CNA Financial - 10-Q quarterly report FY2020 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020



	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 1-5823

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		36-6169860
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



151 N. Franklin		60606
Chicago,	Illinois	(Zip Code)
(Address of principal executive offices)

(312) 822-5000

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par value $2.50	"CNA"	New York Stock Exchange
		Chicago Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 30, 2020, 271,381,340 shares of common stock were outstanding.



Item Number		Page Number
	PART I
1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (Unaudited)	4
	Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2020 and 2019 (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42
3.	Quantitative and Qualitative Disclosures About Market Risk	62
4.	Controls and Procedures	62
	PART II
1.	Legal Proceedings	63
1A.	Risk Factors	63
6.	Exhibits	66

Table of Contents

PART I

Item 1. Condensed Consolidated Financial Statements

CNA Financial Corporation

Condensed Consolidated Statements of Operations (Unaudited)



Periods ended June 30	Three Months						Six Months
(In millions, except per share data)	2020			2019			2020			2019
Revenues
Net earned premiums	$	1,850		$	1,824		$	3,719		$	3,627
Net investment income	534			515			863			1,086
Net investment gains (losses)	69			(18		)	(147		)	13
Non-insurance warranty revenue	308			285			609			566
Other revenues	5			4			13			13
Total revenues	2,766			2,610			5,057			5,305
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits	1,642			1,352			3,067			2,709
Amortization of deferred acquisition costs	342			338			686			680
Non-insurance warranty expense	285			263			566			523
Other operating expenses	284			281			583			564
Interest	31			34			62			68
Total claims, benefits and expenses	2,584			2,268			4,964			4,544
Income before income tax	182			342			93			761
Income tax expense	(31		)	(64		)	(3		)	(141		)
Net income	$	151		$	278		$	90		$	620

Basic earnings per share	$	0.56		$	1.03		$	0.33		$	2.28

Diluted earnings per share	$	0.55		$	1.02		$	0.33		$	2.28

Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic	271.5			271.6			271.5			271.6
Diluted	272.0			272.4			272.3			272.5

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

CNA Financial Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



Periods ended June 30	Three Months				Six Months
(In millions)	2020		2019		2020			2019
Comprehensive Income
Net income	$	151	$	278	$	90		$	620
Other Comprehensive Income, net of tax
Changes in:
Net unrealized gains and losses on investments with an allowance for credit losses	2		—		(9		)	—
Net unrealized gains and losses on other investments	1,191		436		147			966
Net unrealized gains and losses on investments	1,193		436		138			966
Foreign currency translation adjustment	24		—		(53		)	17
Pension and postretirement benefits	7		8		18			15
Other comprehensive income, net of tax	1,224		444		103			998
Total comprehensive income	$	1,375	$	722	$	193		$	1,618

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

CNA Financial Corporation

Condensed Consolidated Balance Sheets



(In millions, except share data)	June 30, 2020 (Unaudited)			December 31, 2019
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $38,392 and $38,126, less allowance for credit loss of $51 and $-)	$	42,775		$	42,207
Equity securities at fair value (cost of $889 and $820)	859			865
Limited partnership investments	1,558			1,752
Other invested assets	65			65
Mortgage loans (less allowance for uncollectible receivables of $20 and $-)	1,042			994
Short term investments	1,458			1,861
Total investments	47,757			47,744
Cash	586			242
Reinsurance receivables (less allowance for uncollectible receivables of $24 and $25)	4,435			4,179
Insurance receivables (less allowance for uncollectible receivables of $33 and $32)	2,755			2,449
Accrued investment income	382			395
Deferred acquisition costs	699			662
Deferred income taxes	195			199
Property and equipment at cost (less accumulated depreciation of $211 and $215)	264			282
Goodwill	145			147
Deferred non-insurance warranty acquisition expense	2,916			2,840
Other assets (includes $- and $21 due from Loews Corporation)	1,961			1,473
Total assets	$	62,095		$	60,612
Liabilities
Insurance reserves:
Claim and claim adjustment expenses	$	22,270		$	21,720
Unearned premiums	4,996			4,583
Future policy benefits	12,596			12,311
Long term debt	2,680			2,679
Deferred non-insurance warranty revenue	3,852			3,779
Other liabilities (includes $14 and $21 due to Loews Corporation)	4,056			3,325
Total liabilities	50,450			48,397
Commitments and contingencies (Notes C and F)
Stockholders' Equity
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,377,196 and 271,412,591 shares outstanding)	683			683
Additional paid-in capital	2,196			2,203
Retained earnings	8,683			9,348
Accumulated other comprehensive income	154			51
Treasury stock (1,663,047 and 1,627,652 shares), at cost	(71		)	(70		)
Total stockholders’ equity	11,645			12,215
Total liabilities and stockholders' equity	$	62,095		$	60,612

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

CNA Financial Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)



Six months ended June 30
(In millions)	2020			2019
Cash Flows from Operating Activities
Net income	$	90		$	620
Adjustments to reconcile net income to net cash flows provided by operating activities:
Deferred income tax (benefit) expense	(33		)	25
Trading portfolio activity	15			4
Net investment losses (gains)	147			(13		)
Equity method investees	68			39
Net amortization of investments	(32		)	(47		)
Depreciation and amortization	31			36
Changes in:
Receivables, net	(586		)	(135		)
Accrued investment income	11			(7		)
Deferred acquisition costs	(41		)	(47		)
Insurance reserves	1,181			203
Other, net	(201		)	(164		)
Net cash flows provided by operating activities	650			514
Cash Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales	3,773			3,858
Fixed maturity securities - maturities, calls and redemptions	1,622			1,374
Equity securities	230			117
Limited partnerships	257			297
Mortgage loans	25			70
Purchases:
Fixed maturity securities	(5,356		)	(4,896		)
Equity securities	(312		)	(88		)
Limited partnerships	(90		)	(139		)
Mortgage loans	(91		)	(147		)
Change in other investments	(2		)	(4		)
Change in short term investments	409			(211		)
Purchases of property and equipment	(10		)	(14		)
Other, net	20			16
Net cash flows provided by investing activities	475			233
Cash Flows from Financing Activities
Dividends paid to common stockholders	(750		)	(738		)
Proceeds from the issuance of debt	—			496
Repayment of debt	—			(520		)
Purchase of treasury stock	(18		)	(16		)
Other, net	(8		)	(10		)
Net cash flows used by financing activities	(776		)	(788		)
Effect of foreign exchange rate changes on cash	(5		)	2
Net change in cash	344			(39		)
Cash, beginning of year	242			310
Cash, end of period	$	586		$	271

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

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CNA Financial Corporation

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Common Stock
Balance, beginning of period	$	683		$	683		$	683		$	683
Balance, end of period	683			683			683			683
Additional Paid-in Capital
Balance, beginning of period	2,187			2,184			2,203			2,192
Stock-based compensation	9			6			(7		)	(2		)
Balance, end of period	2,196			2,190			2,196			2,190
Retained Earnings
Balance, beginning of period, as previously reported	8,634			8,976			9,348			9,277
Cumulative effect adjustments from changes in accounting guidance, net of tax	—			—			(5		)	—
Balance, beginning of period, as adjusted	8,634			8,976			9,343			9,277
Dividends to common stockholders ($0.37, $0.35, $2.74 and $2.70 per share)	(102		)	(95		)	(750		)	(738		)
Net income	151			278			90			620
Balance, end of period	8,683			9,159			8,683			9,159
Accumulated Other Comprehensive Income
Balance, beginning of period	(1,070		)	(324		)	51			(878		)
Other comprehensive income	1,224			444			103			998
Balance, end of period	154			120			154			120
Treasury Stock
Balance, beginning of period	(72		)	(64		)	(70		)	(57		)
Stock-based compensation	1			1			17			8
Purchase of treasury stock	—			(2		)	(18		)	(16		)
Balance, end of period	(71		)	(65		)	(71		)	(65		)
Total stockholders' equity	$	11,645		$	12,087		$	11,645		$	12,087

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

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CNA Financial Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note A. General

Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 89.6% of the outstanding common stock of CNAF as of June 30, 2020.

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, including certain financial statement notes, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2019, including the summary of significant accounting policies in Note A. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

The interim financial data as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

Recently Adopted Accounting Standards Updates (ASU)

ASU 2016-13: In June 2016 the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through the Company’s results of operations. For financial assets measured at cost, the expected credit loss model requires immediate recognition of estimated credit losses over the life of the asset and presentation of the asset at the net amount expected to be collected. This new guidance applies to mortgage loan investments, reinsurance and insurance receivables and other financing receivables. For available-for-sale fixed maturity securities carried at fair value, estimated credit losses will continue to be measured at the present value of expected cash flows, however, the other than temporary impairment (OTTI) concept has been eliminated. Under the previous guidance, estimated credit impairments resulted in a write-down of amortized cost. Under the new guidance, estimated credit losses are recognized through an allowance and reversals of the allowance are permitted if the estimate of credit losses declines. For available-for-sale fixed maturity securities where the Company has an intent to sell, impairment will continue to result in a write-down of amortized cost.

On January 1, 2020, the Company adopted the updated guidance using a modified retrospective method with a cumulative effect adjustment recorded to beginning Retained earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. A prospective transition approach is required for available-for-sale fixed maturity securities that were purchased with credit deterioration (PCD assets) or have recognized an OTTI write-down prior to the effective date. The cumulative effect of the accounting change resulted in a $5 million decrease in Retained earnings, with a corresponding $7 million allowance for credit losses recorded for Mortgage loans partially offset by a $2 million tax impact.

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The allowance for uncollectible insurance and reinsurance receivables was unchanged as a result of adopting the new guidance. At adoption, an allowance for credit losses of $6 million was established for available-for-sale fixed maturity securities that were PCD assets, with a corresponding increase to amortized cost, resulting in no adjustment to the carrying value of the securities. Below is a summary of the significant accounting policies impacted by the adoption of ASU 2016-13.

The allowance for credit losses is a valuation account that is reported as a reduction of a financial asset’s cost basis and is measured on a pool basis when similar risk characteristics exist. Management estimates the allowance using relevant available information from both internal and external sources. Historical credit loss experience provides the basis for the estimation of expected credit losses and adjustments may be made to reflect current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made for any additional factors that come to the Company’s attention. This could include significant shifts in counterparty financial strength ratings, aging of past due receivables, amounts sent to collection agencies, or other underlying portfolio changes. Amounts are considered past due when payments have not been received according to contractual terms. The Company also considers current and forecast economic conditions, using a variety of economic metrics and forecast indices. The sensitivity of expected credit losses relative to changes to these forecast economic conditions can vary by financial asset class. The Company considers a reasonable and supportable forecast period to be up to 24 months from the balance sheet date. After the forecast period, the Company reverts to historical credit experience. The Company uses collateral arrangements such as letters of credit and amounts held in beneficiary trusts to mitigate credit risk, which are considered in the estimate of net amount expected to be collected.

The Company has made a policy election to present accrued interest balances separately from the amortized cost basis of assets and has elected the practical expedient to exclude the accrued interest from the tabular disclosures for mortgage loans and available-for-sale securities. The Company has elected not to estimate an allowance for credit losses on accrued interest receivable. The accrual of interest income is discontinued and the asset is placed on nonaccrual status within 90 days of the interest becoming delinquent. Interest accrued but not received for assets on nonaccrual status is reversed through investment income. Interest received for assets that are on nonaccrual status is recognized as payment is received. The asset is returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are expected. Interest receivable is presented as a component of accrued investment income on the Condensed Consolidated Balance Sheet.

See Note C and Note K to the Condensed Consolidated Financial Statements for additional information regarding credit losses.

Accounting Standards Pending Adoption

In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long Duration Contracts. The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. The guidance requires entities to annually update cash flow assumptions, including morbidity and persistency, and update discount rate assumptions quarterly using an upper-medium grade fixed-income instrument yield. The effect of changes in cash flow assumptions will be recorded in the Company's results of operations and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2021, however the FASB has proposed a one year deferral of the effective date. Early adoption is permitted. The Company may elect to apply the guidance using either a modified retrospective transition method or a full retrospective transition method. The guidance requires restatement of prior periods presented. The Company plans to adopt using the modified retrospective transition method and is currently evaluating the effect the updated guidance will have on its financial statements, including the increased disclosure requirements. The annual updating of cash flow assumptions is expected to increase income statement volatility. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows will be unchanged.

