 | 643 | 566 | |||||||||||||||||||
| Other operating expenses | 303 | 284 | 587 | 583 | |||||||||||||||||||
| Interest | 29 | 31 | 57 | 62 | |||||||||||||||||||
| Total claims, benefits and expenses | 2,567 | 2,584 | 5,055 | 4,964 | |||||||||||||||||||
| Income before income tax | 462 | 182 | 840 | 93 | |||||||||||||||||||
| Income tax expense | (94) | (31) | (160) | (3) | |||||||||||||||||||
| Net income | $ | 368 | $ | 151 | $ | 680 | $ | 90 | |||||||||||||||
| Basic earnings per share | $ | 1.35 | $ | 0.56 | $ | 2.50 | $ | 0.33 | |||||||||||||||
| Diluted earnings per share | $ | 1.35 | $ | 0.55 | $ | 2.49 | $ | 0.33 | |||||||||||||||
| Weighted Average Outstanding Common Stock and Common Stock Equivalents | |||||||||||||||||||||||
| Basic | 271.9 | 271.5 | 271.9 | 271.5 | |||||||||||||||||||
| Diluted | 272.8 | 272.0 | 272.9 | 272.3 | |||||||||||||||||||
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Comprehensive Income | |||||||||||||||||||||||
| Net income | $ | 368 | $ | 151 | $ | 680 | $ | 90 | |||||||||||||||
| Other Comprehensive Income (Loss), 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 | 300 | 1,191 | (327) | 147 | |||||||||||||||||||
| Net unrealized gains and losses on investments | 300 | 1,193 | (327) | 138 | |||||||||||||||||||
| Foreign currency translation adjustment | 12 | 24 | 14 | (53) | |||||||||||||||||||
| Pension and postretirement benefits | 10 | 7 | 19 | 18 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | 322 | 1,224 | (294) | 103 | |||||||||||||||||||
| Total comprehensive income | $ | 690 | $ | 1,375 | $ | 386 | $ | 193 | |||||||||||||||
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, 2021 (Unaudited) | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Investments: | |||||||||||
Fixed maturity securities at fair value (amortized cost of $39,826 and $38,953, less allowance for credit loss of $45 and $40) | $ | 44,910 | $ | 44,631 | |||||||
Equity securities at fair value (cost of $955 and $941) | 1,033 | 992 | |||||||||
| Limited partnership investments | 1,781 | 1,619 | |||||||||
| Other invested assets | 70 | 76 | |||||||||
Mortgage loans (less allowance for uncollectible receivables of $26 and $26) | 1,006 | 1,068 | |||||||||
| Short term investments | 1,465 | 1,907 | |||||||||
| Total investments | 50,265 | 50,293 | |||||||||
| Cash | 462 | 419 | |||||||||
Reinsurance receivables (less allowance for uncollectible receivables of $22 and $21) | 5,198 | 4,457 | |||||||||
Insurance receivables (less allowance for uncollectible receivables of $34 and $33) | 2,954 | 2,607 | |||||||||
| Accrued investment income | 383 | 380 | |||||||||
| Deferred acquisition costs | 721 | 708 | |||||||||
| Deferred income taxes | 121 | 66 | |||||||||
Property and equipment at cost (less accumulated depreciation of $252 and $231) | 234 | 252 | |||||||||
| Goodwill | 148 | 148 | |||||||||
| Deferred non-insurance warranty acquisition expense | 3,305 | 3,068 | |||||||||
| Other assets | 2,416 | 1,628 | |||||||||
| Total assets | $ | 66,207 | $ | 64,026 | |||||||
| Liabilities | |||||||||||
| Insurance reserves: | |||||||||||
| Claim and claim adjustment expenses | $ | 23,480 | $ | 22,706 | |||||||
| Unearned premiums | 5,592 | 5,119 | |||||||||
| Future policy benefits | 13,285 | 13,318 | |||||||||
| Long term debt | 2,777 | 2,776 | |||||||||
| Deferred non-insurance warranty revenue | 4,309 | 4,023 | |||||||||
Other liabilities (includes $74 and $89 due to Loews Corporation) | 4,096 | 3,377 | |||||||||
| Total liabilities | 53,539 | 51,319 | |||||||||
| 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; 271,349,927 and 271,391,603 shares outstanding) | 683 | 683 | |||||||||
| Additional paid-in capital | 2,201 | 2,211 | |||||||||
| Retained earnings | 9,348 | 9,081 | |||||||||
| Accumulated other comprehensive income | 509 | 803 | |||||||||
Treasury stock (1,690,316 and 1,648,640 shares), at cost | (73) | (71) | |||||||||
| Total stockholders’ equity | 12,668 | 12,707 | |||||||||
| Total liabilities and stockholders' equity | $ | 66,207 | $ | 64,026 | |||||||
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) | 2021 | 2020 | |||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ | 680 | $ | 90 | |||||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||
| Deferred income tax expense (benefit) | 27 | (33) | |||||||||
| Trading portfolio activity | 19 | 15 | |||||||||
| Net investment (gains) losses | (95) | 147 | |||||||||
| Equity method investees | (79) | 68 | |||||||||
| Net amortization of investments | (41) | (32) | |||||||||
| Depreciation and amortization | 27 | 31 | |||||||||
| Changes in: | |||||||||||
| Receivables, net | (1,087) | (586) | |||||||||
| Accrued investment income | (3) | 11 | |||||||||
| Deferred acquisition costs | (12) | (41) | |||||||||
| Insurance reserves | 1,373 | 1,181 | |||||||||
| Other, net | (124) | (201) | |||||||||
| Net cash flows provided by operating activities | 685 | 650 | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Dispositions: | |||||||||||
| Fixed maturity securities - sales | 1,846 | 3,773 | |||||||||
| Fixed maturity securities - maturities, calls and redemptions | 2,104 | 1,622 | |||||||||
| Equity securities | 193 | 230 | |||||||||
| Limited partnerships | 124 | 257 | |||||||||
| Mortgage loans | 69 | 25 | |||||||||
| Purchases: | |||||||||||
| Fixed maturity securities | (4,615) | (5,356) | |||||||||
| Equity securities | (181) | (312) | |||||||||
| Limited partnerships | (169) | (90) | |||||||||
| Mortgage loans | (16) | (91) | |||||||||
