CNA Financial - 10-Q quarterly report FY2021 Q1

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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 March 31, 2021


			☐			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 May 5, 2021, 271,656,848 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 months ended March 31, 2021 and 2020 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020 (Unaudited)	4
	Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2021 and 2020 (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
3.	Quantitative and Qualitative Disclosures About Market Risk	53
4.	Controls and Procedures	53
	PART II
1.	Legal Proceedings	54
1A.	Risk Factors	54
2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
6.	Exhibits	57

Table of Contents

PART I

Item 1. Condensed Consolidated Financial Statements

CNA Financial Corporation

Condensed Consolidated Statements of Operations (Unaudited)


Three months ended March 31
(In millions, except per share data)	2021		2020
Revenues
Net earned premiums	$	1,962	$	1,869
Net investment income	504		329
Net investment gains (losses)	57		(216)
Non-insurance warranty revenue	338		301
Other revenues	5		8
Total revenues	2,866		2,291
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits	1,506		1,425
Amortization of deferred acquisition costs	359		344
Non-insurance warranty expense	311		281
Other operating expenses	284		299
Interest	28		31
Total claims, benefits and expenses	2,488		2,380
Income (loss) before income tax	378		(89)
Income tax (expense) benefit	(66)		28
Net income (loss)	$	312	$	(61)

Basic earnings (loss) per share	$	1.15	$	(0.23)

Diluted earnings (loss) per share	$	1.14	$	(0.23)

Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic	271.9		271.5
Diluted	272.9		271.5

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 Loss (Unaudited)


Three months ended March 31
(In millions)	2021		2020
Comprehensive Loss
Net income (loss)	$	312	$	(61)
Other Comprehensive Loss, net of tax
Changes in:
Net unrealized gains and losses on investments with an allowance for credit losses	—		(11)
Net unrealized gains and losses on other investments	(627)		(1,044)
Net unrealized gains and losses on investments	(627)		(1,055)
Foreign currency translation adjustment	2		(77)
Pension and postretirement benefits	9		11
Other comprehensive loss, net of tax	(616)		(1,121)
Total comprehensive loss	$	(304)	$	(1,182)

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)	March 31, 2021 (Unaudited)		December 31, 2020
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $39,291 and $38,953, less allowance for credit loss of $43 and $40)	$	43,579	$	44,631
Equity securities at fair value (cost of $927 and $941)	984		992
Limited partnership investments	1,654		1,619
Other invested assets	77		76
Mortgage loans (less allowance for uncollectible receivables of $26 and $26)	1,043		1,068
Short term investments	1,334		1,907
Total investments	48,671		50,293
Cash	588		419
Reinsurance receivables (less allowance for uncollectible receivables of $22 and $21)	5,111		4,457
Insurance receivables (less allowance for uncollectible receivables of $33 and $33)	2,652		2,607
Accrued investment income	399		380
Deferred acquisition costs	741		708
Deferred income taxes	197		66
Property and equipment at cost (less accumulated depreciation of $243 and $231)	244		252
Goodwill	148		148
Deferred non-insurance warranty acquisition expense	3,149		3,068
Other assets	1,813		1,628
Total assets	$	63,713	$	64,026
Liabilities
Insurance reserves:
Claim and claim adjustment expenses	$	23,056	$	22,706
Unearned premiums	5,319		5,119
Future policy benefits	12,772		13,318
Long term debt	2,777		2,776
Deferred non-insurance warranty revenue	4,119		4,023
Other liabilities (includes $130 and $89 due to Loews Corporation)	3,581		3,377
Total liabilities	51,624		51,319
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; 271,644,861 and 271,391,603 shares outstanding)	683		683
Additional paid-in capital	2,194		2,211
Retained earnings	9,084		9,081
Accumulated other comprehensive income	187		803
Treasury stock (1,395,382 and 1,648,640 shares), at cost	(59)		(71)
Total stockholders’ equity	12,089		12,707
Total liabilities and stockholders' equity	$	63,713	$	64,026

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)


Three months ended March 31
(In millions)	2021		2020
Cash Flows from Operating Activities
Net income (loss)	$	312	$	(61)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Deferred income tax expense (benefit)	30		(37)
Trading portfolio activity	(8)		7
Net investment (gains) losses	(57)		216
Equity method investees	14		98
Net amortization of investments	(24)		(15)
Depreciation and amortization	14		16
Changes in:
Receivables, net	(700)		(229)
Accrued investment income	(19)		(8)
Deferred acquisition costs	(32)		(27)
Insurance reserves	605		510
Other, net	(53)		(258)
Net cash flows provided by operating activities	82		212
Cash Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales	907		823
Fixed maturity securities - maturities, calls and redemptions	1,084		799
Equity securities	119		98
Limited partnerships	49		204
Mortgage loans	42		15
Purchases:
Fixed maturity securities	(2,203)		(1,818)
Equity securities	(81)		(220)
Limited partnerships	(61)		(32)
Mortgage loans	(16)		(61)
Change in other investments	(2)		(6)
Change in short term investments	573		1,267
Purchases of property and equipment	(3)		(3)
Other, net	—		21
Net cash flows provided by investing activities	408		1,087
Cash Flows from Financing Activities
Dividends paid to common stockholders	(310)		(649)
Purchase of treasury stock	(3)		(18)
Other, net	(8)		(8)
Net cash flows used by financing activities	(321)		(675)
Effect of foreign exchange rate changes on cash	—		(9)
Net change in cash	169		615
Cash, beginning of year	419		242
Cash, end of period	$	588	$	857

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

Table of Contents

CNA Financial Corporation

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)


Three months ended March 31
(In millions)	2021		2020
Common Stock
Balance, beginning of period	$	683	$	683
Balance, end of period	683		683
Additional Paid-in Capital
Balance, beginning of period	2,211		2,203
Stock-based compensation	(17)		(16)
Balance, end of period	2,194		2,187
Retained Earnings
Balance, beginning of period, as previously reported	9,081		9,348
Cumulative effect adjustments from changes in accounting guidance, net of tax	—		(5)
Balance, beginning of period, as adjusted	9,081		9,343
Dividends to common stockholders ($1.13 and $2.37 per share)	(309)		(648)
Net income (loss)	312		(61)
Balance, end of period	9,084		8,634
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	803		51
Other comprehensive loss	(616)		(1,121)
Balance, end of period	187		(1,070)
Treasury Stock
Balance, beginning of period	(71)		(70)
Stock-based compensation	15		16
Purchase of treasury stock	(3)		(18)
Balance, end of period	(59)		(72)
Total stockholders' equity	$	12,089	$	10,362

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

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 89.5% of the outstanding common stock of CNAF as of March 31, 2021.

