LOEWS CORPORATION Management's discussion and analysis of financial condition and results of operations is comprised of the following sections:
Page
No.
Overview 47
Results of Operations 48
Consolidated Financial Results 48
CNA Financial 49
Boardwalk Pipelines 55
Loews Hotels & Co 58
Corporate 59
Diamond Offshore 60
Liquidity and Capital Resources 60
Parent Company 60
Subsidiaries 60
Contractual Obligations 62
Investments 63
Insurance Reserves 66
Critical Accounting Estimates 75
Accounting Standards Update 77
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Table of Contents
OVERVIEW
Loews Corporation is a holding company and has five 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 "); the Corporate segment andDiamond Offshore Drilling Inc. ("Diamond Offshore"). The Corporate segment is primarily comprised ofLoews Corporation excluding its subsidiaries and the operations ofAltium Packaging LLC ("Altium Packaging ").Diamond Offshore was deconsolidated during the second quarter of 2020. Each of the operating subsidiaries andDiamond Offshore are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. OnApril 26, 2020 (the "Filing Date"),Diamond Offshore and certain of its direct and indirect subsidiaries filed voluntary petitions in theUnited States Bankruptcy Court for the Southern District of Texas seeking relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Filing"). As a result of the Chapter 11 Filing and applicableU.S. generally accepted accounting principles,Loews Corporation no longer controlsDiamond Offshore for accounting purposes. Therefore,Diamond Offshore was deconsolidated from the Company's consolidated financial statements, effective as of the Filing Date, resulting in the recognition of a loss of$1.2 billion ($957 million after tax) during the year endedDecember 31, 2020 . Results of operations forDiamond Offshore through the Filing Date included an aggregate asset impairment charge of$774 million ($408 million after tax and noncontrolling interests) recognized in the first quarter of 2020. For further information see theDiamond Offshore section of this MD&A. Unless the context otherwise requires, the term "Company" as used herein meansLoews Corporation including its subsidiaries, the terms "Parent Company," "we," "our," "us" or like terms as used herein meanLoews Corporation excluding its subsidiaries, the term "Net income (loss) attributable toLoews Corporation " as used herein means Net income (loss) attributable toLoews Corporation shareholders and the term "subsidiaries" means theLoews Corporation's consolidated subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Note 14 of the Notes to Consolidated Financial Statements included under Item 8) and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders. The following discussion should be read in conjunction with Item 1A, Risk Factors, and Item 8, Financial Statements and Supplementary Data of this Form 10-K. For a discussion of changes in results of operations comparing the years endedDecember 31, 2019 and 2018 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, 2019 , filed with theSEC onFebruary 12, 2020 . 47
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Table of Contents RESULTS OF OPERATIONS
Consolidated Financial Results
The following table summarizes net income (loss) attributable to
Year Ended December 31 2020 2019
(In millions, except per share data)
CNA Financial$ 618 $ 894 Boardwalk Pipelines 206 209 Loews Hotels & Co (212 ) (31 ) Corporate (a) (1,067 ) 35 Diamond Offshore (b) (476 ) (175 )
Net income (loss) attributable to
Basic net income (loss) per share$ (3.32 ) $ 3.08 Diluted net income (loss) per share$ (3.32 ) $ 3.07
(a) Includes a net investment loss of
caused by the write down of the carrying value of our interest in Diamond
Offshore.
(b) Amounts presented for
deconsolidation. See Notes 2 and 20 of the Notes to the Consolidated
Financial Statements included under Item 8.
2020 Compared with 2019
Net loss attributable to
The net loss for 2020 was driven by six main factors: (i) an investment loss of$1.2 billion ($957 million after tax) caused by the write down of the carrying value of our interest inDiamond Offshore as a result of its deconsolidation upon its bankruptcy filing onApril 26, 2020 ; (ii) drilling rig impairment charges atDiamond Offshore during the first quarter of 2020 when it was a consolidated subsidiary; (iii) operating losses in 2020 as compared to operating income in 2019 atLoews Hotels ; (iv) a reduction in CNA's and the parent company's net investment income; (v) net investment losses at CNA in 2020 as compared to net investment gains in 2019; and (vi) lower property and casualty underwriting income at CNA caused mainly by higher catastrophe losses. The economic disruption caused by the COVID-19 pandemic and measures to mitigate the spread of the virus have significantly affected Loews's results in 2020. The full impact of COVID-19 on the Company's financial results will depend on the duration of mandated and voluntary containment efforts, related economic policies, the success of vaccination efforts in mitigating the pandemic, and other societal responses to the pandemic. 48
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Table of ContentsCNA Financial The following table summarizes the results of operations for CNA for the years endedDecember 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8. For further discussion of Net investment income and Investment gains (losses), see the Investments section of this MD&A. Year Ended December 31 2020 2019 (In millions) Revenues: Insurance premiums$ 7,649 $ 7,428 Net investment income 1,935 2,118 Investment gains (losses) (35 ) 49 Non-insurance warranty revenue 1,252 1,161 Other revenues 26 32 Total 10,827 10,788
Expenses:
Insurance claims and policyholders' benefits 6,170 5,806 Amortization of deferred acquisition costs
1,410 1,383
Non-insurance warranty expense 1,159 1,082
Other operating expenses 1,125 1,141
Interest 142 152
Total 10,006 9,564
Income before income tax 821 1,224
Income tax expense (131 ) (224 )
Net income 690 1,000
Amounts attributable to noncontrolling interests (72 ) (106 )
Net income attributable to
2020 Compared with 2019
Net income attributable toLoews Corporation decreased$276 million for 2020 as compared with 2019. The decrease was primarily due to net catastrophe losses of$550 million ($388 million after tax and noncontrolling interests) for 2020 as compared to$179 million ($126 million after tax and noncontrolling interests) in 2019, lower net investment income and investment losses in 2020 as compared with investment gains in 2019. Net catastrophe losses for 2020 include$294 million primarily related to severe weather-related events,$195 million related to COVID-19 and$61 million related to civil unrest. The decrease in net investment income was driven by lower yields in the fixed income portfolio and lower limited partnership and common stock returns. Investment losses were driven by higher impairment losses and the unfavorable change in fair value of non-redeemable preferred stock, partially offset by higher gains on sales of fixed maturity securities. These decreases were partially offset by improved non-catastrophe current accident year underwriting results and a$74 million charge ($52 million after tax and noncontrolling interests) in the third quarter of 2020 as compared to a$216 million charge ($151 million after tax and noncontrolling interests) in the third quarter of 2019 related to recognition of a premium deficiency as a result of the gross premium valuation ("GPV") review. COVID-19 related conditions had a significant impact across CNA during 2020. During the first quarter of 2020, CNA experienced significant declines in the value of its investment portfolio. While financial markets broadly recovered by the end of 2020, CNA's Net investment income and Investment gains (losses) are lower for 2020 as compared with 2019. CNA also recorded significant catastrophe losses during 2020 related to COVID-19 and recorded a reduction in its estimated audit premiums due to lower exposure. The Company's 2020 consolidated financial statements reflect its best estimate of the impacts related to COVID-19. 49
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Table of Contents
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 certain
property and casualty businesses in run-off, including CNA Re and asbestos and
environmental pollution ("A&EP"). 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.
