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CNA FINANCIAL CORP - Quarter Report: 2013 September (Form 10-Q)


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 September 30, 2013
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.)
333 S. Wabash
Chicago, Illinois
(Address of principal executive offices)
 
60604
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 [ ]
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 October 25, 2013
Common Stock, Par value $2.50
 
269,702,799



Item Number
PART I. Financial Information
Page
Number
1.
 


Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012



 
2.
3.
4.
 
PART II. Other Information
 
1.
4.
6.


2

Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions, except per share data)
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,825

 
$
1,781

 
$
5,389

 
$
5,098

Net investment income
597

 
601

 
1,808

 
1,719

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(15
)
 
(62
)
 
(49
)
 
(89
)
Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
(2
)
 
(2
)
 
(2
)
 
(25
)
Net other-than-temporary impairment losses recognized in earnings
(17
)
 
(64
)
 
(51
)
 
(114
)
Other net realized investment gains
21

 
72

 
69

 
180

Net realized investment gains
4

 
8

 
18

 
66

Other revenues
78

 
76

 
285

 
230

Total revenues
2,504

 
2,466

 
7,500

 
7,113

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,414

 
1,435

 
4,364

 
4,164

Amortization of deferred acquisition costs
341

 
333

 
1,004

 
937

Other operating expenses
332

 
341

 
993

 
976

Interest
42

 
43

 
125

 
128

Total claims, benefits and expenses
2,129

 
2,152

 
6,486

 
6,205

Income before income tax
375

 
314

 
1,014

 
908

Income tax expense
(103
)
 
(93
)
 
(298
)
 
(271
)
Net income
$
272

 
$
221

 
$
716

 
$
637

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.01

 
$
0.82

 
$
2.66

 
$
2.37

 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.01

 
$
0.82

 
$
2.65

 
$
2.36

 
 
 
 
 
 
 
 
Dividends per share
$
0.20

 
$
0.15

 
$
0.60

 
$
0.45

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
269.7

 
269.4

 
269.6

 
269.4

Diluted
270.2

 
269.8

 
270.1

 
269.8

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)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments with other-than-temporary impairments
$
(3
)
 
$
36

 
$
3

 
$
73

Net unrealized gains (losses) on other investments
(70
)
 
191

 
(717
)
 
528

Net unrealized gains (losses) on investments
(73
)
 
227

 
(714
)
 
601

Foreign currency translation adjustment
56

 
33

 
(18
)
 
37

Pension and postretirement benefits
4

 
3

 
14

 
12

Other comprehensive income (loss), net of tax
(13
)
 
263

 
(718
)
 
650

Net income
272

 
221

 
716

 
637

Total comprehensive income (loss)
$
259

 
$
484

 
$
(2
)
 
$
1,287

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

4

CNA Financial Corporation
Condensed Consolidated Balance Sheets (Unaudited)
 
September 30,
2013
 
December 31,
2012
(In millions, except share data)
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $39,129 and $38,170)
$
41,274

 
$
42,633

Equity securities at fair value (cost of $189 and $228)
199

 
249

Limited partnership investments
2,790

 
2,462

Other invested assets
55

 
59

Mortgage loans
440

 
401

Short term investments
1,475

 
1,832

Total investments
46,233

 
47,636

Cash
185

 
156

Reinsurance receivables (less allowance for uncollectible receivables of $72 and $73)
5,731

 
6,158

Insurance receivables (less allowance for uncollectible receivables of $90 and $101)
1,993

 
1,882

Accrued investment income
482

 
434

Deferred acquisition costs
642

 
598

Deferred income taxes
331

 
93

Property and equipment at cost (less accumulated depreciation of $358 and $404)
334

 
326

Goodwill
154

 
154

Other assets (includes $0 and $4 due from Loews Corporation)
889

 
773

Separate account business
213

 
312

Total assets
$
57,187

 
$
58,522

Liabilities
 

 
 

Insurance reserves:
 

 
 

Claim and claim adjustment expenses
$
23,962

 
$
24,763

Unearned premiums
3,820

 
3,610

Future policy benefits
10,681

 
11,475

Policyholders’ funds
127

 
157

Short term debt
—

 
13

Long term debt
2,559

 
2,557

Other liabilities (includes $129 and $0 due to Loews Corporation)
3,672

 
3,321

Separate account business
213

 
312

Total liabilities
45,034

 
46,208

Commitments and contingencies (Notes C, G and J)


 


Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 269,701,999 and 269,399,390 shares outstanding)
683

 
683

Additional paid-in capital
2,142

 
2,146

Retained earnings
9,328

 
8,774

Accumulated other comprehensive income
113

 
831

Treasury stock (3,338,244 and 3,640,853 shares), at cost
(91
)
 
(99
)
Notes receivable for the issuance of common stock
(22
)
 
(21
)
Total stockholders’ equity
12,153

 
12,314

Total liabilities and stockholders' equity
$
57,187

 
$
58,522

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)
Nine months ended September 30
 
 
 
(In millions)
2013
 
2012
Cash Flows from Operating Activities
 
 
 
Net income
$
716

 
$
637

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Loss on disposal of property and equipment
—

 
1

Deferred income tax expense
141

 
95

Trading portfolio activity
2

 
(13
)
Net realized investment gains
(18
)
 
(66
)
Equity method investees
(230
)
 
(68
)
Amortization of investments
(20
)
 
(43
)
Depreciation and amortization
80

 
83

Changes in:
 
 


Receivables, net
316

 
348

Accrued investment income
(48
)
 
(46
)
Deferred acquisition costs
(23
)
 
(27
)
Insurance reserves
(166
)
 
(53
)
Other assets
(62
)
 
90

Other liabilities
233

 
47

Other, net
—

 
8

Total adjustments
205

 
356

Net cash flows provided by operating activities
$
921

 
$
993

Cash Flows from Investing Activities
 
 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
$
4,830

 
$
4,761

Fixed maturity securities - maturities, calls and redemptions
2,496

 
2,655

Equity securities
82

 
72

Limited partnerships
91

 
153

Mortgage loans
20

 
6

Purchases:
 
 
 
Fixed maturity securities
(8,205
)
 
(7,369
)
Equity securities
(61
)
 
(30
)
Limited partnerships
(163
)
 
(119
)
Mortgage loans
(59
)
 
(129
)
Change in other investments
(19
)
 
1

Change in short term investments
357

 
(505
)
Purchase of Hardy
—

 
(197
)
Purchases of property and equipment
(67
)
 
(60
)
Other, net
9

 
14

Net cash flows used by investing activities
$
(689
)
 
$
(747
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6

Nine months ended September 30
 
 
 
(In millions)
2013
 
2012
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(162
)
 
$
(122
)
Repayment of debt
(13
)
 
