Claim and Claim Adjustment Expense Reserves |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Claim and Claim Adjustment Expense Reserves [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Claim and Claim Adjustment Expense Reserves |
5. 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. Reserve projections are based primarily on detailed analysis of the facts in each
case, 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 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 $178 million and $160 million for the three months ended September
30, 2021 and 2020 and $357 million and $536
million for the nine months ended September 30, 2021 and 2020. Net catastrophe losses for the three months ended September 30, 2021 included $114
million for Hurricane Ida. Net catastrophe losses for the nine months ended September 30, 2021 were driven by severe weather-related events, primarily Hurricane Ida and Winter Storms Uri and Viola. Net catastrophe losses for the three months ended
September 30, 2020 were driven by severe weather-related events, primarily Hurricanes Laura, Isaias and Sally and the Midwest derecho. Net catastrophe losses for the nine months ended September 30, 2020 included $273 million primarily related to severe weather-related events, $195 million related to the COVID-19 pandemic and $68 million related to civil unrest.
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 other insurance operations.
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. These changes can be favorable or unfavorable.
Favorable net prior year loss reserve development of $10 million and $15 million was recorded for commercial property and
casualty operations (“Property & Casualty Operations”) for the three months ended September 30, 2021 and 2020 and favorable net prior year loss reserve development of $36 million and $58 million was recorded for the nine months ended September 30, 2021 and 2020.
Unfavorable net prior year loss reserve development of $40 million and $50 million was recorded in CNA’s operations outside of Property & Casualty Operations (“Other Insurance Operations”) for the nine months ended September 30, 2021 and 2020.
The following table and discussion present details of the net
prior year loss reserve development in Property & Casualty Operations and Other Insurance Operations:
Three Months
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 higher than expected frequency of large losses in recent accident years and unfavorable development on a latent claim for an older accident year.
Favorable
development in surety was due to lower than expected frequency and lack of systemic activity for accident years 2019 and prior.
Unfavorable
development in general liability was primarily due to increased bodily injury severities in accident years 2012 through 2016 and higher than expected frequency and severity in CNA’s umbrella business in accident years 2015 through 2019.
Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.
Nine Months
2021
Unfavorable development in medical professional liability was due
to higher than expected frequency of large losses in recent accident years.
Favorable development in surety was primarily due to lower than
expected frequency and lack of systemic activity in recent accident years.
Unfavorable development in commercial auto was due to higher than
expected claim severity in CNA’s construction and middle market businesses in recent accident years.
Favorable development in workers’ compensation was due to
favorable medical trends driving lower than expected severity in multiple accident years.
Unfavorable development in property and other was due to higher
than expected claim severity in CNA’s medical treatment business mostly offset by favorable development due to lower than expected loss emergence across multiple accident years in property, energy and marine.
Unfavorable development in other insurance operations was due to
higher than expected emergence in mass tort exposures in older accident years primarily related to abuse.
2020
Unfavorable development in medical professional liability was
primarily due to higher than expected frequency of large losses in recent accident years, unfavorable development on a latent claim for an older accident year and unfavorable outcomes on specific claims in accident years 2015 and 2016 in CNA’s aging
services business.
Favorable development in surety was due to lower than expected
frequency and lack of systemic activity for accident years 2019 and prior.
Unfavorable development in commercial auto was due to unfavorable
claim severity in CNA’s middle market and construction businesses in accident years 2017 through 2019.
Unfavorable development in general liability was driven by
increased bodily injury severities in accident years 2012 through 2016 and higher than expected frequency and severity in CNA’s umbrella business in accident years 2015 through 2019.
Favorable development in workers’ compensation was due to
favorable medical trends driving lower than expected severity in multiple accident years.
Unfavorable development in property and other was primarily due to
higher than expected large loss activity in CNA’s middle market, national accounts and marine business units in accident year 2019.
Unfavorable development in other insurance operations was due to
higher than expected emergence in mass tort exposures in older accident years primarily related to abuse.
Asbestos & Environmental Pollution (“A&EP”) Reserves
In 2010, Continental Casualty Company (“CCC”) together with
several insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of their legacy A&EP liabilities were ceded to NICO through a loss portfolio
transfer (“LPT”). At the effective date of the transaction, approximately $1.6 billion of net A&EP claim and allocated claim adjustment
expense reserves were ceded to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 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. NICO was paid a reinsurance premium of $2.0 billion and
billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million were transferred to NICO,
resulting in total consideration of $2.2 billion.