On December 30, 2020 , CNA entered into an agreement with Cavello Bay Reinsurance
Limited ("Cavello"), a subsidiary of Enstar Group Limited, under which Cavello
reinsured a legacy portfolio of excess workers' compensation policies. The
transaction closed on February 5, 2021 and is based on reserves in place as of
January 1, 2020 and adjusted for any subsequent claim activity. This business
will be reclassified from the Commercial business to Other Insurance Operations,
better reflecting the manner in which CNA is organized for purposes of making
operating decisions and assessing performance. The new classifications will be
presented in the period ending March 31, 2021 , and prior periods presented will
conform to the new presentation. Further information on CNA's retroactive
reinsurance agreement is provided in Note 21 of the Notes to Consolidated
Financial Statements included under Item 8.
In assessing its insurance operations, CNA utilizes the core income (loss)
financial measure. Core income (loss) is calculated by excluding from net income
(loss), investment gains or losses and any cumulative effects of changes in
accounting guidance. In addition, core income (loss) excludes the effects of
noncontrolling interests. The calculation of core income (loss) excludes
investment gains or losses because investment gains or losses are generally
driven by economic factors that are not necessarily reflective of CNA's primary
insurance operations. Core income (loss) is deemed to be a non-GAAP financial
measure and management believes this measure is useful for investors to evaluate
its insurance operations.
Property & Casualty Operations
In evaluating the results of Property & Casualty Operations, CNA utilizes the
loss ratio, the loss ratio excluding catastrophes and development, the expense
ratio, the dividend ratio, the combined ratio and the combined ratio excluding
catastrophes and development. These ratios are calculated using GAAP financial
results. The loss ratio is the percentage of net incurred claim and claim
adjustment expenses to net earned premiums. The loss ratio excluding
catastrophes and development excludes net catastrophes losses and changes in
estimates of claim and claim adjustment expense reserves, net of reinsurance,
for prior years from the loss ratio. The expense ratio is the percentage of
insurance underwriting and acquisition expenses, including the amortization of
deferred acquisition costs, to net earned premiums. The dividend ratio is the
ratio of policyholders' dividends incurred to net earned premiums. The combined
ratio is the sum of the loss, expense and dividend ratios. The combined ratio
excluding catastrophes and development is the sum of the loss ratio excluding
catastrophes and development, the expense ratio and the dividend ratio. In
addition, renewal premium change, rate, retention and new business are also
utilized in evaluating operating trends. Renewal premium change represents the
estimated change in average premium on policies that renew, including rate and
exposure changes. Rate represents the average change in price on policies that
renew excluding exposure change. For certain products within Small Business,
where quantifiable, rate includes the influence of new business as well.
Exposure represents the measure of risk used in the pricing of the insurance
product. Retention represents the percentage of premium dollars renewed in
comparison to the expiring premium dollars from policies available to renew.
Renewal premium change, rate and retention presented for the prior year are
updated to reflect subsequent activity on policies written in the period. New
business represents premiums from policies written with new customers and
additional policies written with existing customers. Gross written premiums,
excluding third party captives, excludes business which is ceded to third party
captives, including business related to large warranty programs.
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The following tables summarize the results of CNA's Property & Casualty
Operations for the years ended
Year Ended December 31, 2020 Specialty Commercial International Total (In millions, except %) Gross written premiums$ 7,180 $ 4,086 $ 1,133$ 12,399 Gross written premiums excluding third party captives 3,296 3,993 1,133 8,422 Net written premiums 3,040 3,565 961 7,566 Net earned premiums 2,883 3,323 940 7,146 Net investment income 449 565 58 1,072 Core income 535 261 38 834 Other performance metrics: Loss ratio excluding catastrophes and development 59.9 % 60.6 % 60.1 % 60.2 % Effect of catastrophe impacts 4.3 10.7 7.1 7.7 Effect of development-related items (2.1 ) 2.1 (0.3 ) 0.1 Loss ratio 62.1 % 73.4 % 66.9 % 68.0 % Expense ratio 31.3 33.0 35.5 32.6 Dividend ratio 0. l 0.5 0.3 Combined ratio 93.5 % 106.9 % 102.4 % 100.9 % Combined ratio excluding catastrophes and development 91.3 % 94.1 % 95.6 % 93.1 % Rate 12 % 10 % 14 % 11 % Renewal premium change 11 8 12 10 Retention 86 84 73 83 New business$ 389 $ 761 $ 245$ 1,395 51
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Table of Contents Year Ended December 31, 2019 Specialty Commercial International Total (In millions, except %) Gross written premiums$ 6,900 $ 3,693 $ 1,111$ 11,704 Gross written premiums excluding third party captives 3,015 3,609 1,111 7,735 Net written premiums 2,848 3,315 971 7,134 Net earned premiums 2,773 3,162 974 6,909 Net investment income 556 654 63 1,273 Core income 671 489 30 1,190 Other performance metrics: Loss ratio excluding catastrophes and development 60.3 % 61.7 % 60.9 % 61.0 % Effect of catastrophe impacts 0.5 4.9 1.1 2.6 Effect of development-related items (3.3 ) 0.7 2.1 (0.7 ) Loss ratio 57.5 % 67.3 % 64.1 % 62.9 % Expense ratio 32.5 32.9 37.7 33.5 Dividend ratio 0.2 0.6 0.3 Combined ratio 90.2 % 100.8 % 101.8 % 96.7 % Combined ratio excluding catastrophes and development 93.0 % 95.2 % 98.6 % 94.8 % Rate 5 % 4 % 8 % 5 % Renewal premium change 8 6 7 6 Retention 88 86 71 84 New business$ 367 $ 682 $ 273$ 1,322
2020 Compared with 2019
Total gross written premiums increased$695 million in 2020 as compared with 2019. Total net written premiums increased$432 million in 2020 as compared with 2019. Gross written premiums, excluding third party captives, for Specialty increased$281 million in 2020 as compared with 2019 driven by strong rate and higher new business. Net written premiums for Specialty increased$192 million in 2020 as compared with 2019. The increase in net earned premiums in 2020 was consistent with the trend in net written premiums for Specialty. Gross written premiums for Commercial increased$393 million in 2020 as compared with 2019 driven by strong rate and higher new business. Net written premiums for Commercial increased$250 million in 2020 as compared with 2019. The increase in net earned premiums in 2020 for Commercial was consistent with the trend in net written premiums partially offset by a reduction in estimated audit premiums as a result of the economic slowdown arising from COVID-19 and premium rate adjustments impacting certain general liability policies. For further information on the general liability premium rate adjustments see Note 19 of the Notes to Consolidated Financial Statements included under Item 8. Gross written premiums for International increased$22 million in 2020 as compared with 2019 driven by growth inEurope andCanada partially offset by the impact of the strategic exit from certain Lloyd's business classes. Net written premiums decreased$10 million in 2020 as compared with 2019. The decrease in net earned premiums in 2020 was consistent with the trend in net written premiums for International. Core income decreased$356 million in 2020 as compared with 2019 primarily due to higher net catastrophe losses and lower net investment income. These results were partially offset by improved non-catastrophe current accident year underwriting results. 52
