LOEWS CORPORATION OVERVIEW
Loews Corporation is a holding company and has four reportable segments comprised of three individual consolidated operating subsidiaries,CNA Financial Corporation ("CNA"),Boardwalk Pipeline Partners, LP ("Boardwalk Pipelines") andLoews Hotels Holding Corporation ("Loews Hotels & Co "); and the Corporate segment. In the first quarter of 2020,Diamond Offshore Drilling Inc. ("Diamond Offshore") was a reportable segment;Diamond Offshore was deconsolidated during the second quarter of 2020. The Corporate segment is primarily comprised ofLoews Corporation , excluding its operating subsidiaries, and the operations ofAltium Packaging LLC ("Altium Packaging ") throughMarch 31, 2021 . OnApril 1, 2021 ,Loews Corporation sold 47% ofAltium Packaging to GIC,Singapore's sovereign wealth fund, for$420 million in cash consideration. As a result of the terms of this transaction,Loews Corporation shares certain participating rights with GIC related to capital allocation and other decisions and was therefore required to deconsolidateAltium Packaging as of the date of the sale under accounting principles generally accepted inthe United States of America ("GAAP"). Subsequent to deconsolidation,Loews Corporation's investment inAltium Packaging is accounted for under the equity method of accounting, with Equity income (loss) reported in Operating expenses and other on the Consolidated Statements of Operations. For further information on the deconsolidations ofDiamond Offshore andAltium Packaging see Note 2 of the Notes to Consolidated Financial Statements included under Item 8. Unless the context otherwise requires, the term "Company" as used herein meansLoews Corporation including its consolidated subsidiaries, the terms "Parent Company," "we," "our," "us" or like terms as used herein meanLoews Corporation excluding its subsidiaries, the term "Net income (loss) attributable toLoews Corporation " as used herein means Net income (loss) attributable toLoews Corporation shareholders and the term "subsidiaries" means theLoews Corporation's consolidated subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Note 14 of the Notes to Consolidated Financial Statements included under Item 8) and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders. The following discussion should be read in conjunction with Item 1A, Risk Factors, and Item 8, Financial Statements and Supplementary Data of this Form 10-K. For a discussion of changes in results of operations comparing the years endedDecember 31, 2020 and 2019 forLoews Corporation and its subsidiaries see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onFebruary 9, 2021 . 43
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RESULTS OF OPERATIONS
Consolidated Financial Results
The following table summarizes net income (loss) attributable to
Year Ended December 31 2021 2020
(In millions, except per share data)
CNA Financial$ 1,077 $ 618 Boardwalk Pipelines 235 206 Loews Hotels & Co (14) (212) Corporate (a) 280 (1,067) Diamond Offshore (b) - (476)
Net income (loss) attributable to
Basic net income (loss) per share$ 6.08 $ (3.32) Diluted net income (loss) per share$ 6.07 $ (3.32)
(a) Includes a net investment gain of
the sale of 47% of
(
interest in
noncontrolling interests) at
deconsolidation.
2021 Compared with 2020
Net income attributable to Loews Corporation for 2021 was $1.6 billion , or $6.07
per share, compared to a net loss attributable to Loews Corporation of $931
million , or $3.32 per share, in 2020. Excluding the items set forth in footnote
(a) in the table above and Diamond Offshore's 2020 net loss in the table above,
net income attributable to Loews Corporation for 2021 and 2020 was $1.1 billion
and $502 million .
The improvement in Loews Corporation's results in 2021 compared to 2020 was
driven by improved current accident year underwriting results, higher net
investment income and investment gains in 2021 as compared to losses in 2020 for
CNA and the significant improvement in results for Loews Hotels due to the
rebound in leisure travel, especially at resort destinations. Boardwalk
Pipelines also contributed positively to Loews Corporation's year-over-year
improvement due to higher revenues from growth projects recently placed into
service. The parent company investment portfolio also generated higher gains in
2021 as compared to 2020.
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The following table summarizes the results of operations for CNA for the years endedDecember 31, 2021 and 2020 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8. For further discussion of Net investment income and Investment gains (losses), see the Investments section of this MD&A. Year Ended December 31 2021 2020 (In millions) Revenues: Insurance premiums$ 8,175 $ 7,649 Net investment income 2,159 1,935 Investment gains (losses) 120 (35) Non-insurance warranty revenue 1,430 1,252 Other revenues 24 26 Total 11,908 10,827
Expenses:
Insurance claims and policyholders' benefits 6,349 6,170 Amortization of deferred acquisition costs
1,443 1,410
Non-insurance warranty expense 1,328 1,159
Other operating expenses 1,191 1,125
Interest 113 142
Total 10,424 10,006
Income before income tax 1,484 821
Income tax expense (282) (131)
Net income 1,202 690
Amounts attributable to noncontrolling interests (125) (72)
Net income attributable to
2021 Compared with 2020
Net income attributable toLoews Corporation increased$459 million for 2021 as compared with 2020. The increase was primarily due to improved current accident year underwriting results. Net catastrophe losses were$397 million ($280 million after tax and noncontrolling interests) for 2021 as compared to$550 million ($388 million after tax and noncontrolling interests) in 2020. Net catastrophe losses for 2021 were driven by severe weather related events, primarily Hurricane Ida andWinter Storms Uri and Viola. Net catastrophe losses for 2020 included$294 million related primarily to severe weather-related events,$195 million related to the COVID-19 pandemic and$61 million related to civil unrest. Results also reflect higher net investment income and investment gains in 2021 as compared with investment losses in 2020. Higher net investment income was driven by limited partnership and common stock returns and the improvement in investment gains (losses) was driven by lower impairment losses. Results for 2021 also reflect the absence of a$74 million charge ($52 million after tax and noncontrolling interests) related to the recognition of an active life reserve premium deficiency for long term care policies in 2020.
CNA's Property & Casualty and Other Insurance Operations
CNA's commercial property and casualty insurance operations ("Property &
Casualty Operations") include its Specialty, Commercial and International lines
of business. CNA's Other Insurance Operations outside of Property & Casualty
Operations include its long term care business that is in run-off, certain
corporate expenses, including interest on CNA's corporate debt, and the results
of certain property and casualty businesses in run-off, including CNA Re,
asbestos and environmental pollution ("A&EP"), a legacy portfolio of excess
workers' compensation ("EWC") policies and certain legacy mass tort reserves.
CNA's 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. We believe the presentation of CNA as one
reportable segment is
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appropriate in accordance with applicable accounting standards on segment
reporting. However, for purposes of this discussion and analysis of the results
of operations, we provide greater detail with respect to CNA's Property &
Casualty Operations and Other Insurance Operations to enhance the reader's
understanding and to provide further transparency into key drivers of CNA's
financial results.
