CNA FINANCIAL CORP - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
For the fiscal year ended December 31, 2022
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)
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 | ||||||||||||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of February 3, 2023, 270,901,829 shares of common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2022 was approximately $1,239 million based on the closing price of $44.90 per share of the common stock on the New York Stock Exchange on June 30, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CNA Financial Corporation Proxy Statement prepared for the 2023 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this report.
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| 1A. | ||||||||
| 1B. | ||||||||
| 2. | ||||||||
| 3. | ||||||||
| 4. | ||||||||
| PART II | ||||||||
| 5. | ||||||||
| 6. | ||||||||
| 7. | ||||||||
| 7A. | ||||||||
| 8. | ||||||||
| 9. | ||||||||
| 9A. | ||||||||
| 9B. | ||||||||
| 9C. | ||||||||
| PART III | ||||||||
| 10. | ||||||||
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| 12. | ||||||||
| 13. | ||||||||
| 14. | ||||||||
| PART IV | ||||||||
| 15. | ||||||||
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PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company. References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNAF and its subsidiaries. CNA's property and casualty and remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company, Western Surety Company, CNA Insurance Company Limited, Hardy Underwriting Bermuda Limited and its subsidiaries (Hardy), and CNA Insurance Company (Europe) S.A. Loews Corporation (Loews) owned approximately 90% of our outstanding common stock as of December 31, 2022.
Our insurance products primarily include commercial property and casualty coverages, including surety. Our services include warranty, risk management information services and claims administration. Our products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, insurance companies, associations, professionals and other groups. The property and casualty insurance industry is highly competitive, both as it relates to rate and service. We compete with a large number of stock and mutual insurance companies, as well as other entities, for both distributors and customers.
Our commercial property and casualty underwriting operations presence in the United States of America (U.S.) consists of field underwriting locations and centralized processing operations which handle policy processing, billing and collection activities and also act as call centers to optimize service. Our claim operations in the U.S. consists of primary locations where we handle multiple claim types and key business functions, as well as regional claim offices which are aligned with our underwriting field structure. We also have property and casualty underwriting operations in Canada, the United Kingdom (U.K.) and Continental Europe, as well as access to business placed at Lloyd's of London through Syndicate 382.
Our commercial property and casualty insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Our operations outside of Property & Casualty Operations are managed and reported in two business segments: Life & Group and Corporate & Other. Each segment is managed separately due to differences in their markets and product mix. Discussion of each segment, including the products offered, customers served and distribution channels used, is set forth in the Management's Discussion and Analysis (MD&A) included under Item 7 and in Note O to the Consolidated Financial Statements included under Item 8.
Current Regulation
The insurance industry is subject to comprehensive and detailed regulation and supervision. Regulatory oversight by applicable agencies is exercised through review of submitted filings and information, examinations (both financial and market conduct), direct inquiries and interviews. Each domestic and foreign jurisdiction has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, prescribing the form and content of statutory financial reports and regulating capital adequacy and the type, quality and amount of investments permitted. Such regulatory powers also extend to premium rate regulations requiring rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets or payments may be subject to prior notice or approval by insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance subsidiaries making the transfer or payments.
As our insurance operations are conducted in both domestic and foreign jurisdictions, we are subject to a number of regulatory agency requirements applicable to a portion, or all, of our operations. These include but are not limited to, the State of Illinois Department of Insurance (which is our global group-wide supervisor), the U.K. Prudential Regulatory Authority and Financial Conduct Authority, the Office of Superintendent of Financial Institutions in Canada, the Luxembourg insurance regulator Commissariat aux Assurances (the CAA) and the Bermuda Monetary Authority.
The U.S. and foreign regulatory environment in which we operate is evolving on an ongoing basis and impacts aspects of corporate governance, risk management practices, public disclosures and cyber security. We have
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invested and continue to invest in the security of our systems and in our technology infrastructure on an enterprise-wide basis.
Domestic insurers are also required by state insurance regulators to provide coverage to certain insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.
Further, domestic insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty funds are governed by state insurance guaranty associations which levy assessments to meet the funding needs of insolvent insurer estates. Other insurance-related assessments are generally levied by state agencies to fund various organizations, including disaster relief funds, rating bureaus, insurance departments and workers' compensation second injury funds, and by industry organizations that assist in the statistical analysis and ratemaking process, and we have the ability to recoup certain of these assessments from policyholders.
Although the U.S. federal government does not currently directly regulate the business of insurance, federal legislative and regulatory initiatives can affect the insurance industry. These initiatives and legislation include proposals relating to terrorism and natural catastrophe exposures, cybersecurity risk management, environmental, social and governance (ESG) initiatives, federal financial services reforms and certain tax reforms.
Hardy, a specialized Lloyd's of London (Lloyd's) underwriter, is also supervised by the Council of Lloyd's, which is the franchisor for all Lloyd's operations. The Council of Lloyd's has wide discretionary powers to regulate Lloyd's underwriting, such as establishing the capital requirements for syndicate participation. In addition, the annual business plan of each syndicate is subject to the review and approval of the Lloyd's Franchise Board, which is responsible for business planning and monitoring for all syndicates.
Capital adequacy and risk management regulations, referred to as Solvency II, apply to our European operations and are enacted by the European Commission, the executive body of the European Union (E.U). Additionally, the International Association of Insurance Supervisors (IAIS) continues to develop capital requirements as more fully discussed below.
Regulation Outlook
The IAIS has adopted a Common Framework (ComFrame) for the supervision of Internationally Active Insurance Groups (IAIGs), which is focused on the group-wide supervision of IAIGs, such as CNA. As part of ComFrame, the IAIS has developed a global capital standard that, if adopted in the U.S., would be applicable to U.S.-based IAIGs. Certain elements of ComFrame are expected to be formally utilized by U.S. state-based regulators beginning in 2023, as a result of such elements being incorporated in regulatory guidelines issued by the National Association of Insurance Commissioners (NAIC). This incorporation is intended to streamline group-wide supervision, further leveraging existing risk and solvency measures and applying them on a group-wide basis.
The NAIC developed an approach to group capital regulation and solvency-monitoring activities using the Group Capital Calculation (GCC). While historically the U.S. regulatory regime was primarily based on legal entity regulation, the GCC quantifies risk across the insurance group. The GCC was adopted by the NAIC along with model legislative language and attendant regulations, which have been adopted in a number of U.S. states where IAIGs are domiciled, including Illinois. Alongside the GCC, the NAIC has also developed the Aggregation Method (AM) approach to assessing group capital as an alternative to the Insurance Capital Standard (ICS) developed by the IAIS. The AM is influenced by the GCC and calculated in a similar manner. By 2024, the IAIS will be assessing whether the AM provides comparable outcomes to the ICS.
On September 22, 2017, the U.S. Treasury Department, the U.S. Trade Representative (USTR) and the E.U. announced they had formally signed a covered agreement on Prudential Measures Regarding Insurance and Reinsurance (U.S.-E.U. Covered Agreement). The U.S.-E.U. Covered Agreement requires U.S. states to prospectively eliminate the requirement that domestic insurance companies must obtain collateral from E.U.
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reinsurance companies that are not licensed in their state (alien reinsurers) in order to obtain reserve credit under statutory accounting. In exchange, the E.U. will not impose local presence requirements on U.S. firms operating in the E.U., and effectively must defer to U.S. group capital regulation for these firms. On December 18, 2018, the U.S. Treasury Department, the USTR and the U.K. announced they formally signed the Bilateral Agreement on Prudential Measures Regarding Insurance and Reinsurance (U.S.-U.K. Covered Agreement). This Agreement has similar terms as the U.S.-E.U. Covered Agreement. Because these covered agreements were not self-executing, U.S. state laws were revised to amend reinsurance collateral requirements to conform to the provisions within each of the agreements. The reinsurance collateral requirements were required to be adopted by the states within five years from the signing of the covered agreements, which was September 1, 2022, or states risked federal preemption in this area. As a result of all relevant jurisdictions adopting these requirements, including Illinois, federal preemption was avoided.
Human Capital
As of December 31, 2022, we had approximately 6,100 employees. We seek to create a culture of inclusion that engages our employees and offers them opportunities to learn, grow and achieve their career goals. We believe this will facilitate our ability to continue to attract and retain a highly talented workforce.
Talent, Recruitment and Development
We focus on attracting, developing and retaining top-tier talent to reflect the specialist nature of our business.
We aim to continually build on the expertise of our workforce. At entry levels, we have implemented trainee and internship programs and we continue to leverage relationships with colleges to attract new and diverse talent. We seek to promote the development of employees, both to optimize current performance and to develop skills for future career growth. We have implemented programs designed for our employees to grow their technical expertise, collaborate with one another and achieve their career goals. We offer a wide range of learning and development opportunities, including mentorship and reverse mentorship programs, apprenticeship and sponsorship programs, tuition reimbursement, technical training and specialized leadership development programs.
CNA leaders engage regularly with our employees on their performance and professional development. We gather employee feedback through pulse surveys and routine dialogue with our employee resource groups and leaders from across the enterprise. Our annual talent and succession planning process culminates in a review with leadership of key talent retention and promotion, as well as a review of our succession plans. Our performance management cycle seeks to ensure that employees have goals and development plans refreshed at least annually and performance review conversations are held between managers and their direct reports throughout the annual performance period.
Employee Benefits
We offer comprehensive compensation and benefits packages to eligible employees including a 401k plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off and certain family assistance programs, including paid family leave, flexible work arrangements and surrogacy and adoption assistance plans.
We provide certain benefits to eligible employees that are geared toward enhancing physical, mental, financial and social health. These include a holistic well-being incentive program with resources for both employees and their families, employee mental health assistance programs, and stress management and resilience programs. In response to the COVID-19 pandemic, CNA has offered remote working options and a hybrid-working environment for eligible employees.
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Diversity, Equity and Inclusion
Diversity, Equity and Inclusion (DEI) is a strategic imperative. Our DEI Vision is to cultivate an inclusive culture grounded in equity that celebrates individuals’ differences, attracts diverse talent, and fosters an environment that enables employees to do their best work.
To act on our DEI Vision, CNA has appointed senior leaders to an executive DEI Council, and our Chairman and CEO serves as the Executive Sponsor. The DEI Council works closely with internal DEI subject matter experts and with our eight employee resource groups to seek to create and drive strategic DEI initiatives.
Critical components of our DEI Vision include:
•Skill building. In 2021, we launched a new DEI learning program aimed to build allyship across the global enterprise. It includes various forms of allyship training and education for our employees – providing them with opportunities to learn and practice new skills.
•Leadership training. CNA requires every people leader and officer to complete inclusive leadership training. We also provide additional networking and learning opportunities for leaders to support the critical role they play in creating an inclusive workplace culture.
•Talent development. In 2021, we launched a new talent sponsorship program that seeks to accelerate the development of high performing diverse employees, diversify our leadership ranks and broadly build inclusive leadership skills. In addition, we offer mentoring and reverse mentoring program opportunities to employees.
•Representation. We seek to increase the representation of diverse talent throughout the organization. We monitor our representation of diverse talent and review our trends in relation to the labor market and industry to understand how we can increase it. We also report this information regularly to our Board of Directors.
•Partnerships. CNA has established new and expanded several existing partnerships with organizations whose DEI values align with our own. Through these partnerships, we uncover new sources of talent, support minority owned businesses, contribute to the development of students from underserved communities and provide opportunities for our employees to volunteer in their local communities.
•Policies and benefits. We regularly review our workplace policies and employee benefits and seek to adapt them to the changing needs of our employees.
We also have a corporate social responsibility strategy with a focus on four core areas: education, environment, inclusion and well-being. Our employees are encouraged to participate in a wide array of volunteer activities and we support their charitable giving by matching employee contributions to qualified nonprofit organizations.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, including CNA. The public can obtain any documents that we file with the SEC at www.sec.gov.
We also make available free of charge on or through our internet website at www.cna.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
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ITEM 1A. RISK FACTORS
Our business faces many risks and uncertainties. These risks and uncertainties could lead to events or circumstances that have a material adverse effect on our results of operations, equity, business and insurer financial strength and corporate debt ratings. We have described below material risks that we face. There may be additional risks that we do not yet know of or that we do not currently perceive to be material that may also affect our business. You should carefully consider and evaluate all of the information included in this report and any subsequent reports we may file with the SEC or make available to the public before investing in any securities we issue.
Insurance Risks
If we determine that our recorded insurance reserves are insufficient to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, we may need to increase our insurance reserves which would result in a charge to our earnings.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for reported and unreported claims. Insurance reserves are not an exact calculation of liability but instead are complex management estimates developed utilizing a variety of actuarial reserve estimation techniques as of a given reporting date. The reserve estimation process involves a high degree of judgment and variability and is subject to a number of factors which are highly uncertain. These factors can be affected by both changes in internal processes and external events. Key variables include frequency of claims, claim severity, mortality, morbidity, discount rates, economic, social and medical inflation, claim handling policies and procedures, case reserving approach, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Mortality is the relative incidence of death. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted.
There is generally a higher degree of variability in estimating required reserves for long-tail coverages, such as long term care, workers' compensation, general liability and professional liability, as they require a relatively longer period of time for claims to be reported and settled. The impact of changes in economic and social inflation, and medical costs are also more pronounced for long-tail coverages due to the longer settlement period. Certain risks and uncertainties associated with our insurance reserves are outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of MD&A in Item 7.
We are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change. Further, the impact of social inflation continues to be significant and the trajectory of its future impact remains uncertain. These issues, have had, and may continue to have, a negative effect on our business, results of operations and financial condition by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims, resulting in further increases in our reserves. The effects of unforeseen emerging claim and coverage issues are extremely difficult to predict and may be material.
In light of the many uncertainties associated with establishing the estimates and making the judgments necessary to establish reserve levels, we continually review and change our reserve estimates in a regular and ongoing process as experience develops from the actual reporting and settlement of claims and as the legal, regulatory and economic environment evolves. If our recorded reserves are insufficient for any reason, the required increase in reserves would be recorded as a charge against our earnings in the period in which reserves are determined to be insufficient. These charges could be substantial.
Our actual experience could vary from the key assumptions used to determine future policy benefit reserves for long term care policies.
Our future policy benefit reserves for long term care policies are based on our best estimate assumptions as of September 30, 2020, due to a reserve unlocking at that date. Key assumptions include morbidity, persistency (the percentage of policies remaining in force), discount rate and future premium rate increases. Estimating future experience for long term care policies is highly uncertain because the adequacy of the reserves is
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contingent upon actual experience and our future expectations related to these key assumptions. If actual or expected future experience differs from these assumptions, the reserves may not be adequate, requiring us to add reserves. The required increase in reserves would be recorded as a charge against our earnings in the period in which reserves are determined to be insufficient. These charges could be substantial. See the Life & Group Policyholder Reserves portion of Reserves - Estimates and Uncertainties section of MD&A in Item 7 for more information.
Morbidity and persistency experience, inclusive of mortality, can be volatile and may be negatively affected by many factors including, but not limited to, policyholder behavior, judicial decisions regarding policy terms, socioeconomic factors, cost of care inflation, changes in health trends and advances in medical care.
A prolonged period during which investment returns remain at levels lower than those anticipated in our reserving discount rate assumptions could result in shortfalls in investment income on assets supporting our obligations under long term care policies, which may require increases to our reserves. This risk is more significant for our long term care products because the long potential duration of the policy obligations exceeds the duration of the supporting investment assets. Further, changes to the Internal Revenue Code may also affect the rate at which we discount our reserves. In addition, we may not receive regulatory approval for the level of premium rate increases we request. Any adverse deviation between the level of future premium rate increases approved and the level included in our reserving assumptions may require an increase to our reserves.
We are vulnerable to material losses from natural and man-made disasters.
Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses. These events can be natural or man-made, and may include hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil unrest, cyber-attacks, pandemics and acts of terrorism. The frequency and severity of these catastrophe events are inherently unpredictable. Exposure to cyber risk is increasing systematically due to greater digital dependence, which increases the potential for, and the potential losses due to, a catastrophic cyber event. Catastrophic cyber-attack scenarios are not bound by time or geographic limitations and cyber-related catastrophic perils don’t have well-established definitions or fundamental physical properties. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, its associated extreme weather events linked to rising temperatures and its effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow. Climate studies by government agencies, academic institutions, catastrophe modeling organizations and other groups indicate that climate change may be altering the frequency and/or severity of catastrophic weather events, such as hurricanes, tornadoes, windstorms, floods and other natural disasters.
The extent of our losses from catastrophes is a function of the total amount of our insured exposures in the affected areas, the frequency and severity of the events themselves, the level of reinsurance coverage, reinsurance reinstatement premiums and state residual market assessments, if any. It can take a long time for the ultimate cost of any catastrophe losses to us to be finally determined, as a multitude of factors contribute to such costs, including evaluation of general liability and pollution exposures, infrastructure disruption, business interruption and reinsurance collectibility. Further, significant catastrophic events or a series of catastrophic events have the potential to impose financial stress on the reinsurance industry, which could impact our ability to collect amounts owed to us by reinsurers, thereby resulting in higher net incurred losses.
Reinsurance coverage for "unconventional" terrorism events (such as nuclear, biological, chemical or radiological attacks) is provided only in limited circumstances. Our principal reinsurance protection against these large-scale terrorist attacks is the coverage currently provided through the Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA) through December 31, 2027. However, such coverage is subject to a mandatory deductible and other limitations. It is also possible that future legislation could change or eliminate the program, which could adversely affect our business by increasing our exposure to terrorism losses, or by lowering our business volume through efforts to avoid that exposure. For a further discussion of TRIPRA, see Part II, Item 7, MD&A - Catastrophes and Related Reinsurance.
As a result of the items discussed above, catastrophe losses are particularly difficult to estimate, could cause us to exhaust our available reinsurance limits and could adversely affect the cost and availability of reinsurance.
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Accordingly, catastrophic events could have a material adverse effect on our business, results of operations, financial condition and liquidity.
The COVID-19 pandemic and measures to mitigate the spread of the virus have resulted in increased claims and related litigation risk across our enterprise, which may continue to have adverse impacts on our business, results of operations and financial condition and could be material.
We have experienced, and may continue to experience, increased claim submissions and litigation related to denial of claims based on policy coverage or the facts of the claim, in certain lines of business that are implicated by the pandemic and mitigating actions taken by our customers and governmental authorities in response to its spread. These lines include primarily healthcare professional liability, workers' compensation, commercial property related business interruption coverage, management liability (directors and officers, employment practices and professional liability lines) and trade credit. We recorded significant losses during 2020, the majority of which are classified as incurred but not reported (IBNR) reserves, in these areas and may experience continued losses, which could be material.
Increased frequency or severity in any or all of the foregoing lines, or others where the exposure has yet to emerge, may have a material impact on our business, results of operations and financial condition.
We have incurred and may continue to incur substantial expenses related to litigation activity in connection with COVID-related legal claims. These actions primarily relate to denial of claims submitted as a result of the pandemic and the mitigating actions under commercial property policies for business interruption coverage, including lockdowns and closing of certain businesses. The significance of such litigation, both in substance and volume, and the resultant activities we have initiated, including external counsel engagement, and the costs related thereto, may have a material impact on our business, results of operations and financial condition.
