CNA FINANCIAL CORPORATION OVERVIEW
The following discussion highlights significant factors affecting the Company. References to "we," "our," "us" or like terms refer to the business of CNA. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q, as well as the supplemental risk factor regarding the COVID-19 pandemic disclosed under Part II, Item 1A of this Form 10-Q. The following discussion should also be read in conjunction with Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission for the year endedDecember 31, 2019 . We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses and any cumulative effects of changes in accounting guidance. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure. See further discussion regarding how we manage our business in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1. For reconciliations of non-GAAP measures to the most comparable GAAP measures and other information, please refer herein and/or to CNA's most recent Annual Report on Form 10-K on file with theSecurities and Exchange Commission . In evaluating the results of our Specialty, Commercial and International segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third party captives, excludes business which is mostly ceded to third party captives, including business related to large warranty programs. Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. 42
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CRITICAL ACCOUNTING ESTIMATES The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the amount of revenues and expenses reported during the period. Actual results may differ from those estimates. Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances. The accounting estimates discussed below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment: • Insurance Reserves
• Long Term Care Reserves
• Reinsurance and Insurance Receivables
• Valuation of Investments and Impairment of Securities
• Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from our estimates and may have a material adverse impact on our results of operations, equity, business, and insurer financial strength and corporate debt ratings. See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further information. 43
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CONSOLIDATED OPERATIONS Results of Operations InMarch 2020 , theWorld Health Organization declared COVID-19 to be a pandemic. The pandemic, together with global, national, regional and local efforts to mitigate the spread of the virus, have rapidly evolved and led to severely depressed economic conditions and financial market disruption. These conditions have had an impact across our enterprise, including significant underwriting losses recorded during the second quarter of 2020 as discussed below. During the first quarter of 2020 we experienced significant declines in the value of our investment portfolio, and while financial markets have partially recovered during the second quarter of 2020, our Net investment income and Net investment losses are unfavorable for the six months endedJune 30, 2020 as compared with the same period in 2019. For more discussion of COVID-19 impacts on our underwriting results, 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. For further discussion of the risks to our business associated with COVID-19, see the Risk Factor included under Part II, Item 1A of this Form 10-Q. The following table includes the consolidated results of our operations including our financial measure, core income (loss). Periods ended June 30 Three Months Six Months (In millions) 2020 2019 2020 2019 Operating Revenues Net earned premiums$ 1,850 $ 1,824 $ 3,719 $ 3,627 Net investment income 534 515 863 1,086 Non-insurance warranty revenue 308 285 609 566 Other revenues 5 4 13 13 Total operating revenues 2,697 2,628 5,204 5,292 Claims, Benefits and Expenses Net incurred claims and benefits 1,636 1,346 3,055 2,697 Policyholders' dividends 6 6 12 12 Amortization of deferred acquisition costs 342 338 686 680 Non-insurance warranty expense 285 263 566 523 Other insurance related expenses 260 258 518 509 Other expenses 55 57 127 123 Total claims, benefits and expenses 2,584 2,268 4,964 4,544 Core income before income tax 113 360 240 748 Income tax expense on core income (14 ) (66 ) (33 ) (136 ) Core income 99 294 207 612 Net investment gains (losses) 69 (18 ) (147 ) 13 Income tax (expense) benefit on net investment gains (losses) (17 ) 2 30 (5 ) Net investment gains (losses), after tax 52 (16 ) (117 ) 8 Net income$ 151 $ 278 $ 90 $ 620 44
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Three Month Comparison Core income decreased$195 million for the three months endedJune 30, 2020 as compared with the same period in 2019. Core income for our Property & Casualty Operations decreased$202 million primarily due to higher net catastrophe losses and unfavorable net prior year loss reserve development. These results were partially offset by favorable net investment income driven by limited partnership and common stock returns and favorable non-catastrophe current accident year underwriting results. Core income for ourLife & Group segment increased$7 million while the core loss for our Corporate & Other segment was consistent with the prior period. Net catastrophe losses were$301 million and$38 million for the three months endedJune 30, 2020 and 2019. Catastrophe losses for the three months endedJune 30, 2020 include$182 million related to COVID-19,$61 million related to civil unrest and$58 million related primarily to severe weather related events. The COVID-19 losses in the second quarter of 2020 follow a detailed review and analysis of existing and potential exposures in light of current information, and represent the Company's best estimate of its ultimate insurance losses and loss adjustment expenses, including defense costs resulting from the pandemic and the consequent economic crisis. The losses were substantially driven by healthcare professional liability with additional impacts from workers' compensation, management liability, commercial property, trade credit and surety. Due to the recent timing of the event, emergence pattern of claims and long tail nature of certain exposures the losses are substantially classified as incurred but not reported (IBNR) reserves. The COVID-19 catastrophe losses do not include the benefits of lower current accident year losses