Effective January 1, 2021 , and in connection with the ceding of certain legacy
reserves under a retroactive reinsurance agreement executed in February 2021 ,
CNA changed the presentation of a legacy portfolio of excess workers'
compensation policies relating to business written in 2007 and prior. This
business, which was previously reported as part of the Commercial business, is
now reported as part of the Other Insurance Operations business. For further
information on this retroactive reinsurance agreement see Note 8 of the Notes to
Consolidated Financial Statements included under Item 8. In addition, a
determination was made to change the presentation of certain legacy mass tort
reserves. Similar to the aforementioned excess workers' compensation legacy
business, these legacy mass tort reserves were previously reported in the
Commercial business and are now reported as part of the Other Insurance
Operations business. These changes were made to better reflect the manner in
which CNA is organized for purposes of making operating decisions and assessing
performance. Prior period information has been conformed to the new
presentation.
In assessing its insurance operations, CNA utilizes the core income (loss)
financial measure. Core income (loss) is calculated by excluding from net income
(loss), investment gains or losses and any cumulative effects of changes in
accounting guidance. In addition, core income (loss) excludes the effects of
noncontrolling interests. The calculation of core income (loss) excludes
investment gains or losses because investment gains or losses are generally
driven by economic factors that are not necessarily reflective of CNA's primary
insurance operations. Core income (loss) is deemed to be a non-GAAP financial
measure and management believes this measure is useful for investors to evaluate
its insurance operations. Please see the non-GAAP reconciliation of core income
(loss) to net income (loss) that follows in this MD&A.
Property & Casualty Operations
In evaluating the results of Property & Casualty Operations, CNA utilizes the
loss ratio, the loss ratio excluding catastrophes and development, the expense
ratio, the dividend ratio, the combined ratio and the combined ratio excluding
catastrophes and development. 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 loss ratio excluding
catastrophes and development excludes net catastrophes losses and changes in
estimates of claim and claim adjustment expense reserves, net of reinsurance,
for prior years 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 combined ratio
excluding catastrophes and development is the sum of the loss ratio excluding
catastrophes and development, the expense ratio and the dividend ratio. In
addition, renewal premium change, rate, retention and new business are also
utilized 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 ceded to third-party
captives, including business related to large warranty programs.
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The following tables summarize the results of CNA's Property & Casualty
Operations for the years ended
Year Ended December 31, 2021 Specialty Commercial International Total
(In millions, except %)
Gross written premiums$ 7,665 $ 4,445 $ 1,297 $ 13,407 Gross written premiums excluding third- party captives 3,672 4,334 1,297 9,303 Net written premiums 3,225 3,595 1,101 7,921 Net earned premiums 3,076 3,552 1,057 7,685 Net investment income 497 624 57 1,178 Core income 704 394 86 1,184 Other performance metrics: Loss ratio excluding catastrophes and development 59.1 % 61.0 % 59.0 % 60.0 % Effect of catastrophe impacts 0.4 10.0 2.6 5.1 Effect of development-related items (1.4) 0.5 0.1 (0.3) Loss ratio 58.1 % 71.5 % 61.7 % 64.8 % Expense ratio 30.5 31.1 33.1 31.1 Dividend ratio 0.1 0.5 0.3 Combined ratio 88.7 % 103.1 % 94.8 % 96.2 %
Combined ratio excluding catastrophes
and development 89.7 % 92.6 % 92.1 % 91.4 % Rate 11 % 7 % 13 % 9 % Renewal premium change 11 8 13 10 Retention 83 82 78 82 New business$ 551 $ 843 $ 274 $ 1,668 Year EndedDecember 31, 2020 Gross written premiums$ 7,180 $ 4,086 $ 1,133 $ 12,399 Gross written premiums excluding third- party captives 3,296 3,993 1,133 8,422 Net written premiums 3,040 3,565 961 7,566 Net earned premiums 2,883 3,323 940 7,146 Net investment income 449 513 58 1,020 Core income 535 267 38 840 Other performance metrics: Loss ratio excluding catastrophes and development 59.9 % 60.4 % 60.1 % 60.2 % Effect of catastrophe impacts 4.3 10.7 7.1 7.7 Effect of development-related items (2.1) 0.5 (0.3) (0.7) Loss ratio 62.1 % 71.6 % 66.9 % 67.2 % Expense ratio 31.3 33.0 35.5 32.6 Dividend ratio 0.1 0.5 0.3 Combined ratio 93.5 % 105.1 % 102.4 % 100.1 % Combined ratio excluding catastrophes and development 91.3 % 93.9 % 95.6 % 93.1 % Rate 12 % 10 % 14 % 11 % Renewal premium change 13 10 12 11 Retention 86 84 73 83 New business$ 389 $ 761 $ 245 $ 1,395 47
-------------------------------------------------------------------------------- Table of Contents 2021 Compared with 2020 Gross written premiums, excluding third-party captives, for Specialty increased$376 million in 2021 as compared with 2020 driven by rate and higher new business. Net written premiums for Specialty increased$185 million in 2021 as compared with 2020. The increase in net earned premiums in 2021 was consistent with the trend in net written premiums for Specialty. Gross written premiums for Commercial increased$359 million in 2021 as compared with 2020 driven by rate and higher new business. Net written premiums for Commercial increased$30 million in 2021 as compared with 2020. Net written premiums for 2021 were unfavorably impacted by theJune 1, 2021 written premium catch-up resulting from the addition of the quota share treaty to the property reinsurance program. Excluding the impact of theJune 1, 2021 written premium catch-up, net written premiums increased$142 million for 2021 as compared with 2020. Net earned premiums for Commercial increased$229 million in 2021 as compared with 2020. The increase in net earned premiums for 2021 was partially impacted by a reduction in estimated audit premiums related to COVID-19 in 2020 for Commercial. Gross written premiums for International increased$164 million in 2021 as compared with 2020. Excluding the effect of foreign currency exchange rates, gross written premiums increased$104 million driven by rate and higher new business. Net written premiums for International increased$140 million in 2021 as compared with 2020. Excluding the effect of foreign currency exchange rates, net written premiums increased$85 million in 2021 as compared with 2020. The increase in net earned premiums in 2021 as compared with 2020 was consistent with the trend in net written premiums for International. Core income increased$344 million in 2021 as compared with 2020 primarily due to improved current accident year underwriting results and higher net investment income driven by limited partnership and common stock returns. Total net catastrophe losses were$397 million in 2021 as compared with$550 million in 2020. For 2021 and 2020 Specialty had net catastrophe losses of$12 million and$125 million , Commercial had net catastrophe losses of$358 million in both years and International had net catastrophe losses of$27 million and$67 million . Favorable net prior year loss reserve development of$49 million and$70 million was recorded in 2021 and 2020. In 2021 and 2020, Specialty recorded favorable net prior year loss reserve development of$45 million and$61 million , Commercial recorded favorable net prior year