| Change in other investments | 6 | (2) | |||||||||
| Change in short term investments | 442 | 409 | |||||||||
| Purchases of property and equipment | (5) | (10) | |||||||||
| Other, net | — | 20 | |||||||||
| Net cash flows (used) provided by investing activities | (202) | 475 | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Dividends paid to common stockholders | (414) | (750) | |||||||||
| Purchase of treasury stock | (18) | (18) | |||||||||
| Other, net | (9) | (8) | |||||||||
| Net cash flows used by financing activities | (441) | (776) | |||||||||
| Effect of foreign exchange rate changes on cash | 1 | (5) | |||||||||
| Net change in cash | 43 | 344 | |||||||||
| Cash, beginning of year | 419 | 242 | |||||||||
| Cash, end of period | $ | 462 | $ | 586 | |||||||
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| 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 | 2,194 | 2,187 | 2,211 | 2,203 | |||||||||||||||||||
| Stock-based compensation | 7 | 9 | (10) | (7) | |||||||||||||||||||
| Balance, end of period | 2,201 | 2,196 | 2,201 | 2,196 | |||||||||||||||||||
| Retained Earnings | |||||||||||||||||||||||
| Balance, beginning of period, as previously reported | 9,084 | 8,634 | 9,081 | 9,348 | |||||||||||||||||||
| Cumulative effect adjustments from changes in accounting guidance, net of tax | — | — | — | (5) | |||||||||||||||||||
| Balance, beginning of period, as adjusted | 9,084 | 8,634 | 9,081 | 9,343 | |||||||||||||||||||
Dividends to common stockholders ($0.38, $0.37, $1.51 and $2.74 per share) | (104) | (102) | (413) | (750) | |||||||||||||||||||
| Net income | 368 | 151 | 680 | 90 | |||||||||||||||||||
| Balance, end of period | 9,348 | 8,683 | 9,348 | 8,683 | |||||||||||||||||||
| Accumulated Other Comprehensive Income | |||||||||||||||||||||||
| Balance, beginning of period | 187 | (1,070) | 803 | 51 | |||||||||||||||||||
| Other comprehensive income (loss) | 322 | 1,224 | (294) | 103 | |||||||||||||||||||
| Balance, end of period | 509 | 154 | 509 | 154 | |||||||||||||||||||
| Treasury Stock | |||||||||||||||||||||||
| Balance, beginning of period | (59) | (72) | (71) | (70) | |||||||||||||||||||
| Stock-based compensation | 1 | 1 | 16 | 17 | |||||||||||||||||||
| Purchase of treasury stock | (15) | — | (18) | (18) | |||||||||||||||||||
| Balance, end of period | (73) | (71) | (73) | (71) | |||||||||||||||||||
| Total stockholders' equity | $ | 12,668 | $ | 11,645 | $ | 12,668 | $ | 11,645 | |||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
7
CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements
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, 2021.
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, 2020, 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, 2021 and for the three and six months ended June 30, 2021 and 2020 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.
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, 2022, with early adoption permitted. The guidance may be applied 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 on the effective date, 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.
8
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, 2021, approximately 952 thousand and 967 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.
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, approximately 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.
The Company repurchased 377,615 and 435,376 shares of CNAF common stock at an aggregate cost of $18 million during each of the six months ended June 30, 2021 and 2020.
9
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Fixed maturity securities | $ | 425 | $ | 430 | $ | 853 | $ | 868 | |||||||||||||||
| Equity securities | 20 | 50 | 49 | 6 | |||||||||||||||||||
| Limited partnership investments | 146 | 44 | 189 | (26) | |||||||||||||||||||
| Mortgage loans | 15 | 14 | 29 | 28 | |||||||||||||||||||
| Short term investments | — | 1 | — | 8 | |||||||||||||||||||
| Trading portfolio | 2 | 8 | 7 | 9 | |||||||||||||||||||
| Other | (1) | 2 | 1 | 2 | |||||||||||||||||||
| Gross investment income | 607 | 549 | 1,128 | 895 | |||||||||||||||||||
| Investment expense | (16) | (15) | (33) | (32) | |||||||||||||||||||
| Net investment income | $ | 591 | $ | 534 | $ | 1,095 | $ | 863 | |||||||||||||||
During the three and six months ended June 30, 2021, $9 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, 2021. 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.
Net investment gains (losses) are presented in the following table.
| Periods ended June 30 | Three Months | Six Months | |||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net investment gains (losses): | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
| Gross gains | $ | 51 | $ | 102 | $ | 109 | $ | 131 | |||||||||||||||
| Gross losses | (20) | (85) | (40) | (189) | |||||||||||||||||||
| Net investment gains (losses) on fixed maturity securities | 31 | 17 | 69 | (58) | |||||||||||||||||||
| Equity securities | 17 | 63 | 19 | (70) | |||||||||||||||||||
| Derivatives | (12) | (10) | 5 | (5) | |||||||||||||||||||
| Mortgage loans | — | — | — | (13) | |||||||||||||||||||
| Short term investments and other | 2 | (1) | 2 | (1) | |||||||||||||||||||
| Net investment gains (losses) | $ | 38 | $ | 69 | $ | 95 | $ | (147) | |||||||||||||||
During the three and six months ended June 30, 2021, $15 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, 2021. 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.