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, 2020, 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 March 31, 2021 and for the three months ended March 31, 2021 and 2020 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.

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, 2022, with early adoption permitted. The guidance may be applied 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 on the effective date, 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 months ended March 31, 2021, approximately 1,020 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 the same period, approximately 120 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 months ended March 31, 2020, approximately 1,015 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were excluded from the calculation of diluted loss per share because the effect would have been antidilutive due to the net loss position of the Company.

The Company repurchased 66,000 and 435,376 shares of CNAF common stock at an aggregate cost of $3 million and $18 million during the three months ended March 31, 2021 and 2020.

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Note C. Investments

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


Three months ended March 31
(In millions)	2021		2020
Fixed maturity securities	$	428	$	438
Equity securities	29		(44)
Limited partnership investments	43		(70)
Mortgage loans	14		14
Short term investments	—		7
Trading portfolio	5		1
Other	2		—
Gross investment income	521		346
Investment expense	(17)		(17)
Net investment income	$	504	$	329

During the three months ended March 31, 2021 and 2020, $13 million and $(45) million of Net investment income was recognized due to the change in fair value of common stock still held as of March 31, 2021 and 2020.

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


Three months ended March 31
(In millions)	2021		2020
Net investment gains (losses):
Fixed maturity securities:
Gross gains	$	58	$	29
Gross losses	(20)		(104)
Net investment gains (losses) on fixed maturity securities	38		(75)
Equity securities	2		(133)
Derivatives	17		5
Mortgage loans	—		(13)
Net investment gains (losses)	$	57	$	(216)

During the three months ended March 31, 2021 and 2020, $2 million of gains and $(133) 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 March 31, 2021 and 2020.

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The following tables present the activity related to the allowance on available-for-sale securities with credit impairments and purchased credit-deteriorated (PCD) assets. Accrued interest receivable on available-for-sale fixed maturity securities totaled $389 million, $371 million and $390 million as of March 31, 2021, December 31, 2020 and March 31, 2020 and is excluded from the estimate of expected credit losses and the amortized cost basis in the tables included within this Note.



(In millions)	Corporate and other bonds		Asset-backed		Total
Allowance for credit losses:
Balance as of January 1, 2021	$	23	$	17	$	40
Additions to the allowance for credit losses:
Securities for which credit losses were not previously recorded	14		—		14
Available-for-sale securities accounted for as PCD assets	2		—		2

Reductions to the allowance for credit losses:
Securities sold during the period (realized)	6		—		6
Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis	—		—		—
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	(6)		(1)		(7)
Balance as of March 31, 2021	$	27	$	16	$	43



(In millions)	Corporate and other bonds		Asset-backed		Total
Allowance for credit losses:
Balance as of January 1, 2020	$	—	$	—	$	—
Additions to the allowance for credit losses:
Impact of adopting ASC 326	6		—		6
Securities for which credit losses were not previously recorded	48		—		48
Available-for-sale securities accounted for as PCD assets	1		—		1

Reductions to the allowance for credit losses:
Securities sold during the period (realized)	5		—		5
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	—		—		—
Balance as of March 31, 2020	$	49	$	—	$	49

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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.


Three months ended March 31
(In millions)	2021		2020
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	7	$	91
Asset-backed	(1)		1
Impairment losses recognized in earnings	$	6	$	92

There were no losses recognized on mortgage loans during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company recognized $13 million of losses related to mortgage loans due to changes in expected credit losses.

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The following tables present a summary of fixed maturity securities.


March 31, 2021	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	21,110	$	2,644	$	71	$	27	$	23,656
States, municipalities and political subdivisions	10,041		1,590		31		—		11,600
Asset-backed:
Residential mortgage-backed	3,215		108		40		—		3,283
Commercial mortgage-backed	1,952		76		24		16		1,988
Other asset-backed	2,281		71		7		—		2,345
Total asset-backed	7,448		255		71		16		7,616
U.S. Treasury and obligations of government-sponsored enterprises	138		1		7		—		132
Foreign government	508		23		2		—		529
Redeemable preferred stock	12		—		—		—		12
Total fixed maturity securities available-for-sale	39,257		4,513		182		43		43,545
Total fixed maturity securities trading	34		—		—		—		34
Total fixed maturity securities	$	39,291	$	4,513	$	182	$	43	$	43,579


December 31, 2020	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	20,792	$	3,578	$	22	$	23	$	24,325
States, municipalities and political subdivisions	9,729		1,863		—		—		11,592
Asset-backed:
Residential mortgage-backed	3,442		146		1		—		3,587
Commercial mortgage-backed	1,933		93		42		17		1,967
Other asset-backed	2,179		81		9		—		2,251
Total asset-backed	7,554		320		52		17		7,805
U.S. Treasury and obligations of government-sponsored enterprises	339		2		3		—		338
Foreign government	512		32		—		—		544
Redeemable preferred stock	—		—		—		—		—
Total fixed maturity securities available-for-sale	38,926		5,795		77		40		44,604
Total fixed maturity securities trading	27		—		—		—		27
Total fixed maturity securities	$	38,953	$	5,795	$	77	$	40	$	44,631

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 March 31, 2021 and December 31, 2020, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2,301 million and $2,773 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
March 31, 2021	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	1,868	$	66	$	82	$	5	$	1,950	$	71
States, municipalities and political subdivisions	866		31		—		—		866		31
Asset-backed:
Residential mortgage-backed	1,584		40		12		—		1,596		40
Commercial mortgage-backed	320		9		285		15		605		24
Other asset-backed	337		3		97		4		434		7
Total asset-backed	2,241		52		394		19		2,635		71
U.S. Treasury and obligations of government-sponsored enterprises	65		7		—		—		65		7
Foreign government	45		2		—		—		45		2
Total	$	5,085	$	158	$	476	$	24	$	5,561	$	182


	Less than 12 Months				12 Months or Longer				Total
December 31, 2020	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	609	$	21	$	12	$	1	$	621	$	22
States, municipalities and political subdivisions	33		—		—		—		33		—
Asset-backed:
Residential mortgage-backed	71		1		11		—		82		1
Commercial mortgage-backed	533		40		28		2		561		42
Other asset-backed	344		9		13		—		357		9
Total asset-backed	948		50		52		2		1,000		52
U.S. Treasury and obligations of government-sponsored enterprises	63		3		—		—		63		3
Foreign government	13		—		—		—		13		—
Total	$	1,666	$	74	$	64	$	3	$	1,730	$	77

Based on current facts and circumstances, the Company believes the unrealized losses presented in the March 31, 2021 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 March 31, 2021.

