Note 8. Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’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 CNA’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 CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $141 million, $156 million and $169 million for the years ended December 31, 2015, 2014 and 2013. Catastrophe losses in 2015 related primarily to U.S. weather-related events.

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 Non-Core segment.


Year Ended December 31	2015			2014			2013

(In millions)

Reserves, beginning of year:
Gross	$	23,271		$	24,089		$	24,763
Ceded		4,344			4,972			5,126

Net reserves, beginning of year		18,927			19,117			19,637


Change in net reserves due to acquisition (disposition) of subsidiaries					(13	)


Net incurred claim and claim adjustment expenses:
Provision for insured events of current year		4,934			5,043			5,114
Decrease in provision for insured events of prior years		(255	)		(36	)		(115	)
Amortization of discount		166			161			154

Total net incurred (a)		4,845			5,168			5,153


Net payments attributable to:
Current year events		(856	)		(945	)		(981	)
Prior year events		(4,089	)		(4,355	)		(4,588	)

Total net payments		(4,945	)		(5,300	)		(5,569	)


Foreign currency translation adjustment and other		(251	)		(45	)		(104	)


Net reserves, end of year		18,576			18,927			19,117
Ceded reserves, end of year		4,087			4,344			4,972

Gross reserves, end of year	$	22,663		$	23,271		$	24,089

(a)

Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected in the Consolidated Statements of Income 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 following tables present the gross and net carried reserves:


December 31, 2015	Specialty		Commercial		International		Other Non-Core		Total

(In millions)

Gross Case Reserves	$	2,011	$	4,975	$	622	$	4,494	$	12,102
Gross IBNR Reserves		4,258		4,208		725		1,370		10,561


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	6,269	$	9,183	$	1,347	$	5,864	$	22,663


Net Case Reserves	$	1,810	$	4,651	$	531	$	2,844	$	9,836
Net IBNR Reserves		3,758		3,925		688		369		8,740


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	5,568	$	8,576	$	1,219	$	3,213	$	18,576


December 31, 2014


Gross Case Reserves	$	2,136	$	5,298	$	752	$	4,070	$	12,256
Gross IBNR Reserves		4,093		4,216		689		2,017		11,015


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	6,229	$	9,514	$	1,441	$	6,087	$	23,271


Net Case Reserves	$	1,929	$	4,947	$	598	$	2,716	$	10,190
Net IBNR Reserves		3,726		3,906		663		442		8,737


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	5,655	$	8,853	$	1,261	$	3,158	$	18,927

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 present the net prior year development recorded for Specialty, Commercial, International and Other Non-Core segments.


Year Ended December 31, 2015	Specialty			Commercial			International			Other			Total

(In millions)

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(141	)	$	(15	)	$	(54	)	$	-		$	(210	)
Pretax (favorable) unfavorable premium development		(11	)		(15	)		18						(8	)

Total pretax (favorable) unfavorable net prior year development	$	(152	)	$	(30	)	$	(36	)	$	-		$	(218	)


Year Ended December 31, 2014


Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(136	)	$	176		$	(59	)	$	(2	)	$	(21	)
Pretax (favorable) unfavorable premium development		(13	)		(20	)		2			(1	)		(32	)

Total pretax (favorable) unfavorable net prior year development	$	(149	)	$	156		$	(57	)	$	(3	)	$	(53	)


Year Ended December 31, 2013


Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(196	)	$	122		$	(38	)	$	(6	)	$	(118	)
Pretax (favorable) unfavorable premium development		(14	)		(8	)		(21	)		1			(42	)

Total pretax (favorable) unfavorable net prior year development	$	(210	)	$	114		$	(59	)	$	(5	)	$	(160	)

Favorable net prior year development of $50 million, $14 million and $9 million was recorded in Life & Group Non-Core for the years ended December 31, 2015, 2014 and 2013. The favorable net prior year development for the year ended December 31, 2015 was driven by favorable claim severity.

Premium development can occur in the property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium. Audits on policies usually occur in a period after the expiration date of the policy.

For the year ended December 31, 2013, favorable premium development for International is primarily due to a commutation recorded at Hardy.

Specialty

The following table and discussion presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (“development”) recorded for the Specialty segment:


Year Ended December 31	2015			2014			2013

(In millions)

Medical professional liability	$	(43	)	$	39		$	(27	)
Other professional liability and management liability					(87	)		(73	)
Surety		(69	)		(82	)		(74	)
Warranty		(2	)		(2	)		(3	)
Other		(27	)		(4	)		(19	)

Total pretax (favorable) unfavorable development	$	(141	)	$	(136	)	$	(196	)

2015

Overall, favorable development for medical professional liability was related to lower than expected severity in accident years 2012 and prior. Unfavorable development was recorded related to increased claim frequency and severity in the aging services business in accident years 2013 and 2014.

Favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions primarily in accident years 2011 through 2014. Additional favorable development related to lower than expected severity for professional services in accident years 2011 and prior. Unfavorable development was recorded related to increased frequency of large claims on public company management liability in accident years 2012 through 2014.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.

Favorable development for other coverages was due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.

