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Cna Financial Corp (CNA) SEC Filing 10-Q Quarterly report for the period ending Sunday, March 31, 2019

Cna Financial Corp

CIK: 21175 Ticker: CNA
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FOR IMMEDIATE RELEASE

CONTACT:
MEDIA:
 
ANALYSTS:
Brandon Davis, 312-822-5885
 
James Anderson, 312-822-7757
CNA FINANCIAL ANNOUNCES FIRST QUARTER 2019 RESULTS
NET INCOME OF $342M, $1.25 PER SHARE; ROE 12.1%
CORE INCOME OF $318M, $1.17 PER SHARE; ROE 10.7%
P&C COMBINED RATIO OF 97.8% VS 96.7% FULL YEAR 2018
P&C UNDERLYING COMBINED RATIO OF 94.9% VS 95.4% FULL YEAR 2018
P&C UNDERLYING LOSS RATIO OF 60.7% VS 61.8% FULL YEAR 2018
QUARTERLY DIVIDEND OF $0.35 PER SHARE
CHICAGO, April 29, 2019 ---
CNA Financial Corporation (NYSE: CNA) today announced first quarter 2019 net income of $342 million, or $1.25 per share, and core income of $318 million, or $1.17 per share. Property & Casualty Operations combined ratio for the first quarter was 97.8% and the underlying combined ratio was 94.9%. Net investment income, after tax, was $465 million for the first quarter of 2019, including $96 million from limited partnership and common stock investments.
The U.S. P&C segments generated gross written premium growth, excluding third party captives, of 5% and net written premium growth of 2%. Gross written premium decreased (5)% and net written premium decreased (12)% for the International segment.
Core income (loss) for our Life & Group and Corporate & Other segments was $10 million and $(6) million, respectively.
CNA Financial declared a quarterly dividend of $0.35 per share, payable May 30, 2019 to stockholders of record on May 13, 2019.
 
Results for the Three Months Ended March 31
($ millions, except per share data)
2019
 
2018
Net income
$
342

 
$
291

Core income (a)
318

 
281

 
 
 
 
Net income per diluted share
$
1.25

 
$
1.07

Core income per diluted share
1.17

 
1.03

 
March 31, 2019
 
December 31, 2018
Book value per share
$
42.19

 
$
41.32

Book value per share excluding AOCI
43.38

 
44.55

(a)
Management utilizes the core income (loss) financial measure to monitor the Company's operations. Please refer herein to the Reconciliation of GAAP Measures to Non-GAAP Measures section of this press release for further discussion of this non-GAAP measure.

1

The following information was filed by Cna Financial Corp (CNA) on Monday, April 29, 2019 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-6169860
(I.R.S. Employer
Identification No.)
151 N. Franklin
Chicago, Illinois
(Address of principal executive offices)
 
60606
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated
filer [x]
 
Accelerated filer [ ]
 
Non-accelerated
filer [ ] (Do not check if a smaller reporting company)
 
Smaller reporting company [ ]
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 25, 2019
Common Stock, Par value $2.50
 
271,539,570




Item Number
 
Page
Number
 
 
1.
 
 
 
 
 
 
 
2.
3.
4.
 
PART II
 
1.
2.
6.

2


PART I
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Three months ended March 31
 
 
 
(In millions, except per share data)
2019
 
2018
Revenues
 
 
 
Net earned premiums
$
1,803

 
$
1,785

Net investment income
571

 
490

Net investment gains:
 
 
 

Other-than-temporary impairment losses
(14
)
 
(6
)
Other net investment gains
45

 
18

Net investment gains
31

 
12

Non-insurance warranty revenue
281

 
238

Other revenues
9

 
10

Total revenues
2,695

 
2,535

Claims, Benefits and Expenses
 
 
 
Insurance claims and policyholders’ benefits
1,357

 
1,339

Amortization of deferred acquisition costs
342

 
296

Non-insurance warranty expense
260

 
216

Other operating expenses
283

 
303

Interest
34

 
35

Total claims, benefits and expenses
2,276

 
2,189

Income before income tax
419

 
346

Income tax expense
(77
)
 
(55
)
Net income
$
342

 
$
291

 
 
 
 
Basic earnings per share
$
1.26

 
$
1.07

 
 
 
 
Diluted earnings per share
$
1.25

 
$
1.07

 
 
 
 
Dividends declared per share
$
2.35

 
$
2.30

 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
Basic
271.6

 
271.4

Diluted
272.6

 
272.4


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).