(70
)
Stock options exercised
1

 
1

Other, net
(26
)
 
(4
)
Net cash flows used by financing activities
$
(200
)
 
$
(195
)
Effect of foreign exchange rate changes on cash
$
(3
)
 
$
3

Net change in cash
$
29

 
$
54

Cash, beginning of year
156

 
75

Cash, end of period
$
185

 
$
129

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


7

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2013
 
2012
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,146

 
2,141

Stock-based compensation
(4
)
 
3

Balance, end of period
2,142

 
2,144

Retained Earnings
 
 
 
Balance, beginning of period
8,774

 
8,308

Dividends paid to common stockholders
(162
)
 
(122
)
Net income
716

 
637

Balance, end of period
9,328

 
8,823

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of period
831

 
480

Other comprehensive income (loss)
(718
)
 
650

Balance, end of period
113

 
1,130

Treasury Stock
 
 
 
Balance, beginning of period
(99
)
 
(102
)
Stock-based compensation
8

 
3

Balance, end of period
(91
)
 
(99
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of period
(21
)
 
(22
)
(Increase) decrease in notes receivable for the issuance of common stock
(1
)
 
1

Balance, end of period
(22
)
 
(21
)
Total Stockholders' Equity
$
12,153

 
$
12,660

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


8

CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. The Company acquired Hardy Underwriting Bermuda Limited and its subsidiaries on July 2, 2012. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2013.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, 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, 2012, 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 periods. Actual results may differ from those estimates.
The interim financial data as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, 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. Intercompany amounts have been eliminated.
Note B. Earnings Per Share
Earnings 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 and nine months ended September 30, 2013, approximately 515 thousand and 501 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 110 thousand and 115 thousand potential shares attributable to exercises 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 and nine months ended September 30, 2012, approximately 450 thousand and 400 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 693 thousand and 740 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.

9

Note C. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Fixed maturity securities
$
504

 
$
507

 
$
1,501

 
$
1,528

Short term investments
1

 
2

 
3

 
5

Limited partnership investments
93

 
89

 
303

 
184

Equity securities
3

 
4

 
9

 
10

Mortgage loans
6

 
5

 
17

 
13

Trading portfolio (a)
3

 
7

 
13

 
18

Other
1

 
—

 
2

 
3

Gross investment income
611

 
614

 
1,848

 
1,761

Investment expense
(14
)
 
(13
)
 
(40
)
 
(42
)
Net investment income
$
597

 
$
601

 
$
1,808

 
$
1,719

___________________
(a)
There were no net unrealized gains (losses) related to changes in fair value of trading securities still held included in net investment income for the three or nine months ended September 30, 2013 or 2012.
Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
51

 
$
75

 
$
132

 
$
193

Gross realized losses
(44
)
 
(49
)
 
(98
)
 
(120
)
Net realized investment gains (losses) on fixed maturity securities
7

 
26

 
34

 
73

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
3

 
5

 
10

 
10

Gross realized losses
(5
)
 
(20
)
 
(27
)
 
(24
)
Net realized investment gains (losses) on equity securities
(2
)
 
(15
)
 
(17
)
 
(14
)
Derivatives
(1
)
 
(1
)
 
(4
)
 
(1
)
Short term investments and other
—

 
(2
)
 
5

 
8

Net realized investment gains (losses)
$
4

 
$
8

 
$
18

 
$
66


10

The components of net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are summarized in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
9

 
$
7

 
$
17

 
$
23

States, municipalities and political subdivisions
—

 
17

 
—

 
17

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
2

 
20

 
5

 
49

Other asset-backed
1

 
—

 
2

 
—

Total asset-backed
3

 
20

 
7

 
49

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

 
—

 
—

 
1

Total fixed maturity securities available-for-sale
12

 
44

 
24

 
90

Equity securities available-for-sale:
 
 
 
 
 
 
 
Common stock
3

 
1

 
5

 
5

Preferred stock
2

 
19

 
22

 
19

Total equity securities available-for-sale
5

 
20

 
27

 
24

Net OTTI losses recognized in earnings
$
17

 
$
64

 
$
51

 
$
114

The following tables provide a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
September 30, 2013
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
$
19,616

 
$
1,695

 
$
151

 
$
21,160

 
$
—

States, municipalities and political subdivisions
11,000

 
672

 
233

 
11,439

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,779

 
141

 
101

 
4,819

 
(33
)
Commercial mortgage-backed
1,942

 
99

 
24

 
2,017

 
(3
)
Other asset-backed
942

 
16

 
2

 
956

 
—

Total asset-backed
7,663

 
256

 
127

 
7,792

 
(36
)
U.S. Treasury and obligations of government-sponsored enterprises
166

 
8

 
1

 
173

 
—

Foreign government
547

 
17

 
3

 
561

 
—

Redeemable preferred stock
94

 
12

 
—

 
106

 
—

Total fixed maturity securities available-for-sale
39,086

 
2,660

 
515

 
41,231

 
$
(36
)
Total fixed maturity securities trading
43

 
—

 
—

 
43

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
41

 
12

 
—

 
53

 
 
Preferred stock
148

 
1

 
3

 
146

 
 
Total equity securities available-for-sale
189

 
13

 
3

 
199

 
 
Total
$
39,318

 
$
2,673

 
$
518

 
$
41,473

 
 

11

December 31, 2012
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
$
19,530

 
$
2,698

 
$
21

 
$
22,207

 
$
—

States, municipalities and political subdivisions
9,372

 
1,455

 
44

 
10,783

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,745

 
246

 
71

 
5,920

 
(28
)
Commercial mortgage-backed
1,692

 
147

 
17

 
1,822

 
(3
)
Other asset-backed
929

 
23

 
—

 
952

 
—

Total asset-backed
8,366

 
416

 
88

 
8,694

 
(31
)
U.S. Treasury and obligations of government-sponsored enterprises
172

 
11

 
1

 
182

 
—

Foreign government
588

 
25

 
—

 
613

 
—

Redeemable preferred stock
113

 
13

 
1

 
125

 
—

Total fixed maturity securities available-for-sale
38,141

 
4,618

 
155

 
42,604

 
$
(31
)
Total fixed maturity securities trading
29

 
—

 
—

 
29

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
38

 
14

 
—

 
52

 
 
Preferred stock
190

 
7

 
—

 
197

 
 
Total equity securities available-for-sale
228

 
21

 
—

 
249

 
 
Total
$
38,398

 
$
4,639

 
$
155

 
$
42,882

 
 
The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. At September 30, 2013 and December 31, 2012, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $723 million and $1,511 million. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs and/or increase in Insurance reserves are recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).