10
The following tables present the activity related to the allowance on available-for-sale securities with credit impairments and purchased credit-deteriorated (PCD) assets. Accrued interest receivable on available-for-sale fixed maturity securities totaled $374 million, $371 million and $373 million as of June 30, 2021, December 31, 2020 and June 30, 2020 and is excluded from the estimate of expected credit losses and the amortized cost basis in the tables included within this Note.
| (In millions) | Corporate and other bonds | Asset-backed | Total | ||||||||||||||
| Allowance for credit losses: | |||||||||||||||||
| Balance as of April 1, 2021 | $ | 27 | $ | 16 | $ | 43 | |||||||||||
| Additions to the allowance for credit losses: | |||||||||||||||||
| Securities for which credit losses were not previously recorded | — | — | — | ||||||||||||||
| Available-for-sale securities accounted for as PCD assets | — | 4 | 4 | ||||||||||||||
| Reductions to the allowance for credit losses: | |||||||||||||||||
| Securities sold during the period (realized) | — | — | — | ||||||||||||||
| 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 | (3) | 1 | (2) | ||||||||||||||
Balance as of June 30, 2021 | $ | 24 | $ | 21 | $ | 45 | |||||||||||
| (In millions) | Corporate and other bonds | Asset-backed | Total | ||||||||||||||
| Allowance for credit losses: | |||||||||||||||||
| Balance as of April 1, 2020 | $ | 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) | ||||||||||||||
Balance as of June 30, 2020 | $ | 39 | $ | 12 | $ | 51 | |||||||||||
11
| (In millions) | Corporate and other bonds | Asset-backed | Total | ||||||||||||||
| Allowance for credit losses: | |||||||||||||||||
| Balance as of January 1, 2021 | $ | 23 | $ | 17 | $ | 40 | |||||||||||
| Additions to the allowance for credit losses: | |||||||||||||||||
| Securities for which credit losses were not previously recorded | 14 | — | 14 | ||||||||||||||
| Available-for-sale securities accounted for as PCD assets | 2 | 4 | 6 | ||||||||||||||
| 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 | — | — | — | ||||||||||||||
| 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 | (9) | — | (9) | ||||||||||||||
Balance as of June 30, 2021 | $ | 24 | $ | 21 | $ | 45 | |||||||||||
| (In millions) | Corporate and other bonds | Asset-backed | Total | ||||||||||||||
| Allowance for credit losses: | |||||||||||||||||
| Balance as of January 1, 2020 | $ | — | $ | — | $ | — | |||||||||||
| 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) | ||||||||||||||
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Fixed maturity securities available-for-sale: | |||||||||||||||||||||||
| Corporate and other bonds | $ | (2) | $ | (1) | $ | 5 | $ | 90 | |||||||||||||||
| Asset-backed | 1 | 12 | — | 13 | |||||||||||||||||||
| Impairment losses (gains) recognized in earnings | $ | (1) | $ | 11 | $ | 5 | $ | 103 | |||||||||||||||
The Company also recognized $13 million of losses on mortgage loans during the six months ended June 30, 2020 due to changes in expected credit losses. There were no losses recognized on mortgage loans during the three and six months ended June 30, 2021 or during the three months ended June 30, 2020.
13
The following tables present a summary of fixed maturity securities.
| June 30, 2021 | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Estimated Fair Value | ||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale: | |||||||||||||||||||||||||||||
| Corporate and other bonds | $ | 21,291 | $ | 3,153 | $ | 35 | $ | 24 | $ | 24,385 | |||||||||||||||||||
| States, municipalities and political subdivisions | 10,125 | 1,743 | 2 | — | 11,866 | ||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||
| Residential mortgage-backed | 3,337 | 99 | 10 | — | 3,426 | ||||||||||||||||||||||||
| Commercial mortgage-backed | 2,068 | 98 | 14 | 17 | 2,135 | ||||||||||||||||||||||||
| Other asset-backed | 2,338 | 84 | 3 | 4 | 2,415 | ||||||||||||||||||||||||
| Total asset-backed | 7,743 | 281 | 27 | 21 | 7,976 | ||||||||||||||||||||||||
| U.S. Treasury and obligations of government-sponsored enterprises | 142 | — | 5 | — | 137 | ||||||||||||||||||||||||
| Foreign government | 515 | 22 | 1 | — | 536 | ||||||||||||||||||||||||
| Total fixed maturity securities available-for-sale | 39,816 | 5,199 | 70 | 45 | 44,900 | ||||||||||||||||||||||||
| Total fixed maturity securities trading | 10 | — | — | — | 10 | ||||||||||||||||||||||||
| Total fixed maturity securities | $ | 39,826 | $ | 5,199 | $ | 70 | $ | 45 | $ | 44,910 | |||||||||||||||||||
| December 31, 2020 | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Estimated Fair Value | ||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale: | |||||||||||||||||||||||||||||
| Corporate and other bonds | $ | 20,792 | $ | 3,578 | $ | 22 | $ | 23 | $ | 24,325 | |||||||||||||||||||
| States, municipalities and political subdivisions | 9,729 | 1,863 | — | — | 11,592 | ||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||
| Residential mortgage-backed | 3,442 | 146 | 1 | — | 3,587 | ||||||||||||||||||||||||
| Commercial mortgage-backed | 1,933 | 93 | 42 | 17 | 1,967 | ||||||||||||||||||||||||
| Other asset-backed | 2,179 | 81 | 9 | — | 2,251 | ||||||||||||||||||||||||
| Total asset-backed | 7,554 | 320 | 52 | 17 | 7,805 | ||||||||||||||||||||||||
| U.S. Treasury and obligations of government-sponsored enterprises | 339 | 2 | 3 | — | 338 | ||||||||||||||||||||||||
| Foreign government | 512 | 32 | — | — | 544 | ||||||||||||||||||||||||
| Total fixed maturity securities available-for-sale | 38,926 | 5,795 | 77 | 40 | 44,604 | ||||||||||||||||||||||||
| Total fixed maturity securities trading | 27 | — | — | — | 27 | ||||||||||||||||||||||||
| Total fixed maturity securities | $ | 38,953 | $ | 5,795 | $ | 77 | $ | 40 | $ | 44,631 | |||||||||||||||||||
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, 2021 and December 31, 2020, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2,635 million and $2,773 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, 2021 | 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 | $ | 1,190 | $ | 33 | $ | 61 | $ | 2 | $ | 1,251 | $ | 35 | |||||||||||||||||||||||
| States, municipalities and political subdivisions | 128 | 2 | — | — | 128 | 2 | |||||||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | 932 | 10 | 10 | — | 942 | 10 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | 153 | 2 | 206 | 12 | 359 | 14 | |||||||||||||||||||||||||||||
| Other asset-backed | 255 | 2 | 74 | 1 | 329 | 3 | |||||||||||||||||||||||||||||
| Total asset-backed | 1,340 | 14 | 290 | 13 | 1,630 | 27 | |||||||||||||||||||||||||||||
| U.S. Treasury and obligations of government-sponsored enterprises | 80 | 5 | — | — | 80 | 5 | |||||||||||||||||||||||||||||
| Foreign government | 48 | 1 | — | — | 48 | 1 | |||||||||||||||||||||||||||||
| Total | $ | 2,786 | $ | 55 | $ | 351 | $ | 15 | $ | 3,137 | $ | 70 | |||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||
| December 31, 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 | $ | 609 | $ | 21 | $ | 12 | $ | 1 | $ | 621 | $ | 22 | |||||||||||||||||||||||
| States, municipalities and political subdivisions | 33 | — | — | — | 33 | — | |||||||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | 71 | 1 | 11 | — | 82 | 1 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | 533 | 40 | 28 | 2 | 561 | 42 | |||||||||||||||||||||||||||||
| Other asset-backed | 344 | 9 | 13 | — | 357 | 9 | |||||||||||||||||||||||||||||
| Total asset-backed | 948 | 50 | 52 | 2 | 1,000 | 52 | |||||||||||||||||||||||||||||
| U.S. Treasury and obligations of government-sponsored enterprises | 63 | 3 | — | — | 63 | 3 | |||||||||||||||||||||||||||||
| Foreign government | 13 | — | — | — | 13 | — | |||||||||||||||||||||||||||||
| Total | $ | 1,666 | $ | 74 | $ | 64 | $ | 3 | $ | 1,730 | $ | 77 | |||||||||||||||||||||||
Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2021 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, 2021.