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Net catastrophe losses were$550 million in 2020 as compared with$179 million in 2019. Net catastrophe losses in 2020 include$294 million primarily related to severe weather-related events,$195 million related to COVID-19 and$61 million related to civil unrest. Specialty net catastrophe losses of$125 million in 2020 included$109 million related to the COVID-19 pandemic and$16 million primarily related to severe weather-related events. Specialty net catastrophe losses were$15 million in 2019. Commercial net catastrophe losses of$358 million in 2020 included$252 million primarily related to severe weather-related events,$58 million related to civil unrest and$48 million related to the COVID-19 pandemic. Commercial net catastrophe losses were$154 million in 2019. International net catastrophe losses of$67 million in 2020 included$38 million related to the COVID-19 pandemic,$26 million primarily related to severe weather-related events and$3 million related to civil unrest. International net catastrophe losses were$10 million in 2019. The COVID-19 catastrophe losses represent CNA's best estimate of ultimate insurance losses and loss adjustment expenses, including defense costs, resulting from the pandemic, mitigating actions and the consequent economic crisis. The losses were substantially driven by healthcare professional liability with additional impacts from workers' compensation, management liability, commercial property, trade credit and surety. Due to the timing and fluidity of the events related to COVID-19, emergence pattern of claims and long tail nature of certain exposures the losses are substantially classified as incurred but not reported ("IBNR") reserves. The COVID-19 catastrophe losses do not include the benefits of lower current accident year losses associated with lower loss frequency in certain lines of business as a result of shelter in place restrictions. Those benefits are modest and are partially offset by the impact of a reduction in the estimated audit premiums and an increase in the credit allowance for premium receivables resulting from depressed economic conditions. Favorable net prior year loss reserve development of$20 million and$73 million was recorded in 2020 and 2019. In 2020 and 2019, Specialty recorded favorable net prior year loss reserve development of$61 million and$92 million , Commercial recorded unfavorable net prior year loss reserve development of$43 million as compared with favorable net prior year loss reserve development of$2 million and International recorded favorable net prior year loss reserve development of$2 million as compared with unfavorable net prior year loss reserve development of$21 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 increased 3.3 points in 2020 as compared with 2019 primarily due to a 4.6 point increase in the loss ratio partially offset by a 1.2 point improvement in the expense ratio. The increase in the loss ratio was primarily due to higher net catastrophe losses, which were 4.3 points of the loss ratio in 2020, as compared with 0.5 points of the loss ratio in 2019. The improvement in the expense ratio was driven by lower underwriting expenses and higher net earned premiums. Commercial's combined ratio increased 6.1 points in 2020 as compared with 2019 due to an increase in the loss ratio. The increase in the loss ratio was driven by higher net catastrophe losses, which were 10.7 points of the loss ratio in 2020, as compared with 4.9 point of the loss ratio in 2019, and unfavorable net prior year loss reserve development in 2020. The expense ratio in 2020 was consistent with 2019 as higher acquisition expenses were offset by higher net earned premiums and lower underwriting expenses. International's combined ratio increased 0.6 points in 2020 as compared with 2019 due to a 2.8 point increase in the loss ratio, partially offset by a 2.2 point improvement in the expense ratio. The increase in the loss ratio was driven by higher net catastrophe losses, which were 7.1 points of the loss ratio in 2020, as compared with 1.1 points of the loss ratio in 2019, partially offset by favorable net prior year loss reserve development in the current year. The improvement in the expense ratio was driven by lower acquisition and underwriting expenses. 53
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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 2020 2019 (In millions) Net earned premiums$ 504 $ 520 Net investment income 863 845 Core loss (99 ) (211 ) 2020 Compared with 2019 Core loss improved$112 million in 2020 as compared with 2019. Core loss in 2020 included a$59 million charge related to the recognition of an active life reserve premium deficiency for long term care policies primarily driven by actions taken on discount rate assumptions. The normative risk free rate (the projection of the 10-yearU.S. Treasury rate in the long term) was lowered by 100 basis points to 2.75% and the time period to grade up to the normative rate was extended from 6 years to 10 years. Core loss in 2020 also included a$36 million charge related to an increase in the structured settlement claim reserves and a$30 million benefit related to a reduction in long term care claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2020. Core loss in 2019 included a$170 million charge related to the recognition of an active life reserve premium deficiency and a$44 million benefit related to a reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2019. Excluding the impacts of the GPV and claim reserve reviews, core results in 2020 were favorable, driven by better than expected morbidity in the long term care business and higher net investment income. The increase in net investment income was driven by the allocation of a portion of limited partnership income to Other Insurance Operations beginning in the fourth quarter of 2020. Further, during 2020, relative to expectations, CNA experienced lower new claim frequency, higher claim terminations and more favorable claim severity amid the effects of COVID-19. Given the uncertainty of these trends, CNA increased its IBNR reserves in anticipation of increased claim activity as the COVID-19 pandemic abates.
Non-GAAP Reconciliation of Core Income to Net Income
The following table reconciles core income to net income attributable to
Year Ended December 31 2020 2019 (In millions) Core income (loss): Property & Casualty Operations$ 834 $ 1,190 Other Insurance Operations (99 ) (211 ) Total core income 735 979 Investment gains (losses) (30 ) 37
Consolidating adjustments including noncontrolling interests (87 ) (122 )
Net income attributable to
$ 618 $ 894 54
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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 NGLs prices may impact the volumes of natural gas or
NGLs transported and stored by customers on its systems. Due to the
capital-intensive nature of its business, Boardwalk Pipelines' operating costs
and expenses typically do not vary significantly based upon the amount of
products transported, with the exception of fuel consumed at its compressor
stations and not included in a fuel tracker.
Current Events
In 2020, the COVID-19 pandemic and measures to mitigate the spread of COVID-19 significantly impacted the world andthe United States . An excess supply of energy products also led to disruptions in the energy sector and volatility in energy prices early in 2020, with a partial recovery of prices and demand occurring in the latter half of 2020. Boardwalk Pipelines' operations are considered essential critical infrastructure under currentCybersecurity and Infrastructure Security Agency guidelines, which allowed Boardwalk Pipelines to remain open during the pandemic. As a result, the impacts from COVID-19 and the volatile energy prices have not been significant to Boardwalk Pipelines' business, though some of its customers have been and continue to be directly impacted by COVID-19 and the volatility in commodity prices. In 2020, Boardwalk Pipelines transported approximately 3.2 Tcf of natural gas, or an 8% increase from 2019. Firm Agreements A substantial portion of Boardwalk Pipelines' transportation and storage capacity is contracted for under firm agreements. For the year endedDecember 31, 2020 , approximately 90% of Boardwalk Pipelines' revenues were derived from capacity reservation fees under firm contracts. The table below shows a rollforward of operating revenues under committed firm agreements in place as ofDecember 31, 2019 toDecember 31, 2020 , including agreements for transportation, storage and other services, over the remaining term of those agreements: As ofDecember 31, 2020 (In millions)
Total projected operating revenues under committed firm agreements as
of
$ 9,329
Adjustments for: Actual revenues recognized from firm agreements in 2020 (a) (1,155 ) Firm agreements entered into in 2020
1,276
Total projected operating revenues under committed firm agreements as
of
$ 9,450
(a) Reflects an increase of
revenues recognized from fixed fees under firm agreements as compared with
its expected 2020 revenues from fixed fees under firm agreements, including
agreements for transportation, storage and other services as of
2019, primarily due to an increase from contract renewals that occurred in
2020.
