CNA Financial - 10-Q quarterly report FY2020 Q3

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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 September 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 October 29, 2020, 271,388,678 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 nine months ended September 30, 2020 and 2019 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (Unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 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	45
3.	Quantitative and Qualitative Disclosures About Market Risk	68
4.	Controls and Procedures	68
	PART II
1.	Legal Proceedings	69
1A.	Risk Factors	69
6.	Exhibits	72

Table of Contents

PART I

Item 1. Condensed Consolidated Financial Statements

CNA Financial Corporation

Condensed Consolidated Statements of Operations (Unaudited)



Periods ended September 30	Three Months						Nine Months
(In millions, except per share data)	2020			2019			2020			2019
Revenues
Net earned premiums	$	1,953		$	1,890		$	5,672		$	5,517
Net investment income	517			487			1,380			1,573
Net investment gains (losses)	27			7			(120		)	20
Non-insurance warranty revenue	317			292			926			858
Other revenues	6			9			19			22
Total revenues	2,820			2,685			7,877			7,990
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits	1,616			1,614			4,683			4,323
Amortization of deferred acquisition costs	360			345			1,046			1,025
Non-insurance warranty expense	293			278			859			801
Other operating expenses	269			289			852			853
Interest	32			32			94			100
Total claims, benefits and expenses	2,570			2,558			7,534			7,102
Income before income tax	250			127			343			888
Income tax expense	(37		)	(20		)	(40		)	(161		)
Net income	$	213		$	107		$	303		$	727

Basic earnings per share	$	0.79		$	0.39		$	1.12		$	2.68

Diluted earnings per share	$	0.79		$	0.39		$	1.11		$	2.67

Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic	271.7			271.6			271.6			271.6
Diluted	272.3			272.6			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 September 30	Three Months					Nine Months
(In millions)	2020		2019			2020			2019
Comprehensive Income
Net income	$	213	$	107		$	303		$	727
Other Comprehensive Income, net of tax
Changes in:
Net unrealized gains and losses on investments with an allowance for credit losses	6		—			(3		)	—
Net unrealized gains and losses on other investments	207		41			354			1,007
Net unrealized gains and losses on investments	213		41			351			1,007
Foreign currency translation adjustment	37		(29		)	(16		)	(12		)
Pension and postretirement benefits	7		7			25			22
Other comprehensive income, net of tax	257		19			360			1,017
Total comprehensive income	$	470	$	126		$	663		$	1,744

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)	September 30, 2020 (Unaudited)			December 31, 2019
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $38,969 and $38,126, less allowance for credit loss of $47 and $-)	$	43,901		$	42,207
Equity securities at fair value (cost of $927 and $820)	919			865
Limited partnership investments	1,567			1,752
Other invested assets	69			65
Mortgage loans (less allowance for uncollectible receivables of $21 and $-)	1,088			994
Short term investments	1,462			1,861
Total investments	49,006			47,744
Cash	442			242
Reinsurance receivables (less allowance for uncollectible receivables of $24 and $25)	4,370			4,179
Insurance receivables (less allowance for uncollectible receivables of $32 and $32)	2,527			2,449
Accrued investment income	401			395
Deferred acquisition costs	697			662
Deferred income taxes	144			199
Property and equipment at cost (less accumulated depreciation of $224 and $215)	256			282
Goodwill	146			147
Deferred non-insurance warranty acquisition expense	2,998			2,840
Other assets (includes $- and $21 due from Loews Corporation)	1,788			1,473
Total assets	$	62,775		$	60,612
Liabilities
Insurance reserves:
Claim and claim adjustment expenses	$	22,534		$	21,720
Unearned premiums	5,020			4,583
Future policy benefits	12,978			12,311
Long term debt	2,776			2,679
Deferred non-insurance warranty revenue	3,951			3,779
Other liabilities (includes $47 and $21 due to Loews Corporation)	3,495			3,325
Total liabilities	50,754			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; 271,387,058 and 271,412,591 shares outstanding)	683			683
Additional paid-in capital	2,202			2,203
Retained earnings	8,796			9,348
Accumulated other comprehensive income	411			51
Treasury stock (1,653,185 and 1,627,652 shares), at cost	(71		)	(70		)
Total stockholders’ equity	12,021			12,215
Total liabilities and stockholders' equity	$	62,775		$	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)



Nine months ended September 30
(In millions)	2020			2019
Cash Flows from Operating Activities
Net income	$	303		$	727
Adjustments to reconcile net income to net cash flows provided by operating activities:
Deferred income tax benefit	(41		)	(72		)
Trading portfolio activity	2			(1		)
Net investment losses (gains)	120			(20		)
Equity method investees	12			48
Net amortization of investments	(51		)	(64		)
Depreciation and amortization	46			52
Changes in:
Receivables, net	(271		)	207
Accrued investment income	(6		)	(18		)
Deferred acquisition costs	(36		)	(37		)
Insurance reserves	1,479			337
Other, net	(149		)	(179		)
Net cash flows provided by operating activities	1,408			980
Cash Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales	5,023			4,872
Fixed maturity securities - maturities, calls and redemptions	2,706			2,116
Equity securities	275			171
Limited partnerships	281			417
Mortgage loans	41			109
Purchases:
Fixed maturity securities	(8,466		)	(7,053		)
Equity securities	(373		)	(140		)
Limited partnerships	(144		)	(167		)
Mortgage loans	(154		)	(193		)
Change in other investments	(4		)	(8		)
Change in short term investments	403			(180		)
Purchases of property and equipment	(16		)	(20		)
Other, net	21			16
Net cash flows used by investing activities	(407		)	(60		)
Cash Flows from Financing Activities
Dividends paid to common stockholders	(850		)	(834		)
Proceeds from the issuance of debt	495			496
Repayment of debt	(419		)	(520		)
Purchase of treasury stock	(18		)	(18		)
Other, net	(9		)	(11		)
Net cash flows used by financing activities	(801		)	(887		)
Effect of foreign exchange rate changes on cash	—			(3		)
Net change in cash	200			30
Cash, beginning of year	242			310
Cash, end of period	$	442		$	340

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 September 30	Three Months						Nine 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	2,196			2,190			2,203			2,192
Stock-based compensation	6			7			(1		)	5
Balance, end of period	2,202			2,197			2,202			2,197
Retained Earnings
Balance, beginning of period, as previously reported	8,683			9,159			9,348			9,277
Cumulative effect adjustments from changes in accounting guidance, net of tax	—			—			(5		)	—
Balance, beginning of period, as adjusted	8,683			9,159			9,343			9,277
Dividends to common stockholders ($0.37, $0.35, $3.11 and $3.05 per share)	(100		)	(95		)	(850		)	(833		)
Net income	213			107			303			727
Balance, end of period	8,796			9,171			8,796			9,171
Accumulated Other Comprehensive Income
Balance, beginning of period	154			120			51			(878		)
Other comprehensive income	257			19			360			1,017
Balance, end of period	411			139			411			139
Treasury Stock
Balance, beginning of period	(71		)	(65		)	(70		)	(57		)
Stock-based compensation	—			—			17			8
Purchase of treasury stock	—			(2		)	(18		)	(18		)
Balance, end of period	(71		)	(67		)	(71		)	(67		)
Total stockholders' equity	$	12,021		$	12,123		$	12,021		$	12,123

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 September 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 September 30, 2020 and for the three and nine months ended September 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 approved 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 nine months ended September 30, 2020, approximately 620 thousand and 730 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, 9 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 nine months ended September 30, 2019, approximately 1 million and 920 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 and approximately 3 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 415,695 shares of CNAF common stock at an aggregate cost of $18 million during each of the nine months ended September 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 September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Fixed maturity securities	$	432		$	452		$	1,300		$	1,362
Equity securities	18			16			24			62
Limited partnership investments	64			12			38			125
Mortgage loans	14			13			42			37
Short term investments	1			8			9			27
Trading portfolio	4			2			13			6
Other	—			—			2			2
Gross investment income	533			503			1,428			1,621
Investment expense	(16		)	(16		)	(48		)	(48		)
Net investment income	$	517		$	487		$	1,380		$	1,573

During the three and nine months ended September 30, 2020, $4 million and $9 million of Net investment income was recognized due to the change in fair value of common stock still held as of September 30, 2020. During the three and nine months ended September 30, 2019, $5 million and $26 million of Net investment income was recognized due to the change in fair value of common stock still held as of September 30, 2019.