15
Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
| June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (In millions) | Cost or Amortized Cost | Estimated Fair Value | Cost or Amortized Cost | Estimated Fair Value | |||||||||||||||||||
| Due in one year or less | $ | 1,685 | $ | 1,702 | $ | 1,456 | $ | 1,458 | |||||||||||||||
| Due after one year through five years | 10,723 | 11,479 | 12,304 | 13,098 | |||||||||||||||||||
| Due after five years through ten years | 13,775 | 15,012 | 12,319 | 13,878 | |||||||||||||||||||
| Due after ten years | 13,633 | 16,707 | 12,847 | 16,170 | |||||||||||||||||||
| Total | $ | 39,816 | $ | 44,900 | $ | 38,926 | $ | 44,604 | |||||||||||||||
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 $274 million and $190 million and a fair value of $(13) million and $(19) million as of June 30, 2021 and December 31, 2020. 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 private placement securities. As of June 30, 2021, the Company had commitments to purchase or fund approximately $1,330 million and sell approximately $95 million under the terms of these investments.
16
Mortgage Loans
The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination. The primary credit quality indicators utilized are debt service coverage ratios (DSCR) and loan-to-value ratios (LTV).
| June 30, 2021 | Mortgage Loans Amortized Cost Basis by Origination Year (1) | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
| DSCR ≥1.6x | |||||||||||||||||||||||||||||||||||||||||
| LTV less than 55% | $ | — | $ | 89 | $ | 33 | $ | 50 | $ | 113 | $ | 183 | $ | 468 | |||||||||||||||||||||||||||
| LTV 55% to 65% | — | — | 19 | — | 9 | 4 | 32 | ||||||||||||||||||||||||||||||||||
| LTV greater than 65% | 5 | — | 6 | — | — | 24 | 35 | ||||||||||||||||||||||||||||||||||
| DSCR 1.2x - 1.6x | |||||||||||||||||||||||||||||||||||||||||
| LTV less than 55% | — | — | 16 | — | 5 | 71 | 92 | ||||||||||||||||||||||||||||||||||
| LTV 55% to 65% | 10 | 38 | 39 | 42 | 27 | — | 156 | ||||||||||||||||||||||||||||||||||
| LTV greater than 65% | — | 34 | 44 | — | 8 | 12 | 98 | ||||||||||||||||||||||||||||||||||
| DSCR ≤1.2 | |||||||||||||||||||||||||||||||||||||||||
| LTV less than 55% | — | — | 50 | — | 8 | 10 | 68 | ||||||||||||||||||||||||||||||||||
| LTV 55% to 65% | — | — | 47 | — | — | — | 47 | ||||||||||||||||||||||||||||||||||
| LTV greater than 65% | — | — | 29 | — | — | 7 | 36 | ||||||||||||||||||||||||||||||||||
| Total | $ | 15 | $ | 161 | $ | 283 | $ | 92 | $ | 170 | $ | 311 | $ | 1,032 | |||||||||||||||||||||||||||
(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, 2021, 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.