associated with lower loss frequency in certain lines of business as a result of shelter in place restrictions. Those benefits are modest and are partially offset by the impact of a reduction in our estimated audit premiums and an increase in our credit allowance for premiums receivables resulting from the depressed economic conditions. Unfavorable net prior year loss reserve development of$22 million was recorded for the three months endedJune 30, 2020 as compared with favorable development of$31 million for the three months endedJune 30, 2019 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Six Month Comparison Core income decreased$405 million for the six months endedJune 30, 2020 as compared with the same period in 2019. Core income for our Property & Casualty Operations decreased$394 million due to higher net catastrophe losses and lower net investment income driven by limited partnership and common stock returns. Core income for ourLife & Group segment increased$1 million while the core loss for our Corporate & Other segment increased$12 million . Net catastrophe losses were$376 million and$96 million for the six months endedJune 30, 2020 and 2019. Catastrophe losses for the six months endedJune 30, 2020 include$195 million related to COVID-19,$61 million related to civil unrest and$120 million related primarily to severe weather related events. Unfavorable net prior year loss reserve development of$7 million was recorded for the six months endedJune 30, 2020 as compared with favorable development of$45 million recorded for the six months endedJune 30, 2019 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. 45
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SEGMENT RESULTS Expected impact of COVID-19 on underwriting results During the second quarter of 2020, our underwriting results were negatively impacted by COVID-19 and the related depressed economic conditions. In many geographic locations, the virus' spread continues to accelerate. Areas where the virus has largely been brought under control continue to be at risk of a second wave. Accordingly, it remains the case that several months past the initial identification of the threat, all of the direct and indirect consequences and implications of COVID-19 are not yet known and may not emerge for some time. Until the virus is brought under control, the timing of any economic recovery remains uncertain. As a result, the impact to our results in the first and second quarters of 2020 may not be indicative of its impacts for the remainder of 2020 or thereafter. For further discussion of the risks to our business associated with COVID-19 and measures to mitigate the spread of the virus, see the Investments and Liquidity and Capital Resources sections of this MD&A and the Risk Factor included under Part II, Item 1A of this Form 10-Q. We experienced year-over-year growth in gross and net written premiums, excluding third party captives, driven by rate increases across property and casualty lines of business. Depressed economic conditions generally have had an unfavorable impact on premium exposures, including audit premium adjustments, policy endorsements, and mid-term cancellations and adjustments. This is particularly the case in our Commercial lines where shelter in place restrictions and reduced economic activity has caused businesses to reduce payroll or otherwise shutter operations. As a result, we recorded a decrease in our estimated audit premiums during the second quarter of 2020 impacting our net earned premiums. If general economic conditions do not improve in the latter half of 2020 or thereafter, our net written premiums and net earned premiums may continue to be unfavorably impacted as a result. Net written premiums are also impacted by the terms and conditions and related cost of reinsurance programs. In the second quarter of 2020 we renewed multiple property and casualty reinsurance treaties at higher costs as well as purchased additional coverage, which will have an unfavorable impact on our net earned premium in future quarters. Lower net earned premiums had an unfavorable impact on our expense ratio in the second quarter of 2020. Our expense ratio was also unfavorably impacted by an increase in our allowance for uncollectible insurance receivables as certain customers, across a broad spectrum of industries and markets, have been impacted by lost business, affecting our ability to collect amounts owed to us. These impacts could continue through the remainder of 2020, and possibly thereafter, as the situation continues to evolve. While our losses incurred during the first six months of 2020 related to COVID-19 represent our best estimate of ultimate insurance losses resulting from events occurring in the first six months of 2020 due to the pandemic and the consequent economic crisis, given the unprecedented nature of this event, a high level of uncertainty exists as to the potential impact on insurance losses from these events or other events that might occur for the remainder of the year and thereafter. The scope, duration and magnitude of the direct and indirect effects continue to rapidly evolve, and could materially impact our ultimate loss estimate, including in lines of business where losses have already been incurred as well as the potential for impacts in other lines unknown at this time. Continued spread of the virus as well as additional or extended shelter in place restrictions and business closures, could cause us to experience additional COVID-19 related catastrophe losses in future quarters. We have also experienced modest benefits in certain lines of business as a result of lower loss frequency from shelter in place restrictions. Those benefits only apply to a portion of our portfolio, as our larger portfolios, including healthcare, construction and property coverages, have seen limited benefit. In addition, the impact from lower frequency is mostly offset by higher severity in certain areas of the portfolio. The following discusses the results of operations for our business segments. Our property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Our operations outside of Property & Casualty Operations are managed and reported in two segments:Life & Group and Corporate & Other. 46
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Specialty
The following table details the results of operations for Specialty.
