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. The Corporate segment is primarily comprised ofLoews Corporation , excluding its operating subsidiaries, the consolidated operations ofAltium Packaging LLC ("Altium Packaging ") throughMarch 31, 2021 and the equity method of accounting forAltium Packaging subsequent to its deconsolidation onApril 1, 2021 . For further information on the deconsolidation ofAltium Packaging see Note 2 of the Notes to Consolidated Financial Statements included under Item 8. Unless the context otherwise requires, as used herein, the term "Company" meansLoews Corporation including its consolidated subsidiaries, the terms "Parent Company," "we," "our," "us" or like terms meanLoews Corporation excluding its subsidiaries, the term "Net income (loss) attributable toLoews Corporation " means Net income (loss) attributable toLoews Corporation shareholders and the term "subsidiaries" meansLoews 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. We are not responsible for the liabilities and obligations of our subsidiaries and there are no Parent Company guarantees. 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, 2021 and 2020 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, 2021 , filed with theSEC onFebruary 8, 2022 .
RESULTS OF OPERATIONS
Consolidated Financial Results
The following table summarizes net income (loss) attributable to
Year Ended December 31 2022 2021
(In millions, except per share data)
CNA Financial$ 802 $ 1,077 Boardwalk Pipelines 247 235 Loews Hotels & Co 117 (14) Corporate (a) (154) 280
Net income attributable to
Basic net income per share$ 4.17 $ 6.08 Diluted net income per share$ 4.16 $ 6.07
(a) Includes a net investment gain of
the sale of 47% of Altium Packaging in 2021.
45
--------------------------------------------------------------------------------
Table of Contents
2022 Compared with 2021
Net income attributable toLoews Corporation for 2022 was$1.0 billion , or$4.16 diluted net income per share, compared to net income attributable toLoews Corporation of$1.6 billion , or$6.07 diluted net income per share, in 2021. Excluding the item set forth in footnote (a) in the table above, net income attributable toLoews Corporation for 2021 was$1.1 billion . Net income attributable toLoews Corporation for 2021 includes a net investment gain of$555 million ($438 million after tax) related to the sale of 47% ofAltium Packaging . Excluding the gain on sale ofAltium Packaging , net income decreased$128 million in 2022 compared to 2021, driven by unfavorable limited partnership and common stock results, and net losses from sales of fixed income securities at CNA, partially offset by improved underwriting results and increased net investment income from fixed income securities for CNA and the significantly improvement results forLoews Hotels & Co due to the rebound in leisure travel. Boardwalk Pipelines also contributed positively toLoews Corporation's year-over-year results due to higher revenues from recently completed growth projects, re-contracting at higher rates and higher utilization-based revenues.
The following table summarizes the results of operations for CNA for the years endedDecember 31, 2022 and 2021 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8. For further discussion of Net investment income and Investment gains (losses), see the Investments section of this MD&A. Year Ended December 31 2022 2021 (In millions) Revenues: Insurance premiums$ 8,667 $ 8,175 Net investment income 1,805 2,159 Investment gains (losses) (199) 120 Non-insurance warranty revenue 1,574 1,430 Other revenues 32 24 Total 11,879 11,908
Expenses:
Insurance claims and policyholders' benefits 6,386 6,349 Amortization of deferred acquisition costs
1,490 1,443
Non-insurance warranty expense 1,471 1,328
Other operating expenses 1,339 1,191
Interest 112 113
Total 10,798 10,424
Income before income tax 1,081 1,484
Income tax expense (188) (282)
Net income 893 1,202
Amounts attributable to noncontrolling interests (91) (125)
Net income attributable to
2022 Compared with 2021
Net income attributable toLoews Corporation decreased$275 million for 2022 as compared with 2021. The decrease was primarily driven by lower net investment income and investment losses in 2022 as compared with investment gains in 2021. Lower net investment income was driven by unfavorable limited partnership and common stock results and investment losses were driven by net losses on fixed maturity securities and the unfavorable change in fair value of non-redeemable preferred stock. These decreases to net income were partially offset by improved underwriting results and higher net investment income from fixed income securities for 2022 as compared with 2021. Catastrophe losses were$247 million ($174 million after tax and noncontrolling interests) for 2022 as compared with$397 million ($280 million after 46
--------------------------------------------------------------------------------
Table of Contents
tax and noncontrolling interests) in 2021. Catastrophe losses for 2022 and 2021 were driven by severe weather related events, primarily Winter Storm Elliott and Hurricane Ian for 2022 and Hurricane Ida andWinter Storms Uri and Viola for 2021.
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 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.
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 some investors may find this measure useful to
evaluate CNA's insurance operations. Please see the non-GAAP reconciliation of
net income (loss) to core 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 underlying loss ratio, the expense ratio, the dividend ratio,
the combined ratio and the underlying combined ratio. These ratios are
calculated using GAAP financial results. The loss ratio is the percentage of net
incurred claim and claim adjustment expenses to net earned premiums. The
underlying loss ratio excludes the impact of catastrophes losses and net prior
year loss reserve and premium development from the loss ratio. The expense ratio
is the percentage of insurance underwriting and acquisition expenses, including
the amortization of deferred acquisition costs, to net earned premiums. The
dividend ratio is the ratio of policyholders' dividends incurred to net earned
premiums. The combined ratio is the sum of the loss, expense and dividend
ratios. The underlying combined ratio is the sum of the underlying loss ratio,
the expense ratio and the dividend ratio. In addition, 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, excluding rate and exposure changes, in
comparison to the expiring premium dollars from policies available to renew.
Renewal premium change, rate and retention presented for the prior year are
updated to reflect subsequent activity on policies written in the period. New
business represents premiums from policies written with new customers and
additional policies written with existing customers. Gross written premiums,
excluding third-party captives, excludes business which is ceded to third-party
captives, including business related to large warranty programs. CNA uses
underwriting gain (loss) to monitor insurance operations. Underwriting gain
(loss) is pretax and is calculated as net earned premiums less total insurance
expenses, which includes insurance claims and policyholders' benefits,
amortization of deferred acquisition costs and other insurance related expenses.