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Net investment gains (losses):
Fixed maturity securities:
Gross gains	$	44		$	34		$	175		$	98
Gross losses	(18		)	(31		)	(207		)	(104		)
Net investment gains (losses) on fixed maturity securities	26			3			(32		)	(6		)
Equity securities	25			7			(45		)	60
Derivatives	(2		)	(2		)	(7		)	(13		)
Mortgage loans	(3		)	—			(16		)	—
Short term investments and other	(19		)	(1		)	(20		)	(21		)
Net investment gains (losses)	$	27		$	7		$	(120	)	$	20

During the three and nine months ended September 30, 2020, $25 million of gains and $44 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 September 30, 2020. During the three and nine months ended September 30, 2019, $7 million and $60 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 September 30, 2019. Short term investments and other included a $20 million loss for the three and nine months ended September 30, 2020 related to the third quarter 2020 redemption of the Company's $400 million senior notes due August 2021 and a $21 million loss for the nine months ended September 30, 2019 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

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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 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 $390 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 September 30
(In millions)	Corporate and other bonds			Asset-backed		Total
Allowance for credit losses:
Beginning balance	$	39		$	12	$	51
Additions to the allowance for credit losses:
For securities for which credit losses were not previously recorded	4			—		4
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)	9			—		9
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	(1		)	1		—
Ending balance as of September 30, 2020	$	34		$	13	$	47



Nine months ended September 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	62			12		74
For available-for-sale securities accounted for as PCD assets	3			—		3

Reductions to the allowance for credit losses:
Securities sold during the period (realized)	15			—		15
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	(21		)	1		(20		)
Ending balance as of September 30, 2020	$	34		$	13	$	47

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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 September 30	Three Months				Nine Months
(In millions)	2020		2019		2020		2019
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	4	$	12	$	94	$	24
Asset-backed	1		2		14		10
Impairment losses recognized in earnings	$	5	$	14	$	108	$	34

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The following tables present a summary of fixed maturity securities.



September 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	$	20,734	$	3,047	$	89	$	34	$	23,658
States, municipalities and political subdivisions	9,459		1,766		1		—		11,224
Asset-backed:
Residential mortgage-backed	3,796		153		1		—		3,948
Commercial mortgage-backed	2,048		85		70		13		2,050
Other asset-backed	2,097		76		19		—		2,154
Total asset-backed	7,941		314		90		13		8,152
U.S. Treasury and obligations of government-sponsored enterprises	347		4		1		—		350
Foreign government	481		29		—		—		510
Redeemable preferred stock	—		—		—		—		—
Total fixed maturity securities available-for-sale	38,962		5,160		181		47		43,894
Total fixed maturity securities trading	7		—		—		—		7
Total fixed maturity securities	$	38,969	$	5,160	$	181	$	47	$	43,901

(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 September 30, 2020 and December 31, 2019, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2,559 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
September 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	$	1,579	$	86	$	56	$	3	$	1,635	$	89
States, municipalities and political subdivisions	154		1		—		—		154		1
Asset-backed:
Residential mortgage-backed	98		1		13		—		111		1
Commercial mortgage-backed	693		69		19		1		712		70
Other asset-backed	432		18		13		1		445		19
Total asset-backed	1,223		88		45		2		1,268		90
U.S. Treasury and obligations of government-sponsored enterprises	25		1		—		—		25		1
Foreign government	20		—		—		—		20		—
Total	$	3,001	$	176	$	101	$	5	$	3,102	$	181



	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 September 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 September 30, 2020.

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Contractual Maturity

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



	September 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	$	1,372	$	1,392	$	1,334	$	1,356
Due after one year through five years	11,955		12,625		9,746		10,186
Due after five years through ten years	13,026		14,359		14,892		15,931
Due after ten years	12,609		15,518		12,134		14,714
Total	$	38,962	$	43,894	$	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 $193 million and $182 million as of September 30, 2020 and December 31, 2019 and a fair value of $(16) million and $(7) million as of September 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 private placement securities. As of September 30, 2020, the Company had commitments to purchase or fund approximately $1,170 million and sell approximately $55 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.



September 30, 2020	Mortgage Loans Amortized Cost Basis by Origination Year ⁽¹⁾
(In millions)	2020		2019		2018		2017		2016		Prior		Total
DSCR ≥1.6x
LTV less than 55%	$	75	$	33	$	19	$	85	$	33	$	161	$	406
LTV 55% to 65%	—		33		29		55		12		—		129
LTV greater than 65%	—		5		—		—		—		12		17
DSCR 1.2x - 1.6x
LTV less than 55%	—		31		10		13		16		79		149
LTV 55% to 65%	20		54		32		24		—		—		130
LTV greater than 65%	48		103		—		—		—		—		151
DSCR ≤1.2
LTV less than 55%	—		—		—		—		—		—		—
LTV 55% to 65%	—		14		14		—		—		—		28
LTV greater than 65%	—		23		—		45		24		7		99
Total	$	143	$	296	$	104	$	222	$	85	$	259	$	1,109


(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 September 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.

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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.



September 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	$	372	$	23,459	$	694	$	24,525
States, municipalities and political subdivisions	—		11,179		45		11,224
Asset-backed	—		7,917		235		8,152
Total fixed maturity securities	372		42,555		974		43,901
Equity securities:
Common stock	157		—		16		173
Non-redeemable preferred stock	65		674		7		746
Total equity securities	222		674		23		919
Short term and other	1,301		25		—		1,326
Total assets	$	1,895	$	43,254	$	997	$	46,146
Liabilities
Other liabilities	$	—	$	16	$	—	$	16
Total liabilities	$	—	$	16	$	—	$	16



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			States, municipalities and political subdivisions		Asset-backed			Equity securities		Total
Balance as of July 1, 2020	$	555		$	—	$	222		$	11	$	788
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—		—			—		—
Reported in Net investment income	—			—		—			—		—
Reported in Other comprehensive income (loss)	5			—		9			—		14
Total realized and unrealized investment gains (losses)	5			—		9			—		14
Purchases	129			45		20			12		206
Sales	—			—		—			—		—
Settlements	(3		)	—		(14		)	—		(17		)
Transfers into Level 3	8			—		—			—		8
Transfers out of Level 3	—			—		(2		)	—		(2		)
Balance as of September 30, 2020	$	694		$	45	$	235		$	23	$	997
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2020 recognized in Net income (loss) in the period	$	—		$	—	$	—		$	—	$	—
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2020 recognized in Other comprehensive income (loss) in the period	5			—		8			—		13



Level 3 (In millions)	Corporate bonds and other			Asset-backed			Equity securities		Total
Balance as of July 1, 2019	$	338		$	193		$	22	$	553
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—			—		—
Reported in Net investment income	—			—			—		—
Reported in Other comprehensive income (loss)	14			1			—		15
Total realized and unrealized investment gains (losses)	14			1			—		15
Purchases	79			22			—		101
Sales	—			—			—		—
Settlements	(3		)	(4		)	—		(7		)
Transfers into Level 3	—			—			—		—
Transfers out of Level 3	—			(16		)	—		(16		)
Balance as of September 30, 2019	$	428		$	196		$	22	$	646
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Net income (loss) in the period	$	—		$	—		$	—	$	—
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Other comprehensive income (loss) in the period	14			2			—		16

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Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		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)	27			—		18			—			45
Total realized and unrealized investment gains (losses)	27			—		18			(7		)	38
Purchases	200			45		100			12			357
Sales	—			—		(9		)	—			(9		)
Settlements	(9		)	—		(22		)	—			(31		)
Transfers into Level 3	8			—		—			—			8
Transfers out of Level 3	—			—		(17		)	—			(17		)
Balance as of September 30, 2020	$	694		$	45	$	235		$	23		$	997
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2020 recognized in Net income (loss) in the period	$	—		$	—	$	—		$	(7	)	$	(7	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2020 recognized in Other comprehensive income (loss) in the period	29			—		19			—			48



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)	34			8			—		42
Total realized and unrealized investment gains (losses)	34			8			2		44
Purchases	211			42			2		255
Sales	—			—			—		—
Settlements	(7		)	(12		)	—		(19		)
Transfers into Level 3	—			45			—		45
Transfers out of Level 3	(32		)	(84		)	—		(116		)
Balance as of September 30, 2019	$	428		$	196		$	22	$	646
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Net income (loss) in the period	$	—		$	—		$	2	$	2
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Other comprehensive income (loss) in the period	29			9			—		38

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 September 30, 2020 and December 31, 2019, there were $64 million and $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.