Periods ended
Three Months Six Months
(In millions, except ratios, rate,
renewal premium change and retention) 2020 2019 2020 2019
Gross written premiums $ 1,762 $ 1,724 $ 3,476 $ 3,425
Gross written premiums excluding third
party captives 811 755 1,552 1,485
Net written premiums 742 713 1,436 1,411
Net earned premiums 705 688 1,390 1,349
Net investment income 133 134 189 289
Core income 90 161 186 330
Other performance metrics:
Loss ratio excluding catastrophes and
development 59.9 % 59.9 % 59.7 % 60.2 %
Effect of catastrophe impacts 15.0 0.1 8.2 1.0
Effect of development-related items (2.9 ) (2.6 ) (2.3 ) (2.9 )
Loss ratio 72.0 % 57.4 % 65.6 % 58.3 %
Expense ratio 32.0 33.1 32.1 33.0
Dividend ratio 0.2 0.2 0.2 0.2
Combined ratio 104.2 % 90.7 % 97.9 % 91.5 %
Combined ratio excluding catastrophes and
development 92.1 % 93.2 % 92.0 % 93.4 %
Rate 12 % 4 % 10 % 3 %
Renewal premium change 11 5 10 6
Retention 85 89 85 89
New business $ 96 $ 97 $ 170 $ 182
Three Month Comparison
Gross written premiums, excluding third party captives, for Specialty increased
$56 million for the three months ended June 30, 2020 as compared with the same
period in 2019 driven by strong rate. Net written premiums for Specialty
increased $29 million for the three months ended June 30, 2020 as compared with
the same period in 2019. The increase in net earned premiums was consistent with
the trend in net written premiums in recent quarters.
Core income decreased $71 million for the three months ended June 30, 2020 as
compared with the same period in 2019 due to higher net catastrophe losses.
The combined ratio of 104.2% increased 13.5 points for the three months ended
June 30, 2020 as compared with the same period in 2019. The loss ratio increased
14.6 points driven by higher net catastrophe losses. Net catastrophe losses were
$105 million , or 15.0 points of the loss ratio, for the three months ended June
30, 2020 , as compared with $1 million , or 0.1 points of the loss ratio, for the
three months ended June 30, 2019 . Net catastrophe losses for the three months
ended June 30, 2020 included $103 million related to the COVID-19 pandemic. The
expense ratio improved 1.1 points for the three months ended June 30, 2020 as
compared with the same period in 2019 driven by lower underwriting expenses and
higher net earned premiums.
Favorable net prior year loss reserve development of $20 million and $18 million
was recorded for the three months ended June 30, 2020 and 2019. Further
information on net prior year loss reserve development is in Note E to the
Condensed Consolidated Financial Statements included under Part I, Item 1.
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Six Month Comparison Gross written premiums, excluding third party captives, for Specialty increased$67 million for the six months endedJune 30, 2020 as compared with the same period in 2019 driven by strong rate. Net written premiums for Specialty increased$25 million for the six months endedJune 30, 2020 as compared with the same period in 2019. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters. Core income decreased$144 million for the six months endedJune 30, 2020 as compared with the same period in 2019 due to higher net catastrophe losses and lower net investment income driven by limited partnership and common stock returns. The combined ratio of 97.9% increased 6.4 points for the six months endedJune 30, 2020 as compared with the same period in 2019. The loss ratio increased 7.3 points due to higher net catastrophe losses. Net catastrophe losses were$113 million , or 8.2 points of the loss ratio, for the six months endedJune 30, 2020 , as compared with$13 million , or 1.0 point of the loss ratio, for the six months endedJune 30, 2019 . Net catastrophe losses for the six months endedJune 30, 2020 included$109 million related to the COVID-19 pandemic. The expense ratio improved 0.9 points for the six months endedJune 30, 2020 as compared with the same period in 2019 driven by lower underwriting expenses and higher net earned premiums. Favorable net prior year loss reserve development of$31 million and$38 million was recorded for the six months endedJune 30, 2020 and 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. The following table summarizes the gross and net carried reserves for Specialty. (In millions) June 30, 2020 December 31, 2019 Gross case reserves $ 1,569 $ 1,481 Gross IBNR reserves 4,127 3,757 Total gross carried claim and claim adjustment expense reserves $ 5,696 $ 5,238 Net case reserves $ 1,407 $ 1,343 Net IBNR reserves 3,412 3,333
Total net carried claim and claim adjustment expense reserves $ 4,819 $
4,676
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Commercial
The following table details the results of operations for Commercial.
Periods ended
Three Months Six Months
(In millions, except ratios, rate,
renewal premium change and retention) 2020 2019 2020 2019
Gross written premiums $ 1,126 $ 1,024 $ 2,188 $ 1,965
Gross written premiums excluding third
party captives 1,044 958 2,103 1,891
Net written premiums 949 912 1,899 1,761
Net earned premiums 795 763 1,613 1,526
Net investment income 177 154 224 344
Core income 20 120 44 259
Other performance metrics:
Loss ratio excluding catastrophes and
development 59.0 % 61.7 % 60.1 % 61.9 %
Effect of catastrophe impacts 19.0 4.9 12.8 5.1
Effect of development-related items 6.0 (0.1 ) 3.0 (0.3 )
Loss ratio 84.0 % 66.5 % 75.9 % 66.7 %
Expense ratio 33.9 32.6 33.6 33.2
Dividend ratio 0.6 0.6 0.6 0.6
Combined ratio 118.5 % 99.7 % 110.1 % 100.5 %
Combined ratio excluding catastrophes and
development 93.5 % 94.9 % 94.3 % 95.7 %
Rate 9 % 3 % 9 % 3 %
Renewal premium change 8 5 8 5
Retention 83 87 84 86
New business $ 205 $ 186 $ 403 $ 350
Three Month Comparison
Gross written premiums for Commercial increased $102 million for the three
months ended June 30, 2020 as compared with the same period in 2019 driven by
strong rate and higher new business. Net written premiums for Commercial
increased $37 million for the three months ended June 30, 2020 as compared with
the same period in 2019. The increase in net earned premiums was consistent with
the trend in net written premiums partially offset by a reduction in estimated
audit premiums as a result of the economic slowdown arising from COVID-19.
