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 90% of the outstanding common stock of CNAF as of March 31, 2023.
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 (SEC) for the year ended December 31, 2022, 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, 2023 and for the three months ended March 31, 2023 and 2022 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. The December 31, 2022 Consolidated Balance Sheet included in this Quarterly Report on Form 10-Q was derived from audited financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC, adjusted for the application of ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12).
Recently Adopted Accounting Standards Updates (ASU)
ASU 2018-12: In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-12, which requires changes to the measurement and disclosure of long-duration contracts. Entities are required to review, and update if there is a change, cash flow assumptions (including morbidity and persistency) used to measure the liability for future policyholder benefits (LFPB) at least annually. The LFPB must also be updated for actual experience at least annually. The LFPB is reflected as Future policyholder benefits reserves on the Condensed Consolidated Balance Sheet. The discount rate assumption used to measure the LFPB must be updated quarterly using an upper-medium grade (low credit risk) fixed-income instrument yield, commonly interpreted as a single-A rate. The effect of changes in cash flow assumptions and actual variances from expected experience are recorded in the Company's results of operations within Insurance claims and policyholders’ benefits. The effect of changes in discount rate assumptions are recorded in Other comprehensive income (loss). In contrast, under legacy accounting guidance, cash flow and discount rate assumptions were locked-in unless a premium deficiency emerged. The discount rate assumption under legacy accounting guidance was determined using the Company’s internal investment portfolio yield, which was generally higher than a single-A yield.
The new guidance eliminates the need to hold shadow reserves associated with the Company’s long term care reserves. Under legacy accounting guidance, to the extent that unrealized gains on fixed maturity securities supporting long term care reserves would have resulted in a premium deficiency if realized, a related increase to Insurance reserves was recorded, net of tax, as a reduction of net unrealized gains (losses), through Other comprehensive income (loss) (shadow reserves).
The unit of account is the level at which reserves are measured. Under the new guidance, the unit of account used to measure the LFPB is the cohort. Cohorts are comprised of insurance contracts issued no more than one
year apart, and must be further disaggregated according to policy benefit and insurance risk characteristics. Under legacy accounting guidance, the LFPB was generally measured at the individual policy level.
Under the new guidance, the Net Premium Ratio (NPR) is capped at 100%. To the extent that NPR would otherwise exceed 100%, the LFPB is increased and a loss is recognized immediately in the Company’s results of operations. The NPR cap is applied at the cohort level each quarter when NPR is updated. In contrast, under legacy accounting guidance, premium deficiency testing was performed annually at the product level. See Note F to the Condensed Consolidated Financial Statements for further explanation of the NPR and LFPB calculations.
The Company adopted the new guidance effective January 1, 2023, using the modified retrospective method applied as of the transition date of January 1, 2021. The Company's run-off long term care business is in scope of the new guidance. All prior periods presented in the financial statements have been adjusted to reflect application of the new guidance. The Company’s original locked in discount rate, utilized for purposes of calculating the NPR under the new guidance, was based on the discount rate assumption used to calculate the LFPB immediately prior to the transition date. While the requirements of the new guidance represent a material change from legacy accounting, the new guidance does not impact capital and surplus under statutory accounting practices, cash flows or the underlying economics of the business.
In December 2022, the FASB issued ASU 2022-05, Financial Services-Insurance (Topic 944): Transition for Sold Contracts (ASU 2022-05). This guidance permits companies to make an election to exclude from the scope of ASU 2018-12 any insurance contracts that have been de-recognized prior to the effective date of ASU 2018-12, assuming that the company has no significant continuing involvement with the de-recognized contracts. In the fourth quarter of 2022, the Company novated its block of legacy annuity business, which was fully-ceded prior to novation. The Company has elected the ASU 2022-05 transition relief, and has excluded the novated legacy annuity business from the scope of ASU 2018-12.
Explanation of ASU 2018-12 Transition Impacts:
The following table presents a roll-forward of the pre-transition LFPB balance as of January 1, 2021:
| | | | | |
(In millions) | |
Balance as of December 31, 2020, as previously reported | $ | 13,318 | |
Reclassification of reserves for policyholders currently receiving benefits to Future policy benefits (1) | 2,844 | |
De-recognition of shadow reserves | (3,293) | |
Re-measurement using an upper-medium grade fixed income instrument yield discount rate | 6,255 | |
Other adjustments | 8 | |
Balance as of January 1, 2021, as adjusted | $ | 19,132 | |
(1) In conjunction with the adoption of ASU 2018-12, at January 1, 2023, the Company reclassified the long term care reserves for policyholders currently receiving benefits from Claim and claim adjustment expenses to Future policy benefits. This change was applied retrospectively as of January 1, 2021.
Shadow reserves associated with the Company’s long term care business were de-recognized as of the transition date in Accumulated other comprehensive income (AOCI). The effect of re-measuring the LFPB at the single-A discount rate as of the transition date was similarly recorded in AOCI. The Company did not have any cohorts for which the NPR exceeded 100% at the transition date.
The Company’s practice under legacy accounting guidance was to calculate and record premium deficiency reserves at the policy level. Accordingly, an allocation methodology was not required to assign historical premium deficiency reserves to cohorts upon transition to ASU 2018-12.
The following table presents after tax adjustments to the opening balance of Stockholders’ equity resulting from adoption of ASU 2018-12:
| | | | | | | | | | | |
(In millions) | Accumulated other comprehensive income (loss) | | Retained earnings |
Balance as of December 31, 2020, as previously reported | $ | 803 | | | $ | 9,081 | |
De-recognition of shadow reserves | 2,601 | | | — | |
Re-measurement of LFPB using an upper-medium grade fixed income instrument yield discount rate | (4,941) | | | — | |
Other adjustments | — | | | (6) | |
Balance as of January 1, 2021, as adjusted | $ | (1,537) | | | $ | 9,075 | |
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Operations for the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
(In millions) | Prior to Adoption | | Effect of Adoption | | As reported |
Insurance claims and policyholders’ benefits (1) | $ | 1,455 | | | $ | 23 | | | $ | 1,478 | |
Income (loss) before income tax | 378 | | | (23) | | | 355 | |
Income tax (expense) benefit | (65) | | | 5 | | | (60) | |
Net income | 313 | | | (18) | | | 295 | |
Basic earnings (loss) per share | 1.15 | | | (0.07) | | | 1.08 | |
Diluted earnings (loss) per share | 1.15 | | | (0.07) | | | 1.08 | |
(1) The effect of adopting ASU 2018-12 on Insurance claims and policyholders’ benefits is inclusive of the re-measurement gain (loss) of $5 million, which is presented parenthetically on the Condensed Consolidated Statement of Operations.