During 2020, Boardwalk Pipelines entered into approximately $1.3 billion of new
firm agreements, of which approximately 55% were from new growth projects
executed in 2020, but will not be placed into commercial service until 2024 or
later years. As of December 31, 2020 , Boardwalk Pipelines' top ten customers
holding firm capacity under firm agreements comprised approximately 40% of its
total projected operating revenues. Additionally, the credit profile associated
with Boardwalk Pipelines' customers comprising the total projected operating
revenues under firm agreements as of December 31, 2020 was 75% rated as
investment grade, 4% rated as non-investment grade and 21% not rated.
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Contract Renewals
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). Boardwalk Pipelines' storage rates are additionally impacted by natural gas price differentials between time periods, such as winter to summer (time period price spreads), and the volatility in time period price spreads. Demand for firm service is primarily based on market conditions which can vary across Boardwalk Pipelines' pipeline systems. While Boardwalk Pipelines has not seen a decrease in the demand for its transportation services as a result of the COVID-19 pandemic or the volatility in energy prices during 2020, if these conditions were to remain for an extended period of time or worsen, Boardwalk Pipelines could see a decline in the demand for its services. Boardwalk Pipelines focuses its marketing efforts on enhancing the value of the capacity that is up for renewal and works with customers to match gas supplies from various basins to new and existing customers and markets, including aggregating supplies at key locations along its pipelines to provide end-use customers with attractive and diverse supply options. If the market perceives the value of Boardwalk Pipelines' available capacity to be lower than its long term view of the capacity, Boardwalk Pipelines may seek to shorten contract terms until market perception improves. Over the past several years, as a result of market conditions, Boardwalk Pipelines has renewed some expiring contracts at lower rates or for shorter terms than in the past. In addition to normal contract expirations, in the 2018 to 2020 timeframe, transportation agreements associated with its significant pipeline expansion projects that were placed into service in the 2007-2009 timeframe, have expired. A substantial portion of the capacity associated with the pipeline expansion projects was recontracted, usually at lower rates or lower volumes, which has negatively impacted Boardwalk Pipelines' operating revenues. The last of the contract expirations associated with the 2007-2009 pipeline expansion projects have occurred and the associated impacts on operating revenues have been and will continue to be realized. Historically, Boardwalk Pipelines had delivered the majority of production volumes from these pipeline expansion projects to other pipelines. Over the past several years, Boardwalk Pipelines has focused on diversifying its deliveries to end-use markets through utilizing available capacity from contract expirations and the capacity created from its growth projects. Boardwalk Pipelines has diversified deliveries such that almost 75% of Boardwalk Pipelines' projected future firm reservation revenues, from firm agreements in place as ofDecember 31, 2020 , are for deliveries to end-use customers.
Pipeline System Maintenance
Boardwalk Pipelines incurs substantial costs for ongoing maintenance of its pipeline systems and related facilities, including those incurred for pipeline integrity management activities, equipment overhauls, general upkeep and repairs. These costs are not dependent on the amount of revenues earned from its transportation services. PHMSA has developed regulations that require transportation pipeline operators to implement integrity management programs to comprehensively evaluate certain areas along pipelines and take additional measures to protect pipeline segments located in highly populated 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. The remaining rulemakings comprising the gas Mega Rule have not been published yet and Boardwalk Pipelines cannot predict when they will be finalized, however, they are expected to include revised pipeline repair criteria as well as more stringent corrosion control requirements. It is expected that these new rules will cause Boardwalk Pipelines to incur increased capital and operating costs, experience operational delays and result in potential adverse impacts to its ability to reliably serve its customers as described under Item 1A. Risk Factors of this Report. 56
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Maintenance costs may be capitalized or expensed, depending on the nature of the activities. For any given reporting period, the mix of projects that Boardwalk Pipelines undertakes will affect the amounts we record as property, plant and equipment on the Consolidated Balance Sheets or recognize as expenses, which impacts earnings. In 2021, Boardwalk Pipelines expects to spend approximately$370 million to maintain its pipeline systems, of which approximately$150 million is expected to be maintenance capital. In 2020, Boardwalk Pipelines spent$361 million to maintain its pipeline systems, of which$149 million was recorded as maintenance capital.
Results of Operations
The following table summarizes the results of operations for Boardwalk Pipelines for the years endedDecember 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2020 2019 (In millions) Revenues: Operating revenues and other$ 1,302 $ 1,300 Total 1,302 1,300 Expenses: Operating and other 855 840 Interest 170 179 Total 1,025 1,019 Income before income tax 277 281 Income tax expense (71 ) (72 )
Net income attributable to
2020 Compared with 2019
Total revenues increased$2 million in 2020 as compared with 2019. Including the effect of items in fuel and transportation expense and excluding net proceeds of approximately$34 million in 2020 and$26 million in 2019 as a result of drawing on letters of credit due to customer bankruptcies in 2020 and 2019, operating revenues decreased$11 million driven by contract expirations that were recontracted at overall lower average rates, partially offset by revenues from recently completed growth projects and higher storage and parking and lending revenues due to favorable market conditions. Operating expenses increased$15 million in 2020 as compared with 2019. Excluding items offset with operating revenues, operating expenses increased$11 million , primarily due to an increased asset base from recently completed growth projects and the expiration of property tax abatements, partially offset by lower maintenance project spending and employee-related costs. Interest expense decreased$9 million in 2020 as compared with 2019 primarily due to lower average interest rates. 57
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Table of ContentsLoews Hotels & Co The following table summarizes the results of operations forLoews Hotels & Co for the years endedDecember 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2020 2019 (In millions) Revenues: Operating revenue$ 167 $ 578 Gain on sale of assets 37 Revenues related to reimbursable expenses 74 114 Total 278 692 Expenses: Operating and other: Operating 273 493 Asset impairments 36 99 Reimbursable expenses 74 114 Depreciation 63 61
Equity (income) loss from joint ventures 73 (69 ) Interest
33 22
Total 552 720
Loss before income tax (274 ) (28 )
Income tax (expense) benefit 62 (3 )
Net loss attributable to
2020 Compared with 2019
Due to the COVID-19 pandemic and efforts to mitigate the spread of the virus, beginning in March of 2020,Loews Hotels & Co temporarily suspended operations at the majority of its owned and/or operated hotels. Since then, most hotels have resumed operations, but occupancy rates remain considerably lower than those from the prior year, or even occupancy rates prior to March of 2020. As such,Loews Hotels & Co has actively managed the operations of its hotel portfolio, in partnership with each hotel's stakeholders, to minimize the financial loss at each property and accommodate available demand. AlthoughLoews Hotels & Co has enacted significant measures to adjust the operating cost structure of each hotel during suspensions of operations, deferred most capital expenditures and reduced the operating costs of its management company, these measures could not offset the impact of significant lost revenues.Loews Hotels & Co has therefore incurred significant operating losses since the start of the pandemic. The resumption of operations for the hotels that currently have suspended operations, the potential for hotels that are operational to suspend operations, as well as occupancy levels for hotels that are operational will depend on numerous factors, many of which are outsideLoews Hotels & Co's control including government capacity restrictions, travel restrictions and the duration and scope of the COVID-19 pandemic. While the duration and period to period severity of the COVID-19 outbreak and related financial impact cannot be estimated at this time,Loews Hotels & Co's results of operations, financial condition and cash flows were materially adversely affected during 2020, and will continue to be materially adversely impacted into 2021. In addition, once the COVID-19 outbreak is mitigated or contained, whenever that may be, historical travel patterns, both domestic and international, may continue to be disrupted either on a temporary basis or with longer term effects. These factors have contributed to impairment charges in 2020, and may lead to additional impairment charges in future periods. Reduced occupancy and average daily rates caused by the COVID-19 pandemic and resulting mitigation efforts and operating cost reduction measures are the primary reasons for the decrease in operating revenues of$411 million and operating expenses of$220 million in 2020 as compared with 2019. Equity losses from joint ventures was$73 million in 2020 as compared to equity income of$69 million in 2019, also driven primarily by the impact of the COVID-19 pandemic. 58
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Loews Hotels & Co considers events or changes in circumstances that indicate the carrying amount of its assets may not be recoverable. In 2020,Loews Hotels & Co recorded impairment charges of$36 million to reduce the carrying value of certain assets to their estimated fair value compared to impairment charges of$99 million in 2019.