Core income decreased $100 million for the three months ended June 30, 2020 as
compared with the same period in 2019 driven by higher net catastrophe losses
and unfavorable net prior year loss reserve development in the current year
period, including a $50 million charge for mass tort exposures primarily due to
New York reviver statute-related claims.
The combined ratio of 118.5% increased 18.8 points for the three months ended
June 30, 2020 as compared with the same period in 2019. The loss ratio increased
17.5 points driven by higher net catastrophe losses and unfavorable net prior
year loss reserve development. Net catastrophe losses were $151 million , or 19.0
points of the loss ratio, for the three months ended June 30, 2020 , as compared
with $37 million , or 4.9 points of the loss ratio, for the three months ended
June 30, 2019 . Net catastrophe losses for the three months ended June 30, 2020
included $43 million related to the COVID-19 pandemic, $61 million related to
civil unrest and $47 million related primarily to severe weather related events.
The combined ratio excluding catastrophes and development of 93.5% improved 1.4
points for the three months ended June 30, 2020 as compared with the same period
in 2019 which reflects a 0.7 point net benefit related to COVID-19 from lower
loss frequency as a result of shelter in place restrictions and an adverse
impact from a reduction in estimated audit premiums. These items decreased the
loss ratio by 1.8 points and increased the expense ratio by 1.1 points.
Excluding the impacts of COVID-19, the combined ratio excluding catastrophes and
development improved 0.7 points due to the loss ratio.
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Unfavorable net prior year loss reserve development of$45 million was recorded for the three months endedJune 30, 2020 as compared with favorable development of$12 million recorded for the three months endedJune 30, 2019 . Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Six Month Comparison Gross written premiums for Commercial increased$223 million for the six months endedJune 30, 2020 as compared with the same period in 2019 driven by strong rate and higher new business. Net written premiums for Commercial increased$138 million for the six months endedJune 30, 2020 as compared with the same period in 2019. The increase in net earned premiums was consistent with the trend in net written premiums partially offset by a reduction in estimated audit premiums as a result of the economic slowdown arising from COVID-19. Core income decreased$215 million for the six months endedJune 30, 2020 as compared with the same period in 2019 due to higher net catastrophe losses, lower net investment income driven by limited partnership and common stock returns and unfavorable net prior year loss reserve development in the current year period, including a$50 million charge for mass tort exposures primarily due toNew York reviver statute-related claims. The combined ratio of 110.1% increased 9.6 points for the six months endedJune 30, 2020 as compared with the same period in 2019. The loss ratio increased 9.2 points driven by higher net catastrophe losses and unfavorable net prior year loss reserve development. Net catastrophe losses were$208 million , or 12.8 points of the loss ratio, for the six months endedJune 30, 2020 , as compared with$77 million , or 5.1 points of the loss ratio, for the six months endedJune 30, 2019 . Net catastrophe losses for the six months endedJune 30, 2020 included$48 million related to the COVID-19 pandemic,$61 million related to civil unrest and$99 million related primarily to severe weather related events. The combined ratio excluding catastrophes and development of 94.3% improved 1.4 points for the six months endedJune 30, 2020 as compared with the same period in 2019 which reflects a 0.3 point net benefit related to COVID-19 from lower loss frequency as a result of shelter in place restrictions and an adverse impact from a reduction in estimated audit premiums. These items decreased the loss ratio by 0.9 points and increased the expense ratio by 0.6 points. Excluding the impacts of COVID-19, the combined ratio excluding catastrophes and development improved 1.1 points due to the loss ratio. Unfavorable net prior year loss reserve development of$41 million was recorded for the six months endedJune 30, 2020 as compared with favorable development of$20 million recorded for the six months endedJune 30, 2019 . Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. The following table summarizes the gross and net carried reserves for Commercial. (In millions) June 30, 2020 December 31, 2019 Gross case reserves $ 3,782 $ 3,937 Gross IBNR reserves 5,048 4,719 Total gross carried claim and claim adjustment expense reserves $ 8,830 $ 8,656 Net case reserves $ 3,351 $ 3,543 Net IBNR reserves 4,668 4,306
Total net carried claim and claim adjustment expense reserves $ 8,019 $
7,849
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International
The following table details the results of operations for International.