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Note B. Earnings (Loss) Per Share

Earnings (loss) per share is based on weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

For the three and six months ended June 30, 2020, approximately 445 thousand and 778 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, 915 thousand and 13 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.

For the three and six months ended June 30, 2019, approximately 776 thousand and 872 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, less than 1 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.

The Company repurchased 435,376 and 365,695 shares of CNAF common stock at an aggregate cost of $18 million and $16 million during the six months ended June 30, 2020 and 2019.

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Note C. Investments

The significant components of Net investment income are presented in the following table.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Fixed maturity securities	$	430		$	455		$	868		$	910
Equity securities	50			16			6			46
Limited partnership investments	44			37			(26		)	113
Mortgage loans	14			12			28			24
Short term investments	1			9			8			19
Trading portfolio	8			2			9			4
Other	2			—			2			2
Gross investment income	549			531			895			1,118
Investment expense	(15		)	(16		)	(32		)	(32		)
Net investment income	$	534		$	515		$	863		$	1,086

During the three and six months ended June 30, 2020, $23 million and $10 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2020. During the three and six months ended June 30, 2019, $4 million and $21 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2019.

Net investment gains (losses) are presented in the following table.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Net investment gains (losses):
Fixed maturity securities:
Gross gains	$	102		$	28		$	131		$	64
Gross losses	(85		)	(31		)	(189		)	(73		)
Net investment gains (losses) on fixed maturity securities	17			(3		)	(58		)	(9		)
Equity securities	63			11			(70		)	53
Derivatives	(10		)	(6		)	(5		)	(11		)
Mortgage loans	—			—			(13		)	—
Short term investments and other	(1		)	(20		)	(1		)	(20		)
Net investment gains (losses)	$	69		$	(18	)	$	(147	)	$	13

During the three and six months ended June 30, 2020, $63 million of gains and $(70) million of losses were recognized in Net investment gains (losses) due to the change in fair value of non-redeemable preferred stock still held as of June 30, 2020. During the three and six months ended June 30, 2019, $11 million and $53 million of gains were recognized in Net investment gains (losses) due to the change in fair value of non-redeemable preferred stock still held as of June 30, 2019. Net investment gains (losses) for the three and six months ended June 30, 2019 included a $21 million loss related to the second quarter 2019 redemption of the Company's $500 million senior notes due August 2020.

For available-for-sale fixed maturity securities, a credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis. The allowance for credit loss related to available-for-sale fixed maturity securities is the difference between present value of cash flows expected to be collected and the amortized cost basis, limited by the amount that the fair value is less than the amortized cost basis. The Company considers all available evidence when determining whether an investment requires a credit loss write-down or allowance to be recorded. Examples of such evidence may include the financial condition and near term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions and industry, sector or other specific factors and whether it is likely that the Company will recover its amortized cost through the collection of cash flows. Changes in the allowance since

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acquisition are presented as a component of Net investment gains (losses) on the Condensed Consolidated Statements of Operations.

The following tables present the activity related to the allowance on available-for-sale securities with credit impairments and PCD assets. Accrued interest receivable on available-for-sale fixed maturity securities totaled $373 million and is excluded from the estimate of expected credit losses and the amortized cost basis in the tables included within this Note.



Three months ended June 30
(in millions)	Corporate and other bonds			Asset-backed		Total
Allowance for credit losses:
Beginning balance	$	49		$	—	$	49
Additions to the allowance for credit losses:
For securities for which credit losses were not previously recorded	10			12		22
For available-for-sale securities accounted for as PCD assets	1			—		1

Reductions to the allowance for credit losses:
Securities sold during the period (realized)	1			—		1
Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis	—			—		—
Write-offs charged against the allowance	—			—		—
Recoveries of amounts previously written off	—			—		—

Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	(20		)	—		(20		)
Ending balance as of June 30, 2020	$	39		$	12	$	51



Six months ended June 30
(in millions)	Corporate and other bonds			Asset-backed		Total
Allowance for credit losses:
Beginning balance	$	—		$	—	$	—
Additions to the allowance for credit losses:
Impact of adopting ASC 326	6			—		6
For securities for which credit losses were not previously recorded	58			12		70
For available-for-sale securities accounted for as PCD assets	2			—		2

Reductions to the allowance for credit losses:
Securities sold during the period (realized)	6			—		6
Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis	1			—		1
Write-offs charged against the allowance	—			—		—
Recoveries of amounts previously written off	—			—		—

Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	(20		)	—		(20		)
Ending balance as of June 30, 2020	$	39		$	12	$	51

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The components of available-for-sale impairment losses recognized in earnings by asset type are presented in the following table. The table includes losses on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date.



Periods ended June 30	Three Months					Six Months
(In millions)	2020			2019		2020		2019
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	(1	)	$	6	$	90	$	12
Asset-backed	12			—		13		8
Impairment losses recognized in earnings	$	11		$	6	$	103	$	20

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The following tables present a summary of fixed maturity securities.



June 30, 2020	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses⁽¹⁾		Estimated Fair Value
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses⁽¹⁾		Estimated Fair Value
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	20,305	$	2,680	$	143	$	39	$	22,803
States, municipalities and political subdivisions	9,426		1,702		1		—		11,127
Asset-backed:
Residential mortgage-backed	3,617		169		2		—		3,784
Commercial mortgage-backed	2,151		70		93		12		2,116
Other asset-backed	1,940		52		33		—		1,959
Total asset-backed	7,708		291		128		12		7,859
U.S. Treasury and obligations of government-sponsored enterprises	491		7		—		—		498
Foreign government	457		26		—		—		483
Redeemable preferred stock	—		—		—		—		—
Total fixed maturity securities available-for-sale	38,387		4,706		272		51		42,770
Total fixed maturity securities trading	5		—		—		—		5
Total fixed maturity securities	$	38,392	$	4,706	$	272	$	51	$	42,775

(1) As of January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Unrealized OTTI Losses (Gains) column that tracked subsequent valuation changes on securities for which a credit loss had previously been recorded has been replaced with the Allowance for Credit Losses column.



December 31, 2019	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	19,789	$	2,292	$	32	$	22,049	$	—
States, municipalities and political subdivisions	9,093		1,559		—		10,652		—
Asset-backed:
Residential mortgage-backed	4,387		133		1		4,519		(17		)
Commercial mortgage-backed	2,265		86		5		2,346		1
Other asset-backed	1,925		41		4		1,962		(3		)
Total asset-backed	8,577		260		10		8,827		(19		)
U.S. Treasury and obligations of government-sponsored enterprises	146		1		2		145		—
Foreign government	491		14		1		504		—
Redeemable preferred stock	10		—		—		10		—
Total fixed maturity securities available-for-sale	38,106		4,126		45		42,187		$	(19	)
Total fixed maturity securities trading	20		—		—		20
Total fixed maturity securities	$	38,126	$	4,126	$	45	$	42,207

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group segment would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of June 30, 2020 and December 31, 2019, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2,342 million and $2,198 million.

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The following tables present the estimated fair value and gross unrealized losses of fixed maturity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by the length of time in which the securities have continuously been in that position.



	Less than 12 Months				12 Months or Longer				Total
June 30, 2020	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	2,095	$	137	$	56	$	6	$	2,151	$	143
States, municipalities and political subdivisions	94		1		—		—		94		1
Asset-backed:
Residential mortgage-backed	53		1		21		1		74		2
Commercial mortgage-backed	971		92		14		1		985		93
Other asset-backed	746		32		14		1		760		33
Total asset-backed	1,770		125		49		3		1,819		128
U.S. Treasury and obligations of government-sponsored enterprises	4		—		—		—		4		—
Foreign government	4		—		—		—		4		—
Total	$	3,967	$	263	$	105	$	9	$	4,072	$	272



	Less than 12 Months				12 Months or Longer				Total
December 31, 2019	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	914	$	21	$	186	$	11	$	1,100	$	32
States, municipalities and political subdivisions	34		—		—		—		34		—
Asset-backed:
Residential mortgage-backed	249		1		30		—		279		1
Commercial mortgage-backed	381		3		20		2		401		5
Other asset-backed	449		3		33		1		482		4
Total asset-backed	1,079		7		83		3		1,162		10
U.S. Treasury and obligations of government-sponsored enterprises	62		2		2		—		64		2
Foreign government	59		1		1		—		60		1
Total	$	2,148	$	31	$	272	$	14	$	2,420	$	45

Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2020 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional impairment losses to be recorded as of June 30, 2020.

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Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity.



	June 30, 2020				December 31, 2019
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,472	$	1,469	$	1,334	$	1,356
Due after one year through five years	11,040		11,622		9,746		10,186
Due after five years through ten years	13,335		14,414		14,892		15,931
Due after ten years	12,540		15,265		12,134		14,714
Total	$	38,387	$	42,770	$	38,106	$	42,187

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.

Derivative Financial Instruments

The Company holds an embedded derivative on a funds withheld liability with a notional value of $197 million and $182 million as of June 30, 2020 and December 31, 2019 and a fair value of $(12) million and $(7) million as of June 30, 2020 and December 31, 2019. The embedded derivative on the funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.

Investment Commitments

As part of its overall investment strategy, the Company invests in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications, and obligations related to privately placed debt securities. As of June 30, 2020, the Company had commitments to purchase or fund approximately $1,205 million and sell approximately $50 million under the terms of these investments.

Mortgage Loans

The allowance for expected credit losses is developed by assessing the credit quality of pools of mortgage loans in good standing using debt service coverage ratios (DSCR) and loan-to-value ratios (LTV). The DSCR compares a property’s net operating income to its debt service payments, including principal and interest. The LTV ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. The pools developed to measure the credit loss allowance use increments of DSCR and LTV to draw distinctions between risk levels. Changes in the allowance for mortgage loans are presented as a component of Net investment gains (losses) on the Condensed Consolidated Statements of Operations.

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The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination.



	Mortgage Loans Amortized Cost Basis by Origination Year ⁽¹⁾
June 30, 2020	2020		2019		2018		2017		2016		Prior		Total
DSCR ≥1.6x
LTV less than 55%	$	60	$	33	$	19	$	100	$	41	$	129	$	382
LTV 55% to 65%	—		32		29		41		4		—		106
LTV greater than 65%	—		5		—		—		—		—		5
DSCR 1.2x - 1.6x
LTV less than 55%	—		32		10		13		16		125		196
LTV 55% to 65%	—		83		32		32		—		—		147
LTV greater than 65%	19		74		—		—		—		—		93
DSCR ≤1.2
LTV less than 55%	—		2		11		—		—		9		22
LTV 55% to 65%	—		14		14		—		—		—		28
LTV greater than 65%	—		22		—		37		24		—		83
Total	$	79	$	297	$	115	$	223	$	85	$	263	$	1,062


(1)	The values in the table above reflect DSCR on a standardized amortization period and LTV based on the most recent appraised values trended forward using changes in a commercial real estate price index.

As of June 30, 2020, accrued interest receivable on mortgage loans totaled $4 million and is excluded from the amortized cost basis disclosed in the table above and the estimate of expected credit losses. The Company had loans with an amortized cost of $22 million that were less than 90 days past due as of June 30, 2020, none of which were placed on nonaccrual status. No interest income was written off for the period ended June 30, 2020.

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Note D. Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are not observable.

Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include i) the review of pricing service methodologies or broker pricing qualifications, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, and iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities.

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Assets and Liabilities Measured at Fair Value

Assets and liabilities measured at fair value on a recurring basis are presented in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.