We have exposures related to asbestos and environmental pollution (A&EP) claims, which could result in material losses.
Our property and casualty insurance subsidiaries have exposures related to A&EP claims. Our experience has been that establishing claim and claim adjustment expense reserves for casualty coverages relating to A&EP claims is subject to uncertainties that are greater than those presented by other claims. Additionally, traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for A&EP. As a result, estimating the ultimate cost of both reported and unreported A&EP claims is subject to a higher degree of variability. On August 31, 2010, we completed a retroactive reinsurance transaction under which substantially all of our legacy A&EP liabilities were ceded to National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., subject to an aggregate limit of $4 billion (Loss Portfolio Transfer). The cumulative amount ceded under the Loss Portfolio Transfer as of December 31, 2022 was $3.5 billion. If the other parties to the Loss Portfolio Transfer do not fully perform their obligations, net losses incurred on A&EP claims covered by the Loss Portfolio Transfer exceed the aggregate limit of $4 billion, or we determine we have exposures to A&EP claims not covered by the Loss Portfolio Transfer, we may need to increase our recorded net reserves which would result in a charge against our earnings. These charges could be substantial. Additionally, if the A&EP claims exceed the limit of the Loss Portfolio Transfer, we will need to assess whether to purchase additional limit or to reassume claim handling responsibility for A&EP claims from an affiliate of NICO. Any additional reinsurance premium or future claim handling costs would also reduce our earnings.
We are exposed to, and may face adverse developments related to, mass tort claims that could arise from, among other things, our insureds’ sale or use of potentially harmful products or substances, changes to the social and legal environment, issues related to altered interpretation of coverage and other new and emerging claim theories.
We face potential exposure to various types of existing, new and emerging mass tort claims, including those related to exposure to potentially harmful products or substances, such as glyphosate, lead paint, per- and polyfluoroalkyl substances (PFAS) and opioids; claims arising from changes that expand the right to sue, remove limitations on recovery, extend the statutes of limitations or otherwise repeal or weaken tort reforms, such as those related to abuse reviver statutes, including New York reviver statutes; and claims related to new and emerging theories of liability, such as those related to global warming and climate change. Evolving
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judicial interpretations and new legislation regarding the application of various tort theories and defenses, including application of various theories of joint and several liability, as well as the application of insurance coverage to these claims, give rise to new and potentially more severe claim activity. Mass tort claim activity, including activity based on such changing judicial interpretations and recent and proposed legislation, could have a material adverse effect on our business, results of operations and financial condition.
Strategic Risks
We face intense competition in our industry; we may be adversely affected by the cyclical nature of the property and casualty business and the evolving landscape of our distribution network.
All aspects of the insurance industry are highly competitive and we must continuously allocate resources to refine and improve our insurance products and services to remain competitive. We compete with a large number of stock and mutual insurance companies and other entities, some of which may be larger or have greater financial or other resources than we do, for both distributors and customers. This includes agents, brokers and managing general underwriters who may increasingly compete with us to the extent that markets continue to provide them with direct access to providers of capital seeking exposure to insurance risk. Insurers compete on the basis of many factors, including products, price, services, ratings and financial strength. The competitor landscape has evolved substantially in recent years, with significant consolidation and new market entrants, such as insurtech firms, resulting in increased pressures on our ability to remain competitive, particularly in obtaining pricing that is both attractive to our customer base and risk-appropriate to us.
In addition, the property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, resulting in less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. During periods in which price competition is high, we may lose business to competitors offering competitive insurance products at lower prices. As a result, our premium levels and expense ratio could be materially adversely impacted.
We market our insurance products worldwide primarily through independent insurance agents, insurance brokers, and managing general underwriters who also promote and distribute the products of our competitors. Any change in our relationships with our distribution network agents, brokers or managing general underwriters, including as a result of consolidation or their increased promotion and distribution of our competitors' products, could adversely affect our ability to sell our products. As a result, our business volume and results of operations could be materially adversely impacted.
Our underwriting strategies currently rely on the effectiveness of reinsurance arrangements and we accordingly face risks relating to reinsurance, including obtaining reinsurance at a cost or on terms and conditions we deem acceptable, reinsurance counterparty risk and ineffective reinsurance coverage.
A primary reason we purchase reinsurance is to manage our exposure to risk, thereby facilitating our underwriting strategies in certain key areas. Under our ceded reinsurance arrangements, a reinsurer assumes a specified portion of our exposure in exchange for a specified portion of policy premiums. The availability and cost of the reinsurance protection we purchase, which affects the volatility and profitability of our business, as well as the level and types of risk we retain, is determined by general economic conditions and conditions in the reinsurance market, such as the occurrence of significant reinsured events or unexpected adverse trends, including those associated with climate change. If we are unable to obtain sufficient reinsurance at a cost or on terms and conditions we deem acceptable, our risk exposure will not be mitigated or we may forego such increased risk, thereby adversely impacting our underwriting strategies. In addition, use of reinsurance exposes us to credit risk of the reinsurers, as the reinsurance arrangements do not relieve us of the liability to the customer. If a reinsurer is unable to meet its financial obligations under a reinsurance arrangement, we will remain obligated under the original policies issued to our customers. Furthermore, while we use various risk management methods, including the use of reinsurance, to effectively manage risk, there is the possibility that one or more natural catastrophes and/or terrorism or other events could result in claims substantially exceeding expectations, thereby making the reinsurance strategy significantly less effective. Such reinsurance-related risks could have a material adverse effect on our business, results of operations and financial condition and adversely affect our underwriting strategies in certain lines of business.
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We may be adversely affected by technological changes or disruptions in the insurance marketplace.
Technological changes in the way insurance transactions are completed in the marketplace, and our ability to react effectively to such change, may present significant competitive risks. For example, more insurers are utilizing "big data" analytics to make underwriting and other decisions that impact product design and pricing. If such utilization is more effective than how we use similar data and information, we will be at a competitive disadvantage. There can be no assurance that we will continue to compete effectively with our industry peers due to technological changes; accordingly, this may have a material adverse effect on our business, results of operations and financial condition.
In addition, agents and brokers, technology companies, or other third parties may create alternate distribution channels for commercial business that may adversely impact product differentiation and pricing. For example, they may create a digitally enabled distribution channel that may adversely impact our competitive position. Our efforts or the efforts of agents and brokers with respect to new products or alternate distribution channels, as well as changes in the way agents and brokers utilize greater levels of data and technology, could adversely impact our business relationship with independent agents and brokers who currently market our products, resulting in a lower volume and/or profitability of business generated from these sources.
We face considerable competition within our industry for qualified, specialized talent and any significant inability to attract and retain talent may adversely affect the execution of our business strategies.
The successful execution of our business strategies depends on our ability to attract and retain qualified talent. Due to the intense competition in our industry and from businesses outside the industry for qualified employees, especially those in key positions and those possessing highly specialized knowledge and industry experience in areas such as underwriting, data and analytics and technology, we may encounter obstacles to our ability to attract and retain such employees, which could materially adversely affect our business, results of operations and financial condition.
We are controlled by a single stockholder which could result in potential conflicts of interest.
Loews beneficially owned approximately 90% of our outstanding shares of common stock as of December 31, 2022, and is in a position to control actions that require the consent of stockholders, including the election of directors, amendment of our Restated Certificate of Incorporation and any merger or sale of substantially all of our assets. In addition, four officers of Loews, along with the Co-Chairman of the Board of Loews, serve on our Board of Directors. We have also entered into services agreements and a registration rights agreement with Loews, and we may in the future enter into other agreements with Loews. It is possible that potential conflicts of interest could arise in the future for our directors who are also officers and/or directors of Loews with respect to a number of areas relating to the past and ongoing relationships of Loews and us, including tax and insurance matters, financial commitments and sales of common stock pursuant to registration rights or otherwise.
Financial Risks
We may incur significant realized and unrealized investment losses and volatility in net investment income arising from changes in the financial markets.
Our investment portfolio is exposed to various risks, such as interest rate, credit spread, issuer default, equity prices and foreign currency, which are unpredictable. Financial markets are highly sensitive to changes in economic conditions, monetary policies, tax policies, domestic and international geopolitical issues and many other factors. Changes in financial markets, including fluctuations in interest rates, credit, equity prices and foreign currency prices, and many other factors beyond our control can adversely affect the value of our investments, the realization of investment income and the rate at which we discount certain liabilities. Our investment portfolio is also subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of our investment portfolio that is carried at fair value in our financial statements is not reflective of the prices at which actual transactions could occur.
We have significant holdings in fixed maturity investments that are sensitive to changes in interest rates. A decline in interest rates may reduce the returns earned on new fixed maturity investments, thereby reducing our net investment income, while an increase in interest rates may reduce the value of our existing fixed maturity
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investments, which could reduce our net unrealized gains included in Accumulated other comprehensive income (AOCI). The value of our fixed maturity investments is also subject to risk that certain investments may default or become impaired due to deterioration in the financial condition of issuers of the investments we hold or in the underlying collateral of the security.
In addition, we invest a portion of our assets in limited partnerships and common stock which are subject to greater market volatility than our fixed maturity investments. Limited partnership investments generally provide a lower level of liquidity than fixed maturity or equity investments, which may also limit our ability to withdraw funds from these investments. The timing and amount of income or losses on such investments is inherently variable and can contribute to volatility in reported earnings.
Further, we hold a portfolio of commercial mortgage loans. We are subject to risk related to the recoverability of loan balances, which is influenced by declines in the estimated cash flows from underlying property leases, fair value of collateral, refinancing risk and the creditworthiness of tenants of credit tenant loan properties, where lease payments directly service the loan. Any changes in actual or expected collections would result in a charge to earnings.
As a result of these factors, we may not earn an adequate return on our investments, may be required to write down the value of our investments and may incur losses on the disposition of our investments all of which could materially adversely affect our business, results of operations and financial condition.
Operational Risks
We use analytical models to assist our decision making in key areas such as pricing, reserving, catastrophe risks and capital modeling and may be adversely affected if actual results differ materially from the model outputs and related analyses.
We use various modeling techniques and data analytics (e.g. scenarios, predictive, stochastic and forecasting) to analyze and estimate exposures, loss trends and other risks associated with our assets and liabilities. This includes both proprietary and third-party modeled outputs and related analyses to assist us in decision-making related to underwriting, pricing, capital allocation, reserving, investing, reinsurance and catastrophe risk, among other things. We incorporate numerous assumptions and forecasts about the future level and variability of policyholder behavior, loss frequency and severity, interest rates, equity markets, inflation, capital requirements, and currency exchange rates, among others. The modeled outputs and related analyses from both proprietary models and third parties are subject to various assumptions, uncertainties, model design errors and the inherent limitations of any statistical analysis. Further, climate change may make modeled outcomes less certain or produce new, non-modeled risks.
In addition, the effectiveness of any model can be degraded by operational risks, including the improper use of the model, input errors, data errors and human error. As a result, actual results may differ materially from our modeled results. Our profitability and financial condition substantially depends on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, results of operations and financial condition may be materially adversely affected.
Any significant interruption in the operation of our business functions, facilities and systems or our vendors' facilities and systems could result in a materially adverse effect on our operations.
Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted manner, through our employees or vendor relationships and using our and their facilities and systems, necessary business functions, such as internet support and 24-hour call centers, processing new and renewal business, providing customer service, processing and paying claims and other obligations and issuing financial statements.
Our, or our vendors', facilities and systems could become unavailable, inoperable, or otherwise impaired from a variety of causes, including natural events, such as hurricanes, tornadoes, windstorms, earthquakes, severe winter weather and fires, or other events, such as explosions, terrorist attacks, computer security breaches or cyber-attacks, riots, hazardous material releases, medical epidemics or pandemics, utility outages, interruptions of data processing and storage systems or unavailability of communications facilities. An interruption in our system availability occurred in March 2021 as a result of a cybersecurity attack we sustained. Please refer to the
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immediately following risk factor for further information regarding this incident. Likewise, we could experience a significant failure, interruption or corruption of one or more of our or our vendors' information technology, telecommunications, or other systems for various reasons, including significant failures or interruptions that might occur as existing systems are replaced or upgraded. The shut-down or unavailability of one or more of our or our vendors’ systems or facilities for these or any other reasons could significantly impair our ability to perform critical business functions in a timely basis.
In addition, because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such events could result in a deterioration of our ability to perform necessary business functions.
The foregoing risks could expose us to monetary and reputational damages. Potential additional exposures relating to significant interruptions to our operations may include substantially increased compliance costs, as well as increased costs relating to investments in computer system and security-related upgrades, and such costs may not be recoverable under our relevant insurance coverage. We have made, and continue to make, investments to improve our security and infrastructure. Some of these investments are a direct result of the March 2021 cybersecurity attack, described in the immediately following risk factor, which are not recoverable under existing insurance coverage.
If our business continuity plans or system security do not sufficiently address these risks, they could have a material adverse effect on our business, results of operations and financial condition.
Any significant breach in our data security infrastructure or our vendors’ facilities and systems could disrupt business, cause financial losses and damage our reputation, and insurance coverage may not be available for claims related to a breach.
A significant breach of our data security infrastructure may result from actions by our employees, vendors, third-party administrators, or unknown third parties or through cyber-attacks. The risk of a breach can exist whether software services are in our or third party administered data centers or are cloud-based software services. Breaches have occurred, and may occur again, in our systems and in the systems of our vendors and third-party administrators.
Such a breach could affect our data framework or cause a failure to protect the personal information of our customers, claimants or employees, or sensitive and confidential information regarding our business or policyholders and may result in operational impairments and financial losses, significant harm to our reputation and the loss of business with existing or potential customers. The breach of confidential information also could give rise to legal liability and regulatory action under data protection and privacy laws, as well as evolving regulation in this regard. During the third quarter of 2021, we were notified of a breach of certain systems of a third-party administrator, which resulted in breach notifications sent by such administrator to potentially impacted persons, including a limited number of our claimants. While we do not believe such notifications and resultant actions will have a material adverse effect on our business, this or similar incidents, or any other such breach of our or our vendors’ data security infrastructure could have a material adverse effect on our business, results of operations and financial condition.
As previously disclosed, we sustained a sophisticated cybersecurity attack in March 2021 involving ransomware that caused a network disruption and impacted certain of our systems. Our investigation into the incident revealed that an unauthorized third party copied some personal information relating to certain current and former employees, contract workers and their dependents and certain other persons, including some policyholders. Although we currently have no indication that the impacted data has been misused, or that CNA or its policyholder data was specifically targeted by the unauthorized third party, we may be subject to subsequent investigations, claims or actions in addition to other costs, fines, penalties, or other obligations related to impacted data, whether or not such data is misused. In addition, the misuse, or perceived misuse, of sensitive or confidential information regarding our business or policyholders could cause harm to our reputation and result in the loss of business with existing or potential customers, which could adversely impact our business, results of operations and financial condition.
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Although we maintain cybersecurity insurance coverage insuring against costs resulting from cyber-attacks (including the March 2021 attack), we do not expect the amount available under our coverage policy to cover all losses from cyber-attacks. In addition, potential disputes with our insurers about the availability of insurance coverage could occur. Further, as a result of the March 2021 attack, we incurred higher costs for the replenishment of our current policy through the end of the term, and we believe we will incur higher costs for future cybersecurity insurance coverage beyond the current term.
We may also be subject to future cyber incidents that could have a material adverse effect on our business, results of operations or financial condition or may result in operational impairments and financial losses, as well as significant harm to our reputation.
Inability to detect and prevent significant employee or third-party service provider misconduct, inadvertent errors and omissions, or exposure relating to functions performed on our behalf could result in a materially adverse effect on our business, results of operations and financial condition.
We may incur losses which arise from employees or third-party service providers engaging in intentional, negligent or inadvertent misconduct, fraud, errors and omissions, failure to comply with internal guidelines, including with respect to underwriting authority, or failure to comply with regulatory requirements. Our or our third-party service providers' controls may not be able to detect all possible circumstances of such noncompliant activity and the internal structures in place to prevent this activity may not be effective in all cases. Any losses relating to such non-compliant activity could adversely affect our business, results of operations and financial condition.
Portions of our insurance business is underwritten and serviced by third parties. With respect to underwriting, our contractual arrangements with third parties will typically grant them limited rights to write new and renewal policies, subject to contractual restrictions and obligations, including requiring them to underwrite within the terms of our licenses. Should these third parties issue policies that exceed these contractual restrictions, we could be deemed liable for such policies and subject to regulatory fines and penalties for any breach of licensing requirements. It is possible that in such circumstance we might not be fully indemnified for such third parties’ contractual breaches.
Additionally, we rely on certain third-party claims administrators, including the administrator of our long term care claims, to handle policyholder services and perform significant claim administration and claim adjudication functions. Any failure by such administrator to properly perform service functions may result in losses as a result of over-payment of claims, legal claims against us and adverse regulatory enforcement exposure.
We have also licensed certain systems from third parties. We cannot be certain that we will have access to these systems or that our information technology or application systems will continue to operate as intended.
These risks could adversely impact our reputation and client relationships and have a material adverse effect on our business, results of operations and financial condition.
Loss of key vendor relationships and issues relating to the transitioning of vendor relationships could compromise our ability to conduct business.
In the event that one or more of our vendors suffers a bankruptcy, is sold to another entity, sustains a significant business interruption or otherwise becomes unable to continue to provide products or services at the requisite level, we may be adversely affected. We may suffer operational impairments and financial losses associated with transferring business to a new vendor, assisting a vendor with rectifying operational difficulties, failure by vendors to properly perform service functions or assuming previously outsourced operations ourselves. Our inability to provide for appropriate servicing if a vendor becomes unable to fulfill its contractual obligations to us, either through transitioning to another service provider temporarily or permanently or assuming servicing internally, may have a materially adverse effect on our business, results of operations and financial condition.
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We are subject to capital adequacy requirements and, if we are unable to maintain or raise sufficient capital to meet these requirements, regulatory agencies may restrict or prohibit us from operating our business.
Insurance companies such as ours are subject to capital adequacy standards set by regulators to help identify companies that merit further regulatory attention. In the U.S., these standards apply specified risk factors to various asset, premium and reserve components of our legal entity statutory basis of accounting financial statements. Current rules, including those promulgated by insurance regulators and specialized markets, such as Lloyd's, require companies to maintain statutory capital and surplus at a specified minimum level determined using the applicable jurisdiction's regulatory capital adequacy formula. If we do not meet these minimum requirements, we may be restricted or prohibited from operating our business in the applicable jurisdictions and specialized markets. If we are required to record a material charge against earnings in connection with a change in estimated insurance reserves, or the occurrence of a catastrophic event or otherwise, or if we incur significant losses related to our investment portfolio, which severely deteriorates our capital position, we may violate these minimum capital adequacy requirements unless we are able to raise sufficient additional capital. We may be limited in our ability to raise significant amounts of capital on favorable terms or at all.
The IAIS has adopted a ComFrame for the supervision of IAIGs and has developed a global capital standard that, if adopted in the U.S., would be applicable to U.S.-based IAIGs. The NAIC also developed the GCC and AM approach to assessing group capital as an alternative to the ICS developed by the IAIS. The development and adoption of these capital standards could increase our prescribed capital requirement, the level at which regulatory scrutiny intensifies, as well as significantly increase our cost of regulatory compliance.