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Contractual Maturity

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


	March 31, 2021				December 31, 2020
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,468	$	1,473	$	1,456	$	1,458
Due after one year through five years	10,837		11,583		12,304		13,098
Due after five years through ten years	13,640		14,685		12,319		13,878
Due after ten years	13,312		15,804		12,847		16,170
Total	$	39,257	$	43,545	$	38,926	$	44,604

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 $256 million and $190 million and a fair value of $(2) million and $(19) million as of March 31, 2021 and December 31, 2020. 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 March 31, 2021, the Company had commitments to purchase or fund approximately $1,365 million and sell approximately $100 million under the terms of these investments.

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Mortgage Loans

The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination. The primary credit quality indicators utilized are debt service coverage ratios (DSCR) and loan-to-value ratios (LTV).


March 31, 2021	Mortgage Loans Amortized Cost Basis by Origination Year (1)
(In millions)	2021		2020		2019		2018		2017		Prior		Total
DSCR ≥1.6x
LTV less than 55%	$	—	$	75	$	32	$	36	$	114	$	187	$	444
LTV 55% to 65%	—		14		20		14		15		11		74
LTV greater than 65%	5		—		5		—		—		24		34
DSCR 1.2x - 1.6x
LTV less than 55%	—		—		16		—		5		77		98
LTV 55% to 65%	—		20		40		53		27		—		140
LTV greater than 65%	10		52		44		—		9		12		127
DSCR ≤1.2
LTV less than 55%	—		—		50		—		8		10		68
LTV 55% to 65%	—		—		48		—		—		—		48
LTV greater than 65%	—		—		29		—		—		7		36
Total	$	15	$	161	$	284	$	103	$	178	$	328	$	1,069

(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 March 31, 2021, 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.


March 31, 2021							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate bonds and other	$	152	$	23,444	$	767	$	24,363
States, municipalities and political subdivisions	—		11,556		44		11,600
Asset-backed	—		7,301		315		7,616
Total fixed maturity securities	152		42,301		1,126		43,579
Equity securities:
Common stock	177		—		21		198
Non-redeemable preferred stock	67		711		8		786
Total equity securities	244		711		29		984
Short term and other	1,178		25		—		1,203
Total assets	$	1,574	$	43,037	$	1,155	$	45,766
Liabilities
Other liabilities	$	—	$	2	$	—	$	2
Total liabilities	$	—	$	2	$	—	$	2


December 31, 2020							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate bonds and other	$	355	$	24,109	$	770	$	25,234
States, municipalities and political subdivisions	—		11,546		46		11,592
Asset-backed	—		7,497		308		7,805
Total fixed maturity securities	355		43,152		1,124		44,631
Equity securities:
Common stock	175		—		20		195
Non-redeemable preferred stock	68		722		7		797
Total equity securities	243		722		27		992
Short term and other	1,761		28		—		1,789
Total assets	$	2,359	$	43,902	$	1,151	$	47,412
Liabilities
Other liabilities	$	—	$	19	$	—	$	19
Total liabilities	$	—	$	19	$	—	$	19

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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 January 1, 2021	$	770	$	46	$	308	$	27	$	1,151
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	(13)		—		—		1		(12)
Reported in Net investment income	—		—		2		1		3
Reported in Other comprehensive income (loss)	(40)		(2)		(9)		—		(51)
Total realized and unrealized investment gains (losses)	(53)		(2)		(7)		2		(60)
Purchases	42		—		30		—		72
Sales	—		—		—		—		—
Settlements	(2)		—		(17)		—		(19)
Transfers into Level 3	10		—		9		—		19
Transfers out of Level 3	—		—		(8)		—		(8)
Balance as of March 31, 2021	$	767	$	44	$	315	$	29	$	1,155
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2021 recognized in Net income (loss) in the period	$	—	$	—	$	—	$	2	$	2
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2021 recognized in Other comprehensive income (loss) in the period	(40)		(2)		(9)		—		(51)


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)	—		—		—		—		—
Reported in Net investment income	—		—		—		(3)		(3)
Reported in Other comprehensive income (loss)	(37)		—		(9)		—		(46)
Total realized and unrealized investment gains (losses)	(37)		—		(9)		(3)		(49)
Purchases	67		—		45		—		112
Sales	—		—		—		—		—
Settlements	(2)		—		(3)		—		(5)
Transfers into Level 3	—		—		—		—		—
Transfers out of Level 3	—		—		(1)		—		(1)
Balance as of March 31, 2020	$	496	$	—	$	197	$	15	$	708
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2020 recognized in Net income (loss) in the period	$	—	$	—	$	—	$	(3)	$	(3)
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2020 recognized in Other comprehensive income (loss) in the period	(35)		—		(9)		—		(44)

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 March 31, 2021 and December 31, 2020, there were $72 million and $71 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.

March 31, 2021

Estimated Fair Value
(In millions)

Valuation Technique(s)

Unobservable Input(s)

Range
(Weighted Average)

Fixed maturity securities

936

Discounted cash flow

Credit spread

1% - 8% (2%)

December 31, 2020

Estimated Fair Value
(In millions)

Valuation Technique(s)

Unobservable Input(s)

Range
(Weighted Average)

Fixed maturity securities

966

Discounted cash flow

Credit spread

1% - 8% (3%)

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.


March 31, 2021	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	1,043	$	—	$	—	$	1,107	$	1,107
Liabilities
Long term debt	$	2,777	$	—	$	3,016	$	—	$	3,016


December 31, 2020	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	1,068	$	—	$	—	$	1,151	$	1,151
Liabilities
Long term debt	$	2,776	$	—	$	3,148	$	—	$	3,148

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 $125 million and $75 million for the three months ended March 31, 2021 and 2020. Net catastrophe losses for the three months ended March 31, 2021 were primarily driven by Winter Storms Uri and Viola. Net catastrophe losses for the three months ended March 31, 2020 included $13 million related to the COVID-19 pandemic, with the remaining $62 million 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 three months ended March 31, 2021
(In millions)	2021		2020
Reserves, beginning of year:
Gross	$	22,706	$	21,720
Ceded	4,005		3,835
Net reserves, beginning of year	18,701		17,885
Reduction of net reserves due to Excess Workers' Compensation Loss Portfolio Transfer	(632)		—
Net incurred claim and claim adjustment expenses:
Provision for insured events of current year	1,474		1,355
Increase (decrease) in provision for insured events of prior years	(54)		(8)
Amortization of discount	50		51
Total net incurred (1)	1,470		1,398
Net payments attributable to:
Current year events	(85)		(72)
Prior year events	(1,067)		(1,218)
Total net payments	(1,152)		(1,290)
Foreign currency translation adjustment and other	(32)		(88)
Net reserves, end of period	18,355		17,905
Ceded reserves, end of period	4,701		3,967
Gross reserves, end of period	$	23,056	$	21,872

(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, the loss on the Excess Workers' Compensation Loss Portfolio Transfer, 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.