12

The following tables summarize the estimated fair value and gross unrealized losses of available-for-sale fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
Securities in a Gross Unrealized Loss Position
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 2013
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
$
3,521

 
$
146

 
$
45

 
$
5

 
$
3,566

 
$
151

States, municipalities and political subdivisions
2,413

 
179

 
122

 
54

 
2,535

 
233

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,289

 
40

 
287

 
61

 
1,576

 
101

Commercial mortgage-backed
449

 
20

 
79

 
4

 
528

 
24

Other asset-backed
207

 
2

 
—

 
—

 
207

 
2

Total asset-backed
1,945

 
62

 
366

 
65

 
2,311

 
127

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

 
1

 
—

 
—

 
21

 
1

Foreign government
76

 
3

 
—

 
—

 
76

 
3

Total fixed maturity securities available-for-sale
7,976

 
391

 
533

 
124

 
8,509

 
515

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
86

 
3

 
—

 
—

 
86

 
3

Total
$
8,062

 
$
394

 
$
533

 
$
124

 
$
8,595

 
$
518

 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2012
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
$
846

 
$
13

 
$
108

 
$
8

 
$
954

 
$
21

States, municipalities and political subdivisions
254

 
5

 
165

 
39

 
419

 
44

Asset-backed:
 
 
 
 
 
 
 
 
 

 
 

Residential mortgage-backed
583

 
5

 
452

 
66

 
1,035

 
71

Commercial mortgage-backed
85

 
2

 
141

 
15

 
226

 
17

Total asset-backed
668

 
7

 
593

 
81

 
1,261

 
88

U.S. Treasury and obligations of government-sponsored enterprises
23

 
1

 
—

 
—

 
23

 
1

Redeemable preferred stock
28

 
1

 
—

 
—

 
28

 
1

Total
$
1,819

 
$
27

 
$
866

 
$
128

 
$
2,685

 
$
155

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $3 million and $15 million for the three and nine months ended September 30, 2013 and $12 million and $59 million for the three and nine months ended September 30, 2012.
Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2013 Securities in a Gross Unrealized Loss Position table above, are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. The investments with longer duration, primarily included within the states, municipalities and political subdivision asset category, were more significantly impacted by changes in market interest rates. The Company has no current intent to sell these

13

securities, 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 at September 30, 2013.
The following table summarizes the activity for the three and nine months ended September 30, 2013 and 2012 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at September 30, 2013 and 2012 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Beginning balance of credit losses on fixed maturity securities
$
89

 
$
99

 
$
95

 
$
92

Additional credit losses for securities for which an OTTI loss was previously recognized
1

 
2

 
2

 
23

Credit losses for securities for which an OTTI loss was not previously recognized
—

 
—

 
—

 
2

Reductions for securities sold during the period
(7
)
 
(3
)
 
(14
)
 
(11
)
Reductions for securities the Company intends to sell or more likely than not will be required to sell
—

 
—

 
—

 
(8
)
Ending balance of credit losses on fixed maturity securities
$
83

 
$
98

 
$
83

 
$
98

Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 30, 2013 and December 31, 2012. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.
Contractual Maturity
 
September 30, 2013
 
December 31, 2012
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
2,475

 
$
2,516

 
$
1,648

 
$
1,665

Due after one year through five years
10,687

 
11,304

 
13,603

 
14,442

Due after five years through ten years
10,586

 
10,901

 
8,726

 
9,555

Due after ten years
15,338

 
16,510

 
14,164

 
16,942

Total
$
39,086

 
$
41,231

 
$
38,141

 
$
42,604

Investment Commitments
As of September 30, 2013, the Company had committed approximately $405 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
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. As of September 30, 2013, the Company had commitments to purchase or fund additional amounts of $172 million and sell $143 million under the terms of such securities.


14

Note D. Derivative Financial Instruments
Gross estimated fair values of derivative positions are presented in Other invested assets and Other liabilities on the Condensed Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended September 30, 2013 and December 31, 2012. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.
Derivative Financial Instruments
September 30, 2013
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
(Liability)
Without hedge designation
 
 
 
 
 
Credit default swaps - purchased protection
$
20

 
$
—

 
$
—

Currency forwards
27

 
—

 
(1
)
Equity warrants
5

 
—

 
—

Total without hedge designation
52

 
—

 
(1
)
Trading activities
 
 
 
 
 
Futures sold, not yet purchased
17

 
—

 
—

Total
$
69

 
$
—

 
$
(1
)
December 31, 2012
Contractual/
Notional
Amount

Estimated Fair Value
(In millions)

Asset

(Liability)
Without hedge designation




 
Credit default swaps - purchased protection
$
20


$
—


$
(1
)
Currency forwards
59


—


(2
)
Equity warrants
5


—


—

Total
$
84


$
—


$
(3
)
During the three and nine months ended September 30, 2013, new derivative transactions entered into totaled $224 million and $2,271 million in notional value while derivative termination activity totaled $221 million and $2,286 million. This activity was attributable to forward commitments for mortgage-backed securities, interest rate futures and foreign currency forwards. During the three and nine months ended September 30, 2012, new derivative transactions entered into totaled $472 million and $1,251 million in notional value while derivative termination activity totaled $488 million and $1,200 million. This activity was primarily attributable to interest rate futures, forward commitments for mortgage-backed securities and foreign currency forwards.

15

Note E. 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 methodologies and inputs used to estimate fair value for each specific security. Prices are determined by a dedicated group who ultimately report to the Company's Chief Financial Officer. This group is responsible for valuation policies and procedures. 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 methodologies 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 include i) the review of pricing service or broker pricing methodologies, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, iv) deep dives, where the Company independently validates detailed information regarding inputs and assumptions for individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

16

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are summarized below.
September 30, 2013
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
27

 
$
20,945

 
$
211

 
$
21,183

States, municipalities and political subdivisions
—

 
11,364

 
95

 
11,459

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,449

 
370

 
4,819

Commercial mortgage-backed
—

 
1,860

 
157

 
2,017

Other asset-backed
—

 
523

 
433

 
956

Total asset-backed
—

 
6,832

 
960

 
7,792

U.S. Treasury and obligations of government-sponsored enterprises
144

 
29

 
—

 
173

Foreign government
81

 
480

 
—

 
561

Redeemable preferred stock
48

 
58

 
—

 
106

Total fixed maturity securities
300

 
39,708

 
1,266

 
41,274

Equity securities
135

 
51

 
13

 
199

Other invested assets
—

 
55

 
—

 
55

Short term investments
992

 
430

 
—

 
1,422

Life settlement contracts, included in Other assets
—

 
—

 
90

 
90

Separate account business
12

 
199

 
2

 
213

Total assets
$
1,439

 
$
40,443

 
$
1,371

 
$
43,253

Liabilities
 
 
 