loss reserve development of$6 million and$7 million and International recorded unfavorable net prior year loss reserve development of$2 million as compared with favorable net prior year loss reserve development of$2 million . Further information on net prior year loss reserve development is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8. Specialty's combined ratio improved 4.8 points in 2021 as compared with 2020 primarily due to a 4.0 point improvement in the loss ratio and a 0.8 point improvement in the expense ratio. The improvement in the loss ratio was primarily due to lower net catastrophe losses, which were 0.4 points of the loss ratio in 2021, as compared with 4.3 points of the loss ratio in 2020. The improvement in the expense ratio was driven by higher net earned premiums. Commercial's combined ratio improved 2.0 points in 2021 as compared with 2020 primarily due to a 1.9 point improvement in the expense ratio. The improvement in the expense ratio was primarily due to higher net earned premiums and lower acquisition costs. Net catastrophe losses were 10.0 points of the loss ratio in 2021, as compared with 10.7 points of the loss ratio in 2020. International's combined ratio improved 7.6 points in 2021 as compared with 2020 due to a 5.2 point improvement in the loss ratio and a 2.4 point improvement in the expense ratio. The improvement in the loss ratio was driven by lower net catastrophe losses, which were 2.6 points of the loss ratio in 2021, as compared with 7.1 points of the loss ratio in 2020, and improved non-catastrophe current accident year underwriting results. The improvement in the expense ratio was driven by lower acquisition costs. 48 -------------------------------------------------------------------------------- Table of Contents Other Insurance Operations
The following table summarizes the results of CNA's Other Insurance Operations
for the years ended
Years Ended December 31 2021 2020 (In millions) Net earned premiums$ 491 $ 504 Net investment income 981 915 Core loss (78) (105) 2021 Compared with 2020 Core results improved$27 million in 2021 as compared with 2020 primarily due to higher net investment income driven by limited partnership returns. Core results in 2021 included a$31 million favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2021. Core results in 2020 included a$59 million charge related to the recognition of an active life reserve premium deficiency for long term care policies. The results for 2020 also included a$36 million charge related to an increase in the structured settlement claim reserves, partially offset by a$30 million favorable impact from the reduction in long term care claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2020. Core results for 2021 also included expenses related to theMarch 2021 cybersecurity attack, the recognition of a$12 million loss resulting from the legacy excess workers' compensation loss portfolio transfer ("EWC LPT") and higher unfavorable net prior year loss reserve development on legacy mass tort exposures as compared with 2020. The application of retroactive reinsurance accounting to additional cessions to the A&EP Loss Portfolio Transfer ("LPT") in both periods resulted in charges of$25 million and$5 million in 2021 and 2020, which have no economic impact. For further information on the A&EP LPT, EWC LPT and net prior year loss reserve development see Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Non-GAAP Reconciliation of Core Income to Net Income
The following table reconciles core income to net income attributable to
Year Ended December 31 2021 2020 (In millions) Core income (loss): Property & Casualty Operations$ 1,184 $ 840 Other Insurance Operations (78) (105) Total core income 1,106 735 Investment gains (losses) 96 (30)
Consolidating adjustments including noncontrolling interests (125)
(87)
Net income attributable to Loews Corporation$ 1,077 $ 618 Boardwalk Pipelines Overview Boardwalk Pipelines operates in the midstream portion of the natural gas and natural gas liquids ("NGLs") industry, providing transportation and storage for those commodities. Boardwalk Pipelines is not in the business of buying and selling natural gas and NGLs other than for system management purposes, but changes in natural gas and NGLs prices may impact the volumes of natural gas or NGLs transported and stored by customers on its systems. Due to the capital-intensive nature of its business, Boardwalk Pipelines' operating costs and expenses typically do not vary significantly based upon the 49 -------------------------------------------------------------------------------- Table of Contents amount of products transported, with the exception of costs recorded in fuel and transportation expense, which are netted with fuel retained on our Consolidated Statements of Operations. For further information on Boardwalk Pipelines' revenue recognition policies see Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
Firm Agreements
A substantial portion of Boardwalk Pipelines' transportation and storage capacity is contracted for under firm agreements. For the year endedDecember 31, 2021 , approximately 89% of Boardwalk Pipelines' revenues were derived from capacity reservation fees under firm contracts. The table below shows a rollforward of operating revenues under committed firm agreements in place as ofDecember 31, 2020 toDecember 31, 2021 , including agreements for transportation, storage and other services, over the remaining term of those agreements: As ofDecember 31, 2021 (In millions)
Total projected operating revenues under committed firm agreements as of
$ 9,450 Adjustments for: Actual revenues recognized from firm agreements in 2021 (a)
(1,180)
Firm agreements entered into in 2021
790
Total projected operating revenues under committed firm agreements as of December 31, 2021$ 9,060 (a)Reflects an increase of$70 million in Boardwalk Pipelines' actual 2021 revenues recognized from fixed fees under firm agreements as compared with its expected 2021 revenues from fixed fees under firm agreements, including agreements for transportation, storage and other services as ofDecember 31, 2020 , primarily due to an increase from contract renewals that occurred in 2021. During 2021, Boardwalk Pipelines entered into$790 million of new firm agreements, of which approximately 28% were from new growth projects executed in 2021. For firm agreements associated with new growth projects, the associated assets may not be placed into commercial service until sometime in the future. Each year a portion of Boardwalk Pipelines' firm transportation and storage agreements expire. The rates Boardwalk Pipelines is able to charge customers are heavily influenced by market trends (both short and longer term), including the available supply, geographical location of natural gas production, the competition between producing basins, competition with other pipelines for supply and markets, the demand for gas by end-users such as power plants, petrochemical facilities and LNG export facilities and the price differentials between the gas supplies and the market demand for the gas (basis differentials). As ofDecember 31, 2021 , Boardwalk Pipelines' top ten customers holding firm capacity under firm agreements comprised approximately 39% of its total projected operating revenues. Additionally, the credit profile associated with Boardwalk Pipelines' customers comprising the total projected operating revenues under firm agreements as ofDecember 31, 2021 was 74% rated as investment grade, 10% rated as non-investment grade and 16% not rated.