Our insurance subsidiaries, upon whom we depend for dividends in order to fund our corporate obligations, are limited by insurance regulators in their ability to pay dividends.
We are a holding company and are dependent upon dividends, loans and other sources of cash from our subsidiaries in order to meet our obligations. Ordinary dividend payments, or dividends that do not require prior approval by the insurance subsidiaries' domiciliary insurance regulator, are generally limited to amounts determined by formulas that vary by jurisdiction. If we are restricted from paying or receiving intercompany dividends, by regulatory rule or otherwise, we may not be able to fund our corporate obligations and debt service requirements or pay our stockholders dividends from available cash. As a result, we would need to pursue other sources of capital which may be more expensive or may not be available at all.
Rating agencies may downgrade their ratings of us, thereby adversely affecting our ability to write insurance at competitive rates or at all and increasing our cost of capital.
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries, as well as our public debt, are rated by rating agencies, including, A.M. Best Company (A.M. Best), Moody's Investors Service, Inc. (Moody's), Standard & Poor's (S&P) and Fitch Ratings, Inc. (Fitch). Ratings reflect the rating agency's opinions of an insurance company's or insurance holding company's financial strength, capital adequacy, enterprise risk management practices, operating performance, strategic position and ability to meet its obligations to policyholders and debt holders, and may also reflect opinions on other areas such as information security and climate risk, as well as ESG matters more broadly.
The rating agencies may take action to lower our ratings in the future as a result of any significant financial loss or changes in the methodology or criteria applied by the rating agencies. The severity of the impact on our business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets and the required collateralization of certain future payment obligations or reserves. Further, if one or more of our corporate debt ratings were downgraded, we may find it more difficult to access the capital markets and we may incur higher borrowing costs.
In addition, it is possible that a significant lowering of the corporate debt ratings of Loews by certain of the rating agencies could result in an adverse effect on our ratings, independent of any change in our circumstances.
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For further discussion of our ratings, see the Ratings subsection within the Liquidity and Capital Resources section of MD&A in Item 7.
We are subject to extensive existing state, local, federal and foreign governmental regulations that restrict our ability to do business and generate revenues; additional regulation or significant modification to existing regulations or failure to comply with regulatory requirements may have a materially adverse effect on our business, results of operations and financial condition.
The insurance industry is subject to comprehensive and detailed regulation and supervision. Most insurance regulations are designed to protect the interests of our policyholders and third-party claimants, rather than our investors. Each jurisdiction in which we do business has established supervisory agencies that regulate the manner in which we do business. Any changes in regulation could impose significant burdens on us. In addition, the Lloyd's marketplace sets rules under which its members, including our Hardy syndicate, operate.
These rules and regulations relate to, among other things, the standards of solvency (including risk-based capital measures), government-supported backstops for certain catastrophic events (including terrorism), investment restrictions, accounting and reporting methodology, establishment of reserves and potential assessments of funds to settle covered claims against impaired, insolvent or failed private or quasi-governmental insurers. In addition, rules and regulations have recently been introduced, or are being considered, in the areas of information security and ESG, which may also affect our business. We also are subject to numerous regulations governing the protection of personal and confidential information of our clients and employees, including medical records, credit card data and financial information. These laws and regulations are increasing in complexity and number, change frequently, sometimes conflict, and could expose us to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions, including regulations related to cyber security protocols (which continue to evolve in breadth, sophistication and maturity in response to an ever-evolving threat landscape). In response to climate change, regulators at the federal, state and international level also could impose new regulations requiring disclosure of underwriting or investment in certain industry sectors.
Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. State jurisdictions ensure compliance with such regulations through market conduct exams, which may result in losses to the extent non-compliance is ascertained, either as a result of failure to document transactions properly or failure to comply with internal guidelines, or otherwise. The jurisdictions in which we do business may also require us to provide coverage to persons whom we would not otherwise consider eligible or restrict us from withdrawing from unprofitable lines of business or unprofitable market areas. Each jurisdiction dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each jurisdiction.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease our principal executive offices in Chicago, Illinois, as well as other offices throughout the U.S. We also lease offices in Canada, the U.K., Belgium, Denmark, France, Germany, Italy, Luxembourg and the Netherlands, primarily for branch and insurance business operations in those locations.
We consider our properties to be in generally good condition and suitable to carry on our business.
ITEM 3. LEGAL PROCEEDINGS
Information on our legal proceedings is set forth in Note F to the Consolidated Financial Statements included under Item 8.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange under the symbol CNA.
As of February 3, 2023, we had 270,901,829 shares of common stock outstanding and approximately 90% of our outstanding common stock was owned by Loews. We had 788 stockholders of record as of February 3, 2023 according to the records maintained by our transfer agent.
Our Board of Directors has approved an authorization to purchase, in the open market or through privately negotiated transactions, our outstanding common stock, as our management deems appropriate. No repurchases of our common stock were made in the three months ended December 31, 2022.
The following graph compares the five-year total return of our common stock, the Standard & Poor's 500 (S&P 500) Index and the S&P 500 Property & Casualty Insurance Index. The graph assumes that the value of the investment in our common stock and each index was $100 at the base period, January 1, 2018, and that dividends, if any, were reinvested in the stock or index.
| Company / Index | Base Period | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||||||||||||||||
| CNA Financial Corporation | $ | 100.00 | $ | 88.84 | $ | 97.26 | $ | 92.02 | $ | 109.50 | $ | 113.66 | |||||||||||||||||||||||
| S&P 500 Index | 100.00 | 95.62 | 125.72 | 148.85 | 191.58 | 156.88 | |||||||||||||||||||||||||||||
| S&P 500 Property & Casualty Insurance Index | 100.00 | 95.31 | 119.96 | 128.31 | 153.05 | 181.93 | |||||||||||||||||||||||||||||
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ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2021 Compared with 2020
This section of this Form 10-K generally discusses 2022 and 2021 results and year-to-year comparisons between 2022 and 2021. A discussion of changes in our results of operations from 2021 to 2020 has been omitted from this Form 10-K, but may be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2021, filed with the SEC on February 8, 2022.
Index to this MD&A
Management's discussion and analysis of financial condition and results of operations is comprised of the following sections:
| Page No. | |||||
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OVERVIEW
The following discussion should be read in conjunction with Part I, Item 1A Risk Factors and Part II, Item 8 Financial Statements and Supplementary Data of this Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
The preparation of Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the amount of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Note A to the Consolidated Financial Statements included under Item 8 should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from our estimates and may have a material adverse impact on our results of operations, financial condition, equity, business, and insurer financial strength and corporate debt ratings.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts are primarily related to long term care policies and are estimated using actuarial estimates about morbidity and persistency as well as assumptions about expected investment returns and future premium rate increases. The reserve for unearned premiums represents the portion of premiums written related to the unexpired terms of coverage. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
Long Term Care Reserves
Future policy benefit reserves for our long term care policies are based on certain assumptions, including morbidity, persistency, inclusive of mortality, discount rates and future premium rate increases. The adequacy of the reserves is contingent upon actual experience and our future expectations related to these key assumptions. If actual or expected future experience differs from these assumptions, the reserves may not be adequate, requiring us to add to reserves.
A prolonged period during which investment returns remain at levels lower than those anticipated in our reserving discount rate assumption could result in shortfalls in investment income on assets supporting our obligations under long term care policies, which may require increases to our reserves. In addition, we may not receive regulatory approval for the level of premium rate increases we request.
These changes to our reserves could materially adversely impact our results of operations, financial condition and equity. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
Reinsurance and Insurance Receivables
Exposure exists with respect to the collectibility of ceded property and casualty and life reinsurance to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities we have ceded under reinsurance agreements. An allowance for uncollectible reinsurance is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer financial strength rating and solvency, industry
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experience and current and forecast economic conditions. Further information on our reinsurance receivables is in Note G to the Consolidated Financial Statements included under Item 8.
Additionally, exposure exists with respect to the collectibility of amounts due from policyholders related to insurance contracts, including amounts due from insureds under high deductible policies and retrospectively rated policies. An allowance for uncollectible insurance receivables is recorded on the basis of periodic evaluations of balances due from insureds, currently as well as in the future, historical business default data, management's experience and current and forecast economic conditions.
If actual experience differs from the estimates made by management in determining the allowances for uncollectible reinsurance and insurance receivables, net receivables as reflected on our Consolidated Balance Sheets may not be collected. Therefore, our results of operations, financial condition or equity could be materially adversely affected. Further information on our process for determining the allowances for uncollectible reinsurance and insurance receivables is in Note A to the Consolidated Financial Statements included under Item 8.
Valuation of Investments and Impairment of Securities
Our fixed maturity and equity securities are carried at fair value on the balance sheet. Fair value represents the price that would be received in a sale of an asset in an orderly transaction between market participants on the measurement date, the determination of which may require us to make a significant number of assumptions and judgments. Securities with the greatest level of subjectivity around valuation are those that rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are based on assumptions consistent with what we believe other market participants would use to price such securities. Further information on our fair value measurements is in Note C to the Consolidated Financial Statements included under Item 8.
Our fixed maturity securities are subject to market declines below amortized cost that may result in the recognition of impairment losses in earnings. Factors considered in the determination of whether or not an impairment loss is recognized in earnings include a current intention or need to sell the security or an indication that a credit loss exists. Significant judgment is required in the determination of whether a credit loss has occurred for a security. We consider all available evidence when determining whether a security requires a credit allowance to be recorded, including the financial condition and expected near-term and long-term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions, industry, sector or other specific factors and whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security.
Our mortgage loan portfolio is subject to the expected credit loss model, which requires immediate recognition of estimated credit losses over the life of the asset and the presentation of the asset at the net amount expected to be collected. Significant judgment is required in the determination of estimated credit losses and any changes in our expectation of the net amount to be collected are recognized in earnings.
Further information on our process for evaluating impairments and expected credit losses is in Note A to the Consolidated Financial Statements included under Item 8.
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Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return basis of assets and liabilities. Any resulting future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. The assessment of the need for a valuation allowance requires management to make estimates and assumptions about future earnings, reversal of existing temporary differences and available tax planning strategies. If actual experience differs from these estimates and assumptions, the recorded deferred tax asset may not be fully realized resulting in an increase to income tax expense in our results of operations. In addition, the ability to record deferred tax assets in the future could be limited, resulting in a higher effective tax rate in that future period. Further information on our income taxes is in Note D to the Consolidated Financial Statements included under Item 8.
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RESERVES - ESTIMATES AND UNCERTAINTIES
The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain. As noted below, we review our reserves for each segment of our business periodically, and any such review could result in the need to increase reserves in amounts which could be material and could adversely affect our results of operations, equity, business and insurer financial strength and corporate debt ratings. Further information on reserves is provided in Note E to the Consolidated Financial Statements included under Item 8.
Property and Casualty Claim and Claim Adjustment Expense Reserves
We maintain loss reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (IBNR). IBNR includes a provision for development on known cases as well as a provision for late reported incurred claims. Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves as of each balance sheet date are provided in the Segment Results section of this MD&A and in Note E to the Consolidated Financial Statements included under Item 8.
As discussed in the Risk Factors discussion within Item 1A, there is a risk that our recorded reserves are insufficient to cover our estimated ultimate unpaid liability for claims and claim adjustment expenses. Unforeseen emerging or potential claims and coverage issues are also difficult to predict and could materially adversely affect the adequacy of our claim and claim adjustment expense reserves and could lead to future reserve additions.
In addition, our property and casualty insurance subsidiaries also have actual and potential exposures related to A&EP claims, which could result in material losses. To mitigate the risks posed by our exposure to A&EP claims and claim adjustment expenses, we completed a transaction with NICO under which substantially all of our legacy A&EP liabilities were ceded to NICO effective January 1, 2010. See Note E to the Consolidated Financial Statements included under Item 8 for further discussion about the transaction with NICO, its impact on our results of operations and the deferred retroactive reinsurance gains and the amount of remaining reinsurance limit.
Establishing Property & Casualty Reserve Estimates
In developing claim and claim adjustment expense (loss or losses) reserve estimates, our actuaries perform detailed reserve analyses that are staggered throughout the year. The data is organized at a reserve group level. A reserve group typically can be a line of business covering a subset of insureds such as commercial automobile liability for small or middle market customers or it can be a particular type of claim such as construction defect. Every reserve group is reviewed at least once during the year, but most are reviewed more frequently. The analyses generally review losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to establish estimates net of reinsurance. In addition to the detailed analyses, we review actual loss emergence for all products each quarter.
Most of our business can be characterized as long-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. Our long-tail exposures include commercial automobile liability, workers' compensation, general liability, medical professional liability, other professional liability and management liability coverages, assumed reinsurance run-off and products liability. Short-tail exposures include property, commercial automobile physical damage, marine, surety and
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warranty. Specialty, Commercial and International contain both long-tail and short-tail exposures. Corporate & Other contains run-off long-tail exposures.
Various methods are used to project ultimate losses for both long-tail and short-tail exposures.
The paid development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident or policy years with further expected changes in paid losses. Selection of the paid loss pattern may require consideration of several factors, including the impact of economic, social and medical inflation on claim costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself may require evaluation of changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors. Because this method assumes that losses are paid at a consistent rate, changes in any of these factors can affect the results. Since the method does not rely on case reserves, it is not directly influenced by changes in their adequacy.
For many reserve groups, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail products such as workers' compensation.
The incurred development method is similar to the paid development method, but it uses case incurred losses instead of paid losses. Since the method uses more data (case reserves in addition to paid losses) than the paid development method, the incurred development patterns may be less variable than paid patterns. However, selection of the incurred loss pattern typically requires analysis of all of the same factors described above. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place, and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.
The loss ratio method multiplies earned premiums by an expected loss ratio to produce ultimate loss estimates for each accident or policy year. This method may be useful for immature accident or policy periods or if loss development patterns are inconsistent, losses emerge very slowly or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio typically requires analysis of loss ratios from earlier accident or policy years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes and other applicable factors.
The Bornhuetter-Ferguson method using paid loss is a combination of the paid development method and the loss ratio method. This method normally determines expected loss ratios similar to the approach used to estimate the expected loss ratio for the loss ratio method and typically requires analysis of the same factors described above. This method assumes that future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the paid development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the paid development method typically requires consideration of the same factors listed in the description of the paid development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. For long-tail lines, this method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson method using incurred loss is similar to the Bornhuetter-Ferguson method using paid loss except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving have taken place, and the method typically requires analysis of the same factors that need to be reviewed for the loss ratio and incurred development methods.
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The frequency times severity method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident or policy year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for reserve groups where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that affect the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims may require analysis of several factors, including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss may require analysis of the impact of large losses and claim cost trends based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.
Stochastic modeling produces a range of possible outcomes based on varying assumptions related to the particular reserve group being modeled. For some reserve groups, we use models which rely on historical development patterns at an aggregate level, while other reserve groups are modeled using individual claim variability assumptions supplied by the claims department. In either case, multiple simulations using varying assumptions are run and the results are analyzed to produce a range of potential outcomes. The results will typically include a mean and percentiles of the possible reserve distribution which aid in the selection of a point estimate.
For many exposures, especially those that can be considered long-tail, a particular accident or policy year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, our actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method. For most of our products, even the incurred losses for accident or policy years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, we may not assign much, if any, weight to the paid and incurred development methods. We may use the loss ratio, Bornhuetter-Ferguson and/or frequency times severity methods. For short-tail exposures, the paid and incurred development methods can often be relied on sooner, primarily because our history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, we may also use the loss ratio, Bornhuetter-Ferguson and/or frequency times severity methods for short-tail exposures.
For other more complex reserve groups where the above methods may not produce reliable indications, we use additional methods tailored to the characteristics of the specific situation.
Periodic Reserve Reviews
The reserve analyses performed by our actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with senior management to determine the best estimate of reserves. Senior management considers many factors in making this decision. Our recorded reserves reflect our best estimate as of a particular point in time based upon known facts and circumstances, consideration of the factors cited above and our judgment. The carried reserve differs from the actuarial point estimate as discussed further below.
Currently, our recorded reserves are modestly higher than the actuarial point estimate. For Commercial, Specialty and International, the difference between our reserves and the actuarial point estimate is primarily driven by uncertainty with respect to immature accident years, claim cost inflation, changes in claims handling, changes to the tort environment which may adversely affect claim costs and the effects from the economy. For Corporate & Other, the difference between our reserves and the actuarial point estimate is primarily driven by the potential tail volatility of run-off exposures.
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The key assumptions fundamental to the reserving process are often different for various reserve groups and accident or policy years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the paid development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. As a result, the effect on reserve estimates of a particular change in assumptions typically cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.
Our recorded reserves are management's best estimate. In order to provide an indication of the variability associated with our net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in significant factors affecting our reserve estimates for particular types of business. These significant factors are the ones that we believe could most likely materially affect the reserves. This discussion covers the major types of business for which we believe a material deviation to our reserves is reasonably possible. There can be no assurance that actual experience will be consistent with the current assumptions or with the variation indicated by the discussion. In addition, there can be no assurance that other factors and assumptions will not have a material impact on our reserves.
The three areas for which we believe a significant deviation to our net reserves is reasonably possible are (i) professional liability, management liability and surety products; (ii) workers' compensation; and (iii) general liability.
Professional liability, management liability and surety products include US professional liability coverages provided to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and other professional firms. They also include directors and officers (D&O), errors and omissions (E&O), employment practices, fiduciary, fidelity, cyber and surety coverages, and medical liability. The most significant factor affecting reserve estimates for these liability coverages is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislative changes and other factors. Underwriting and claim handling decisions, such as the classes of business written and individual claim settlement decisions, can also affect claim severity. If the estimated claim severity increases by 9%, we estimate that net reserves would increase by approximately $500 million. If the estimated claim severity decreases by 3%, we estimate that net reserves would decrease by approximately $150 million. Our net reserves for these products were approximately $5.3 billion as of December 31, 2022.
For workers' compensation, since many years will pass from the time the business is written until all claim payments have been made, the most significant factor affecting workers' compensation reserve estimates is claim cost inflation on claim payments. Workers' compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers' compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would increase by approximately $350 million. If estimated workers' compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would decrease by approximately $300 million. Our net reserves for workers' compensation were approximately $3.7 billion as of December 31, 2022.
For general liability, the most significant factor affecting reserve estimates is claim severity. Claim severity is driven by changes in the cost of repairing or replacing property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors. If the estimated claim severity for general liability increases by 6%, we estimate that our net reserves would increase by approximately $200 million. If the estimated claim severity for general liability decreases by 3%, we estimate that our net reserves would decrease by approximately $100 million. Our net reserves for general liability were approximately $3.6 billion as of December 31, 2022.
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Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, we regularly review the adequacy of our reserves and reassess our reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods. In reviewing our reserve estimates, we make adjustments in the period that the need for such adjustments is determined. These reviews have resulted in our identification of information and trends that have caused us to change our reserves in prior periods and could lead to our identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations, equity, business and insurer financial strength and corporate debt ratings positively or negatively. See discussion within Note E to the Consolidated Financial Statements included under Item 8 for additional information about reserve development and the Ratings section of this MD&A for further information regarding our financial strength and corporate debt ratings.