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, 2021 | Total Assets/Liabilities at Fair Value | ||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
| Corporate bonds and other | $ | 158 | $ | 24,027 | $ | 883 | $ | 25,068 | |||||||||||||||
| States, municipalities and political subdivisions | — | 11,809 | 57 | 11,866 | |||||||||||||||||||
| Asset-backed | — | 7,566 | 410 | 7,976 | |||||||||||||||||||
| Total fixed maturity securities | 158 | 43,402 | 1,350 | 44,910 | |||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Common stock | 198 | — | 16 | 214 | |||||||||||||||||||
| Non-redeemable preferred stock | 67 | 743 | 9 | 819 | |||||||||||||||||||
| Total equity securities | 265 | 743 | 25 | 1,033 | |||||||||||||||||||
| Short term and other | 1,310 | 26 | — | 1,336 | |||||||||||||||||||
| Total assets | $ | 1,733 | $ | 44,171 | $ | 1,375 | $ | 47,279 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Other liabilities | $ | — | $ | 14 | $ | — | $ | 14 | |||||||||||||||
| Total liabilities | $ | — | $ | 14 | $ | — | $ | 14 | |||||||||||||||
| December 31, 2020 | Total Assets/Liabilities at Fair Value | ||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
| Corporate bonds and other | $ | 355 | $ | 24,109 | $ | 770 | $ | 25,234 | |||||||||||||||
| States, municipalities and political subdivisions | — | 11,546 | 46 | 11,592 | |||||||||||||||||||
| Asset-backed | — | 7,497 | 308 | 7,805 | |||||||||||||||||||
| Total fixed maturity securities | 355 | 43,152 | 1,124 | 44,631 | |||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Common stock | 175 | — | 20 | 195 | |||||||||||||||||||
| Non-redeemable preferred stock | 68 | 722 | 7 | 797 | |||||||||||||||||||
| Total equity securities | 243 | 722 | 27 | 992 | |||||||||||||||||||
| Short term and other | 1,761 | 28 | — | 1,789 | |||||||||||||||||||
| Total assets | $ | 2,359 | $ | 43,902 | $ | 1,151 | $ | 47,412 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Other liabilities | $ | — | $ | 19 | $ | — | $ | 19 | |||||||||||||||
| Total liabilities | $ | — | $ | 19 | $ | — | $ | 19 | |||||||||||||||
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 | States, municipalities and political subdivisions | Asset-backed | Equity securities | Total | ||||||||||||||||||||||||
| Balance as of April 1, 2021 | $ | 767 | $ | 44 | $ | 315 | $ | 29 | $ | 1,155 | |||||||||||||||||||
| Total realized and unrealized investment gains (losses): | |||||||||||||||||||||||||||||
| Reported in Net investment gains (losses) | 3 | — | — | — | 3 | ||||||||||||||||||||||||
| Reported in Net investment income | — | — | 1 | — | 1 | ||||||||||||||||||||||||
| Reported in Other comprehensive income (loss) | 16 | 2 | 4 | — | 22 | ||||||||||||||||||||||||
| Total realized and unrealized investment gains (losses) | 19 | 2 | 5 | — | 26 | ||||||||||||||||||||||||
| Purchases | 122 | 12 | 84 | — | 218 | ||||||||||||||||||||||||
| Sales | (3) | — | — | (4) | (7) | ||||||||||||||||||||||||
| Settlements | (22) | (1) | (10) | — | (33) | ||||||||||||||||||||||||
| Transfers into Level 3 | — | — | 21 | — | 21 | ||||||||||||||||||||||||
| Transfers out of Level 3 | — | — | (5) | — | (5) | ||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 883 | $ | 57 | $ | 410 | $ | 25 | $ | 1,375 | |||||||||||||||||||
| Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2021 recognized in Net income (loss) in the period | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2021 recognized in Other comprehensive income (loss) in the period | 16 | 2 | 4 | — | 22 | ||||||||||||||||||||||||
Level 3 (In millions) | Corporate bonds and other | States, municipalities and political subdivisions | 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 | ||||||||||||||||||||||||
20
Level 3 (In millions) | Corporate bonds and other | States, municipalities and political subdivisions | Asset-backed | Equity securities | Total | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | 770 | $ | 46 | $ | 308 | $ | 27 | $ | 1,151 | |||||||||||||||||||
| Total realized and unrealized investment gains (losses): | |||||||||||||||||||||||||||||
| Reported in Net investment gains (losses) | (10) | — | — | 1 | (9) | ||||||||||||||||||||||||
| Reported in Net investment income | — | — | 3 | 1 | 4 | ||||||||||||||||||||||||
| Reported in Other comprehensive income (loss) | (24) | — | (5) | — | (29) | ||||||||||||||||||||||||
| Total realized and unrealized investment gains (losses) | (34) | — | (2) | 2 | (34) | ||||||||||||||||||||||||
| Purchases | 164 | 12 | 114 | — | 290 | ||||||||||||||||||||||||
| Sales | (3) | — | — | (4) | (7) | ||||||||||||||||||||||||
| Settlements | (24) | (1) | (27) | — | (52) | ||||||||||||||||||||||||
| Transfers into Level 3 | 10 | — | 30 | — | 40 | ||||||||||||||||||||||||
| Transfers out of Level 3 | — | — | (13) | — | (13) | ||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 883 | $ | 57 | $ | 410 | $ | 25 | $ | 1,375 | |||||||||||||||||||
| Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2021 recognized in Net income (loss) in the period | $ | — | $ | — | $ | — | $ | 2 | $ | 2 | |||||||||||||||||||
| Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2021 recognized in Other comprehensive income (loss) in the period | (24) | — | (5) | — | (29) | ||||||||||||||||||||||||
Level 3 (In millions) | Corporate bonds and other | States, municipalities and political subdivisions | 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 | ||||||||||||||||||||||||
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, 2021 and December 31, 2020, there were $65 million and $71 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.
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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, 2021 | Estimated Fair Value (In millions) | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||||||||||||
| Fixed maturity securities | $ | 1,067 | Discounted cash flow | Credit spread | 1% - 8% (2%) | ||||||||||||||||||
| December 31, 2020 | Estimated Fair Value (In millions) | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||||||||||||
| Fixed maturity securities | $ | 966 | Discounted cash flow | Credit spread | 1% - 8% (3%) | ||||||||||||||||||
For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
| June 30, 2021 | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Mortgage loans | $ | 1,006 | $ | — | $ | — | $ | 1,079 | $ | 1,079 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Long term debt | $ | 2,777 | $ | — | $ | 3,043 | $ | — | $ | 3,043 | |||||||||||||||||||
| December 31, 2020 | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Mortgage loans | $ | 1,068 | $ | — | $ | — | $ | 1,151 | $ | 1,151 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Long term debt | $ | 2,776 | $ | — | $ | 3,148 | $ | — | $ | 3,148 | |||||||||||||||||||
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.
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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 $54 million and $179 million for the three and six months ended June 30, 2021 related primarily to severe weather related events. 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.