47
--------------------------------------------------------------------------------
Table of Contents
The following tables summarize the results of CNA's Property & Casualty
Operations for the years ended
Year Ended December 31, 2022 Specialty Commercial International Total
(In millions, except %)
Gross written premiums$ 7,514 $ 5,170 $ 1,394 $ 14,078 Gross written premiums excluding third- party captives 3,814 5,056 1,394 10,264 Net written premiums 3,306 4,193 1,164 8,663 Net earned premiums 3,203 3,923 1,070 8,196 Underwriting gain 366 106 87 559 Net investment income 431 488 63 982 Core income 668 466 106 1,240 Other performance metrics: Loss ratio excluding catastrophes and development 58.6 % 61.5 % 58.5 % 60.0 % Effect of catastrophe impacts 0.1 5.6 2.2 3.0 Effect of development-related items (1.3) (0.7) (1.2) (1.0) Loss ratio 57.4 % 66.4 % 59.5 % 62.0 % Expense ratio 31.0 30.4 32.3 30.9 Dividend ratio 0.2 0.5 0.3 Combined ratio 88.6 % 97.3 % 91.8 % 93.2 %
Combined ratio excluding catastrophes
and development 89.8 % 92.4 % 90.8 % 91.2 % Rate 6 % 5 % 6 % 5 % Renewal premium change 7 8 11 8 Retention 86 86 81 86 New business$ 548 $ 1,009 $ 319 $ 1,876 Year EndedDecember 31, 2021 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 Underwriting gain (loss) 347 (112) 55 290 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 12 11 13 12 Retention 83 82 78 82 New business$ 551 $ 843 $ 274 $ 1,668 48
--------------------------------------------------------------------------------
Table of Contents
2022 Compared with 2021
Gross written premiums, excluding third-party captives, for Specialty increased$142 million in 2022 as compared with 2021 driven by retention and rate. Net written premiums for Specialty increased$81 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums for Specialty. Gross written premiums for Commercial increased$725 million in 2022 as compared with 2021 driven by higher new business and retention. Net written premiums for Commercial increased$598 million in 2022 as compared with 2021. The prior period included a one-time written premium catch-up resulting from the addition of a quota share treaty to the property reinsurance program. Excluding the impact of the prior period written premium catch-up, net written premiums increased$486 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums for Commercial. Gross written premiums for International increased$97 million in 2022 as compared with 2021. Excluding the effect of foreign currency exchange rates, gross written premiums increased$176 million driven by higher new business, rate and retention. Net written premiums for International increased$63 million in 2022 as compared with 2021. Excluding the effect of foreign currency exchange rates, net written premiums increased$137 million in 2022 as compared with 2021. The increase in net earned premiums was consistent with the trend in net written premiums for International. Core income increased$56 million in 2022 as compared with 2021 primarily due to improved underwriting results and higher net investment income from fixed income securities partially offset by lower net investment income due to unfavorable limited partnership and common stock results. Catastrophe losses were$247 million in 2022 as compared with$397 million in 2021. For 2022 and 2021 Specialty had catastrophe losses of$2 million and$12 million , Commercial had catastrophe losses of$222 million and$358 million and International had catastrophe losses of$23 million and$27 million . Favorable net prior year loss reserve development of$96 million and$49 million was recorded in 2022 and 2021. In 2022 and 2021, Specialty recorded favorable net prior year loss reserve development of$40 million and$45 million , Commercial recorded favorable net prior year loss reserve development of$43 million and$6 million and International recorded favorable net prior year loss reserve development of$13 million as compared with unfavorable 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 0.1 point in 2022 as compared with 2021 primarily due to a 0.7 point improvement in the loss ratio largely offset by a 0.5 point increase in the expense ratio. The improvement in the loss ratio was largely due to improved current accident year underwriting results. Catastrophe losses were 0.1 point of the loss ratio in 2022, as compared with 0.4 points of the loss ratio in 2021. The increase in the expense ratio was primarily due to an increase in underwriting expenses driven by investments in technology and talent. Commercial's combined ratio improved 5.8 points in 2022 as compared with 2021 primarily due to a 5.1 point improvement in the loss ratio and a 0.7 point improvement in the expense ratio. The improvement in the loss ratio was driven by lower catastrophe losses, which were 5.6 points of the loss ratio in 2022, as compared with 10.0 points of the loss ratio in 2021, and higher favorable net prior year loss reserve development. The combined ratio excluding catastrophes and development improved 0.2 points in 2022 as compared with 2021. The improvement in the expense ratio of 0.7 points was driven by higher net earned premiums and lower acquisition costs partially offset by an increase in underwriting expenses. The loss ratio excluding catastrophes and development increased 0.5 points primarily driven by a shift in mix of business associated with the property quota share treaty purchased during June of 2021. Property coverages, which have a lower underlying loss ratio than most other commercial coverages, now represent a smaller proportion of net earned premiums. International's combined ratio improved 3.0 points in 2022 as compared with 2021 due to a 2.2 point improvement in the loss ratio and a 0.8 point improvement in the expense ratio. Catastrophe losses were 2.2 points of the loss ratio in 2022, as compared with 2.6 points of the loss ratio in 2021. The improvement in the expense ratio was primarily driven by lower acquisition costs. 49
--------------------------------------------------------------------------------
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 2022 2021 (In millions) Net earned premiums$ 473 $ 491 Net investment income 823 981 Core loss (192) (78) 2022 Compared with 2021 Core results decreased$114 million in 2022 as compared with 2021 primarily due to a$167 million pretax decline in net investment income from limited partnerships and an increase in expenses as a result of continued investments in technology infrastructure and security. Core results in 2022 also reflect a$25 million pretax favorable impact from the reduction in long term care claim reserves and a$5 million pretax favorable impact from the reduction in structured settlement claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2022 as compared with a$40 million pretax favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2021. These decreases to core results for 2022 were partially offset by favorability related to the A&EP Loss Portfolio Transfer ("LPT") and the prior period recognition of a$12 million loss resulting from the legacy excess workers' compensation loss portfolio transfer ("EWC LPT"). The application of retroactive reinsurance accounting to additional cessions to the A&EP LPT resulted in a benefit of$3 million in 2022 compared to a charge of$25 million in 2021, both of which have no economic impact. For further information on the A&EP LPT and EWC LPT see Note 8 of the Notes to Consolidated Financial Statements included under Item 8. CNA anticipates a net pension cost of approximately$12 million in 2023 as compared with a benefit of$55 million in 2022. The change is primarily due to higher interest cost on projected benefit obligations as a result of an increase in discount rates year over year, as well as a lower expected return on plan assets as a result of a lower plan asset base given actual asset returns in 2022. A portion of this additional cost will result in an unfavorable impact on CNA's expense ratio in 2023.