2014

Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior and increased frequency of other large medical professional liability losses in accident years 2011 through 2013.

Overall, favorable development for other professional liability and management liability was related to better than expected severity in accident years 2008 through 2011, including favorable outcomes on individual large claims. Additional favorable development related to lower than expected frequency in accident years 2011 through 2013. Unfavorable development was recorded due to higher than expected severity in financial institution and professional service coverages in accident years 2009 through 2011.

Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2012 and prior.

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 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.

Commercial

The following table and discussion presents further detail of the development recorded for the Commercial segment:


Year Ended December 31	2015			2014			2013

(In millions)

Commercial auto	$	(22	)	$	31		$	18
General liability		(33	)		45			64
Workers’ compensation		80			139			91
Property and other		(40	)		(39	)		(51	)

Total pretax (favorable) unfavorable development	$	(15	)	$	176		$	122

2015

Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2009 through 2014.

Favorable development for general liability was primarily due to favorable settlements on claims in accident years 2010 through 2013.

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act (“DBA”) contractors in accident years 2008 through 2014.

Favorable development for property and other was primarily due to better than expected claim emergence from 2012 and 2014 catastrophe events and better than expected frequency of large claims in accident year 2014.

The year ended December 31, 2015 also included unfavorable loss development related to extra contractual obligation losses and losses associated with premium development.

2014

Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected severity for liability coverages in accident years 2010 through 2013. Favorable development was recorded related to fewer large claims than expected in accident years 2008 and 2009.

Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2010 through 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2009.

Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to DBA contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.

Favorable development for property and other first party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.

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 CNA’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 DBA 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.

International

The following table and discussion presents further detail of the development recorded for the International segment:


Year Ended December 31	2015			2014			2013

(In millions)

Medical professional liability	$	(9	)	$	(7	)	$	(7	)
Other professional liability		(16	)		(26	)		(30	)
Liability		(17	)		(13	)		(8	)
Property & marine		(29	)		(14	)		13
Other		17			(9	)		(17	)
Commutations					10			11

Total pretax (favorable) unfavorable development	$	(54	)	$	(59	)	$	(38	)

2015

Favorable development in medical professional liability was due to better than expected frequency of losses in accident years 2011 to 2013.

Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.

Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.

Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.

Unfavorable development in other is due to higher than expected large losses in financial institutions and political risk, primarily in accident year 2014.

2014

Overall, favorable development for other professional liability was primarily related to better than expected severity in accident years 2012 and prior. Unfavorable development was recorded in accident year 2008 due to financial crisis claims.

Favorable development for liability was primarily related to better than expected frequency and severity in accident years 2009 and subsequent.

Favorable development for property and marine coverages primarily related to better than expected frequency of large claims in accident years 2012 and prior.

Favorable development for other coverages was a result of better than expected frequency in Hardy, primarily in financial institution coverages.

Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for uncollectible reinsurance.

2013

Overall, favorable development for other professional liability was primarily related to better than expected severity in accident years 2011 and prior. Unfavorable development was recorded related to higher than expected severity in accident year 2012.

Overall, unfavorable development for property and marine coverages 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 was recorded related to better than expected severity in accident years 2008 through 2011.

Favorable development for other coverages was largely a result of better than expected severity in Hardy in accident year 2012.

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 CNA’s insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO (loss portfolio transfer or “LPT”). At the transaction effective date, CNA 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 $4.0 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 aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities. CNA paid NICO a reinsurance premium of $2.0 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.

Through December 31, 2013, CNA recorded $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the loss portfolio transfer exceeded the $2.2 billion consideration paid, resulting in a deferred retroactive reinsurance gain. This deferred gain is recognized in earnings 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. In a period in which the estimate of ceded losses is changed, the required change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the inception of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Statements of Income.

The following table presents the impact of the loss portfolio transfer on the Consolidated Statements of Income.


Year Ended December 31	2015			2014			2013

(In millions)

Net A&EP adverse development before consideration of LPT	$	150		$	-		$	363
Provision for uncollectible third party reinsurance on A&EP								140

Additional amounts ceded under LPT		150			-			503
Retroactive reinsurance benefit recognized		(85	)		(13	)		(314	)

Pretax impact of deferred retroactive reinsurance	$	65		$	(13	)	$	189

During 2013, 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, CNA recognized a provision for uncollectible third-party reinsurance which increased the expected recovery from NICO.

The fourth quarter of 2014 A&EP reserve review was not completed in 2014 because additional information and analysis on inuring third party reinsurance recoveries were needed to finalize the review. The review was finalized in the second quarter of 2015. Unfavorable development was due to a decrease in anticipated future reinsurance recoveries related to asbestos claims and higher than expected severity on pollution claims. CNA adopted the second quarter of the year as the timing for all future annual A&EP claims actuarial reviews.

As of December 31, 2015 and 2014, the cumulative amounts ceded under the LPT were $2.6 billion and $2.5 billion. The unrecognized deferred retroactive reinsurance benefit was $241 million and $176 million as of December 31, 2015 and 2014.

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.8 billion and $3.4 billion as of December 31, 2015 and 2014. 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 CNA’s A&EP claims.