September 30, 2020	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	888	Discounted cash flow	Credit spread	1% - 10% (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.



September 30, 2020	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	1,088	$	—	$	—	$	1,159	$	1,159
Liabilities
Long term debt	$	2,776	$	—	$	3,118	$	—	$	3,118



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 $160 million and $536 million for the three and nine months ended September 30, 2020. Net catastrophe losses for the three months ended September 30, 2020 were driven by severe weather related events, primarily Hurricanes Laura, Isaias and Sally, and the Midwest derecho. Net catastrophe losses for the nine months ended September 30, 2020 included $273 million related primarily to severe weather related events, $195 million related to the COVID-19 pandemic and $68 million related to civil unrest. The Company reported catastrophe losses, net of reinsurance, of $32 million and $128 million for the three and nine months ended September 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 nine months ended September 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	4,425			3,968
Increase (decrease) in provision for insured events of prior years	(68		)	(65		)
Amortization of discount	143			143
Total net incurred ⁽¹⁾	4,500			4,046
Net payments attributable to:
Current year events	(556		)	(599		)
Prior year events	(3,285		)	(3,547		)
Total net payments	(3,841		)	(4,146		)
Foreign currency translation adjustment and other	39			29
Net reserves, end of period	18,583			17,894
Ceded reserves, end of period	3,951			3,702
Gross reserves, end of period	$	22,534		$	21,596


(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 September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Specialty	$	(16	)	$	(20	)	$	(47	)	$	(58	)
Commercial	1			35			42			15
International	—			1			(3		)	14
Corporate & Other	—			—			—			—
Total pretax (favorable) unfavorable development	$	(15	)	$	16		$	(8	)	$	(29	)

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Specialty

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Medical Professional Liability	$	25		$	29		$	35		$	59
Other Professional Liability and Management Liability	—			(18		)	(6		)	(37		)
Surety	(40		)	(43		)	(70		)	(83		)
Warranty	—			—			(3		)	(7		)
Other	(1		)	12			(3		)	10
Total pretax (favorable) unfavorable development	$	(16	)	$	(20	)	$	(47	)	$	(58	)

Three Months

2020

Unfavorable development in medical professional liability was primarily due to higher than expected frequency of large losses in recent accident years and unfavorable development on a latent claim for an older accident year.

Favorable development in surety was due to lower than expected frequency and lack of systemic activity for accident years 2019 and prior.

2019

Unfavorable development in medical professional liability was primarily due to higher than expected indemnity severity in accident years 2016 through 2018 in the Company's aging services business.

Favorable development in other professional liability and management liability was due to lower than expected large claim losses in recent accident years in the Company's public company directors and officers liability (D&O) business.

Favorable development in surety was due to lower than expected frequency for accident years 2015 through 2018.

Unfavorable development in other was primarily due to higher than expected severity in aging services related to auto liability coverages.

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Nine Months

2020

Unfavorable development in medical professional liability was primarily due to higher than expected frequency of large losses in recent accident years, unfavorable development on a latent claim for an older accident year and unfavorable outcomes on specific claims in accident years 2015 and 2016 in the Company's aging services business.

Favorable development in surety was due to lower than expected frequency and lack of systemic activity for accident years 2019 and prior.

2019

Unfavorable development in medical professional liability was primarily due to higher than expected indemnity severity in accident years 2016 through 2018 in the Company's aging services business, 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 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 and lower than expected large claim losses in recent accident years in the Company's public company D&O business.

Favorable development in surety was due to lower than expected frequency for accident years 2018 and prior.

Unfavorable development in other was primarily due to higher than expected severity in aging services related to auto liability coverages.

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Commercial

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Commercial Auto	$	9		$	(16	)	$	33		$	(24	)
General Liability	15			43			65			36
Workers' Compensation	(23		)	7			(97		)	2
Property and Other	—			1			41			1
Total pretax (favorable) unfavorable development	$	1		$	35		$	42		$	15

Three Months

2020

Unfavorable development in general liability was primarily due to increased bodily injury severities in accident years 2012 through 2016 and higher than expected frequency and severity in the Company’s umbrella business in accident years 2015 through 2019.

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

2019

Favorable development in commercial auto was primarily due to a decline in bodily injury frequency in accident year 2018 and continued lower than expected severity across accident years 2013 through 2016.

Unfavorable development in general liability was primarily due to higher than expected emergence in mass tort exposures related to accident years 2009 and prior, 2015 and 2016.

Nine 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, increased bodily injury severities in accident years 2012 through 2016 and higher than expected frequency and severity in the Company’s umbrella business in accident years 2015 through 2019.

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 emergence in mass tort exposures as well as higher than expected large loss experience in the Company's excess and umbrella business in accident year 2017.

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International

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Pretax (favorable) unfavorable development:
Casualty	$	(5	)	$	(6	)	$	(11	)	$	(11	)
Property, Energy and Marine⁽¹⁾	9			4			10			23
Specialty	(4		)	3			(2		)	2
Total pretax (favorable) unfavorable development	$	—		$	1		$	(3	)	$	14


(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.

Nine Months

2020

Favorable development in casualty was primarily driven by better than expected loss experience across Europe and Canada in multiple accident years.

Unfavorable development in property, energy and marine was driven by adverse attritional and large loss experience on discontinued lines, primarily in the Company’s construction and renewable energy business in recent accident years.

2019

Favorable development in casualty was driven by lower than expected large losses and claim severity in accident years 2014 and prior in Hardy and Europe.

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 $9 million and $7 million for the three months ended September 30, 2020 and 2019 and $43 million for the nine months ended September 30, 2020 and 2019. As of September 30, 2020 and December 31, 2019, the cumulative amounts ceded under the LPT were $3.2 billion. The unrecognized deferred retroactive reinsurance benefit was $349 million and $392 million as of September 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 $3.5 billion and $3.7 billion as of September 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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Life & Group Policyholder Reserves

The Company’s Life & Group segment includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and the Company has the ability to increase policy premiums, subject to state regulatory approval.

The Company maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for the Life & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, the Company’s actuaries perform a detailed claim experience study on an annual basis. The study reviews the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for structured settlement obligations, the Company's actuaries monitor mortality experience on an annual basis. The Company’s recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent studies.

The Company's most recent annual claim experience studies were completed in the third quarter of 2020 and resulted in a $46 million pretax increase in claim and claim adjustment expense reserve estimates for structured settlement obligations primarily due to lower discount rate assumptions and mortality assumption changes and a $37 million pretax reduction in claim and claim adjustment expense reserves for long term care policies primarily due to lower claim severity than anticipated in the reserve estimates. The Company's 2019 annual claim experience studies were completed in the third quarter of 2019 and resulted in a $56 million pretax reduction in claim and claim adjustment expense reserves for long term care policies primarily due to lower claim severity than anticipated in the reserve estimates.

Future policy benefit reserves represent the active life reserves related to the Company’s long term care policies for policyholders that are not currently receiving benefits, which represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.

The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency, discount rates and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Discount rates are influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and may also be affected by changes to the Internal Revenue Code. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. As a result of this variability, the Company’s long term care future policy benefit reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.

Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in the Company’s results of operations in the period in which the need for such adjustment is determined. If the GPV required reserves are less than the existing recorded reserves, assumptions remain locked in and no adjustment is required. Periodically, management engages independent third parties to assess the appropriateness of its best estimate assumptions. The most recent third party assessment, performed in 2019, validated the assumption setting process and confirmed the best estimate assumptions appropriately reflected the experience data at that time.

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The GPV for the long term care future policy benefit reserves, performed in the third quarter of 2020 and 2019, indicated a premium deficiency primarily driven by lower discount rate assumptions. Recognition of the premium deficiency resulted in a $74 million and a $216 million pretax increase in policyholders' benefits reflected in the Company's results of operations for the three and nine months ended September 30, 2020 and 2019.