Pipeline System Maintenance
Boardwalk Pipelines incurs substantial costs for ongoing maintenance of its pipeline systems and related facilities, including those incurred for pipeline integrity management activities, equipment overhauls, general upkeep and repairs. These costs are not dependent on the amount of revenues earned from its transportation services. PHMSA has developed regulations that require transportation pipeline operators to implement integrity management programs to comprehensively evaluate certain high risk areas, known as HCAs, and MCAs, along pipelines and take additional safety measures to protect people and property in these areas. The HCAs for natural gas pipelines are predicated on high-population density areas (which, for natural gas transmission lines, include Class 3 and 4 areas and, depending on the potential impacts of a risk event, may include Class 1 and 2 areas) whereas HCAs along Boardwalk Pipelines' NGL pipelines are based on high-population density areas, areas near certain drinking water sources and unusually sensitive ecological areas. These regulations have resulted in an overall increase in Boardwalk Pipelines' ongoing maintenance costs, including maintenance capital and maintenance expense. In 2019, PHMSA issued the first part of its gas Mega Rule, which became effective onJuly 1, 2020 . This regulation imposed numerous requirements, including MAOP reconfirmation through re-verification of all historical records for pipelines in service, which re-certification process may require natural gas pipelines installed before 1970 (previously excluded from certain pressure testing obligations) to be pressure tested, the periodic assessment of additional pipeline mileage outside of HCAs (in MCAs as well as Class 3 and Class 4 areas), the reporting of exceedances of MAOP and the consideration of seismicity as a risk factor in integrity management. In 2021, PHMSA issued a final rule that will impose safety regulations related to onshore gas gathering lines and inJune 2021 , PHMSA 50
-------------------------------------------------------------------------------- Table of Contents issued an Advisory Bulletin advising pipeline and pipeline facility operators of applicable requirements to update their inspection and maintenance plans for the elimination of hazardous leaks and minimization of natural gas released from pipeline facilities. PHMSA, together with state regulators, is expected to commence inspection of these plans in 2022. It is expected that these new rules will cause Boardwalk Pipelines to incur increased capital and operating costs, experience operational delays and result in potential adverse impacts to its ability to reliably serve its customers as described under Item 1A. Risk Factors of this Report. Maintenance costs may be capitalized or expensed, depending on the nature of the activities. For any given reporting period, the mix of projects that Boardwalk Pipelines undertakes will affect the amounts we record as property, plant and equipment on the Consolidated Balance Sheets or recognize as expenses, which impacts earnings. In 2022, Boardwalk Pipelines expects to spend approximately$400 million to maintain its pipeline systems and to comply with new regulatory initiatives previously mentioned, of which approximately$155 million is expected to be maintenance capital. In 2021, Boardwalk Pipelines spent$381 million to maintain its pipeline systems, of which$154 million was recorded as maintenance capital. Results of Operations The following table summarizes the results of operations for Boardwalk Pipelines for the years endedDecember 31, 2021 and 2020 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2021 2020 (In millions) Revenues: Operating revenues and other$ 1,349 $ 1,302 Total 1,349 1,302 Expenses: Operating and other 885 855 Interest 161 170 Total 1,046 1,025 Income before income tax 303 277 Income tax expense (68) (71)
Net income attributable to
2021 Compared with 2020
Total revenues increased$47 million in 2021 as compared with 2020. Including the effect of items in fuel and transportation expense and excluding net proceeds of approximately$34 million in 2020 as a result of drawing on a letter of credit due to a customer bankruptcy in 2020, operating revenues increased$77 million primarily driven by recently completed growth projects and higher utilization based revenues due to higher volumes. Operating expenses increased$30 million in 2021 as compared with 2020. Excluding items offset with operating revenues, operating expenses increased$26 million , primarily due to an increase in maintenance project costs and an increased asset base from recently completed growth projects. Interest expense decreased$9 million in 2021 as compared with 2020 primarily due to lower interest rates and lower average outstanding long term debt balances. 51
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The following table summarizes the results of operations forLoews Hotels & Co for the years endedDecember 31, 2021 and 2020 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2021 2020 (In millions) Revenues: Operating revenue$ 337 $ 167 Other revenues 47 37 Revenues related to reimbursable expenses 96 74 Total 480 278 Expenses: Operating and other: Operating 334 273 Asset impairments 10 36 Reimbursable expenses 96 74 Depreciation 63 63
Equity (income) loss from joint ventures (47) 73 Interest
36 33
Total 492 552
Loss before income tax (12) (274)
Income tax (expense) benefit (2) 62
Net loss attributable to
2021 Compared with 2020
Loews Hotels & Co's results have been significantly impacted by the COVID-19 pandemic. ByApril 2020 , most hotel properties owned and/or operated byLoews Hotels & Co had temporarily suspended operations. These hotel properties gradually resumed operations at various times, culminating with all hotels having resumed operations byJune 30, 2021 . During 2021, overall occupancy rates gradually improved, with hotel properties located in resort destinations improving sooner than hotel properties located in city centers. However, occupancy levels have not reached pre-pandemic levels at many hotels owned and/or operated byLoews Hotels & Co , and business in certain markets continues to be adversely impacted by COVID-19 variants. Operating revenues improved by$170 million and operating expenses increased by$61 million in 2021 as compared with 2020. This comparison is impacted by robust pre-pandemic business levels prior tomid-March 2020 followed by results that were significantly depressed by the pandemic for the remainder of 2020. Through 2021, occupancy levels have gradually increased leading to improved revenues at all hotel properties, particularly those in resort areas, with operating expense also increasing to support the increased demand levels. As all properties have not resumed all levels of pre-pandemic service offerings, hotel operating expense, including staffing levels, will continue to increase as those resume.
Equity (income) loss from joint ventures improved
Loews Hotels & Co considers events or changes in circumstances that indicate the carrying amount of its assets may not be recoverable. In 2021 and 2020,Loews Hotels & Co recorded impairment charges of$10 million and$36 million to reduce the carrying value of certain assets to their estimated fair value. Other revenues for 2021 included$39 million related to the one-time acceleration of government grant payments, used to retire outstanding debt of an owned hotel prior to maturity and cover certain prepayment costs, and net gains of$8 million 52
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related primarily to the sale of undeveloped land. Other revenues for 2020
included gains of
Interest expense for 2021 increased$3 million as compared with 2020 primarily due to the write off of unamortized issuance costs and the prepayment premium associated with the debt retirement mentioned above.