Gain on sale of assets of
Interest expense for 2020 increased$11 million as compared with 2019 primarily due to the increase in aggregate debt balances and less capitalized interest related to hotel development projects.
Corporate
Corporate operations consist primarily of investment income at the Parent Company, operating results ofAltium Packaging , Parent Company interest expense and other Parent Company administrative costs. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of limited partnership investments and the trading portfolio held at the Parent Company. The following table summarizes the results of operations for Corporate for the years endedDecember 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8: Year Ended December 31 2020 2019 (In millions) Revenues: Net investment income$ 59 $ 230 Investment loss (1,211 ) Operating revenues and other 1,023 933 Total (129 ) 1,163 Expenses: Operating and other 1,098 1,004 Interest 127 115 Total 1,225 1,119 Income (loss) before income tax (1,354 ) 44 Income tax (expense) benefit 287 (9 )
Net income (loss) attributable to
2020 Compared with 2019
Net investment income for the Parent Company decreased$171 million in 2020 as compared with 2019 as a result of the significant decline in the performance of equity based and short term investments in response to the COVID-19 pandemic and related containment measures.
Investment loss of
Operating revenues and other includeAltium Packaging revenues of$1,022 million and$932 million for 2020 and 2019. The increase of$90 million in 2020 as compared with 2019 reflects an increase of$63 million related to the full year impact of acquisitions in 2019, an acquisition in November of 2020, higher volumes and higher year-over-year resin prices.Altium Packaging's contracts with its customers provide for price adjustments for changes in resin prices on a prospective basis. Due to fluctuations in resin prices, over time resin raw material costs are generally offset by the change in revenues, so thatAltium Packaging's gross margins return to the same level as prior to the change in prices. Operating and other expenses includeAltium Packaging operating expenses of$992 million and$913 million for 2020 and 2019, which include depreciation and amortization expense. The increase in operating expenses of$79 million in 2020 as compared with 2019 is primarily due to$56 million for the full year impact of acquisitions in 2019 and an acquisition in November of 2020, higher depreciation and amortization expenses and the increase in resin prices. 59
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Corporate Operating and other expenses were$106 million and$91 million for 2020 and 2019. The increases of$15 million in 2020 as compared with 2019 are primarily due to legal and other corporate overhead expenses. Interest expenses increased$12 million in 2020 as compared with 2019 due to the issuance in May of 2020 of the Parent Company's$500 million aggregate principal amount of 3.2% senior notes dueMay 15, 2030 and incremental borrowings byAltium Packaging to fund its 2019 acquisitions.
Contract drilling revenues were$287 million and$935 million for 2020 and 2019. Contract drilling expenses were$254 million and$793 million for 2020 and 2019. Results for 2020 included in our Consolidated Financial Statements reflect only the period through theApril 26, 2020 deconsolidation. Operating and other expenses for 2020 include an aggregate asset impairment charge of$774 million ($408 million after tax and noncontrolling interests) recognized in the first quarter of 2020.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company
Parent Company cash and investments, net of receivables and payables, totaled$3.5 billion atDecember 31, 2020 as compared to$3.3 billion atDecember 31, 2019 . In 2020, we received$947 million in dividends from our subsidiaries, including a special dividend from CNA of$485 million . Cash outflows included the payment of$923 million to fund treasury stock purchases,$70 million of cash dividends to our shareholders,$151 million of cash contributions toLoews Hotels & Co and$19 million to purchase common shares of CNA. OnFebruary 3, 2021 , we received a$199 million dividend fromAltium Packaging . In March of 2021, we will receive dividends of$275 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 Registration Statement on file with theSecurities and Exchange Commission ("SEC") registering the future sale of an unlimited amount of our debt and equity securities from time to time. We are not responsible for the liabilities and obligations of our subsidiaries and there are no Parent Company guarantees.
In May of 2020, we completed a public offering of
Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries outstanding common stock in the open market or otherwise. In 2020, we purchased 22.0 million shares ofLoews Corporation common stock and 564,430 shares of CNA common stock. As ofFebruary 5, 2021 , we had purchased an additional 2.2 million shares ofLoews Corporation common stock in 2021 at an aggregate cost of$100 million . As ofFebruary 5, 2021 , there were 267,046,558 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$1.8 billion in 2020 and$1.1 billion in 2019. The increase in cash provided by operating activities was driven by an increase in premiums collected, lower net claim payments and lower income taxes paid, partially offset by a lower level of distributions from limited partnerships. 60
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CNA paid dividends of$3.48 per share on its common stock, including a special dividend of$2.00 per share in 2020. OnFebruary 5, 2021 , CNA's Board of Directors declared a quarterly dividend of$0.38 per share and a special dividend of$0.75 per share payableMarch 11, 2021 to shareholders of record onFebruary 22, 2021 . CNA's declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA's earnings, financial condition, business needs and regulatory constraints. The payment of dividends by CNA's insurance subsidiaries without prior approval of the insurance department of each subsidiary's domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments. In August of 2020, CNA completed a public offering of$500 million aggregate principal amount of its 2.1% senior notes dueAugust 15, 2030 and used the net proceeds to redeem the entire$400 million outstanding aggregate principal balance of its 5.8% senior notes dueAugust 15, 2021 and for general corporate purposes. CNA has an effective shelf registration statement on file with theSEC under which it may publicly issue debt, equity or hybrid securities from time to time. OnFebruary 5, 2021 , in connection with the closing of the retroactive reinsurance transaction with Cavello, CNA transferred approximately$630 million of cash into a collateral trust account as security for Cavello's obligations under the terms of the agreement. See Note 21 of the Notes to Consolidated Financial Statements included under Item 8 for further information on the retroactive reinsurance transaction with Cavello. Dividends fromContinental Casualty Company ("CCC"), a subsidiary of CNA, are subject to the insurance holding company laws of theState of Illinois , the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by theIllinois Department of Insurance (the "Department"), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as the timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As ofDecember 31, 2020 , CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2021 that would not be subject to the Department's prior approval is$1,070 million , less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of$975 million in 2020. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company. CNA has a financial strength rating of A and senior debt rating of bbb+ fromA.M. Best Company ("A.M. Best"), a financial strength rating of A2 and senior debt rating of Baa2 from Moody's, a financial strength rating of A+ and senior debt rating of A- from S&P and financial strength rating of A+ and senior debt rating of BBB+ from Fitch.A.M. Best , Moody's, S&P and Fitch maintain stable outlooks across CNA's financial strength and senior debt credit ratings.