June 30, 2020							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3		Total Assets/Liabilities at Fair Value
Assets
Fixed maturity securities:
Corporate bonds and other	$	519	$	22,715	$	555	$	23,789
States, municipalities and political subdivisions	—		11,127		—		11,127
Asset-backed	—		7,637		222		7,859
Total fixed maturity securities	519		41,479		777		42,775
Equity securities:
Common stock	150		—		4		154
Non-redeemable preferred stock	62		636		7		705
Total equity securities	212		636		11		859
Short term and other	1,313		21		—		1,334
Total assets	$	2,044	$	42,136	$	788	$	44,968
Liabilities
Other liabilities	$	—	$	12	$	—	$	12
Total liabilities	$	—	$	12	$	—	$	12



December 31, 2019							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3		Total Assets/Liabilities at Fair Value
Assets
Fixed maturity securities:
Corporate bonds and other	$	175	$	22,085	$	468	$	22,728
States, municipalities and political subdivisions	—		10,652		—		10,652
Asset-backed	—		8,662		165		8,827
Total fixed maturity securities	175		41,399		633		42,207
Equity securities:
Common stock	135		—		7		142
Non-redeemable preferred stock	54		658		11		723
Total equity securities	189		658		18		865
Short term and other	397		1,344		—		1,741
Total assets	$	761	$	43,401	$	651	$	44,813
Liabilities
Other liabilities	$	—	$	7	$	—	$	7
Total liabilities	$	—	$	7	$	—	$	7

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The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).



Level 3 (In millions)	Corporate bonds and other			Asset-backed			Equity securities			Total
Balance as of April 1, 2020	$	496		$	197		$	15		$	708
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—			(4		)	(4		)
Reported in Net investment income	—			—			—			—
Reported in Other comprehensive income (loss)	59			18			—			77
Total realized and unrealized investment gains (losses)	59			18			(4		)	73
Purchases	4			35			—			39
Sales	—			(9		)	—			(9		)
Settlements	(4		)	(5		)	—			(9		)
Transfers into Level 3	—			—			—			—
Transfers out of Level 3	—			(14		)	—			(14		)
Balance as of June 30, 2020	$	555		$	222		$	11		$	788
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Net income (loss) in the period	$	—		$	—		$	(4	)	$	(4	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Other comprehensive income (loss) in the period	58			18			—			76



Level 3 (In millions)	Corporate bonds and other			Asset-backed			Equity securities		Total
Balance as of April 1, 2019	$	253		$	184		$	20	$	457
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—			—		—
Reported in Net investment income	—			—			—		—
Reported in Other comprehensive income (loss)	12			4			—		16
Total realized and unrealized investment gains (losses)	12			4			—		16
Purchases	76			—			2		78
Sales	—			—			—		—
Settlements	(2		)	(4		)	—		(6		)
Transfers into Level 3	—			40			—		40
Transfers out of Level 3	(1		)	(31		)	—		(32		)
Balance as of June 30, 2019	$	338		$	193		$	22	$	553
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Net income (loss) in the period	$	—		$	—		$	—	$	—
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Other comprehensive income (loss) in the period	10			5			—		15

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Level 3 (In millions)	Corporate bonds and other			Asset-backed			Equity securities			Total
Balance as of January 1, 2020	$	468		$	165		$	18		$	651
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—			(4		)	(4		)
Reported in Net investment income	—			—			(3		)	(3		)
Reported in Other comprehensive income (loss)	22			10			—			32
Total realized and unrealized investment gains (losses)	22			10			(7		)	25
Purchases	71			80			—			151
Sales	—			(9		)	—			(9		)
Settlements	(6		)	(9		)	—			(15		)
Transfers into Level 3	—			—			—			—
Transfers out of Level 3	—			(15		)	—			(15		)
Balance as of June 30, 2020	$	555		$	222		$	11		$	788
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Net income (loss) in the period	$	—		$	—		$	(7	)	$	(7	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2020 recognized in Other comprehensive income (loss) in the period	24			10			—			34



Level 3 (In millions)	Corporate bonds and other			Asset-backed			Equity securities		Total
Balance as of January 1, 2019	$	222		$	197		$	18	$	437
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—			2		2
Reported in Net investment income	—			—			—		—
Reported in Other comprehensive income (loss)	20			7			—		27
Total realized and unrealized investment gains (losses)	20			7			2		29
Purchases	132			20			2		154
Sales	—			—			—		—
Settlements	(4		)	(8		)	—		(12		)
Transfers into Level 3	—			45			—		45
Transfers out of Level 3	(32		)	(68		)	—		(100		)
Balance as of June 30, 2019	$	338		$	193		$	22	$	553
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Net income (loss) in the period	$	—		$	—		$	3	$	3
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2019 recognized in Other comprehensive income (loss) in the period	17			8			—		25

Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume.

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Valuation Methodologies and Inputs

The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.

Fixed Maturity Securities

Level 1 securities include highly liquid government securities and exchange traded bonds, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with some inputs that are not market observable.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with some inputs that are not market observable.

Short Term and Other Invested Assets

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

As of June 30, 2020 and December 31, 2019, there were $60 million of overseas deposits within Other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.

Derivative Financial Investments

The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities primarily valued with observable inputs.

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Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company. The weighted average rate is calculated based on fair value.



June 30, 2020	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	693	Discounted cash flow	Credit spread	1% - 9% (3%)



December 31, 2019	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	525	Discounted cash flow	Credit spread	1% - 6% (2%)

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.



June 30, 2020	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	1,042	$	—	$	—	$	1,104	$	1,104
Liabilities
Long term debt	$	2,680	$	—	$	2,953	$	—	$	2,953



December 31, 2019	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	994	$	—	$	—	$	1,025	$	1,025
Note receivable	21		—		—		21		21
Liabilities
Long term debt	$	2,679	$	—	$	2,906	$	—	$	2,906

In the first quarter of 2020, the note receivable was repaid in full. As of December 31, 2019, the note receivable was included within Other assets on the Condensed Consolidated Balance Sheets.

The carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Short term investments not carried at fair value, Accrued investment income and certain Other assets and Other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the tables above.

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Note E. Claim and Claim Adjustment Expense Reserves

Property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to historical patterns such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and economic conditions, including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $301 million and $376 million for the three and six months ended June 30, 2020. Net catastrophe losses for the three months ended June 30, 2020 included $182 million related to the COVID-19 pandemic, $61 million related to civil unrest and $58 million related primarily to severe weather related events. Net catastrophe losses for the six months ended June 30, 2020 included $195 million related to the COVID-19 pandemic, $61 million related to civil unrest and $120 million related primarily to severe weather related events. The Company reported catastrophe losses, net of reinsurance, of $38 million and $96 million for the three and six months ended June 30, 2019 related primarily to U.S. weather related events.

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Liability for Unpaid Claim and Claim Adjustment Expenses

The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group segment.



For the six months ended June 30
(In millions)	2020			2019
Reserves, beginning of year:
Gross	$	21,720		$	21,984
Ceded	3,835			4,019
Net reserves, beginning of year	17,885			17,965
Net incurred claim and claim adjustment expenses:
Provision for insured events of current year	2,899			2,615
Increase (decrease) in provision for insured events of prior years	19			(36		)
Amortization of discount	98			98
Total net incurred ⁽¹⁾	3,016			2,677
Net payments attributable to:
Current year events	(256		)	(315		)
Prior year events	(2,342		)	(2,519		)
Total net payments	(2,598		)	(2,834		)
Foreign currency translation adjustment and other	(35		)	55
Net reserves, end of period	18,268			17,863
Ceded reserves, end of period	4,002			3,866
Gross reserves, end of period	$	22,270		$	21,729


(1)	Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and benefit expenses related to future policy benefits, which are not reflected in the table above.

Net Prior Year Development

Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Specialty	$	(20	)	$	(18	)	$	(31	)	$	(38	)
Commercial	45			(12		)	41			(20		)
International	(3		)	(1		)	(3		)	13
Corporate & Other	—			—			—			—
Total pretax (favorable) unfavorable development	$	22		$	(31	)	$	7		$	(45	)

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Specialty

The following table presents further detail of the development recorded for the Specialty segment.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Medical Professional Liability	$	—		$	15		$	10		$	30
Other Professional Liability and Management Liability	(9		)	(7		)	(6		)	(19		)
Surety	—			(15		)	(30		)	(40		)
Warranty	(3		)	(7		)	(3		)	(7		)
Other	(8		)	(4		)	(2		)	(2		)
Total pretax (favorable) unfavorable development	$	(20	)	$	(18	)	$	(31	)	$	(38	)

Three Months

2019

Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in the Company's dentists business.

Favorable development in surety was due to lower than expected frequency for accident years 2015 and 2016.

Six Months

2020

Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on specific claims in accident years 2015 and 2016 in the Company's aging services business.

Favorable development in surety was primarily due to lower than expected frequency for accident years 2017 and prior.

2019

Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident year 2013 in the Company's allied healthcare business, unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in the Company's dentists business.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency and favorable outcomes on individual claims in accident years 2017 and prior related to financial institutions.

Favorable development in surety was due to lower than expected frequency for accident years 2016 and prior.

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Commercial

The following table presents further detail of the development recorded for the Commercial segment.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Commercial Auto	$	15		$	(3	)	$	24		$	(8	)
General Liability	50			13			50			(7		)
Workers' Compensation	(61		)	(7		)	(74		)	(5		)
Property and Other	41			(15		)	41			—
Total pretax (favorable) unfavorable development	$	45		$	(12	)	$	41		$	(20	)

Three Months

2020

Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction business in accident years 2017 through 2019.

Unfavorable development in general liability was driven by higher than expected emergence in mass tort exposures, primarily due to New York reviver statute-related claims from accident years prior to 2010.

Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.

Unfavorable development in property and other was primarily due to higher than expected large loss activity in accident year 2019 in the Company's middle market, national accounts, and marine business units.

2019

Unfavorable development in general liability was primarily due to higher than expected large loss experience in the Company's excess and umbrella business in accident year 2017.

Favorable development in property and other was primarily due to continued lower than expected claim severity from catastrophes in accident year 2017.

Six Months

2020

Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction business in accident years 2017 through 2019.

Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.

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International

The following table presents further detail of the development recorded for the International segment.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Casualty	$	(6	)	$	(5	)	$	(6	)	$	(5	)
Property, Energy and Marine⁽¹⁾	1			5			1			19
Specialty	2			(1		)	2			(1		)
Total pretax (favorable) unfavorable development	$	(3	)	$	(1	)	$	(3	)	$	13


(1)	Effective January 1, 2020 the Property and Energy and Marine lines of business have been combined in the International segment. Prior period information has been conformed to the new line of business presentation.

Six Months

2019

Unfavorable development in property, energy and marine was driven by higher than expected claims in Hardy on 2018 accident year catastrophes.

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Asbestos and Environmental Pollution (A&EP) Reserves

In 2010, Continental Casualty Company (CCC) together with several of the Company’s insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statements of Operations.

The impact of the LPT on the Condensed Consolidated Statements of Operations was the recognition of a retroactive reinsurance benefit of $20 million and $14 million for the three months ended June 30, 2020 and 2019 and $34 million and $36 million for the six months ended June 30, 2020 and 2019. As of June 30, 2020 and December 31, 2019, the cumulative amounts ceded under the LPT were $3.2 billion. The unrecognized deferred retroactive reinsurance benefit was $358 million and $392 million as of June 30, 2020 and December 31, 2019 and is included within Other liabilities on the Condensed Consolidated Balance Sheets.

NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $3.3 billion and $3.7 billion as of June 30, 2020 and December 31, 2019. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the majority of the Company’s A&EP claims.

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Note F. Legal Proceedings, Contingencies and Guarantees

The Company is a party to various claims and litigation incidental to its business, which, based on the facts and circumstances currently known, are not material to the Company's results of operations or financial position.

Guarantees

As of June 30, 2020 and December 31, 2019, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements. Management does not believe that any future indemnity claims will be significantly greater than the amounts recorded.