Corporate
Corporate operations consist primarily of investment income, interest expense and administrative costs at the Parent Company. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of the trading portfolio held at the Parent Company. Corporate also includes the operating results ofAltium Packaging throughMarch 31, 2021 and the equity method accounting forAltium Packaging beginning onApril 1, 2021 , as a result of the sale of 47% ofAltium Packaging and the resulting deconsolidation. See Note 2 of the Notes to Consolidated Financial Statements included under Item 8 for further information. The following table summarizes the results of operations for Corporate for the years endedDecember 31, 2021 and 2020 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2021 2020 (In millions) Revenues: Net investment income$ 99 $ 59 Investment gains (losses) 540 (1,211) Operating revenues and other 281 1,023 Total 920 (129) Expenses: Operating and other 399 1,098 Interest 114 127 Total 513 1,225 Income (loss) before income tax 407
(1,354)
Income tax (expense) benefit (127) 287
Net income (loss) attributable to
2021 Compared with 2020
Net investment income for the Parent Company increased
Investment gains of$540 million in 2021 were primarily due to a gain of$555 million ($438 million after tax) on the sale of 47% ofAltium Packaging . Investment losses of$1.2 billion ($957 million after tax) for 2020 was due to the loss recognized upon deconsolidation ofDiamond Offshore as a result of its Chapter 11 Filing. Operating revenues and other for 2021 includeAltium Packaging revenues of$280 million prior to its deconsolidation onApril 1, 2021 and$1,022 million for 2020. Operating and other expenses decreased in 2021 as compared with 2020 primarily due to the deconsolidation ofAltium Packaging onApril 1, 2021 . Operating and other expenses forAltium Packaging were$300 million in 2021 and$992 million in 2020. Operating and other expenses also include legal and other corporate overhead expenses at the Parent Company. Interest expenses decreased$13 million in 2021 as compared with 2020, primarily due to the deconsolidation ofAltium Packaging onApril 1, 2021 , partially offset by theMay 2020 issuance of the Parent Company's$500 million 3.2% senior notes and a charge of approximately$14 million to write off debt issuance costs for the early retirement of debt atAltium Packaging in the first quarter of 2021. 53
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Income tax expense includes the recognition of a
Amounts presented forDiamond Offshore for 2020 only include the period through its deconsolidation onApril 26, 2020 . Contract drilling revenues and contract drilling expenses were$287 million and$254 million for this 2020 period. Results for 2020 also include an aggregate asset impairment charge of$774 million ($408 million after tax and noncontrolling interests) recognized in the first quarter of 2020. For more information on the deconsolidation ofDiamond Offshore see Note 2 of the Notes to Consolidated Financial Statements included under Item 8 for further information.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company
Parent Company cash and investments, net of receivables and payables, totaled$3.4 billion atDecember 31, 2021 as compared to$3.5 billion atDecember 31, 2020 . In 2021, we received$853 million in cash dividends from our subsidiaries, including a special cash dividend of$182 million from CNA and a$199 million cash dividend fromAltium Packaging in connection with a debt recapitalization prior to its deconsolidation onApril 1, 2021 . Cash outflows in 2021 included the payment of$1.1 billion to fund treasury stock purchases,$65 million of cash dividends to our shareholders and$32 million of cash contributions toLoews Hotels & Co. OnApril 1, 2021 , we sold 47% ofAltium Packaging to GIC and received$420 million in cash consideration. In March of 2022, we will receive cash dividends of$584 million from CNA. As a holding company we depend on dividends from our subsidiaries and returns on our investment portfolio to fund our obligations. We also have an effective shelf registration statement on file with theSecurities and Exchange Commission ("SEC") registering the future sale of an unlimited amount of our debt and equity securities from time to time. We are not responsible for the liabilities and obligations of our subsidiaries and there are no Parent Company guarantees. Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries outstanding common stock in the open market, in privately negotiated transactions or otherwise. In 2021, we purchased 21.1 million shares ofLoews Corporation common stock. As ofFebruary 4, 2022 , we had purchased an additional 0.2 million shares ofLoews Corporation common stock in 2022 at an aggregate cost of$14 million . As ofFebruary 4, 2022 , there were 248,202,443 shares ofLoews Corporation common stock outstanding.Loews Corporation has a corporate credit and senior debt rating of A with a stable outlook fromS&P Global Ratings ("S&P"), a senior debt rating of A3 with a stable outlook from Moody's Investors Service ("Moody's") and a senior debt rating of A with a stable outlook fromFitch Ratings Inc. ("Fitch"). Future uses of our cash may include investing in our subsidiaries, new acquisitions, dividends and/or repurchases of our and our subsidiaries' outstanding common stock. 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 and business needs. Subsidiaries CNA's cash provided by operating activities was$2.0 billion in 2021 and$1.8 billion in 2020. The increase in cash provided by operating activities was driven by an increase in net premiums collected and lower net claim payments, which were impacted by a slowdown in court dockets. These items were partially offset by the payment of the EWC LPT premium. For further information on the EWC LPT see Note 8 of the Notes to Consolidated Financial Statements included under Item 8. CNA paid cash dividends of$2.27 per share on its common stock, including a special cash dividend of$0.75 per share in 2021. OnFebruary 4, 2022 , CNA's Board of Directors declared a quarterly cash dividend of$0.40 per share and a special cash dividend of$2.00 per share payableMarch 10, 2022 to shareholders of record onFebruary 22, 2022 . CNA's declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA's earnings, financial condition, business needs and regulatory constraints. The payment of dividends by CNA's 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. 54
-------------------------------------------------------------------------------- Table of Contents Dividends fromContinental Casualty Company ("CCC"), a subsidiary of CNA, 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 the timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As ofDecember 31, 2021 , CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2022 that would not be subject to the Department's prior approval is$1.2 billion , less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of$880 million in 2021. 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. CNA has a financial strength rating of A and senior debt rating of bbb+ fromA.M. Best Company ("A.M. Best"), a financial strength rating of A2 and senior debt rating of Baa2 from Moody's, a financial strength rating of A+ and senior debt rating of A- from S&P and financial strength rating of A+ and senior debt rating of BBB+ from Fitch.A.M. Best , Moody's, S&P and Fitch maintain stable outlooks across CNA's financial strength and senior debt credit ratings.
CNA has an effective shelf registration statement on file with the
Boardwalk Pipelines' cash provided by operating activities decreased$12 million in 2021 compared to 2020, primarily due to the timing of receivables partially offset by the change in net income. For 2021 and 2020, Boardwalk Pipelines' capital expenditures were$349 million and$438 million , consisting primarily of a combination of growth and maintenance capital. Boardwalk Pipelines expects total capital expenditures to be approximately$360 million in 2022, including approximately$155 million for maintenance capital and$205 million related to growth projects. Boardwalk Pipelines anticipates that its existing capital resources, including its revolving credit facility and cash flows from operating activities, will be adequate to fund its operations and capital expenditures for 2022. Boardwalk Pipelines may seek to access the debt markets to fund some or all capital expenditures for growth projects, acquisitions, to refinance maturing debt or for general corporate purposes. Boardwalk Pipelines has$300 million outstanding aggregate principal amount of its 4.0% notes maturing in June of 2022, which it expects to retire near or at maturity through available capital resources, including using available cash, borrowing under its revolving credit facility or publicly issuing debt securities. Boardwalk Pipelines has an effective shelf registration statement on file with theSEC under which it may publicly issue debt securities, warrants or rights from time to time.
In December of 2021, Boardwalk Pipelines paid a distribution of
Boardwalk Pipelines has a senior debt rating of BBB- with a stable outlook from S&P, a senior debt rating of Baa3 with a stable outlook from Moody's and a senior debt rating of BBB- with a positive outlook from Fitch.
Certain of the hotels wholly or partially owned by subsidiaries ofLoews Hotels & Co are financed by debt facilities, with a number of different lenders. Each of the loan agreements underlying these facilities contain a variety of financial and operational covenants. As a result of the impacts of COVID-19,Loews Hotels & Co has proactively requested certain lenders, where applicable, to (1) temporarily waive certain covenants to avoid an event of default and/or further restriction of the hotel's cash balances through the establishment of lockboxes and other measures; (2) temporarily allow funds previously restricted directly or indirectly under the hotel's underlying loan agreement for the renewal, replacement and addition of building improvements, furniture and fixtures to be used instead for hotel operations and maintenance; and/or (3) defer certain interest and/or principal payments while the hotels operations were temporarily suspended or significantly impacted by a decline in occupancy.Loews Hotels & Co also continues to work with lenders on loans that are being reviewed for extension. These discussions with lenders are ongoing and may requireLoews Hotels & Co to make principal paydowns, establish restricted cash reserves or provide guaranties of a subsidiary's debt to otherwise avoid an event of default. Through the date of this Report, none ofLoews Hotels & Co's subsidiaries is in default on any of its loans. As ofDecember 31, 2021 ,Loews Hotels & Co has loans that mature within twelve months and is actively working with lenders to refinance$93 million in current maturities of long-term debt. InOctober 2021 Loews Hotels & Co announced the development of theLoews Arlington Hotel and Convention Center inArlington, Texas . The hotel, for whichLoews Hotels & Co will serve as manager and hold a majority equity interest, is expected to open in early 2024 with approximately 888 guestrooms and over 250,000 square feet of function space. The 55 -------------------------------------------------------------------------------- Table of Contents approximately$550 million hotel project will be funded initially through a mix of partner contributions before drawing on a$300 million construction loan in the second half of 2022. Based on the timing of construction relative to the seasonality ofLoews Hotels & Co's business and restrictions on certain cash held byLoews Hotels & Co , aLoews Corporation capital contribution may be required to fund all or partLoews Hotels & Co's partner contributions.