Non-GAAP Reconciliation of Net Income Attributable to
The following table reconciles net income attributable to
Year EndedDecember 31 2022
2021
(In millions)
Net income attributable to Loews Corporation$ 802 $ 1,077 Investment (gains) losses 154
(96)
Consolidating adjustments including noncontrolling interests 92
125
Total core income $ 1,048 $ 1,106
Core income (loss):
Property & Casualty Operations $ 1,240 $ 1,184
Other Insurance Operations (192) (78)
Total core income $ 1,048 $ 1,106
50
--------------------------------------------------------------------------------
Table of Contents
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 NGL 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 do not vary significantly based upon the 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. Boardwalk Pipelines' operations and maintenance expenses are
impacted by its compliance with the requirements of, among other regulations,
the Pipeline and Hazardous Materials Safety Administration Mega Rule ("Mega
Rule") and Boardwalk Pipelines' efforts to monitor, control and reduce
emissions, as further discussed below.
Firm Agreements
A substantial portion of Boardwalk Pipelines' transportation and storage capacity is contracted for under firm agreements. For the year endedDecember 31, 2022 , approximately 87% of Boardwalk Pipelines' revenues were derived from capacity reservation fees under firm contracts. The table below shows a rollforward of projected operating revenues under committed firm agreements in place as ofDecember 31, 2021 toDecember 31, 2022 , including agreements for transportation, storage and other services, over the remaining term of those agreements: As ofDecember 31, 2022 (In millions)
Total projected operating revenues under committed firm agreements as of
$ 9,060 Adjustments for: Actual revenues recognized from firm agreements in 2022 (a)
(1,236)
Firm agreements entered into in 2022
1,301
Total projected operating revenues under committed firm agreements as of December 31, 2022$ 9,125 (a)Reflects an increase of$96 million in Boardwalk Pipelines' actual 2022 revenues recognized from fixed fees under firm agreements as compared with its expected 2022 revenues from fixed fees under firm agreements, including agreements for transportation, storage and other services as ofDecember 31, 2021 , primarily due to an increase from contract renewals that occurred in 2022. During 2022, Boardwalk Pipelines entered into$1.3 billion of new firm agreements, of which approximately 4% were from new growth projects executed in 2022. 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, 2022 , Boardwalk Pipelines' top ten customers holding firm capacity under firm agreements comprised approximately 56% of its total projected operating revenues and the credit profile associated with Boardwalk Pipelines' customers comprising the total projected operating revenues under firm agreements was 73% rated as investment grade, 10% rated as non-investment grade and 17% not rated.
Pipeline System Maintenance and Greenhouse Gases ("GHGs") Emission Reduction Initiatives
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
51
--------------------------------------------------------------------------------
Table of Contents
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 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 and state regulators reportedly began their review of these plans in 2022, and PHMSA has separately announced plans to propose rules addressing methane leaks from pipelines. InAugust 2022 , PHMSA published another final rule expanding the Management of Change process, extending corrosion control requirements for gas transmission pipelines, adding requirements that operators ensure no conditions exist following an extreme weather event that could adversely affect the safe operation of the pipeline, and adopting repair criteria for non-HCAs similar to those applicable to HCAs. Due to the nature of Boardwalk Pipelines' business, its operations emit various types of GHGs. Boardwalk Pipelines seeks to carefully monitor its emissions and expects to incur additional costs to mitigate emissions. New legislation or regulations could increase the costs related to operating and maintaining Boardwalk Pipelines' facilities. Depending on the particular law, regulation or program, Boardwalk Pipelines could be required to incur capital expenditures for installing new monitoring equipment or emission controls on its facilities, acquire and surrender allowances for GHG emissions, pay taxes or fees related to GHG emissions and/or administer and manage a more comprehensive GHG emissions program. Boardwalk Pipelines has been focused on seeking to meet and, in certain instances, pursuing projects aimed at exceeding regulatory obligations (such as those found in the Clean Air Act ("CAA")) by working to reduce emissions of regulated air pollutants, including methane, associated with its pipeline transportation and storage assets. For example, in selecting new compression equipment for growth or asset reliability projects, Boardwalk Pipelines considers air emissions as a component in the decision-making process and, when appropriate, places increased emphasis in the selection process on equipment with emissions performance that exceeds applicable federal standards. Several of Boardwalk Pipelines' reliability projects over the last few years have resulted in replacement of older, higher-emitting compressor drivers with units equipped with advanced emission control systems. As a result, these projects have resulted in decreases in emissions of nitrogen oxides and other air pollutants.