Three months ended March 31
(In millions)	2021		2020
Pretax (favorable) unfavorable development:
Specialty	$	(15)	$	(11)
Commercial	—		(4)
International	—		—
Corporate & Other	—		—
Total pretax (favorable) unfavorable development	$	(15)	$	(15)

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Specialty

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


Three months ended March 31
(In millions)	2021		2020
Pretax (favorable) unfavorable development:
Medical Professional Liability	$	8	$	10
Other Professional Liability and Management Liability	—		3
Surety	(15)		(30)
Warranty	(8)		—
Other	—		6
Total pretax (favorable) unfavorable development	$	(15)	$	(11)

2021

Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years.

2020

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

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

Commercial

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


Three months ended March 31
(In millions)	2021		2020
Pretax (favorable) unfavorable development:
Commercial Auto	$	—	$	9
General Liability	—		—
Workers' Compensation	—		(13)
Property and Other	—		—
Total pretax (favorable) unfavorable development	$	—	$	(4)

2020

Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in accident years 2016 through 2018.

International

There was no development recorded in the International segment for the three months ended March 31, 2021 and 2020.

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Asbestos & 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 on 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 $10 million and $14 million for the three months ended March 31, 2021 and 2020. As of March 31, 2021 and December 31, 2020, the cumulative amounts ceded under the LPT were $3.3 billion. The unrecognized deferred retroactive reinsurance benefit was $388 million and $398 million as of March 31, 2021 and December 31, 2020 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 $4.6 billion and $4.2 billion as of March 31, 2021 and December 31, 2020. 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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Excess Workers' Compensation LPT

On February 5, 2021, CCC completed a transaction with Cavello Bay Reinsurance Limited (Cavello), a subsidiary of Enstar Group Limited, under which certain legacy excess workers’ compensation (EWC) liabilities were ceded to Cavello. Under the terms of the transaction, based on reserves in place as of January 1, 2020, the Company ceded approximately $690 million of net EWC claim and allocated claim adjustment expense reserves to Cavello under an LPT with an aggregate limit of $1 billion. The Company paid Cavello a reinsurance premium of $697 million, less claims paid between January 1, 2020 and the closing date of the agreement of $64 million. After transaction costs, the Company recognized an after-tax loss of approximately $12 million in the Corporate & Other segment for the three months ended March 31, 2021 related to the EWC LPT.

Cavello established a collateral trust account as security for its obligations to the Company, which will be maintained at 105% of outstanding reserves. As of March 31, 2021, the remaining amount available under the $1 billion aggregate limit of the EWC LPT was $310 million on an incurred basis.

Credit Risk for Ceded Reserves

The majority of the Company’s outstanding voluntary reinsurance receivables are due from reinsurers with financial strength ratings of A- or higher. Receivables due from reinsurers with lower financial strength ratings are primarily due from captive reinsurers and are backed by collateral arrangements.

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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 March 31, 2021 and December 31, 2020, 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 March 31, 2021, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.6 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.


Three months ended March 31
(In millions)	2021		2020
Net periodic pension cost (benefit)
Interest cost on projected benefit obligation	$	15	$	20
Expected return on plan assets	(38)		(39)
Amortization of net actuarial (gain) loss	12		11
Settlement loss	—		1
Total net periodic pension cost (benefit)	$	(11)	$	(7)

For the three months ended March 31, 2021, the Company recognized $3 million of non-service benefit in Insurance claims and policyholders' benefits and $8 million of non-service benefit in Other operating expenses related to net periodic pension benefit. For the three months ended March 31, 2020, the Company recognized $2 million of non-service benefit in Insurance claims and policyholders' benefits and $5 million of non-service benefit in Other operating expenses related to net periodic pension benefit.

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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		Net unrealized gains (losses) on other investments		Pension and postretirement benefits		Cumulative foreign currency translation adjustment		Total
Balance as of January 1, 2021	$	—	$	1,745	$	(848)	$	(94)	$	803
Other comprehensive income (loss) before reclassifications	(3)		(593)		—		2		(594)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(8), $2, $— and $(5)	(3)		34		(9)		—		22
Other comprehensive income (loss) net of tax (expense) benefit of $—, $162, $(2), $— and $160	—		(627)		9		2		(616)
Balance as of March 31, 2021	$	—	$	1,118	$	(839)	$	(92)	$	187


(In millions)	Net unrealized gains (losses) on investments with an allowance for credit losses		Net unrealized gains (losses) on other investments		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)		(1,066)		1		(77)		(1,190)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $10, $6, $3, $— and $19	(37)		(22)		(10)		—		(69)
Other comprehensive income (loss) net of tax (expense) benefit of $3, $281, $(3), $— and $281	(11)		(1,044)		11		(77)		(1,121)
Balance as of March 31, 2020	$	(11)	$	(19)	$	(822)	$	(218)	$	(1,070)

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


Component of AOCI						Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with an allowance for credit 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.

Effective January 1, 2021, and in connection with the ceding of certain legacy reserves under a retroactive reinsurance agreement executed in February 2021, management changed the segment presentation of a legacy portfolio of excess workers’ compensation policies relating to business written in 2007 and prior. This business, which was previously reported as part of the Commercial business segment, is now reported as part of the Corporate & Other business segment. Further information on this retroactive reinsurance agreement is provided in Note E. In addition, a determination was made to change the segment presentation of certain legacy mass tort reserves. Similar to the aforementioned excess workers’ compensation legacy business, these legacy mass tort reserves were previously reported in the Commercial business segment and are now reported as part of the Corporate & Other business segment. These changes were made to better reflect the manner in which the Company is organized for purposes of making operating decisions and assessing performance. Prior period information has been conformed to the new segment presentation.