The Company has provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities issued by a previously owned subsidiary. As of June 30, 2020, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.7 billion, which will be paid over the lifetime of the annuitants. The Company does not believe any payment is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

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Note G. Benefit Plans

The components of net periodic pension cost (benefit) are presented in the following table.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Net periodic pension cost (benefit)
Interest cost on projected benefit obligation	$	20		$	25		$	40		$	50
Expected return on plan assets	(39		)	(35		)	(78		)	(71		)
Amortization of net actuarial (gain) loss	11			10			22			20
Settlement loss	1			—			2			—
Total net periodic pension cost (benefit)	$	(7	)	$	—		$	(14	)	$	(1	)

For the three and six months ended June 30, 2020, the Company recognized $2 million and $4 million of non-service benefit in Insurance claims and policyholders' benefits and $5 million and $10 million of non-service benefit in Other operating expenses. For the three and six months ended June 30, 2019, the Company recognized less than $1 million of non-service benefit in Insurance claims and policyholders' benefits and less than $1 million and $1 million of non-service benefit in Other operating expenses.

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Note H. Accumulated Other Comprehensive Income (Loss) by Component

The tables below display the changes in Accumulated other comprehensive income (loss) by component.



(In millions)	Net unrealized gains (losses) on investments with an allowance for credit losses⁽¹⁾			Net unrealized gains (losses) on other investments⁽¹⁾			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance as of April 1, 2020	$	(11	)	$	(19	)	$	(822	)	$	(218	)	$	(1,070	)
Other comprehensive income (loss) before reclassifications	(2		)	1,209			(2		)	24			1,229
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(4), $2, $- and $(1)	(4		)	18			(9		)	—			5
Other comprehensive income (loss) net of tax (expense) benefit of $(1), $(317), $(1), $- and $(319)	2			1,191			7			24			1,224
Balance as of June 30, 2020	$	(9	)	$	1,172		$	(815	)	$	(194	)	$	154



(In millions)	Net unrealized gains (losses) on investments with OTTI losses⁽¹⁾			Net unrealized gains (losses) on other investments⁽¹⁾			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance as of April 1, 2019	$	20		$	587		$	(768	)	$	(163	)	$	(324	)
Other comprehensive income (loss) before reclassifications	(1		)	434			—			—			433
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $-, $2, $- and $2	(1		)	(2		)	(8		)	—			(11		)
Other comprehensive income (loss) net of tax (expense) benefit of $(1), $(114), $(2), $- and $(117)	—			436			8			—			444
Balance as of June 30, 2019	$	20		$	1,023		$	(760	)	$	(163	)	$	120

(1)

As of January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Net unrealized gains (losses) on investments with OTTI losses column that tracked the change in unrealized gains (losses) on investments with OTTI losses has been replaced with the Net unrealized gains (losses) on investments with an allowance for credit losses column. The balances previously reported in the Net unrealized gains (losses) on investments with OTTI losses column are now reported in the Net unrealized gains (losses) on other investments column.

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(In millions)	Net unrealized gains (losses) on investments with an allowance for credit losses⁽¹⁾			Net unrealized gains (losses) on other investments⁽¹⁾			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance as of January 1, 2020	$	—		$	1,025		$	(833	)	$	(141	)	$	51
Other comprehensive income (loss) before reclassifications	(50		)	143			(1		)	(53		)	39
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $11, $2, $5, $- and $18	(41		)	(4		)	(19		)	—			(64		)
Other comprehensive income (loss) net of tax (expense) benefit of $2, $(36), $(4), $- and $(38)	(9		)	147			18			(53		)	103
Balance as of June 30, 2020	$	(9	)	$	1,172		$	(815	)	$	(194	)	$	154



(In millions)	Net unrealized gains (losses) on investments with OTTI losses⁽¹⁾			Net unrealized gains (losses) on other investments⁽¹⁾			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance as of January 1, 2019	$	16		$	61		$	(775	)	$	(180	)	$	(878	)
Other comprehensive income (loss) before reclassifications	3			955			(1		)	17			974
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $1, $4, $- and $5	(1		)	(7		)	(16		)	—			(24		)
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(255), $(4), $- and $(261)	4			962			15			17			998
Balance as of June 30, 2019	$	20		$	1,023		$	(760	)	$	(163	)	$	120

(1)

Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:



Component of AOCI		Condensed Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with an allowance for credit losses, Net unrealized gains (losses) on investments with OTTI losses and Net unrealized gains (losses) on other investments		Net investment gains (losses)
Pension and postretirement benefits		Other operating expenses and Insurance claims and policyholders' benefits

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Note I. Business Segments

The Company's property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International. These three segments are collectively referred to as Property & Casualty Operations. The Company's operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.

The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2019. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only Insurance and Reinsurance receivables, Insurance reserves, Deferred acquisition costs, Goodwill and Deferred non-insurance warranty acquisition expense and revenue are readily identifiable for individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of Net investment income and Net investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense have been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.

In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio.

The performance of the Company's insurance operations is monitored by management through core income (loss), which is derived from certain income statement amounts. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk.

Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses and any cumulative effects of changes in accounting guidance. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations.

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The Company's results of operations and selected balance sheet items by segment are presented in the following tables.



Three months ended June 30, 2020	Specialty			Commercial			International			Life & Group		Corporate & Other
(In millions)															Eliminations			Total
Operating revenues
Net earned premiums	$	705		$	795		$	224		$	126	$	—		$	—		$	1,850
Net investment income	133			177			14			206		4			—			534
Non-insurance warranty revenue	308			—			—			—		—			—			308
Other revenues	—			5			—			—		1			(1		)	5
Total operating revenues	1,146			977			238			332		5			(1		)	2,697
Claims, benefits and expenses
Net incurred claims and benefits	508			666			176			304		(18		)	—			1,636
Policyholders’ dividends	1			5			—			—		—			—			6
Amortization of deferred acquisition costs	153			147			42			—		—			—			342
Non-insurance warranty expense	285			—			—			—		—			—			285
Other insurance related expenses	73			124			39			25		(1		)	—			260
Other expenses	10			13			(2		)	—		35			(1		)	55
Total claims, benefits and expenses	1,030			955			255			329		16			(1		)	2,584
Core income (loss) before income tax	116			22			(17		)	3		(11		)	—			113
Income tax (expense) benefit on core income (loss)	(26		)	(2		)	3			11		—			—			(14		)
Core income (loss)	$	90		$	20		$	(14	)	$	14	$	(11	)	$	—		99
Net investment gains (losses)																		69
Income tax (expense) benefit on net investment gains (losses)																		(17		)
Net investment gains (losses), after tax																		52
Net income (loss)																		$	151

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Three months ended June 30, 2019	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	688		$	763		$	243		$	130		$	—		$	—		$	1,824
Net investment income	134			154			15			205			7			—			515
Non-insurance warranty revenue	285			—			—			—			—			—			285
Other revenues	(1		)	3			1			—			2			(1		)	4
Total operating revenues	1,106			920			259			335			9			(1		)	2,628
Claims, benefits and expenses
Net incurred claims and benefits	395			507			147			309			(12		)	—			1,346
Policyholders’ dividends	1			5			—			—			—			—			6
Amortization of deferred acquisition costs	152			130			56			—			—			—			338
Non-insurance warranty expense	263			—			—			—			—			—			263
Other insurance related expenses	76			119			34			30			(1		)	—			258
Other expenses	12			7			3			2			34			(1		)	57
Total claims, benefits and expenses	899			768			240			341			21			(1		)	2,268
Core income (loss) before income tax	207			152			19			(6		)	(12		)	—			360
Income tax (expense) benefit on core income (loss)	(46		)	(32		)	(2		)	13			1			—			(66		)
Core income (loss)	$	161		$	120		$	17		$	7		$	(11	)	$	—		294
Net investment gains (losses)																			(18		)
Income tax (expense) benefit on net investment gains (losses)																			2
Net investment gains (losses), after tax																			(16		)
Net income (loss)																			$	278

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Six months ended June 30, 2020	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	1,390		$	1,613		$	463		$	253		$	—		$	—		$	3,719
Net investment income	189			224			29			414			7			—			863
Non-insurance warranty revenue	609			—			—			—			—			—			609
Other revenues	1			12			—			—			3			(3		)	13
Total operating revenues	2,189			1,849			492			667			10			(3		)	5,204
Claims, benefits and expenses
Net incurred claims and benefits	913			1,224			330			620			(32		)	—			3,055
Policyholders’ dividends	2			10			—			—			—			—			12
Amortization of deferred acquisition costs	304			291			91			—			—			—			686
Non-insurance warranty expense	566			—			—			—			—			—			566
Other insurance related expenses	142			251			75			51			(1		)	—			518
Other expenses	23			19			11			3			74			(3		)	127
Total claims, benefits and expenses	1,950			1,795			507			674			41			(3		)	4,964
Core income (loss) before income tax	239			54			(15		)	(7		)	(31		)	—			240
Income tax (expense) benefit on core income (loss)	(53		)	(10		)	3			25			2			—			(33		)
Core income (loss)	$	186		$	44		$	(12	)	$	18		$	(29	)	$	—		207
Net investment gains (losses)																			(147		)
Income tax (expense) benefit on net investment gains (losses)																			30
Net investment gains (losses), after tax																			(117		)
Net income (loss)																			$	90



June 30, 2020
(In millions)
Reinsurance receivables	$	897	$	925	$	246	$	407	$	1,984	$	—	$	4,459
Insurance receivables	1,035		1,429		313		10		1		—		2,788
Deferred acquisition costs	315		293		91		—		—		—		699
Goodwill	117		—		28		—		—		—		145
Deferred non-insurance warranty acquisition expense	2,916		—		—		—		—		—		2,916
Insurance reserves
Claim and claim adjustment expenses	5,696		8,830		1,906		3,751		2,087		—		22,270
Unearned premiums	2,424		1,927		517		128		—		—		4,996
Future policy benefits	—		—		—		12,596		—		—		12,596
Deferred non-insurance warranty revenue	3,852		—		—		—		—		—		3,852

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Six months ended June 30, 2019	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	1,349		$	1,526		$	493		$	260		$	—		$	(1	)	$	3,627
Net investment income	289			344			30			409			14			—			1,086
Non-insurance warranty revenue	566			—			—			—			—			—			566
Other revenues	—			10			1			1			4			(3		)	13
Total operating revenues	2,204			1,880			524			670			18			(4		)	5,292
Claims, benefits and expenses
Net incurred claims and benefits	787			1,017			309			617			(33		)	—			2,697
Policyholders’ dividends	2			10			—			—			—			—			12
Amortization of deferred acquisition costs	299			257			124			—			—			—			680
Non-insurance warranty expense	523			—			—			—			—			—			523
Other insurance related expenses	146			249			59			58			(2		)	(1		)	509
Other expenses	24			18			7			4			73			(3		)	123
Total claims, benefits and expenses	1,781			1,551			499			679			38			(4		)	4,544
Core income (loss) before income tax	423			329			25			(9		)	(20		)	—			748
Income tax (expense) benefit on core income (loss)	(93		)	(70		)	(2		)	26			3			—			(136		)
Core income (loss)	$	330		$	259		$	23		$	17		$	(17	)	$	—		612
Net investment gains (losses)																			13
Income tax (expense) benefit on net investment gains (losses)																			(5		)
Net investment gains (losses), after tax																			8
Net income (loss)																			$	620



December 31, 2019
(In millions)
Reinsurance receivables	$	575	$	855	$	247	$	385	$	2,142	$	—	$	4,204
Insurance receivables	971		1,210		284		16		—		—		2,481
Deferred acquisition costs	311		257		94		—		—		—		662
Goodwill	117		—		30		—		—		—		147
Deferred non-insurance warranty acquisition expense	2,840		—		—		—		—		—		2,840
Insurance reserves
Claim and claim adjustment expenses	5,238		8,656		1,876		3,716		2,234		—		21,720
Unearned premiums	2,337		1,626		495		125		—		—		4,583
Future policy benefits	—		—		—		12,311		—		—		12,311
Deferred non-insurance warranty revenue	3,779		—		—		—		—		—		3,779

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The following table presents operating revenue by line of business for each reportable segment.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Specialty
Management & Professional Liability	$	645		$	629		$	1,213		$	1,265
Surety	153			151			291			290
Warranty & Alternative Risks	348			326			685			649
Specialty revenues	1,146			1,106			2,189			2,204
Commercial
Middle Market	355			351			690			708
Construction ⁽¹⁾	275			241			525			489
Small Business	114			123			226			254
Other Commercial	233			205			408			429
Commercial revenues	977			920			1,849			1,880
International
Canada	68			68			141			134
Europe	94			88			186			179
Hardy	76			103			165			211
International revenues	238			259			492			524
Life & Group revenues	332			335			667			670
Corporate & Other revenues	5			9			10			18
Eliminations	(1		)	(1		)	(3		)	(4		)
Total operating revenues	2,697			2,628			5,204			5,292
Net investment gains (losses)	69			(18		)	(147		)	13
Total revenues	$	2,766		$	2,610		$	5,057		$	5,305


(1)	Effective January 1, 2020, the Construction line of business is presented separately in the Commercial segment to better align with the Company's underwriting expertise and the manner in which the products are sold. Prior period information has been conformed to the new line of business presentation.