Boardwalk Pipelines has identified the reduction of GHG emissions as an area of focus and looks for opportunities to reduce emissions using a variety of strategies, including the following:
•evaluating replacing older compression equipment with electric drive compression or new low emission, fuel efficient units when practical; •modifying fuel systems on certain reciprocating compression equipment to lower fuel consumption and emissions; •conducting emissions surveys and performing maintenance and repairs on identified component leaks; •performing annual leak surveys along Boardwalk Pipelines' pipelines with the aid of helicopters and fixed-wing planes, and analytical field surveys when appropriate; •performing leak detection and recovery and Subpart W surveys on all of Boardwalk Pipelines' compressor stations (theU.S. Environmental Protection Agency ("EPA ") only requires Boardwalk Pipelines to survey 48 of its 79 compressor stations); •using optical gas imaging cameras to scan natural gas piping and components at Boardwalk Pipelines' compressor stations to visualize any leaks in real time; •installing continuous monitoring emission detection equipment as a pilot project at three compression stations; •employing experts in air emissions to develop and monitor efforts in reducing emissions; •reducing methane emissions vented to the atmosphere from transmission pipeline blowdowns by using existing and portable compression and flaring when feasible; 52
--------------------------------------------------------------------------------
Table of Contents
•installing repair sleeves and composite wraps to avoid pipeline blowdowns; and •exploring options to replace high-bleed natural gas pneumatic devices with low or zero flow bleed devices. However, Boardwalk Pipelines cannot guarantee that it will be able to implement any of the opportunities it may review or explore, or, for any opportunities it chooses to implement, to implement them in their intended manner or within a specific timeframe or across all operational assets. These new and any future regulations adopted by PHMSA and efforts to reduce GHG emissions are expected to cause Boardwalk Pipelines to incur increased capital and operating costs, may cause Boardwalk Pipelines to experience operational delays and may result in potential adverse impacts to its ability to reliably serve its customers as. For more information, see Item 1. Business and 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 it records as property, plant and equipment on the Consolidated Balance Sheets or recognizes as expenses, which impacts earnings. In 2023, Boardwalk Pipelines expects to spend approximately$460 million to maintain its pipeline systems, comply with regulations and monitor, control and reduce its GHG emissions, of which approximately$195 million is expected to be maintenance capital. In 2022, Boardwalk Pipelines spent$408 million , of which$157 million was recorded as maintenance capital.
Results of Operations
The following table summarizes the results of operations for Boardwalk Pipelines for the years endedDecember 31, 2022 and 2021 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8. Boardwalk Pipelines also utilizes a non-GAAP measure, earnings before interest, income tax expense, depreciation and amortization ("EBITDA") as a financial measure to assess its operating and financial performance and return on invested capital. Management believes some investors may find this measure useful in evaluating Boardwalk Pipelines' performance. Year Ended December 31 2022 2021 (In millions) Revenues: Operating revenues and other$ 1,446 $ 1,349 Total 1,446 1,349 Expenses: Operating and other: Operating costs and expenses 554 515 Depreciation and amortization 396 370 Interest 166 161 Total 1,116 1,046 Income before income tax 330 303 Income tax expense (83) (68) Net income attributable to Loews Corporation$ 247 $ 235 EBITDA$ 892 $ 834 2022 Compared with 2021
Net income attributable to
Total revenues increased$97 million in 2022 as compared with 2021, primarily driven by an increase in transportation revenues of$75 million due to recently completed growth projects, re-contracting at higher rates and higher utilization-based revenues and an$18 million increase in Boardwalk Pipelines' storage and parking and lending revenues due to favorable market conditions. 53
--------------------------------------------------------------------------------
Table of Contents
Operating expenses increased$39 million in 2022 as compared with 2021 primarily due to increased costs of$24 million from maintenance projects associated with the requirements of the Mega Rule, higher utility, materials and supplies and vehicle costs and asset impairment charges of$8 million resulting from an increase in the estimate of existing asset retirement obligations related to retired assets. Depreciation and amortization expense increased$26 million in 2022 as compared with 2021 primarily due to a change in the estimated life of certain assets and an increased asset base from recently completed growth projects. Interest expense increased$5 million in 2022 as compared with 2021 primarily due to higher average outstanding long-term debt balances and lower capitalized interest.
Non-GAAP Reconciliation of Net Income Attributable to
The following table for Boardwalk Pipelines presents a reconciliation of net
income attributable to
Year Ended December 31 2022 2021 (In millions) Net income attributable to Loews Corporation$ 247 $ 235 Income tax expense 83 68 Depreciation and amortization 396 370 Interest 166 161 EBITDA$ 892 $ 834 54
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the results of operations forLoews Hotels & Co for the years endedDecember 31, 2022 and 2021 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2022 2021 (In millions) Revenues: Operating revenue$ 596 $ 337 Other revenues 47 Revenues related to reimbursable expenses 125 96 Total 721 480 Expenses: Operating and other: Operating 483 334 Asset impairments 25 10 Reimbursable expenses 125 96 Depreciation 64 63 Equity income from joint ventures (148) (47) Interest 11 36 Total 560 492 Income (loss) before income tax 161 (12) Income tax expense (44) (2)
Net income (loss) attributable to
2022 Compared with 2021
Net income (loss) attributable to
Loews Hotels & Co's results significantly improved in 2022 as compared with 2021 primarily due to considerably higher overall occupancy rates in 2022, as travel significantly rebounded from the impacts of the COVID-19 pandemic, and increased overall average daily room rates. Operating revenues improved by$259 million and operating expenses increased by$149 million in 2022 as compared with 2021. The increase in operating revenues was driven by stronger occupancy levels and higher average daily room rates at many hotels in 2022 as compared to 2021. Operating expenses have likewise increased, largely due to higher staffing levels, to support the higher demand levels and resumption of additional pre-pandemic services. Equity income from joint ventures improved$101 million in 2022 as compared to 2021. The increase in equity income from joint ventures was driven by stronger occupancy levels and higher average daily room rates at many joint venture hotels, particularly at theUniversal Orlando Resort , during 2022 as compared to 2021. Operating expenses have likewise increased, largely due to higher staffing levels, to support the higher demand levels and resumption of additional pre-pandemic services at those joint venture hotels. Additionally, improvement in 2022 also resulted from having all 9,000 rooms available at theUniversal Orlando Resort for the whole year whereas certain rooms were not available during a portion of 2021.