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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 September 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 September 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 September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Net periodic pension cost (benefit)
Interest cost on projected benefit obligation	$	20		$	25		$	60		$	75
Expected return on plan assets	(38		)	(36		)	(116		)	(107		)
Amortization of net actuarial (gain) loss	11			10			33			30
Settlement loss	—			—			2			—
Total net periodic pension cost (benefit)	$	(7	)	$	(1	)	$	(21	)	$	(2	)

For the three and nine months ended September 30, 2020, the Company recognized $2 million and $6 million of non-service benefit in Insurance claims and policyholders' benefits and $5 million and $15 million of non-service benefit in Other operating expenses. For the three and nine months ended September 30, 2019, the Company recognized less than $1 million and $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 July 1, 2020	$	(9	)	$	1,172	$	(815	)	$	(194	)	$	154
Other comprehensive income (loss) before reclassifications	2			231		(2		)	37			268
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(7), $2, $- and $(4)	(4		)	24		(9		)	—			11
Other comprehensive income (loss) net of tax (expense) benefit of $(1), $(56), $(3), $- and $(60)	6			207		7			37			257
Balance as of September 30, 2020	$	(3	)	$	1,379	$	(808	)	$	(157	)	$	411



(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 July 1, 2019	$	20	$	1,023	$	(760	)	$	(163	)	$	120
Other comprehensive income (loss) before reclassifications	—		44		—			(29		)	15
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $-, $2, $- and $2	—		3		(7		)	—			(4		)
Other comprehensive income (loss) net of tax (expense) benefit of $-, $(11), $(2), $- and $(13)	—		41		7			(29		)	19
Balance as of September 30, 2019	$	20	$	1,064	$	(753	)	$	(192	)	$	139

(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	(48		)	374		(3		)	(16		)	307
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $12, $(5), $7, $- and $14	(45		)	20		(28		)	—			(53		)
Other comprehensive income (loss) net of tax (expense) benefit of $1, $(92), $(7), $- and $(98)	(3		)	354		25			(16		)	360
Balance as of September 30, 2020	$	(3	)	$	1,379	$	(808	)	$	(157	)	$	411



(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			999			(1		)	(12		)	989
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $1, $6, $- and $7	(1		)	(4		)	(23		)	—			(28		)
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(266), $(6), $- and $(274)	4			1,003			22			(12		)	1,017
Balance as of September 30, 2019	$	20		$	1,064		$	(753	)	$	(192	)	$	139

(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 September 30, 2020	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	734		$	857		$	236		$	127		$	—		$	(1	)	$	1,953
Net investment income	126			165			15			208			3			—			517
Non-insurance warranty revenue	317			—			—			—			—			—			317
Other revenues	—			6			—			—			—			—			6
Total operating revenues	1,177			1,028			251			335			3			(1		)	2,793
Claims, benefits and expenses
Net incurred claims and benefits	433			673			150			363			(8		)	—			1,611
Policyholders’ dividends	—			5			—			—			—			—			5
Amortization of deferred acquisition costs	158			150			52			—			—			—			360
Non-insurance warranty expense	293			—			—			—			—			—			293
Other insurance related expenses	66			127			31			28			—			(1		)	251
Other expenses	14			7			(8		)	3			34			—			50
Total claims, benefits and expenses	964			962			225			394			26			(1		)	2,570
Core income (loss) before income tax	213			66			26			(59		)	(23		)	—			223
Income tax (expense) benefit on core income (loss)	(45		)	(14		)	1			24			4			—			(30		)
Core income (loss)	$	168		$	52		$	27		$	(35	)	$	(19	)	$	—		193
Net investment gains (losses)																			27
Income tax (expense) benefit on net investment gains (losses)																			(7		)
Net investment gains (losses), after tax																			20
Net income (loss)																			$	213

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Three months ended September 30, 2019	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	712		$	813		$	236		$	130		$	—		$	(1	)	$	1,890
Net investment income	121			136			17			207			6			—			487
Non-insurance warranty revenue	292			—			—			—			—			—			292
Other revenues	1			10			(1		)	(1		)	1			(1		)	9
Total operating revenues	1,126			959			252			336			7			(2		)	2,678
Claims, benefits and expenses
Net incurred claims and benefits	411			564			163			476			(7		)	—			1,607
Policyholders’ dividends	2			5			—			—			—			—			7
Amortization of deferred acquisition costs	155			134			56			—			—			—			345
Non-insurance warranty expense	278			—			—			—			—			—			278
Other insurance related expenses	71			123			35			29			—			(1		)	257
Other expenses	13			9			7			1			35			(1		)	64
Total claims, benefits and expenses	930			835			261			506			28			(2		)	2,558
Core income (loss) before income tax	196			124			(9		)	(170		)	(21		)	—			120
Income tax (expense) benefit on core income (loss)	(43		)	(27		)	—			48			4			—			(18		)
Core income (loss)	$	153		$	97		$	(9	)	$	(122	)	$	(17	)	$	—		102
Net investment gains (losses)																			7
Income tax (expense) benefit on net investment gains (losses)																			(2		)
Net investment gains (losses), after tax																			5
Net income (loss)																			$	107

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Nine months ended September 30, 2020	Specialty			Commercial			International		Life & Group			Corporate & Other
(In millions)															Eliminations			Total
Operating revenues
Net earned premiums	$	2,124		$	2,470		$	699	$	380		$	—		$	(1	)	$	5,672
Net investment income	315			389			44		622			10			—			1,380
Non-insurance warranty revenue	926			—			—		—			—			—			926
Other revenues	1			18			—		—			3			(3		)	19
Total operating revenues	3,366			2,877			743		1,002			13			(4		)	7,997
Claims, benefits and expenses
Net incurred claims and benefits	1,346			1,897			480		983			(40		)	—			4,666
Policyholders’ dividends	2			15			—		—			—			—			17
Amortization of deferred acquisition costs	462			441			143		—			—			—			1,046
Non-insurance warranty expense	859			—			—		—			—			—			859
Other insurance related expenses	208			378			106		79			(1		)	(1		)	769
Other expenses	37			26			3		6			108			(3		)	177
Total claims, benefits and expenses	2,914			2,757			732		1,068			67			(4		)	7,534
Core income (loss) before income tax	452			120			11		(66		)	(54		)	—			463
Income tax (expense) benefit on core income (loss)	(98		)	(24		)	4		49			6			—			(63		)
Core income (loss)	$	354		$	96		$	15	$	(17	)	$	(48	)	$	—		400
Net investment gains (losses)																		(120		)
Income tax (expense) benefit on net investment gains (losses)																		23
Net investment gains (losses), after tax																		(97		)
Net income (loss)																		$	303



September 30, 2020
(In millions)
Reinsurance receivables	$	855	$	948	$	253	$	401	$	1,937	$	—	$	4,394
Insurance receivables	1,015		1,267		269		7		1		—		2,559
Deferred acquisition costs	324		285		88		—		—		—		697
Goodwill	117		—		29		—		—		—		146
Deferred non-insurance warranty acquisition expense	2,998		—		—		—		—		—		2,998
Insurance reserves
Claim and claim adjustment expenses	5,698		9,054		1,975		3,766		2,041		—		22,534
Unearned premiums	2,550		1,847		502		121		—		—		5,020
Future policy benefits	—		—		—		12,978		—		—		12,978
Deferred non-insurance warranty revenue	3,951		—		—		—		—		—		3,951