Periods ended
Three Months Six Months
(In millions, except ratios, rate,
renewal premium change and retention) 2020 2019 2020 2019
Gross written premiums $ 277 $ 287 $ 584 $ 611
Net written premiums 239 249 458 508
Net earned premiums 224 243 463 493
Net investment income 14 15 29 30
Core (loss) income (14 ) 17 (12 ) 23
Other performance metrics:
Loss ratio excluding catastrophes and
development 59.9 % 60.1 % 60.1 % 58.5 %
Effect of catastrophe impacts 19.9 0.2 11.9 1.3
Effect of development-related items (1.2 ) (0.1 ) (0.7 ) 2.7
Loss ratio 78.6 % 60.2 % 71.3 % 62.5 %
Expense ratio 36.7 37.3 36.1 37.2
Combined ratio 115.3 % 97.5 % 107.4 % 99.7 %
Combined ratio excluding catastrophes and
development 96.6 % 97.4 % 96.2 % 95.7 %
Rate 13 % 7 % 11 % 6 %
Renewal premium change 11 8 9 4
Retention 74 70 72 69
New business $ 62 $ 75 $ 130 $ 155
Three Month Comparison
Gross written premiums for International decreased $10 million for the three
months ended June 30, 2020 as compared with the same period in 2019. Excluding
the effect of foreign currency exchange rates, gross written premiums decreased
$3 million driven by the continued impact of the strategic exit from certain
Lloyd's business classes, offset by growth in Europe and Canada . Net written
premiums decreased $10 million for the three months ended June 30, 2020 as
compared with the same period in 2019. Excluding the effect of foreign currency
exchange rates, net written premiums decreased $6 million for the three months
ended June 30, 2020 as compared with the same period in 2019. The decrease in
net earned premiums was consistent with the trend in net written premiums in
recent quarters.
Core income decreased $31 million for the three months ended June 30, 2020 as
compared with the same period in 2019 due to higher net catastrophe losses.
The combined ratio of 115.3% increased 17.8 points for the three months ended
June 30, 2020 as compared with the same period in 2019. The loss ratio increased
18.4 points driven by higher net catastrophe losses. Net catastrophe losses were
$45 million , or 19.9 points of the loss ratio, for the three months ended June
30, 2020 , as compared with less than $1 million , or 0.2 points of the loss
ratio, for the three months ended June 30, 2019 . Net catastrophe losses for the
three months ended June 30, 2020 included $36 million related to the COVID-19
pandemic. The combined ratio excluding catastrophes and development of 96.6%
improved 0.8 points for the three months ended June 30, 2020 as compared with
the same period in 2019 due to a 0.2 point improvement in the loss ratio
excluding catastrophes and development primarily driven by lower loss frequency
from the impact of COVID-19 as well as 0.6 points of improvement in the expense
ratio driven by lower acquisition and underwriting expenses.
Favorable net prior year loss reserve development of $3 million and $1 million
was recorded for the three months ended June 30, 2020 and 2019. Further
information on net prior year loss reserve development is in Note E to the
Condensed Consolidated Financial Statements included under Part I, Item 1.
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Six Month Comparison Gross written premiums for International decreased$27 million for the six months endedJune 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, gross written premiums decreased$18 million driven by the continued impact of the strategic exit from certain Lloyd's business classes, offset by growth inCanada andEurope . Net written premiums decreased$50 million for the six months endedJune 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, net written premiums decreased$42 million for the six months endedJune 30, 2020 as compared with the same period in 2019. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters. Core income decreased$35 million for the six months endedJune 30, 2020 as compared with the same period in 2019 driven by higher net catastrophe losses partially offset by favorable net prior year loss reserve development in the current year period. The combined ratio of 107.4% increased 7.7 points for the six months endedJune 30, 2020 as compared with the same period in 2019. The loss ratio increased 8.8 points driven by higher net catastrophe losses partially offset by favorable net prior year loss reserve development in the current year period. Net catastrophe losses were$55 million , or 11.9 points of the loss ratio, for the six months endedJune 30, 2020 , as compared with$6 million , or 1.3 points of the loss ratio, for the six months endedJune 30, 2019 . Net catastrophe losses for the six months endedJune 30, 2020 included$38 million related to the COVID-19 pandemic. The expense ratio improved 1.1 points for the six months endedJune 30, 2020 as compared with the same period in 2019 driven by lower acquisition and underwriting expenses. Favorable net prior year loss reserve development of$3 million was recorded for the six months endedJune 30, 2020 as compared with unfavorable development of$13 million for the six months endedJune 30, 2019 . Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. The following table summarizes the gross and net carried reserves for International. (In millions) June 30, 2020 December 31, 2019 Gross case reserves $ 815 $ 858 Gross IBNR reserves 1,091 1,018 Total gross carried claim and claim adjustment expense reserves $ 1,906 $ 1,876 Net case reserves $ 727 $ 759 Net IBNR reserves 927 869
Total net carried claim and claim adjustment expense reserves $ 1,654 $
1,628
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Life & Group The following table summarizes the results of operations forLife & Group . Periods ended June 30 Three Months Six Months (In millions) 2020 2019 2020 2019 Net earned premiums$ 126 $ 130 $ 253 $ 260 Net investment income 206 205 414 409 Core income (loss) before income tax 3 (6 ) (7 ) (9 ) Income tax benefit on core income (loss) 11 13 25 26 Core income 14 7 18 17 Three Month Comparison Core income of$14 million for the three months endedJune 30, 2020 was primarily driven by better than expected persistency. Six Month Comparison Results for the six months endedJune 30, 2020 were generally consistent with the three month summary above. Corporate & Other The following table summarizes the results of operations for the Corporate & Other segment, including intersegment eliminations. Periods ended June 30 Three Months Six Months (In millions) 2020 2019 2020 2019
Net investment income
(11 ) (11 ) (29 ) (17 )
Three Month Comparison
Results for the three months ended June 30, 2020 were generally consistent with
the same period in 2019.