Life & Group Policyholder Reserves
Our Life & Group segment includes our run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and we have the ability to increase policy premiums, subject to state regulatory approval.
We maintain both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for our Life & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for our long term care policies, our actuaries perform a detailed claim reserve review on an annual basis. The review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for our structured settlement obligations, our actuaries monitor mortality experience on an annual basis. Our recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent reviews. Claim and claim adjustment expense reserves for long term care policies and structured settlement obligations are discounted as discussed in Note A to the Consolidated Financial Statements included under Item 8.
Future policy benefit reserves consist of the active life reserves related to our long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.
The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency, discount rates and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Discount rates are influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and may also be affected by changes to the Internal Revenue Code. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. As a result of this variability, our long term care reserves may be subject to material increases if actual experience develops adversely to our expectations.
Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the
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existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in our results of operations in the period in which the need for such adjustment is determined. If the GPV required reserves are less than the existing recorded reserves, assumptions remain locked in and no adjustment is required.
Information regarding ASU 2018-12, which, beginning in 2023, will require changes in the measurement and disclosure of long-duration contracts, including our long term care business, is provided in the Accounting Standards Update section of this MD&A and in Note A to the Consolidated Financial Statements included under Item 8.
The September 30, 2022 GPV indicated that our recorded reserves included a margin of approximately $125 million. A summary of the changes in the estimated reserve margin is presented in the table below:
| Long Term Care Active Life Reserve - Change in estimated reserve margin (In millions) | |||||
| September 30, 2021 Estimated Margin | $ | 72 | |||
Changes in underlying economic assumptions(1) | (130) | ||||
| Changes in underlying morbidity assumptions | (30) | ||||
| Changes in underlying persistency assumptions | 40 | ||||
| Changes in underlying premium rate action assumptions | 190 | ||||
| Changes in underlying expense and other assumptions | (17) | ||||
| September 30, 2022 Estimated Margin | $ | 125 | |||
(1) Economic assumptions include the impact of interest rates and cost of care inflation.
The increase in the margin in 2022 was primarily driven by changes in discount rate assumptions due to higher near-term expected reinvestment rates and higher than previously estimated rate increases on active rate increase programs. These favorable drivers were partially offset by changes in cost of care inflation assumptions.
We have determined that additional future policy benefit reserves for profits followed by losses are not currently required based on the most recent projection.
The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our future policy benefit reserve assumptions. The annual GPV process involves updating all assumptions to management's then current best estimate, and historically all significant assumptions have been revised each year. In the table below, we have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group. The impact of each sensitivity is discrete and does not reflect the impact one factor may have on another or the mitigating impact from management actions, which may include additional future premium rate increases. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. Any required increase in the recorded reserves resulting from a hypothetical revision in the table below would first reduce the margin in our carried reserves before it would affect results from operations. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
| 2022 GPV | |||||
| Estimated reduction to pretax income | |||||
| Hypothetical revisions (In millions) | |||||
Morbidity:(1) | |||||
| 2.5% increase in morbidity | $ | 200 | |||
| 5% increase in morbidity | 500 | ||||
| Persistency: | |||||
| 5% decrease in active life mortality and lapse | $ | 100 | |||
| 10% decrease in active life mortality and lapse | 300 | ||||
| Discount Rates: | |||||
| 25 basis point decline in new money interest rates | $ | — | |||
| 50 basis point decline in new money interest rates | 100 | ||||
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CATASTROPHES AND RELATED REINSURANCE
Various events can cause catastrophe losses. These events can be natural or man-made, including hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil unrest, cyber-attacks, pandemics and acts of terrorism that produce unusually large aggregate losses. In most, but not all cases, our catastrophe losses from these events in the U.S. are defined consistent with the definition of the Property Claims Service (PCS). PCS defines a catastrophe as an event that causes damage of $25 million or more in direct insured losses to property and affects a significant number of policyholders and insurers. For events outside of the U.S., we define a catastrophe as an industry recognized event that generates an accumulation of claims amounting to more than $1 million for the International segment.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in our results of operations and/or equity. We reported catastrophe losses, net of reinsurance, of $247 million and $397 million for the years ended December 31, 2022 and 2021. Catastrophe losses for the years ended December 31, 2022 and 2021 were driven by severe weather related events, primarily Winter Storm Elliott and Hurricane Ian for 2022 and Hurricane Ida and Winter Storms Uri and Viola for 2021.
We use various analyses and methods, including using one of the industry standard natural catastrophe models to estimate hurricane and earthquake losses at various return periods, to inform underwriting and reinsurance decisions designed to manage our exposure to catastrophic events. We generally seek to manage our exposure through the purchase of catastrophe reinsurance and have catastrophe reinsurance treaties that cover property and workers’ compensation losses. We conduct an ongoing review of our risk and catastrophe reinsurance coverages and from time to time make changes as we deem appropriate.
In 2021, we added a quota share treaty to our property reinsurance program, which covers policies written during the treaty term and in-force as of June 1, 2021. As a result of the coverage of in-force policies, net written premiums were reduced by $122 million during the second quarter of 2021 for the one-time catch-up under the treaty of unearned premium on policies previously written as of the treaty inception. The treaty was renewed for a term of June 1, 2022 to June 1, 2023.
The following discussion summarizes our most significant catastrophe reinsurance coverage at January 1, 2023.
Group North American Property Treaty
We purchased corporate catastrophe excess-of-loss treaty reinsurance covering our U.S. states and territories and Canadian property exposures underwritten in our North American and European companies. Exposures underwritten through Hardy are excluded and covered under a separate treaty. The treaty has a term of June 1, 2022 to June 1, 2023 and provides coverage for the accumulation of covered losses from catastrophe occurrences above our per occurrence retention of $190 million up to $900 million for all losses other than earthquakes. Earthquakes are covered up to $1.0 billion. Losses stemming from terrorism events are covered unless they are due to a nuclear, biological or chemical attack. All layers of the treaty provide for one full reinstatement.
Group Workers' Compensation Treaty
We also purchased corporate Workers' Compensation catastrophe excess-of-loss treaty reinsurance for the period January 1, 2023 to January 1, 2024 providing $275 million of coverage for the accumulation of covered losses related to natural catastrophes above our per occurrence retention of $25 million. The treaty also provides $600 million of coverage for the accumulation of covered losses related to terrorism events above our retention of $25 million. Of this $600 million in Terrorism coverage, $200 million is provided for nuclear, biological chemical and radiation events. One full reinstatement is available for the first $275 million above the retention, regardless of the covered peril.
Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA)
Our principal reinsurance protection against large-scale terrorist attacks, including nuclear, biological, chemical or radiological attacks, is the coverage currently provided through TRIPRA which runs through the end of 2027. TRIPRA provides a U.S. government backstop for insurance-related losses resulting from any “act of
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terrorism,” which is certified by the Secretary of Treasury in consultation with the Secretary of Homeland Security for losses that exceed a threshold of $200 million industry-wide for the calendar year 2023. Under the current provisions of the program, in 2023, the federal government will reimburse 80% of our covered losses in excess of our applicable deductible up to a total industry program cap of $100 billion. Our deductible is based on eligible commercial property and casualty earned premiums for the preceding calendar year. Based on 2022 earned premiums, our estimated deductible under the program is $1 billion for 2023. If an act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual industry aggregate limit, Congress would be responsible for determining how additional losses in excess of $100 billion will be paid.
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CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations including our financial measure, core income (loss). For more detailed components of our business operations and a discussion of the core income (loss) financial measure, see the Segment Results section within this MD&A. For further discussion of Net investment income and Net investment gains or losses, see the Investments section of this MD&A.
| Years ended December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Operating Revenues | |||||||||||
| Net earned premiums | $ | 8,667 | $ | 8,175 | |||||||
| Net investment income | 1,805 | 2,159 | |||||||||
| Non-insurance warranty revenue | 1,574 | 1,430 | |||||||||
| Other revenues | 32 | 24 | |||||||||
| Total operating revenues | 12,078 | 11,788 | |||||||||
| Claims, Benefits and Expenses | |||||||||||
| Net incurred claims and benefits | 6,361 | 6,327 | |||||||||
| Policyholders' dividends | 25 | 22 | |||||||||
| Amortization of deferred acquisition costs | 1,490 | 1,443 | |||||||||
| Non-insurance warranty expense | 1,471 | 1,328 | |||||||||
| Other insurance related expenses | 1,160 | 1,062 | |||||||||
| Other expenses | 291 | 242 | |||||||||
| Total claims, benefits and expenses | 10,798 | 10,424 | |||||||||
| Core income before income tax | 1,280 | 1,364 | |||||||||
| Income tax expense on core income | (232) | (258) | |||||||||
| Core income | 1,048 | 1,106 | |||||||||
| Net investment (losses) gains | (199) | 120 | |||||||||
| Income tax benefit (expense) on net investment gains (losses) | 45 | (24) | |||||||||
| Net investment (losses) gains, after tax | (154) | 96 | |||||||||
| Net income | $ | 894 | $ | 1,202 | |||||||
2022 Compared with 2021
Core income decreased $58 million in 2022 as compared with 2021. Core income for our Property & Casualty Operations increased $56 million primarily due to improved underwriting results and higher net investment income from fixed income securities partially offset by lower investment income from limited partnership and common stock results. Core results for our Life & Group segment decreased $135 million, while core loss for our Corporate & Other segment improved $21 million.
Catastrophe losses were $247 million in 2022 as compared with $397 million in 2021. Catastrophe losses for the years ended December 31, 2022 and 2021 were driven by severe weather related events, primarily Winter Storm Elliott and Hurricane Ian for 2022 and Hurricane Ida and Winter Storms Uri and Viola for 2021.
Favorable net prior year loss reserve development of $32 million was recorded in 2022 as compared with unfavorable net prior year loss reserve development of $11 million in 2021 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Consolidated Financial Statements included under Item 8.
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SEGMENT RESULTS
The following discusses the results of operations for our business segments.
Our property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Specialty provides management and professional liability and other coverages through property and casualty products and services using a network of brokers, independent agencies and managing general underwriters. Commercial works with a network of brokers and independent agents to market a broad range of property and casualty insurance products to all types of insureds targeting small business, construction, middle markets and other commercial customers. The International segment underwrites property and casualty coverages on a global basis through a branch operation in Canada, a European business consisting of insurance companies based in the U.K. and Luxembourg and Hardy, our Lloyd's syndicate.
Our operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other. Life & Group primarily includes the results of our long term care business that is in run-off. Corporate & Other primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty businesses in run-off, including CNA Re, A&EP, a legacy portfolio of excess workers' compensation (EWC) policies and certain legacy mass tort reserves. Intersegment eliminations are also included in this segment.
We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses and any cumulative effects of changes in accounting guidance. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure and management believes some investors may find this measure useful to evaluate our primary operations. See further discussion regarding how we manage our business and reconciliations of non-GAAP measures to the most comparable GAAP measures and other information in Note O to the Consolidated Financial Statements included under Item 8.
In evaluating the results of our Specialty, Commercial and International segments, we utilize the loss ratio, the underlying loss ratio, the expense ratio, the dividend ratio, the combined ratio and the underlying combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The underlying loss ratio excludes the impact of catastrophes losses and net prior year loss reserve and premium development from the loss ratio. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The underlying combined ratio is the sum of the underlying loss ratio, the expense ratio and the dividend ratio. In addition, we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed, excluding rate and exposure changes, in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third-party captives, excludes business which is ceded to third-party captives, including business related to large warranty programs. We use underwriting gain (loss) to monitor our insurance operations. Underwriting gain (loss) is pretax and is calculated as net earned premiums less total insurance expenses, which includes insurance claims and policyholders' benefits, amortization of deferred acquisition costs and other insurance related expenses.
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition
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expenses. Further information on our reserves is provided in Note E to the Consolidated Financial Statements included under Item 8.
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Specialty
Specialty provides management and professional liability and other coverages through property and casualty products and services using a network of brokers, independent agencies and managing general underwriters. Specialty includes the following business groups:
Management & Professional Liability consists of the following coverages and products:
•Professional liability coverages and risk management services to various professional firms, including architects, real estate agents, accounting firms and law firms.
•D&O, E&O, employment practices, fiduciary, fidelity and cyber coverages. Specific areas of focus include small and mid-size firms, public as well as privately held firms and not-for-profit organizations.
•Insurance products to serve the healthcare industry, including professional and general liability as well as associated casualty coverages. Key customer groups include aging services, allied medical facilities, dentists, physicians, nurses and other medical practitioners.
Surety offers small, medium and large contract and commercial surety bonds. Surety provides surety and fidelity bonds in all 50 states.
Warranty and Alternative Risks provides extended service contracts and insurance products that provide protection from the financial burden associated with mechanical breakdown and other related losses, primarily for vehicles, portable electronic communication devices and other consumer goods. Service contracts are generally distributed by commission-based independent representatives and sold by auto dealerships and retailers in North America to customers in conjunction with the purchase of a new or used vehicle or new consumer goods. Additionally, our insurance companies may issue contractual liability insurance policies or guaranteed asset protection reimbursement insurance policies to cover the liabilities of these service contracts issued by affiliated entities or third parties.
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The following table details the results of operations for Specialty.
| Years ended December 31 | |||||||||||
| (In millions, except ratios, rate, renewal premium change and retention) | 2022 | 2021 | |||||||||
| Gross written premiums | $ | 7,514 | $ | 7,665 | |||||||
| Gross written premiums excluding third-party captives | 3,814 | 3,672 | |||||||||
| Net written premiums | 3,306 | 3,225 | |||||||||
| Net earned premiums | 3,203 | 3,076 | |||||||||
| Underwriting gain | 366 | 347 | |||||||||
| Net investment income | 431 | 497 | |||||||||
| Core income | 668 | 704 | |||||||||
| Other performance metrics: | |||||||||||
| Loss ratio excluding catastrophes and development | 58.6 | % | 59.1 | % | |||||||
| Effect of catastrophe impacts | 0.1 | 0.4 | |||||||||
| Effect of development-related items | (1.3) | (1.4) | |||||||||
| Loss ratio | 57.4 | 58.1 | |||||||||
| Expense ratio | 31.0 | 30.5 | |||||||||
| Dividend ratio | 0.2 | 0.1 | |||||||||
| Combined ratio | 88.6 | % | 88.7 | % | |||||||
| Combined ratio excluding catastrophes and development | 89.8 | % | 89.7 | % | |||||||
| Rate | 6 | % | 11 | % | |||||||
| Renewal premium change | 7 | 12 | |||||||||
| Retention | 86 | 83 | |||||||||
| New business | $ | 548 | $ | 551 | |||||||
2022 Compared with 2021
Gross written premiums, excluding third-party captives, for Specialty increased $142 million in 2022 as compared with 2021 driven by retention and rate. Net written premiums for Specialty increased $81 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income decreased $36 million in 2022 as compared with 2021 primarily due to lower net investment income driven by limited partnership and common stock results partially offset by improved current accident year underwriting results.
The combined ratio of 88.6% improved 0.1 point in 2022 as compared with 2021 primarily due to a 0.7 point improvement in the loss ratio largely offset by a 0.5 point increase in the expense ratio. The improvement in the loss ratio was largely due to improved current accident year underwriting results. Catastrophe losses were $2 million, or 0.1 points of the loss ratio, for 2022, as compared with $12 million, or 0.4 points of the loss ratio, for 2021. The increase in the expense ratio was primarily due to an increase in underwriting expenses driven by investments in technology and talent.
Favorable net prior year loss reserve development of $40 million and $45 million was recorded in 2022 and 2021. Further information on net prior year loss reserve development is in Note E to the Consolidated Financial Statements included under Item 8.
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The following table summarizes the gross and net carried reserves for Specialty.
| December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Gross case reserves | $ | 1,529 | $ | 1,578 | |||||||
| Gross IBNR reserves | 5,349 | 4,855 | |||||||||
| Total gross carried claim and claim adjustment expense reserves | $ | 6,878 | $ | 6,433 | |||||||
| Net case reserves | $ | 1,310 | $ | 1,338 | |||||||
| Net IBNR reserves | 4,253 | 3,927 | |||||||||
| Total net carried claim and claim adjustment expense reserves | $ | 5,563 | $ | 5,265 | |||||||
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Commercial
Commercial works with a network of brokers and independent agents to market a broad range of property and casualty insurance products to all types of insureds targeting small business, construction, middle markets and other commercial customers. Property products include standard and excess property, marine and boiler and machinery coverages. Casualty products include standard casualty insurance products such as workers' compensation, general and product liability, commercial auto, umbrella, and excess and surplus coverages. Most insurance programs are provided on a guaranteed cost basis; however, we also offer specialized loss-sensitive insurance programs and total risk management services relating to claim and information services to the large commercial insurance marketplace.
The following table details the results of operations for Commercial.
| Years ended December 31 | |||||||||||
| (In millions, except ratios, rate, renewal premium change and retention) | 2022 | 2021 | |||||||||
| Gross written premiums | $ | 5,170 | $ | 4,445 | |||||||
| Gross written premiums excluding third-party captives | 5,056 | 4,334 | |||||||||
| Net written premiums | 4,193 | 3,595 | |||||||||
| Net earned premiums | 3,923 | 3,552 | |||||||||
| Underwriting gain (loss) | 106 | (112) | |||||||||
| Net investment income | 488 | 624 | |||||||||
| Core income | 466 | 394 | |||||||||
| Other performance metrics: | |||||||||||
| Loss ratio excluding catastrophes and development | 61.5 | % | 61.0 | % | |||||||
| Effect of catastrophe impacts | 5.6 | 10.0 | |||||||||
| Effect of development-related items | (0.7) | 0.5 | |||||||||
| Loss ratio | 66.4 | 71.5 | |||||||||
| Expense ratio | 30.4 | 31.1 | |||||||||
| Dividend ratio | 0.5 | 0.5 | |||||||||
| Combined ratio | 97.3 | % | 103.1 | % | |||||||
| Combined ratio excluding catastrophes and development | 92.4 | % | 92.6 | % | |||||||
| Rate | 5 | % | 7 | % | |||||||
| Renewal premium change | 8 | 11 | |||||||||
| Retention | 86 | 82 | |||||||||
| New business | $ | 1,009 | $ | 843 | |||||||
2022 Compared with 2021
Gross written premiums for Commercial increased $725 million in 2022 as compared with 2021 driven by higher new business and retention. Net written premiums for Commercial increased $598 million in 2022 as compared with 2021. The prior period included a one-time written premium catch-up resulting from the addition of a quota share treaty to our property reinsurance program. Excluding the impact of the prior period written premium catch-up, net written premiums increased $486 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income increased $72 million in 2022 as compared with 2021, driven by lower catastrophe losses and improved non-catastrophe underwriting results partially offset by lower net investment income driven by limited partnerships and common stock results.