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Note J. Non-Insurance Revenues from Contracts with Customers

The Company reported $3.9 billion of Deferred non-insurance warranty revenue as of June 30, 2020 and $3.8 billion as of December 31, 2019. For the three and six months ended June 30, 2020, the Company recognized $278 million and $564 million of revenues that were included in the deferred revenue balance as of January 1, 2020. For the three and six months ended June 30, 2019, the Company recognized $246 million and $511 million of revenues that were included in the deferred revenue balance as of January 1, 2019. For the three and six months ended June 30, 2020 and 2019, Non-insurance warranty revenue recognized from performance obligations related to prior periods due to a change in estimate was not material. The Company expects to recognize approximately $0.6 billion of the deferred revenue in the remainder of 2020, $1.0 billion in 2021, $0.8 billion in 2022 and $1.5 billion thereafter.

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Note K. Expected Credit Losses - Uncollectible Reinsurance and Insurance Receivables

The Company has established an allowance for uncollectible reinsurance receivables which relates to both amounts already billed on ceded paid losses as well as ceded reserves that will be billed when losses are paid in the future. For assessing expected credit losses, the Company separates reinsurance receivables into two pools: voluntary reinsurance receivables and involuntary reinsurance exposures to mandatory pools. The Company has not recorded an allowance for involuntary pools as there is no perceived credit risk. The principal credit quality indicator used in the valuation of the allowance on voluntary reinsurance receivables is the financial strength rating of the reinsurer sourced from major rating agencies. If the reinsurer is unrated, an internal financial strength rating is assigned based on the Company’s historical loss experience and the Company’s assessment of reinsurance counterparty risk profile, which generally corresponds with a B rating. Changes in the allowance are presented as a component of Insurance claims and policyholders' benefits on the Condensed Consolidated Statements of Operations.

The following table summarizes the outstanding amount of voluntary reinsurance receivables, gross of any collateral arrangements, by financial strength rating.



(In millions)	June 30, 2020
A- to A++	$	2,717
B- to B++	926
Insolvent	4
Total voluntary reinsurance outstanding balance⁽¹⁾	$	3,647


(1)	Expected credit losses for legacy A&EP receivables are ceded to NICO and the reinsurance limit on the LPT has not been exhausted, therefore no allowance is recorded for these receivables and they are excluded from the table above. Refer to Note E for information regarding the LPT. The Company has also excluded receivables from involuntary pools.

Voluntary reinsurance receivables within the B- to B++ rating distribution are primarily due from captive reinsurers and backed by collateral arrangements.

The Company has established an allowance for uncollectible insurance receivables. A loss rate methodology is used to determine expected credit losses for premium receivables. This methodology uses the Company’s historical annual credit losses relative to gross premium written to develop a range of credit loss rates for each dollar of gross written premium underwritten. The expected credit loss for loss sensitive business in good standing is calculated on a pool basis, using historical default rate data obtained from major rating agencies. Changes in the allowance are presented as a component of Other operating expenses on the Condensed Consolidated Statements of Operations.

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Item 2. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

OVERVIEW

The following discussion highlights significant factors affecting the Company. References to “we,” “our,” “us” or like terms refer to the business of CNA.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q, as well as the supplemental risk factor regarding the COVID-19 pandemic disclosed under Part II, Item 1A of this Form 10-Q. The following discussion should also be read in conjunction with Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2019.

We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of net investment gains or losses and any cumulative effects of changes in accounting guidance. The calculation of core income (loss) excludes net investment gains or losses because net investment gains or losses are generally driven by economic factors that are not necessarily reflective of our primary operations. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure. See further discussion regarding how we manage our business in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1. For reconciliations of non-GAAP measures to the most comparable GAAP measures and other information, please refer herein and/or to CNA's most recent Annual Report on Form 10-K on file with the Securities and Exchange Commission.

In evaluating the results of our Specialty, Commercial and International segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third party captives, excludes business which is mostly ceded to third party captives, including business related to large warranty programs.

Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of any related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the amount of revenues and expenses reported during the period. Actual results may differ from those estimates.

Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.

The accounting estimates discussed below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment:


•	Insurance Reserves


•	Long Term Care Reserves


•	Reinsurance and Insurance Receivables


•	Valuation of Investments and Impairment of Securities


•	Income Taxes

Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from our estimates and may have a material adverse impact on our results of operations, equity, business, and insurer financial strength and corporate debt ratings. See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for further information.

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CONSOLIDATED OPERATIONS

Results of Operations

In March 2020, the World Health Organization declared COVID-19 to be a pandemic. The pandemic, together with global, national, regional and local efforts to mitigate the spread of the virus, have rapidly evolved and led to severely depressed economic conditions and financial market disruption. These conditions have had an impact across our enterprise, including significant underwriting losses recorded during the second quarter of 2020 as discussed below. During the first quarter of 2020 we experienced significant declines in the value of our investment portfolio, and while financial markets have partially recovered during the second quarter of 2020, our Net investment income and Net investment losses are unfavorable for the six months ended June 30, 2020 as compared with the same period in 2019.

For more discussion of COVID-19 impacts on our underwriting results, detailed components of our business operations and a discussion of the core income (loss) financial measure, see the Segment Results section within this MD&A. For further discussion of Net investment income and Net investment gains or losses, see the Investments section of this MD&A. For further discussion of the risks to our business associated with COVID-19, see the Risk Factor included under Part II, Item 1A of this Form 10-Q.

The following table includes the consolidated results of our operations including our financial measure, core income (loss).



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Operating Revenues
Net earned premiums	$	1,850		$	1,824		$	3,719		$	3,627
Net investment income	534			515			863			1,086
Non-insurance warranty revenue	308			285			609			566
Other revenues	5			4			13			13
Total operating revenues	2,697			2,628			5,204			5,292
Claims, Benefits and Expenses
Net incurred claims and benefits	1,636			1,346			3,055			2,697
Policyholders' dividends	6			6			12			12
Amortization of deferred acquisition costs	342			338			686			680
Non-insurance warranty expense	285			263			566			523
Other insurance related expenses	260			258			518			509
Other expenses	55			57			127			123
Total claims, benefits and expenses	2,584			2,268			4,964			4,544
Core income before income tax	113			360			240			748
Income tax expense on core income	(14		)	(66		)	(33		)	(136		)
Core income	99			294			207			612
Net investment gains (losses)	69			(18		)	(147		)	13
Income tax (expense) benefit on net investment gains (losses)	(17		)	2			30			(5		)
Net investment gains (losses), after tax	52			(16		)	(117		)	8
Net income	$	151		$	278		$	90		$	620

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Three Month Comparison

Core income decreased $195 million for the three months ended June 30, 2020 as compared with the same period in 2019. Core income for our Property & Casualty Operations decreased $202 million primarily due to higher net catastrophe losses and unfavorable net prior year loss reserve development. These results were partially offset by favorable net investment income driven by limited partnership and common stock returns and favorable non-catastrophe current accident year underwriting results. Core income for our Life & Group segment increased $7 million while the core loss for our Corporate & Other segment was consistent with the prior period.

Net catastrophe losses were $301 million and $38 million for the three months ended June 30, 2020 and 2019. Catastrophe losses for the three months ended June 30, 2020 include $182 million related to COVID-19, $61 million related to civil unrest and $58 million related primarily to severe weather related events. The COVID-19 losses in the second quarter of 2020 follow a detailed review and analysis of existing and potential exposures in light of current information, and represent the Company's best estimate of its ultimate insurance losses and loss adjustment expenses, including defense costs resulting from the pandemic and the consequent economic crisis. The losses were substantially driven by healthcare professional liability with additional impacts from workers' compensation, management liability, commercial property, trade credit and surety. Due to the recent timing of the event, emergence pattern of claims and long tail nature of certain exposures the losses are substantially classified as incurred but not reported (IBNR) reserves.

The COVID-19 catastrophe losses do not include the benefits of lower current accident year losses associated with lower loss frequency in certain lines of business as a result of shelter in place restrictions. Those benefits are modest and are partially offset by the impact of a reduction in our estimated audit premiums and an increase in our credit allowance for premiums receivables resulting from the depressed economic conditions.

Unfavorable net prior year loss reserve development of $22 million was recorded for the three months ended June 30, 2020 as compared with favorable development of $31 million for the three months ended June 30, 2019 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Six Month Comparison

Core income decreased $405 million for the six months ended June 30, 2020 as compared with the same period in 2019. Core income for our Property & Casualty Operations decreased $394 million due to higher net catastrophe losses and lower net investment income driven by limited partnership and common stock returns. Core income for our Life & Group segment increased $1 million while the core loss for our Corporate & Other segment increased $12 million.

Net catastrophe losses were $376 million and $96 million for the six months ended June 30, 2020 and 2019. Catastrophe losses for the six months ended June 30, 2020 include $195 million related to COVID-19, $61 million related to civil unrest and $120 million related primarily to severe weather related events. Unfavorable net prior year loss reserve development of $7 million was recorded for the six months ended June 30, 2020 as compared with favorable development of $45 million recorded for the six months ended June 30, 2019 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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SEGMENT RESULTS

Expected impact of COVID-19 on underwriting results

During the second quarter of 2020, our underwriting results were negatively impacted by COVID-19 and the related depressed economic conditions. In many geographic locations, the virus’ spread continues to accelerate. Areas where the virus has largely been brought under control continue to be at risk of a second wave. Accordingly, it remains the case that several months past the initial identification of the threat, all of the direct and indirect consequences and implications of COVID-19 are not yet known and may not emerge for some time. Until the virus is brought under control, the timing of any economic recovery remains uncertain. As a result, the impact to our results in the first and second quarters of 2020 may not be indicative of its impacts for the remainder of 2020 or thereafter. For further discussion of the risks to our business associated with COVID-19 and measures to mitigate the spread of the virus, see the Investments and Liquidity and Capital Resources sections of this MD&A and the Risk Factor included under Part II, Item 1A of this Form 10-Q.

We experienced year-over-year growth in gross and net written premiums, excluding third party captives, driven by rate increases across property and casualty lines of business. Depressed economic conditions generally have had an unfavorable impact on premium exposures, including audit premium adjustments, policy endorsements, and mid-term cancellations and adjustments. This is particularly the case in our Commercial lines where shelter in place restrictions and reduced economic activity has caused businesses to reduce payroll or otherwise shutter operations. As a result, we recorded a decrease in our estimated audit premiums during the second quarter of 2020 impacting our net earned premiums. If general economic conditions do not improve in the latter half of 2020 or thereafter, our net written premiums and net earned premiums may continue to be unfavorably impacted as a result.

Net written premiums are also impacted by the terms and conditions and related cost of reinsurance programs. In the second quarter of 2020 we renewed multiple property and casualty reinsurance treaties at higher costs as well as purchased additional coverage, which will have an unfavorable impact on our net earned premium in future quarters.