Six Month Comparison
Core loss is driven by interest expense on corporate debt partially offset by
amortization of the deferred gain related to the A&EP Loss Portfolio Transfer
(LPT). The A&EP LPT is further discussed in Note E to the Condensed Consolidated
Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves for Corporate
& Other.
(In millions) June 30, 2020 December 31, 2019
Gross case reserves $ 1,169 $ 1,137
Gross IBNR reserves 918 1,097
Total gross carried claim and claim adjustment expense reserves $ 2,087 $ 2,234
Net case reserves $ 89 $ 92
Net IBNR reserves 78 83Total net carried claim and claim adjustment expense reserves $ 167 $
175
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INVESTMENTS
The financial market disruption in the first quarter of 2020 significantly impacted our investment portfolio. Losses from our limited partnership and common and preferred equity portfolios, as well as the recognition of impairment losses on certain fixed maturity holdings, negatively impacted our Net income for the three months endedMarch 31, 2020 . While financial markets have partially recovered during the second quarter of 2020, there could be continued volatility in our investment portfolio. Net Investment Income The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock. Periods ended June 30 Three Months Six Months (In millions) 2020 2019 2020 2019 Fixed income securities: Taxable fixed income securities$ 360 $ 385 $ 731 $ 768 Tax-exempt fixed income securities 80 80 158 162 Total fixed income securities 440 465 889 930 Limited partnership investments 44 37 (26 ) 113 Common stock 40 6 (15 ) 26 Other, net of investment expense 10 7 15 17 Pretax net investment income$ 534 $ 515 $ 863 $ 1,086 Fixed income securities, after tax$ 361 $ 382 $ 728 $ 762 Net investment income, after tax 436 420 709 885 Effective income yield for the fixed income securities portfolio, pretax 4.6 % 4.8 % 4.6 % 4.8 % Effective income yield for the fixed income securities portfolio, after tax 3.8 % 3.9 % 3.8 % 3.9 % Limited partnership and common stock return 5.0 % 2.1 %
(2.3 )% 6.8 %
Pretax net investment income increased$19 million for the three months endedJune 30, 2020 as compared with the same period in 2019 driven by limited partnership and common stock returns offset by lower yields in our fixed income portfolio. The limited partnership returns for the three months endedJune 30, 2020 include limited partnerships representing 55% reporting on a current basis with no reporting lag and 45% reporting on a lag, primarily three months or less. Limited partnerships reporting on a current basis include substantially all of the Company's hedge funds. Pretax net investment income decreased$223 million for the six months endedJune 30, 2020 as compared with the same period in 2019 driven by limited partnership and common stock returns and lower yields in our fixed income portfolio. 54
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Net Investment Gains (Losses) The components of Net investment gains (losses) are presented in the following table. Periods ended June 30 Three Months Six Months (In millions) 2020 2019 2020 2019 Fixed maturity securities: Corporate and other bonds$ (40 ) $ (7 ) $ (119 ) $ (7 ) States, municipalities and political subdivisions 33 4 33 12 Asset-backed 24 - 28 (14 ) Total fixed maturity securities 17 (3 ) (58 ) (9 ) Non-redeemable preferred stock 63 11 (70 ) 53 Short term and other (11 ) (26 ) (6 ) (31 ) Mortgage loans - - (13 ) - Net investment gains (losses) 69 (18 ) (147 ) 13 Income tax (expense) benefit on net investment gains (losses) (17 ) 2 30 (5 )
Net investment gains (losses), after tax
Net investment gains (losses) increased$87 million for the three months endedJune 30, 2020 as compared with the same period in 2019. The increase was driven by the favorable change in fair value of non-redeemable preferred stock and higher net realized investment gains on sales of fixed maturity securities. Pretax impairment losses of$11 million on available-for-sale securities were recognized in the current quarter. Net investment gains (losses) decreased$160 million for the six months endedJune 30, 2020 as compared with the same period in 2019. The decrease was driven by higher impairment losses and the unfavorable change in fair value of non-redeemable preferred stock. Pretax impairment losses of$103 million on available-for-sale securities and$13 million of credit losses on mortgage loans were recognized for the six months endedJune 30, 2020 . Further information on our investment gains and losses is set forth in Note C to the Condensed Consolidated Financial Statements included under Part 1, Item 1. 55
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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.