3


CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Comprehensive Income (Loss)
 
 
 
Net income
$
342

 
$
291

Other Comprehensive Income (Loss), Net of Tax
 
 
 
Changes in:
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
4

 
(9
)
Net unrealized gains on other investments
526

 
(429
)
Net unrealized gains on investments
530

 
(438
)
Foreign currency translation adjustment
17

 
12

Pension and postretirement benefits
7

 
10

Other comprehensive income (loss), net of tax
554

 
(416
)
Total comprehensive income (loss)
$
896

 
$
(125
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

4


CNA Financial Corporation
Condensed Consolidated Balance Sheets
(In millions, except share data)
March 31, 2019 (Unaudited)
 
December 31,
2018
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $37,940 and $38,085)
$
40,553

 
$
39,546

Equity securities at fair value (cost of $812 and $844)
814

 
780

Limited partnership investments
1,876

 
1,982

Other invested assets
59

 
53

Mortgage loans
863

 
839

Short term investments
1,474

 
1,286

Total investments
45,639

 
44,486

Cash
223

 
310

Reinsurance receivables (less allowance for uncollectible receivables of $29 and $29)
4,277

 
4,426

Insurance receivables (less allowance for uncollectible receivables of $41 and $42)
2,435

 
2,323

Accrued investment income
406

 
391

Deferred acquisition costs
664

 
633

Deferred income taxes
217

 
392

Property and equipment at cost (less accumulated depreciation of $214 and $216)
314

 
324

Goodwill
147

 
146

Deferred non-insurance warranty acquisition expense
2,576

 
2,513

Other assets (includes $- and $8 due from Loews Corporation)
1,579

 
1,208

Total assets
$
58,477

 
$
57,152

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
21,836

 
$
21,984

Unearned premiums
4,422

 
4,183

Future policy benefits
11,078

 
10,597

Long term debt
2,681

 
2,680

Deferred non-insurance warranty revenue
3,472

 
3,402

Other liabilities (includes $31 and $23 due to Loews Corporation)
3,533

 
3,089

Total liabilities
47,022

 
45,935

Commitments and contingencies (Notes C and F)


 


Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,527,510 and 271,456,978 shares outstanding)
683

 
683

Additional paid-in capital
2,184

 
2,192

Retained earnings
8,976

 
9,277

Accumulated other comprehensive income (loss)
(324
)
 
(878
)
Treasury stock (1,512,733 and 1,583,265 shares), at cost
(64
)
 
(57
)
Total stockholders’ equity
11,455

 
11,217

Total liabilities and stockholders' equity
$
58,477

 
$
57,152

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

5


CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Cash Flows from Operating Activities
 
 
 
Net income
$
342

 
$
291

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax expense
32

 
29

Trading portfolio activity
(3
)
 
(1
)
Net investment (gains)
(31
)
 
(12
)
Equity method investees
14

 
(2
)
Net amortization of investments
(25
)
 
(15
)
Depreciation and amortization
19

 
20

Changes in:
 
 
 
Receivables, net
44

 
(215
)
Accrued investment income
(15
)
 
(3
)
Deferred acquisition costs
(30
)
 
(29
)
Insurance reserves
57

 
311

Other, net
(117
)
 
(156
)
Net cash flows provided by operating activities
287

 
218

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
2,259

 
2,576

Fixed maturity securities - maturities, calls and redemptions
576

 
531

Equity securities
64

 
7

Limited partnerships
186

 
69

Mortgage loans
35

 
11

Purchases:
 
 
 
Fixed maturity securities
(2,447
)
 
(2,690
)
Equity securities
(36
)
 
(98
)
Limited partnerships
(114
)
 
(62
)
Mortgage loans
(59
)
 
(36
)
Change in other investments
(6
)
 
(4
)
Change in short term investments
(177
)
 
208

Purchases of property and equipment
(8
)
 
(38
)
Other, net
16

 
15

Net cash flows provided by investing activities
289

 
489

Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
(643
)
 