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, 2020. 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 March 31, 2021	Specialty		Commercial		International		Life & Group		Corporate & Other
(In millions)											Eliminations		Total
Operating revenues
Net earned premiums	$	735	$	855	$	252	$	120	$	—	$	—	$	1,962
Net investment income	117		148		14		219		6		—		504
Non-insurance warranty revenue	338		—		—		—		—		—		338
Other revenues	—		5		—		1		1		(2)		5
Total operating revenues	1,190		1,008		266		340		7		(2)		2,809
Claims, benefits and expenses
Net incurred claims and benefits	427		639		155		281		(2)		—		1,500
Policyholders’ dividends	1		5		—		—		—		—		6
Amortization of deferred acquisition costs	154		153		52		—		—		—		359
Non-insurance warranty expense	311		—		—		—		—		—		311
Other insurance related expenses	70		115		35		25		10		—		255
Other expenses	11		9		(5)		2		42		(2)		57
Total claims, benefits and expenses	974		921		237		308		50		(2)		2,488
Core income (loss) before income tax	216		87		29		32		(43)		—		321
Income tax (expense) benefit on core income (loss)	(46)		(18)		(5)		4		7		—		(58)
Core income (loss)	$	170	$	69	$	24	$	36	$	(36)	$	—	263
Net investment gains (losses)													57
Income tax (expense) benefit on net investment gains (losses)													(8)
Net investment gains (losses), after tax													49
Net income (loss)													$	312


March 31, 2021
(In millions)
Reinsurance receivables	$	957	$	859	$	300	$	389	$	2,628	$	—	$	5,133
Insurance receivables	1,004		1,322		357		2		—		—		2,685
Deferred acquisition costs	340		299		102		—		—		—		741
Goodwill	117		—		31		—		—		—		148
Deferred non-insurance warranty acquisition expense	3,149		—		—		—		—		—		3,149
Insurance reserves
Claim and claim adjustment expenses	5,916		8,449		2,142		3,726		2,823		—		23,056
Unearned premiums	2,666		1,930		588		135		—		—		5,319
Future policy benefits	—		—		—		12,772		—		—		12,772
Deferred non-insurance warranty revenue	4,119		—		—		—		—		—		4,119

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Three months ended March 31, 2020	Specialty		Commercial		International		Life & Group		Corporate & Other
(In millions)											Eliminations		Total
Operating revenues
Net earned premiums	$	685	$	818	$	239	$	127	$	—	$	—	$	1,869
Net investment income	56		42		15		208		8		—		329
Non-insurance warranty revenue	301		—		—		—		—		—		301
Other revenues	1		8		—		—		1		(2)		8
Total operating revenues	1,043		868		254		335		9		(2)		2,507
Claims, benefits and expenses
Net incurred claims and benefits	405		555		154		316		(11)		—		1,419
Policyholders’ dividends	1		5		—		—		—		—		6
Amortization of deferred acquisition costs	151		144		49		—		—		—		344
Non-insurance warranty expense	281		—		—		—		—		—		281
Other insurance related expenses	69		127		36		26		—		—		258
Other expenses	13		6		13		3		39		(2)		72
Total claims, benefits and expenses	920		837		252		345		28		(2)		2,380
Core income (loss) before income tax	123		31		2		(10)		(19)		—		127
Income tax (expense) benefit on core income (loss)	(27)		(8)		—		14		2		—		(19)
Core income (loss)	$	96	$	23	$	2	$	4	$	(17)	$	—	108
Net investment gains (losses)													(216)
Income tax (expense) benefit on net investment gains (losses)													47
Net investment gains (losses), after tax													(169)
Net income (loss)													$	(61)


December 31, 2020
(In millions)
Reinsurance receivables	$	886	$	848	$	302	$	390	$	2,052	$	—	$	4,478
Insurance receivables	1,052		1,254		328		4		2		—		2,640
Deferred acquisition costs	330		281		97		—		—		—		708
Goodwill	117		—		31		—		—		—		148
Deferred non-insurance warranty acquisition expense	3,068		—		—		—		—		—		3,068
Insurance reserves
Claim and claim adjustment expenses	5,748		8,250		2,091		3,743		2,874		—		22,706
Unearned premiums	2,635		1,824		546		114		—		—		5,119
Future policy benefits	—		—		—		13,318		—		—		13,318
Deferred non-insurance warranty revenue	4,023		—		—		—		—		—		4,023

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


Three months ended March 31
(In millions)	2021		2020
Specialty
Management & Professional Liability	$	667	$	568
Surety	142		138
Warranty & Alternative Risks	381		337
Specialty revenues	1,190		1,043
Commercial
Middle Market	375		335
Construction	309		250
Small Business	126		112
Other Commercial	198		171
Commercial revenues	1,008		868
International
Canada	79		73
Europe	111		92
Hardy	76		89
International revenues	266		254
Life & Group revenues	340		335
Corporate & Other revenues	7		9
Eliminations	(2)		(2)
Total operating revenues	2,809		2,507
Net investment gains (losses)	57		(216)
Total revenues	$	2,866	$	2,291

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Note J. Non-Insurance Revenues from Contracts with Customers

The Company had deferred non-insurance warranty revenue balances of $4.1 billion and $4.0 billion reported in Deferred non-insurance warranty revenue as of March 31, 2021 and December 31, 2020. For the three months ended March 31, 2021 and 2020, the Company recognized $0.3 billion of revenues that were included in the deferred revenue balance as of January 1, 2021 and 2020. For the three months ended March 31, 2021 and 2020, 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 $0.9 billion of the deferred revenue in the remainder of 2021, $1.0 billion in 2022, $0.8 billion in 2023 and $1.3 billion thereafter.

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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 updates and additions to our Risk Factors 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, 2020.

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, financial condition, 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, 2020 for further information.

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CONSOLIDATED OPERATIONS

Results of Operations

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


Three months ended March 31
(In millions)	2021		2020
Operating Revenues
Net earned premiums	$	1,962	$	1,869
Net investment income	504		329
Non-insurance warranty revenue	338		301
Other revenues	5		8
Total operating revenues	2,809		2,507
Claims, Benefits and Expenses
Net incurred claims and benefits	1,500		1,419
Policyholders' dividends	6		6
Amortization of deferred acquisition costs	359		344
Non-insurance warranty expense	311		281
Other insurance related expenses	255		258
Other expenses	57		72
Total claims, benefits and expenses	2,488		2,380
Core income before income tax	321		127
Income tax expense on core income	(58)		(19)
Core income	263		108
Net investment gains (losses)	57		(216)
Income tax (expense) benefit on net investment gains (losses)	(8)		47
Net investment gains (losses), after tax	49		(169)
Net income (loss)	$	312	$	(61)

Core income increased $155 million for the three months ended March 31, 2021 as compared with the same period in 2020. Core income for our Property & Casualty Operations increased $142 million primarily due to higher net investment income driven by limited partnership and common stock returns and improved non-catastrophe current accident year underwriting results. These results were partially offset by higher net catastrophe losses. Core income for our Life & Group segment increased $32 million while core loss for our Corporate & Other segment increased $19 million.