June 30, 2020 December 31, 2019
Estimated Fair Net Unrealized Gains Estimated Fair Net Unrealized
(In millions) Value (Losses) Value Gains (Losses)
U.S. Government , Government agencies
and Government-sponsored enterprises $ 3,997 $ 149 $ 4,136 $ 95
AAA 3,599 443 3,254 349
AA 6,717 920 6,663 801
A 9,257 1,218 9,062 1,051
BBB 16,867 1,742 16,839 1,684
Non-investment grade 2,338 (38 ) 2,253 101
Total $ 42,775 $ 4,434 $ 42,207 $ 4,081
As of June 30, 2020 and December 31, 2019 , 1% of our fixed maturity portfolio
was rated internally. AAA rated securities included $1.9 billion and $1.5
billion of pre-funded municipal bonds as of June 30, 2020 and December 31, 2019 .
The following table presents available-for-sale fixed maturity securities in a
gross unrealized loss position by ratings distribution.
June 30, 2020
Estimated Fair Gross Unrealized
(In millions) Value Losses
U.S. Government , Government agencies and
Government-sponsored enterprises $ 7 $ -
AAA 40 1
AA 238 9
A 919 35
BBB 1,729 111
Non-investment grade 1,139 116
Total $ 4,072 $ 272
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.
June 30, 2020
Estimated Fair Gross Unrealized
(In millions) Value Losses
Due in one year or less $ 158 $ 16
Due after one year through five years 1,154 73
Due after five years through ten years 2,168 136
Due after ten years 592 47
Total $ 4,072 $ 272
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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 theLife & 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. June 30, 2020 December 31, 2019 Effective Effective Estimated Fair Duration Duration (In millions) Value (In years) Estimated Fair Value (In years) Investments supporting Life & Group$ 18,370 8.8 $ 18,015 8.9 Other investments 26,165 4.1 26,813 4.1 Total$ 44,535 6.0 $ 44,828 6.0 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 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Short Term Investments The carrying value of the components of the Short term investments are presented in the following table. (In millions) June 30, 2020 December 31, 2019 Short term investments: Commercial paper $ - $ 1,181 U.S. Treasury securities 1,251 364 Other 207 316 Total short term investments $ 1,458 $ 1,861
Beginning in early March and continuing into the second quarter of 2020, we
shifted our commercial paper holdings to
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LIQUIDITY AND CAPITAL RESOURCES Cash Flows Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes. Related to the COVID-19 pandemic and efforts to mitigate the spread of the virus, cash flows have been and may continue to be adversely impacted by lower premium volumes, suspensions and cancellations of policies, return of premiums or premium refunds and increased claim and defense cost payments. At this time, we do not believe these impacts would give rise to a material liquidity concern given our overall liquid assets and anticipated future cash flows. For the six months endedJune 30, 2020 , net cash provided by operating activities was$650 million as compared with$514 million for the same period in 2019. The increase in cash provided by operating activities was driven by lower net claim payments, an increase in premiums collected and lower income taxes paid, partially offset by a lower level of distributions from limited partnerships. 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. Net cash provided by investing activities was$475 million for the six months endedJune 30, 2020 , as compared with$233 million for the same period in 2019. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management. Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, and outflows for stockholder dividends, repayment of debt and purchases of treasury stock. For the six months endedJune 30, 2020 , net cash used by financing activities was$776 million as compared with$788 million for the same period 2019. Financing activities for the periods presented include: • During the six months endedJune 30, 2020 , we paid dividends of$750
million and repurchased 435,376 shares of our common stock at an aggregate
cost of $18 million .