(624
)
Repayment of debt

 
(150
)
Purchase of treasury stock
(14
)
 

Other, net
(8
)
 
(7
)
Net cash flows used by financing activities
(665
)
 
(781
)
Effect of foreign exchange rate changes on cash
2

 
1

Net change in cash
(87
)
 
(73
)
Cash, beginning of year
310

 
355

Cash, end of period
$
223

 
$
282

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6


CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,192

 
2,175

Stock-based compensation
(8
)
 
(2
)
Balance, end of period
2,184

 
2,173

Retained Earnings
 
 
 
Balance, beginning of period
9,277

 
9,364

Dividends to common stockholders ($2.35 and $2.30 per share)
(643
)
 
(627
)
Net income
342

 
291

Balance, end of period
8,976

 
9,028

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of period
(878
)
 
16

Other comprehensive income (loss)
554

 
(416
)
Balance, end of period
(324
)
 
(400
)
Treasury Stock
 
 
 
Balance, beginning of period
(57
)
 
(60
)
Stock-based compensation
7

 
1

Purchase of treasury stock
(14
)
 

Balance, end of period
(64
)
 
(59
)
Total stockholders' equity
$
11,455

 
$
11,425

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).


7


CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 approximately 89% of the outstanding common stock of CNAF as of March 31, 2019.
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 for the year ended December 31, 2018, 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, 2019 and for the three months ended March 31, 2019 and 2018 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.
Recently Adopted Accounting Standards Updates (ASU)
ASU 2016-02: In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet assets and liabilities for the rights and obligations created by the majority of leases, including those historically accounted for as operating leases. On January 1, 2019, the Company adopted the updated guidance using a modified retrospective method. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. The Company utilized the package of practical expedients allowing the Company to not reassess whether a contract is or contains a lease, lease classification and initial direct costs. The Company also utilized the practical expedient to not separate lease and non-lease components for all leases.
Adoption of the updated guidance resulted in the following changes to the Condensed Consolidated Balance Sheet on January 1, 2019:
(In millions)
Balance as of December 31, 2018
 
Adjustments Due to Adoption of Topic 842
 
Balance as of January 1, 2019
Property and equipment at cost (less accumulated depreciation)
$
324

 
$
2

 
$
326

Other assets
1,208

 
237

 
1,445

Other liabilities
3,089

 
239

 
3,328


Operating lease right-of-use (ROU) assets, included within Other assets, were reduced by accrued rent and lease incentives of $75 million previously classified as Other liabilities. The updated guidance did not impact the Condensed Consolidated Statements of Operations. See Note K to the Condensed Consolidated Financial Statements for additional information regarding leases.

8


Accounting Standards Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The guidance will be applied using a modified retrospective approach with the cumulative effect recognized as an adjustment to retained earnings. A prospective transition approach is required for debt securities that have recognized an other-than-temporary impairment prior to the effective date. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, but expects the primary changes to be the use of the expected credit loss model for its mortgage loan portfolio, reinsurance and insurance receivables and other financing receivables and the use of the allowance method rather than the write-down method for credit losses within the available-for-sale fixed maturities portfolio. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines.
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.  The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts.  The guidance requires entities to annually update cash flow assumptions, including morbidity and persistency, and update discount rate assumptions quarterly using an upper-medium grade fixed-income instrument yield.  The effect of changes in cash flow assumptions will be recorded in Net income and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2020, and requires restatement of the prior periods presented. Early adoption is permitted. The Company is currently evaluating the method and timing of adoption and the effect the updated guidance will have on its financial statements. The annual updating of cash flow assumptions is expected to increase income statement volatility. The quarterly change in discount rate is expected to increase volatility in the Company’s stockholders' equity, but that will be somewhat mitigated because Shadow Adjustments are eliminated under the new guidance. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows are unchanged.

9


Note B. Earnings (Loss) Per Share
Earnings (loss) per share is based on the 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.
For the three months ended March 31, 2019 and 2018, approximately 971 thousand and 1,009 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For the three months ended March 31, 2018 approximately 9 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive. For the three months ended March 31, 2019 there were no antidilutive shares.
The Company repurchased 317,508 shares of CNA Financial Corporation common stock at an aggregate cost of $14 million during the three months ended March 31, 2019. No repurchases were made during 2018.