In 2022 and 2021,
Interest expense for 2022 decreased$25 million as compared with 2021 primarily due to the increase in fair value of interest rate caps of$11 million , higher capitalized interest on a project under development, and lower average debt balances. 55
--------------------------------------------------------------------------------
Table of Contents
Other revenues for 2021 included$39 million related to the acceleration of state and local government grant payments, used to retire outstanding debt of an owned hotel prior to maturity and cover certain prepayment costs, and net gains of$8 million related primarily to the sale of undeveloped land.
Corporate
Corporate operations consist primarily of investment income, interest expense and administrative costs at the Parent Company. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of the trading portfolio held at the Parent Company. Corporate also includes the consolidated operations ofAltium Packaging throughMarch 31, 2021 and the equity method of accounting forAltium Packaging subsequent to its deconsolidation onApril 1, 2021 . See Note 2 of the Notes to Consolidated Financial Statements included under Item 8 for further information. The following table summarizes the results of operations for Corporate for the years endedDecember 31, 2022 and 2021 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2022 2021 (In millions) Revenues: Net investment income (loss)$ (7) $ 99 Investment gains 540 Operating revenues and other 5 281 Total (2) 920 Expenses: Operating and other 91 378 Equity method loss 9 21 Interest 89 114 Total 189 513 Income (loss) before income tax (191) 407 Income tax (expense) benefit 37 (127)
Net income (loss) attributable to
2022 Compared with 2021
Net investment loss for the Parent Company was$7 million in 2022 as compared with net investment income of$99 million in 2021 primarily due to the decline in fair value of equity based investments, partially offset by improved results from short term investments in the trading portfolio. 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 and its deconsolidation onApril 1, 2021 .
Operating revenues and other for 2021 include
Operating and other expenses decreased$287 million in 2022 as compared with 2021 primarily due to$279 million of operating expenses forAltium Packaging throughMarch 31, 2021 prior to its deconsolidation and use of the equity method forAltium Packaging since its deconsolidation. In addition, there were lower corporate expenses at the Parent Company in 2022 as compared with 2021. Interest expenses decreased$25 million in 2022 as compared with 2021, due to consolidated interest expenses forAltium Packaging throughMarch 31, 2021 , which included a charge of approximately$14 million to write off debt issuance costs for the early retirement of debt. Income tax expense of$127 million in 2021 included the recognition of$117 million of taxes on the investment gain and the recognition of a$40 million deferred tax liability, both of which were related to the sale of 47% ofAltium Packaging . 56
--------------------------------------------------------------------------------
Table of Contents
In 2023, the Company expects to record approximately$50 million in Operating and other expenses to recognize unrealized losses which are included in AOCI due to the planned termination of a non-contributory defined benefit plan.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company
Parent Company cash and investments, net of receivables and payables, totaled$3.2 billion atDecember 31, 2022 as compared to$3.4 billion atDecember 31, 2021 . In 2022, we received$978 million in cash dividends from our subsidiaries, including a special cash dividend of$486 million from CNA. Cash outflows in 2022 included the payment of$729 million to fund treasury stock purchases,$61 million of cash dividends to our shareholders,$26 million to purchase common shares of CNA and equity contributions of$33 million toLoews Hotels & Co and$79 million toAltium Packaging . In March of 2023, we will receive cash dividends of$395 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 unspecified amount of our debt, equity or hybrid 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 2022, we purchased 12.7 million shares ofLoews Corporation common stock and 0.7 million shares of CNA's common stock. As ofFebruary 3, 2023 , we had purchased an additional 1.0 million shares ofLoews Corporation common stock in 2023 at an additional aggregate cost of$58 million . As ofFebruary 3, 2023 , there were 234,997,673 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
CNA paid cash dividends of$3.60 per share on its common stock, including a special cash dividend of$2.00 per share in 2022. OnFebruary 3, 2023 , CNA's Board of Directors declared a quarterly cash dividend of$0.42 per share and a special cash dividend of$1.20 per share payableMarch 9, 2023 to shareholders of record onFebruary 21, 2023 . 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. CNA believes that its present cash flows from operating, investing and financing activities are sufficient to fund its current and expected working capital and debt obligation needs and does not expect this to change in the near term. Dividends to CNA 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, 2022 , CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2023 that would not be subject to the Department's prior approval is$1.1 billion , less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of$990 million in 2022. 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 57
--------------------------------------------------------------------------------
Table of Contents
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 increased$98 million in 2022 compared to 2021, primarily due to the increase in net income, higher depreciation expense and an increase in Boardwalk Pipelines' fuel tracker liability. For 2022 and 2021, Boardwalk Pipelines' capital expenditures were$344 million and$349 million , consisting of growth capital expenditures of$180 million and$175 million and maintenance capital expenditures of$157 million and$154 million . During 2022, Boardwalk Pipelines also spent$7 million on natural gas to be used in its integrated natural gas pipeline system. During 2021, Boardwalk Pipelines acquired certain natural gas pipeline assets for approximately$20 million . Boardwalk Pipelines expects total capital expenditures to be approximately$405 million in 2023, including approximately$195 million for maintenance capital and$210 million related to growth projects. Boardwalk Pipelines anticipates that its existing capital resources, including its cash on hand, revolving credit facility and cash flows from operating activities, will be adequate to fund its operations and capital expenditures for 2023. 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 partnership purposes. Boardwalk Pipelines has an effective shelf registration statement on file with theSEC under which it may publicly issue$1.0 billion of debt securities, warrants or rights from time to time. In February of 2022, Boardwalk Pipelines completed a public offering of$500 million aggregate principal amount of its 3.6% senior notes dueSeptember 1, 2032 , which utilized$500 million of capacity under its shelf registration statement. Boardwalk Pipelines used the proceeds to retire the outstanding$300 million aggregate principal amount of its 4.0% senior notes dueJune 2022 in March of 2022, to fund growth capital expenditures and for general corporate purposes. In November of 2022, Boardwalk Pipelines used its available cash to retire the outstanding$300 million aggregate principal amount of its 3.4% senior notes due inFebruary 2023 . In June of 2022, Boardwalk Pipelines amended its revolving credit facility to, among other things, extend the maturity date by one year toMay 27, 2027 . As ofDecember 31, 2022 , Boardwalk Pipelines had no outstanding borrowings and all of the$1.0 billion available borrowing capacity under its revolving credit facility.