Lower net earned premiums had an unfavorable impact on our expense ratio in the second quarter of 2020. Our expense ratio was also unfavorably impacted by an increase in our allowance for uncollectible insurance receivables as certain customers, across a broad spectrum of industries and markets, have been impacted by lost business, affecting our ability to collect amounts owed to us. These impacts could continue through the remainder of 2020, and possibly thereafter, as the situation continues to evolve.

While our losses incurred during the first six months of 2020 related to COVID-19 represent our best estimate of ultimate insurance losses resulting from events occurring in the first six months of 2020 due to the pandemic and the consequent economic crisis, given the unprecedented nature of this event, a high level of uncertainty exists as to the potential impact on insurance losses from these events or other events that might occur for the remainder of the year and thereafter. The scope, duration and magnitude of the direct and indirect effects continue to rapidly evolve, and could materially impact our ultimate loss estimate, including in lines of business where losses have already been incurred as well as the potential for impacts in other lines unknown at this time. Continued spread of the virus as well as additional or extended shelter in place restrictions and business closures, could cause us to experience additional COVID-19 related catastrophe losses in future quarters.

We have also experienced modest benefits in certain lines of business as a result of lower loss frequency from shelter in place restrictions. Those benefits only apply to a portion of our portfolio, as our larger portfolios, including healthcare, construction and property coverages, have seen limited benefit. In addition, the impact from lower frequency is mostly offset by higher severity in certain areas of the portfolio.

The following discusses the results of operations for our business segments. Our property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Our operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.

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Specialty

The following table details the results of operations for Specialty.



Periods ended June 30	Three Months						Six Months
(In millions, except ratios, rate, renewal premium change and retention)	2020			2019			2020			2019
Gross written premiums	$	1,762		$	1,724		$	3,476		$	3,425
Gross written premiums excluding third party captives	811			755			1,552			1,485
Net written premiums	742			713			1,436			1,411
Net earned premiums	705			688			1,390			1,349
Net investment income	133			134			189			289
Core income	90			161			186			330

Other performance metrics:
Loss ratio excluding catastrophes and development	59.9		%	59.9		%	59.7		%	60.2		%
Effect of catastrophe impacts	15.0			0.1			8.2			1.0
Effect of development-related items	(2.9		)	(2.6		)	(2.3		)	(2.9		)
Loss ratio	72.0		%	57.4		%	65.6		%	58.3		%
Expense ratio	32.0			33.1			32.1			33.0
Dividend ratio	0.2			0.2			0.2			0.2
Combined ratio	104.2		%	90.7		%	97.9		%	91.5		%
Combined ratio excluding catastrophes and development	92.1		%	93.2		%	92.0		%	93.4		%

Rate	12		%	4		%	10		%	3		%
Renewal premium change	11			5			10			6
Retention	85			89			85			89
New business	$	96		$	97		$	170		$	182

Three Month Comparison

Gross written premiums, excluding third party captives, for Specialty increased $56 million for the three months ended June 30, 2020 as compared with the same period in 2019 driven by strong rate. Net written premiums for Specialty increased $29 million for the three months ended June 30, 2020 as compared with the same period in 2019. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $71 million for the three months ended June 30, 2020 as compared with the same period in 2019 due to higher net catastrophe losses.

The combined ratio of 104.2% increased 13.5 points for the three months ended June 30, 2020 as compared with the same period in 2019. The loss ratio increased 14.6 points driven by higher net catastrophe losses. Net catastrophe losses were $105 million, or 15.0 points of the loss ratio, for the three months ended June 30, 2020, as compared with $1 million, or 0.1 points of the loss ratio, for the three months ended June 30, 2019. Net catastrophe losses for the three months ended June 30, 2020 included $103 million related to the COVID-19 pandemic. The expense ratio improved 1.1 points for the three months ended June 30, 2020 as compared with the same period in 2019 driven by lower underwriting expenses and higher net earned premiums.

Favorable net prior year loss reserve development of $20 million and $18 million was recorded for the three months ended June 30, 2020 and 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Six Month Comparison

Gross written premiums, excluding third party captives, for Specialty increased $67 million for the six months ended June 30, 2020 as compared with the same period in 2019 driven by strong rate. Net written premiums for Specialty increased $25 million for the six months ended June 30, 2020 as compared with the same period in 2019. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $144 million for the six months ended June 30, 2020 as compared with the same period in 2019 due to higher net catastrophe losses and lower net investment income driven by limited partnership and common stock returns.

The combined ratio of 97.9% increased 6.4 points for the six months ended June 30, 2020 as compared with the same period in 2019. The loss ratio increased 7.3 points due to higher net catastrophe losses. Net catastrophe losses were $113 million, or 8.2 points of the loss ratio, for the six months ended June 30, 2020, as compared with $13 million, or 1.0 point of the loss ratio, for the six months ended June 30, 2019. Net catastrophe losses for the six months ended June 30, 2020 included $109 million related to the COVID-19 pandemic. The expense ratio improved 0.9 points for the six months ended June 30, 2020 as compared with the same period in 2019 driven by lower underwriting expenses and higher net earned premiums.

Favorable net prior year loss reserve development of $31 million and $38 million was recorded for the six months ended June 30, 2020 and 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves for Specialty.



(In millions)	June 30, 2020		December 31, 2019
Gross case reserves	$	1,569	$	1,481
Gross IBNR reserves	4,127		3,757
Total gross carried claim and claim adjustment expense reserves	$	5,696	$	5,238
Net case reserves	$	1,407	$	1,343
Net IBNR reserves	3,412		3,333
Total net carried claim and claim adjustment expense reserves	$	4,819	$	4,676

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Commercial

The following table details the results of operations for Commercial.



Periods ended June 30	Three Months						Six Months
(In millions, except ratios, rate, renewal premium change and retention)	2020			2019			2020			2019
Gross written premiums	$	1,126		$	1,024		$	2,188		$	1,965
Gross written premiums excluding third party captives	1,044			958			2,103			1,891
Net written premiums	949			912			1,899			1,761
Net earned premiums	795			763			1,613			1,526
Net investment income	177			154			224			344
Core income	20			120			44			259

Other performance metrics:
Loss ratio excluding catastrophes and development	59.0		%	61.7		%	60.1		%	61.9		%
Effect of catastrophe impacts	19.0			4.9			12.8			5.1
Effect of development-related items	6.0			(0.1		)	3.0			(0.3		)
Loss ratio	84.0		%	66.5		%	75.9		%	66.7		%
Expense ratio	33.9			32.6			33.6			33.2
Dividend ratio	0.6			0.6			0.6			0.6
Combined ratio	118.5		%	99.7		%	110.1		%	100.5		%
Combined ratio excluding catastrophes and development	93.5		%	94.9		%	94.3		%	95.7		%

Rate	9		%	3		%	9		%	3		%
Renewal premium change	8			5			8			5
Retention	83			87			84			86
New business	$	205		$	186		$	403		$	350

Three Month Comparison

Gross written premiums for Commercial increased $102 million for the three months ended June 30, 2020 as compared with the same period in 2019 driven by strong rate and higher new business. Net written premiums for Commercial increased $37 million for the three months ended June 30, 2020 as compared with the same period in 2019. The increase in net earned premiums was consistent with the trend in net written premiums partially offset by a reduction in estimated audit premiums as a result of the economic slowdown arising from COVID-19.

Core income decreased $100 million for the three months ended June 30, 2020 as compared with the same period in 2019 driven by higher net catastrophe losses and unfavorable net prior year loss reserve development in the current year period, including a $50 million charge for mass tort exposures primarily due to New York reviver statute-related claims.

The combined ratio of 118.5% increased 18.8 points for the three months ended June 30, 2020 as compared with the same period in 2019. The loss ratio increased 17.5 points driven by higher net catastrophe losses and unfavorable net prior year loss reserve development. Net catastrophe losses were $151 million, or 19.0 points of the loss ratio, for the three months ended June 30, 2020, as compared with $37 million, or 4.9 points of the loss ratio, for the three months ended June 30, 2019. Net catastrophe losses for the three months ended June 30, 2020 included $43 million related to the COVID-19 pandemic, $61 million related to civil unrest and $47 million related primarily to severe weather related events. The combined ratio excluding catastrophes and development of 93.5% improved 1.4 points for the three months ended June 30, 2020 as compared with the same period in 2019 which reflects a 0.7 point net benefit related to COVID-19 from lower loss frequency as a result of shelter in place restrictions and an adverse impact from a reduction in estimated audit premiums. These items decreased the loss ratio by 1.8 points and increased the expense ratio by 1.1 points. Excluding the impacts of COVID-19, the combined ratio excluding catastrophes and development improved 0.7 points due to the loss ratio.

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Unfavorable net prior year loss reserve development of $45 million was recorded for the three months ended June 30, 2020 as compared with favorable development of $12 million recorded for the three months ended June 30, 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Six Month Comparison

Gross written premiums for Commercial increased $223 million for the six months ended June 30, 2020 as compared with the same period in 2019 driven by strong rate and higher new business. Net written premiums for Commercial increased $138 million for the six months ended June 30, 2020 as compared with the same period in 2019. The increase in net earned premiums was consistent with the trend in net written premiums partially offset by a reduction in estimated audit premiums as a result of the economic slowdown arising from COVID-19.

Core income decreased $215 million for the six months ended June 30, 2020 as compared with the same period in 2019 due to higher net catastrophe losses, lower net investment income driven by limited partnership and common stock returns and unfavorable net prior year loss reserve development in the current year period, including a $50 million charge for mass tort exposures primarily due to New York reviver statute-related claims.

The combined ratio of 110.1% increased 9.6 points for the six months ended June 30, 2020 as compared with the same period in 2019. The loss ratio increased 9.2 points driven by higher net catastrophe losses and unfavorable net prior year loss reserve development. Net catastrophe losses were $208 million, or 12.8 points of the loss ratio, for the six months ended June 30, 2020, as compared with $77 million, or 5.1 points of the loss ratio, for the six months ended June 30, 2019. Net catastrophe losses for the six months ended June 30, 2020 included $48 million related to the COVID-19 pandemic, $61 million related to civil unrest and $99 million related primarily to severe weather related events. The combined ratio excluding catastrophes and development of 94.3% improved 1.4 points for the six months ended June 30, 2020 as compared with the same period in 2019 which reflects a 0.3 point net benefit related to COVID-19 from lower loss frequency as a result of shelter in place restrictions and an adverse impact from a reduction in estimated audit premiums. These items decreased the loss ratio by 0.9 points and increased the expense ratio by 0.6 points. Excluding the impacts of COVID-19, the combined ratio excluding catastrophes and development improved 1.1 points due to the loss ratio.

Unfavorable net prior year loss reserve development of $41 million was recorded for the six months ended June 30, 2020 as compared with favorable development of $20 million recorded for the six months ended June 30, 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves for Commercial.



(In millions)	June 30, 2020		December 31, 2019
Gross case reserves	$	3,782	$	3,937
Gross IBNR reserves	5,048		4,719
Total gross carried claim and claim adjustment expense reserves	$	8,830	$	8,656
Net case reserves	$	3,351	$	3,543
Net IBNR reserves	4,668		4,306
Total net carried claim and claim adjustment expense reserves	$	8,019	$	7,849

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International

The following table details the results of operations for International.



Periods ended June 30	Three Months						Six Months
(In millions, except ratios, rate, renewal premium change and retention)	2020			2019			2020			2019
Gross written premiums	$	277		$	287		$	584		$	611
Net written premiums	239			249			458			508
Net earned premiums	224			243			463			493
Net investment income	14			15			29			30
Core (loss) income	(14		)	17			(12		)	23

Other performance metrics:
Loss ratio excluding catastrophes and development	59.9		%	60.1		%	60.1		%	58.5		%
Effect of catastrophe impacts	19.9			0.2			11.9			1.3
Effect of development-related items	(1.2		)	(0.1		)	(0.7		)	2.7
Loss ratio	78.6		%	60.2		%	71.3		%	62.5		%
Expense ratio	36.7			37.3			36.1			37.2
Combined ratio	115.3		%	97.5		%	107.4		%	99.7		%
Combined ratio excluding catastrophes and development	96.6		%	97.4		%	96.2		%	95.7		%

Rate	13		%	7		%	11		%	6		%
Renewal premium change	11			8			9			4
Retention	74			70			72			69
New business	$	62		$	75		$	130		$	155

Three Month Comparison

Gross written premiums for International decreased $10 million for the three months ended June 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, gross written premiums decreased $3 million driven by the continued impact of the strategic exit from certain Lloyd’s business classes, offset by growth in Europe and Canada. Net written premiums decreased $10 million for the three months ended June 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, net written premiums decreased $6 million for the three months ended June 30, 2020 as compared with the same period in 2019. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $31 million for the three months ended June 30, 2020 as compared with the same period in 2019 due to higher net catastrophe losses.