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Balance Sheet as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
(In millions) | Prior to Adoption | | Effect of Adoption | | As reported |
Deferred income taxes | $ | 1,178 | | | $ | 73 | | | $ | 1,251 | |
Total assets | 60,927 | | | 73 | | | 61,000 | |
Claim and claim adjustment expenses (1) | 25,099 | | | (2,979) | | | 22,120 | |
Future policy benefits (1) | 10,151 | | | 3,329 | | | 13,480 | |
Total liabilities | 52,102 | | | 350 | | | 52,452 | |
Retained earnings | 9,572 | | | (236) | | | 9,336 | |
Accumulated other comprehensive income (loss) | (3,557) | | | (41) | | | (3,598) | |
Total stockholders' equity | 8,825 | | | (277) | | | 8,548 | |
(1) In conjunction with the adoption of ASU 2018-12, at January 1, 2023, the Company reclassified the long term care reserves for policyholders currently receiving benefits from Claim and claim adjustment expenses to Future policy benefits. This change was applied retrospectively as of January 1, 2021.
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
(In millions) | Prior to Adoption | | Effect of Adoption | | As reported |
Impact of changes in discount rates used to measure long-duration contract liabilities | $ | — | | | $ | 1,635 | | | $ | 1,635 | |
Changes in: Net unrealized gains and losses on other investments | (1,611) | | | (1,032) | | | (2,643) | |
Net unrealized gains and losses on investments | (1,615) | | | (1,032) | | | (2,647) | |
Other comprehensive income (loss), net of tax | (1,623) | | | 603 | | | (1,020) | |
Total comprehensive income (loss) | (1,310) | | | 585 | | | (725) | |
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
(In millions) | Prior to Adoption | | Effect of Adoption | | As reported |
Net income | $ | 313 | | | $ | (18) | | | $ | 295 | |
Deferred income tax expense (benefit) | 17 | | | (5) | | | 12 | |
Changes in: Insurance reserves | 489 | | | 23 | | | 512 | |
| | | | | |
The effects of adoption of ASU 2018-12 on segment results of operations of the Life & Group segment for the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
(In millions) | Prior to Adoption | | Effect of Adoption | | As reported |
Net incurred claims and benefits (1) | $ | 281 | | | $ | 23 | | | $ | 304 | |
Core income (loss) before income tax | 16 | | | (23) | | | (7) | |
Income tax (expense) benefit on core income (loss) | 7 | | | 5 | | | 12 | |
Core income (loss) | 23 | | | (18) | | | 5 | |
(1) The effect of adopting ASU 2018-12 on Net incurred claims and benefits is inclusive of the re-measurement gain (loss) of $5 million, which is presented parenthetically on the Condensed Consolidated Statement of Operations.
The effects of adoption of ASU 2018-12 on segment results for selected balance sheet lines of the Life & Group segment as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
(In millions) | Prior to Adoption | | Effect of Adoption | | As reported |
Claim and claim adjustment expenses (1) | $ | 3,674 | | | $ | (2,979) | | | $ | 695 | |
Future policy benefits (1) | 10,151 | | | 3,329 | | | 13,480 | |
(1) In conjunction with the adoption of ASU 2018-12, at January 1, 2023, the Company reclassified the long term care reserves for policyholders currently receiving benefits from Claim and claim adjustment expenses to Future policy benefits. This change was applied retrospectively as of January 1, 2021.
Note B. Earnings (Loss) Per Share Data
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.
The following table presents the income and share data used in the basic and diluted earnings per share computations.
| | | | | | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions, except per share data) | 2023 | | 2022 | | | | |
Net income (loss) (1) | $ | 297 | | | $ | 295 | | | | | |
| | | | | | | |
Common Stock and Common Stock Equivalents | | | | | | | |
Basic | | | | | | | |
Weighted average shares outstanding | 271.3 | | | 271.8 | | | | | |
Diluted | | | | | | | |
Weighted average shares outstanding | 271.3 | | | 271.8 | | | | | |
Dilutive effect of stock-based awards under compensation plans | 1.0 | | | 1.1 | | | | | |
Total | 272.3 | | | 272.9 | | | | | |
| | | | | | | |
Earnings (loss) per share (1) | | | | | | | |
Basic | $ | 1.10 | | | $ | 1.08 | | | | | |
Diluted | $ | 1.09 | | | $ | 1.08 | | | | | |
(1) As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts have been adjusted to reflect application of the new guidance.
Excluded from the calculation of diluted earnings (loss) per share is the impact of potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans that would have been antidilutive during the respective periods.
The Company repurchased 550,000 and 445,000 shares of CNAF common stock at an aggregate cost of $24 million and $21 million during the three months ended March 31, 2023 and 2022.
Note C. Investments
The significant components of Net investment income are presented in the following table.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Fixed maturity securities | $ | 470 | | | $ | 429 | |
Equity securities | 12 | | | 2 | |
Limited partnership investments | 25 | | | 18 | |
Mortgage loans | 14 | | | 15 | |
Short term investments | 15 | | | — | |
Trading portfolio | 3 | | | 1 | |
Other | 5 | | | — | |
Gross investment income | 544 | | | 465 | |
Investment expense | (19) | | | (17) | |
Net investment income | $ | 525 | | | $ | 448 | |
Net investment income (loss) recognized due to the change in fair value of common stock held as of March 31, 2023 and 2022 | $ | (1) | | | $ | (5) | |
Net investment gains (losses) are presented in the following table.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Net investment gains (losses): | | | |
Fixed maturity securities: | | | |
Gross gains | $ | 35 | | | $ | 26 | |
Gross losses | (57) | | | (28) | |
Net investment gains (losses) on fixed maturity securities | (22) | | | (2) | |
Equity securities | (14) | | | (38) | |
Derivatives | — | | | 29 | |
| | | |
Short term investments and other | 1 | | | — | |
Net investment gains (losses) | $ | (35) | | | $ | (11) | |
Net investment gains (losses) recognized due to the change in fair value of non-redeemable preferred stock held as of March 31, 2023 and 2022 | $ | (2) | | | $ | (38) | |
The components of available-for-sale impairment losses (gains) recognized in earnings by asset type are presented in the following table. The table includes losses (gains) 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) | 2023 | | 2022 |
Fixed maturity securities available-for-sale: | | | |
Corporate and other bonds | $ | 8 | | | $ | 8 | |
Asset-backed | — | | | 2 | |
Impairment losses (gains) recognized in earnings | $ | 8 | | | $ | 10 | |
There were no losses recognized on mortgage loans during the three months ended March 31, 2023 or 2022.