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Nine months ended September 30, 2019	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	2,061		$	2,339		$	729		$	390		$	—		$	(2	)	$	5,517
Net investment income	410			480			47			616			20			—			1,573
Non-insurance warranty revenue	858			—			—			—			—			—			858
Other revenues	1			20			—			—			5			(4		)	22
Total operating revenues	3,330			2,839			776			1,006			25			(6		)	7,970
Claims, benefits and expenses
Net incurred claims and benefits	1,198			1,581			472			1,093			(40		)	—			4,304
Policyholders’ dividends	4			15			—			—			—			—			19
Amortization of deferred acquisition costs	454			391			180			—			—			—			1,025
Non-insurance warranty expense	801			—			—			—			—			—			801
Other insurance related expenses	217			372			94			87			(2		)	(2		)	766
Other expenses	37			27			14			5			108			(4		)	187
Total claims, benefits and expenses	2,711			2,386			760			1,185			66			(6		)	7,102
Core income (loss) before income tax	619			453			16			(179		)	(41		)	—			868
Income tax (expense) benefit on core income (loss)	(136		)	(97		)	(2		)	74			7			—			(154		)
Core income (loss)	$	483		$	356		$	14		$	(105	)	$	(34	)	$	—		714
Net investment gains (losses)																			20
Income tax (expense) benefit on net investment gains (losses)																			(7		)
Net investment gains (losses), after tax																			13
Net income (loss)																			$	727



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 September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Specialty
Management & Professional Liability	$	668		$	638		$	1,881		$	1,903
Surety	153			156			444			446
Warranty & Alternative Risks	356			332			1,041			981
Specialty revenues	1,177			1,126			3,366			3,330
Commercial
Middle Market	381			357			1,071			1,065
Construction ⁽¹⁾	298			265			823			754
Small Business	126			124			352			377
Other Commercial	223			213			631			643
Commercial revenues	1,028			959			2,877			2,839
International
Canada	73			70			214			204
Europe	96			91			282			270
Hardy	82			91			247			302
International revenues	251			252			743			776
Life & Group revenues	335			336			1,002			1,006
Corporate & Other revenues	3			7			13			25
Eliminations	(1		)	(2		)	(4		)	(6		)
Total operating revenues	2,793			2,678			7,997			7,970
Net investment gains (losses)	27			7			(120		)	20
Total revenues	$	2,820		$	2,685		$	7,877		$	7,990


(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 $4.0 billion of Deferred non-insurance warranty revenue as of September 30, 2020 and $3.8 billion as of December 31, 2019. For the three and nine months ended September 30, 2020, the Company recognized $262 million and $826 million of revenues that were included in the deferred revenue balance as of January 1, 2020. For the three and nine months ended September 30, 2019, the Company recognized $236 million and $747 million of revenues that were included in the deferred revenue balance as of January 1, 2019. For the three and nine months ended September 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 $0.3 billion of the deferred revenue in the remainder of 2020, $1.1 billion in 2021, $0.9 billion in 2022 and $1.7 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)	September 30, 2020
A- to A++	$	2,729
B- to B++	874
Insolvent	4
Total voluntary reinsurance outstanding balance⁽¹⁾	$	3,607


(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 loss ratio excluding catastrophes and development, the expense ratio, the dividend ratio, the combined ratio and the combined ratio excluding catastrophes and development. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The loss ratio excluding catastrophes and development excludes net catastrophes losses and changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years from the loss ratio. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The combined ratio excluding catastrophes and development is the sum of the loss ratio excluding catastrophes and development, the expense ratio and the dividend ratio. In addition 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 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. While these conditions have had a significant impact across our enterprise during 2020, COVID-19 impacts to our results for the three months ended September 30, 2020 were more limited. During the first quarter of 2020 we experienced significant declines in the value of our investment portfolio, and during the second quarter of 2020 we recorded significant underwriting losses. While financial markets have broadly recovered during the second and third quarters of 2020, our Net investment income and Net investment gains (losses) are lower for the nine months ended September 30, 2020 as compared with the same period in 2019.

For a further discussion of COVID-19 impacts on our underwriting results see the Expected impact of COVID-19 on underwriting results within the Segment Results section of this MD&A. For a 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.

For more 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.

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Operating Revenues
Net earned premiums	$	1,953		$	1,890		$	5,672		$	5,517
Net investment income	517			487			1,380			1,573
Non-insurance warranty revenue	317			292			926			858
Other revenues	6			9			19			22
Total operating revenues	2,793			2,678			7,997			7,970
Claims, Benefits and Expenses
Net incurred claims and benefits	1,611			1,607			4,666			4,304
Policyholders' dividends	5			7			17			19
Amortization of deferred acquisition costs	360			345			1,046			1,025
Non-insurance warranty expense	293			278			859			801
Other insurance related expenses	251			257			769			766
Other expenses	50			64			177			187
Total claims, benefits and expenses	2,570			2,558			7,534			7,102
Core income before income tax	223			120			463			868
Income tax expense on core income	(30		)	(18		)	(63		)	(154		)
Core income	193			102			400			714
Net investment gains (losses)	27			7			(120		)	20
Income tax (expense) benefit on net investment gains (losses)	(7		)	(2		)	23			(7		)
Net investment gains (losses), after tax	20			5			(97		)	13
Net income	$	213		$	107		$	303		$	727

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Three Month Comparison

Core income increased $91 million for the three months ended September 30, 2020 as compared with the same period in 2019. Core income for our Property & Casualty Operations increased $6 million primarily due to improved non-catastrophe current accident year underwriting results, higher net investment income driven by limited partnership and common stock returns and favorable net prior year loss reserve development in the current year period. These results were largely offset by higher net catastrophe losses. Core loss for our Life & Group segment improved $87 million. Results for the three months ended September 30, 2020 include a $59 million charge related to recognition of a premium deficiency as a result of the third quarter 2020 gross premium valuation (GPV) compared to a $170 million charge related to recognition of a premium deficiency as a result of the third quarter 2019 GPV. Core loss for our Corporate & Other segment increased $2 million.

Net catastrophe losses were $160 million and $32 million for the three months ended September 30, 2020 and 2019. Net catastrophe losses for the three months ended September 30, 2020 were driven by severe weather related events, primarily Hurricanes Laura, Isaias and Sally, and the Midwest derecho.

Favorable net prior year loss reserve development of $15 million was recorded for the three months ended September 30, 2020 as compared with unfavorable net prior year loss reserve development of $16 million for the three months ended September 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.

Nine Month Comparison

Core income decreased $314 million for the nine months ended September 30, 2020 as compared with the same period in 2019. Core income for our Property & Casualty Operations decreased $388 million primarily due to higher net catastrophe losses and lower net investment income driven by limited partnership and common stock returns. Core loss for our Life & Group segment improved $88 million. Results for the nine months ended September 30, 2020 include a $59 million charge related to recognition of a premium deficiency as a result of the third quarter 2020 GPV compared to a $170 million charge related to recognition of a premium deficiency as a result of the third quarter 2019 GPV. Core loss for our Corporate & Other segment increased $14 million.

Net catastrophe losses were $536 million and $128 million for the nine months ended September 30, 2020 and 2019. Catastrophe losses for the nine months ended September 30, 2020 include $273 million related primarily to severe weather related events, $195 million related to COVID-19 and $68 million related to civil unrest. The COVID-19 losses, which were recognized in the first half of 2020, followed 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 timing and fluidity of the events, 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.

Favorable net prior year loss reserve development of $8 million and $29 million was recorded for the nine months ended September 30, 2020 and 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 Property & Casualty underwriting results

Our underwriting results for the first nine months of 2020 were negatively impacted by COVID-19 and the related depressed economic conditions. In many geographic locations, the virus continues to spread. Accordingly, it remains the case that 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 three 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. However, depressed economic conditions generally have had an unfavorable impact on premium exposures, resulting in a decrease in our estimated audit premiums during the second quarter of 2020 and causing an unfavorable impact on our net earned premiums. Additionally, in the second quarter of 2020 we renewed multiple property and casualty reinsurance treaties at higher costs as well as purchased additional coverage, which had an unfavorable impact on net written premiums and will have an unfavorable impact on our net earned premiums in future quarters. Lower net earned premiums have had and may continue to have an unfavorable impact on our expense ratio. Our expense ratio has also been unfavorably impacted by increases in our allowance for uncollectible insurance receivables, more than offset by lower travel-related expenses. If general economic conditions do not improve in the remainder of 2020 or thereafter, our net written premiums, net earned premiums and our expense ratio may continue to be unfavorably impacted as a result.