10


Note C. Investments
The significant components of Net investment income are presented in the following table.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Fixed maturity securities
$
455

 
$
446

Equity securities
30

 
10

Limited partnership investments
76

 
30

Mortgage loans
12

 
11

Short term investments
10

 
6

Trading portfolio
2

 
2

Other
2

 

Gross investment income
587

 
505

Investment expense
(16
)
 
(15
)
Net investment income
$
571

 
$
490


During the three months ended March 31, 2019 and 2018, $17 million and less than $1 million of Net investment income was recognized due to the change in fair value of common stock still held as of March 31, 2019 and 2018.
Net investment gains (losses) are presented in the following table.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Net investment gains (losses):
 
 
 
Fixed maturity securities:
 
 
 
Gross gains
$
36

 
$
69

Gross losses
(42
)
 
(51
)
Net investment gains (losses) on fixed maturity securities
(6
)
 
18

Equity securities
42

 
(15
)
Derivatives
(5
)
 
5

Short term investments and other

 
4

Net investment gains (losses)
$
31

 
$
12


During the three months ended March 31, 2019 and 2018, $42 million of Net investment gains and $15 million of Net investment losses were recognized due to the change in fair value of non-redeemable preferred stock still held as of March 31, 2019 and 2018.
The components of Other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Fixed maturity securities available-for-sale:

 
 
Corporate and other bonds
$
6

 
$
5

Asset-backed
8

 
1

OTTI losses recognized in earnings
$
14

 
$
6





11


The following tables present a summary of fixed maturity securities.
March 31, 2019
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
19,296

 
$
1,269

 
$
99

 
$
20,466

 
$

States, municipalities and political subdivisions
9,279

 
1,299

 

 
10,578

 

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,760

 
92

 
20

 
4,832

 
(22
)
Commercial mortgage-backed
2,026

 
53

 
7

 
2,072

 

Other asset-backed
1,877

 
25

 
12

 
1,890

 
(3
)
Total asset-backed
8,663

 
170

 
39

 
8,794

 
(25
)
U.S. Treasury and obligations of government-sponsored enterprises
162

 
3

 
1

 
164

 

Foreign government
502

 
12

 
1

 
513

 

Redeemable preferred stock
10

 

 

 
10

 

Total fixed maturity securities available-for-sale
37,912

 
2,753

 
140

 
40,525

 
$
(25
)
Total fixed maturity securities trading
28

 

 

 
28

 
 
Total fixed maturity securities
$
37,940

 
$
2,753

 
$
140

 
$
40,553

 
 
December 31, 2018
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
18,764

 
$
791

 
$
395

 
$
19,160

 
$

States, municipalities and political subdivisions
9,681

 
1,076

 
9

 
10,748

 

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,815

 
68

 
57

 
4,826

 
(20
)
Commercial mortgage-backed
2,200

 
28

 
32

 
2,196

 

Other asset-backed
1,975

 
11

 
24

 
1,962

 

Total asset-backed
8,990

 
107

 
113

 
8,984

 
(20
)
U.S. Treasury and obligations of government-sponsored enterprises
156

 
3

 

 
159

 

Foreign government
480

 
5

 
4

 
481

 

Redeemable preferred stock
10

 

 

 
10

 

Total fixed maturity securities available-for-sale
38,081

 
1,982

 
521

 
39,542

 
$
(20
)
Total fixed maturity securities trading
4

 

 

 
4

 
 
Total fixed maturity securities
$
38,085

 
$
1,982

 
$
521

 
$
39,546

 
 

The net unrealized gains on investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group segment would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of March 31, 2019 and December 31, 2018, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,458 million and $1,078 million.