Net catastrophe losses were $125 million and $75 million for the three months ended March 31, 2021 and 2020. Favorable net prior year loss reserve development of $15 million was recorded in the three months ended March 31, 2021 and 2020 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

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.

Effective January 1, 2021, we changed the segment presentation of a legacy portfolio of excess workers’ compensation policies and certain legacy mass tort reserves. These businesses were previously reported in the Commercial business segment and are now reported as part of the Corporate & Other business segment. Prior period information has been conformed to the new segment presentation. See Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1 for more information on the changes to our business segments.

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Specialty

The following table details the results of operations for Specialty.


Three months ended March 31
(In millions, except ratios, rate, renewal premium change and retention)	2021			2020
Gross written premiums	$	1,794		$	1,714
Gross written premiums excluding third party captives	816			741
Net written premiums	742			694
Net earned premiums	735			685
Net investment income	117			56
Core income	170			96

Other performance metrics:
Loss ratio excluding catastrophes and development	59.4		%	59.5		%
Effect of catastrophe impacts	0.7			1.1
Effect of development-related items	(2.1)			(1.5)
Loss ratio	58.0			59.1
Expense ratio	30.6			32.0
Dividend ratio	0.2			0.2
Combined ratio	88.8		%	91.3		%
Combined ratio excluding catastrophes and development	90.2		%	91.7		%

Rate	10		%	10		%
Renewal premium change	9			11
Retention	86			83
New business	$	103		$	74

Gross written premiums, excluding third party captives, for Specialty increased $75 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by higher new business and strong rate. Net written premiums for Specialty increased $48 million for the three months ended March 31, 2021 as compared with the same period in 2020. The increase in net earned premiums was consistent with the trend in net written premiums.

Core income increased $74 million for the three months ended March 31, 2021 as compared with the same period in 2020 primarily due to higher net investment income driven by limited partnership and common stock returns and improved underwriting results.

The combined ratio of 88.8% improved 2.5 points for the three months ended March 31, 2021 as compared with the same period in 2020 due to a 1.4 point improvement in the expense ratio and a 1.1 point improvement in the loss ratio. The improvement in the loss ratio was primarily due to higher favorable net prior year loss reserve development and lower net catastrophe losses. Net catastrophe losses were $5 million, or 0.7 points of the loss ratio, for the three months ended March 31, 2021, as compared with $8 million, or 1.1 points of the loss ratio, for the three months ended March 31, 2020. The improvement in the expense ratio was driven by higher net earned premiums.

Favorable net prior year loss reserve development of $15 million and $11 million was recorded for the three months ended March 31, 2021 and 2020. 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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The following table summarizes the gross and net carried reserves for Specialty.


(In millions)	March 31, 2021		December 31, 2020
Gross case reserves	$	1,575	$	1,567
Gross IBNR reserves	4,341		4,181
Total gross carried claim and claim adjustment expense reserves	$	5,916	$	5,748
Net case reserves	$	1,418	$	1,410
Net IBNR reserves	3,577		3,488
Total net carried claim and claim adjustment expense reserves	$	4,995	$	4,898

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Commercial

The following table details the results of operations for Commercial.


Three months ended March 31
(In millions, except ratios, rate, renewal premium change and retention)	2021			2020
Gross written premiums	$	1,113		$	1,062
Gross written premiums excluding third party captives	1,111			1,059
Net written premiums	960			950
Net earned premiums	855			818
Net investment income	148			42
Core income	69			23

Other performance metrics:
Loss ratio excluding catastrophes and development	60.8		%	60.8		%
Effect of catastrophe impacts	13.4			7.0
Effect of development-related items	0.5			—
Loss ratio	74.7			67.8
Expense ratio	31.4			33.2
Dividend ratio	0.6			0.6
Combined ratio	106.7		%	101.6		%
Combined ratio excluding catastrophes and development	92.8		%	94.6		%

Rate	10		%	8		%
Renewal premium change	8			9
Retention	84			86
New business	$	211		$	198

Gross written premiums for Commercial increased $51 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by higher new business and strong rate. Net written premiums for Commercial increased $10 million for the three months ended March 31, 2021 as compared with the same period in 2020. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income increased $46 million for the three months ended March 31, 2021 as compared with the same period in 2020 primarily due to higher net investment income driven by limited partnership and common stock returns partially offset by higher net catastrophe losses.

The combined ratio of 106.7% increased 5.1 points for the three months ended March 31, 2021 as compared with the same period in 2020 due to a 6.9 point increase in the loss ratio partially offset by a 1.8 point improvement in the expense ratio. The increase in the loss ratio was primarily due to higher net catastrophe losses. Net catastrophe losses were $115 million, or 13.4 points of the loss ratio, for the three months ended March 31, 2021, as compared with $57 million, or 7.0 points of the loss ratio, for the three months ended March 31, 2020. The improvement in the expense ratio was driven by favorable acquisition expenses and higher net earned premiums.

There was no net prior year loss reserve development recorded for the three months ended March 31, 2021 as compared with favorable net prior year loss reserve development of $4 million for the three months ended March 31, 2020. 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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The following table summarizes the gross and net carried reserves for Commercial.


(In millions)	March 31, 2021		December 31, 2020
Gross case reserves	$	3,238	$	3,215
Gross IBNR reserves	5,211		5,035
Total gross carried claim and claim adjustment expense reserves	$	8,449	$	8,250
Net case reserves	$	2,925	$	2,885
Net IBNR reserves	4,732		4,590
Total net carried claim and claim adjustment expense reserves	$	7,657	$	7,475

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International

The following table details the results of operations for International.


Three months ended March 31
(In millions, except ratios, rate, renewal premium change and retention)	2021			2020
Gross written premiums	$	343		$	307
Net written premiums	235			219
Net earned premiums	252			239
Net investment income	14			15
Core income	24			2

Other performance metrics:
Loss ratio excluding catastrophes and development	59.6		%	60.3		%
Effect of catastrophe impacts	2.0			4.3
Effect of development-related items	(0.1)			(0.1)
Loss ratio	61.5			64.5
Expense ratio	34.4			35.4
Combined ratio	95.9		%	99.9		%
Combined ratio excluding catastrophes and development	94.0		%	95.7		%

Rate	14		%	9		%
Renewal premium change	11			9
Retention	74			70
New business	$	80		$	68

Gross written premiums for International increased $36 million for the three months ended March 31, 2021 as compared with the same period in 2020. Excluding the effect of foreign currency exchange rates, gross written premiums increased $19 million driven by growth in Europe and Canada. Net written premiums for International increased $16 million for the three months ended March 31, 2021 as compared with the same period in 2020. Excluding the effects of foreign currency exchange rates, net written premiums increased $3 million for the three months ended March 31, 2021 as compared with the same period in 2020. The increase in net earned premiums was consistent with the trend in net written premiums.