The combined ratio of 97.3% improved 5.8 points in 2022 as compared with 2021 primarily due to a 5.1 improvement in the loss ratio and a 0.7 point improvement in the expense ratio. The improvement in the loss ratio was driven by lower catastrophe losses and higher favorable net prior year loss reserve development. Catastrophe losses were $222 million, or 5.6 points of the loss ratio, for 2022, as compared with $358 million,
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or 10.0 points of the loss ratio, for 2021. The combined ratio excluding catastrophes and development improved 0.2 points in 2022 as compared with 2021. The improvement in the expense ratio of 0.7 points was driven by higher net earned premiums and lower acquisition costs partially offset by an increase in underwriting expenses. The loss ratio excluding catastrophes and development increased 0.5 points primarily driven by a shift in mix of business associated with the property quota share treaty purchased during June of 2021. Our property coverages, which have a lower underlying loss ratio than most other commercial coverages, now represent a smaller proportion of net earned premiums.
Favorable net prior year loss reserve development of $43 million and $6 million was recorded in 2022 and 2021. Further information on net prior year loss reserve development is in Note E to the Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves for Commercial.
| December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Gross case reserves | $ | 3,156 | $ | 3,184 | |||||||
| Gross IBNR reserves | 6,239 | 5,706 | |||||||||
| Total gross carried claim and claim adjustment expense reserves | $ | 9,395 | $ | 8,890 | |||||||
| Net case reserves | $ | 2,809 | $ | 2,850 | |||||||
| Net IBNR reserves | 5,621 | 5,215 | |||||||||
| Total net carried claim and claim adjustment expense reserves | $ | 8,430 | $ | 8,065 | |||||||
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International
The International segment underwrites property and casualty coverages on a global basis through a branch operation in Canada, a European business consisting of insurance companies based in the U.K. and Luxembourg and Hardy, our Lloyd's syndicate.
Canada provides standard commercial and specialty insurance products, primarily in the marine, oil & gas, construction, manufacturing and life science industries.
Europe provides a diverse range of specialty products as well as commercial insurance products primarily in the marine, property, financial services and healthcare & technology industries in the U.K. and Continental Europe on both a domestic and cross-border basis.
Hardy operates through Lloyd’s Syndicate 382 underwriting energy, marine, property, casualty and specialty lines with risks located in many countries around the world. The capacity of, and results from the syndicate, are 100% attributable to CNA.
The following table details the results of operations for International.
| Years ended December 31 | |||||||||||
| (In millions, except ratios, rate, renewal premium change and retention) | 2022 | 2021 | |||||||||
| Gross written premiums | $ | 1,394 | $ | 1,297 | |||||||
| Net written premiums | 1,164 | 1,101 | |||||||||
| Net earned premiums | 1,070 | 1,057 | |||||||||
| Underwriting gain | 87 | 55 | |||||||||
| Net investment income | 63 | 57 | |||||||||
| Core income | 106 | 86 | |||||||||
| Other performance metrics: | |||||||||||
| Loss ratio excluding catastrophes and development | 58.5 | % | 59.0 | % | |||||||
| Effect of catastrophe impacts | 2.2 | 2.6 | |||||||||
| Effect of development-related items | (1.2) | 0.1 | |||||||||
| Loss ratio | 59.5 | 61.7 | |||||||||
| Expense ratio | 32.3 | 33.1 | |||||||||
| Combined ratio | 91.8 | % | 94.8 | % | |||||||
| Combined ratio excluding catastrophes and development | 90.8 | % | 92.1 | % | |||||||
| Rate | 6 | % | 13 | % | |||||||
| Renewal premium change | 11 | 13 | |||||||||
| Retention | 81 | 78 | |||||||||
| New business | $ | 319 | $ | 274 | |||||||
2022 Compared with 2021
Gross written premiums for International increased $97 million in 2022 as compared with 2021. Excluding the effect of foreign currency exchange rates, gross written premiums increased $176 million driven by higher new business, rate and retention. Net written premiums for International increased $63 million in 2022 as compared with 2021. Excluding the effect of foreign currency exchange rates, net written premiums increased $137 million as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums.
Core income increased $20 million in 2022 as compared with 2021 largely driven by improved underwriting results partially offset by an unfavorable impact from changes in foreign currency exchange rates.
The combined ratio of 91.8% improved 3.0 points in 2022 as compared with 2021 due to a 2.2 point improvement in the loss ratio and a 0.8 point improvement in the expense ratio. Catastrophe losses were $23
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million, or 2.2 points of the loss ratio, for 2022, as compared with $27 million, or 2.6 points of the loss ratio, for 2021. The improvement in the expense ratio was primarily driven by lower acquisition costs.
Favorable net prior year loss reserve development of $13 million was recorded in 2022 as compared with unfavorable net prior year loss reserve development of $2 million in 2021. Further information on net prior year loss reserve development is in Note E to the Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves for International.
| December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Gross case reserves | $ | 817 | $ | 859 | |||||||
| Gross IBNR reserves | 1,586 | 1,421 | |||||||||
| Total gross carried claim and claim adjustment expense reserves | $ | 2,403 | $ | 2,280 | |||||||
| Net case reserves | $ | 686 | $ | 744 | |||||||
| Net IBNR reserves | 1,317 | 1,196 | |||||||||
| Total net carried claim and claim adjustment expense reserves | $ | 2,003 | $ | 1,940 | |||||||
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Life & Group
The Life & Group segment includes our run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies were sold on both an individual and group basis.
The following table summarizes the results of operations for Life & Group.
| Years ended December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Net earned premiums | $ | 473 | $ | 491 | |||||||
| Net investment income | 804 | 966 | |||||||||
| Core (loss) income before income tax | (53) | 105 | |||||||||
| Income tax benefit on core income | 44 | 21 | |||||||||
| Core (loss) income | (9) | 126 | |||||||||
2022 Compared with 2021
Core results decreased $135 million in 2022 as compared with 2021 primarily due to $167 million pretax decline in net investment income from limited partnerships.
Life & Group results for 2022 include a $25 million pretax favorable impact from the reduction in long term care claim reserves and a $5 million pretax favorable impact from the reduction in structured settlement claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2022. Core income for 2021 included a $40 million pretax favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2021.
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The following tables summarize policyholder reserves for Life & Group.
| December 31, 2022 | |||||||||||||||||
| (In millions) | Claim and claim adjustment expenses | Future policy benefits | Total | ||||||||||||||
| Long term care | $ | 2,979 | $ | 10,151 | $ | 13,130 | |||||||||||
| Structured settlement obligations | 508 | — | 508 | ||||||||||||||
| Other | 9 | — | 9 | ||||||||||||||
| Total | 3,496 | 10,151 | 13,647 | ||||||||||||||
Shadow adjustments (1) | 77 | — | 77 | ||||||||||||||
Ceded reserves (2) | 101 | — | 101 | ||||||||||||||
| Total gross reserves | $ | 3,674 | $ | 10,151 | $ | 13,825 | |||||||||||
| December 31, 2021 | |||||||||||||||||
| (In millions) | Claim and claim adjustment expenses | Future policy benefits | Total | ||||||||||||||
| Long term care | $ | 2,905 | $ | 10,012 | $ | 12,917 | |||||||||||
| Structured settlement obligations | 526 | — | 526 | ||||||||||||||
| Other | 10 | — | 10 | ||||||||||||||
| Total | 3,441 | 10,012 | 13,453 | ||||||||||||||
Shadow adjustments (1) | 200 | 2,936 | 3,136 | ||||||||||||||
Ceded reserves (2) | 113 | 288 | 401 | ||||||||||||||
| Total gross reserves | $ | 3,754 | $ | 13,236 | $ | 16,990 | |||||||||||
(1) To the extent that unrealized gains on fixed maturity securities supporting long term care reserves would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains (losses), through Other comprehensive income (loss). To the extent that unrealized gains or losses on fixed maturity securities supporting structured settlements not funded by annuities would impact the reserve balance if realized, a related increase or decrease in Insurance reserves is recorded, net of tax, as a reduction or increase of net unrealized gains (losses), through Other comprehensive income (Shadow Adjustments).
(2) Ceded reserves relate to claim or policy reserves fully reinsured in connection with a sale or exit from the underlying business. In the fourth quarter of 2022, we novated our block of legacy annuity business resulting in the reduction of all associated gross and ceded future policy benefit reserves.
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Corporate & Other
Corporate & Other primarily includes certain corporate expenses, including interest on corporate debt and the results of certain property and casualty business in run-off, including CNA Re, A&EP, a legacy portfolio of EWC policies and certain legacy mass tort reserves.
The following table summarizes the results of operations for the Corporate & Other segment, including intersegment eliminations.
| Years ended December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Net investment income | $ | 19 | $ | 15 | |||||||
| Insurance claims and policyholders' benefits | 76 | 109 | |||||||||
| Interest expense | 112 | 112 | |||||||||
| Core loss | (183) | (204) | |||||||||
2022 Compared with 2021
Core loss improved $21 million for 2022 as compared with 2021 driven by favorability related to the A&EP Loss Portfolio Transfer (LPT) and the prior period recognition of a $12 million after-tax loss resulting from the legacy EWC LPT. These results were partially offset by an increase in expenses as result of continued investments in technology infrastructure and security.
The application of retroactive reinsurance accounting to additional cessions to the A&EP LPT resulted in an after-tax benefit of $3 million in 2022 compared to an after-tax charge of $25 million in 2021, both of which have no economic impact. The A&EP LPT and EWC LPT are further discussed in Note E to the Condensed Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves for Corporate & Other.
| December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Gross case reserves | $ | 1,428 | $ | 1,551 | |||||||
| Gross IBNR reserves | 1,321 | 1,266 | |||||||||
| Total gross carried claim and claim adjustment expense reserves | $ | 2,749 | $ | 2,817 | |||||||
| Net case reserves | $ | 137 | $ | 146 | |||||||
| Net IBNR reserves | 202 | 148 | |||||||||
| Total net carried claim and claim adjustment expense reserves | $ | 339 | $ | 294 | |||||||
PENSION PLAN IMPACT ON 2023 RESULTS
We anticipate a net pension cost of approximately $12 million in 2023 as compared with a benefit of $55 million in 2022. The change is primarily due to higher interest cost on projected benefit obligations as a result of an increase in discount rates year over year, as well as a lower expected return on plan assets as a result of a lower plan asset base given actual asset returns in 2022. A portion of this additional cost will result in an unfavorable impact on our expense ratio in 2023.
Our legacy pension plan is further discussed in Note I to the Condensed Financial Statements included under Item 8.
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INVESTMENTS
Net Investment Income
The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
| Years ended December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Fixed income securities: | |||||||||||
| Taxable fixed income securities | $ | 1,585 | $ | 1,439 | |||||||
| Tax-exempt fixed income securities | 244 | 311 | |||||||||
| Total fixed income securities | 1,829 | 1,750 | |||||||||
| Limited partnership and common stock investments | (31) | 402 | |||||||||
| Other, net of investment expense | 7 | 7 | |||||||||
| Net investment income | $ | 1,805 | $ | 2,159 | |||||||
| Effective income yield for the fixed income securities portfolio | 4.4 | % | 4.3 | % | |||||||
| Limited partnership and common stock return | (1.4) | % | 22.3 | % | |||||||
Net investment income decreased $354 million in 2022 as compared with 2021 driven by unfavorable limited partnership and common stock results partially offset by higher income from fixed income securities.
Net Investment (Losses) Gains
The components of Net investment (losses) gains are presented in the following table.
| Years ended December 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
Fixed maturity securities (1): | |||||||||||
| Corporate bonds and other | $ | (89) | $ | 134 | |||||||
| States, municipalities and political subdivisions | 26 | — | |||||||||
| Asset-backed | (34) | (38) | |||||||||
| Total fixed maturity securities | (97) | 96 | |||||||||
| Non-redeemable preferred stock | (116) | 4 | |||||||||
| Derivatives, short term and other | 22 | 10 | |||||||||
| Mortgage loans | (8) | 10 | |||||||||
| Net investment (losses) gains | (199) | 120 | |||||||||
| Income tax benefit (expense) on net investment gains (losses) | 45 | (24) | |||||||||
| Net investment (losses) gains, after tax | $ | (154) | $ | 96 | |||||||
(1) Excludes the loss in 2022 on the assets supporting the funds withheld liability, which is reflected in the Derivatives, short term and other line.
Pretax net investment results decreased $319 million for 2022 as compared with 2021 driven by net losses on fixed maturity securities and the unfavorable change in fair value of non-redeemable preferred stock.
Additionally, Derivatives, short term and other for 2022 includes an $18 million non-economic net gain related to the coinsurance agreement on our legacy annuity business in our Life & Group segment and the associated funds withheld embedded derivative, which was novated in 2022.
Further information on our investment gains and losses as well as on our derivative financial instruments is set forth in Notes A and B to the Consolidated Financial Statements included under Item 8.
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Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.
| December 31 | 2022 | 2021 | |||||||||||||||||||||
(In millions) | Estimated Fair Value | Net Unrealized Gains (Losses) | Estimated Fair Value | Net Unrealized Gains (Losses) | |||||||||||||||||||
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,419 | $ | (336) | $ | 2,600 | $ | 42 | |||||||||||||||
| AAA | 2,398 | (208) | 3,784 | 360 | |||||||||||||||||||
| AA | 6,342 | (663) | 7,665 | 823 | |||||||||||||||||||
| A | 9,043 | (531) | 9,511 | 1,087 | |||||||||||||||||||
| BBB | 15,651 | (1,447) | 18,458 | 2,043 | |||||||||||||||||||
| Non-investment grade | 1,774 | (219) | 2,362 | 91 | |||||||||||||||||||
| Total | $ | 37,627 | $ | (3,404) | $ | 44,380 | $ | 4,446 | |||||||||||||||
As of December 31, 2022 and 2021, 1% of our fixed maturity portfolio was rated internally. AAA rated securities included $0.3 billion and $1.7 billion of prefunded municipal bonds as of December 31, 2022 and 2021.
The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.
| December 31, 2022 | |||||||||||
| (In millions) | Estimated Fair Value | Gross Unrealized Losses | |||||||||
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,355 | $ | 337 | |||||||
| AAA | 1,559 | 298 | |||||||||
| AA | 4,327 | 817 | |||||||||
| A | 6,615 | 749 | |||||||||
| BBB | 13,226 | 1,621 | |||||||||
| Non-investment grade | 1,429 | 234 | |||||||||
| Total | $ | 29,511 | $ | 4,056 | |||||||
The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.
| December 31, 2022 | |||||||||||
| (In millions) | Estimated Fair Value | Gross Unrealized Losses | |||||||||
| Due in one year or less | $ | 774 | $ | 16 | |||||||
| Due after one year through five years | 7,799 | 539 | |||||||||
| Due after five years through ten years | 10,367 | 1,515 | |||||||||
| Due after ten years | 10,571 | 1,986 | |||||||||
| Total | $ | 29,511 | $ | 4,056 | |||||||
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Duration
A primary objective in the management of the investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group segment.
The effective durations of fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
| December 31 | 2022 | 2021 | |||||||||||||||||||||
| (In millions) | Estimated Fair Value | Effective Duration (In years) | Estimated Fair Value | Effective Duration (In years) | |||||||||||||||||||
| Investments supporting Life & Group | $ | 14,511 | 9.9 | $ | 18,458 | 9.2 | |||||||||||||||||
| Other investments | 25,445 | 4.7 | 28,915 | 4.9 | |||||||||||||||||||
| Total | $ | 39,956 | 6.6 | $ | 47,373 | 6.6 | |||||||||||||||||
The effective duration of Investments supporting Life & Group liabilities at December 31, 2022 lengthened as compared with December 31, 2021, reflecting strategic repositioning to capitalize on higher rates and reduce reinvestment risk.
The investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For 2022, net cash provided by operating activities was $2,502 million as compared with $1,997 million for 2021. The increase in cash provided by operating activities was driven by the prior year payment of the EWC LPT premium. The EWC LPT is further discussed in Note E to the Consolidated Financial Statements included under Part II, Item 8.
Cash flows from investing activities include the purchase and disposition of financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, equipment and other assets not generally held for resale.
For 2022, net cash used by investing activities was $1,512 million as compared with $1,228 million for 2021. Net cash used or provided by investing activities is primarily driven by cash available from operations and by other factors, such as financing activities.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, and outflows for stockholder dividends, repayment of debt and purchases of our common stock.
For 2022, net cash used by financing activities was $1,032 million as compared with $648 million for 2021. Financing activities for the periods presented include:
•In 2022, we paid dividends of $982 million and repurchased 890,000 shares of our common stock at an aggregate cost of $39 million.
•In 2021, we paid dividends of $621 million and repurchased 377,615 shares of our common stock at an aggregate cost of $18 million.
Liquidity
We believe that our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home Loan Bank of Chicago (FHLBC).
CCC paid dividends of $990 million and $880 million to CNAF during 2022 and 2021.
We have an effective automatic shelf registration statement on file with the Securities and Exchange Commission under which we may publicly issue an unspecified amount of debt, equity or hybrid securities from time to time.
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Common Stock Dividends
Cash dividends of $3.60 per share on our common stock, including a special cash dividend of $2.00 per share, were declared and paid in 2022. On February 3, 2023, our Board of Directors declared a quarterly cash dividend of $0.42 per share and a special cash dividend of $1.20 per share, payable March 9, 2023 to stockholders of record on February 21, 2023. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.
Our ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from our subsidiaries. The payment of dividends to us by our insurance subsidiaries without prior approval of the insurance department of each subsidiary's domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.
Further information on our dividends from subsidiaries is provided in Note M to the Consolidated Financial Statements included under Item 8.
Commitments, Contingencies and Guarantees
We have various commitments, contingencies and guarantees which arose in the ordinary course of business. The impact of these commitments, contingencies and guarantees should be considered when evaluating our liquidity and capital resources.
A summary of our commitments is presented in the following table.
| December 31, 2022 | |||||||||||||||||||||||||||||
| (In millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||
Debt (1) | $ | 3,191 | $ | 350 | $ | 697 | $ | 1,091 | $ | 1,053 | |||||||||||||||||||
Lease obligations (2) | 261 | 39 | 59 | 45 | 118 | ||||||||||||||||||||||||
Claim and claim adjustment expense reserves (3) | 26,151 | 6,239 | 7,139 | 3,596 | 9,177 | ||||||||||||||||||||||||
Future policy benefit reserves (4) | 25,478 | (318) | 169 | 979 | 24,648 | ||||||||||||||||||||||||
Total (5) | $ | 55,081 | $ | 6,310 | $ | 8,064 | $ | 5,711 | $ | 34,996 | |||||||||||||||||||
(1) Includes estimated future interest payments.
(2) The lease obligations reflected above are not discounted.
(3) The Claim and claim adjustment expense reserves reflected above are not discounted and represent our estimate of the amount and timing of the ultimate settlement and administration of gross claims based on our assessment of facts and circumstances known as of December 31, 2022. See the Reserves - Estimates and Uncertainties section of this MD&A for further information.
(4) The Future policy benefit reserves reflected above are not discounted and represent our estimate of the ultimate amount and timing of the settlement of benefits net of expected premiums, and are based on our assessment of facts and circumstances known as of December 31, 2022. See the Reserves - Estimates and Uncertainties section of this MD&A for further information.
(5) Does not include investment commitments of approximately $1,455 million related to future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to private placement securities.
Further information on our commitments, contingencies and guarantees is provided in Notes A, B, E, F, H and L to the Consolidated Financial Statements included under Item 8.