12


The following tables present the estimated fair value and gross unrealized losses of fixed maturity securities in a gross unrealized loss position 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, 2019
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
$
1,656

 
$
39

 
$
1,743

 
$
60

 
$
3,399

 
$
99

States, municipalities and political subdivisions
14

 

 
3

 

 
17

 

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
94

 

 
1,494

 
20

 
1,588

 
20

Commercial mortgage-backed
184

 
2

 
236

 
5

 
420

 
7

Other asset-backed
450

 
10

 
95

 
2

 
545

 
12

Total asset-backed
728

 
12

 
1,825

 
27

 
2,553

 
39

U.S. Treasury and obligations of government-sponsored enterprises
48

 
1

 
14

 

 
62

 
1

Foreign government
32

 
1

 
27

 

 
59

 
1

Total
$
2,478


$
53


$
3,612


$
87


$
6,090


$
140

 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2018
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
$
8,543

 
$
340

 
$
825

 
$
55

 
$
9,368

 
$
395

States, municipalities and political subdivisions
517

 
8

 
5

 
1

 
522

 
9

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,932

 
23

 
1,119

 
34

 
3,051

 
57

Commercial mortgage-backed
728

 
10

 
397

 
22

 
1,125

 
32

Other asset-backed
834

 
21

 
125

 
3

 
959

 
24

Total asset-backed
3,494

 
54

 
1,641

 
59

 
5,135

 
113

U.S. Treasury and obligations of government-sponsored enterprises
21

 

 
19

 

 
40

 

Foreign government
114

 
2

 
124

 
2

 
238

 
4

Total
$
12,689

 
$
404

 
$
2,614

 
$
117

 
$
15,303

 
$
521



13


Based on current facts and circumstances, the Company believes the unrealized losses presented in the March 31, 2019 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. 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 OTTI losses to be recorded as of March 31, 2019.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of March 31, 2019 and 2018 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Beginning balance of credit losses on fixed maturity securities
$
18

 
$
27

Reductions for securities sold during the period
(1
)
 
(2
)
Ending balance of credit losses on fixed maturity securities
$
17

 
$
25


Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
March 31, 2019
 
December 31, 2018
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,144

 
$
1,155

 
$
1,350

 
$
1,359

Due after one year through five years
7,718

 
7,992

 
7,979

 
8,139

Due after five years through ten years
16,874

 
17,374

 
16,859

 
16,870

Due after ten years
12,176

 
14,004

 
11,893

 
13,174

Total
$
37,912

 
$
40,525

 
$
38,081

 
$
39,542


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.
Derivative Financial Instruments
The Company holds an embedded derivative on a funds withheld liability with a notional value of $174 million and $172 million as of March 31, 2019 and December 31, 2018 and a fair value of $(2) million and $4 million as of March 31, 2019 and December 31, 2018. The embedded derivative on the funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As of March 31, 2019, the Company had committed approximately $597 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of March 31, 2019, the Company had mortgage loan commitments of $9 million representing signed loan applications received and accepted.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. Purchases and sales of privately placed debt securities are recorded once funded. As of March 31, 2019, the Company had commitments to purchase or fund additional amounts of $283 million and sell $150 million under the terms of such securities.


14


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, iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

15


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 U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.
March 31, 2019
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate bonds and other
$
203

 
$
20,707

 
$
253

 
$
21,163

States, municipalities and political subdivisions

 
10,596

 

 
10,596

Asset-backed

 
8,610

 
184

 
8,794

Total fixed maturity securities
203

 
39,913

 
437

 
40,553

Equity securities:
 
 
 
 
 
 
 
Common stock
136

 

 
4

 
140

Non-redeemable preferred stock
50

 
608

 
16

 
674

Total equity securities
186

 
608

 
20

 
814

Short term and other
253

 
1,126

 

 
1,379

Total assets
$
642

 
$
41,647


$
457


$
42,746

Liabilities
 
 
 
 
 

 
 

Other liabilities
$

 
$
2

 
$

 
$
2

Total liabilities
$

 
$
2

 
$

 
$
2

December 31, 2018
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate bonds and other
$
196

 
$
19,396

 
$
222

 
$
19,814

States, municipalities and political subdivisions

 
10,748

 

 
10,748

Asset-backed

 
8,787

 
197

 
8,984

Total fixed maturity securities
196

 
38,931

 
419

 
39,546

Equity securities:
 
 
 
 
 
 
 
Common stock
144

 

 
4

 
148

Non-redeemable preferred stock
48

 
570

 
14

 
632

Total equity securities
192

 
570

 
18

 
780

Short term and other
216

 
949

 