The following tables present a summary of fixed maturity securities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | 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 | $ | 24,140 | | | $ | 437 | | | $ | 1,675 | | | $ | 1 | | | $ | 22,901 | |
States, municipalities and political subdivisions | 8,332 | | | 410 | | | 741 | | | — | | | 8,001 | |
Asset-backed: | | | | | | | | | |
Residential mortgage-backed | 3,066 | | | 6 | | | 413 | | | — | | | 2,659 | |
Commercial mortgage-backed | 1,868 | | | 5 | | | 242 | | | — | | | 1,631 | |
Other asset-backed | 3,464 | | | 8 | | | 306 | | | 1 | | | 3,165 | |
Total asset-backed | 8,398 | | | 19 | | | 961 | | | 1 | | | 7,455 | |
U.S. Treasury and obligations of government-sponsored enterprises | 126 | | | — | | | 2 | | | — | | | 124 | |
Foreign government | 647 | | | 1 | | | 39 | | | — | | | 609 | |
Redeemable preferred stock | 3 | | | — | | | — | | | — | | | 3 | |
Total fixed maturity securities available-for-sale | 41,646 | | | 867 | | | 3,418 | | | 2 | | | 39,093 | |
Total fixed maturity securities trading | 14 | | | — | | | — | | | — | | | 14 | |
Total fixed maturity securities | $ | 41,660 | | | $ | 867 | | | $ | 3,418 | | | $ | 2 | | | $ | 39,107 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | 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 | $ | 23,137 | | | $ | 301 | | | $ | 2,009 | | | $ | — | | | $ | 21,429 | |
States, municipalities and political subdivisions | 8,918 | | | 338 | | | 939 | | | — | | | 8,317 | |
Asset-backed: | | | | | | | | | |
Residential mortgage-backed | 3,073 | | | 5 | | | 447 | | | — | | | 2,631 | |
Commercial mortgage-backed | 1,886 | | | 4 | | | 255 | | | — | | | 1,635 | |
Other asset-backed | 3,287 | | | 2 | | | 361 | | | 1 | | | 2,927 | |
Total asset-backed | 8,246 | | | 11 | | | 1,063 | | | 1 | | | 7,193 | |
U.S. Treasury and obligations of government-sponsored enterprises | 111 | | | 1 | | | 2 | | | — | | | 110 | |
Foreign government | 617 | | | 1 | | | 43 | | | — | | | 575 | |
Redeemable preferred stock | 3 | | | — | | | — | | | — | | | 3 | |
Total fixed maturity securities available-for-sale | 41,032 | | | 652 | | | 4,056 | | | 1 | | | 37,627 | |
Total fixed maturity securities trading | — | | | — | | | — | | | — | | | — | |
Total fixed maturity securities | $ | 41,032 | | | $ | 652 | | | $ | 4,056 | | | $ | 1 | | | $ | 37,627 | |
The following tables present the estimated fair value and gross unrealized losses of available-for-sale 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, 2023 | 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 | $ | 10,753 | | | $ | 545 | | | $ | 6,184 | | | $ | 1,130 | | | $ | 16,937 | | | $ | 1,675 | |
States, municipalities and political subdivisions | 1,708 | | | 87 | | | 2,347 | | | 654 | | | 4,055 | | | 741 | |
Asset-backed: | | | | | | | | | | | |
Residential mortgage-backed | 741 | | | 28 | | | 1,784 | | | 385 | | | 2,525 | | | 413 | |
Commercial mortgage-backed | 474 | | | 36 | | | 1,072 | | | 206 | | | 1,546 | | | 242 | |
Other asset-backed | 1,073 | | | 86 | | | 1,474 | | | 220 | | | 2,547 | | | 306 | |
Total asset-backed | 2,288 | | | 150 | | | 4,330 | | | 811 | | | 6,618 | | | 961 | |
U.S. Treasury and obligations of government-sponsored enterprises | 57 | | | 1 | | | 41 | | | 1 | | | 98 | | | 2 | |
Foreign government | 231 | | | 7 | | | 327 | | | 32 | | | 558 | | | 39 | |
Total | $ | 15,037 | | | $ | 790 | | | $ | 13,229 | | | $ | 2,628 | | | $ | 28,266 | | | $ | 3,418 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2022 | 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 | $ | 15,946 | | | $ | 1,585 | | | $ | 1,634 | | | $ | 424 | | | $ | 17,580 | | | $ | 2,009 | |
States, municipalities and political subdivisions | 4,079 | | | 769 | | | 456 | | | 170 | | | 4,535 | | | 939 | |
Asset-backed: | | | | | | | | | | | |
Residential mortgage-backed | 1,406 | | | 144 | | | 1,143 | | | 303 | | | 2,549 | | | 447 | |
Commercial mortgage-backed | 1,167 | | | 159 | | | 408 | | | 96 | | | 1,575 | | | 255 | |
Other asset-backed | 2,087 | | | 262 | | | 542 | | | 99 | | | 2,629 | | | 361 | |
Total asset-backed | 4,660 | | | 565 | | | 2,093 | | | 498 | | | 6,753 | | | 1,063 | |
U.S. Treasury and obligations of government-sponsored enterprises | 76 | | | 1 | | | 16 | | | 1 | | | 92 | | | 2 | |
Foreign government | 473 | | | 26 | | | 78 | | | 17 | | | 551 | | | 43 | |
Total | $ | 25,234 | | | $ | 2,946 | | | $ | 4,277 | | | $ | 1,110 | | | $ | 29,511 | | | $ | 4,056 | |
The following table presents the estimated fair value and gross unrealized losses of available-for-sale fixed maturity securities in a gross unrealized loss position for which an allowance for credit loss has not been recorded, by ratings distribution.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
(In millions) | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,357 | | | $ | 302 | | | $ | 2,355 | | | $ | 337 | |
AAA | 1,424 | | | 260 | | | 1,559 | | | 298 | |
AA | 4,053 | | | 670 | | | 4,327 | | | 817 | |
A | 6,440 | | | 619 | | | 6,615 | | | 749 | |
BBB | 12,651 | | | 1,360 | | | 13,226 | | | 1,621 | |
Non-investment grade | 1,341 | | | 207 | | | 1,429 | | | 234 | |
Total | $ | 28,266 | | | $ | 3,418 | | | $ | 29,511 | | | $ | 4,056 | |
Based on current facts and circumstances, the Company believes the unrealized losses presented in the March 31, 2023 securities in a gross unrealized loss position tables above are not indicative of the ultimate collectability of the current amortized cost of the securities, but rather are primarily attributable to changes in risk-free interest rates and a general market widening of credit spreads. In reaching this determination, the Company considered the continued volatility in risk-free rates and credit spreads as well as the fact that its unrealized losses are concentrated in investment grade issuers. Additionally, 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, 2023.