 
 

 
 

Derivative financial instruments, included in Other liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)
Total liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)

17

December 31, 2012
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
6

 
$
22,011

 
$
219

 
$
22,236

States, municipalities and political subdivisions
—

 
10,687

 
96

 
10,783

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
5,507

 
413

 
5,920

Commercial mortgage-backed
—

 
1,693

 
129

 
1,822

Other asset-backed
—

 
584

 
368

 
952

Total asset-backed
—

 
7,784

 
910

 
8,694

U.S. Treasury and obligations of government-sponsored enterprises
158

 
24

 
—

 
182

Foreign government
140

 
473

 
—

 
613

Redeemable preferred stock
40

 
59

 
26

 
125

Total fixed maturity securities
344

 
41,038

 
1,251

 
42,633

Equity securities
117

 
98

 
34

 
249

Other invested assets
—

 
58

 
1

 
59

Short term investments
987

 
799

 
6

 
1,792

Life settlement contracts, included in Other assets
—

 
—

 
100

 
100

Separate account business
4

 
306

 
2

 
312

Total assets
$
1,452

 
$
42,299

 
$
1,394

 
$
45,145

Liabilities
 

 
 

 
 

 
 

Derivative financial instruments, included in Other liabilities
$
—

 
$
(2
)
 
$
(1
)
 
$
(3
)
Total liabilities
$
—

 
$
(2
)
 
$
(1
)
 
$
(3
)

18

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) for the three months ended September 30, 2013 and 2012.
Level 3
(In millions)
Balance at
July 1,
2013
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2013
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
202

 
$
1

 
$
—

 
$
6

 
$
(6
)
 
$
(8
)
 
$
17

 
$
(1
)
 
$
211

 
$
—

States, municipalities and political subdivisions
140

 
—

 
(3
)
 
—

 
—

 
(15
)
 
—

 
(27
)
 
95

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
428

 
—

 
(20
)
 
5

 
—

 
(21
)
 
—

 
(22
)
 
370

 
(1
)
Commercial mortgage-backed
165

 
(1
)
 
(2
)
 
10

 
—

 
(1
)
 
—

 
(14
)
 
157

 
—

Other asset-backed
387

 
—

 
1

 
56

 
—

 
(6
)
 
—

 
(5
)
 
433

 
(1
)
Total asset-backed
980

 
(1
)
 
(21
)
 
71

 
—

 
(28
)
 
—

 
(41
)
 
960

 
(2
)
Redeemable preferred stock
25

 
(1
)
 
1

 
—

 
—

 
(25
)
 
—

 
—

 
—

 
—

Total fixed maturity securities
1,347

 
(1
)
 
(23
)
 
77

 
(6
)
 
(76
)
 
17

 
(69
)
 
1,266

 
(2
)
Equity securities
13

 
(2
)
 
2

 
—

 
—

 
—

 
—

 
—

 
13

 
(2
)
Life settlement contracts
91

 
3

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
90

 
—

Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,453

 
$
—

 
$
(21
)
 
$
77

 
$
(6
)
 
$
(80
)
 
$
17

 
$
(69
)
 
$
1,371

 
$
(4
)

19

Level 3
(In millions)
Balance at
July 1,
2012
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2012
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2012 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
488

 
$
1

 
$
(4
)
 
$
50

 
$
(5
)
 
$
(11
)
 
$
—

 
$
(260
)
 
$
259

 
$
(1
)
States, municipalities and political subdivisions
89

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
89

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
443

 
(17
)
 
20

 
21

 
—

 
(8
)
 
—

 
(22
)
 
437

 
(18
)
Commercial mortgage-backed
166

 
4

 
6

 
12

 
—

 
(17
)
 
11

 
(65
)
 
117

 
—

Other asset-backed
434

 
2

 
5

 
143

 
(117
)
 
(34
)
 
—

 
(62
)
 
371

 
—

Total asset-backed
1,043

 
(11
)
 
31

 
176

 
(117
)
 
(59
)
 
11

 
(149
)
 
925

 
(18
)
Redeemable preferred stock
27

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
26

 
—

Total fixed maturity securities
1,647

 
(10
)
 
26

 
226

 
(122
)
 
(70
)
 
11

 
(409
)
 
1,299

 
(19
)
Equity securities
93

 
(19
)
 
(10
)
 
—

 
—

 
—

 
—

 
(14
)
 
50

 
(19
)
Other invested assets, including derivatives, net
10

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
10

 
—

Short term investments
4

 
—

 
—

 
7

 
(4
)
 
—

 
1

 
—

 
8

 
—

Life settlement contracts
116

 
7

 
—

 
—

 
—

 
(10
)
 
—

 
—

 
113

 
—

Separate account business
3

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3

 
—

Total
$
1,873

 
$
(22
)
 
$
16

 
$
233

 
$
(126
)
 
$
(80
)
 
$
12

 
$
(423
)
 
$
1,483

 
$
(38
)

20

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) for the nine months ended September 30, 2013 and 2012.

Level 3
(In millions)
Balance at
January 1,
2013
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2013
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
219

 
$
2

 
$
(1
)
 
$
129

 
$
(96
)
 
$
(34
)
 
$
43

 
$
(51
)
 
$
211

 
$
(2
)
States, municipalities and political subdivisions
96

 
(3
)
 
1

 
122

 
(79
)
 
(20
)
 
5

 
(27
)
 
95

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
413

 
2

 
(21
)
 
116

 
(10
)
 
(53
)
 
4

 
(81
)
 
370

 
(3
)
Commercial mortgage-backed
129

 
—

 
7

 
88

 
—

 
(10
)
 
21

 
(78
)
 
157

 
—

Other asset-backed
368

 
3

 
(1
)
 
230

 
(132
)
 
(30
)
 
—

 
(5
)
 
433

 
(2
)
Total asset-backed
910

 
5

 
(15
)
 
434

 
(142
)
 
(93
)
 
25

 
(164
)
 
960

 
(5
)
Redeemable preferred stock
26

 
(1
)
 
—

 
—

 
—

 
(25
)
 
—

 
—

 
—

 
—

Total fixed maturity securities
1,251

 
3

 
(15
)
 
685

 
(317
)
 
(172
)
 
73

 
(242
)
 
1,266

 
(7
)
Equity securities
34

 
(22
)
 
2

 
—

 
—

 
—

 
—

 
(1
)
 
13

 
(22
)
Other invested assets, including derivatives, net
—

 
—

 
—

 
—

 
(1
)
 
1

 
—

 
—

 
—

 
—

Short term investments
6

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
—

 
—

 
—

Life settlement contracts
100

 
14

 
—

 
—

 
—

 
(24
)
 
—

 
—

 
90

 
(1
)
Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,393

 
$
(5
)
 
