XML 114 R14.htm IDEA: XBRL DOCUMENT v2.4.0.8
Claim and Claim Adjustment Expense Reserves
 12 Months Ended
Dec. 31, 2013
Insurance Loss Reserves [Abstract]  
Claim and Claim Adjustment Expense Reserves
Note F. Claim and Claim Adjustment Expense Reserves
The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including 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 such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, 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 all 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 the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $169 million, $391 million and $222 million for the years ended December 31, 2013, 2012 and 2011. Catastrophe losses in 2012 included Storm Sandy.
The table below provides a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the life company.
Reconciliation of Claim and Claim Adjustment Expense Reserves
As of and for the years ended December 31
 
 
 
 
 
(In millions)
2013
 
2012
 
2011
Reserves, beginning of year:
 
 
 
 
 
Gross
$
24,763

 
$
24,303

 
$
25,496

Ceded
5,126

 
5,020

 
6,122

Net reserves, beginning of year
19,637

 
19,283

 
19,374

Change in net reserves due to acquisition (disposition) of subsidiaries
—

 
291

 
(277
)
Net incurred claim and claim adjustment expenses:
 
 
 
 
 
Provision for insured events of current year
5,114

 
5,273

 
4,904

Decrease in provision for insured events of prior years
(115
)
 
(182
)
 
(429
)
Amortization of discount
154

 
145

 
135

Total net incurred (a)
5,153

 
5,236

 
4,610

Net payments attributable to:
 
 
 
 
 
Current year events
(981
)
 
(988
)
 
(1,029
)
Prior year events
(4,588
)
 
(4,280
)
 
(3,473
)
Total net payments
(5,569
)
 
(5,268
)
 
(4,502
)
Foreign currency translation adjustment and other
(104
)
 
95

 
78

Net reserves, end of year
19,117

 
19,637

 
19,283

Ceded reserves, end of year
4,972

 
5,126

 
5,020

Gross reserves, end of year
$
24,089

 
$
24,763

 
$
24,303



(a)
Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits and policyholders' funds, which are not reflected in the table above.
The changes in provision for insured events of prior years (net prior year claim and claim adjustment expense reserve development) were as follows.
Reserve Development
Years ended December 31
 
 
 
 
 
(In millions)
2013
 
2012
 
2011
Property and casualty reserve development
$
(115
)
 
$
(180
)
 
$
(429
)
Life reserve development in life company
—

 
(2
)
 
—

Total
$
(115
)
 
$
(182
)
 
$
(429
)

The following tables summarize the gross and net carried reserves as of December 31, 2013 and 2012.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
December 31, 2013
CNA Specialty
 
CNA Commercial
 
Hardy
 
Life &
Group Non-Core
 
Corporate
& Other Non-Core
 
Total
(In millions)
 
 
 
 
 
Gross Case Reserves
$
2,270

 
$
5,829

 
$
275

 
$
2,748

 
$
1,140

 
$
12,262

Gross IBNR Reserves
4,419

 
4,820

 
111

 
310

 
2,167

 
11,827

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,689

 
$
10,649

 
$
386

 
$
3,058

 
$
3,307

 
$
24,089

Net Case Reserves
$
2,024

 
$
5,358

 
$
159

 
$
2,352

 
$
283

 
$
10,176

Net IBNR Reserves
4,142

 
4,269

 
75

 
271

 
184

 
8,941

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
6,166

 
$
9,627

 
$
234

 
$
2,623

 
$
467

 
$
19,117



December 31, 2012
CNA Specialty
 
CNA Commercial
 
Hardy
 
Life &
Group Non-Core
 
Corporate
& Other Non-Core
 
Total
(In millions)
 
 
 
 
 
Gross Case Reserves
$
2,292

 
$
6,146

 
$
333

 
$
2,690

 
$
1,207

 
$
12,668

Gross IBNR Reserves
4,456

 
5,180

 
188

 
316

 
1,955

 
12,095

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,748

 
$
11,326

 
$
521

 
$
3,006

 
$
3,162

 
$
24,763

Net Case Reserves
$
2,008

 
$
5,611

 
$
192

 
$
2,253

 
$
292

 
$
10,356

Net IBNR Reserves
4,104

 
4,600

 
82

 
275

 
220

 
9,281

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
6,112

 
$
10,211

 
$
274

 
$
2,528

 
$
512

 
$
19,637


Net Prior Year Development
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development. These changes can be favorable or unfavorable. The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments for the years ended December 31, 2013, 2012 and 2011.
Favorable net prior year development of $9 million, $11 million and $29 million was recorded in the Life & Group Non-Core segment for the years ended December 31, 2013, 2012 and 2011.
Net Prior Year Development
Year ended December 31, 2013
 