Boardwalk Pipelines' cash provided by operating activities decreased
For 2020 and 2019, Boardwalk Pipelines' capital expenditures were$438 million and$429 million , consisting primarily of a combination of growth and maintenance capital. Boardwalk Pipelines expects total capital expenditures to be approximately$340 million in 2021, including approximately$150 million for maintenance capital and$190 million related to growth projects. Boardwalk Pipelines anticipates that its existing capital resources, including its revolving credit facility and cash flows from operating activities, will be adequate to fund its operations and capital expenditures for 2021. Boardwalk Pipelines may seek to access the debt markets to fund some or all capital expenditures for growth projects, acquisitions or for general corporate purposes. During 2020, Boardwalk Pipelines utilized the remaining capacity under its effective shelf registration statement, and it plans to file with theSEC and expects to have declared effective in the first quarter of 2021 a$1.0 billion shelf registration statement under which it may publicly issue debt securities, warrants or rights from time to time.
In November of 2020, Boardwalk Pipelines paid a distribution of
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Boardwalk Pipelines has a senior debt rating of BBB- with a stable outlook from S&P, a senior debt rating of Baa3 with a stable outlook from Moody's and a senior debt rating of BBB- with a positive outlook from Fitch.
Certain of the hotels wholly or partially owned byLoews Hotels & Co are financed by debt facilities, with a number of different lenders. Each of the loan agreements underlying these facilities contain a variety of financial and operational covenants. As a result of the impacts of COVID-19,Loews Hotels & Co has proactively requested certain lenders, where applicable, to (1) temporarily waive certain covenants to avoid an event of default and/or further restriction of the hotel's cash balances through the establishment of lockboxes and other measures; (2) temporarily allow funds previously restricted directly or indirectly under the hotel's underlying loan agreement for the renewal, replacement and addition of building improvements, furniture and fixtures to be used instead for hotel operations and maintenance; and/or (3) defer certain interest and/or principal payments while the hotels operations are temporarily suspended or significantly impacted by a decline in occupancy.Loews Hotels & Co also continues to work with lenders on loans that are being reviewed for extension. These discussions with lenders are ongoing and may requireLoews Hotels & Co to make principal paydowns or provide guaranties of a subsidiary's debt to otherwise avoid an event of default. Through the date of this Report,Loews Hotels & Co is not in default on any of its loans. Additionally, due to temporary suspension of operations and lost revenues in certain joint venture entities,Loews Hotels & Co has received capital call notices in accordance with the underlying joint venture agreements to support the properties' operations. ThroughDecember 31, 2020 ,Loews Hotels & Co funded approximately$51 million to these joint ventures in 2020. In 2020Loews Hotels & Co received capital contributions of$151 million fromLoews Corporation to fund working capital and growth projects. Due to the ongoing impact of the COVID-19 pandemic to the travel and hospitality industry,Loews Hotels & Co will require additional funding fromLoews Corporation during 2021. The amount needed will depend on numerous factors, including how quickly properties are able to return to sustainable operating levels. OnFebruary 3, 2021 ,Altium Packaging issued a$1.05 billion seven-year secured term loan. The term loan is a variable rate facility which bears interest at a floating rate equal to the London Interbank Offered Rate ("LIBOR") plus an applicable margin of 2.75%, subject to a 0.5% LIBOR floor. The proceeds were used to pay the outstanding principal balances of its variable rate term loans and lending facility and pay a dividend of$200 million .
Off-Balance Sheet Arrangements
At
Contractual Obligations
Our contractual payment obligations are as follows:
Payments Due by Period
Less than More than
December 31, 2020 Total 1 year 1-3 years 3-5 years 5 years
(In millions)
Debt (a) $ 13,053 $ 458 $ 2,512 $ 2,614 $ 7,469
Operating leases 666 89 152 108 317Claim and claim adjustment expense
reserves (b) 23,709 5,983 6,205 3,096 8,425 Future policy benefit reserves (c) 25,394 (329 ) 111 865 24,747 Purchase and other obligations 215 206 4 2 3 Total$ 63,037 $ 6,407 $ 8,984 $ 6,685 $ 40,961
(a) Includes estimated future interest payments.
(b) 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 of
Insurance Reserves section of this MD&A for further information.
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(c) 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 of
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. These types of investments generally have greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations - Corporate.The Parent Company enters into short sales and invests in certain derivative instruments that are used for asset and liability management activities, income enhancements to its portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily reports of existing positions and valuation fluctuations to seek to ensure that open positions are consistent with the portfolio strategy. Credit exposure associated with non-performance by counterparties to derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Balance Sheets. We mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives by using multiple counterparties. We occasionally require collateral 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.
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 2020 2019
(In millions)
Fixed income securities:
Taxable fixed income securities
23 46
Other, net of investment expense 21 36 Net investment income
$ 1,935 $ 2,118
Effective income yield for the fixed income securities portfolio
4.5 % 4.8 %
Limited partnership and common stock return 8.3 % 11.7 %
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CNA's net investment income decreased
Investment Gains (Losses)
The components of CNA's investment gains (losses) are presented in the following table: Year Ended December 31 2020 2019 (In millions) Investment gains (losses): Fixed maturity securities: Corporate and other bonds$ (71 ) $ (8 ) States, municipalities and political subdivisions 40
13
Asset-backed 31 (11 ) Total fixed maturity securities - (6 ) Non-redeemable preferred stock (3 )
66
Short term and other (32 ) (11 ) Total investment gains (losses) (35 )
49
Income tax (expense) benefit 5 (12 ) Amounts attributable to noncontrolling interests 3
(4 )
Investment gains (losses) attributable to
CNA's investment gains (losses) decreased$84 million in 2020 as compared with 2019. The decrease was driven by higher impairment losses and the unfavorable change in fair value of non-redeemable preferred stock partially offset by higher net realized investment gains on sales of fixed maturity securities.
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, 2020 December 31, 2019
Net Net
Unrealized Unrealized
Estimated Gains Estimated Gains
Fair Value (Losses) Fair Value (Losses)
(In millions)
U.S. Government , Government agencies and
Government-sponsored enterprises $ 3,672 $ 117 $ 4,136 $ 95
AAA 3,627 454 3,254 349
AA 7,159 1,012 6,663 801
A 9,543 1,390 9,062 1,051
BBB 18,007 2,596 16,839 1,684
Non-investment grade 2,623 149 2,253 101
Total $ 44,631 $ 5,718 $ 42,207 $ 4,081 As of
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The following table presents CNA's available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution:
Gross
Estimated Unrealized
December 31, 2020 Fair Value Losses
(In millions)
U.S. Government , Government agencies and
Government-sponsored enterprises $ 115 $ 3
AAA 36 1
AA 163 7
A 561 14
BBB 520 28
Non-investment grade 335 24
Total $ 1,730 $ 77
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:
Gross
Estimated Unrealized
December 31, 2020 Fair Value Losses
(In millions)
Due in one year or less $ 161 $ 9
Due after one year through five years 676 24
Due after five years through ten years 653 36
Due after ten years 240 8
Total $ 1,730 $ 77
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.