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 $407 million, $394 million, and $389 million as of March 31, 2023, December 31, 2022, and March 31, 2022 and is excluded from the estimate of expected credit losses and the amortized cost basis in the table included within this Note.
| | | | | | | | | | | | | | | | | |
(In millions) | Corporate and other bonds | | Asset-backed | | Total |
Allowance for credit losses: | | | | | |
Balance as of January 1, 2023 | $ | — | | | $ | 1 | | | $ | 1 | |
Additions to the allowance for credit losses: | | | | | |
| | | | | |
Available-for-sale securities accounted for as PCD assets | 9 | | | — | | | 9 | |
| | | | | |
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 | 3 | | | — | | | 3 | |
| | | | | |
| | | | | |
| | | | | |
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | 1 | | | — | | | 1 | |
Balance as of March 31, 2023 | $ | 1 | | | $ | 1 | | | $ | 2 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
(In millions) | Corporate and other bonds | | Asset-backed | | Total |
Allowance for credit losses: | | | | | |
Balance as of January 1, 2022 | $ | 11 | | | $ | 7 | | | $ | 18 | |
Additions to the allowance for credit losses: | | | | | |
| | | | | |
Available-for-sale securities accounted for as PCD assets | — | | | — | | | — | |
| | | | | |
Reductions to the allowance for credit losses: | | | | | |
Securities sold during the period (realized) | — | | | — | | | — | |
Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis | — | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | 1 | | | (2) | | | (1) | |
Balance as of March 31, 2022 | $ | 12 | | | $ | 5 | | | $ | 17 | |
Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
(In millions) | Cost or Amortized Cost | | Estimated Fair Value | | Cost or Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 1,009 | | | $ | 989 | | | $ | 1,012 | | | $ | 1,001 | |
Due after one year through five years | 10,486 | | | 10,035 | | | 9,880 | | | 9,399 | |
Due after five years through ten years | 13,763 | | | 12,702 | | | 13,788 | | | 12,453 | |
Due after ten years | 16,388 | | | 15,367 | | | 16,352 | | | 14,774 | |
Total | $ | 41,646 | | | $ | 39,093 | | | $ | 41,032 | | | $ | 37,627 | |
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.
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, 2023, the Company had commitments to purchase or fund approximately $1,665 million and sell approximately $125 million under the terms of these investments.
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, 2023 | Mortgage Loans Amortized Cost Basis by Origination Year (1) |
(In millions) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
DSCR ≥1.6x | | | | | | | | | | | | | |
LTV less than 55% | $ | — | | | $ | 9 | | | $ | 13 | | | $ | 112 | | | $ | 41 | | | $ | 280 | | | $ | 455 | |
LTV 55% to 65% | — | | | — | | | — | | | — | | | — | | | — | | | — | |
LTV greater than 65% | — | | | 31 | | | 11 | | | — | | | — | | | — | | | 42 |
DSCR 1.2x - 1.6x | | | | | | | | | | | | | |
LTV less than 55% | — | | | 5 | | | 49 | | | 13 | | | 43 | | | 47 | | | 157 |
LTV 55% to 65% | 12 | | | 44 | | | — | | | 24 | | | — | | | 8 | | | 88 |
LTV greater than 65% | — | | | 58 | | | — | | | — | | | — | | | — | | | 58 |
DSCR ≤1.2 | | | | | | | | | | | | | |
LTV less than 55% | — | | | 34 | | | — | | | — | | | 35 | | | — | | | 69 |
LTV 55% to 65% | — | | | 41 | | | — | | | — | | | 43 | | | — | | | 84 |
LTV greater than 65% | — | | | 27 | | | 21 | | | — | | | 22 | | | 7 | | | 77 |
Total | $ | 12 | | | $ | 249 | | | $ | 94 | | | $ | 149 | | | $ | 184 | | | $ | 342 | | | $ | 1,030 | |
(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, 2023, 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.
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.
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 United States of America (U.S.) Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.
| | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | | | | | | | Total Assets/Liabilities at Fair Value |
(In millions) | Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
Corporate bonds and other | $ | 135 | | | $ | 22,604 | | | $ | 912 | | | $ | 23,651 | |
States, municipalities and political subdivisions | — | | | 7,957 | | | 44 | | | 8,001 | |
Asset-backed | — | | | 6,596 | | | 859 | | | 7,455 | |
Total fixed maturity securities | 135 | | | 37,157 | | | 1,815 | | | 39,107 | |
Equity securities: | | | | | | | |
Common stock | 177 | | | — | | | 29 | | | 206 | |
Non-redeemable preferred stock | 55 | | | 421 | | | — | | | 476 | |
Total equity securities | 232 | | | 421 | | | 29 | | | 682 | |
Short term and other | 975 | | | 27 | | | — | | | 1,002 | |
Total assets | $ | 1,342 | | | $ | 37,605 | | | $ | 1,844 | | | $ | 40,791 | |
Liabilities | | | | | | | |
Other liabilities | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
Total liabilities | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | Total Assets/Liabilities at Fair Value |
(In millions) | Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
Corporate bonds and other | $ | 120 | | | $ | 21,187 | | | $ | 810 | | | $ | 22,117 | |
States, municipalities and political subdivisions | — | | | 8,274 | | | 43 | | | 8,317 | |
Asset-backed | — | | | 6,405 | | | 788 | | | 7,193 | |
Total fixed maturity securities | 120 | | | 35,866 | | | 1,641 | | | 37,627 | |
Equity securities: | | | | | | | |
Common stock | 150 | | | — | | | 35 | | | 185 | |
Non-redeemable preferred stock | 54 | | | 435 | | | — | | | 489 | |
Total equity securities | 204 | | | 435 | | | 35 | | | 674 | |
Short term and other | 1,608 | | | 71 | | | — | | | 1,679 | |
Total assets | $ | 1,932 | | | $ | 36,372 | | | $ | 1,676 | | | $ | 39,980 | |
Liabilities | | | | | | | |
Other liabilities | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
Total liabilities | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
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, 2023 | $ | 810 | | | $ | 43 | | | $ | 788 | | | $ | 35 | | | | | $ | 1,676 | |
Total realized and unrealized investment gains (losses): | | | | | | | | | | | |
Reported in Net investment gains (losses) | — | | | — | | | — | | | — | | | | | — | |
Reported in Net investment income | — | | | — | | | 5 | | | (6) | | | | | (1) | |
Reported in Other comprehensive income (loss) | 24 | | | 1 | | | 7 | | | — | | | | | 32 | |
Total realized and unrealized investment gains (losses) | 24 | | | 1 | | | 12 | | | (6) | | | | | 31 | |
Purchases | 81 | | | — | | | 55 | | | — | | | | | 136 | |
Sales | — | | | — | | | — | | | — | | | | | — | |
Settlements | (3) | | | — | | | (9) | | | — | | | | | (12) | |
Transfers into Level 3 | — | | | — | | | 23 | | | — | | | | | 23 | |
Transfers out of Level 3 | — | | | — | | | (10) | | | — | | | | | (10) | |
Balance as of March 31, 2023 | $ | 912 | | | $ | 44 | | | $ | 859 | | | $ | 29 | | | | | $ | 1,844 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2023 recognized in Net income (loss) in the period | $ | — | | | $ | — | | | $ | — | | | $ | (6) | | | | | $ | (6) | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2023 recognized in Other comprehensive income (loss) in the period | 24 | | | 1 | | | 7 | | | — | | | | | 32 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 (In millions) | Corporate bonds and other | | States, municipalities and political subdivisions | | Asset-backed | | Equity securities | | | | Total |
Balance as of January 1, 2022 | $ | 937 | | | $ | 56 | | | $ | 556 | | | $ | 29 | | | | | $ | 1,578 | |
Total realized and unrealized investment gains (losses): | | | | | | | | | | | |
Reported in Net investment gains (losses) | (1) | | | — | | | 2 | | | (1) | | | | | — | |
Reported in Net investment income | — | | | — | | | 1 | | | 4 | | | | | 5 | |
Reported in Other comprehensive income (loss) | (71) | | | (5) | | | (32) | | | — | | | | | (108) | |
Total realized and unrealized investment gains (losses) | (72) | | | (5) | | | (29) | | | 3 | | | | | (103) | |
Purchases | 67 | | | — | | | 140 | | | 12 | | | | | 219 | |
Sales | (5) | | | — | | | — | | | — | | | | | (5) | |
Settlements | (22) | | | — | | | (17) | | | — | | | | | (39) | |
Transfers into Level 3 | 10 | | | — | | | 5 | | | — | | | | | 15 | |
Transfers out of Level 3 | — | | | — | | | (51) | | | — | | | | | (51) | |
Balance as of March 31, 2022 | $ | 915 | | | $ | 51 | | | $ | 604 | | | $ | 44 | | | | | $ | 1,614 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2022 recognized in Net income (loss) in the period | $ | — | | | $ | — | | | $ | — | | | $ | 3 | | | | | $ | 3 | |
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2022 recognized in Other comprehensive income (loss) in the period | (72) | | | (5) | | | (31) | | | — | | | | | (108) | |
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.