Core income increased $22 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by improved current accident year underwriting results.

The combined ratio of 95.9% improved 4.0 points for the three months ended March 31, 2021 as compared with the same period in 2020 due to a 3.0 point improvement in the loss ratio and a 1.0 point improvement in the expense ratio. The improvement in the loss ratio was driven by improved current accident year underwriting results. Net catastrophe losses were $5 million, or 2.0 points of the loss ratio, for the three months ended March 31, 2021, as compared with $10 million, or 4.3 points of the loss ratio, for the three months ended March 31, 2020. The improvement in the expense ratio was driven by favorable commission rates and higher net earned premiums.

There was no net prior year loss reserve development recorded for the three months ended March 31, 2021 and 2020. 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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The following table summarizes the gross and net carried reserves for International.


(In millions)	March 31, 2021		December 31, 2020
Gross case reserves	$	861	$	892
Gross IBNR reserves	1,281		1,199
Total gross carried claim and claim adjustment expense reserves	$	2,142	$	2,091
Net case reserves	$	740	$	777
Net IBNR reserves	1,112		1,045
Total net carried claim and claim adjustment expense reserves	$	1,852	$	1,822

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Life & Group

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


Three months ended March 31
(In millions)	2021		2020
Net earned premiums	$	120	$	127
Net investment income	219		208
Core income (loss) before income tax	32		(10)
Income tax benefit on core loss	4		14
Core income	36		4

Core income improved $32 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by better than expected morbidity in the long term care business and higher net investment income. The increase in net investment income was driven by returns in the limited partnership portfolio. Further, during the first quarter of 2021, relative to expectations, we experienced lower new claim frequency, higher claim terminations and more favorable claim severity in the long term care business 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.

Corporate & Other

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


Three months ended March 31
(In millions)	2021		2020
Net investment income	$	6	$	8
Interest expense	28		31
Core loss	(36)		(17)

Core loss increased $19 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by the recognition of a $12 million after-tax loss resulting from the legacy excess workers' compensation (EWC) Loss Portfolio Transfer (LPT). The EWC 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)	March 31, 2021		December 31, 2020
Gross case reserves	$	1,626	$	1,614
Gross IBNR reserves	1,197		1,260
Total gross carried claim and claim adjustment expense reserves	$	2,823	$	2,874
Net case reserves	$	123	$	560
Net IBNR reserves	130		331
Total net carried claim and claim adjustment expense reserves	$	253	$	891

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INVESTMENTS

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.


Three months ended March 31
(In millions)	2021			2020
Fixed income securities:
Taxable fixed income securities	$	359		$	371
Tax-exempt fixed income securities	80			78
Total fixed income securities	439			449
Limited partnership investments	43			(70)
Common stock	18			(55)
Other, net of investment expense	4			5
Net investment income	$	504		$	329

Effective income yield for the fixed income securities portfolio	4.4		%	4.6		%
Limited partnership and common stock return	3.4		%	(7.0)		%

Net investment income increased $175 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by limited partnership and common stock returns.

Net Investment Gains (Losses)

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


Three months ended March 31
(In millions)	2021		2020
Fixed maturity securities:
Corporate and other bonds	$	36	$	(79)
States, municipalities and political subdivisions	(1)		—
Asset-backed	3		4
Total fixed maturity securities	38		(75)
Non-redeemable preferred stock	2		(133)
Short term and other	17		5
Mortgage loans	—		(13)
Net investment gains (losses)	57		(216)
Income tax (expense) benefit on net investment gains (losses)	(8)		47
Net investment gains (losses), after tax	$	49	$	(169)

Net investment gains (losses) increased $273 million for the three months ended March 31, 2021 as compared with the same period in 2020 driven by the favorable relative change in fair value of non-redeemable preferred stock and lower impairment losses.

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.


	March 31, 2021				December 31, 2020
(In millions)	Estimated Fair Value		Net Unrealized Gains (Losses)		Estimated Fair Value		Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises	$	3,149	$	36	$	3,672	$	117
AAA	3,589		385		3,627		454
AA	7,221		802		7,159		1,012
A	9,380		1,057		9,543		1,390
BBB	17,692		1,920		18,007		2,596
Non-investment grade	2,548		131		2,623		149
Total	$	43,579	$	4,331	$	44,631	$	5,718

As of March 31, 2021 and December 31, 2020, 1% of our fixed maturity portfolio was rated internally. AAA rated securities included $1.9 billion and $1.8 billion of pre-refunded municipal bonds as of March 31, 2021 and December 31, 2020.

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


	March 31, 2021
(In millions)	Estimated Fair Value		Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises	$	1,631	$	47
AAA	202		9
AA	896		29
A	1,096		33
BBB	1,372		47
Non-investment grade	364		17
Total	$	5,561	$	182

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.


	March 31, 2021
(In millions)	Estimated Fair Value		Gross Unrealized Losses
Due in one year or less	$	135	$	5
Due after one year through five years	672		21
Due after five years through ten years	3,090		82
Due after ten years	1,664		74
Total	$	5,561	$	182

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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.


	March 31, 2021			December 31, 2020
(In millions)	Estimated Fair Value		Effective Duration (In years)	Estimated Fair Value		Effective Duration (In years)
Investments supporting Life & Group	$	17,952	9.1	$	18,518	9.2
Other investments	27,666		4.9	28,839		4.5
Total	$	45,618	6.5	$	47,357	6.3

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, 2020.

Short Term Investments

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


(In millions)	March 31, 2021		December 31, 2020
Short term investments:
U.S. Treasury securities	$	1,109	$	1,702
Other	225		205
Total short term investments	$	1,334	$	1,907

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary operating cash flow sources are premiums and investment income. 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.

For the three months ended March 31, 2021, net cash provided by operating activities was $82 million as compared with $212 million for the same period in 2020. The decrease in cash provided by operating activities was driven by the payment of the EWC LPT premium partially offset by lower net claim payments and an increase in premiums collected. The EWC LPT is further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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

Net cash provided by investing activities was $408 million for the three months ended March 31, 2021, as compared with $1,087 million for the same period in 2020. Net cash used or provided by investing activities is primarily driven by cash available from operations and other factors, such as financing activities.