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Ratings
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by major rating agencies and these ratings reflect the rating agency's opinion of the insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security and may be revised or withdrawn at any time by the issuing organization. Each agency's rating should be evaluated independently of any other agency's rating. One or more of these agencies could take action in the future to change the ratings of our insurance subsidiaries.
The table below reflects the Insurer Financial Strength Ratings of CNA's insurance company subsidiaries issued by A.M. Best, Moody's, S&P and Fitch. The table also includes the ratings for CNAF's senior debt.
| December 31, 2022 | Insurer Financial Strength Ratings | Senior Debt Ratings | |||||||||
| A.M. Best | A | bbb+ | |||||||||
| Moody's | A2 | Baa2 | |||||||||
| S&P | A+ | A- | |||||||||
| Fitch | A+ | BBB+ | |||||||||
A.M. Best, Moody’s, S&P and Fitch maintain stable outlooks across the Company’s Financial Strength and Senior Debt Ratings.
CNA Insurance Company Limited and CNA Insurance Company (Europe) S.A. are included within S&P’s Insurer Financial Strength Rating for the Company. Syndicate 382 benefits from the Financial Strength Rating of Lloyd’s, which is rated A+ by S&P and A by A.M. Best with stable outlooks.
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ACCOUNTING STANDARDS UPDATE
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. For the Company, this includes the long term care business. The Company will adopt the new guidance effective January 1, 2023, using the modified retrospective method applied as of the transition date of January 1, 2021.
The most significant impact will be the effect of updating the discount rate assumption quarterly to reflect an upper-medium grade fixed-income instrument yield, rather than CNA’s expected investment portfolio yield. This will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The Company expects the net impact of these changes will be a decrease of approximately $2.3 billion in Accumulated other comprehensive income (AOCI) as of the transition date of January 1, 2021. To illustrate the sensitivity of this adjustment, had the Company used interest rates in effect as of December 31, 2022 in its calculation, the transition impact to AOCI would have been a decrease of approximately $250 million.
The requirement to review, and update if there is a change, cash flow assumptions at least annually is expected to change the pattern of earnings being recognized. Under current accounting guidance, the Company’s third quarter 2022 gross premium valuation assessment indicated a pretax reserve margin of $125 million, with no unlocking event. However under the new guidance, the effect of changes in cash flow assumptions from the Company’s assessment would be recorded in the Company’s results of operations (except for discount rate changes which would be recorded quarterly through AOCI).
For a discussion of Accounting Standards, see Note A to the Consolidated Financial Statements included under Item 8.
FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves (note that loss reserves for long term care, A&EP and other mass tort claims are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures); the impact of routine ongoing insurance reserve reviews we conduct; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statements. These risks and uncertainties are addressed in Part I, Item IA Risk Factors and include, but are not limited to, the following:
Company-Specific Factors
•the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of this report, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;
•the risk that the other parties to the transactions in which, subject to certain limitations, we ceded our legacy A&EP and EWC liabilities, respectively, will not fully perform their respective obligations to CNA, the uncertainty in estimating loss reserves for A&EP and EWC liabilities and the possible continued exposure of CNA to liabilities for A&EP and EWC claims that are not covered under the terms of the respective transactions;
•the performance of reinsurance companies under reinsurance contracts with us; and
•the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.
50
Industry and General Market Factors
•the COVID-19 pandemic and measures to mitigate the spread of the virus may continue to result in increased claims and related litigation risk across our enterprise;
•the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;
•product and policy availability and demand and market responses, including the level of ability to obtain rate increases;
•general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create losses to our lines of business and inflationary pressures on medical care costs, construction costs and other economic sectors, as well as social inflation, that increase the severity of claims;
•conditions in the capital and credit markets, including uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;
•conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms; and
•the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.
Regulatory and Legal Factors
•regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, which are increasing in complexity and number, change frequently, sometimes conflict, and could expose us to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions, including regulations related to cyber security protocols (which continue to evolve in breadth, sophistication and maturity in response to an ever-evolving threat landscape), legal inquiries by state authorities, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, including those revising applicability of statutes of limitations, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations;
•regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies;
•regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards; and
•regulatory and legal implications relating to the sophisticated cyber incident sustained by the Company in March 2021 that may arise.
Impact of Natural and Man-Made Disasters and Mass Tort Claims
•weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes, tornados and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, wildfires, rain, hail and snow;
•regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
•man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;
•the occurrence of epidemics and pandemics; and
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•mass tort claims, including those related to exposure to potentially harmful products or substances such as glyphosate, lead paint, PFAS and opioids; and claims arising from changes that repeal or weaken tort reforms, such as those related to abuse reviver statutes.
Our forward-looking statements speak only as of the date of the filing of this Annual Report on Form 10-K and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the filing of this Annual Report on Form 10-K, even if our expectations or any related events or circumstances change.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments are exposed to various market risks, such as interest rate risk, equity price risk and foreign currency risk. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in these risks in the near term could have a material adverse impact on our results of operations, financial condition or equity.
Discussions herein regarding market risk focus on only one element of market risk, which is price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors such as credit spreads. The fair value of our financial instruments is generally adversely affected when interest rates rise, equity markets decline or the dollar strengthens against foreign currency.
Active management of market risk is integral to our operations. We may take the following actions to manage our exposure to market risk within defined tolerance ranges: (1) change the character of future investments purchased or sold or (2) use derivatives to offset the market behavior of existing assets and liabilities or assets expected to be purchased and liabilities expected to be incurred.
Sensitivity Analysis
We monitor our sensitivity to interest rate changes by revaluing financial assets and liabilities using a variety of different interest rates. The Company uses duration and convexity at the security level to estimate the change in fair value that would result from a change in each security's yield. Duration measures the price sensitivity of an asset to changes in yield. Convexity measures how the duration of the asset changes with interest rates. The duration and convexity analysis takes into account the unique characteristics (e.g., call and put options and prepayment expectations) of each security in determining the hypothetical change in fair value. The analysis is performed at the security level and aggregated up to the asset category levels for reporting in the tables below.
The evaluation is performed by applying an instantaneous change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on our fair value at risk and the resulting effect on stockholders' equity. The analysis presents the sensitivity of the fair value of our financial instruments to selected changes in capital market rates and index levels. The range of change chosen reflects our view of changes that are reasonably possible over a one-year period. The selection of the range of values chosen to represent changes in interest rates should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
The sensitivity analysis estimates the decline in the fair value of our interest sensitive assets and liabilities that were held as of December 31, 2022 and 2021 due to an instantaneous change in the yield of the security at the end of the period of 100 and 150 basis points, with all other variables held constant.
The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency exchange rates versus the United States dollar from their levels as of December 31, 2022 and 2021, with all other variables held constant.
Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500 from its level as of December 31, 2022 and 2021, with all other variables held constant. Our common stock holdings, which are included in equity securities, were assumed to be highly and positively correlated with the S&P 500 index. For our limited partnership holdings, the estimated change in value was largely derived from a beta analysis calculation of historical experience of our portfolio and indices with similar strategies relative to the S&P 500.
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The following tables present the estimated effects on the fair value of our financial instruments as of December 31, 2022 and 2021 due to an increase in yield rates of 100 basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the S&P 500, with all other variables held constant.
Market Risk Scenario 1
| December 31, 2022 | Increase (Decrease) | ||||||||||||||||||||||
| (In millions) | Estimated Fair Value | Interest Rate Risk | Foreign Currency Risk | Equity Price Risk | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Fixed maturity securities (1) | $ | 37,627 | $ | (2,603) | $ | (266) | $ | — | |||||||||||||||
| Equity securities | 674 | (18) | — | (18) | |||||||||||||||||||
| Limited partnership investments | 1,926 | — | — | (77) | |||||||||||||||||||
| Other invested assets | 78 | — | (7) | — | |||||||||||||||||||
Mortgage loans (2) | 973 | (38) | — | — | |||||||||||||||||||
| Short term investments | 1,832 | (2) | (21) | — | |||||||||||||||||||
| Total assets | 43,110 | (2,661) | (294) | (95) | |||||||||||||||||||
| Derivative financial instruments, included in Other liabilities | (1) | — | 1 | — | |||||||||||||||||||
| Total | $ | 43,109 | $ | (2,661) | $ | (293) | $ | (95) | |||||||||||||||
Short term debt (3) | $ | 248 | $ | (2) | $ | — | $ | — | |||||||||||||||
Long term debt (3) | 2,349 | (92) | — | — | |||||||||||||||||||
| Total debt | $ | 2,597 | $ | (94) | $ | — | $ | — | |||||||||||||||
| December 31, 2021 | Increase (Decrease) | ||||||||||||||||||||||
| (In millions) | Estimated Fair Value | Interest Rate Risk | Foreign Currency Risk | Equity Price Risk | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Fixed maturity securities (1) | $ | 44,380 | $ | (3,061) | $ | (265) | $ | — | |||||||||||||||
| Equity securities | 1,035 | (28) | (1) | (27) | |||||||||||||||||||
| Limited partnership investments | 1,859 | — | — | (74) | |||||||||||||||||||
| Other invested assets | 91 | — | (8) | — | |||||||||||||||||||
Mortgage loans (2) | 1,018 | (44) | — | — | |||||||||||||||||||
| Short term investments | 1,990 | (3) | (19) | — | |||||||||||||||||||
| Total assets | 50,373 | (3,136) | (293) | (101) | |||||||||||||||||||
| Derivative financial instruments, included in Other liabilities | (12) | 35 | — | — | |||||||||||||||||||
| Total | $ | 50,361 | $ | (3,101) | $ | (293) | $ | (101) | |||||||||||||||
Short term debt (3) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Long term debt (3) | 2,978 | (134) | — | — | |||||||||||||||||||
| Total debt | $ | 2,978 | $ | (134) | $ | — | $ | — | |||||||||||||||
(1) Shadow Adjustments related to Life & Group reserves would reduce the impact of the decrease in fixed maturity securities.
(2) Reported at amortized value, less allowance for uncollectible receivables, in the Consolidated Balance Sheets included under Item 8 and not adjusted for fair value changes.
(3) Reported at amortized value in the Consolidated Balance Sheets included under Item 8 and not adjusted for fair value changes.
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The following tables present the estimated effects on the fair value of our financial instruments as of December 31, 2022 and 2021 due to an increase in yield rates of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the S&P 500, with all other variables held constant.
Market Risk Scenario 2
| December 31, 2022 | Increase (Decrease) | ||||||||||||||||||||||
| (In millions) | Estimated Fair Value | Interest Rate Risk | Foreign Currency Risk | Equity Price Risk | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Fixed maturity securities (1) | $ | 37,627 | $ | (3,902) | $ | (532) | $ | — | |||||||||||||||
| Equity securities | 674 | (26) | — | (46) | |||||||||||||||||||
| Limited partnership investments | 1,926 | — | — | (193) | |||||||||||||||||||
| Other invested assets | 78 | — | (14) | — | |||||||||||||||||||
Mortgage loans (2) | 973 | (57) | — | — | |||||||||||||||||||
| Short term investments | 1,832 | (3) | (41) | — | |||||||||||||||||||
| Total assets | 43,110 | (3,988) | (587) | (239) | |||||||||||||||||||
| Derivative financial instruments, included in Other liabilities | (1) | — | 2 | — | |||||||||||||||||||
| Total | $ | 43,109 | $ | (3,988) | $ | (585) | $ | (239) | |||||||||||||||
Short term debt (3) | $ | 248 | $ | (3) | $ | — | $ | — | |||||||||||||||
Long term debt (3) | 2,349 | (138) | — | — | |||||||||||||||||||
| Total debt | $ | 2,597 | $ | (141) | $ | — | $ | — | |||||||||||||||
| December 31, 2021 | Increase (Decrease) | ||||||||||||||||||||||
| (In millions) | Estimated Fair Value | Interest Rate Risk | Foreign Currency Risk | Equity Price Risk | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Fixed maturity securities (1) | $ | 44,380 | $ | (4,590) | $ | (530) | $ | — | |||||||||||||||
| Equity securities | 1,035 | (42) | (1) | (66) | |||||||||||||||||||
| Limited partnership investments | 1,859 | — | — | (186) | |||||||||||||||||||
| Other invested assets | 91 | — | (17) | — | |||||||||||||||||||
Mortgage loans (2) | 1,018 | (65) | — | — | |||||||||||||||||||
| Short term investments | 1,990 | (4) | (37) | — | |||||||||||||||||||
| Total assets | 50,373 | (4,701) | (585) | (252) | |||||||||||||||||||
| Derivative financial instruments, included in Other liabilities | (12) | 53 | — | — | |||||||||||||||||||
| Total | $ | 50,361 | $ | (4,648) | $ | (585) | $ | (252) | |||||||||||||||
Short term debt (3) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Long term debt (3) | 2,978 | (202) | — | — | |||||||||||||||||||
| Total debt | $ | 2,978 | $ | (202) | $ | — | $ | — | |||||||||||||||
(1) Shadow Adjustments related to Life & Group reserves would reduce the impact of the decrease in fixed maturity securities.
(2) Reported at amortized value, less allowance for uncollectible receivables, in the Consolidated Balance Sheets included under Item 8 and not adjusted for fair value changes.
(3) Reported at amortized value in the Consolidated Balance Sheets included under Item 8 and not adjusted for fair value changes.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CNA Financial Corporation
Consolidated Statements of Operations
| Years ended December 31 | |||||||||||||||||
| (In millions, except per share data) | 2022 | 2021 | 2020 | ||||||||||||||
| Revenues | |||||||||||||||||
| Net earned premiums | $ | 8,667 | $ | 8,175 | $ | 7,649 | |||||||||||
| Net investment income | 1,805 | 2,159 | 1,935 | ||||||||||||||
| Net investment (losses) gains | (199) | 120 | (54) | ||||||||||||||
| Non-insurance warranty revenue | 1,574 | 1,430 | 1,252 | ||||||||||||||
| Other revenues | 32 | 24 | 26 | ||||||||||||||
| Total revenues | 11,879 | 11,908 | 10,808 | ||||||||||||||
| Claims, Benefits and Expenses | |||||||||||||||||
| Insurance claims and policyholders’ benefits | 6,386 | 6,349 | 6,170 | ||||||||||||||
| Amortization of deferred acquisition costs | 1,490 | 1,443 | 1,410 | ||||||||||||||
| Non-insurance warranty expense | 1,471 | 1,328 | 1,159 | ||||||||||||||
| Other operating expenses | 1,339 | 1,191 | 1,126 | ||||||||||||||
| Interest | 112 | 113 | 122 | ||||||||||||||
| Total claims, benefits and expenses | 10,798 | 10,424 | 9,987 | ||||||||||||||
| Income before income tax | 1,081 | 1,484 | 821 | ||||||||||||||
| Income tax expense | (187) | (282) | (131) | ||||||||||||||
| Net income | $ | 894 | $ | 1,202 | $ | 690 | |||||||||||
| Basic earnings per share | $ | 3.29 | $ | 4.42 | $ | 2.54 | |||||||||||
| Diluted earnings per share | $ | 3.28 | $ | 4.41 | $ | 2.53 | |||||||||||
| Weighted Average Outstanding Common Stock and Common Stock Equivalents | |||||||||||||||||
| Basic | 271.6 | 271.8 | 271.6 | ||||||||||||||
| Diluted | 272.5 | 272.8 | 272.4 | ||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CNA Financial Corporation
Consolidated Statements of Comprehensive (Loss) Income
| Years ended December 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Comprehensive (Loss) Income | |||||||||||||||||
| Net income | $ | 894 | $ | 1,202 | $ | 690 | |||||||||||
| Other Comprehensive (Loss) Income, net of tax | |||||||||||||||||
| Changes in: | |||||||||||||||||
| Net unrealized gains and losses on investments with an allowance for credit losses | (5) | (2) | — | ||||||||||||||
| Net unrealized gains and losses on other investments | (3,777) | (706) | 720 | ||||||||||||||
| Net unrealized gains and losses on investments | (3,782) | (708) | 720 | ||||||||||||||
| Foreign currency translation adjustment | (108) | (19) | 47 | ||||||||||||||
| Pension and postretirement benefits | 13 | 244 | (15) | ||||||||||||||
| Other comprehensive (loss) income, net of tax | (3,877) | (483) | 752 | ||||||||||||||
| Total comprehensive (loss) income | $ | (2,983) | $ | 719 | $ | 1,442 | |||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CNA Financial Corporation
Consolidated Balance Sheets
| December 31 | |||||||||||
| (In millions, except share data) | 2022 | 2021 | |||||||||
| Assets | |||||||||||
| Investments: | |||||||||||
Fixed maturity securities at fair value (amortized cost of $41,032 and $39,952, less allowance for credit loss of $1 and $18) | $ | 37,627 | $ | 44,380 | |||||||
Equity securities at fair value (cost of $703 and $964) | 674 | 1,035 | |||||||||
| Limited partnership investments | 1,926 | 1,859 | |||||||||
| Other invested assets | 78 | 91 | |||||||||
Mortgage loans (less allowance for uncollectible receivables of $24 and $16) | 1,040 | 973 | |||||||||
| Short term investments | 1,832 | 1,990 | |||||||||
| Total investments | 43,177 | 50,328 | |||||||||
| Cash | 475 | 536 | |||||||||
Reinsurance receivables (less allowance for uncollectible receivables of $22 and $21) | 5,416 | 5,463 | |||||||||
Insurance receivables (less allowance for uncollectible receivables of $29 and $29) | 3,158 | 2,945 | |||||||||
| Accrued investment income | 402 | 377 | |||||||||
| Deferred acquisition costs | 806 | 737 | |||||||||
| Deferred income taxes | 1,178 | 142 | |||||||||
Property and equipment at cost (less accumulated depreciation of $280 and $255) | 226 | 226 | |||||||||
| Goodwill | 144 | 148 | |||||||||
| Deferred non-insurance warranty acquisition expense | 3,671 | 3,476 | |||||||||
Other assets (includes $18 and $ - due from Loews Corporation) | 2,274 | 2,261 | |||||||||
| Total assets | $ | 60,927 | $ | 66,639 | |||||||
| Liabilities | |||||||||||
| Insurance reserves: | |||||||||||
| Claim and claim adjustment expenses | $ | 25,099 | $ | 24,174 | |||||||
| Unearned premiums | 6,374 | 5,761 | |||||||||
| Future policy benefits | 10,151 | 13,236 | |||||||||
| Short term debt | 243 | — | |||||||||
| Long term debt | 2,538 | 2,779 | |||||||||
| Deferred non-insurance warranty revenue | 4,714 | 4,503 | |||||||||
Other liabilities (includes $26 and $56 due to Loews Corporation) | 2,983 | 3,377 | |||||||||
| Total liabilities | 52,102 | 53,830 | |||||||||
| Commitments and contingencies (Notes B and F) | |||||||||||
| Stockholders' Equity | |||||||||||
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 270,895,902 and 271,363,999 shares outstanding) | 683 | 683 | |||||||||
| Additional paid-in capital | 2,220 | 2,215 | |||||||||
| Retained earnings | 9,572 | 9,663 | |||||||||
| Accumulated other comprehensive (loss) income | (3,557) | 320 | |||||||||
Treasury stock (2,144,341 and 1,676,244 shares), at cost | (93) | (72) | |||||||||
| Total stockholders’ equity | 8,825 | 12,809 | |||||||||
| Total liabilities and stockholders' equity | $ | 60,927 | $ | 66,639 | |||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CNA Financial Corporation
Consolidated Statements of Cash Flows
| Years ended December 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||||
| Net income | $ | 894 | $ | 1,202 | $ | 690 | |||||||||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||||||||
| Deferred income tax (benefit) expense | (34) | 47 | (49) | ||||||||||||||
| Trading portfolio activity | 6 | 20 | (5) | ||||||||||||||
| Net investment losses (gains) | 199 | (120) | 54 | ||||||||||||||
| Equity method investees | 250 | (127) | (8) | ||||||||||||||
| Net amortization of investments | (129) | (81) | (67) | ||||||||||||||
| Depreciation and amortization | 51 | 54 | 60 | ||||||||||||||
| Changes in: | |||||||||||||||||
| Receivables, net | (226) | (1,358) | (409) | ||||||||||||||
| Accrued investment income | (29) | 3 | 16 | ||||||||||||||
| Deferred acquisition costs | (79) | (30) | (43) | ||||||||||||||
| Insurance reserves | 1,791 | 2,463 | 1,681 | ||||||||||||||
| Other, net | (192) | (76) | (145) | ||||||||||||||
| Net cash flows provided by operating activities | 2,502 | 1,997 | 1,775 | ||||||||||||||
| Cash Flows from Investing Activities | |||||||||||||||||
| Dispositions: | |||||||||||||||||
| Fixed maturity securities - sales | 5,909 | 3,816 | 5,904 | ||||||||||||||
| Fixed maturity securities - maturities, calls and redemptions | 2,358 | 4,464 | 3,760 | ||||||||||||||
| Equity securities | 509 | 316 | 355 | ||||||||||||||
| Limited partnerships | 138 | 246 | 373 | ||||||||||||||
| Mortgage loans | 125 | 190 | 74 | ||||||||||||||
| Purchases: | |||||||||||||||||
| Fixed maturity securities | (9,821) | (9,307) | (10,269) | ||||||||||||||
| Equity securities | (294) | (304) | (452) | ||||||||||||||
| Limited partnerships | (337) | (440) | (224) | ||||||||||||||
| Mortgage loans | (200) | (95) | (172) | ||||||||||||||
| Change in other investments | 8 | (6) | (8) | ||||||||||||||
| Change in short term investments | 155 | (83) | (39) | ||||||||||||||
| Purchases of property and equipment | (52) | (26) | (23) | ||||||||||||||
| Other, net | (10) | 1 | 16 | ||||||||||||||
| Net cash flows used by investing activities | (1,512) | (1,228) | (705) | ||||||||||||||
| Cash Flows from Financing Activities | |||||||||||||||||
| Dividends paid to common stockholders | (982) | (621) | (950) | ||||||||||||||
| Proceeds from the issuance of debt | — | — | 495 | ||||||||||||||
| Repayment of debt | — | — | (419) | ||||||||||||||
| Purchase of treasury stock | (39) | (18) | (18) | ||||||||||||||
| Other, net | (11) | (9) | (10) | ||||||||||||||
| Net cash flows used by financing activities | (1,032) | (648) | (902) | ||||||||||||||
| Effect of foreign exchange rate changes on cash | (19) | (4) | 9 | ||||||||||||||
| Net change in cash | (61) | 117 | 177 | ||||||||||||||
| Cash, beginning of year | 536 | 419 | 242 | ||||||||||||||
| Cash, end of period | $ | 475 | $ | 536 | $ | 419 | |||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CNA Financial Corporation
Consolidated Statements of Stockholders' Equity
| Years ended December 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Common Stock | |||||||||||||||||
| Balance, beginning of year | $ | 683 | $ | 683 | $ | 683 | |||||||||||
| Balance, end of year | 683 | 683 | 683 | ||||||||||||||
| Additional Paid-in Capital | |||||||||||||||||
| Balance, beginning of year | 2,215 | 2,211 | 2,203 | ||||||||||||||
| Stock-based compensation | 5 | 4 | 8 | ||||||||||||||
| Balance, end of year | 2,220 | 2,215 | 2,211 | ||||||||||||||
| Retained Earnings | |||||||||||||||||
| Balance, beginning of year, as previously reported | 9,663 | 9,081 | 9,348 | ||||||||||||||
| Cumulative effect adjustments from changes in accounting guidance, net of tax | — | — | (5) | ||||||||||||||
| Balance, beginning of year, as adjusted | 9,663 | 9,081 | 9,343 | ||||||||||||||
Dividends to common stockholders ($3.60, $2.27, and $3.48 per share) | (985) | (620) | (952) | ||||||||||||||
| Net income | 894 | 1,202 | 690 | ||||||||||||||
| Balance, end of year | 9,572 | 9,663 | 9,081 | ||||||||||||||
| Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||
| Balance, beginning of year, as previously reported | 320 | 803 | 51 | ||||||||||||||
| Other comprehensive (loss) income | (3,877) | (483) | 752 | ||||||||||||||
| Balance, end of year | (3,557) | 320 | 803 | ||||||||||||||
| Treasury Stock | |||||||||||||||||
| Balance, beginning of year | (72) | (71) | (70) | ||||||||||||||
| Stock-based compensation | 18 | 17 | 17 | ||||||||||||||
| Purchase of treasury stock | (39) | (18) | (18) | ||||||||||||||
| Balance, end of year | (93) | (72) | (71) | ||||||||||||||
| Total stockholders' equity | $ | 8,825 | $ | 12,809 | $ | 12,707 | |||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CNA Financial Corporation
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
Basis of Presentation
The 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 90% of the outstanding common stock of CNAF as of December 31, 2022.