 
1,165

Total assets
$
604


$
40,450


$
437


$
41,491

Liabilities
 
 
 
 
 

 
 

Other liabilities
$

 
$
(4
)
 
$

 
$
(4
)
Total liabilities
$

 
$
(4
)
 
$

 
$
(4
)


16


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, 2019
$
222

 
$

 
$
197

 
$
18

 
$
437

Total realized and unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
Reported in Net investment gains (losses)

 

 

 
2

 
2

Reported in Other comprehensive income (loss)
8

 

 
3

 

 
11

Total realized and unrealized investment gains (losses)
8




3


2

 
13

Purchases
56

 

 
20

 

 
76

Sales

 

 

 

 

Settlements
(2
)
 

 
(4
)
 

 
(6
)
Transfers into Level 3

 

 
5

 

 
5

Transfers out of Level 3
(31
)
 

 
(37
)
 

 
(68
)
Balance as of March 31, 2019
$
253

 
$

 
$
184

 
$
20

 
$
457

Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2019 recognized in Net income (loss)
$

 
$

 
$

 
$
2

 
$
2

Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2019 recognized in Other comprehensive income (loss)
7

 

 
3

 

 
10

Level 3
(In millions)
Corporate bonds and other
 
States, municipalities and political subdivisions
 
Asset-backed
 
Equity securities
 
Total
Balance as of January 1, 2018
$
98

 
$
1

 
$
335

 
$
20

 
$
454

Total realized and unrealized investment gains (losses):
 
 
 
 
 
 
 
 


Reported in Net investment gains (losses)
(1
)
 

 
7

 
(2
)
 
4

Reported in Other comprehensive income (loss)

 

 
(5
)
 

 
(5
)
Total realized and unrealized investment gains (losses)
(1
)



2


(2
)

(1
)
Purchases

 

 
30

 

 
30

Sales

 

 
(72
)
 

 
(72
)
Settlements
(2
)
 

 
(6
)
 

 
(8
)
Transfers into Level 3
5

 

 

 

 
5

Transfers out of Level 3

 

 
(10
)
 

 
(10
)
Balance as of March 31, 2018
$
100

 
$
1

 
$
279

 
$
18

 
$
398

Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2018 recognized in Net income (loss)
$

 
$

 
$

 
$
(2
)
 
$
(2
)

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.

17


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 and exchange traded bonds and redeemable preferred stock, 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 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 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 commercial paper, 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 Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
As of March 31, 2019 and December 31, 2018, there were approximately $54 million and $48 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.
Derivative Financial Investments
Level 2 investments primarily include the embedded derivative on the funds withheld liability. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs.

18


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, 2019
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
293

 
Discounted cash flow
 
Credit spread
 
1% - 5% (3%)
December 31, 2018
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
228

 
Discounted cash flow
 
Credit spread
 
1% - 12% (3%)

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, 2019
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
863

 
$

 
$

 
$
868

 
$
868

Note receivable
20

 

 

 
20

 
20

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,681

 
$

 
$
2,792

 
$

 
$
2,792

December 31, 2018
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
839

 
$

 
$

 
$
827

 
$
827

Note receivable
35

 

 

 
35

 
35

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,680

 
$

 
$
2,731

 
$

 
$
2,731


The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair values of mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.
The fair value of the note receivable was based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar notes, adjusted for specific credit risk. The note receivable is included within Other assets on the Condensed Consolidated Balance Sheets.
The Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.
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.

19


Note E. Claim and Claim Adjustment Expense Reserves
Property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. 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, including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the 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 $58 million and $34 million for the three months ended March 31, 2019 and 2018. Net catastrophe losses in the first quarter of 2019 and 2018 related primarily to U.S. weather related events.