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 non-U.S. government securities 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, 2023 and December 31, 2022, there were $73 million and $72 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.
Other Liabilities
Level 2 securities include currency forward contracts valued using observable market forward rates.
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, 2023 | Estimated Fair Value (In millions) | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
Fixed maturity securities | $ | 1,340 | | | Discounted cash flow | | Credit spread | | 1% - 8% (3%) |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Estimated Fair Value (In millions) | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
Fixed maturity securities | $ | 1,177 | | | Discounted cash flow | | Credit spread | | 1% - 8% (2%) |
For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | Carrying Amount | | Estimated Fair Value |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | |
Mortgage loans | $ | 1,006 | | | $ | — | | | $ | — | | | $ | 958 | | | $ | 958 | |
Liabilities | | | | | | | | | |
Short term debt | $ | 243 | | | $ | — | | | $ | 245 | | | $ | — | | | $ | 245 | |
Long term debt | 2,539 | | | — | | | 2,387 | | | — | | | 2,387 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Carrying Amount | | Estimated Fair Value |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | |
Mortgage loans | $ | 1,040 | | | $ | — | | | $ | — | | | $ | 973 | | | $ | 973 | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Short term debt | $ | 243 | | | $ | — | | | $ | 248 | | | $ | — | | | $ | 248 | |
Long term debt | 2,538 | | | — | | | 2,349 | | | — | | | 2,349 | |
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.
Note E. Claim and Claim Adjustment Expense Reserves
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, economic, medical and social 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. Claim and claim adjustment expense reserves are also maintained for the Company's structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for structured settlement obligations, the Company's actuaries review mortality experience on an annual basis. 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 $52 million and $19 million for the three months ended March 31, 2023 and 2022 primarily related to severe weather related events.
Liability for Unpaid Claim and Claim Adjustment Expenses
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 (1) |
Reserves, beginning of year: | | | |
Gross | $ | 22,120 | | | $ | 21,269 | |
Ceded | 5,191 | | | 4,969 | |
Net reserves, beginning of year | 16,929 | | | 16,300 | |
Net incurred claim and claim adjustment expenses: | | | |
Provision for insured events of current year | 1,326 | | | 1,188 | |
Increase (decrease) in provision for insured events of prior years | 13 | | | (7) | |
Amortization of discount | 11 | | | 12 | |
Total net incurred (2) | 1,350 | | | 1,193 | |
Net payments attributable to: | | | |
Current year events | (72) | | | (68) | |
Prior year events | (1,042) | | | (920) | |
Total net payments | (1,114) | | | (988) | |
Foreign currency translation adjustment and other | 35 | | | (92) | |
Net reserves, end of period | 17,200 | | | 16,413 | |
Ceded reserves, end of period | 5,209 | | | 5,002 | |
Gross reserves, end of period | $ | 22,409 | | | $ | 21,415 | |
(1) In conjunction with the Company's adoption of ASU 2018-12, at January 1, 2023, long term care reserves for policyholders currently receiving benefits were reclassified from Claim and claim adjustment expenses into Future policy benefits and this change was applied retrospectively as of January 1, 2021. See Note A to the Condensed Consolidated Financial Statements for additional information.
(2) 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 and uncollectible reinsurance, 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) | 2023 | | 2022 |
Pretax (favorable) unfavorable development: | | | |
Specialty | $ | — | | | $ | (10) | |
Commercial | (2) | | | (2) | |
International | 15 | | | — | |
Corporate & Other | — | | | — |
Total pretax (favorable) unfavorable development | $ | 13 | | | $ | (12) | |
Specialty
The following table presents further detail of the development recorded for the Specialty segment.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Pretax (favorable) unfavorable development: | | | |
Medical Professional Liability | $ | 9 | | | $ | 8 | |
Other Professional Liability and Management Liability | — | | | — | |
Surety | — | | | (9) | |
Warranty | (9) | | | (9) | |
Other | — | | | — | |
Total pretax (favorable) unfavorable development | $ | — | | | $ | (10) | |
Commercial
The following table presents further detail of the development recorded for the Commercial segment.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Pretax (favorable) unfavorable development: | | | |
Commercial Auto | $ | — | | | $ | — | |
General Liability | — | | | — | |
Workers' Compensation | (2) | | | (2) | |
Property and Other | — | | | — | |
Total pretax (favorable) unfavorable development | $ | (2) | | | $ | (2) | |
International
The following table presents further detail of the development recorded for the International segment.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Pretax (favorable) unfavorable development: | | | |
Commercial | $ | (2) | | | $ | — | |
Specialty | 19 | | | — | |
Other | (2) | | | — | |
Total pretax (favorable) unfavorable development | $ | 15 | | | $ | — | |
2023
Unfavorable development in specialty was due to higher than expected large loss emergence in the Company's professional liability business in accident year 2017.
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 $8 million and $12 million for the three months ended March 31, 2023 and 2022. As of March 31, 2023 and December 31, 2022, the cumulative amounts ceded under the LPT were $3.5 billion. The unrecognized deferred retroactive reinsurance benefit was $417 million and $425 million as of March 31, 2023 and December 31, 2022 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 $2.5 billion as of March 31, 2023. 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.
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.
Note F. Future Policy Benefits Reserves
Future policy benefits reserves are related to the Company's run-off long term care business, which is included in the Life & Group segment.