$
(13
)
 
$
685

 
$
(324
)
 
$
(195
)
 
$
73

 
$
(243
)
 
$
1,371

 
$
(30
)

21

Level 3
(In millions)
Balance at
January 1,
2012
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2012
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2012 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
482

 
$
7

 
$
2

 
$
197

 
$
(118
)
 
$
(43
)
 
$
42

 
$
(310
)
 
$
259

 
$
(1
)
States, municipalities and political subdivisions
171

 
—

 
3

 
—

 
—

 
(85
)
 
—

 
—

 
89

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
452

 
(15
)
 
(2
)
 
81

 
—

 
(24
)
 
—

 
(55
)
 
437

 
(18
)
Commercial mortgage-backed
59

 
6

 
14

 
141

 
(12
)
 
(21
)
 
11

 
(81
)
 
117

 
—

Other asset-backed
343

 
8

 
8

 
501

 
(293
)
 
(93
)
 
—

 
(103
)
 
371

 
—

Total asset-backed
854

 
(1
)
 
20

 
723

 
(305
)
 
(138
)
 
11

 
(239
)
 
925

 
(18
)
Redeemable preferred stock
—

 
—

 
(1
)
 
53

 
(26
)
 
—

 
—

 
—

 
26

 
—

Total fixed maturity securities
1,507

 
6

 
24

 
973

 
(449
)
 
(266
)
 
53

 
(549
)
 
1,299

 
(19
)
Equity securities
67

 
(19
)
 
6

 
26

 
(16
)
 
—

 
—

 
(14
)
 
50

 
(21
)
Other invested assets, including derivatives, net
10

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
10

 
—

Short term investments
27

 
—

 
—

 
23

 
(4
)
 
(39
)
 
1

 
—

 
8

 
—

Life settlement contracts
117

 
30

 
—

 
—

 
—

 
(34
)
 
—

 
—

 
113

 
3

Separate account business
23

 
—

 
—

 
—

 
(20
)
 
—

 
—

 
—

 
3

 
—

Total
$
1,751

 
$
17

 
$
30

 
$
1,022

 
$
(489
)
 
$
(339
)
 
$
54

 
$
(563
)
 
$
1,483

 
$
(37
)


22
Table of Contents

* Net realized and unrealized gains and losses shown above are reported in Net income (loss) as follows:
Major Category of Assets and Liabilities
 
Condensed Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale
 
Net realized investment gains (losses)
Fixed maturity securities trading
 
Net investment income
Equity securities
 
Net realized investment gains (losses)
Other invested assets - Derivative financial instruments held in a trading portfolio
 
Net investment income
Other invested assets - Derivative financial instruments not held in a trading portfolio
 
Net realized investment gains (losses)
Other invested assets - Overseas deposits
 
Net investment income
Life settlement contracts
 
Other revenues
Securities shown in the Level 3 tables on the previous pages may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2013 and $106 million of transfers from Level 2 to Level 1 during the three and nine months ended September 30, 2012. The Company's policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
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
Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include prices from recently executed transactions of similar securities, broker/dealer 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.
Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government 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. Securities are generally 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 tax-exempt auction rate certificates and private placement debt securities. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the expected call date assumption is unobservable due to the uncertain nature of principal prepayments prior to maturity and the credit spread adjustment that is security specific. Fair value of certain private placement debt securities 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 non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

23
Table of Contents

Other Invested Assets
Level 1 securities include exchange traded derivatives, primarily futures, valued using quoted market prices. Level 2 securities primarily include overseas deposits, which can be redeemed at net asset value in 90 days or less, and derivatives, primarily currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 3 of the valuation hierarchy due to a lack of transparency as to whether these quotes are based on information that is observable in the marketplace.
Short Term Investments
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 Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as the Company's own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
Separate Account Business
Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.
Significant Unobservable Inputs
The table below presents 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 table 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.
Assets
(In millions)
Fair Value at September 30, 2013
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
179

 
Discounted cash flow
 
Expected call date
 
2.1 - 5.3 years (3.8 years)
 
 
 
 
 
Credit spread
 
1.92% - 26.24% (3.80%)
Equity securities
$
13

 
Market approach
 
Private offering price
 
$289.80 - $4,273.77 per share
($1,337.14 per share)
Life settlement contracts
$
90

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
69% - 883% (208.8%)

24
Table of Contents

Assets
(In millions)
Fair Value at December 31, 2012
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
121

 
Discounted cash flow
 
Expected call date
 
3.3 - 5.3 years (4.3 years)
 
 
 
 
 
Credit spread adjustment
 
0.02% - 0.48% (0.17%)
 
$
72

 
Market approach
 
Private offering price
 
$42.39 - $102.32 ($100.11)
Equity securities
$
34

 
Market approach
 
Private offering price
 
$4.54 - $3,842.00 per share
($571.17 per share)
Life settlement contracts
$
100

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
69% - 883% (208.9%)
For fixed maturity securities, an increase to the expected call date and credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption 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 instrument assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are listed in the tables below.
September 30, 2013
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Notes receivable for the issuance of common stock
$
22

 
$
—

 
$
—

 
$
22

 
$
22

Mortgage loans
440

 
—

 
—

 
452

 
452

Financial liabilities
 
 
 
 
 
 
 
 
 
Premium deposits and annuity contracts
$
68

 
$
—

 
$
—

 
$
69

 
$
69

Long term debt
2,559

 
—

 
2,928

 
—

 
2,928

December 31, 2012
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Notes receivable for the issuance of common stock
$
21

 
$
—

 
$
—

 
$
21

 
$
21

Mortgage loans
401

 
—

 
—

 
418

 
418

Financial liabilities
 
 
 
 
 
 
 
 
 
Premium deposits and annuity contracts
$
100

 
$
—

 
$
—

 
$
104

 
$
104

Short term debt
13

 
—

 
13

 
—

 
13

Long term debt
2,557

 
—

 
3,016

 
—

 
3,016

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair values of Notes receivable for the issuance of common stock were estimated using discounted cash flows utilizing interest rates currently offered for obligations securitized with similar collateral, adjusted for specific note receivable risk.
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.
Premium deposits and annuity contracts were valued based on cash surrender values or estimated fair values of policyholder liabilities, net of amounts ceded related to sold business.

25
Table of Contents

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.


26

Note F. Claim and Claim Adjustment Expense Reserves
The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including 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 such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that 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 the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $42 million and $146 million for the three and nine months ended September 30, 2013. Catastrophe losses in 2013 related primarily to U.S. storms. The Company reported catastrophe losses, net of reinsurance, of $27 million and $123 million for the three and nine months ended September 30, 2012.