In December of 2022, 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 Baa2 with a stable outlook from Moody's and a senior debt rating of BBB with a stable outlook from Fitch.
As ofDecember 31, 2022 ,Loews Hotels & Co has a$110 million variable rate mortgage loan that matures within twelve months, which it currently intends to refinance before maturity.Loews Hotels & Co , through its subsidiaries, has mortgage loans maturing beyond twelve months which it will also work to refinance prior to maturity. Extending any indebtedness, including loans of unconsolidated joint venture partnerships, may requireLoews Hotels & Co to make principal pay downs, establish restricted cash reserves or provide guaranties of the subsidiary's debt. Through the date of this Report, none ofLoews Hotels & Co's subsidiaries are in default on any of their loans.Loews Hotels & Co contributed$41 million to two joint venture development projects expected to open in 2025. These projects are currently estimated to require an aggregate additional investment of approximately$160 million in capital contributions fromLoews Hotels & Co. Based on the timing of capital calls relative to the seasonality ofLoews Hotels & Co's business, capital contributions fromLoews Corporation toLoews Hotels & Co may be required.
In 2022,
In August of 2022, we made a cash contribution of$79 million to our equity method investee,Altium Packaging . These funds and a pro rata contribution from our joint venture partner were used byAltium Packaging for an acquisition which expanded its offerings and increased its bottle manufacturing capabilities throughout key industries and geographies. 58
--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations
We and our subsidiaries have contractual obligations which arise in the ordinary
course of business. For a discussion regarding the obligations related to our
and our subsidiaries long term debt see Note 11 of the Notes to Consolidated
Financial Statements included under Item 8. For contractual payment obligations
related to the claim and claim adjustment expense reserves and future policy
benefit reserves see the table below:
Payments Due by Period
Less than More than
December 31, 2022 Total 1 year 1-3 years 3-5 years 5 years
(In millions)
Claim and claim adjustment expense
reserves (a)$ 26,151 $ 6,239 $ 7,139 $ 3,596 $ 9,177 Future policy benefit reserves (b) 25,478 (318) 169 979 24,648 (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, 2022 . 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, 2022 . 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 Parent Company 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 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.
59
--------------------------------------------------------------------------------
Table of Contents
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 2022 2021
(In millions)
Fixed income securities: Taxable fixed income securities$ 1,585 $ 1,439 Tax-exempt fixed income securities 244 311 Total fixed income securities 1,829 1,750
Limited partnership and common stock investments (31) 402 Other, net of investment expense
7 7
Net investment income $ 1,805 $ 2,159 Effective income yield for the fixed income securities portfolio
4.4 % 4.3 %
Limited partnership and common stock return (1.4) % 22.3 %
CNA's net investment income decreased $354 million in 2022 as compared with 2021
driven by unfavorable limited partnership and common stock results, partially
offset by higher income from fixed income securities.
Investment Gains (Losses)
The components of CNA's investment gains (losses) are presented in the following table: Year Ended December 31 2022 2021 (In millions) Investment gains (losses): Fixed maturity securities:(a) Corporate and other bonds$ (89) $ 134 States, municipalities and political subdivisions 26 Asset-backed (34)
(38)
Total fixed maturity securities (97)
96
Non-redeemable preferred stock (116)
4
Derivatives, short term and other 14
20
Total investment gains (losses) (199)
120
Income tax (expense) benefit 45
(24)
Amounts attributable to noncontrolling interests 16
(10)
Investment gains (losses) attributable to
(a)Excludes the loss in 2022 on the assets supporting the funds withheld liability, which is reflected in the Derivatives, short term and other line.
CNA's investment gains (losses) decreased
60
--------------------------------------------------------------------------------
Table of Contents
Additionally, Derivatives, short term and other for 2022 includes an
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, 2022 December 31, 2021
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 $ 2,419 $ (336) $ 2,600 $ 42
AAA 2,398 (208) 3,784 360
AA 6,342 (663) 7,665 823
A 9,043 (531) 9,511 1,087
BBB 15,651 (1,447) 18,458 2,043
Non-investment grade 1,774 (219) 2,362 91
Total $ 37,627 $ (3,404) $ 44,380 $ 4,446
As of
The following table presents CNA's available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution:
Estimated Gross Unrealized
December 31, 2022 Fair Value Losses
(In millions)
U.S. Government , Government agencies and Government-sponsored
enterprises $ 2,355 $ 337
AAA 1,559 298
AA 4,327 817
A 6,615 749
BBB 13,226 1,621
Non-investment grade 1,429 234
Total $ 29,511 $ 4,056
61
--------------------------------------------------------------------------------
Table of Contents
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, 2022 Fair Value Gross Unrealized Losses
(In millions)
Due in one year or less $ 774 $ 16
Due after one year through five years 7,799 539
Due after five years through ten years 10,367 1,515 Due after ten years 10,571 1,986 Total$ 29,511 $ 4,056 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. 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, 2022 December 31, 2021 Estimated Effective Estimated Effective Fair Value Duration (Years) Fair Value Duration (Years) (In millions of dollars) Investments supportingOther Insurance Operations $ 14,511 9.9 $ 18,458 9.2 Other investments 25,445 4.7 28,915 4.9 Total $ 39,956 6.6 $ 47,373 6.6
The effective duration of investments supporting Other Insurance Operations
liabilities at
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.
62
--------------------------------------------------------------------------------
Table of Contents
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.