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The effective durations of CNA's fixed income securities and short term
investments are presented in the following table. Amounts presented are net of
payable and receivable amounts for securities purchased and sold, but not yet
settled.
December 31, 2020 December 31, 2019
Effective Effective
Estimated Duration Estimated Duration
Fair Value (Years) Fair Value (Years)
(In millions of dollars)
Investments supporting
Operations$ 18,518 9.2$ 18,015 8.9 Other investments 28,839 4.5 26,813 4.1 Total$ 47,357 6.3$ 44,828 6.0 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. Short Term Investments
The carrying value of the components of CNA's Short term investments are presented in the following table:
December 31 2020 2019 (In millions) Short term investments: Commercial paper$ 1,181 U.S. Treasury securities$ 1,702 364 Other 205 316 Total short term investments$ 1,907 $ 1,861
During 2020, CNA shifted its commercial paper holdings to
In addition to short term investments, CNA held
INSURANCE RESERVES
The level of claim 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 financial condition, 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.
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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.
Given the unprecedented nature of the event, a particularly high level of
uncertainty exists as to the potential impact on insurance losses related to the
COVID-19 pandemic, mitigating actions and consequent economic crisis. 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, the
deferred retroactive reinsurance gain 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 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 inflation on claim
costs, the rate at which claims professionals make claim payments and close
claims, the impact of judicial decisions and legislative changes, 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 and the impact of 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.
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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.
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For many exposures, especially those that are considered long-tail, a particular accident or policy year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, CNA's actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method. For most of CNA's products, even the incurred losses for accident or policy years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, CNA may not assign much, if any, weight to the paid and incurred development methods. CNA may use the loss ratio, Bornhuetter-Ferguson and/or frequency times severity methods. For short-tail exposures, the paid and incurred development methods can often be relied on sooner primarily because CNA's history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, CNA may also use the loss ratio, Bornhuetter-Ferguson and/or frequency times severity methods for short-tail exposures.
For other more complex reserve groups where the above methods may not produce reliable indications, CNA uses additional methods tailored to the characteristics of the specific situation.
Periodic Reserve Reviews
The reserve analyses performed by CNA's actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with CNA's senior management to determine management's 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 reserves differ 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, employment practices, fiduciary, fidelity and surety coverages and medical liability. The most significant factor affecting reserve estimates for these liability coverages is 69
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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$400 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$4.6 billion as ofDecember 31, 2020 . 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 estimate is claim cost inflation on claim payments. Workers' compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers' compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, CNA estimates that its net reserves would increase by approximately$350 million . If estimated workers' compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, CNA estimates that its net reserves would decrease by approximately$350 million . Net reserves for workers' compensation were approximately$3.9 billion as ofDecember 31, 2020 . 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$3.5 billion as ofDecember 31, 2020 . Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, CNA regularly reviews the adequacy of its reserves and reassesses its reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods. In reviewing CNA's reserve estimates, CNA makes adjustments in the period that the need for such adjustments is determined. These reviews have resulted in CNA's identification of information and trends that have caused CNA to change its reserves in prior periods and could lead to CNA's identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations and equity and CNA's financial condition, business and insurer financial strength and corporate debt ratings positively or negatively. See Note 8 of the Notes to the Consolidated Financial Statements included under Item 8 for additional information about reserve development. The following table summarizes gross and net carried reserves for CNA's Property & Casualty Operations: December 31 2020 2019 (In millions) Gross Case Reserves$ 6,183 $ 6,276 Gross IBNR Reserves 10,697 9,494
Total Gross Carried Claim and Claim Adjustment Expense Reserves
$ 15,770 Net Case Reserves$ 5,544 $ 5,645 Net IBNR Reserves 9,380 8,508
Total Net Carried Claim and Claim Adjustment Expense Reserves
$ 14,153 70
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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 2020 2019 (In millions) Gross Case Reserves$ 1,105 $ 1,137 Gross IBNR Reserves 978 1,097
Total Gross Carried Claim and Claim Adjustment Expense Reserves
$ 2,234 Net Case Reserves$ 88 $ 92 Net IBNR Reserves 74 83
Total Net Carried Claim and Claim Adjustment Expense Reserves
Life & Group Policyholder Reserves
CNA's Life & Group business includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and CNA has the ability to increase policy premiums, subject to state regulatory approval. CNA maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for itsLife & Group business. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for CNA's long term care policies, its actuaries perform a detailed claim reserve review on an annual basis. The review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for CNA's structured settlement obligations, CNA's actuaries monitor mortality experience on an annual basis. CNA's recorded claim and claim adjustment expense reserves reflect CNA's best estimate after incorporating the results of the most recent reviews. Claim and claim adjustment expense reserves for long term care policies and structured settlement obligations are discounted as discussed in Note 1 to the Consolidated Financial Statements included under Item 8. Future policy benefit reserves consist of the active life reserves related to CNA's long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk. 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 assumptions are unlocked and future 71
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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. Periodically, CNA engages independent third parties to assess the appropriateness of its best estimate assumptions. The most recent third party assessment, performed in 2019, validated the assumption setting process and confirmed the best estimate assumptions appropriately reflected the experience data at that time. TheSeptember 30, 2020 GPV indicated a premium deficiency of$74 million and future policy benefit reserves were increased accordingly. As a result, the long term care active life reserves carried as ofSeptember 30, 2020 represent CNA's best estimate assumptions at that date with no margin for adverse deviation. A summary of the changes as a result of the 2020 GPV is presented in the table below: (In millions)
Long term care active life reserve - change in estimated reserve margin
September 30, 2019 estimated margin $
-
Changes in underlying discount rate assumptions (609 ) Changes in underlying morbidity assumptions
51
Changes in underlying persistency assumptions
152
Changes in underlying premium rate action assumptions
318
Changes in underlying expense and other assumptions
14
September 30, 2020 Premium Deficiency $
(74 )
The premium deficiency was primarily driven by changes in discount rate assumptions due to lower expected reinvestment rates, contemplating both near-term market indications and long-term normative assumptions. This unfavorable driver was significantly offset by higher than previously estimated rate increases on active rate increase programs, new planned rate increase filings and favorable changes to the underlying persistency and morbidity assumptions.
CNA's projections do not indicate a pattern of expected profits in earlier
future years followed by expected losses in later future years. As such, CNA is
not establishing additional future policy benefit reserves for profits followed
by losses in periods where the long term care business generates core income.
The need for these additional future policy benefit reserves will be
re-evaluated in connection with the next GPV, which is expected to be completed
in the third quarter of 2021.