27

Net Prior Year Development
The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments.
Net Prior Year Development
Three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
(In millions)
CNA Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(74
)
 
$
(3
)
 
$
(6
)
 
$
2

 
$
(81
)
Pretax (favorable) unfavorable premium development
(3
)
 
7

 
1

 
—

 
5

Total pretax (favorable) unfavorable net prior year development
$
(77
)
 
$
4

 
$
(5
)
 
$
2

 
$
(76
)
Three months ended September 30, 2012
 
 
 
 
 
 
 
 
 
(In millions)
CNA Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(39
)
 
$
2

 
$
(6
)
 
$
3

 
$
(40
)
Pretax (favorable) unfavorable premium development
(1
)
 
(5
)
 
—

 
(1
)
 
(7
)
Total pretax (favorable) unfavorable net prior year development
$
(40
)
 
$
(3
)
 
$
(6
)
 
$
2

 
$
(47
)
Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
(In millions)
CNA Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(130
)
 
$
13

 
$
5

 
$
—

 
$
(112
)
Pretax (favorable) unfavorable premium development
(16
)
 
(8
)
 
7

 
1

 
(16
)
Total pretax (favorable) unfavorable net prior year development
$
(146
)
 
$
5

 
$
12

 
$
1

 
$
(128
)
Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
(In millions)
CNA Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(80
)
 
$
(25
)
 
$
(6
)
 
$
1

 
$
(110
)
Pretax (favorable) unfavorable premium development
(15
)
 
(41
)
 
—

 
1

 
(55
)
Total pretax (favorable) unfavorable net prior year development
$
(95
)
 
$
(66
)
 
$
(6
)
 
$
2

 
$
(165
)
For the nine months ended September 30, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.

28

CNA Specialty
The following table provides further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the CNA Specialty segment for the three and nine months ended September 30, 2013 and 2012.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Medical Professional Liability
$
9

 
$
9

 
$
(11
)
 
$
(6
)
Other Professional Liability
(4
)
 
1

 
(28
)
 
(1
)
Surety
(76
)
 
(60
)
 
(74
)
 
(59
)
Warranty
—

 
—

 
—

 
(1
)
Other
(3
)
 
11

 
(17
)
 
(13
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(74
)
 
$
(39
)
 
$
(130
)
 
$
(80
)
Three Month Comparison
2013
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
2012
Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.
Other includes standard property and casualty coverages provided to CNA Specialty customers. Unfavorable development for other coverages was primarily due to an unfavorable outcome on an individual general liability claim in accident year 2009.
Nine Month Comparison
2013
Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.
Overall, favorable development for other professional liability was related to better than expected loss emergence in accident years 2007 through 2009. Unfavorable development was recorded in accident years 2010 through 2012 related to an increase in severity.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.


29

2012
Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.
Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.

30

CNA Commercial
The following table provides further detail of the development recorded for the CNA Commercial segment for the three and nine months ended September 30, 2013 and 2012.
Periods ended September 30
Three Months

Nine Months
(In millions)
2013

2012

2013

2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Commercial Auto
$
4

 
$
9

 
$
1

 
$
11

General Liability
(18
)
 
(21
)
 
(24
)
 
(26
)
Workers’ Compensation
26

 
24

 
96

 
13

Property and Other
(15
)
 
(10
)
 
(60
)
 
(23
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(3
)
 
$
2

 
$
13

 
$
(25
)
Three Month Comparison
2013
Favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2005 through 2007 and 2012.
Unfavorable development for workers’ compensation was primarily due to increased frequency and severity on claims related to Defense Base Act (DBA) contractors in accident year 2012.
Favorable development for property and other coverages was primarily related to favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.
2012
Favorable development for general liability coverages was primarily due to favorable loss emergence in accident years 2003 and prior related to large account business.
Unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011.
Favorable development for property and other coverages was due to favorable loss emergence in non-catastrophe losses in accident years 2009 and subsequent.
Nine Month Comparison
2013
Favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2009 and prior and 2012.
Unfavorable development for workers’ compensation includes the Company's response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers’ compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013. Additional unfavorable development was recorded in accident year 2012 related to increased frequency and severity on claims related to DBA contractors and in accident year 2010 due to higher than expected large losses and increased severity in the state of California.
Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 and favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.

31

2012
Unfavorable development for commercial auto coverages was primarily due to higher than expected frequency in accident years 2009 and subsequent.
Favorable development for general liability coverages was primarily due to favorable loss emergence in accident years 2003 and prior related to large account business.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011 and losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.
Favorable development for property and other coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident years 2009 through 2011.

32

Hardy
The following table provides further detail of the development recorded for the Hardy segment for the three and nine months ended September 30, 2013 and 2012.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Marine and Aviation
$
—

 
$
1

 
$
3

 
$
1

Non-Marine Property
1

 
(5
)
 
8

 
(5
)
Property Treaty
(5
)
 
—

 
(3
)
 
—

Specialty
(2
)
 
(2
)
 
(3
)
 
(2
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(6
)
 
$
(6
)
 
$
5

 
$
(6
)
Three Months
2013
Favorable development for property treaty was due to favorable emergence of losses from catastrophe events in 2011 and 2012. Favorable development for specialty was primarily due to favorable outcomes on several large losses.
Nine Months
2013
Unfavorable development for non-marine property was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake.
Favorable development for property treaty was due to favorable emergence of losses from catastrophe events in 2011 and 2012. Favorable development for specialty was primarily due to favorable outcomes on several large losses.



33

Note G. Legal Proceedings and Contingent Liabilities
The Company is a party to routine litigation incidental to its business, which, based on the facts and circumstances currently known, is not material to the Condensed Consolidated Financial Statements.
Note H. Benefit Plans
The components of net periodic cost (benefit) are presented in the following table.
Net Periodic Cost (Benefit)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Pension cost (benefit)
 
 
 
 
 
 
 
Service cost
$
3

 
$
3

 
$
9

 
$
9

Interest cost on projected benefit obligation
30

 
34

 
90

 
101

Expected return on plan assets
(45
)
 
(43
)
 
(135
)
 
(128
)
Amortization of net actuarial (gain) loss
10

 
10

 
34

 
29

Settlement loss
3

 
—

 
3

 
—

Net periodic pension cost (benefit)
$
1

 
$
4

 
$
1

 
$
11

 
 
 
 
 
 
 
 
Postretirement cost (benefit)
 
 
 
 
 
 
 
Interest cost on projected benefit obligation
$
—

 
$
1

 
$
1

 
$
2

Amortization of prior service credit
(4
)
 
(4
)
 
(13
)
 
(13
)
Amortization of net actuarial (gain) loss
1

 
—

 
1

 
—

Net periodic postretirement cost (benefit)
$
(3
)
 
$
(3
)
 
$
(11
)
 
$
(11
)
Note I. Other Intangible Assets
Other intangible assets are presented in the following table.
 