While our losses incurred during the first nine months of 2020 related to COVID-19 represent our best estimate of ultimate insurance losses resulting from events occurring in the first nine 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 could continue to evolve through the remainder of 2020, and possibly thereafter, 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 new 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 September 30	Three Months						Nine Months
(In millions, except ratios, rate, renewal premium change and retention)	2020			2019			2020			2019
Gross written premiums	$	1,855		$	1,766		$	5,331		$	5,191
Gross written premiums excluding third party captives	861			778			2,413			2,263
Net written premiums	795			732			2,231			2,143
Net earned premiums	734			712			2,124			2,061
Net investment income	126			121			315			410
Core income	168			153			354			483

Other performance metrics:
Loss ratio excluding catastrophes and development	60.0		%	60.1		%	59.8		%	60.2		%
Effect of catastrophe impacts	1.0			0.5			5.7			0.8
Effect of development-related items	(2.0		)	(2.8		)	(2.1		)	(2.9		)
Loss ratio	59.0		%	57.8		%	63.4		%	58.1		%
Expense ratio	30.5			31.8			31.5			32.6
Dividend ratio	—			0.2			0.1			0.2
Combined ratio	89.5		%	89.8		%	95.0		%	90.9		%
Combined ratio excluding catastrophes and development	90.5		%	92.1		%	91.4		%	93.0		%

Rate	13		%	6		%	11		%	4		%
Renewal premium change	12			9			11			7
Retention	86			87			85			88
New business	$	104		$	91		$	275		$	274

Three Month Comparison

Gross written premiums, excluding third party captives, for Specialty increased $83 million for the three months ended September 30, 2020 as compared with the same period in 2019 driven by strong rate and higher new business. Net written premiums for Specialty increased $63 million for the three months ended September 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 increased $15 million for the three months ended September 30, 2020 as compared with the same period in 2019 primarily due to improved non-catastrophe current accident year underwriting results.

The combined ratio of 89.5% improved 0.3 points for the three months ended September 30, 2020 as compared with the same period in 2019 primarily due to a 1.3 point improvement in the expense ratio largely offset by a 1.2 point increase in the loss ratio. The expense ratio improvement was driven by lower underwriting expenses and higher net earned premiums. The increase in the loss ratio was driven by lower favorable net prior year loss reserve development and higher net catastrophe losses. Net catastrophe losses were $7 million, or 1.0 point of the loss ratio, for the three months ended September 30, 2020, as compared with $3 million, or 0.5 points of the loss ratio, for the three months ended September 30, 2019. Net catastrophe losses for the three months ended September 30, 2020 related primarily to severe weather related events.

Favorable net prior year loss reserve development of $16 million and $20 million was recorded for the three months ended September 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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Nine Month Comparison

Gross written premiums, excluding third party captives, for Specialty increased $150 million for the nine months ended September 30, 2020 as compared with the same period in 2019 driven by strong rate. Net written premiums for Specialty increased $88 million for the nine months ended September 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 $129 million for the nine months ended September 30, 2020 as compared with the same period in 2019 primarily due to higher net catastrophe losses and lower net investment income driven by limited partnership and common stock returns.

The combined ratio of 95.0% increased 4.1 points for the nine months ended September 30, 2020 as compared with the same period in 2019 primarily due to a 5.3 point increase in the loss ratio partially offset by a 1.1 point improvement in the expense ratio. The increase in the loss ratio was primarily due to higher net catastrophe losses. Net catastrophe losses were $120 million, or 5.7 points of the loss ratio, for the nine months ended September 30, 2020, as compared with $16 million, or 0.8 points of the loss ratio, for the nine months ended September 30, 2019. Net catastrophe losses for the nine months ended September 30, 2020 included $109 million related to the COVID-19 pandemic and $11 million related primarily to severe weather related events. The improvement in the expense ratio was driven by lower underwriting expenses and higher net earned premiums.

Favorable net prior year loss reserve development of $47 million and $58 million was recorded for the nine months ended September 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)	September 30, 2020		December 31, 2019
Gross case reserves	$	1,580	$	1,481
Gross IBNR reserves	4,118		3,757
Total gross carried claim and claim adjustment expense reserves	$	5,698	$	5,238
Net case reserves	$	1,412	$	1,343
Net IBNR reserves	3,464		3,333
Total net carried claim and claim adjustment expense reserves	$	4,876	$	4,676

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Commercial

The following table details the results of operations for Commercial.



Periods ended September 30	Three Months						Nine Months
(In millions, except ratios, rate, renewal premium change and retention)	2020			2019			2020			2019
Gross written premiums	$	915		$	860		$	3,103		$	2,825
Gross written premiums excluding third party captives	915			852			3,018			2,742
Net written premiums	804			775			2,703			2,536
Net earned premiums	857			813			2,470			2,339
Net investment income	165			136			389			480
Core income	52			97			96			356

Other performance metrics:
Loss ratio excluding catastrophes and development	61.0		%	61.5		%	60.4		%	61.8		%
Effect of catastrophe impacts	17.0			3.0			14.3			4.3
Effect of development-related items	0.6			4.8			2.1			1.5
Loss ratio	78.6		%	69.3		%	76.8		%	67.6		%
Expense ratio	32.3			31.7			33.2			32.7
Dividend ratio	0.6			0.6			0.6			0.6
Combined ratio	111.5		%	101.6		%	110.6		%	100.9		%
Combined ratio excluding catastrophes and development	93.9		%	93.8		%	94.2		%	95.1		%

Rate	11		%	4		%	9		%	3		%
Renewal premium change	8			5			8			5
Retention	81			86			84			86
New business	$	168		$	173		$	564		$	522

Three Month Comparison

Gross written premiums for Commercial increased $55 million for the three months ended September 30, 2020 as compared with the same period in 2019 driven by strong rate. Net written premiums for Commercial increased $29 million for the three months ended September 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 $45 million for the three months ended September 30, 2020 as compared with the same period in 2019 driven by higher net catastrophe losses partially offset by less unfavorable net prior year loss reserve development in the current year period and higher net investment income driven by limited partnership and common stock returns.

The combined ratio of 111.5% increased 9.9 points for the three months ended September 30, 2020 as compared with the same period in 2019 due to a 9.3 point increase in the loss ratio and a 0.6 point increase in the expense ratio. The increase in the loss ratio was driven by higher net catastrophe losses partially offset by less unfavorable net prior year loss reserve development in the current year period. Net catastrophe losses were $146 million, or 17.0 points of the loss ratio, for the three months ended September 30, 2020, as compared with $25 million, or 3.0 points of the loss ratio, for the three months ended September 30, 2019. Net catastrophe losses for the three months ended September 30, 2020 related primarily to severe weather related events. The increase in the expense ratio was driven by higher acquisition expenses partially offset by higher net earned premiums.

Unfavorable net prior year loss reserve development of $1 million and $35 million was recorded for the three months ended September 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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Nine Month Comparison

Gross written premiums for Commercial increased $278 million for the nine months ended September 30, 2020 as compared with the same period in 2019 driven by strong rate and higher new business. Net written premiums for Commercial increased $167 million for the nine months ended September 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 partially offset by a reduction in estimated audit premiums as a result of the economic slowdown arising from COVID-19.

Core income decreased $260 million for the nine months ended September 30, 2020 as compared with the same period in 2019 primarily 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 110.6% increased 9.7 points for the nine months ended September 30, 2020 as compared with the same period in 2019 due to a 9.2 point increase in the loss ratio and a 0.5 point increase in the expense ratio. The increase in the loss ratio was driven by higher net catastrophe losses. Net catastrophe losses were $354 million, or 14.3 points of the loss ratio, for the nine months ended September 30, 2020, as compared with $102 million, or 4.3 points of the loss ratio, for the nine months ended September 30, 2019. Net catastrophe losses for the nine months ended September 30, 2020 included $240 million related primarily to severe weather related events, $66 million related to civil unrest and $48 million related to the COVID-19 pandemic. The increase in the expense ratio was driven by higher acquisition expenses partially offset by higher net earned premiums.

Unfavorable net prior year loss reserve development of $42 million and $15 million was recorded for the nine months ended September 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 Commercial.



(In millions)	September 30, 2020		December 31, 2019
Gross case reserves	$	3,776	$	3,937
Gross IBNR reserves	5,278		4,719
Total gross carried claim and claim adjustment expense reserves	$	9,054	$	8,656
Net case reserves	$	3,378	$	3,543
Net IBNR reserves	4,819		4,306
Total net carried claim and claim adjustment expense reserves	$	8,197	$	7,849

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International

The following table details the results of operations for International.