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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) | 2021 | 2020 | |||||||||
| Reserves, beginning of year: | |||||||||||
| Gross | $ | 22,706 | $ | 21,720 | |||||||
| Ceded | 4,005 | 3,835 | |||||||||
| Net reserves, beginning of year | 18,701 | 17,885 | |||||||||
| Reduction of net reserves due to Excess Workers' Compensation Loss Portfolio Transfer | (632) | — | |||||||||
| Net incurred claim and claim adjustment expenses: | |||||||||||
| Provision for insured events of current year | 2,930 | 2,899 | |||||||||
| Increase (decrease) in provision for insured events of prior years | (78) | 19 | |||||||||
| Amortization of discount | 95 | 98 | |||||||||
Total net incurred (1) | 2,947 | 3,016 | |||||||||
| Net payments attributable to: | |||||||||||
| Current year events | (317) | (256) | |||||||||
| Prior year events | (1,949) | (2,342) | |||||||||
| Total net payments | (2,266) | (2,598) | |||||||||
| Foreign currency translation adjustment and other | (5) | (35) | |||||||||
| Net reserves, end of period | 18,745 | 18,268 | |||||||||
| Ceded reserves, end of period | 4,735 | 4,002 | |||||||||
| Gross reserves, end of period | $ | 23,480 | $ | 22,270 | |||||||
(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, the loss on the Excess Workers' Compensation Loss Portfolio Transfer, 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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Pretax (favorable) unfavorable development: | |||||||||||||||||||||||
| Specialty | $ | (10) | $ | (20) | $ | (25) | $ | (31) | |||||||||||||||
| Commercial | — | (5) | — | (9) | |||||||||||||||||||
| International | (1) | (3) | (1) | (3) | |||||||||||||||||||
| Corporate & Other | 40 | 50 | 40 | 50 | |||||||||||||||||||
| Total pretax (favorable) unfavorable development | $ | 29 | $ | 22 | $ | 14 | $ | 7 | |||||||||||||||
Unfavorable development of $40 million and $50 million was recorded within the Corporate & Other segment for the three and six months ended June 30, 2021 and 2020 due to higher than expected emergence in mass tort exposures in older accident years primarily related to abuse.
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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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Pretax (favorable) unfavorable development: | |||||||||||||||||||||||
| Medical Professional Liability | $ | — | $ | — | $ | 8 | $ | 10 | |||||||||||||||
| Other Professional Liability and Management Liability | 10 | (9) | 10 | (6) | |||||||||||||||||||
| Surety | (23) | — | (38) | (30) | |||||||||||||||||||
| Warranty | — | (3) | (8) | (3) | |||||||||||||||||||
| Other | 3 | (8) | 3 | (2) | |||||||||||||||||||
| Total pretax (favorable) unfavorable development | $ | (10) | $ | (20) | $ | (25) | $ | (31) | |||||||||||||||
Three Months
2021
Unfavorable development in other professional liability and management liability was due to higher than expected claim severity and frequency in the Company’s cyber business in recent accident years.
Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years.
Six Months
2021
Unfavorable development in other professional liability and management liability was due to higher than expected claim severity and frequency in the Company’s cyber business in recent accident years.
Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years.
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.
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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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Pretax (favorable) unfavorable development: | |||||||||||||||||||||||
| Commercial Auto | $ | 30 | $ | 15 | $ | 30 | $ | 24 | |||||||||||||||
| General Liability | — | — | — | — | |||||||||||||||||||
| Workers' Compensation | (42) | (61) | (42) | (74) | |||||||||||||||||||
| Property and Other | 12 | 41 | 12 | 41 | |||||||||||||||||||
| Total pretax (favorable) unfavorable development | $ | — | $ | (5) | $ | — | $ | (9) | |||||||||||||||
Three Months
2021
Unfavorable development in commercial auto was due to higher than expected claim severity in the Company’s construction and middle market businesses in recent accident years.
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 the Company’s marine business in multiple accident years.
2020
Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction businesses in accident years 2017 through 2019.
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 the Company's middle market, national accounts and marine business units in accident year 2019.
Six Months
2021
Unfavorable development in commercial auto was due to higher than expected claim severity in the Company’s construction and middle market businesses in recent accident years.
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 the Company’s marine business in multiple accident years.
2020
Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction businesses in accident years 2017 through 2019.
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 the Company's middle market, national accounts and marine business units in accident year 2019.
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Pretax (favorable) unfavorable development: | |||||||||||||||||||||||
| Casualty | $ | 1 | $ | (6) | $ | 1 | $ | (6) | |||||||||||||||
| Property, Energy and Marine | (3) | 1 | (3) | 1 | |||||||||||||||||||
| Specialty | 1 | 2 | 1 | 2 | |||||||||||||||||||
| Total pretax (favorable) unfavorable development | $ | (1) | $ | (3) | $ | (1) | $ | (3) | |||||||||||||||
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Asbestos & 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 impact of the LPT on the Condensed Consolidated Statements of Operations was the recognition of a retroactive reinsurance benefit of $12 million and $20 million for the three months ended June 30, 2021 and 2020 and $22 million and $34 million for the six months ended June 30, 2021 and 2020. As of June 30, 2021 and December 31, 2020, the cumulative amounts ceded under the LPT were $3.3 billion. The unrecognized deferred retroactive reinsurance benefit was $376 million and $398 million as of June 30, 2021 and December 31, 2020 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 $2.9 billion as of June 30, 2021. 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.
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Excess Workers' Compensation LPT
On February 5, 2021, CCC completed a transaction with Cavello Bay Reinsurance Limited (Cavello), a subsidiary of Enstar Group Limited, under which certain legacy excess workers’ compensation (EWC) liabilities were ceded to Cavello. Under the terms of the transaction, based on reserves in place as of January 1, 2020, the Company ceded approximately $690 million of net EWC claim and allocated claim adjustment expense reserves to Cavello under an LPT with an aggregate limit of $1 billion. The Company paid Cavello a reinsurance premium of $697 million, less claims paid between January 1, 2020 and the closing date of the agreement of $64 million. After transaction costs, the Company recognized an after-tax loss of approximately $12 million in the Corporate & Other segment in the first quarter of 2021 related to the EWC LPT.
As of June 30, 2021, the cumulative amounts ceded under the EWC LPT were $690 million and the remaining amount available under the $1 billion aggregate limit was $310 million.
Cavello established a collateral trust account as security for its obligations to the Company, which will be maintained at 105% of outstanding reserves.
Credit Risk for Ceded Reserves
The majority of the Company’s outstanding voluntary reinsurance receivables are due from reinsurers with financial strength ratings of A- or higher. Receivables due from reinsurers with lower financial strength ratings are primarily due from captive reinsurers and are backed by collateral arrangements.
30
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.