The determination of Future policy benefits reserves requires management to make estimates and assumptions about expected policyholder experience over the remaining life of the policy. Since policies may be in force for several decades, these assumptions are subject to significant estimation risk. As a result of this variability, the Company’s future policy benefits reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.
The LFPB is computed using the net level premium method, which incorporates cash flow assumptions and discount rate assumptions. Under the net level premium method, the LFPB is equal to the present value of future benefits and claim settlement expenses less the present value of future net premiums. Net premiums are equal to gross premiums multiplied by the NPR. The NPR is generally the ratio of the present value of benefits and expense payments to the present value of gross premiums, expected over the lifetime of the policy. As a result of the modified retrospective adoption of ASU 2018-12, the Company’s NPR calculation incorporates the original locked in discount rate and the reserve balance as of the transition date of January 1, 2021.
The key cash flow assumptions used to estimate the LFPB are morbidity, persistency (inclusive of mortality), anticipated future premium rate increases and expenses. 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. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. Expense assumptions relate to claim adjudication. The Company has not elected the practical expedient that allows locking in the expense assumption. The discount rate is determined using the upper-medium grade fixed income instrument yield curve.
The Company has elected to update the NPR and the LFPB for actual experience on a quarterly basis. A quarterly assessment is also made as to whether evidence suggests that cash flow assumptions should be updated. Annually in the third quarter, actuarial analysis is performed on policyholder morbidity, persistency, premium rate increases and expense experience. This analysis, combined with judgment, informs the setting of updated cash flow assumptions used to estimate the LFPB. Actuarial analysis includes predictive modeling, actual to expected experience comparisons and trend analysis. Applicable industry research is also considered.
Quarterly, to derive the upper-medium grade fixed income instrument yield discount rate assumption, the Company uses a published spot rate curve constructed from single-A rated U.S. dollar denominated corporate bonds. The Company uses linear interpolation to determine yield assumptions for tenors that fall between points for which observable rates are available. For cash flows that are projected to occur beyond the tenor for which market-observable rates are available, the Company applies judgment to estimate a normative rate which the Company grades to over 10 years.
Quarterly, the updated NPR is used to derive an updated LFPB as of the beginning of the current quarter measured at the original locked in discount rate. The updated LFPB is then compared to the existing carrying amount of the liability as of the same date (measured at the original locked in discount rate) to determine the re-measurement gain (loss), which is presented parenthetically within the Insurance claims and policyholders’ benefits line on the Condensed Consolidated Statements of Operations.
Insurance contracts are grouped into cohorts according to issue year. Contracts assumed through reinsurance are generally included within the same cohorts as contracts issued directly by the Company, according to issue year. The issue year for assumed contracts is defined according to the date that the Company’s assumption of insurance risk incepted. For assumed contracts that were reinsured concurrently with the issuance of the underlying direct contract, issue year is defined as the year that the underlying policy was issued. For contracts that were already in-force when assumed by the Company, issue year is defined as the year in which the reinsurance agreement incepted. For group long term care business, issue year is defined as the year the individual insurance certificate was issued. Long term care is the Company's only long-duration product line, therefore, cohorts are not further disaggregated by product.
The following table summarizes balances and changes in the LFPB.
| | | | | | | | | | | | |
|
(In millions) | 2023 | | 2022 |
| Present value of future net premiums | | | |
| Balance, January 1 | $ | 3,993 | | | $ | 4,735 | |
Effect of changes in discount rate | (74) | | | (880) | |
Balance, January 1, at original locked in discount rate | 3,919 | | | 3,855 | |
Effect of changes in cash flow assumptions (1) | — | | | — | |
Effect of actual variances from expected experience (1) | (49) | | | (18) | |
Adjusted balance, January 1 | 3,870 | | | 3,837 | |
Interest accrual | 52 | | | 53 | |
Net premiums: earned during period | (111) | | | (112) | |
Balance, end of period at original locked in discount rate | 3,811 | | | 3,778 | |
Effect of changes in discount rate | 154 | | | 525 | |
Balance, March 31 | $ | 3,965 | | | $ | 4,303 | |
| | | | |
| Present value of future benefits & expenses | | | |
| Balance, January 1 | $ | 17,472 | | | $ | 22,745 | |
Effect of changes in discount rate | (125) | | | (5,942) | |
Balance, January 1, at original locked in discount rate | 17,347 | | | 16,803 | |
Effect of changes in cash flow assumptions (1) | — | | | — | |
Effect of actual variances from expected experience (1) | (50) | | | (23) | |
Adjusted balance, January 1 | 17,297 | | | 16,780 | |
Interest accrual | 242 | | | 241 | |
Benefit & expense payments | (302) | | | (233) | |
Balance, end of period at original locked in discount rate | 17,237 | | | 16,788 | |
Effect of changes in discount rate | 704 | | | 3,517 | |
Balance, March 31 | $ | 17,941 | | | $ | 20,305 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Net LFPB | $ | 13,976 | | | $ | 16,002 | |
(1) As of March 31, 2023 and 2022, the re-measurement gain (loss) of $1 million and $5 million presented parenthetically on the Condensed Consolidated Statement of Operations is comprised of the effect of changes in cash flow assumptions and the effect of actual variances from expected experience.
Earned premiums associated with the Company's long term care business were $115 million and $120 million for the three months ended March 31, 2023 and 2022.
The following table presents undiscounted expected future benefit and expense payments, and undiscounted expected future gross premiums.
| | | | | | | | | | | |
| As of March 31 |
(In millions) | 2023 | | 2022 |
Expected future benefit and expense payments | $ | 33,759 | | | $ | 33,674 | |
Expected future gross premiums | 5,729 | | | 5,969 | |
Discounted expected future gross premiums at the upper-medium grade fixed income instrument yield discount rate were $4,046 million and $4,567 million as of March 31, 2023 and 2022.
The weighted average effective duration of the LFPB calculated using the original locked in discount rate was 12 years as of March 31, 2023 and 2022.
The weighted average interest rates in the table below are calculated based on the rate used to discount all future cash flows.
| | | | | | | | | | | | | | | | | |
| As of March 31 | | As of December 31 |
| 2023 | | 2022 | | 2022 |
Original locked in discount rate | 5.26 | % | | 5.31 | % | | 5.27 | % |
Upper-medium grade fixed income instrument discount rate | 4.92 | | | 3.67 | | | 5.23 | |
For the three months ended March 31, 2023, immediate charges to net income resulting from adverse development that caused NPR to exceed 100% were $13 million. There were no such charges for the three months ended March 31, 2022. The portion of losses recognized in a prior period due to NPR exceeding 100% which, due to favorable development, was reversed through net income for the three months ended March 31, 2023 and 2022 was $11 million and $1 million.
Note G. 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
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, 2023, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.5 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.