In 2021,
Contractual Obligations
We and our subsidiaries have contractual obligations which arise in the ordinary
course of business. For a discussion regarding the obligations related to our
and our subsidiaries long term debt see Note 11 of the Notes to Consolidated
Financial Statements included under Item 8. For contractual payment obligations
related to the claim and claim adjustment expense reserves and future policy
benefit reserves see the table below:
Payments Due by Period
Less than More than
December 31, 2021 Total 1 year 1-3 years 3-5 years 5 years
(In millions)
Claim and claim adjustment expense
reserves (a)$ 24,955 $ 6,015 $ 6,719 $ 3,401 $ 8,820 Future policy benefit reserves (b) 25,581 (301) 158 909 24,815 (a)The claim and claim adjustment expense reserves reflected above are not discounted and represent CNA's estimate of the amount and timing of the ultimate settlement and administration of gross claims based on its assessment of facts and circumstances known as ofDecember 31, 2021 . See the Insurance Reserves section of this MD&A for further information. (b)The future policy benefit reserves reflected above are not discounted and represent CNA's estimate of the ultimate amount and timing of the settlement of benefits net of expected premiums, and are based on its assessment of facts and circumstances known as ofDecember 31, 2021 . Additional information on future policy benefit reserves is included in Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
Further information on our commitments, contingencies and guarantees is provided in the Notes to Consolidated Financial Statements included under Item 8.
INVESTMENTS
Investment activities of our non-insurance subsidiaries primarily consist of investments in fixed income securities, including short term investments.The Parent Company portfolio also includes equity securities, including short sales and derivative instruments, and investments in limited partnerships. Certain of these types of investments generally have greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations - Corporate.The Parent Company enters into short sales and invests in certain derivative instruments that are used for asset and liability management activities, income enhancements to its portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily reports of existing positions and valuation fluctuations to seek to ensure that open positions are consistent with the portfolio strategy. Credit exposure associated with non-performance by counterparties to derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Balance Sheets. The risk of non-performance is mitigated by monitoring the creditworthiness of counterparties and diversifying derivatives by using multiple counterparties. Collateral is occasionally required from derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.
Insurance
CNA maintains a large portfolio of fixed maturity and equity securities, including large amounts of corporate and government issued debt securities, residential and commercial mortgage-backed securities, other asset-backed securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array
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of asset classes. CNA's investment portfolio supports its obligation to pay
future insurance claims and provides investment returns which are an important
part of CNA's overall profitability.
Net Investment Income
The significant components of CNA's net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
Year Ended December 31 2021 2020
(In millions)
Fixed income securities: Taxable fixed income securities$ 1,439 $ 1,451 Tax-exempt fixed income securities 311 319 Total fixed income securities 1,750 1,770
Limited partnership and common stock investments 402 144 Other, net of investment expense
7 21
Net investment income $ 2,159 $ 1,935 Effective income yield for the fixed income securities portfolio
4.3 % 4.5 %
Limited partnership and common stock return 22.3 % 8.3 %
CNA's net investment income increased $224 million in 2021 as compared with 2020
driven by higher limited partnership and common stock returns partially offset
by lower yields in the fixed income portfolio.
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Investment Gains (Losses)
The components of CNA's investment gains (losses) are presented in the following
table:
Year Ended December 31 2021 2020
(In millions)
Investment gains (losses):
Fixed maturity securities:
Corporate and other bonds $ 134 $ (71)
States, municipalities and political subdivisions 40
Asset-backed (38)
31
Total fixed maturity securities 96
-
Non-redeemable preferred stock 4
(3)
Short term and other 20
(32)
Total investment gains (losses) 120
(35)
Income tax (expense) benefit (24)
5
Amounts attributable to noncontrolling interests (10)
3
Investment gains (losses) attributable to
CNA's investment gains (losses) improved
Further information on CNA's investment gains and losses is set forth in Note 3 of the Notes to Consolidated Financial Statements included under Item 8.
Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of CNA's fixed maturity securities by rating distribution:
December 31, 2021 December 31, 2020
Net Net
Estimated Unrealized Gains Estimated Unrealized Gains
Fair Value (Losses) Fair Value (Losses)
(In millions)
U.S. Government , Government agencies and
Government-sponsored enterprises $ 2,600 $ 42 $ 3,672 $ 117
AAA 3,784 360 3,627 454
AA 7,665 823 7,159 1,012
A 9,511 1,087 9,543 1,390
BBB 18,458 2,043 18,007 2,596
Non-investment grade 2,362 91 2,623 149
Total $ 44,380 $ 4,446 $ 44,631 $ 5,718
As of
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The following table presents CNA's available-for-sale fixed maturity securities
in a gross unrealized loss position by ratings distribution:
Estimated
December 31, 2021 Fair Value Gross Unrealized Losses
(In millions)
U.S. Government , Government agencies and
Government-sponsored enterprises $ 898 $ 8
AAA 368 6
AA 875 17
A 1,516 23
BBB 1,812 42
Non-investment grade 596 16
Total $ 6,065 $ 112
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:
Estimated
December 31, 2021 Fair Value Gross Unrealized Losses
(In millions)
Due in one year or less $ 144 $ 4
Due after one year through five years 1,191 22
Due after five years through ten years 2,803 44 Due after ten years 1,927 42 Total$ 6,065 $ 112 Duration A primary objective in the management of CNA's investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. CNA's 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. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on its views of a specific issuer or industry sector. A further consideration in the management of CNA's 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, CNA segregates investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in Other Insurance Operations. 59
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The effective durations of CNA's 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, 2021 December 31, 2020
Estimated Effective Estimated Effective
Fair Value Duration (Years) Fair Value Duration (Years)
(In millions of dollars)
Investments supporting Other Insurance
Operations $ 18,458 9.2 $ 18,518 9.2
Other investments 28,915 4.9 28,839 4.5
Total $ 47,373 6.6 $ 47,357 6.3
CNA's 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, CNA
periodically reviews 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.
INSURANCE RESERVES
The level of reserves CNA maintains represents its best estimate, as of a
particular point in time, of what the ultimate settlement and administration of
claims will cost based on CNA's assessment of facts and circumstances known at
that time. Reserves are not an exact calculation of liability but instead are
complex estimates that CNA derives, 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, CNA reviews its reserves for each segment of its 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 and equity and CNA's equity, business and insurer financial strength
and corporate debt ratings. Further information on reserves is provided in Note
8 of the Notes to Consolidated Financial Statements included under Item 8.