September 30, 2013
 
December 31, 2012
(In millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Value of business acquired
$
62

 
$
62

 
$
62

 
$
43

Trade name
8

 
1

 
8

 
—

Distribution channel
13

 
1

 
13

 
—

Total finite-lived intangible assets
83

 
64

 
83

 
43

Indefinite-lived intangible assets
73

 
 
 
73

 
 
Total other intangible assets
$
156

 
$
64

 
$
156

 
$
43

For the three and nine months ended September 30, 2013, amortization expense of $1 million and $14 million was included in Amortization of deferred acquisition costs and $(1) million and $4 million was included in Other operating expenses in the Statement of Operations for the Hardy segment. For the three and nine months ended September 30, 2012, amortization expense of $18 million was included in Amortization of deferred acquisition costs and $6 million was included in Other operating expenses in the Statement of Operations for the Hardy segment. The gross carrying amounts and accumulated amortization in the table above may change from period to period as a result of foreign currency translation. Estimated future amortization expense for intangible assets is $1 million for the remainder of 2013, $4 million in 2014, $1 million in 2015 and $2 million in years 2016, 2017 and 2018.

34

Note J. Commitments, Contingencies, and Guarantees
Commitments and Contingencies
The Company holds an investment in a real estate joint venture. In the normal course of business, the Company, on a joint and several basis with other unrelated insurance company shareholders, has committed to continue funding the operating deficits of this joint venture. Additionally, the Company and the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016. The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as long as the joint venture continues to be funded by its shareholders which provide liquidity to make its annual lease payments.
In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, the Company would be required to assume the obligation for the entire office building operating lease. The Company does not believe it is likely that it will be required to do so. However, the maximum potential future lease payments and other related costs at September 30, 2013 that the Company could be required to pay under this guarantee, in excess of amounts already recorded, were approximately $90 million. If the Company were required to assume the entire lease obligation, the Company would have the right to pursue reimbursement from the other shareholders and the right to all sublease revenues.
Guarantees
In the course of selling business entities and assets to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of September 30, 2013, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $723 million.
In addition, the Company has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 2013, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser's ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire or until the agreed upon contract terms expire.
As of September 30, 2013 and December 31, 2012, the Company had recorded liabilities of approximately $7 million related to indemnification agreements and management believes that it is not likely that any future indemnity claims will be significantly greater than the amounts recorded.

35

Note K. Business Segments
The Company's core property and casualty commercial insurance operations are reported in three business segments: CNA Specialty, CNA Commercial and Hardy. The Company's non-core operations are managed in two segments: Life & Group Non-Core and Corporate & Other Non-Core.
The accounting policies of the segments are the same as those described in Note A of the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2012. 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 and goodwill are readily identifiable for all 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 realized investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense has 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. Net operating income, which is derived from certain income statement amounts, is used by management to monitor performance of the Company's insurance operations. 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. Based on such analyses, the Company may recognize an OTTI loss on an investment security in accordance with its policy, or sell a security, which may produce realized gains and losses.
Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses and 2) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains or losses because net realized investment gains or losses are largely discretionary, except for some losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.
The Company's results of operations and selected balance sheet items by segment are presented in the following tables.


36

Three months ended September 30, 2013
CNA
Specialty
 
CNA
Commercial
 
Hardy
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
768

 
$
832

 
$
86

 
$
140

 
$
—

 
$
(1
)
 
$
1,825

Net investment income
159

 
219

 
1

 
209

 
9

 
—

 
597

Other revenues
67

 
10

 
1

 
(3
)
 
3

 
—

 
78

Total operating revenues
994

 
1,061

 
88

 
346

 
12

 
(1
)
 
2,500

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
427

 
565

 
35

 
377

 
4

 
—

 
1,408

Policyholders’ dividends
3

 
1

 
—

 
2

 
—

 
—

 
6

Amortization of deferred acquisition costs
161

 
148

 
25

 
7

 
—

 
—

 
341

Other insurance related expenses
64

 
141

 
14

 
34

 
1

 
(1
)
 
253

Other expenses
58

 
7

 
2

 
5

 
49

 
—

 
121

Total claims, benefits and expenses
713

 
862

 
76

 
425

 
54

 
(1
)
 
2,129

Operating income (loss) before income tax
281

 
199

 
12

 
(79
)
 
(42
)
 
—

 
371

Income tax (expense) benefit on operating income (loss)
(94
)
 
(68
)
 
—

 
44

 
16

 
—

 
(102
)
Net operating income (loss)
187

 
131

 
12

 
(35
)
 
(26
)
 
—

 
269

Net realized investment gains (losses), pre-tax
2

 
1

 
—

 
—

 
1

 
—

 
4

Income tax (expense) benefit on net realized investment gains (losses)
(1
)
 
—

 
1

 
—

 
(1
)
 
—

 
(1
)
Net realized investment gains (losses)
1

 
1

 
1

 
—

 
—

 
—

 
3

Net income (loss)
$
188

 
$
132

 
$
13

 
$
(35
)
 
$
(26
)
 
$
—

 
$
272


37

Three months ended September 30, 2012
CNA
Specialty
 
CNA
Commercial
 
Hardy
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
738

 
$
840

 
$
64

 
$
141

 
$
(2
)
 
$
—

 
$
1,781

Net investment income
159

 
230

 
2

 
201

 
9

 
—

 
601

Other revenues
58

 
11

 
—

 
1

 
7

 
(1
)
 
76

Total operating revenues
955

 
1,081

 
66

 
343

 
14

 
(1
)
 
2,458

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
460

 
591

 
21

 
350

 
8

 
—

 
1,430

Policyholders’ dividends
1

 
3

 
—

 
1

 
—

 
—

 
5

Amortization of deferred acquisition costs
156

 
151

 
20

 
6

 
—

 
—

 
333

Other insurance related expenses
73

 
146

 
13

 
35

 
1

 
—

 
268

Other expenses
53

 
7

 
7

 
8

 
42

 
(1
)
 
116

Total claims, benefits and expenses
743

 
898

 
61

 
400

 
51

 
(1
)
 
2,152

Operating income (loss) before income tax
212

 
183

 
5

 
(57
)
 
(37
)
 
—

 
306

Income tax (expense) benefit on operating income (loss)
(76
)
 
(58
)
 
(2
)
 
35

 
11

 
—

 
(90
)
Net operating income (loss)
136

 
125

 
3

 
(22
)
 
(26
)
 
—

 
216

Net realized investment gains (losses), pre-tax
2

 
10

 
(1
)
 
(3
)
 