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,
63
--------------------------------------------------------------------------------
Table of Contents
judicial decisions, legislative changes and other factors. Because this method
assumes that losses are paid at a consistent rate, changes in any of these
factors can affect the results. Since the method does not rely on case reserves,
it is not directly influenced by changes in their adequacy.
For many reserve groups, paid loss data for recent periods may be too immature
or erratic for accurate predictions. This situation often exists for long-tail
exposures. In addition, changes in the factors described above may result in
inconsistent payment patterns. Finally, estimating the paid loss pattern
subsequent to the most mature point available in the data analyzed often
involves considerable uncertainty for long-tail products such as workers'
compensation.
The incurred development method is similar to the paid development method, but
it uses case incurred losses instead of paid losses. Since the method uses more
data (case reserves in addition to paid losses) than the paid development
method, the incurred development patterns may be less variable than paid
patterns. However, selection of the incurred loss pattern typically requires
analysis of all of the same factors described above. In addition, the inclusion
of case reserves can lead to distortions if changes in case reserving practices
have taken place, and the use of case incurred losses may not eliminate the
issues associated with estimating the incurred loss pattern subsequent to the
most mature point available.
The loss ratio method multiplies earned premiums by an expected loss ratio to
produce ultimate loss estimates for each accident or policy year. This method
may be useful for immature accident or policy periods or if loss development
patterns are inconsistent, losses emerge very slowly or there is relatively
little loss history from which to estimate future losses. The selection of the
expected loss ratio typically requires analysis of loss ratios from earlier
accident or policy years or pricing studies and analysis of inflationary trends,
frequency trends, rate changes, underwriting changes and other applicable
factors.
The Bornhuetter-Ferguson method using paid loss is a combination of the paid
development method and the loss ratio method. This method normally determines
expected loss ratios similar to the approach used to estimate the expected loss
ratio for the loss ratio method and typically requires analysis of the same
factors described above. This method assumes that future losses will develop at
the expected loss ratio level. The percent of paid loss to ultimate loss implied
from the paid development method is used to determine what percentage of
ultimate loss is yet to be paid. The use of the pattern from the paid
development method typically requires consideration of the same factors listed
in the description of the paid development method. The estimate of losses yet to
be paid is added to current paid losses to estimate the ultimate loss for each
year. For long-tail lines, this method will react very slowly if actual ultimate
loss ratios are different from expectations due to changes not accounted for by
the expected loss ratio calculation.
The Bornhuetter-Ferguson method using incurred loss is similar to the
Bornhuetter-Ferguson method using paid loss except that it uses case incurred
losses. The use of case incurred losses instead of paid losses can result in
development patterns that are less variable than paid patterns. However, the
inclusion of case reserves can lead to distortions if changes in case reserving
have taken place, and the method typically requires analysis of the same factors
that need to be reviewed for the loss ratio and incurred development methods.
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
64
--------------------------------------------------------------------------------
Table of Contents
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 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, E&O, employment practices, fiduciary, fidelity, cyber and surety coverages and medical liability. The most significant factor affecting reserve estimates for these liability coverages is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislative changes and other factors. Underwriting and claim handling decisions such as the classes of business written and individual claim settlement decisions can also affect claim severity. If the estimated claim severity increases by 9%, CNA estimates that net reserves would increase by approximately$500 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$5.3 billion as ofDecember 31, 2022 . For workers' compensation, since many years will pass from the time the business is written until all claim payments have been made, the most significant factor affecting workers' compensation reserve estimates is claim cost inflation on claim payments. Workers' compensation claim cost inflation is driven by the cost of medical care, the cost of wage 65
--------------------------------------------------------------------------------
Table of Contents
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$300 million . Net reserves for workers' compensation were approximately$3.7 billion as ofDecember 31, 2022 . For general liability, the most significant factor affecting reserve estimates is claim severity. Claim severity is driven by changes in the cost of repairing or replacing property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors. If the estimated claim severity for general liability increases by 6%, 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$3.6 billion as ofDecember 31, 2022 . Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, CNA regularly reviews the adequacy of its reserves and reassesses its reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods. In reviewing CNA's reserve estimates, CNA makes adjustments in the period that the need for such adjustments is determined. These reviews have resulted in CNA's identification of information and trends that have caused CNA to change its reserves in prior periods and could lead to CNA's identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations and equity and CNA's business and insurer financial strength and corporate debt ratings positively or negatively. See Note 8 of the Notes to the Consolidated Financial Statements included under Item 8 for additional information about reserve development. The following table summarizes gross and net carried reserves for CNA's Property & Casualty Operations: December 31 2022 2021 (In millions) Gross Case Reserves$ 5,502 $ 5,621 Gross IBNR Reserves 13,174 11,982
Total Gross Carried Claim and Claim Adjustment Expense Reserves
$ 17,603 Net Case Reserves$ 4,805 $ 4,932 Net IBNR Reserves 11,191 10,338
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 2022 2021 (In millions) Gross Case Reserves$ 1,428 $ 1,551 Gross IBNR Reserves 1,321 1,266
Total Gross Carried Claim and Claim Adjustment Expense Reserves
$ 2,817 Net Case Reserves$ 137 $ 146 Net IBNR Reserves 202 148
Total Net Carried Claim and Claim Adjustment Expense Reserves
$ 294 66
--------------------------------------------------------------------------------
Table of Contents
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. 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. Information regarding Accounting Standards Update ("ASU") 2018-12, which, beginning in 2023, will require changes in the measurement and disclosure of long-duration contracts, including CNA's long term care business, is provided in the Accounting Standards Update section of this MD&A and in Note 1 of the Notes to Consolidated Financial Statements included under Item 8. 67
--------------------------------------------------------------------------------
Table of Contents
The
(In millions)
Long term care active life reserve - change in estimated reserve margin
September 30, 2021 estimated margin
Changes in underlying economic assumptions (a)
(130)
Changes in underlying morbidity assumptions
(30)
Changes in underlying persistency assumptions
40
Changes in underlying premium rate action assumptions
190
Changes in underlying expense and other assumptions
(17)
September 30, 2022 Estimated Margin
(a) Economic assumptions include the impact of interest rates and cost of care inflation.