Note H. Benefit Plans
The components of net periodic pension cost (benefit) are presented in the following table.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Net periodic pension cost (benefit) | | | |
Interest cost on projected benefit obligation | $ | 25 | | | $ | 17 | |
Expected return on plan assets | (30) | | | (38) | |
Amortization of net actuarial loss | 8 | | | 7 | |
| | | |
Total net periodic pension cost (benefit) | $ | 3 | | | $ | (14) | |
The following table indicates the line items in which the non-service cost (benefit) is presented on the Condensed Consolidated Statements of Operations.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Non-Service Cost (Benefit): | | | |
Insurance claims and policyholder's benefits | $ | 1 | | | $ | (4) | |
Other operating expenses | 2 | | | (10) | |
Total net periodic pension cost (benefit) | $ | 3 | | | $ | (14) | |
Note I. 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(1) | | Pension and postretirement benefits | | Cumulative impact of changes in discount rates used to measure long duration contracts (1) | | Cumulative foreign currency translation adjustment | | Total |
Balance as of January 1, 2023, as previously reported | $ | (7) | | | $ | (2,738) | | | $ | (591) | | | $ | — | | | $ | (221) | | | $ | (3,557) | |
Cumulative effect adjustment from accounting change for adoption of ASU 2018-12(1) net of tax (expense) benefit of $—, $—, $—, $11, $— and $11 | — | | | — | | | — | | | (41) | | | — | | | (41) | |
Balance as of January 1, 2023 | $ | (7) | | | $ | (2,738) | | | $ | (591) | | | $ | (41) | | | $ | (221) | | | $ | (3,598) | |
Other comprehensive income (loss) before reclassifications | (8) | | | 652 | | | — | | | (396) | | | 17 | | | 265 | |
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $—, $4, $2, $—, $— and $6 | — | | | (18) | | | (7) | | | — | | | — | | | (25) | |
Other comprehensive income (loss) net of tax (expense) benefit of $2, $(180), $(2), $105, $— and $(75) | (8) | | | 670 | | | 7 | | | (396) | | | 17 | | | 290 | |
Balance as of March 31, 2023 | $ | (15) | | | $ | (2,068) | | | $ | (584) | | | $ | (437) | | | $ | (204) | | | $ | (3,308) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Net unrealized gains (losses) on investments with an allowance for credit losses | | Net unrealized gains (losses) on other investments(1) | | Pension and postretirement benefits | | Cumulative impact of changes in discount rates used to measure long duration contracts(1) | | Cumulative foreign currency translation adjustment | | Total |
Balance as of January 1, 2022, as previously reported | $ | (2) | | | $ | 1,039 | | | $ | (604) | | | $ | — | | | $ | (113) | | | $ | 320 | |
Cumulative effect adjustment from accounting change for adoption of ASU 2018-12(1) net of tax (expense) benefit of $—, $617, $—, $(1,063), $— and $(446) | — | | | 2,320 | | | — | | | (4,000) | | | — | | | (1,680) | |
Balance as of January 1, 2022, as adjusted | (2) | | | 3,359 | | | (604) | | | (4,000) | | | (113) | | | (1,360) | |
Other comprehensive income (loss) before reclassifications | (4) | | | (2,644) | | | — | | | 1,635 | | | (14) | | | (1,027) | |
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $—, $1, $2, $—, $— and $3 | — | | | (1) | | | (6) | | | — | | | — | | | (7) | |
Other comprehensive income (loss) net of tax (expense) benefit of $1, $698, $(2), $(435), $— and $262 | (4) | | | (2,643) | | | 6 | | | 1,635 | | | (14) | | | (1,020) | |
Balance as of March 31, 2022 | $ | (6) | | | $ | 716 | | | $ | (598) | | | $ | (2,365) | | | $ | (127) | | | $ | (2,380) | |
(1) See Note A to the Condensed Consolidated Financial Statements for additional information.
Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:
| | | | | | | | |
Component of AOCI | | Condensed Consolidated Statements of Operations Line Item Affected by Reclassifications |
Net unrealized gains (losses) on investments with an allowance for credit losses 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 |
Note J. Business Segments
The Company's property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International. These three segments are collectively referred to as Property & Casualty Operations. The Company's operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.
The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2022. 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. 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.
The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2023 | Specialty | | Commercial | | International | | Life & Group | | Corporate & Other | | | | |
(In millions) | | | | | | Eliminations | | Total |
Operating revenues | | | | | | | | | | | | | |
Net earned premiums | $ | 797 | | | $ | 1,046 | | | $ | 290 | | | $ | 115 | | | $ | — | | | $ | — | | | $ | 2,248 | |
Net investment income | 129 | | | 149 | | | 23 | | | 214 | | | 10 | | | — | | | 525 | |
Non-insurance warranty revenue | 407 | | | — | | | — | | | — | | | — | | | — | | | 407 | |
Other revenues | — | | | 7 | | | — | | | — | | | 3 | | | (3) | | | 7 | |
Total operating revenues | 1,333 | | | 1,202 | | | 313 | | | 329 | | | 13 | | | (3) | | | 3,187 | |
Claims, benefits and expenses | | | | | | | | | | | | | |
Net incurred claims and benefits | 465 | | | 688 | | | 189 | | | 311 | | | (7) | | | — | | | 1,646 | |
Policyholders’ dividends | 1 | | | 6 | | | — | | | — | | | — | | | — | | | 7 | |
Amortization of deferred acquisition costs | 165 | | | 169 | | | 45 | | | — | | | — | | | — | | | 379 | |
Non-insurance warranty expense | 384 | | | — | | | — | | | — | | | — | | | — | | | 384 | |
Other insurance related expenses | 86 | | | 142 | | | 47 | | | 29 | | | 1 | | | — | | | 305 | |
Other expenses | 14 | | | 6 | | | 1 | | | 1 | | | 41 | | | (3) | | | 60 | |
Total claims, benefits and expenses | 1,115 | | | 1,011 | | | 282 | | | 341 | | | 35 | | | (3) | | | 2,781 | |
Core income (loss) before income tax | 218 | | | 191 | | | 31 | | | (12) | | | (22) | | | — | | | 406 | |
Income tax (expense) benefit on core income (loss) | (47) | | | (40) | | | (7) | | | 9 | | | 4 | | | — | | | (81) | |
Core income (loss) | $ | 171 | | | $ | 151 | | | $ | 24 | | | $ | (3) | | | $ | (18) | | | $ | — | | | 325 | |