 
 
 
 
 
 
 
 
(In millions)
CNA
Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(230
)
 
$
104

 
$
14

 
$
(6
)
 
$
(118
)
Pretax (favorable) unfavorable premium development
(17
)
 
(9
)
 
(17
)
 
1

 
(42
)
Total pretax (favorable) unfavorable net prior year development
$
(247
)
 
$
95

 
$
(3
)
 
$
(5
)
 
$
(160
)

Year ended December 31, 2012
 
 
 
 
 
 
 
 
 
(In millions)
CNA
Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(135
)
 
$
(46
)
 
$
(11
)
 
$
(13
)
 
$
(205
)
Pretax (favorable) unfavorable premium development
(15
)
 
(35
)
 
3

 
1

 
(46
)
Total pretax (favorable) unfavorable net prior year development
$
(150
)
 
$
(81
)
 
$
(8
)
 
$
(12
)
 
$
(251
)

Year ended December 31, 2011
 
 
 
 
 
 
 
(In millions)
CNA
Specialty
 
CNA Commercial
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(217
)
 
$
(204
)
 
$
(2
)
 
$
(423
)
Pretax (favorable) unfavorable premium development
(28
)
 
21

 
(1
)
 
(8
)
Total pretax (favorable) unfavorable net prior year development
$
(245
)
 
$
(183
)
 
$
(3
)
 
$
(431
)

For the year ended December 31, 2013, favorable premium development for Hardy was recorded related to a commutation as discussed later in this note.
For the year ended December 31, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.
For the year ended December 31, 2011, favorable premium development was recorded for CNA Specialty primarily due to changes in estimates of exposures in medical professional liability tail coverages. Unfavorable premium development for CNA Commercial was recorded due to a reduction of ultimate premium estimates relating to retrospectively rated policies, partially offset by premium adjustments on auditable policies due to increased exposures.
CNA Specialty
The following table provides further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the CNA Specialty segment for the years ended December 31, 2013, 2012 and 2011.
Years ended December 31
 
 
 
 
 
(In millions)
2013
 
2012
 
2011
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
Medical Professional Liability
$
(35
)
 
$
(32
)
 
$
(92
)
Other Professional Liability and Management Liability
(101
)
 
(22
)
 
(78
)
Surety
(74
)
 
(63
)
 
(47
)
Warranty
(3
)
 
(5
)
 
(13
)
Other
(17
)
 
(13
)
 
13

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(230
)
 
$
(135
)
 
$
(217
)

2013
Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.
Overall, favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2010 and prior. Unfavorable development was recorded in accident year 2011 related to an increase in severity in management liability.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
Other includes standard property and casualty coverages provided to CNA Specialty customers. Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages primarily in accident years 2010 and subsequent.
2012
Favorable development for medical professional liability was primarily due to better than expected loss emergence in accident years 2008 and prior.
Overall, favorable development for other professional liability and management liability was primarily due to better than expected loss emergence in accident years 2003 through 2007. Unfavorable development was recorded in our lawyer coverages in accident years 2010 and 2011 primarily due to increased frequency and severity.
Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.
Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers' compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.

2011
Favorable development for medical professional liability was primarily due to favorable case incurred emergence in nurses, physicians, excess institutions and primary institutions in accident years 2008 and prior.
Favorable development for other professional liability and management liability was driven by better than expected loss emergence in the life agents, accountants, and architects & engineers business in accident years 2008 and prior. In addition, favorable development in the Company's European book of business was primarily due to favorable outcomes on several large losses in financial directors and officers and errors and omissions coverages in accident years 2003 and prior.
Favorable development for surety coverages was primarily due to a decrease in the estimated loss on a large national contractor in accident year 2005 and better than expected loss emergence in accident years 2009 and prior.
Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss policy covering the Company's non-insurance warranty subsidiary.
Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers' compensation coverages in accident years 2009 and 2010.