Periods ended September 30	Three Months						Nine Months
(In millions, except ratios, rate, renewal premium change and retention)	2020			2019			2020			2019
Gross written premiums	$	238		$	226		$	822		$	837
Net written premiums	222			201			680			709
Net earned premiums	236			236			699			729
Net investment income	15			17			44			47
Core income (loss)	27			(9		)	15			14

Other performance metrics:
Loss ratio excluding catastrophes and development	60.1		%	67.3		%	60.1		%	61.4		%
Effect of catastrophe impacts	3.0			1.7			8.9			1.4
Effect of development-related items	0.1			0.4			(0.4		)	1.9
Loss ratio	63.2		%	69.4		%	68.6		%	64.7		%
Expense ratio	34.9			38.0			35.6			37.5
Combined ratio	98.1		%	107.4		%	104.2		%	102.2		%
Combined ratio excluding catastrophes and development	95.0		%	105.3		%	95.7		%	98.9		%

Rate	16		%	10		%	12		%	7		%
Renewal premium change	14			6			11			5
Retention	70			74			71			70
New business	$	58		$	52		$	187		$	207

Three Month Comparison

Gross written premiums for International increased $12 million for the three months ended September 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, gross written premiums increased $9 million driven by growth in Europe and Canada partially offset by the continued impact of the strategic exit from certain Lloyd’s business classes. Net written premiums increased $21 million for the three months ended September 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, net written premiums increased $18 million for the three months ended September 30, 2020 as compared with the same period in 2019. Net earned premiums were consistent with the same period in 2019.

Core results improved $36 million for the three months ended September 30, 2020 as compared with the same period in 2019 primarily due to improved non-catastrophe current accident year underwriting results.

The combined ratio of 98.1% improved 9.3 points for the three months ended September 30, 2020 as compared with the same period in 2019 due to a 6.2 point improvement in the loss ratio and a 3.1 point improvement in the expense ratio. The improvement in the loss ratio was primarily due to improved non-catastrophe current accident year underwriting results driven by lower large losses partially offset by higher net catastrophe losses. Net catastrophe losses were $7 million, or 3.0 points of the loss ratio, for the three months ended September 30, 2020, as compared with $4 million, or 1.7 points of the loss ratio, for the three months ended September 30, 2019. Net catastrophe losses for the three months ended September 30, 2020 related primarily to severe weather related events. The improvement in the expense ratio was driven by lower acquisition and underwriting expenses.

There was no prior year loss reserve development recorded for the three months ended September 30, 2020 as compared with unfavorable development of $1 million for the three months ended September 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.

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Nine Month Comparison

Gross written premiums for International decreased $15 million for the nine months ended September 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, gross written premiums decreased $10 million driven by the continued impact of the strategic exit from certain Lloyd’s business classes partially offset by growth in Canada and Europe. Net written premiums decreased $29 million for the nine months ended September 30, 2020 as compared with the same period in 2019. Excluding the effect of foreign currency exchange rates, net written premiums decreased $24 million for the nine months ended September 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 for the nine months ended September 30, 2020 was generally consistent with the same period in 2019.

The combined ratio of 104.2% increased 2.0 points for the nine months ended September 30, 2020 as compared with the same period in 2019 due to a 3.9 point increase in the loss ratio partially offset by a 1.9 point improvement in the expense ratio. The increase in the loss ratio was 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 $62 million, or 8.9 points of the loss ratio, for the nine months ended September 30, 2020, as compared with $10 million, or 1.4 points of the loss ratio, for the nine months ended September 30, 2019. Net catastrophe losses for the nine months ended September 30, 2020 included $38 million related to the COVID-19 pandemic and $24 million related primarily to severe weather related events. The improvement in the expense ratio was driven by lower acquisition and underwriting expenses.

Favorable net prior year loss reserve development of $3 million was recorded for the nine months ended September 30, 2020 as compared with unfavorable development of $14 million for the nine months ended September 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)	September 30, 2020		December 31, 2019
Gross case reserves	$	821	$	858
Gross IBNR reserves	1,154		1,018
Total gross carried claim and claim adjustment expense reserves	$	1,975	$	1,876
Net case reserves	$	718	$	759
Net IBNR reserves	997		869
Total net carried claim and claim adjustment expense reserves	$	1,715	$	1,628

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Life & Group

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Net earned premiums	$	127		$	130		$	380		$	390
Net investment income	208			207			622			616
Core loss before income tax	(59		)	(170		)	(66		)	(179		)
Income tax benefit on core loss	24			48			49			74
Core loss	(35		)	(122		)	(17		)	(105		)

Three Month Comparison

Core loss improved $87 million for the three months ended September 30, 2020 as compared with the same period in 2019. Core loss for the three months ended September 30, 2020 included a $59 million charge related to the recognition of an active life reserve premium deficiency for long term care policies primarily driven by actions taken on discount rate assumptions. The normative risk free rate (the projection of the 10-year U.S. Treasury rate in the long term) was lowered by 100 basis points to 2.75% and the time period to grade up to the normative rate was extended from 6 years to 10 years. Core loss for the three months ended September 30, 2020 also included a $36 million increase in the structured settlement claim reserves and a $30 million reduction in long term care claim reserves, both resulting from the annual claim experience studies in the third quarter of 2020. Excluding the impacts of the GPV and claim reserve reviews, core results were favorable driven by better than expected morbidity in the long term care business. During the third quarter of 2020, relative to expectations, we experienced lower new claim frequency, higher claim terminations and more favorable claim severity amid the effects of COVID-19. Given the uncertainty of these trends, we increased our IBNR reserves in anticipation of increased claim activity as the COVID-19 pandemic abates.

Core loss for the three months ended September 30, 2019 included a $170 million charge related to the recognition of an active life reserve premium deficiency partially offset by a $44 million reduction in long term care claim reserves resulting from the annual claim experience study in the third quarter of 2019.

Nine Month Comparison

Core loss improved $88 million for the nine months ended September 30, 2020 as compared with the same period in 2019. The drivers of core loss for the nine month period were generally consistent with the three month summary noted above.

Life & Group Policyholder Reserves

Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a GPV to determine if there is a premium deficiency. See Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1 for further information on the reserving process.

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The September 30, 2020 GPV indicated a premium deficiency of $74 million and future policy benefit reserves were increased accordingly. As a result, the long term care active life reserves carried as of September 30, 2020 represent management's best estimate assumptions at that date with no margin for adverse deviation. A summary of the changes in the GPV results is presented in the table below:



Long Term Care Active Life Reserve - Change in estimated reserve margin (In millions)
September 30, 2019 Estimated Margin	$	—
Changes in underlying discount rate assumptions	(609		)
Changes in underlying morbidity assumptions	51
Changes in underlying persistency assumptions	152
Changes in underlying premium rate action assumptions	318
Changes in underlying expense and other assumptions	14
September 30, 2020 Premium Deficiency	$	(74	)

The premium deficiency was primarily driven by changes in discount rate assumptions due to lower expected reinvestment rates, contemplating both near-term market indications and long-term normative assumptions. This unfavorable driver was significantly offset by higher than previously estimated rate increases on active rate increase programs, new planned rate increase filings and favorable changes to the underlying persistency and morbidity assumptions.

Our projections do not indicate a pattern of expected profits in earlier future years followed by expected losses in later future years. As such, we will not establish additional future policy benefit reserves for profits followed by losses in periods where the long term care business generates core income. The need for these additional future policy benefit reserves will be re-evaluated in connection with the next GPV, which is expected to be completed in the third quarter of 2021.

The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our active life reserve assumptions. The annual GPV process involves updating all assumptions to management's then current best estimate, and historically all significant assumptions have been revised each year. In the Hypothetical revisions table below, we have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group and would occur absent any changes, mitigating or otherwise, in the other assumptions. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below.