Data Breach-related Contingency
As previously disclosed, the Company sustained a sophisticated cybersecurity attack in March 2021 involving ransomware. The Company’s investigation revealed that an unauthorized third party copied some personal information relating to certain current and former employees, contractor workers and their dependents and certain other persons, including some policyholders. In July 2021, we provided notifications to the impacted individuals and to regulators, in accordance with applicable law. The Company may be subject to subsequent investigations, fines or penalties, as well as other legal claims and actions, related to the foregoing. The likelihood is reasonably possible, but the amount of such fines, penalties or costs, if any, cannot be estimated at this time.
Based on the information currently known, we do not believe that the March 2021 cybersecurity attack will have a material impact on our business, results of operations or financial condition, but no assurances can be given as we continue to assess the full impact from the incident, including costs, expenses and insurance coverage.
Guarantees
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, 2021, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.6 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.
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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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net periodic pension cost (benefit) | |||||||||||||||||||||||
| Interest cost on projected benefit obligation | $ | 16 | $ | 20 | $ | 31 | $ | 40 | |||||||||||||||
| Expected return on plan assets | (39) | (39) | (77) | (78) | |||||||||||||||||||
| Amortization of net actuarial (gain) loss | 11 | 11 | 23 | 22 | |||||||||||||||||||
| Settlement loss | 1 | 1 | 1 | 2 | |||||||||||||||||||
| Total net periodic pension cost (benefit) | $ | (11) | $ | (7) | $ | (22) | $ | (14) | |||||||||||||||
For the three and six months ended June 30, 2021, the Company recognized $3 million and $6 million of non-service benefit in Insurance claims and policyholders' benefits and $8 million and $16 million of non-service benefit in Other operating expenses related to net periodic pension benefit. 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 related to net periodic pension benefit.
32
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 | Net unrealized gains (losses) on other investments | Pension and postretirement benefits | Cumulative foreign currency translation adjustment | Total | ||||||||||||||||||||||||
| Balance as of April 1, 2021 | $ | — | $ | 1,118 | $ | (839) | $ | (92) | $ | 187 | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 1 | 323 | — | 12 | 336 | ||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $—, $(7), $3, $— and $(4) | 1 | 23 | (10) | — | 14 | ||||||||||||||||||||||||
Other comprehensive income (loss) net of tax (expense) benefit of $—, $(75), $(3), $— and $(78) | — | 300 | 10 | 12 | 322 | ||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | — | $ | 1,418 | $ | (829) | $ | (80) | $ | 509 | |||||||||||||||||||
| (In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | Net unrealized gains (losses) on other investments | 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 | |||||||||||||||||||
33
| (In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | Net unrealized gains (losses) on other investments | Pension and postretirement benefits | Cumulative foreign currency translation adjustment | Total | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | — | $ | 1,745 | $ | (848) | $ | (94) | $ | 803 | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (2) | (270) | — | 14 | (258) | ||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(15), $5, $— and $(9) | (2) | 57 | (19) | — | 36 | ||||||||||||||||||||||||
Other comprehensive income (loss) net of tax (expense) benefit of $—, $87, $(5), $— and $82 | — | (327) | 19 | 14 | (294) | ||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | — | $ | 1,418 | $ | (829) | $ | (80) | $ | 509 | |||||||||||||||||||
| (In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | Net unrealized gains (losses) on other investments | 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 | |||||||||||||||||||
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 an allowance for credit 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 | |||||||
34
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.
Effective January 1, 2021, and in connection with the ceding of certain legacy reserves under a retroactive reinsurance agreement executed in February 2021, management changed the segment presentation of a legacy portfolio of excess workers’ compensation policies relating to business written in 2007 and prior. This business, which was previously reported as part of the Commercial business segment, is now reported as part of the Corporate & Other business segment. Further information on this retroactive reinsurance agreement is provided in Note E. In addition, a determination was made to change the segment presentation of certain legacy mass tort reserves. Similar to the aforementioned excess workers’ compensation legacy business, these legacy mass tort reserves were previously reported in the Commercial business segment and are now reported as part of the Corporate & Other business segment. These changes were made to better reflect the manner in which the Company is organized for purposes of making operating decisions and assessing performance. Prior period information has been conformed to the new segment presentation.
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, 2020. 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.
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The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
| Three months ended June 30, 2021 | Specialty | Commercial | International | Life & Group | Corporate & Other | ||||||||||||||||||||||||||||||||||||
| (In millions) | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||
| Operating revenues | |||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 762 | $ | 881 | $ | 266 | $ | 126 | $ | — | $ | — | $ | 2,035 | |||||||||||||||||||||||||||
| Net investment income | 134 | 174 | 14 | 265 | 4 | — | 591 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty revenue | 359 | — | — | — | — | — | 359 | ||||||||||||||||||||||||||||||||||
| Other revenues | — | 5 | 1 | (1) | 2 | (1) | 6 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 1,255 | 1,060 | 281 | 390 | 6 | (1) | 2,991 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses | |||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 439 | 588 | 159 | 322 | 31 | — | 1,539 | ||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 1 | 6 | — | — | — | — | 7 | ||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 159 | 148 | 50 | — | — | — | 357 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty expense | 332 | — | — | — | — | — | 332 | ||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 71 | 136 | 39 | 25 | — | — | 271 | ||||||||||||||||||||||||||||||||||
| Other expenses | 12 | 11 | (3) | 2 | 40 | (1) | 61 | ||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 1,014 | 889 | 245 | 349 | 71 | (1) | 2,567 | ||||||||||||||||||||||||||||||||||
