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Future Policy Benefits Reserves | 6 Months Ended
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Jun. 30, 2023
Insurance [Abstract] |
Future Policy Benefit Reserves | Future Policy Benefits Reserves Future policy benefits reserves are related to CNA’s run-off long term care business, which is included in Other Insurance Operations. 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, CNA’s future policy benefits reserves may be subject to material increases if actual experience develops adversely to its 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 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 practical expedient that allows locking in the expense assumption has not been elected. The discount rate is determined using the upper-medium grade fixed income instrument yield curve. CNA 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, a published spot rate curve constructed from single-A rated U.S. dollar denominated corporate bonds is used. Linear interpolation is used 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, judgment is applied to estimate a normative rate which is graded 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 Consolidated Condensed 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 CNA, according to issue year. The issue year for assumed contracts is defined according to the date that the 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, 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 CNA’s only long-duration product line, therefore, cohorts are not further disaggregated by product. The following table summarizes balances and changes in the LFPB.
| 2023 |  | 2022
(In millions) |  |  |
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 (a) |  |  |  |  |
Effect of actual variances from expected experience (a) | (85) |  |  | (37) |
Adjusted balance, January 1 | 3,834 |  |  | 3,818 |
Interest accrual | 103 |  |  | 105 |
Net premiums: earned during period | (225) |  |  | (225) |
Balance, end of period at original locked in discount rate | 3,712 |  |  | 3,698 |
Effect of changes in discount rate | 78 |  |  | 246 |
Balance, June 30 | $ | 3,790 |  |  | $ | 3,944 |
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 (a) |  |  |  |  |
Effect of actual variances from expected experience (a) | (51) |  |  | (43) |
Adjusted balance, January 1 | 17,296 |  |  | 16,760 |
Interest accrual | 482 |  |  | 482 |
Benefit & expense payments | (629) |  |  | (470) |
Balance, end of period at original locked in discount rate | 17,149 |  |  | 16,772 |
Effect of changes in discount rate | 307 |  |  | 1,329 |
Balance, June 30 | $ | 17,456 |  |  | $ | 18,101 |
Net LFPB | $ | 13,666 |  |  | $ | 14,157 |
(a) | As of June 30, 2023 and 2022, the re-measurement gain (loss) of $(34) million and $6 million presented parenthetically on the Consolidated Condensed Statement of Operations is comprised of the effect of changes in cash flow assumptions and the effect of actual variances from expected experience.
The following table presents earned premiums and interest expense associated with the long term care business recognized on the Condensed Consolidated Statement of Operations.
| Three Months Ended | Six Months Ended
| June 30, | June 30,
| 2023 |  | 2022 | 2023 |  | 2022
(In millions) |  |  |  |  |  |
Earned premiums | $ | 113 |  |  | $ | 118 |  | $ | 228 |  |  | $ | 238 |
Interest expense | 189 |  |  | 189 |  | 379 |  |  | 377 |
The following table presents undiscounted expected future benefit and expense payments and undiscounted expected future gross premiums.
| June 30,
| 2023 |  | 2022
(In millions) |  |  |
Expected future benefit and expense payments | $ | 33,287 |  |  | $ | 33,429 |
Expected future gross premiums | 5,536 |  |  | 5,848 |
Discounted expected future gross premiums at the upper-medium grade fixed income instrument yield discount rate were $3.9 billion and $4.2 billion as of June 30, 2023 and 2022. The weighted average effective duration of the LFPB calculated using the original locked in discount rate was 12 years as of June 30, 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.
| June 30, |  | December 31,
| 2023 |  | 2022 |  | 2022
Original locked in discount rate | 5.25 | % |  | 5.29 | % |  | 5.27 | %
Upper-medium grade fixed income instrument discount rate | 5.10 |  |  | 4.64 |  |  | 5.23 |
For the three and six months ended June 30, 2023, immediate charges to net income resulting from adverse development that caused the NPR to exceed 100% were $29 million and $42 million. For the three and six months ended June 30, 2022, immediate charges to net income resulting from adverse development that caused the NPR to exceed 100% were less than $1 million. For the three and six months ended June 30, 2023, the portion of losses recognized in a prior period due to NPR exceeding 100% which, due to favorable development, was reversed through net income were less than $1 million and $11 million. For the six months ended June 30, 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 was $1 million. There were no such reversals for the three months ended June 30, 2022.

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- Definition The entire disclosure for long duration contracts. This may include the information pertinent to an understanding of the types of traditional and nontraditional insurance and investment contracts sold and serviced, including the nature and amount of estimated guaranteed obligations pertaining to such contracts and the assumptions underlying such estimated amounts, hedging strategies, and sales inducements offered. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 944 -SubTopic 40 -Name Accounting Standards Codification -Section 65 -Paragraph 2 -Subparagraph (u) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480016/944-40-65-2 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 944 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//944/tableOfContent + Details
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