The accompanying 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. The preparation of 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 Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Accounting Standards Updates (ASU) 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. For the Company, this includes the long term care business. Entities will be required to review, and update if there is a change, cash flow assumptions (including morbidity and persistency) at least annually, and to 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. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted, and may be applied using either a modified retrospective transition method or a full retrospective transition method. Financial statements for prior periods presented shall be adjusted to reflect the effects of applying the new accounting guidance.
The Company will adopt the new guidance effective January 1, 2023, using the modified retrospective method applied as of the transition date of January 1, 2021. The Company will use a published spot rate curve constructed from A+, A and A- rated U.S. dollar denominated corporate bonds matched to the duration of the corresponding insurance liabilities, to calculate discount rates. The Company will group its long-duration contracts into calendar year cohorts based on the contract issue date.
The most significant impact at the transition date will be the effect of updating the discount rate assumption to reflect an upper-medium grade fixed-income instrument yield, which will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The Company expects the net impact of these changes will be a decrease of approximately $2.3 billion in Accumulated other comprehensive income (AOCI) as of the transition date of January 1, 2021. There is a minimal transition impact expected to retained earnings.
The requirement to review, and update if there is a change, cash flow assumptions at least annually is expected to change the pattern of earnings being recognized. Adoption will also significantly expand the Company’s disclosures, and will impact systems, processes, and controls. While the requirements of the new guidance represent a material change from existing GAAP, the new guidance will not impact capital and surplus under statutory accounting practices, cash flows, or the underlying economics of the business.
In December 2022, the FASB issued ASU 2022-05, Financial Services-Insurance (Topic 944): Transition for Sold Contracts. This guidance permits companies to make an election to exclude from the scope of ASU 2018-12 any insurance contracts that have been de-recognized prior to the effective date of ASU 2018-12, assuming that the company has no significant continuing involvement with the de-recognized contracts. In the fourth quarter of 2022, the Company novated its block of legacy annuity business, which was fully-ceded prior
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to novation. The Company plans to elect the ASU 2022-05 transition relief, and will exclude the novated legacy annuity business from the scope of ASU 2018-12.
The Company continues to make progress on its implementation activities and is in the process of reviewing restated results, and finalizing updates to internal controls associated with adoption of the new guidance.
Insurance Operations
Premiums: Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are principally earned ratably over the term of the policies. Premiums on long term care contracts are earned ratably over the policy year in which they are due. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage.
Property and casualty contracts that are retrospectively rated or subject to audit premiums contain provisions that result in an adjustment to the initial policy premium depending on the contract provisions. These provisions stipulate the adjustment due to loss experience of the insured during the coverage period, or changes in the level of exposure to insurance risk. For such contracts, the Company estimates the amount of ultimate premiums that the Company may earn upon completion of the coverage period and recognizes either an asset or a liability for the difference between the initial policy premium and the estimated ultimate premium. The Company either adjusts such estimated ultimate premium amounts during the course of the coverage period based on actual results to date, or by conducting premium audits after the policy has expired to determine the final exposure to insured risks. The resulting adjustment is recorded as either a reduction of or an increase to the earned premiums for the period.
Insurance receivables include balances due currently or in the future, including amounts due from insureds related to paid losses under high deductible policies, and are presented at unpaid balances, net of an allowance for uncollectible receivables. A loss rate methodology is used to determine expected credit losses for premium receivables. This methodology uses the Company’s historical annual credit losses relative to gross premium written to develop a range of credit loss rates for each dollar of gross written premium underwritten. Additionally, an expected credit loss for amounts due from insureds under high deductible and retrospectively rated policies is calculated on a pool basis, informed by historical default rate data obtained from major rating agencies. Changes in the allowance are presented as a component of Other operating expenses on the Consolidated Statements of Operations. Amounts are considered past due based on policy payment terms. Insurance receivables and any related allowance are written off after collection efforts are exhausted or a negotiated settlement is reached. See the Credit Losses section of this note for additional information on the Company’s allowances for expected credit losses.
Claim and claim adjustment expense reserves: Claim and claim adjustment expense reserves, except reserves for structured settlements not associated with asbestos and environmental pollution (A&EP), workers' compensation lifetime claims and long term care claims, are not discounted and are based on i) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; ii) estimates of incurred but not reported (IBNR) losses; iii) estimates of losses on assumed reinsurance; iv) estimates of future expenses to be incurred in the settlement of claims; v) estimates of salvage and subrogation recoveries and vi) estimates of amounts due from insureds related to losses under high deductible policies. Management considers current conditions and trends as well as past Company and industry experience in establishing these estimates. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Ceded claim and claim adjustment expense reserves are reported as a component of Reinsurance receivables on the Consolidated Balance Sheets.
Claim and claim adjustment expense reserves are presented net of anticipated amounts due from insureds related to losses under deductible policies of $1.1 billion as of December 31, 2022 and 2021. A significant portion of these amounts are supported by collateral. The Company has an allowance for uncollectible deductible amounts, which is presented as a component of the allowance for doubtful accounts included in Insurance receivables on the Consolidated Balance Sheets.
Structured settlements have been negotiated for certain property and casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. The Company's obligations for structured settlements not funded by annuities are included in claim and claim adjustment expense reserves and
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are discounted at a weighted average interest rate of 6.4% as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, the discounted reserves for unfunded structured settlements were $485 million and $503 million, net of discount of $590 million and $621 million. For the years ended December 31, 2022, 2021 and 2020, the amount of interest recognized on the discounted reserves of unfunded structured settlements was $36 million, $36 million and $35 million, respectively. This interest accretion is presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations, but is excluded from the Company’s disclosure of prior year loss reserve development.
Workers' compensation lifetime claim reserves are calculated using mortality assumptions determined through statutory regulation and economic factors. As of December 31, 2022 and 2021, workers' compensation lifetime claim reserves are discounted at a 3.5% interest rate. As of December 31, 2022 and 2021, the discounted reserves for workers’ compensation lifetime claim reserves were $211 million and $228 million, net of discount of $93 million and $97 million. For the years ended December 31, 2022, 2021 and 2020, the amount of interest accretion recognized on the discounted reserves of workers’ compensation lifetime claim reserves was $9 million, $12 million and $15 million, respectively. This interest accretion is presented as a component of Insurance claims and policyholders' benefits on the Consolidated Statements of Operations, but is excluded from the Company's disclosure of prior year loss reserve development.
Long term care claim reserves for policyholders that are currently receiving benefits are calculated using mortality and morbidity assumptions based on Company and industry experience. These long term care claim reserves are discounted at a weighted average interest rate of 5.9% and 5.8% as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, such discounted reserves totaled $2.8 billion and $2.7 billion, net of discount of $450 million and $428 million.
Future policy benefit reserves: Future policy benefit reserves represent the active life reserves related to the Company's long term care policies for policyholders that are not currently receiving benefits and are computed using the net level premium method, which incorporates actuarial assumptions as to morbidity, persistency, inclusive of mortality, discount rate, future premium rate adjustments and expenses. Expense assumptions primarily relate to claim adjudication. These assumptions are locked in over the life of the policy; however if a premium deficiency emerges, the assumptions are unlocked and the future policy benefit reserves are increased. The September 30, 2022 gross premium valuation (GPV) indicated that recorded reserves included a margin of approximately $125 million. Long term care active life reserves for policy holders not currently receiving benefits are discounted at a weighted average interest rate of 5.3% as of December 31, 2022 and 2021.
In circumstances where the cash flow projections supporting future policy benefit reserves are expected to result in profits being recognized in early future years followed by losses in later future years, the future policy benefit reserves are increased by an amount necessary to offset losses that are projected to be recognized in later future years. The Company has not recorded additional future policy benefit reserves for profits followed by losses.
Insurance-related assessments: Liabilities for insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated and when the event obligating the entity to pay an imposed or probable assessment has occurred. Liabilities for insurance-related assessments are not discounted and are included as part of Other liabilities on the Consolidated Balance Sheets. As of December 31, 2022 and 2021, the liability balances were $74 million and $79 million.
Reinsurance: Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity.
Reinsurance receivables related to paid losses are presented at unpaid balances. Reinsurance receivables related to unpaid losses are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefit reserves. Reinsurance receivables are reported net of an allowance for uncollectible amounts on the Consolidated Balance Sheets. The cost of reinsurance is primarily accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies or over the reinsurance contract period. The ceding of insurance does not discharge the primary liability of the Company.
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The Company has established an allowance for uncollectible reinsurance receivables which relates to both amounts already billed on ceded paid losses as well as ceded reserves that will be billed when losses are paid in the future. For assessing expected credit losses, the Company separates reinsurance receivables into two pools: voluntary reinsurance receivables and involuntary receivables related to mandatory pools. The Company has not recorded an allowance for involuntary pools as there is no perceived credit risk. The principal credit quality indicator used in the valuation of the allowance on voluntary reinsurance receivables is the financial strength rating of the reinsurer sourced from major rating agencies. If the reinsurer is unrated, an internal financial strength rating is assigned based on the Company’s historical loss experience and the Company’s assessment of reinsurance counterparty risk profile, which generally corresponds with a B rating. Reinsurer financial strength ratings are updated and reviewed on an annual basis or sooner if the Company becomes aware of significant changes related to a reinsurer. The allowance for uncollectible reinsurance receivables is estimated on the basis of periodic evaluations of balances due from reinsurers, reinsurer financial strength rating and solvency, industry experience and current and forecast economic conditions. Because billed receivables generally approximate 5% or less of total reinsurance receivables, the age of the reinsurance receivables related to paid losses is not a significant input into the allowance analysis. Changes in the allowance for uncollectible reinsurance receivables are presented as a component of Insurance claims and policyholders' benefits on the Consolidated Statements of Operations. See the Credit Losses section of this note for additional information on the Company's allowances for expected credit losses.
Amounts are considered past due based on the reinsurance contract terms. Reinsurance receivables related to paid losses and any related allowance are written off after collection efforts have been exhausted or a negotiated settlement is reached with the reinsurer. Reinsurance receivables from insolvent insurers related to paid losses are written off when the settlement due from the estate can be reasonably estimated. At the time reinsurance receivables related to paid losses are written off, any required adjustment to reinsurance receivables related to unpaid losses is recorded as a component of Insurance claims and policyholders' benefits on the Consolidated Statements of Operations.
A loss portfolio transfer is a retroactive reinsurance contract. If the cumulative claim and allocated claim adjustment expenses ceded under a loss portfolio transfer exceed the consideration paid, the resulting gain from such excess is deferred and amortized into earnings in future periods in proportion to actual recoveries under the loss portfolio transfer. In any period in which there is a revised estimate of claim and allocated claim adjustment expenses and the loss portfolio transfer is in a gain position, the deferred gain is recalculated as if the revised estimate was available at the inception date of the loss portfolio transfer and the change in the deferred gain is recognized in earnings.
Deferred acquisition costs: Deferrable acquisition costs include commissions, premium taxes and certain underwriting and policy issuance costs which are incremental direct costs of successful contract acquisitions. Acquisition costs related to property and casualty business are deferred and amortized ratably over the period the related premiums are earned. Deferred acquisition costs are presented net of ceding commissions and other ceded acquisition costs.
The Company evaluates deferred acquisition costs for recoverability. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Adjustments, if necessary, are recorded in current period results of operations.
Policyholder dividends: Policyholder dividends are paid to participating policyholders within the workers' compensation and surety lines of business. Net written premiums for participating dividend policies were approximately 2%, 1% and 1% of total net written premiums for each of the years ended December 31, 2022, 2021 and 2020. Dividends to policyholders are accrued according to the Company's best estimate of the amount to be paid in accordance with contractual provisions and applicable state laws. Dividends to policyholders are presented as a component of Insurance claims & policyholders' benefits on the Consolidated Statements of Operations and Other liabilities on the Consolidated Balance Sheets.
Investments
The Company classifies its fixed maturity securities as either available-for-sale or trading, and as such, they are carried at fair value. Changes in fair value of trading securities are reported within Net investment income on
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the Consolidated Statements of Operations. Changes in fair value related to available-for-sale securities are reported as a component of Other comprehensive income.
The cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts, which are included in Net investment income on the Consolidated Statements of Operations. The amortization of premium and accretion of discount for fixed maturity securities takes into consideration call and maturity dates that produce the lowest yield.
For asset-backed securities included in fixed maturity securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments predominantly using the retrospective method.
To the extent that unrealized gains on fixed maturity securities supporting long term care reserves would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains (losses), through Other comprehensive income (loss). To the extent that unrealized gains or losses on fixed maturity securities supporting structured settlements not funded by annuities would impact the reserve balance if realized, a related increase or decrease in Insurance reserves is recorded, net of tax, as a reduction or increase of net unrealized gains (losses), through Other comprehensive income (Shadow Adjustments). Shadow Adjustments, net of tax, decreased $2,416 million and $296 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $61 million and $2,477 million, respectively.
Equity securities are carried at fair value. The Company's non-redeemable preferred stock contain characteristics of debt securities, are priced similarly to bonds and are held primarily for income generation through periodic dividends. While recognition of gains and losses on these securities is not discretionary, management does not consider the changes in fair value of non-redeemable preferred stock to be reflective of our primary operations. As such, the changes in the fair value of these securities are recorded through Net investment gains (losses) on the Consolidated Statements of Operations. The Company owns certain common stock with the intention of holding the securities primarily for market appreciation and as such, the changes in the fair value of these securities are recorded through Net investment income.
The Company's carrying value of investments in limited partnerships is its share of the net asset value of each partnership, as determined by the general partner. Certain partnerships for which results are not available on a timely basis are reported on a lag, primarily three months or less. Changes in net asset values are accounted for under the equity method and recorded within Net investment income on the Consolidated Statements of Operations.