In years subsequent to the effective date of the LPT, adverse
prior year development on A&EP reserves was recognized 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 a change in the estimate of A&EP reserves is recognized 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
Consolidated Condensed Statements of Operations.
The
impact of the LPT on the Consolidated Condensed Statements of Operations was the recognition of a retroactive reinsurance benefit of $8 million and $9 million for the three months ended September 30, 2021 and 2020 and $30
million and $43 million for the nine months ended September 30, 2021 and 2020. As of September 30, 2021 and December 31, 2020, the
cumulative amounts ceded under the LPT were $3.3 billion. The unrecognized deferred retroactive reinsurance benefit was $368 million and $398 million as of
September 30, 2021 and December 31, 2020 and is included within Other liabilities on the Consolidated Condensed Balance Sheets.
NICO
established a collateral trust account as security for its obligations under the LPT. The fair value of the collateral trust account was $2.9 billion as of September 30, 2021. 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 A&EP claims.
Excess Workers’ Compensation LPT
On
February 5, 2021, CNA 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, approximately $690 million of net EWC claim and allocated claim adjustment expense reserves were ceded to Cavello under a loss portfolio transfer (“EWC LPT”) with an
aggregate limit of $1.0 billion. Cavello was paid 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, a loss of approximately $11 million (after tax and
noncontrolling interest) was recognized in Other Insurance Operations in the first quarter of 2021 related to the EWC LPT.
As of September 30, 2021, the cumulative amount ceded under the EWC LPT was $690 million.
Cavello established a collateral trust account as security for
its obligations, which will be maintained at 105% of outstanding reserves.
Credit Risk for Ceded Reserves
The majority of CNA’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.
Life & Group Policyholder Reserves
CNA’s Life & Group business includes its run-off long term
care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care
subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and CNA has the ability to increase policy premiums, subject to state regulatory approval.
CNA maintains both claim and claim adjustment expense reserves
as well as future policy benefit reserves for policyholder benefits for its Life & Group business. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits,
including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, CNA’s actuaries perform a detailed claim reserve review on an annual basis. The
review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained
for the
structured settlement obligations. In developing the claim and claim adjustment
expense reserve estimates for structured settlement obligations, CNA’s actuaries review mortality experience on an annual basis. CNA’s recorded claim and claim adjustment expense reserves reflect management’s best estimate after incorporating the
results of the most recent reviews.
CNA completed its annual claim reserve reviews in the third
quarters of 2021 and 2020 resulting in $40 million and $37 million pretax reductions in long term care reserves primarily due to lower claim severity than anticipated in the reserve estimates and $2 million and $46 million pretax increases in the structured
settlement claim reserves primarily due to lower discount rate assumptions and mortality assumption changes.
Future policy benefit reserves consist of active life reserves
related to CNA’s long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves
requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to
significant estimation risk.
The actuarial assumptions that CNA believes are subject to the
most variability are morbidity, persistency, discount rates and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies
remaining in force and can be affected by policy lapses, benefit reductions and death. Discount rates are influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and
may also be affected by changes to the Internal Revenue Code. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. As a result of this
variability, CNA’s long term care reserves may be subject to material increases if actual experience develops adversely to CNA’s expectations.
Annually, in the third quarter, CNA assesses the adequacy of its
long term care future policy benefit reserves by performing a gross premium valuation (“GPV”) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the
assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the existing assumptions are unlocked
and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in the Company’s results of operations in the period in which the need for such adjustment is determined. If the GPV required reserves are less
than the existing recorded reserves, assumptions remain locked in and no adjustment is required.
The GPV for the long term care future policy benefit reserves,
performed in the third quarter of 2021, indicated the recorded reserves included a pretax margin of approximately $72 million as of
September 30, 2021.
The GPV for the long term care future policy benefit reserves
performed in the third quarter of 2020 indicated a premium deficiency primarily driven by lower discount rate assumptions. Recognition of the premium deficiency resulted in a $74 million pretax increase in policyholders’ benefits reflected in the Company’s results of operations for the three and nine months ended September 30, 2020.
|