The increase in the margin in 2022 was primarily driven by changes in discount rate assumptions due to higher near term expected reinvestment rates and higher than previously estimated rate increases on active rate increase programs. These favorable drivers were partially offset by changes in cost of care inflation assumptions.
CNA has determined that additional future policy benefit reserves for profits followed by losses are not currently required based on the most recent projection.
The table below summarizes the estimated pretax impact on CNA's results of
operations from various hypothetical revisions to its future policy benefit
reserve assumptions. The annual GPV process involves updating all assumptions to
management's then current best estimate, and historically all significant
assumptions have been revised each year. In the table below, CNA has assumed
that revisions to such assumptions would occur in each policy type, age and
duration within each policy group. The impact of each sensitivity is discrete
and does not reflect the impact one factor may have on another or the mitigating
impact from management actions, which may include additional future premium rate
increases. Although such hypothetical revisions are not currently required or
anticipated, 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
2022 GPV to Pretax Income
(In millions)
Hypothetical revisions
Morbidity (a):
2.5% increase in morbidity $ 200
5% increase in morbidity 500
Persistency:
5% decrease in active life mortality and lapse $ 100
10% decrease in active life mortality and lapse
300
Discount rates:
25 basis point decline in new money interest rates $ -
50 basis point decline in new money interest rates 100
68
--------------------------------------------------------------------------------
Table of Contents
(a) Represents a sensitivity in future paid claims.
The following tables summarize policyholder reserves for CNA's long term care
operations:
Claim and claim Future
December 31, 2022 adjustment expenses policy benefits Total
(In millions)
Long term care $ 2,979 $ 10,151 $ 13,130
Structured settlement obligations 508 508
Other 9 9
Total 3,496 10,151 13,647
Shadow adjustments (a) 77 77
Ceded reserves (b) 101 101
Total gross reserves $ 3,674 $ 10,151 $ 13,825
December 31, 2021
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
(a)To the extent that unrealized gains on fixed maturity securities supporting
long term care reserves would result in a premium deficiency if realized, a
related increase in Insurance reserves is recorded, after tax and noncontrolling
interests, as a reduction of net unrealized gains (losses), through Other
comprehensive income (loss). To the extent that unrealized gains or losses on
fixed maturity securities supporting structured settlements not funded by
annuities would impact the reserve balance if realized, a related increase or
decrease in Insurance reserves is recorded, after tax and noncontrolling
interests, as a reduction or increase of net unrealized gains (losses) 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. In the fourth
quarter of 2022, CNA novated its block of legacy annuity business resulting in
the reduction of all associated gross and ceded future policy benefit reserves.
CATASTROPHES AND RELATED REINSURANCE
Various events can cause catastrophe losses. These events can be natural or man-made, including hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil unrest, cyber attacks, pandemics and acts of terrorism that produce unusually large aggregate losses. In most, but not all cases, 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. Catastrophe losses, net of reinsurance, of$247 million and$397 million were recorded for the years endedDecember 31, 2022 and 2021. Catastrophe losses for the years endedDecember 31, 2022 and 2021 were driven by severe weather related events, primarily Winter Storm Elliott and Hurricane Ian for 2022 and Hurricane Ida andWinter Storms Uri and Viola for 2021. 69
--------------------------------------------------------------------------------
Table of Contents
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. In 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 of 2021 for the one-time catch-up under the treaty of unearned premium on policies previously written as of the treaty inception. The treaty was renewed for a term ofJune 1, 2022 toJune 1, 2023 .
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, 2022 toJune 1, 2023 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, 2023 toJanuary 1, 2024 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$600 million of coverage for the accumulation of covered losses related to terrorism events above CNA's retention of$25 million . Of the$600 million in terrorism coverage,$200 million is provided for nuclear, biological, chemical and radiation events. One full reinstatement is available for the first$275 million above the retention, regardless of the covered peril.
Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIPRA")
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 2023. Under the current provisions of the program, in 2023 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 2022 earned premiums, CNA's estimated deductible under the program is$1.0 billion for 2023. If an act of terrorism or acts of terrorism result in covered losses exceeding the$100 billion annual industry aggregate limit,Congress would be responsible for determining how additional losses in excess of$100 billion will be paid.
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
on 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.
70
--------------------------------------------------------------------------------
Table of Contents
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.
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.
71
--------------------------------------------------------------------------------
Table of Contents
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 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
InAugust 2018 , theFinancial Accounting Standards Board ("FASB") issued ASU 2018-12, "Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts." The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. For the Company, this includes CNA's long term care business. The Company will adopt the new guidance effectiveJanuary 1, 2023 , using the modified retrospective method applied as of the transition date ofJanuary 1, 2021 . The most significant impact will be the effect of updating the discount rate assumption quarterly to reflect an upper-medium grade fixed-income instrument yield, rather than the expected investment portfolio yield. This will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The net impact of these changes is expected to be a decrease of approximately$2.1 billion (after tax and noncontrolling interests) in AOCI as of the transition date ofJanuary 1, 2021 . To illustrate the sensitivity of this adjustment, had the interest rates in effect as ofDecember 31, 2022 been used in the calculation, the transition impact to AOCI would have been a decrease of approximately$225 million (after tax and noncontrolling interests). The requirement to review, and update if there is a change, cash flow assumptions at least annually is expected to change the pattern of earnings being recognized. Under current accounting guidance, the third quarter 2022 gross premium valuation assessment indicated a pretax reserve margin of$125 million , with no unlocking event. However under the new guidance, the effect of changes in cash flow assumptions from the assessment would be recorded in results of operations (except for discount rate changes which would be recorded quarterly through AOCI).
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.
© Edgar Online, source