Net investment gains (losses) | | | | | | | | | | | | | (35) | |
Income tax (expense) benefit on net investment gains (losses) | | | | | | | | | | | | | 7 | |
Net investment gains (losses), after tax | | | | | | | | | | | | | (28) | |
Net income (loss) | | | | | | | | | | | | | $ | 297 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
Reinsurance receivables | $ | 1,419 | | | $ | 1,118 | | | $ | 442 | | | $ | 102 | | | $ | 2,425 | | | $ | — | | | $ | 5,506 | |
Insurance receivables | 1,008 | | | 1,754 | | | 388 | | | 5 | | | — | | | — | | | 3,155 | |
Deferred acquisition costs | 394 | | | 338 | | | 120 | | | — | | | — | | | — | | | 852 | |
Goodwill | 117 | | | — | | | 28 | | | — | | | — | | | — | | | 145 | |
Deferred non-insurance warranty acquisition expense | 3,671 | | | — | | | — | | | — | | | — | | | — | | | 3,671 | |
Insurance reserves | | | | | | | | | | | | | |
Claim and claim adjustment expenses | 6,976 | | | 9,528 | | | 2,502 | | | 704 | | | 2,699 | | | — | | | 22,409 | |
Unearned premiums | 3,188 | | | 2,558 | | | 713 | | | 123 | | | — | | | (1) | | | 6,581 | |
Future policy benefits | — | | | — | | | — | | | 13,976 | | | — | | | — | | | 13,976 | |
Deferred non-insurance warranty revenue | 4,710 | | | — | | | — | | | — | | | — | | | — | | | 4,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2022 | Specialty | | Commercial | | International | | Life & Group (1) | | Corporate & Other | | | | |
(In millions) | | | | | Eliminations | | Total (1) |
Operating revenues | | | | | | | | | | | | | |
Net earned premiums | $ | 772 | | | $ | 904 | | | $ | 264 | | | $ | 120 | | | $ | (1) | | | $ | — | | | $ | 2,059 | |
Net investment income | 103 | | | 118 | | | 14 | | | 212 | | | 1 | | | — | | | 448 | |
Non-insurance warranty revenue | 382 | | | — | | | — | | | — | | | — | | | — | | | 382 | |
Other revenues | 1 | | | 8 | | | (1) | | | (1) | | | 2 | | | (2) | | | 7 | |
Total operating revenues | 1,258 | | | 1,030 | | | 277 | | | 331 | | | 2 | | | (2) | | | 2,896 | |
Claims, benefits and expenses | | | | | | | | | | | | | |
Net incurred claims and benefits | 445 | | | 573 | | | 158 | | | 304 | | | (8) | | | — | | | 1,472 | |
Policyholders’ dividends | 1 | | | 5 | | | — | | | — | | | — | | | — | | | 6 | |
Amortization of deferred acquisition costs | 157 | | | 148 | | | 39 | | | — | | | — | | | — | | | 344 | |
Non-insurance warranty expense | 354 | | | — | | | — | | | — | | | — | | | — | | | 354 | |
Other insurance related expenses | 81 | | | 130 | | | 47 | | | 31 | | | 2 | | | — | | | 291 | |
Other expenses | 13 | | | 7 | | | 1 | | | 3 | | | 41 | | | (2) | | | 63 | |
Total claims, benefits and expenses | 1,051 | | | 863 | | | 245 | | | 338 | | | 35 | | | (2) | | | 2,530 | |
Core income (loss) before income tax | 207 | | | 167 | | | 32 | | | (7) | | | (33) | | | — | | | 366 | |
Income tax (expense) benefit on core income (loss) | (44) | | | (35) | | | (6) | | | 12 | | | 5 | | | — | | | (68) | |
Core income (loss) | $ | 163 | | | $ | 132 | | | $ | 26 | | | $ | 5 | | | $ | (28) | | | $ | — | | | 298 | |
Net investment gains (losses) | | | | | | | | | | | | | (11) | |
Income tax (expense) benefit on net investment gains (losses) | | | | | | | | | | | | | 8 | |
Net investment gains (losses), after tax | | | | | | | | | | | | | (3) | |
Net income (loss) | | | | | | | | | | | | | $ | 295 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
Reinsurance receivables | $ | 1,384 | | | $ | 1,062 | | | $ | 414 | | | $ | 101 | | | $ | 2,477 | | | $ | — | | | $ | 5,438 | |
Insurance receivables | 1,082 | | | 1,728 | | | 369 | | | 8 | | | — | | | — | | | 3,187 | |
Deferred acquisition costs | 381 | | | 321 | | | 104 | | | — | | | — | | | — | | | 806 | |
Goodwill | 117 | | | — | | | 27 | | | — | | | — | | | — | | | 144 | |
Deferred non-insurance warranty acquisition expense | 3,671 | | | — | | | — | | | — | | | — | | | — | | | 3,671 | |
Insurance reserves | | | | | | | | | | | | | |
Claim and claim adjustment expenses | 6,878 | | | 9,395 | | | 2,403 | | | 695 | | | 2,749 | | | — | | | 22,120 | |
Unearned premiums | 3,193 | | | 2,425 | | | 653 | | | 103 | | | — | | | — | | | 6,374 | |
Future policy benefits | — | | | — | | | — | | | 13,480 | | | — | | | — | | | 13,480 | |
Deferred non-insurance warranty revenue | 4,714 | | | — | | | — | | | — | | | — | | | — | | | 4,714 | |
(1) As of January 1, 2023, the Company adopted ASU 2018-12 using the modified retrospective method applied as of the transition date of January 1, 2021. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. See Note A to the Condensed Consolidated Financial Statements for additional information.
The following table presents operating revenues by line of business for each reportable segment.
| | | | | | | | | | | |
Three months ended March 31 | | | |
(In millions) | 2023 | | 2022 |
Specialty | | | |
Management & Professional Liability | $ | 705 | | | $ | 673 | |
Surety | 168 | | | 148 | |
Warranty & Alternative Risks | 460 | | | 437 | |
Specialty revenues | 1,333 | | | 1,258 | |
Commercial | | | |
Middle Market | 398 | | | 362 | |
Construction | 385 | | | 324 | |
Small Business | 150 | | | 138 | |
Other Commercial | 269 | | | 206 | |
Commercial revenues | 1,202 | | | 1,030 | |
International | | | |
Canada | 93 | | | 88 | |
Europe | 127 | | | 120 | |
Hardy | 93 | | | 69 | |
International revenues | 313 | | | 277 | |
Life & Group revenues | 329 | | | 331 | |
Corporate & Other revenues | 13 | | | 2 | |
Eliminations | (3) | | | (2) | |
Total operating revenues | 3,187 | | | 2,896 | |
Net investment gains (losses) | (35) | | | (11) | |
Total revenues | $ | 3,152 | | | $ | 2,885 | |
Note K. Non-Insurance Revenues from Contracts with Customers
The Company had deferred non-insurance warranty revenue balances of $4.7 billion reported in Deferred non-insurance warranty revenue as of March 31, 2023 and December 31, 2022. For the three months ended March 31, 2023 and 2022, the Company recognized $0.4 billion of revenues that were included in the deferred revenue balance as of January 1, 2023 and 2022. For the three months ended March 31, 2023 and 2022, 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 $1.2 billion of the deferred revenue in the remainder of 2023, $1.1 billion in 2024, $0.9 billion in 2025 and $1.5 billion thereafter.