Mortgage loans are commercial in nature, are carried at unpaid principal balance, net of unamortized fees and an allowance for expected credit losses, and are recorded once funded. The allowance for expected credit losses is developed by assessing the credit quality of pools of mortgage loans in good standing using debt service coverage ratios (DSCR) and loan-to-value ratios (LTV). The DSCR compares a property’s net operating income to its debt service payments, including principal and interest. The LTV ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. The pools developed to measure the credit loss allowance use increments of DSCR and LTV to draw distinctions between risk levels. The Company applies expected credit loss rates by pool to the outstanding receivable balances. Changes in the allowance for mortgage loans are presented as a component of Net investment gains (losses) on the Consolidated Statements of Operations. See the Credit Losses section of this note for additional information on the Company’s allowances for expected credit losses. Interest income from mortgage loans is recognized on an accrual basis using the effective yield method.
Other invested assets include overseas deposits. Overseas deposits are valued using the net asset value per share (or equivalent) practical expedient. They are primarily short-term government securities, agency securities and corporate bonds held in trusts that are managed by Lloyd's of London. These funds are required of Lloyd's syndicates to protect policyholders in overseas markets and may be denominated in local currency.
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Short term investments are carried at fair value, with the exception of cash accounts earning interest, which are carried at cost and approximate fair value. Changes in fair value are reported as a component of Other comprehensive income.
Purchases and sales of all securities are recorded on the trade date, except for private placement securities, including bank loan participations, which are recorded once funded. Net investment gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
In the normal course of investing activities, the Company enters into relationships with variable interest entities (VIEs), as both an investor in limited partnerships and asset-backed securities issued by third-party VIEs. The Company is not the primary beneficiary of these VIEs, and therefore does not consolidate them. The Company determines whether it is the primary beneficiary of a VIE based on a qualitative assessment of the relative power and benefits of the Company and the other participants in the VIE. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the Company’s Consolidated Balance Sheets and any unfunded commitments.
An available-for-sale security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and allowance for credit losses. When a security is impaired, it is evaluated to determine whether the Company intends to sell the security before recovery of amortized cost or whether a credit loss exists. Losses on securities that the Company intends to sell are recognized as impairment losses within Net investment gains (losses) on the Consolidated Statements of Operations. If a credit loss exists, an allowance is established and the corresponding amount is recognized as an impairment loss within Net investment gains (losses) on the Consolidated Statements of Operations. The allowance for credit losses related to available-for-sale fixed maturity securities is the difference between the present value of cash flows expected to be collected and the amortized cost basis, limited by the amount that the fair value is less than the amortized cost basis. In subsequent periods, the allowance is reviewed, with any changes in the allowance presented as a component of Net investment gains (losses) on the Consolidated Statements of Operations. Changes in the difference between the amortized cost basis, net of the allowance, and the fair value, are recognized in Other comprehensive income.
Significant judgment is required in the determination of whether an impairment loss has occurred for a security. The Company follows a consistent and systematic process for determining and recording an impairment loss, including the evaluation of securities in an unrealized loss position and securities with an allowance for credit losses on at least a quarterly basis.
The Company’s assessment of whether an impairment loss has occurred incorporates both quantitative and qualitative information. A credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis. Significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches. The Company considers all available evidence when determining whether an investment requires a credit loss write-down or allowance to be recorded. Examples of such evidence may include the financial condition and near-term and long-term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions and industry, sector or other specific factors and whether it is likely that the Company will recover its amortized cost through the collection of cash flows. See the Credit Losses section of this note for additional information on the Company’s allowances for expected credit losses.
Credit Losses
The allowances for credit losses on fixed maturity securities, mortgage loans, reinsurance receivables and insurance receivables are valuation accounts that are reported as a reduction of a financial asset’s cost basis and are measured on a pool basis when similar risk characteristics exist. Management estimates the allowance using relevant available information from both internal and external sources. Historical credit loss experience provides the basis for the estimation of expected credit losses and adjustments may be made to reflect current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made for any additional factors that come to the Company’s attention. This could include significant shifts in
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counterparty financial strength ratings, aging of past due receivables, amounts sent to collection agencies, or other underlying portfolio changes. Amounts are considered past due when payments have not been received according to contractual terms. The Company also considers current and forecast economic conditions, using a variety of economic metrics and forecast indices. The sensitivity of expected credit losses relative to changes to these forecast economic conditions can vary by financial asset class. The Company considers a reasonable and supportable forecast period to be up to 24 months from the balance sheet date. After the forecast period, the Company reverts to historical credit experience. The Company uses collateral arrangements such as letters of credit and amounts held in beneficiary trusts to mitigate credit risk, which are considered in the estimate of net amount expected to be collected. Amounts are written off against the allowance when determined to be uncollectible.
The Company has made a policy election to present accrued interest balances separately from the amortized cost basis of assets and has elected the practical expedient to exclude the accrued interest from the tabular disclosures for mortgage loans and available-for-sale securities. The Company has elected not to estimate an allowance for credit losses on accrued interest receivable. The accrual of interest income is discontinued and the asset is placed on nonaccrual status within 90 days of the interest becoming delinquent. Interest accrued but not received for assets on nonaccrual status is reversed through investment income. Interest received for assets that are on nonaccrual status is recognized as payment is received. The asset is returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are expected. Interest receivable is presented as a component of accrued investment income on the Consolidated Balance Sheet.
Deferred Non-Insurance Warranty Revenue and Acquisition Expense
Non-insurance warranty revenue is primarily generated from separately-priced service contracts that provide mechanical breakdown and other coverages to vehicle or consumer goods owners. The warranty contracts generally provide coverage from 1 month to 10 years. For warranty products where the Company acts as the principal in the transaction, Non-insurance warranty revenue is reported on a gross basis, with amounts paid by customers reported as Non-insurance warranty revenue and commissions paid to agents reported as Non-insurance warranty expense.
Non-insurance warranty revenue is reported net of any premiums related to contractual liability coverage issued by the Company's insurance operations. Additionally, the Company provides warranty administration services for dealer and manufacturer obligor warranty products, which include limited warranties and guaranteed asset protection waivers. The Company recognizes Non-insurance warranty revenue over the service period in proportion to the actuarially determined expected claims emergence pattern. Customers predominantly pay in full at the inception of the warranty contract. The liability for deferred revenue represents the unearned portion of revenue in advance of the Company's performance. The deferred revenue balance includes amounts which are refundable on a pro rata basis upon cancellation.
Dealers, retailers and agents earn commission for assisting the Company in obtaining non-insurance warranty contracts. Additionally, the Company utilizes third-parties to perform warranty administrator services for its consumer goods warranties. These costs, which are deferred and recorded as Deferred non-insurance warranty acquisition expense, are amortized to Non-insurance warranty expense consistent with how the related revenue is recognized. The Company evaluates deferred costs for recoverability including consideration of anticipated investment income. Adjustments to deferred costs, if necessary, are recorded in the current period results of operations.
Income Taxes
The Company and its eligible subsidiaries (CNA Tax Group) are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities, based on enacted tax rates and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is
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established for any portion of a deferred tax asset that management believes will not be realized. The Company releases tax effects from AOCI utilizing the security-by-security approach for Net unrealized gains (losses) on investments with an allowance for credit losses and Net unrealized gains (losses) on other investments. For Pension and postretirement benefits, tax effects from AOCI are released at enacted tax rates based on the pre-tax adjustments to pension liabilities or assets recognized within Other comprehensive income.
Pension and Postretirement Benefits
The Company recognizes the overfunded or underfunded status of its defined benefit plans in Other assets or Other liabilities on the Consolidated Balance Sheets. Changes in funded status related to prior service costs and credits, and actuarial gains and losses arising from differences between actual experience and actuarial assumptions, are recognized in the year in which the changes occur through Other comprehensive income. Unrecognized actuarial gains and losses in excess of 10% of the greater of the beginning of the year projected benefit obligation or fair value of plan assets (the corridor) are amortized as a component of net periodic pension cost (benefit) over the average remaining life expectancy of the plan participants. Annual service cost, interest cost, expected return on plan assets, amortization of prior service costs and credits and amortization of actuarial gains and losses are recognized on the Consolidated Statements of Operations.
The vested benefit obligation for the CNA Retirement Plan is determined based on eligible compensation and accrued service for previously entitled employees. Effective June 30, 2015, future benefit accruals under the CNA Retirement Plan were eliminated and the benefit obligations were frozen.
Stock-Based Compensation
The Company records compensation expense using the fair value method for all awards it grants, modifies or cancels primarily on a straight-line basis over the requisite service period, generally three years.
Foreign Currency
The Company's foreign subsidiaries' balance sheet accounts are translated at the exchange rates in effect at each reporting date and income statement accounts are either translated at the exchange rates on the date of the transaction or at average exchange rates. Foreign currency translation gains and losses are reflected in Stockholders' equity as a component of AOCI. Foreign currency transaction gains (losses) of $(22) million, less than $(1) million and $13 million were included in determining Net income for the years ended December 31, 2022, 2021 and 2020, respectively.
Leases
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use (ROU) assets and lease liabilities are included in and on the Company's Consolidated Balance Sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. Certain leases contain options to terminate before maturity. The lease term used to calculate the ROU asset includes any renewal options or lease termination options that the Company expects to exercise. The discount rate used to determine the commencement date present value of lease payments is typically the Company’s secured borrowing rate, as most of the Company’s leases do not provide an implicit rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. The Company has elected to account for its lease and non-lease components as a single lease component. The Company’s non-lease components consist of variable lease costs not based on an index or rate and are excluded from the measurement of ROU assets and lease liabilities. Variable lease costs not based on an index or rate are treated as period costs, and represent charges for services provided by the landlord and the Company's reimbursement to the landlord for costs such as real estate taxes and insurance.
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The Company occupies office facilities under lease agreements that expire at various dates. The Company's lease agreements do not contain significant residual value guarantees, restrictions or covenants. The Company does not have any significant finance leases.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various classes of property and equipment and is determined principally on the straight-line method. Furniture and fixtures are depreciated over seven years. Office equipment is depreciated over five years. The estimated lives for data processing equipment and software generally range from to five years, but can be as long as ten years. Leasehold improvements are depreciated over the corresponding lease terms not to exceed the underlying asset life.
Goodwill
Goodwill represents the excess of purchase price over the fair value of the net assets of acquired entities and businesses. Goodwill in the International segment may change from period to period as a result of foreign currency translation.
Goodwill is tested for impairment annually or when certain triggering events require such tests. As a result of reviews completed for the year ended December 31, 2022, the Company determined that the estimated fair value of the reporting units were in excess of their carrying value including Goodwill. Changes in future periods in assumptions about the level of economic capital, business growth, earnings projections or the weighted average cost of capital could result in goodwill impairment.
Other Intangible Assets
Other intangible assets are reported within Other assets on the Consolidated Balance Sheets. Finite-lived intangible assets are amortized over their estimated useful lives. Indefinite-lived other intangible assets are tested for impairment annually or when certain triggering events require such tests.
Earnings (Loss) Per Share Data
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 each of the years ended December 31, 2022, 2021 and 2020, approximately 1 million 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. Excluded from the calculation of diluted earnings (loss) per share is the impact of potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans that would have been antidilutive during the respective periods.
Supplementary Cash Flow Information
Cash payments made for interest were $109 million, $110 million and $124 million for the years ended December 31, 2022, 2021 and 2020. Cash payments made for income taxes were $277 million, $278 million and $108 million for the years ended December 31, 2022, 2021 and 2020.
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Note B. Investments
The significant components of Net investment income are presented in the following table.
| Years ended December 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Fixed maturity securities | $ | 1,787 | $ | 1,707 | $ | 1,728 | |||||||||||
| Equity securities | 23 | 83 | 65 | ||||||||||||||
| Limited partnership investments | (12) | 362 | 121 | ||||||||||||||
| Mortgage loans | 54 | 61 | 57 | ||||||||||||||
| Short term investments | 16 | 1 | 9 | ||||||||||||||
| Trading portfolio | 4 | 9 | 18 | ||||||||||||||
| Other | 5 | — | 1 | ||||||||||||||
| Gross investment income | 1,877 | 2,223 | 1,999 | ||||||||||||||
| Investment expense | (72) | (64) | (64) | ||||||||||||||
| Net investment income | $ | 1,805 | $ | 2,159 | $ | 1,935 | |||||||||||
| Net investment income (loss) recognized due to the change in fair value of common stock held as of December 31, 2022, 2021 and 2020 | $ | 47 | $ | 28 | $ | 34 | |||||||||||
As of December 31, 2022 and 2021, the Company held $0 and less than $1 million of non-income producing fixed maturity securities. As of December 31, 2022 and 2021, the Company held $7 million of non-income producing mortgage loans. As of December 31, 2022 and 2021, no investments in a single issuer exceeded 10% of stockholders' equity, other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.
Net investment gains (losses) are presented in the following table.
| Years ended December 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Net investment gains (losses): | |||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| Gross gains | $ | 120 | $ | 186 | $ | 220 | |||||||||||
| Gross losses | (261) | (90) | (220) | ||||||||||||||
| Net investment gains (losses) on fixed maturity securities | (141) | 96 | — | ||||||||||||||
| Equity securities | (116) | 4 | (3) | ||||||||||||||
| Derivatives | 64 | 6 | (10) | ||||||||||||||
| Mortgage loans | (8) | 10 | (21) | ||||||||||||||
| Short term investments and other | 2 | 4 | (20) | ||||||||||||||
| Net investment gains (losses) | $ | (199) | $ | 120 | $ | (54) | |||||||||||
| Net investment gains (losses) recognized due to the change in fair value of non-redeemable preferred stock held as of December 31, 2022, 2021 and 2020 | $ | (75) | $ | 2 | $ | (3) | |||||||||||
Net investment gains (losses) for the year ended December 31, 2022 in the table above include an $18 million net gain related to the novation of a coinsurance agreement on the Company’s legacy annuity business, which was transacted on a funds withheld basis and gave rise to an embedded derivative. The net gain of $18 million is comprised of a $62 million gain on the associated embedded derivative partially offset by a $44 million loss on fixed maturity securities supporting the funds withheld liability, transferred with the novation, to recognize unrealized losses which had been included in AOCI since the inception of the coinsurance agreement. Taken together, this net gain is the final recognition of changes in the valuation of the funds held assets and offsets previously recognized net investment losses on the associated embedded derivative.
Short term investments and other included a $20 million loss for the year ended December 31, 2020 related to the redemption of the Company's $400 million senior notes due August 2021.
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The components of available-for-sale impairment losses (gains) recognized in earnings by asset type are presented in the following table. The table includes losses (gains) on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date.
| Years ended December 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Fixed maturity securities available-for-sale: | |||||||||||||||||
| Corporate and other bonds | $ | 62 | $ | 11 | $ | 87 | |||||||||||
| Asset-backed | — | 20 | 24 | ||||||||||||||
| Impairment losses (gains) recognized in earnings | $ | 62 | $ | 31 | $ | 111 | |||||||||||
For the years ended December 31, 2022, 2021, and 2020 the Company also recognized $8 million of losses,$10 million of gains and $21 million of losses related to mortgage loans primarily due to changes in expected credit losses.
The net change in unrealized gains on fixed maturity securities was $(7,850) million, $(1,272) million and $1,637 million for the years ended December 31, 2022, 2021 and 2020.
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The following tables present a summary of fixed maturity securities.
| December 31, 2022 | 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 | $ | 23,137 | $ | 301 | $ | 2,009 | $ | — | $ | 21,429 | |||||||||||||||||||
| States, municipalities and political subdivisions | 8,918 | 338 | 939 | — | 8,317 | ||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||
| Residential mortgage-backed | 3,073 | 5 | 447 | — | 2,631 | ||||||||||||||||||||||||
| Commercial mortgage-backed | 1,886 | 4 | 255 | — | 1,635 | ||||||||||||||||||||||||
| Other asset-backed | 3,287 | 2 | 361 | 1 | 2,927 | ||||||||||||||||||||||||
| Total asset-backed | 8,246 | 11 | 1,063 | 1 | 7,193 | ||||||||||||||||||||||||
| U.S. Treasury and obligations of government-sponsored enterprises | 111 | 1 | 2 | — | 110 | ||||||||||||||||||||||||
| Foreign government | 617 | 1 | 43 | — | 575 | ||||||||||||||||||||||||
| Redeemable preferred stock | 3 | — | — | — | 3 | ||||||||||||||||||||||||
| Total fixed maturity securities available-for-sale | 41,032 | 652 | 4,056 | 1 | 37,627 | ||||||||||||||||||||||||
| Total fixed maturity securities trading | — | — | — | — | — | ||||||||||||||||||||||||
| Total fixed maturity securities | $ | 41,032 | $ | 652 | $ | 4,056 | $ | 1 | $ | 37,627 | |||||||||||||||||||
| December 31, 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 | $ | 21,444 | $ | 2,755 | $ | 56 | $ | 11 | $ | 24,132 | |||||||||||||||||||
| States, municipalities and political subdivisions | 10,358 | 1,599 | 14 | — | 11,943 | ||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||
| Residential mortgage-backed | 2,893 | 71 | 8 | — | 2,956 | ||||||||||||||||||||||||
| Commercial mortgage-backed | 1,987 | 63 | 19 | — | 2,031 | ||||||||||||||||||||||||
| Other asset-backed | 2,561 | 54 | 10 | 7 | 2,598 | ||||||||||||||||||||||||
| Total asset-backed | 7,441 | 188 | 37 | 7 | 7,585 | ||||||||||||||||||||||||
| U.S. Treasury and obligations of government-sponsored enterprises | 132 | 1 | 3 | — | 130 | ||||||||||||||||||||||||
| Foreign government | 570 | 15 | 2 | — | 583 | ||||||||||||||||||||||||
| Redeemable preferred stock | — | — | — | — | — | ||||||||||||||||||||||||
| Total fixed maturity securities available-for-sale | 39,945 | 4,558 | 112 | 18 | 44,373 | ||||||||||||||||||||||||
| Total fixed maturity securities trading | 7 | — | — | — | 7 | ||||||||||||||||||||||||
| Total fixed maturity securities | $ | 39,952 | $ | 4,558 | $ | 112 | $ | 18 | $ | 44,380 | |||||||||||||||||||
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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 | |||||||||||||||||||||||||||||||||
| December 31, 2022 | 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 | $ | 15,946 | $ | 1,585 | $ | 1,634 | $ | 424 | $ | 17,580 | $ | 2,009 | |||||||||||||||||||||||
| States, municipalities and political subdivisions | 4,079 | 769 | 456 | 170 | 4,535 | 939 | |||||||||||||||||||||||||||||
| Asset-backed: | |||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | 1,406 | 144 | 1,143 | 303 | 2,549 | 447 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | 1,167 | 159 | 408 | 96 | 1,575 | 255 | |||||||||||||||||||||||||||||
| Other asset-backed | 2,087 | 262 | 542 | 99 | 2,629 | 361 | |||||||||||||||||||||||||||||
| Total asset-backed | 4,660 | 565 | |||||||||||||||||||||||||||||||||