Property and Casualty Claim and Claim Adjustment Expense Reserves
CNA maintains loss reserves to cover its 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 discussion that
follows and in Note 8 of the Notes to Consolidated Financial Statements included
under Item 8.
There is a risk that CNA's recorded reserves are insufficient to cover its
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 CNA's claim and
claim adjustment expense reserves and could lead to future reserve additions.
In addition, CNA's 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 CNA's exposure to A&EP claims and claim
adjustment expenses, CNA completed a transaction with National Indemnity Company
("NICO"), under which substantially all of CNA's legacy A&EP liabilities were
ceded to NICO effective January 1, 2010 . See Note 8 of the Notes to the
Consolidated Financial Statements included under Item 8 for further discussion
about the transaction with NICO, its impact on CNA's results of operations and
the deferred retroactive reinsurance gains and the amount of remaining
reinsurance limit.
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Establishing Property & Casualty Reserve Estimates
In developing claim and claim adjustment expense ("loss" or "losses") reserve
estimates, CNA's 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, CNA reviews actual
loss emergence for all products each quarter.
Most of CNA's 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. CNA's 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 warranty. Property & Casualty Operations contain both
long-tail and short-tail exposures. Other Insurance Operations contain 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.
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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.
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 CNA, 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, CNA uses 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, CNA's 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 CNA's 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, CNA may not assign much, if any, weight to the paid and incurred
development methods. CNA 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
CNA's history includes a sufficient number of years to cover the entire period
over which paid and incurred losses are expected to change. However, CNA 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, CNA uses additional methods tailored to the characteristics of the specific situation.
Periodic Reserve Reviews
The reserve analyses performed by CNA's actuaries result in point estimates.
Each quarter, the results of the detailed reserve reviews are summarized and
discussed with CNA's senior management to determine the best estimate of
reserves. CNA's senior management considers many factors in making this
decision. CNA's recorded reserves reflect its best estimate as of a particular
point in time based upon known facts and circumstances, consideration of the
factors cited above and its judgment. The carried reserve differs from the
actuarial point estimate as discussed further below.
Currently, CNA's recorded reserves are modestly higher than the actuarial point
estimate. For Property & Casualty Operations, the difference between CNA's
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 CNA's legacy A&EP liabilities, the
difference between CNA's reserves and the actuarial point estimate is primarily
driven by the potential tail volatility of run-off exposures.
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
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estimates of a particular change in assumptions typically cannot be specifically
quantified, and changes in these assumptions cannot be tracked over time.
CNA's recorded reserves are management's best estimate. In order to provide an
indication of the variability associated with CNA's net reserves, the following
discussion provides a sensitivity analysis that shows the approximate estimated
impact of variations in significant factors affecting CNA's reserve estimates
for particular types of business. These significant factors are the ones that
CNA believes could most likely materially affect the reserves. This discussion
covers the major types of business for which CNA believes a material deviation
to its 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 CNA's reserves.
The three areas for which CNA believes a significant deviation to its 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 includeU.S. 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 D&O, employment practices, fiduciary, fidelity 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%, CNA estimates that net reserves would increase by approximately$450 million . If the estimated claim severity decreases by 3%, CNA estimates that net reserves would decrease by approximately$150 million . CNA's net reserves for these products were approximately$5.0 billion as ofDecember 31, 2021 . 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, CNA estimates that its 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, CNA estimates that its net reserves would decrease by approximately$350 million . Net reserves for workers' compensation were approximately$3.9 billion as ofDecember 31, 2021 . 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%, CNA estimates that its net reserves would increase by approximately$200 million . If the estimated claim severity for general liability decreases by 3%, CNA estimates that its net reserves would decrease by approximately$100 million . Net reserves for general liability were approximately$3.2 billion as ofDecember 31, 2021 . Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, CNA regularly reviews the adequacy of its reserves and reassesses its reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods. In reviewing CNA's reserve estimates, CNA makes adjustments in the period that the need for such adjustments is determined. These reviews have resulted in CNA's identification of information and trends that have caused CNA to change its reserves in prior periods and could lead to CNA's identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations and equity and CNA's business and insurer financial strength and corporate debt ratings positively or negatively. See Note 8 of the Notes to the Consolidated Financial Statements included under Item 8 for additional information about reserve development. 63
-------------------------------------------------------------------------------- Table of Contents The following table summarizes gross and net carried reserves for CNA's Property & Casualty Operations: December 31 2021 2020 (In millions) Gross Case Reserves$ 5,621 $ 5,674 Gross IBNR Reserves 11,982 10,415
Total Gross Carried Claim and Claim Adjustment Expense Reserves
$ 16,089 Net Case Reserves$ 4,932 $ 5,072 Net IBNR Reserves 10,338 9,123
Total Net Carried Claim and Claim Adjustment Expense Reserves
The following table summarizes the gross and net carried reserves for other insurance businesses in run-off, including CNA Re and A&EP:
December 31 2021 2020 (In millions) Gross Case Reserves$ 1,551 $ 1,614 Gross IBNR Reserves 1,266 1,260
Total Gross Carried Claim and Claim Adjustment Expense Reserves
$ 2,874 Net Case Reserves$ 146 $ 560 Net IBNR Reserves 148 331
Total Net Carried Claim and Claim Adjustment Expense Reserves
Life & Group Policyholder Reserves
CNA's Life & Group business includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and CNA has the ability to increase policy premiums, subject to state regulatory approval. CNA maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for itsLife & Group business. 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 CNA's long term care policies, its 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 CNA's structured settlement obligations, CNA's actuaries monitor mortality experience on an annual basis. CNA's recorded claim and claim adjustment expense reserves reflect CNA'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 1 to the Consolidated Financial Statements included under Item 8. Future policy benefit reserves consist of the active life reserves related to CNA's 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. 64 -------------------------------------------------------------------------------- Table of Contents 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, CNA's long term care reserves may be subject to material increases if actual experience develops adversely to its expectations. Annually, in the third quarter, CNA 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 existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in CNA's 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, the assumptions remain locked in and no adjustment is required.
The
(In millions)
Long term care active life reserve - change in estimated reserve margin
September 30, 2020 estimated margin
$ -
Changes in underlying discount rate assumptions (a)
65
Changes in underlying morbidity assumptions
205
Changes in underlying persistency assumptions
(233)
Changes in underlying premium rate action assumptions
27
Changes in underlying expense and other assumptions
8
September 30, 2021 Estimated Margin
(a) Including cost of care inflation assumption.
The increase in the margin in 2021 was primarily driven by changes in discount rate assumptions due to higher near term expected reinvestment rates and favorable changes to underlying morbidity assumptions. These favorable drivers were partially offset by unfavorable changes to underlying persistency assumptions.
CNA has determined that additional future policy benefit reserves for profits followed by losses are not currently required based on the most recent projection.