The combined ratio of 115.3% increased 17.8 points for the three months ended June 30, 2020 as compared with the same period in 2019. The loss ratio increased 18.4 points driven by higher net catastrophe losses. Net catastrophe losses were $45 million, or 19.9 points of the loss ratio, for the three months ended June 30, 2020, as compared with less than $1 million, or 0.2 points of the loss ratio, for the three months ended June 30, 2019. Net catastrophe losses for the three months ended June 30, 2020 included $36 million related to the COVID-19 pandemic. The combined ratio excluding catastrophes and development of 96.6% improved 0.8 points for the three months ended June 30, 2020 as compared with the same period in 2019 due to a 0.2 point improvement in the loss ratio excluding catastrophes and development primarily driven by lower loss frequency from the impact of COVID-19 as well as 0.6 points of improvement in the expense ratio driven by lower acquisition and underwriting expenses.

Favorable net prior year loss reserve development of $3 million and $1 million was recorded for the three months ended June 30, 2020 and 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Six Month Comparison

Gross written premiums for International decreased $27 million for the six months ended June 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, gross written premiums decreased $18 million driven by the continued impact of the strategic exit from certain Lloyd’s business classes, offset by growth in Canada and Europe. Net written premiums decreased $50 million for the six months ended June 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, net written premiums decreased $42 million for the six months ended June 30, 2020 as compared with the same period in 2019. The decrease in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income decreased $35 million for the six months ended June 30, 2020 as compared with the same period in 2019 driven by higher net catastrophe losses partially offset by favorable net prior year loss reserve development in the current year period.

The combined ratio of 107.4% increased 7.7 points for the six months ended June 30, 2020 as compared with the same period in 2019. The loss ratio increased 8.8 points driven by higher net catastrophe losses partially offset by favorable net prior year loss reserve development in the current year period. Net catastrophe losses were $55 million, or 11.9 points of the loss ratio, for the six months ended June 30, 2020, as compared with $6 million, or 1.3 points of the loss ratio, for the six months ended June 30, 2019. Net catastrophe losses for the six months ended June 30, 2020 included $38 million related to the COVID-19 pandemic. The expense ratio improved 1.1 points for the six months ended June 30, 2020 as compared with the same period in 2019 driven by lower acquisition and underwriting expenses.

Favorable net prior year loss reserve development of $3 million was recorded for the six months ended June 30, 2020 as compared with unfavorable development of $13 million for the six months ended June 30, 2019. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves for International.



(In millions)	June 30, 2020		December 31, 2019
Gross case reserves	$	815	$	858
Gross IBNR reserves	1,091		1,018
Total gross carried claim and claim adjustment expense reserves	$	1,906	$	1,876
Net case reserves	$	727	$	759
Net IBNR reserves	927		869
Total net carried claim and claim adjustment expense reserves	$	1,654	$	1,628

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Life & Group

The following table summarizes the results of operations for Life & Group.



Periods ended June 30	Three Months					Six Months
(In millions)	2020		2019			2020			2019
Net earned premiums	$	126	$	130		$	253		$	260
Net investment income	206		205			414			409
Core income (loss) before income tax	3		(6		)	(7		)	(9		)
Income tax benefit on core income (loss)	11		13			25			26
Core income	14		7			18			17

Three Month Comparison

Core income of $14 million for the three months ended June 30, 2020 was primarily driven by better than expected persistency.

Six Month Comparison

Results for the six months ended June 30, 2020 were generally consistent with the three month summary above.

Corporate & Other

The following table summarizes the results of operations for the Corporate & Other segment, including intersegment eliminations.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Net investment income	$	4		$	7		$	7		$	14
Interest expense	31			34			62			68
Core loss	(11		)	(11		)	(29		)	(17		)

Three Month Comparison

Results for the three months ended June 30, 2020 were generally consistent with the same period in 2019.

Six Month Comparison

Core loss is driven by interest expense on corporate debt partially offset by amortization of the deferred gain related to the A&EP Loss Portfolio Transfer (LPT). The A&EP LPT is further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves for Corporate & Other.



(In millions)	June 30, 2020		December 31, 2019
Gross case reserves	$	1,169	$	1,137
Gross IBNR reserves	918		1,097
Total gross carried claim and claim adjustment expense reserves	$	2,087	$	2,234
Net case reserves	$	89	$	92
Net IBNR reserves	78		83
Total net carried claim and claim adjustment expense reserves	$	167	$	175

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INVESTMENTS

The financial market disruption in the first quarter of 2020 significantly impacted our investment portfolio. Losses from our limited partnership and common and preferred equity portfolios, as well as the recognition of impairment losses on certain fixed maturity holdings, negatively impacted our Net income for the three months ended March 31, 2020. While financial markets have partially recovered during the second quarter of 2020, there could be continued volatility in our investment portfolio.

Net Investment Income

The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Fixed income securities:
Taxable fixed income securities	$	360		$	385		$	731		$	768
Tax-exempt fixed income securities	80			80			158			162
Total fixed income securities	440			465			889			930
Limited partnership investments	44			37			(26		)	113
Common stock	40			6			(15		)	26
Other, net of investment expense	10			7			15			17
Pretax net investment income	$	534		$	515		$	863		$	1,086
Fixed income securities, after tax	$	361		$	382		$	728		$	762
Net investment income, after tax	436			420			709			885

Effective income yield for the fixed income securities portfolio, pretax	4.6		%	4.8		%	4.6		%	4.8		%
Effective income yield for the fixed income securities portfolio, after tax	3.8		%	3.9		%	3.8		%	3.9		%
Limited partnership and common stock return	5.0		%	2.1		%	(2.3		)%	6.8		%

Pretax net investment income increased $19 million for the three months ended June 30, 2020 as compared with the same period in 2019 driven by limited partnership and common stock returns offset by lower yields in our fixed income portfolio. The limited partnership returns for the three months ended June 30, 2020 include limited partnerships representing 55% reporting on a current basis with no reporting lag and 45% reporting on a lag, primarily three months or less. Limited partnerships reporting on a current basis include substantially all of the Company's hedge funds.

Pretax net investment income decreased $223 million for the six months ended June 30, 2020 as compared with the same period in 2019 driven by limited partnership and common stock returns and lower yields in our fixed income portfolio.

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Net Investment Gains (Losses)

The components of Net investment gains (losses) are presented in the following table.



Periods ended June 30	Three Months						Six Months
(In millions)	2020			2019			2020			2019
Fixed maturity securities:
Corporate and other bonds	$	(40	)	$	(7	)	$	(119	)	$	(7	)
States, municipalities and political subdivisions	33			4			33			12
Asset-backed	24			—			28			(14		)
Total fixed maturity securities	17			(3		)	(58		)	(9		)
Non-redeemable preferred stock	63			11			(70		)	53
Short term and other	(11		)	(26		)	(6		)	(31		)
Mortgage loans	—			—			(13		)	—
Net investment gains (losses)	69			(18		)	(147		)	13
Income tax (expense) benefit on net investment gains (losses)	(17		)	2			30			(5		)
Net investment gains (losses), after tax	$	52		$	(16	)	$	(117	)	$	8

Net investment gains (losses) increased $87 million for the three months ended June 30, 2020 as compared with the same period in 2019. The increase was driven by the favorable change in fair value of non-redeemable preferred stock and higher net realized investment gains on sales of fixed maturity securities. Pretax impairment losses of $11 million on available-for-sale securities were recognized in the current quarter.

Net investment gains (losses) decreased $160 million for the six months ended June 30, 2020 as compared with the same period in 2019. The decrease was driven by higher impairment losses and the unfavorable change in fair value of non-redeemable preferred stock. Pretax impairment losses of $103 million on available-for-sale securities and $13 million of credit losses on mortgage loans were recognized for the six months ended June 30, 2020.

Further information on our investment gains and losses is set forth in Note C to the Condensed Consolidated Financial Statements included under Part 1, Item 1.

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Portfolio Quality

The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.



	June 30, 2020					December 31, 2019
(In millions)	Estimated Fair Value		Net Unrealized Gains (Losses)			Estimated Fair Value		Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises	$	3,997	$	149		$	4,136	$	95
AAA	3,599		443			3,254		349
AA	6,717		920			6,663		801
A	9,257		1,218			9,062		1,051
BBB	16,867		1,742			16,839		1,684
Non-investment grade	2,338		(38		)	2,253		101
Total	$	42,775	$	4,434		$	42,207	$	4,081

As of June 30, 2020 and December 31, 2019, 1% of our fixed maturity portfolio was rated internally. AAA rated securities included $1.9 billion and $1.5 billion of pre-funded municipal bonds as of June 30, 2020 and December 31, 2019.

The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.



	June 30, 2020
(In millions)	Estimated Fair Value		Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises	$	7	$	—
AAA	40		1
AA	238		9
A	919		35
BBB	1,729		111
Non-investment grade	1,139		116
Total	$	4,072	$	272

The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.



	June 30, 2020
(In millions)	Estimated Fair Value		Gross Unrealized Losses
Due in one year or less	$	158	$	16
Due after one year through five years	1,154		73
Due after five years through ten years	2,168		136
Due after ten years	592		47
Total	$	4,072	$	272

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Duration

A primary objective in the management of the investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.

A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group segment.

The effective durations of fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.



	June 30, 2020			December 31, 2019
(In millions)	Estimated Fair Value		Effective Duration (In years)	Estimated Fair Value		Effective Duration (In years)
Investments supporting Life & Group	$	18,370	8.8	$	18,015	8.9
Other investments	26,165		4.1	26,813		4.1
Total	$	44,535	6.0	$	44,828	6.0

The investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.

Short Term Investments

The carrying value of the components of the Short term investments are presented in the following table.



(In millions)	June 30, 2020		December 31, 2019
Short term investments:
Commercial paper	$	—	$	1,181
U.S. Treasury securities	1,251		364
Other	207		316
Total short term investments	$	1,458	$	1,861

Beginning in early March and continuing into the second quarter of 2020, we shifted our commercial paper holdings to U.S. Treasury securities.

In addition to Short term investments, the Company held $586 million and $242 million of Cash as of June 30, 2020 and December 31, 2019.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.

Related to the COVID-19 pandemic and efforts to mitigate the spread of the virus, cash flows have been and may continue to be adversely impacted by lower premium volumes, suspensions and cancellations of policies, return of premiums or premium refunds and increased claim and defense cost payments. At this time, we do not believe these impacts would give rise to a material liquidity concern given our overall liquid assets and anticipated future cash flows.

For the six months ended June 30, 2020, net cash provided by operating activities was $650 million as compared with $514 million for the same period in 2019. The increase in cash provided by operating activities was driven by lower net claim payments, an increase in premiums collected and lower income taxes paid, partially offset by a lower level of distributions from limited partnerships.

Cash flows from investing activities include the purchase and disposition of financial instruments, excluding those held as trading, and may include the purchase and sale of businesses, equipment and other assets not generally held for resale.

Net cash provided by investing activities was $475 million for the six months ended June 30, 2020, as compared with $233 million for the same period in 2019. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.

Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, and outflows for stockholder dividends, repayment of debt and purchases of treasury stock.