| Core income (loss) before income tax | 241 | 171 | 36 | 41 | (65) | — | 424 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on core income (loss) | (53) | (34) | (10) | 2 | 12 | — | (83) | ||||||||||||||||||||||||||||||||||
| Core income (loss) | $ | 188 | $ | 137 | $ | 26 | $ | 43 | $ | (53) | $ | — | 341 | ||||||||||||||||||||||||||||
| Net investment gains (losses) | 38 | ||||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on net investment gains (losses) | (11) | ||||||||||||||||||||||||||||||||||||||||
| Net investment gains (losses), after tax | 27 | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 368 | |||||||||||||||||||||||||||||||||||||||
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| 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 | 161 | 14 | 206 | 20 | — | 534 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty revenue | 308 | — | — | — | — | — | 308 | ||||||||||||||||||||||||||||||||||
| Other revenues | — | 5 | — | — | 1 | (1) | 5 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 1,146 | 961 | 238 | 332 | 21 | (1) | 2,697 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses | |||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 508 | 614 | 176 | 304 | 34 | — | 1,636 | ||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 1 | 5 | — | — | — | — | 6 | ||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 153 | 147 | 42 | — | — | — | 342 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty expense | 285 | — | — | — | — | — | 285 | ||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 73 | 124 | 39 | 25 | (1) | — | 260 | ||||||||||||||||||||||||||||||||||
| Other expenses | 10 | 12 | (2) | — | 36 | (1) | 55 | ||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 1,030 | 902 | 255 | 329 | 69 | (1) | 2,584 | ||||||||||||||||||||||||||||||||||
| Core income (loss) before income tax | 116 | 59 | (17) | 3 | (48) | — | 113 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on core income (loss) | (26) | (10) | 3 | 11 | 8 | — | (14) | ||||||||||||||||||||||||||||||||||
| Core income (loss) | $ | 90 | $ | 49 | $ | (14) | $ | 14 | $ | (40) | $ | — | 99 | ||||||||||||||||||||||||||||
| Net investment gains (losses) | 69 | ||||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on net investment gains (losses) | (17) | ||||||||||||||||||||||||||||||||||||||||
| Net investment gains (losses), after tax | 52 | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 151 | |||||||||||||||||||||||||||||||||||||||
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| Six months ended June 30, 2021 | Specialty | Commercial | International | Life & Group | Corporate & Other | ||||||||||||||||||||||||||||||||||||
| (In millions) | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||
| Operating revenues | |||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 1,497 | $ | 1,736 | $ | 518 | $ | 246 | $ | — | $ | — | $ | 3,997 | |||||||||||||||||||||||||||
| Net investment income | 251 | 322 | 28 | 484 | 10 | — | 1,095 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty revenue | 697 | — | — | — | — | — | 697 | ||||||||||||||||||||||||||||||||||
| Other revenues | — | 10 | 1 | — | 3 | (3) | 11 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 2,445 | 2,068 | 547 | 730 | 13 | (3) | 5,800 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses | |||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 866 | 1,227 | 314 | 603 | 29 | — | 3,039 | ||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 2 | 11 | — | — | — | — | 13 | ||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 313 | 301 | 102 | — | — | — | 716 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty expense | 643 | — | — | — | — | — | 643 | ||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 141 | 251 | 74 | 50 | 10 | — | 526 | ||||||||||||||||||||||||||||||||||
| Other expenses | 23 | 20 | (8) | 4 | 82 | (3) | 118 | ||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 1,988 | 1,810 | 482 | 657 | 121 | (3) | 5,055 | ||||||||||||||||||||||||||||||||||
| Core income (loss) before income tax | 457 | 258 | 65 | 73 | (108) | — | 745 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on core income (loss) | (99) | (52) | (15) | 6 | 19 | — | (141) | ||||||||||||||||||||||||||||||||||
| Core income (loss) | $ | 358 | $ | 206 | $ | 50 | $ | 79 | $ | (89) | $ | — | 604 | ||||||||||||||||||||||||||||
| Net investment gains (losses) | 95 | ||||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on net investment gains (losses) | (19) | ||||||||||||||||||||||||||||||||||||||||
| Net investment gains (losses), after tax | 76 | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 680 | |||||||||||||||||||||||||||||||||||||||
| June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||
| Reinsurance receivables | $ | 1,084 | $ | 814 | $ | 339 | $ | 414 | $ | 2,569 | $ | — | $ | 5,220 | |||||||||||||||||||||||||||
| Insurance receivables | 1,108 | 1,509 | 365 | 6 | — | — | 2,988 | ||||||||||||||||||||||||||||||||||
| Deferred acquisition costs | 340 | 277 | 104 | — | — | — | 721 | ||||||||||||||||||||||||||||||||||
| Goodwill | 117 | — | 31 | — | — | — | 148 | ||||||||||||||||||||||||||||||||||
| Deferred non-insurance warranty acquisition expense | 3,305 | — | — | — | — | — | 3,305 | ||||||||||||||||||||||||||||||||||
| Insurance reserves | |||||||||||||||||||||||||||||||||||||||||
| Claim and claim adjustment expenses | 6,178 | 8,533 | 2,225 | 3,754 | 2,790 | — | 23,480 | ||||||||||||||||||||||||||||||||||
| Unearned premiums | 2,767 | 2,086 | 616 | 123 | — | — | 5,592 | ||||||||||||||||||||||||||||||||||
| Future policy benefits | — | — | — | 13,285 | — | — | 13,285 | ||||||||||||||||||||||||||||||||||
| Deferred non-insurance warranty revenue | 4,309 | — | — | — | — | — | 4,309 | ||||||||||||||||||||||||||||||||||
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| Six months ended June 30, 2020 | Specialty | Commercial | International | Life & Group | Corporate & Other | ||||||||||||||||||||||||||||||||||||
| (In millions) | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||
| Operating revenues | |||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 1,390 | $ | 1,613 | $ | 463 | $ | 253 | $ | — | $ | — | $ | 3,719 | |||||||||||||||||||||||||||
| Net investment income | 189 | 203 | 29 | 414 | 28 | — | 863 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty revenue | 609 | — | — | — | — | — | 609 | ||||||||||||||||||||||||||||||||||
| Other revenues | 1 | 13 | — | — | 2 | (3) | 13 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 2,189 | 1,829 | 492 | 667 | 30 | (3) | 5,204 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses | |||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 913 | 1,169 | 330 | 620 | 23 | — | 3,055 | ||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 2 | 10 | — | — | — | — | 12 | ||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 304 | 291 | 91 | — | — | — | 686 | ||||||||||||||||||||||||||||||||||
| Non-insurance warranty expense | 566 | — | — | — | — | — | 566 | ||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 142 | 251 | 75 | 51 | (1) | — | 518 | ||||||||||||||||||||||||||||||||||
| Other expenses | 23 | 18 | 11 | 3 | 75 | (3) | 127 | ||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 1,950 | ||||||||||||||||||||||||||||||||||||||||