• During the six months ended June 30, 2019 , we paid dividends of $738 million and repurchased 365,695 shares of our common stock at an aggregate
cost of
• In the second quarter of 2019, we issued
notes due
principal balances of our 5.875% senior notes due
Common Stock Dividends Dividends of$2.74 per share on our common stock, including a special dividend of$2.00 per share, were declared and paid during the six months endedJune 30, 2020 . OnJuly 31, 2020 , our Board of Directors declared a quarterly dividend of$0.37 per share, payableSeptember 3, 2020 to stockholders of record onAugust 17, 2020 . 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. 58
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Liquidity
We believe that our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. In addition, we held$6 billion of cash, short term investments and highly liquid securities issued by theU.S. government and its agencies as ofJune 30, 2020 , of which$518 million was held at the CNAF holding company. There are currently no amounts outstanding under our$250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in theFederal Home Loan Bank of Chicago (FHLBC). Dividends from CCC are subject to the insurance holding company laws of theState of Illinois , the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by theIllinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As ofJune 30, 2020 , CCC was in a positive earned surplus position. CCC paid dividends of$815 million and$805 million during the six months endedJune 30, 2020 and 2019. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company. We have an effective automatic shelf registration statement under which we may publicly issue debt, equity or hybrid securities from time to time. 59
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ACCOUNTING STANDARDS UPDATE For a discussion of Accounting Standards Updates adopted in the current period and that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1. FORWARD-LOOKING STATEMENTS This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as "believes," "expects," "intends," "anticipates," "estimates" and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for long term care, A&EP and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: Company-Specific Factors • the risks and uncertainties associated with our insurance reserves, as
outlined in the Critical Accounting Estimates and the Reserves - Estimates
and Uncertainties sections of our 2019 Annual Report on Form 10-K and 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 transaction in which, subject to
certain limitations, we ceded our legacy A&EP liabilities will not fully
perform their obligations to CNA, the uncertainty in estimating loss reserves
for A&EP liabilities and the possible continued exposure of CNA to
liabilities for A&EP claims that are not covered under the terms of the
transaction;
• the performance of reinsurance companies under reinsurance contracts with us;
and
• the risks and uncertainties associated with potential acquisitions and
divestitures, including the consummation of such transactions, the successful
integration of acquired operations and the potential for subsequent
impairment of goodwill or intangible assets.
Industry and General Market Factors • the COVID-19 pandemic, and actions seeking to mitigate the spread of the
virus, have resulted in significant risk across our enterprise, as economic
uncertainty and depressed business conditions brought on by the crisis may
materially and adversely impact our business, driving significant decreases
in our premium volume and resulting in significant losses in our investment
portfolio, increased claim and litigation activity and unfavorable regulatory
outcomes.
• the impact of competitive products, policies and pricing and the competitive
environment in which we operate, including changes in our book of business;
• product and policy availability and demand and market responses, including
the level of ability to obtain rate increases and decline or non-renew
underpriced accounts, to achieve premium targets and profitability and to
realize growth and retention estimates;
• general economic and business conditions, including recessionary conditions
that may decrease the size and number of our insurance customers and create
additional losses to our lines of business, especially those that provide
management and professional liability insurance, as well as surety bonds, to
businesses engaged in real estate, financial services and professional
services and inflationary pressures on medical care costs, construction costs
and other economic sectors that increase the severity of claims;
• conditions in the capital and credit markets, including uncertainty and
instability in these markets, as well as the overall economy, and their
impact on the returns, types, liquidity and valuation of our investments;
• conditions in the capital and credit markets that may limit our ability to
raise significant amounts of capital on favorable terms; and
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• 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 Factors • regulatory and legal initiatives and compliance with governmental regulations
and other legal requirements, including with respect to cyber security
protocols, legal inquiries by state authorities, judicial interpretations
within the regulatory framework, including interpretation of policy
provisions, decisions regarding coverage and theories of liability,
legislative actions that increase claimant activity, including those revising
applicability of statutes of limitations, trends in litigation and the
outcome of any litigation involving us and rulings and changes in tax laws
and regulations;
• regulatory limitations, impositions and restrictions upon us, including with
respect to our ability to increase premium rates, and the effects of
assessments and other surcharges for guaranty funds and second-injury funds,
other mandatory pooling arrangements and future assessments levied on
insurance companies; and
• regulatory limitations and restrictions, including limitations upon our
ability to receive dividends from our insurance subsidiaries, imposed by
regulatory authorities, including regulatory capital adequacy standards.
Impact of 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 and earthquakes, as well as climate change,
including effects on global weather patterns, greenhouse gases, sea, land and
air temperatures, sea levels, rain, hail and snow;
• regulatory requirements imposed by coastal state regulators in the wake of
hurricanes or other natural disasters, including limitations on the ability
to exit markets or to non-renew, cancel or change terms and conditions in
policies, as well as mandatory assessments to fund any shortfalls arising
from the inability of quasi-governmental insurers to pay claims;
• man-made disasters, including the possible occurrence of terrorist attacks,
the unpredictability of the nature, targets, severity or frequency of such
events, and the effect of the absence or insufficiency of applicable
terrorism legislation on coverages;
• the occurrence of epidemics and pandemics; and
• mass tort claims, including those related to exposure to potentially harmful
products or substances such as glyphosate, lead paint and opioids; and claims
arising from changes that repeal or weaken tort reforms, such as those
related to abuse reviver statutes.
Referendum on the
"Brexit." While the withdrawal of the
specificity and detail regarding the long term relationship between the two
sides and how businesses operating in both jurisdictions may be affected. In
any event, effective
out of our
Luxembourg, which was established specifically to address the departure of
the
effectively throughout the E.U. As a result, the complexity and cost of
regulatory compliance of our European business has increased and will likely
continue to result in elevated expenses.
Our forward-looking statements speak only as of the date of the filing of this
Quarterly Report on Form 10-Q and we do not undertake any obligation to update
or revise any forward-looking statement to reflect events or circumstances after
the date of the statement, even if our expectations or any related events or
circumstances change.
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