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The table below summarizes the estimated pretax impact on CNA's results of
operations from various hypothetical revisions to its active life reserve
assumptions. The annual GPV process involves updating all assumptions to
management's then current best estimate, and historically all significant
assumptions have been revised each year. In the hypothetical revisions table
below, CNA has assumed that revisions to such assumptions would occur in each
policy type, age and duration within each policy group and would occur absent
any changes, mitigating or otherwise, in the other assumptions. Although such
hypothetical revisions are not currently required or anticipated, CNA believes
they could occur based on past variances in experience and its expectations of
the ranges of future experience that could reasonably occur. Any actual
adjustment would be dependent on the specific policies affected and, therefore,
may differ from the estimates summarized below.
Estimated Reduction
2020 GPV to Pretax Income
(In millions)
Hypothetical revisions
Morbidity:
2.5% increase in morbidity $ 339
5% increase in morbidity 677
Persistency:
5% decrease in active life mortality and lapse $ 254
10% decrease in active life mortality and lapse
469
Discount rates: 25 basis point decline in new money interest rates $
175
50 basis point decline in new money interest rates
356
Premium rate actions: 25% decrease in anticipated future premium rate increases $
66
50% decrease in anticipated future premium rate increases
132
The following tables summarize policyholder reserves for CNA's long term care
operations:
Claim and claim
adjustment Future
December 31, 2020 expenses policy benefits Total
(In millions)
Long term care $ 2,844 $ 9,762 $ 12,606
Structured settlement annuities 543 543
Other 10 10
Total 3,397 9,762 13,159
Shadow adjustments (a) 218 3,293 3,511
Ceded reserves (b) 128 263 391
Total gross reserves $ 3,743 $ 13,318 $ 17,061
December 31, 2019
Long term care $ 2,863 $ 9,470 $ 12,333
Structured settlement annuities 515 515
Other 12 12
Total 3,390 9,470 12,860
Shadow adjustments (a) 167 2,615 2,782
Ceded reserves (b) 159 226 385
Total gross reserves $ 3,716 $ 12,311 $ 16,027
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(a) To the extent that unrealized gains on fixed income securities supporting
long term care products and annuity contracts would result in a premium
deficiency if those gains were realized, an increase in Insurance reserves is
recorded, after tax and noncontrolling interests, as a reduction of net
unrealized gains through Other comprehensive income (loss) ("Shadow
Adjustments").
(b) Ceded reserves relate to claim or policy reserves fully reinsured in
connection with a sale or exit from the underlying business.
CATASTROPHES AND RELATED REINSURANCE
Various events can cause catastrophe losses. These events can be natural or man-made, including hurricanes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil unrest, cyber attacks, pandemics and acts of terrorism that produce unusually large aggregate losses. In most, but not all cases, CNA's catastrophe losses from these events in theU.S. are defined consistent with the definition of the Property Claims Service ("PCS"). PCS defines a catastrophe as an event that causes damage of$25 million or more in direct insured losses to property and affects a significant number of policyholders and insurers. For events outside of theU.S. , CNA defines a catastrophe as an industry recognized event that generates an accumulation of claims amounting to more than$1 million for the International line of business. Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA's results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of$550 million and$179 million for the years endedDecember 31, 2020 and 2019. Net catastrophe losses for the year endedDecember 31, 2020 included$294 million related primarily to severe weather related events,$195 million related to the COVID-19 pandemic and$61 million related to civil unrest. Net catastrophe losses for the year endedDecember 31, 2019 related primarily toU.S. weather related events. CNA generally seeks to manage its exposure to catastrophes 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 coverages and from time to time makes changes as it deems appropriate. The following discussion summarizes CNA's most significant catastrophe reinsurance coverage atJanuary 1, 2021 .
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. The treaty has a term ofMay 1, 2020 toMay 1, 2021 and provides coverage for the accumulation of covered losses from catastrophe occurrences above CNA's per occurrence retention of$250 million up to$1.2 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, 2021 toJanuary 1, 2022 providing$275 million of coverage for the accumulation of covered losses related to natural catastrophes above CNA's per occurrence retention of$25 million . The treaty provides$475 million of coverage for the accumulation of covered losses related to terrorism events above CNA's retention of$25 million . Of the$475 million in terrorism coverage,$200 million is provided for nuclear, biological, chemical and radiation events. One full reinstatement is available for the first$275 million above the retention, regardless of the covered peril. CNA also purchased a targeted facultative facility to address exposure accumulations in specific peak terrorism zones.
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 2021. Under the current provisions of the program, in 2021 the federal government will reimburse 80% of CNA's covered losses in excess of its applicable 74
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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 2020 earned premiums, CNA's estimated deductible under the program is$820 million for 2021. If an act of terrorism or acts of terrorism result in covered losses exceeding the$100 billion annual industry aggregate limit,Congress would be responsible for determining how additional losses in excess of$100 billion will be paid.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the related notes. Actual results could differ from those estimates. The Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances.
We consider the accounting policies discussed below to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations, financial condition, equity, business and CNA's insurer financial strength and corporate debt ratings.
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 also require an increase 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.
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Reinsurance and Other Receivables
Exposure exists with respect to the collectibility of ceded property and casualty and life reinsurance to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities CNA has ceded under reinsurance agreements. An allowance for doubtful accounts on reinsurance receivables is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer financial strength rating and solvency, industry experience and current and forecast economic conditions. Further information on CNA's reinsurance receivables is included in Note 16 of the Notes to Consolidated Financial Statements included under Item 8. Additionally, exposure exists with respect to the collectibility of amounts due from customers on other receivables. An allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due, currently as well as in the future, historical reinsurer default data, management's experience and current and forecast economic conditions. If actual experience differs from the estimates made by management in determining the allowances for doubtful accounts on reinsurance and other receivables, net receivables as reflected on our Consolidated Balance Sheets may not be collected. Therefore, our results of operations, financial condition and/or equity could be materially adversely affected. Further information on CNA's process for determining the allowance for doubtful accounts on reinsurance and insurance receivables is in Note 1 to the Consolidated Financial Statements included under Item 8.
Valuation of Investments and Impairment of Securities
Fixed maturity and equity securities are carried at fair value on the balance sheet. Fair value represents the price that would be received in a sale of an asset in an orderly transaction between market participants on the measurement date, the determination of which may require us to make a significant number of assumptions and judgments. Securities with the greatest level of subjectivity around valuation are those that rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are based on assumptions consistent with what we believe other market participants would use to price such securities. Further information on fair value measurements is included in Note 4 of the Notes to Consolidated Financial Statements included under Item 8. CNA's fixed maturity securities are subject to market declines below amortized cost that may result in the recognition of impairment losses in earnings. Factors considered in the determination of whether or not an impairment loss is recognized in earnings include a current intention or need to sell the security or an indication that a credit loss exists. Significant judgment is required in the determination of whether a credit loss has occurred for a security. CNA considers all available evidence when determining whether a security requires a credit allowance to be recorded, including the financial condition 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.
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Impairment of Long-Lived Assets
We review our long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We use a probability-weighted cash flow analysis to test property and equipment for impairment based on relevant market data. If an asset is determined to be impaired, a loss is recognized to reduce the carrying amount to the fair value of the asset. Management's cash flow assumptions are an inherent part of our asset impairment evaluation and the use of different assumptions could produce results that differ from the reported amounts.
ACCOUNTING STANDARDS UPDATE
For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please read Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
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