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The table below summarizes the estimated pretax impact on CNA's results of
operations from various hypothetical revisions to its active life 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, CNA has assumed
that revisions to such assumptions would occur in each policy type, age and
duration within each policy group and would occur absent any changes, mitigating
or otherwise, in the other assumptions. Although such hypothetical revisions are
not currently required or anticipated, CNA believes they could occur based on
past variances in experience and its 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 the 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.
Estimated Reduction
2021 GPV to Pretax Income
(In millions)
Hypothetical revisions
Morbidity:
2.5% increase in morbidity $ 300
5% increase in morbidity 600
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 $
100
50 basis point decline in new money interest rates
200
Premium rate actions:
50% decrease in anticipated future premium rate increases $ -
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The following tables summarize policyholder reserves for CNA's long term care
operations:
Claim and claim Future
December 31, 2021 adjustment expenses policy benefits Total
(In millions)
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 (a) 200 2,936 3,136
Ceded reserves (b) 113 288 401
Total gross reserves $ 3,754 $ 13,236 $ 16,990
December 31, 2020
Long term care $ 2,844 $ 9,762 $ 12,606
Structured settlement obligations 543 543
Other 10 10
Total 3,397 9,762 13,159
Shadow adjustments (a) 218 3,293 3,511
Ceded reserves (b) 128 263 391
Total gross reserves $ 3,743 $ 13,318 $ 17,061
(a)To the extent that unrealized gains on fixed maturity securities supporting
structured settlements not funded by annuities were realized, or that unrealized
gains on fixed maturity securities supporting long term care products would
result in a premium deficiency if realized, a related increase in Insurance
reserves is recorded, after tax and noncontrolling interests, as a reduction of
net unrealized gains through Other comprehensive income ("Shadow Adjustments").
(b)Ceded reserves relate to claim or policy reserves fully reinsured in
connection with a sale or exit from the underlying business.
CATASTROPHES AND RELATED REINSURANCE
Various events can cause catastrophe losses. These events can be natural or man-made, including hurricanes, 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, CNA's catastrophe losses from these events in theU.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 theU.S. , CNA defines a catastrophe as an industry recognized event that generates an accumulation of claims amounting to more than$1 million for the International line of business. Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA's results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of$397 million and$550 million for the years endedDecember 31, 2021 and 2020. Net catastrophe losses for the year endedDecember 31, 2021 were driven by severe weather related events, primarily Hurricane Ida andWinter Storms Uri and Viola. Net catastrophe losses for the year endedDecember 31, 2020 included$294 million related primarily to severe weather related events,$195 million related to the COVID-19 pandemic and$61 million related to civil unrest. CNA uses 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 its exposure to catastrophic events. CNA generally seeks to manage its exposure through the purchase of catastrophe reinsurance and has catastrophe reinsurance treaties that cover property and workers' compensation losses. CNA conducts an ongoing review of its risk and catastrophe reinsurance coverages and from time to time makes changes as it deems appropriate. 67
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During the second quarter of 2021, CNA added a quota share treaty to its property reinsurance program, which covers policies written during the treaty term and in-force as ofJune 1, 2021 . As a result of the coverage of in-force policies, net written premiums were reduced by$122 million during the second quarter for the one-time catch-up under the treaty of unearned premium on policies previously written as of theJune 1, 2021 treaty inception. This ceded premium will earn in future quarters consistent with the underlying gross policies.
The following discussion summarizes CNA's most significant catastrophe
reinsurance coverage at
Group North American Property Treaty
CNA purchased corporate catastrophe excess-of-loss treaty reinsurance covering itsU.S. states and territories and Canadian property exposures underwritten in its North American and European companies. Exposures underwritten through Hardy are excluded and covered under a separate treaty. The treaty has a term ofJune 1, 2021 toJune 1, 2022 and provides coverage for the accumulation of covered losses from catastrophe occurrences above CNA's 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.
CNA also purchased corporate Workers' Compensation catastrophe excess-of-loss treaty reinsurance for the periodJanuary 1, 2022 toJanuary 1, 2023 providing$275 million of coverage for the accumulation of covered losses related to natural catastrophes above CNA's per occurrence retention of$25 million . The treaty provides$475 million of coverage for the accumulation of covered losses related to terrorism events above CNA's retention of$25 million . Of the$475 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")
CNA's 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 aU.S. government backstop for insurance-related losses resulting from any "act of terrorism," which is certified by the Secretary ofTreasury in consultation with the Secretary ofHomeland Security for losses that exceed a threshold of$200 million industry-wide for the calendar year 2022. Under the current provisions of the program, in 2022 the federal government will reimburse 80% of CNA's covered losses in excess of its applicable deductible up to a total industry program cap of$100 billion . CNA's deductible is based on eligible commercial property and casualty earned premiums for the preceding calendar year. Based on 2021 earned premiums, CNA's estimated deductible under the program is$915 million for 2022. 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.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the related notes. Actual results could differ from those estimates. The 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 we believe are reasonable under the known facts and circumstances.
We consider the accounting policies discussed below to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations, financial condition, equity, business and CNA's insurer financial strength and corporate debt ratings.
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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 Insurance Reserves section of this MD&A.
Long Term Care Reserves
Future policy benefit reserves for CNA's 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 CNA's future expectations related to these key assumptions. If actual or CNA's expected future experience differs from these assumptions, the reserves may not be adequate, requiring CNA to add to reserves. A prolonged period during which investment returns remain at levels lower than those anticipated in CNA's reserving discount rate assumption could result in shortfalls in investment income on assets supporting CNA's obligations under long term care policies, which may require increases to CNA's reserves. In addition, CNA may not receive regulatory approval for the level of premium rate increases it requests. These changes to CNA's reserves could materially adversely impact our results of operations, financial condition and equity. The reserving process is discussed in further detail in the Insurance Reserves section of this MD&A.
Reinsurance and Other 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 CNA has ceded under reinsurance agreements. An allowance for doubtful accounts on reinsurance receivables is recorded 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. Further information on CNA's reinsurance receivables is included in Note 16 of the Notes to Consolidated Financial Statements included under Item 8. Additionally, exposure exists with respect to the collectibility of amounts due from customers on other receivables. An allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due, currently as well as in the future, historical reinsurer 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 doubtful accounts on reinsurance and other receivables, net receivables as reflected on our Consolidated Balance Sheets may not be collected. Therefore, our results of operations, financial condition and/or equity could be materially adversely affected. Further information on CNA's process for determining the allowance for doubtful accounts on reinsurance and insurance receivables is in Note 1 to the Consolidated Financial Statements included under Item 8.
Valuation of Investments and Impairment of Securities
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 fair value measurements is included in Note 4 of the Notes to
Consolidated Financial Statements included under Item 8.
CNA's 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. CNA
considers all available evidence when determining whether a security requires a
credit allowance to be recorded, including the financial condition
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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 CNA expects to receive cash flows sufficient
to recover the entire amortized cost basis of the security.
CNA's 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 CNA's expectation of the net amount to be
collected are recognized in earnings.
Further information on CNA's process for evaluating impairments and expected credit losses is included in Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
ACCOUNTING STANDARDS UPDATE
For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please read Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
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