September 30, 2020
	Estimated reduction to pretax income
Hypothetical revisions (In millions)	Estimated reduction to pretax income
Morbidity:
2.5% increase in morbidity	$	339
5% increase in morbidity	677
Persistency:
5% decrease in active life mortality and lapse	$	254
10% decrease in active life mortality and lapse	469
Discount Rates:
25 basis point decline in new money interest rates	$	175
50 basis point decline in new money interest rates	356
Premium Rate Actions:
25% decrease in anticipated future premium rate increases	$	66
50% decrease in anticipated future premium rate increases	132

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The following table summarizes policyholder reserves for Life & Group.



September 30, 2020
(In millions)	Claim and claim adjustment expenses		Future policy benefits		Total
Long term care	$	2,866	$	9,678	$	12,544
Structured settlement annuities	547		—		547
Other	12		—		12
Total	3,425		9,678		13,103
Shadow adjustments ⁽¹⁾	204		3,035		3,239
Ceded reserves ⁽²⁾	137		265		402
Total gross reserves	$	3,766	$	12,978	$	16,744



December 31, 2019
(In millions)	Claim and claim adjustment expenses		Future policy benefits		Total
Long term care	$	2,863	$	9,470	$	12,333
Structured settlement annuities	515		—		515
Other	12		—		12
Total	3,390		9,470		12,860
Shadow adjustments ⁽¹⁾	167		2,615		2,782
Ceded reserves ⁽²⁾	159		226		385
Total gross reserves	$	3,716	$	12,311	$	16,027


(1)	To the extent that unrealized gains on fixed income securities supporting long term care products and annuity contracts would result in a premium deficiency if those gains were realized, an increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).


(2)	Ceded reserves relate to claim or policy reserves fully reinsured in connection with a sale or exit from the underlying business.

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Corporate & Other

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Net investment income	$	3		$	6		$	10		$	20
Interest expense	32			31			94			99
Core loss	(19		)	(17		)	(48		)	(34		)

Three Month Comparison

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

Nine 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)	September 30, 2020		December 31, 2019
Gross case reserves	$	1,147	$	1,137
Gross IBNR reserves	894		1,097
Total gross carried claim and claim adjustment expense reserves	$	2,041	$	2,234
Net case reserves	$	90	$	92
Net IBNR reserves	76		83
Total net carried claim and claim adjustment expense reserves	$	166	$	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 broadly recovered during the second and third quarters 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 September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Fixed income securities:
Taxable fixed income securities	$	363		$	383		$	1,094		$	1,151
Tax-exempt fixed income securities	80			79			238			241
Total fixed income securities	443			462			1,332			1,392
Limited partnership investments	64			12			38			125
Common stock	7			6			(8		)	32
Other, net of investment expense	3			7			18			24
Pretax net investment income	$	517		$	487		$	1,380		$	1,573
Fixed income securities, after tax	$	364		$	378		$	1,092		$	1,140
Net investment income, after tax	421			399			1,130			1,284

Effective income yield for the fixed income securities portfolio, pretax	4.5		%	4.8		%	4.6		%	4.8		%
Effective income yield for the fixed income securities portfolio, after tax	3.7		%	3.9		%	3.7		%	3.9		%
Limited partnership and common stock return	4.1		%	0.9		%	1.7		%	7.7		%

Pretax net investment income increased $30 million for the three months ended September 30, 2020 as compared with the same period in 2019 driven by limited partnership and common stock returns partially offset by lower yields in our fixed income portfolio.

Pretax net investment income decreased $193 million for the nine months ended September 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 September 30	Three Months						Nine Months
(In millions)	2020			2019			2020			2019
Fixed maturity securities:
Corporate and other bonds	$	14		$	7		$	(105	)	$	—
States, municipalities and political subdivisions	6			1			39			13
Asset-backed	6			(5		)	34			(19		)
Total fixed maturity securities	26			3			(32		)	(6		)
Non-redeemable preferred stock	25			7			(45		)	60
Short term and other	(21		)	(3		)	(27		)	(34		)
Mortgage loans	(3		)	—			(16		)	—
Net investment gains (losses)	27			7			(120		)	20
Income tax (expense) benefit on net investment gains (losses)	(7		)	(2		)	23			(7		)
Net investment gains (losses), after tax	$	20		$	5		$	(97	)	$	13

Net investment gains (losses) increased $20 million for the three months ended September 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 partially offset by a loss on the third quarter 2020 redemption of our $400 million senior notes due August 2021. Pretax impairment losses of $5 million on available-for-sale securities and $3 million of credit losses on mortgage loans were recognized in the current quarter.

Net investment gains (losses) decreased $140 million for the nine months ended September 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 partially offset by higher net realized investment gains on sales of fixed maturity securities. Pretax impairment losses of $108 million on available-for-sale securities and $16 million of credit losses on mortgage loans were recognized for the nine months ended September 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.



	September 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	$	4,026	$	127	$	4,136	$	95
AAA	3,623		452		3,254		349
AA	6,773		961		6,663		801
A	9,470		1,296		9,062		1,051
BBB	17,488		2,105		16,839		1,684
Non-investment grade	2,521		38		2,253		101
Total	$	43,901	$	4,979	$	42,207	$	4,081

As of September 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 September 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.



	September 30, 2020
(In millions)	Estimated Fair Value		Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises	$	99	$	1
AAA	37		1
AA	244		9
A	642		21
BBB	1,264		71
Non-investment grade	816		78
Total	$	3,102	$	181

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.



	September 30, 2020
(In millions)	Estimated Fair Value		Gross Unrealized Losses
Due in one year or less	$	142	$	8
Due after one year through five years	819		54
Due after five years through ten years	1,479		83
Due after ten years	662		36
Total	$	3,102	$	181

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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.



	September 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	$	18,700	9.0	$	18,015	8.9
Other investments	27,408		4.5	26,813		4.1
Total	$	46,108	6.3	$	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)	September 30, 2020		December 31, 2019
Short term investments:
Commercial paper	$	—	$	1,181
U.S. Treasury securities	1,247		364
Other	215		316
Total short term investments	$	1,462	$	1,861

During 2020, we shifted our commercial paper holdings to U.S. Treasury securities.

In addition to Short term investments, the Company held $442 million and $242 million of Cash as of September 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, as the situation continues to evolve through the remainder of 2020, and possibly thereafter, uncertainty exists as to the potential impacts on our operating cash flows. 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 nine months ended September 30, 2020, net cash provided by operating activities was $1,408 million as compared with $980 million for the same period in 2019. The increase in cash provided by operating activities was driven by an increase in premiums collected, lower net claim payments and lower income taxes paid, partially offset by a lower level of distributions from limited partnerships.

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 used by investing activities was $407 million for the nine months ended September 30, 2020, as compared with $60 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 nine months ended September 30, 2020, net cash used by financing activities was $801 million as compared with $887 million for the same period 2019. Financing activities for the periods presented include:


•	During the nine months ended September 30, 2020, we paid dividends of $850 million and repurchased 435,376 shares of our common stock at an aggregate cost of $18 million.


•	In the third quarter of 2020, we issued $500 million of 2.05% senior notes due August 15, 2030 and redeemed the $400 million outstanding aggregate principal balances of our 5.750% senior notes due August 15, 2021.


•	During the nine months ended September 30, 2019, we paid dividends of $834 million and repurchased 415,695 shares of our common stock at an aggregate cost of $18 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 $3.11 per share on our common stock, including a special dividend of $2.00 per share, were declared and paid during the nine months ended September 30, 2020. On October 30, 2020, our Board of Directors declared a quarterly dividend of $0.37 per share, payable December 3, 2020 to stockholders of record on November 16, 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 $5.5 billion of cash, short term investments and highly liquid securities issued by the U.S. government and its agencies as of September 30, 2020, of which $517 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 September 30, 2020, CCC was in a positive earned surplus position. CCC paid dividends of $855 million and $940 million during the nine months ended September 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 (note that loss reserves for long term care, A&EP and other mass tort claims 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, drive significant decreases in our premium volume and result 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, wildfires, 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 nine months ended September 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 September 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 September 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 September 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 Reports on Form 10-Q for each of the first two quarters of 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 June 30, 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 continues to spread. Accordingly, it remains the case that 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 remainder of 2020 or thereafter, our net written premiums and net earned premiums may 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 nine 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 nine 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 could continue to evolve through the remainder of 2020, and possibly thereafter, 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 new 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 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 nine months 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 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

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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 the majority of 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: November 2, 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 Q3

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