For the six months ended June 30, 2020, net cash used by financing activities was $776 million as compared with $788 million for the same period 2019. Financing activities for the periods presented include:


•	During the six months ended June 30, 2020, we paid dividends of $750 million and repurchased 435,376 shares of our common stock at an aggregate cost of $18 million.


•	During the six months ended June 30, 2019, we paid dividends of $738 million and repurchased 365,695 shares of our common stock at an aggregate cost of $16 million.


•	In the second quarter of 2019, we issued $500 million of 3.90% senior notes due May 1, 2029 and redeemed the $500 million outstanding aggregate principal balances of our 5.875% senior notes due August 15, 2020.

Common Stock Dividends

Dividends of $2.74 per share on our common stock, including a special dividend of $2.00 per share, were declared and paid during the six months ended June 30, 2020. On July 31, 2020, our Board of Directors declared a quarterly dividend of $0.37 per share, payable September 3, 2020 to stockholders of record on August 17, 2020. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.

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Liquidity

We believe that our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. In addition, we held $6 billion of cash, short term investments and highly liquid securities issued by the U.S. government and its agencies as of June 30, 2020, of which $518 million was held at the CNAF holding company. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home Loan Bank of Chicago (FHLBC).

Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of June 30, 2020, CCC was in a positive earned surplus position. CCC paid dividends of $815 million and $805 million during the six months ended June 30, 2020 and 2019. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

We have an effective automatic shelf registration statement under which we may publicly issue debt, equity or hybrid securities from time to time.

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ACCOUNTING STANDARDS UPDATE

For a discussion of Accounting Standards Updates adopted in the current period and that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1.

FORWARD-LOOKING STATEMENTS

This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for long term care, A&EP and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:

Company-Specific Factors

•

the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our 2019 Annual Report on Form 10-K and this report, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;


•	the risk that the other parties to the transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;


•	the performance of reinsurance companies under reinsurance contracts with us; and


•	the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.

Industry and General Market Factors

•

the COVID-19 pandemic, and actions seeking to mitigate the spread of the virus, have resulted in significant risk across our enterprise, as economic uncertainty and depressed business conditions brought on by the crisis may materially and adversely impact our business, driving significant decreases in our premium volume and resulting in significant losses in our investment portfolio, increased claim and litigation activity and unfavorable regulatory outcomes.


•	the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;


•	product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;

•

general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;


•	conditions in the capital and credit markets, including uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;


•	conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms; and

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•	the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.

Regulatory Factors

•

regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, including with respect to cyber security protocols, legal inquiries by state authorities, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, including those revising applicability of statutes of limitations, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations;


•	regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies; and


•	regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards.

Impact of Natural and Man-Made Disasters and Mass Tort Claims


•	weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow;


•	regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;


•	man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;


•	the occurrence of epidemics and pandemics; and


•	mass tort claims, including those related to exposure to potentially harmful products or substances such as glyphosate, lead paint and opioids; and claims arising from changes that repeal or weaken tort reforms, such as those related to abuse reviver statutes.

Referendum on the United Kingdom's Membership in the European Union

•

in 2016, the U.K. approved an exit from the E.U., commonly referred to as "Brexit.” While the withdrawal of the U.K. from the E.U. was official as of January 31, 2020, until the transition period ends, there remains a lack of specificity and detail regarding the long term relationship between the two sides and how businesses operating in both jurisdictions may be affected. In any event, effective January 1, 2019, our E.U. business is no longer handled out of our U.K.-domiciled subsidiary, but through our European subsidiary in Luxembourg, which was established specifically to address the departure of the U.K. from the E.U. and to seek to ensure the Company’s ability to operate effectively throughout the E.U. As a result, the complexity and cost of regulatory compliance of our European business has increased and will likely continue to result in elevated expenses.

Our forward-looking statements speak only as of the date of the filing of this Quarterly Report on Form 10-Q and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in our market risk components for the six months ended June 30, 2020. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.

As of June 30, 2020, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of June 30, 2020.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. Other Information

Item 1. Legal Proceedings

Information on our legal proceedings is set forth in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, include detailed discussions of certain material risk factors facing us. The information presented below describes updates and additions to and should be read in conjunction with the risk factors and information disclosed in our Form 10-K and restates in their entirety the risk factors contained in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

The COVID-19 pandemic and measures to mitigate the spread of the virus have resulted in significant risk across our enterprise, which have had, and may continue to have, material adverse impacts on our business, results of operations and financial condition, the extent of which cannot be determined with any certainty at this time.

The COVID-19 outbreak, and actions seeking to mitigate the spread of the virus, accelerated in both breadth and scope through the month of February, with the World Health Organization declaring it a pandemic on March 11, 2020. The situation has continued to evolve exponentially with implicated exposures increasing given sustained uncertainties across the global marketplace. Both the extensiveness of the pandemic itself, as well as the measures taken to mitigate the virus' spread globally, are unprecedented and their effects continue to be pervasive. In many geographic locations, the virus’ spread continues to accelerate. Areas where the virus has largely been brought under control continue to be at risk of a second wave. Accordingly, it remains the case that several months past the initial identification of the threat, all of the direct and indirect consequences and implications of COVID-19 and measures to mitigate its spread are not yet known and may not emerge for some time.

Risks presented by the ongoing effects of COVID-19 that are known at this time include the following:

Broad economic impact

The economic effect of the pandemic has been broad in nature and has significantly impacted business operations across all industries, including ours. Depressed economic conditions have led to and may continue to lead to decreased insured exposures causing us to experience declines in premium volume, especially for lines of business that are sensitive to rates of economic growth and those that are impacted by audit premium adjustments. Significant decreases in premium volume directly and adversely impacts our underwriting expense ratio. In addition, certain customers, across a broad spectrum of industries and markets, have been and continue to be impacted by lost business, which may affect our ability to collect amounts owed to us by policyholders. We recorded a decrease in our estimated audit premiums during the second quarter of 2020 impacting our net earned premium and if general economic conditions do not improve in the latter half of 2020 or thereafter, our net written premiums and net earned premiums may continue to be depressed, which may have a material impact on our business, results of operations and financial condition, the extent of which cannot be determined with any certainty at this time.

While our losses incurred during the first six months of 2020 related to COVID-19 and measures to mitigate its spread represent our best estimate of our ultimate insurance losses resulting from events occurring in the first six months of 2020 due to the pandemic and the consequent economic crisis, given the unprecedented nature of this event, a high level of uncertainty exists as to the potential impact on insurance losses from these events or other events that might occur for the remainder of the year and thereafter. The scope, duration and magnitude of the direct and indirect effects continue to rapidly evolve, and could materially impact our ultimate loss estimate, including in lines of business where losses have already been incurred, as well as the potential for impacts in other lines unknown at this time. Continued spread of the virus as well as additional or extended shelter in place restrictions and business closures, could cause us to experience additional COVID-19 related catastrophe losses in future quarters, which could be material.

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Financial Markets and Investments

The COVID-19 pandemic has also significantly impacted financial markets. As investors have embarked on a flight to quality, risk free rates have decreased. In addition, liquidity concerns and overall economic uncertainties drove increased volatility in credit spreads and equity markets. While government actions to date have provided some stability to financial markets, economic prospects in the short term continue to be depressed and we remain in a historically low interest rate environment. The unabated spread of the virus and the extension of efforts to mitigate the spread in numerous geographic areas, particularly in the U.S., will continue to cause substantial uncertainty on the timing and strength of any economic recovery and could continue to impact our investment portfolio results and valuations, and may result in additional volatility or losses in our investment portfolio, which could be material.

The value of our fixed maturity investments is subject to risk that certain investments may default or become impaired due to deterioration in the financial condition of issuers of the investments we hold or in the underlying collateral of the security or loan, particularly in industries heavily impacted by COVID-19 and mitigating actions, including energy, retail, travel, entertainment, and real estate. Our municipal bond portfolio is also subject to risks of default by state and local governments and agencies that are under increased strain related to the pandemic.

These significant financial market disruptions may have a material impact on our business, results of operations and financial condition, the extent of which cannot be determined with any certainty at this time.

Claims and related litigation

Claim activity and related litigation has increased, and may continue to increase significantly, in certain lines of business as a result of the pandemic and mitigating actions. We have experienced, and are likely to continue to experience, increased frequency in claim submissions in product lines that are implicated by the virus and the mitigating activities taken by our customers and governmental authorities in response to its spread, as well as increased litigation related to denial of claims based on policy coverage. These lines include primarily healthcare professional liability and workers' compensation, as well as commercial property-related business interruption coverage, management liability (directors and officers, employment practices, and professional liability lines) and trade credit. In addition, our surety lines may continue to experience increased losses, particularly in construction surety, where there is significant risk that contractors will be adversely and materially impacted by general economic conditions. We have recorded significant losses in these areas in the first half of 2020 and may experience continued losses, which could be material.

Increased frequency or severity in any or all of the foregoing lines, or others where the exposure has yet to emerge, may have a material impact on our business, results of operations and financial condition, the extent of which cannot be determined with any certainty at this time.

We have also begun to incur substantial expenses related to litigation activity in connection with COVID-related legal claims. These actions primarily relate to denial of claims submitted as a result of the pandemic and the mitigating actions under commercial property policies for business interruption coverage, including lockdowns and closing of certain businesses. The significance of such litigation, both in substance and volume, and the resultant activities we have initiated, including external counsel engagement, and the costs related thereto, may have a material impact on our business, results of operation and financial condition, the extent of which cannot be determined with any certainty at this time.

Regulatory impact

The regulatory environment is rapidly evolving in direct response to the pandemic and the mitigating actions being taken. Numerous regulatory authorities to which our business is subject have implemented or are contemplating broad and significant regulations restricting and governing insurance company operations during the pandemic crisis. Such actions include, but are not limited to, premium moratoriums, premium refunds and reductions, restrictions on policy cancellations and potential legislation-driven expansion of policy terms. To date, certain state authorities have ordered premium refunds and certain regulatory and legislative bodies have proposed requiring insurers to cover business interruption under policies that were not written to provide for such coverage under the current circumstances. In addition, certain states have directed expansion of workers’ compensation

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coverage through presumption of compensability of claims for a broad category of workers. This highly fluid and challenging regulatory environment, and the new regulations we are now, and may be, subject to may have a material impact on our business, results of operation and financial condition, the extent of which cannot be determined with any certainty at this time.

Business operational impact

Beginning on March 17, 2020, we instituted mandatory work from home for all of our employees, across the United States and globally, including Canada, the United Kingdom and Europe, and moved to teleconference meetings only across the enterprise. As of the date of this report, the work from home mandate remains in place across our global workforce. Mandatory work from home may impact the productivity of our workforce, and increases the risk of information security exposure. Disruptions to our employees’ productivity, as well as their health and welfare, especially in the context of accelerated contagion of the virus (which has not occurred across our employee population at this time), along with the heightened security risks presented by widespread remote access to our computer systems, may have a material impact on our business operations, the extent of which cannot be determined with any certainty at this time.

In addition, in virtually all cases, our critical vendors have also had to impose workplace restrictions or work from home mandates on their employees, which may result in interruption in service delivery or failure by vendors to properly perform required services, including delivery in a manner more susceptible to significant information security risk. Such vendor issues may result in a material impact on our business operations, the extent of which cannot be determined with any certainty at this time.

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Item 6. Exhibits

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		CNA Financial Corporation

Dated: August 3, 2020	By	/s/ Albert J. Miralles
		Albert J. Miralles Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial and accounting officer)

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EXHIBIT INDEX



Description of Exhibit	Exhibit Number
Certification of Chief Executive Officer	31.1

Certification of Chief Financial Officer	31.2

Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.1

Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.2

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document	101.INS

Inline XBRL Taxonomy Extension Schema	101.SCH

Inline XBRL Taxonomy Extension Calculation Linkbase	101.CAL

Inline XBRL Taxonomy Extension Definition Linkbase	101.DEF

Inline XBRL Taxonomy Label Linkbase	101.LAB

Inline XBRL Taxonomy Extension Presentation Linkbase	101.PRE

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)	104.1

CNA Financial - 10-Q quarterly report FY2020 Q2

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