20


Liability for Unpaid Claim and Claim Adjustment Expenses
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group segment.
For the three months ended March 31
 
 
 
(In millions)
2019
 
2018
Reserves, beginning of year:
 
 
 
Gross
$
21,984

 
$
22,004

Ceded
4,019

 
3,934

Net reserves, beginning of year
17,965

 
18,070

Net incurred claim and claim adjustment expenses:
 
 
 
Provision for insured events of current year
1,309

 
1,246

Increase (decrease) in provision for insured events of prior years
8

 
(34
)
Amortization of discount
50

 
47

Total net incurred (1)
1,367

 
1,259

Net payments attributable to:
 
 
 
Current year events
(100
)
 
(91
)
Prior year events
(1,309
)
 
(1,219
)
Total net payments
(1,409
)
 
(1,310
)
Foreign currency translation adjustment and other
13

 
(9
)
Net reserves, end of period
17,936

 
18,010

Ceded reserves, end of period
3,900

 
4,057

Gross reserves, end of period
$
21,836

 
$
22,067


(1)
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, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits, 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.
For the three months ended March 31
 
 
 
(In millions)
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
Specialty
$
(20
)
 
$
(30
)
Commercial
(8
)
 
(9
)
International
14

 

Corporate & Other

 

Total pretax (favorable) unfavorable development
$
(14
)
 
$
(39
)


21


Specialty
The following table presents further detail of the development recorded for the Specialty segment.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
Medical Professional Liability
$
15

 
$
20

Other Professional Liability and Management Liability
(12
)
 
(34
)
Surety
(25
)
 
(15
)
Warranty

 

Other
2

 
(1
)
Total pretax (favorable) unfavorable development
$
(20
)
 
$
(30
)

2019
Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident year 2013 in our allied healthcare business.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency and favorable outcomes on individual claims in accident years 2017 and prior related to financial institutions. This was partially offset by unfavorable development in management liability in accident year 2014 due to large claim activity.
Favorable development in surety was due to lower than expected frequency for accident years 2016 and prior.
2018
Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in our hospitals business.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2013 through 2015 related to financial institutions.
Favorable development in surety was due to lower than expected loss emergence for accident years 2015 and prior.

22


Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
Commercial Auto
$
(5
)
 
$
(1
)
General Liability
(20
)
 
(8
)
Workers' Compensation
2

 
(6
)
Property and Other
15

 
6

Total pretax (favorable) unfavorable development
$
(8
)
 
$
(9
)

2019
Favorable development in general liability was primarily due to lower than expected frequency on latent construction defect claims in multiple accident years.
Unfavorable development in property and other was primarily due to higher than expected frequency and large loss activity in accident year 2018 in our marine business.
2018
Favorable development in general liability was primarily due to lower than expected frequency and severity in accident years 2015 and prior for our middle market construction business.

23


International
The following table presents further detail of the development recorded for the International segment.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Pretax (favorable) unfavorable development:
 
 
 
Casualty
$

 
$

Property
15

 
(1
)
Energy and Marine
(1
)
 

Specialty (1)

 
1

Total pretax (favorable) unfavorable development
$
14

 
$


(1) Effective January 1, 2019 the Healthcare and Technology line of business has been absorbed within the Specialty line of business in the International segment. Prior period information has been conformed to the new line of business presentation.
2019
Unfavorable development in property was driven by higher than expected claims in Hardy on 2018 accident year catastrophes.


24


Asbestos and 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 in the Condensed Consolidated Statements of Operations.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Three months ended March 31
 
 
 
(In millions)
2019
 
2018
Additional amounts ceded under LPT:
 
 
 
Net A&EP adverse development before consideration of LPT
$

 
$
113

Provision for uncollectible third-party reinsurance on A&EP

 
(16
)
Total additional amounts ceded under LPT

 
97

Retroactive reinsurance benefit recognized
(22
)
 
(57
)
Pretax impact of deferred retroactive reinsurance
$
(22
)
 
$
40


The Company intends to complete its annual A&EP reserve review in the fourth quarter of 2019 and maintain this timing for all future annual A&EP reserve reviews. The Company completed A&EP reserve reviews in both the first and fourth quarters of 2018. Based upon the Company's 2018 first quarter A&EP reserve review, net unfavorable prior year development of $113 million was recognized before consideration of cessions to the LPT for the three months ended March 31, 2018. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos and environmental accounts and paid losses on assumed reinsurance exposures. Additionally, in 2018, the Company released a portion of its provision for uncollectible third-party reinsurance.
As of March 31, 2019 and December 31, 2018, the cumulative amounts ceded under the LPT were $3.1 billion. The unrecognized deferred retroactive reinsurance benefit was $352 million and $374 million