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 three months ended March 31, 2021, net cash used by financing activities was $321 million as compared with $675 million for the same period in 2020. In the first quarter of 2021, we paid dividends of $310 million and repurchased 66,000 shares of common stock at an aggregate cost of $3 million. In the first quarter of 2020, we paid dividends of $649 million and repurchased 435,376 shares of our common stock at an aggregate cost of $18 million.

Common Stock Dividends

A quarterly cash dividend of $0.38 per share and a special cash dividend of $0.75 per share on our common stock were declared and paid in the first quarter of 2021. On April 30, 2021, our Board of Directors declared a quarterly cash dividend of $0.38 per share, payable June 3, 2021 to stockholders of record on May 17, 2021. 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. 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 Continental Casualty Company (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 March 31, 2021, CCC was in a positive earned surplus position. CCC paid dividends of $330 million and $670 million during the three months ended March 31, 2021 and 2020. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

We have an effective automatic shelf registration statement on file with the Securities and Exchange Commission 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, see Note A to the Condensed Consolidated Financial Statements included under Part 1, 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 as well as those risks contained in the Risk Factors section of our 2020 Annual Report on Form 10-K and this report:

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 2020 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; economic uncertainty and depressed business conditions brought on by the crisis may materially and adversely impact our business operations and may lead to 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 losses to our lines of business 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 and Legal Factors

•regulatory and legal initiatives and compliance with governmental regulations and other legal requirements, including with respect to cyber security protocols (which may be enhanced following completion of work relating to the sophisticated cyber incident sustained by the Company in March 2021 as discussed in Risk Factors, Part II, Item 1A of this report), 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;

•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; and

•regulatory and legal implications relating to the sophisticated cyber incident sustained by the Company in March 2021 that may arise.

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.

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 three months ended March 31, 2021. 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, 2020 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 March 31, 2021, 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 March 31, 2021.

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 March 31, 2021 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, 2020, includes a detailed discussion of certain material risk factors facing us. The information presented below describes updates and additions to such risk factors and should be read in conjunction with the risk factors and information disclosed in our Form 10-K.

Any significant interruption in the operation of our business functions, facilities and systems or our vendors' facilities and systems could result in a materially adverse effect on our operations.

Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted manner, through our employees or vendor relationships, necessary business functions, such as internet support and 24-hour call centers, processing new and renewal business and processing and paying claims and other obligations.

Our or our vendors' facilities and systems could become unavailable, inoperable, or otherwise impaired from a variety of causes, including natural events, such as hurricanes, tornadoes, windstorms, earthquakes, severe winter weather and fires, or other events, such as explosions, terrorist attacks, computer security breaches or cyber attacks, riots, hazardous material releases, medical epidemics or pandemics, utility outages, interruptions of our data processing and storage systems or the systems of third-party vendors, or unavailability of communications facilities. An interruption of our system availability occurred in March 2021 as a result of a cybersecurity attack sustained by the Company. Please refer to following risk factor for further information regarding this incident. Likewise, we could experience a significant failure, interruption or corruption of one or more of our or our vendors’ information technology, telecommunications, or other systems for various reasons, including significant failures or interruptions that might occur as existing systems are replaced or upgraded. The shut-down or unavailability of one or more of our or our vendors' systems or facilities for these and other reasons could significantly impair our ability to perform critical business functions on a timely basis.

In addition, because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such events could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner, or perform other necessary business functions, including the ability to issue financial statements in a timely manner.

The foregoing risks could also expose us to monetary and reputational damages. Potential exposures resulting from the March 2021 cybersecurity attack, described in the following risk factor, as well as any future incidents may include substantially increased compliance costs and required computer system upgrades and security-related investments. If our business continuity plans or system security do not sufficiently address these risks, they could have a material adverse effect on our business, results of operations and financial condition.

Based on the information currently known, we do not believe that the March 2021 cybersecurity attack will have a material impact on our business, results of operations or financial condition. However, no assurances can be given, and we may be subject to future incidents that could have a material adverse effect or result in operational impairments and financial losses as well as significant harm to our reputation.

Any significant breach in our data security infrastructure could disrupt business, cause financial losses and damage our reputation, and insurance coverage may not be available for claims related to a breach.

A significant breach of our data security infrastructure may result from actions by our employees, vendors, third-party administrators, or unknown third parties or through cyber attacks. The risk of a breach can exist whether software services are in our data centers or we use cloud-based software services.

Such a breach could affect our data framework or cause a failure to protect the personal information of our customers, claimants or employees, or sensitive and confidential information regarding our business and may

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result in operational impairments and financial losses, as well as significant harm to our reputation. The breach of confidential information also could give rise to legal liability and regulatory action under data protection and privacy laws, as well as evolving regulation in this regard. Any such breach of our data security infrastructure could have a material adverse effect on our business, results of operations and financial condition.

We sustained a sophisticated cybersecurity attack in March 2021 involving ransomware that caused a network disruption and impacted certain of our systems. Promptly upon detection, we undertook steps to address the incident, including engaging a team of third-party forensic experts and notifying law enforcement and key regulators. As of the date of this report, we have restored network systems and resumed normal operations. We are continuing to assess the full extent of the impact from the incident, as well as determining any additional actions we may take to improve our existing systems. Although the investigation is ongoing, should we determine that personal information was impacted, it is possible that notification to individuals, other parties and/or regulators may be required based on applicable law. As a result or otherwise related to the incident, we may be subject to subsequent investigations, claims or actions in addition to other costs, fines, penalties, or other obligations.

Although we maintain cybersecurity insurance coverage insuring against costs resulting from cyber attacks (including the attack described above), it is possible losses may exceed the amount available under our coverage and our coverage policy may not cover all losses. Further, future cybersecurity insurance coverage may be difficult to obtain or may only be available at significantly higher costs to us.

Based on the information currently known, we do not believe that the March 2021 cybersecurity attack will have a material impact on our business, results of operations or financial condition. However, no assurances can be given, and we may be subject to future incidents that could have such a material adverse effect or may result in operational impairments and financial losses, as well as significant harm to our reputation.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2 (a) and (b) are not applicable

Period

(a) Total number of shares purchased

(b) Average price paid per share

(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in millions)

March 1, 2021 - March 31, 2021

66,000

46.32

N/A

Total

66,000

N/A

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: May 7, 2021	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 FY2021 Q1

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