CNA Commercial
The following table provides further detail of the development recorded for the CNA Commercial segment for the years ended December 31, 2013, 2012 and 2011.
Years ended December 31



 
 
(In millions)
2013

2012
 
2011
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
Commercial Auto
$
15

 
$
27

 
$
(98
)
General Liability
59

 
(64
)
 
(39
)
Workers' Compensation
92

 
15

 
36

Property and Other
(62
)
 
(24
)
 
(103
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
104

 
$
(46
)
 
$
(204
)

2013
Unfavorable development for commercial auto coverages was primarily due to higher than expected frequency in accident years 2011 and 2012 and large loss emergence in accident years 2009 and 2010.
Unfavorable development for general liability coverages was primarily related to increased incurred loss severity in accident years 2010 through 2012.
Unfavorable development for workers' compensation includes the Company's response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers' compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013. Additional unfavorable development was recorded in accident year 2012 related to increased frequency and severity on claims related to Defense Base Act contractors and in accident year 2010 due to higher than expected large losses and increased severity in the state of California.
Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 as well as favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.
2012
Unfavorable development for commercial auto coverages was primarily due to higher than expected loss emergence in accident years 2007 and subsequent and higher than expected frequency in accident year 2011.
Overall, favorable development for general liability coverages was primarily due to better than expected loss emergence in accident years 2006 and subsequent related to umbrella business and 2003 and prior related to large account business. Unfavorable development was recorded in accident years 2009 through 2011 related to several large losses.
Overall, unfavorable development for workers' compensation was primarily due to increased medical severity in accident years 2010 and 2011 and the recognition of losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.
Overall, favorable development for property and other coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident years 2009 and 2010. Unfavorable development was recorded in accident year 2011 related to several large losses.

2011
Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims and favorable claim emergence on umbrella policies in accident years 2006 and prior.
Favorable development in the general liability coverages was primarily due to favorable claim emergence in accident years 2007 and prior related to both primary and umbrella liability coverages.
Unfavorable development for workers' compensation was related to increased medical severity in accident year 2010.
Overall, favorable development for property and other coverages was due to decreased frequency of large losses in commercial multi-peril coverages primarily in accident year 2010, favorable loss emergence related to catastrophe claims in accident year 2008 and favorable loss emergence related to non-catastrophe claims in accident years 2010 and prior. This development amount also included unfavorable development related to unallocated claim adjustment expenses.
Hardy
The following table provides further detail of the development recorded for the Hardy segment for the years ended December 31, 2013 and 2012.
Years ended December 31
 
 
 
(In millions)
2013
 
2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
Marine and Aviation
$
2

 
$
—

Non-Marine Property
12

 
(7
)
Property Treaty
(5
)
 
(3
)
Specialty
(6
)
 
(1
)
Commutation
11

 
—

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
14

 
$
(11
)

2013
Unfavorable development for non-marine property was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake, and one large non-catastrophe claim.
Favorable development for property treaty was due to favorable emergence of losses from catastrophe and non-catastrophe claims in 2011 and 2012.
Favorable development for specialty was primarily due to favorable outcomes on several large losses and favorable claim emergence.
The commutation of a third-party capital provider's 15% participation in the 2012 year of account resulted in recognition of the 15% share of year of account premiums, losses and expenses.

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 (Loss Portfolio Transfer or LPT). Under the terms of the NICO 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 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.

The following table displays the impact of the Loss Portfolio Transfer on the Consolidated Statements of Operations.

Years ended December 31
 
 
 
 
 
(In millions)
2013
 
2012
 
2011
Net A&EP adverse development before consideration of LPT
$
363

 
$
261

 
$
84

Provision for uncollectible third-party reinsurance on A&EP
140

 
—

 
—

Additional amounts ceded under LPT
503

 
261

 
84

Retroactive reinsurance benefit recognized
(314
)
 
(261
)
 
(84
)
Pretax impact of unrecognized deferred retroactive reinsurance benefit
$
189

 
$
—

 
$
—



During 2013, 2012, and 2011, unfavorable development was recorded for accident years 2000 and prior related to A&EP claims due to an increase in ultimate claim severity and higher than anticipated claim reporting, as well as increased defense costs. Additionally, in 2013 the Company recognized a provision for uncollectible third-party reinsurance which increased the expected recovery from NICO.
The Loss Portfolio Transfer is a retroactive reinsurance contract. In the event that the cumulative claim and allocated claim adjustment expenses ceded under the Loss Portfolio Transfer exceed the consideration paid, the resulting gain from such excess is deferred. A portion of the deferred gain is cumulatively recognized in earnings in the period such excess arises as if the revised estimate was available at the inception date of the Loss Portfolio Transfer.
In the fourth quarter of 2013, the cumulative amounts ceded under the Loss Portfolio Transfer of $2.5 billion exceeded the $2.2 billion consideration paid, resulting in a $189 million deferred retroactive reinsurance gain. This deferred benefit will be recognized in earnings in future periods in proportion to actual recoveries under the Loss Portfolio Transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within the limit under the contract.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account at December 31, 2013 was $3.1 billion. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full 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 Company’s A&EP claims.