—

 
—

 
8

Income tax (expense) benefit on net realized investment gains (losses)
(2
)
 
(3
)
 
—

 
1

 
1

 
—

 
(3
)
Net realized investment gains (losses)
—

 
7

 
(1
)
 
(2
)
 
1

 
—

 
5

Net income (loss)
$
136

 
$
132

 
$
2

 
$
(24
)
 
$
(25
)
 
$
—

 
$
221


38

Nine months ended September 30, 2013
CNA
Specialty
 
CNA
Commercial
 
Hardy
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
2,237

 
$
2,509

 
$
226

 
$
419

 
$
—

 
$
(2
)
 
$
5,389

Net investment income
480

 
680

 
3

 
620

 
25

 
—

 
1,808

Other revenues
190

 
85

 
1

 
2

 
8

 
(1
)
 
285

Total operating revenues
2,907

 
3,274

 
230

 
1,041

 
33

 
(3
)
 
7,482

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
1,344

 
1,809

 
107

 
1,082

 
6

 
—

 
4,348

Policyholders’ dividends
5

 
5

 
—

 
6

 
—

 
—

 
16

Amortization of deferred acquisition costs
467

 
450

 
66

 
21

 
—

 
—

 
1,004

Other insurance related expenses
200

 
426

 
43

 
100

 
1

 
(2
)
 
768

Other expenses
172

 
18

 
15

 
12

 
134

 
(1
)
 
350

Total claims, benefits and expenses
2,188

 
2,708

 
231

 
1,221

 
141

 
(3
)
 
6,486

Operating income (loss) before income tax
719

 
566

 
(1
)
 
(180
)
 
(108
)
 
—

 
996

Income tax (expense) benefit on operating income (loss)
(244
)
 
(198
)
 
3

 
109

 
38

 
—

 
(292
)
Net operating income (loss)
475

 
368

 
2

 
(71
)
 
(70
)
 
—

 
704

Net realized investment gains (losses), pre-tax
(1
)
 
(7
)
 
2

 
14

 
10

 
—

 
18

Income tax (expense) benefit on net realized investment gains (losses)
—

 
3

 
—

 
(5
)
 
(4
)
 
—

 
(6
)
Net realized investment gains (losses)
(1
)
 
(4
)
 
2

 
9

 
6

 
—

 
12

Net income (loss)
$
474

 
$
364

 
$
4

 
$
(62
)
 
$
(64
)
 
$
—

 
$
716

September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
613

 
$
1,107

 
$
227

 
$
1,229

 
$
2,627

 
$
—

 
$
5,803

Insurance receivables
$
746

 
$
1,112

 
$
211

 
$
10

 
$
4

 
$
—

 
$
2,083

Deferred acquisition costs
$
320

 
$
270

 
$
52

 
$
—

 
$
—

 
$
—

 
$
642

Goodwill
$
117

 
$
—

 
$
37

 
$
—

 
$
—

 
$
—

 
$
154

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
$
6,846

 
$
10,763

 
$
432

 
$
3,050

 
$
2,871

 
$
—

 
$
23,962

Unearned premiums
1,811

 
1,604

 
274

 
132

 
—

 
(1
)
 
3,820

Future policy benefits
—

 
—

 
—

 
10,681

 
—

 
—

 
10,681

Policyholders’ funds
10

 
15

 
—

 
102

 
—

 
—

 
127


39

Nine months ended September 30, 2012
CNA
Specialty
 
CNA
Commercial
 
Hardy (a)
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 
 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
2,163

 
$
2,452

 
$
64

 
$
421

 
$
(1
)
 
$
(1
)
 
$
5,098

Net investment income
446

 
646

 
2

 
600

 
25

 
—

 
1,719

Other revenues
171

 
31

 
—

 
15

 
14

 
(1
)
 
230

Total operating revenues
2,780

 
3,129

 
66

 
1,036

 
38

 
(2
)
 
7,047

Claims, Benefits and Expenses
 

 
 
 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
1,376

 
1,749

 
21

 
1,009

 
(5
)
 
—

 
4,150

Policyholders’ dividends
—

 
9

 
—

 
5

 
—

 
—

 
14

Amortization of deferred acquisition costs
458

 
437

 
20

 
22

 
—

 
—

 
937

Other insurance related expenses
222

 
425

 
13

 
106

 
1

 
(1
)
 
766

Other expenses
153

 
24

 
7

 
18

 
137

 
(1
)
 
338

Total claims, benefits and expenses
2,209

 
2,644

 
61

 
1,160

 
133

 
(2
)
 
6,205

Operating income (loss) before income tax
571

 
485

 
5

 
(124
)
 
(95
)
 
—

 
842

Income tax (expense) benefit on operating income (loss)
(197
)
 
(164
)
 
(2
)
 
86

 
29

 
—

 
(248
)
Net operating income (loss)
374

 
321

 
3

 
(38
)
 
(66
)
 
—

 
594

Net realized investment gains (losses), pre-tax
18

 
34

 
(1
)
 
14

 
1

 
—

 
66

Income tax (expense) benefit on net realized investment gains (losses)
(6
)
 
(12
)
 
—

 
(5
)
 
—

 
—

 
(23
)
Net realized investment gains (losses)
12

 
22

 
(1
)
 
9

 
1

 
—

 
43

Net income (loss)
$
386

 
$
343

 
$
2

 
$
(29
)
 
$
(65
)
 
$
—

 
$
637

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
665

 
$
1,155

 
$
294

 
$
1,273

 
$
2,844

 
$
—

 
$
6,231

Insurance receivables
$
673

 
$
1,116

 
$
181

 
$
9

 
$
4

 
$
—

 
$
1,983

Deferred acquisition costs
$
300

 
$
269

 
$
29

 
$
—

 
$
—

 
$
—

 
$
598

Goodwill
$
117

 
$
—

 
$
37

 
$
—

 
$
—

 
$
—

 
$
154

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
$
6,748

 
$
11,326

 
$
521

 
$
3,006

 
$
3,162

 
$
—

 
$
24,763

Unearned premiums
1,685

 
1,569

 
222

 
134

 
—

 
—

 
3,610

Future policy benefits
—

 
—

 
—

 
11,475

 
—

 
—

 
11,475

Policyholders’ funds
8

 
15

 
—

 
134

 
—

 
—

 
157


_______________________________
(a)
Included from date of acquisition.


40

The following table provides revenue by line of business for each reportable segment. Revenues are comprised of operating revenues and net realized investment gains and losses.
Revenues by Line of Business
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
CNA Specialty
 
 
 
 
 
 
 
International
$
59

 
$
53

 
$
177

 
$
163

Professional & Management Liability
720

 
700

 
2,107

 
2,039

Surety
126

 
124

 
365

 
364

Warranty & Alternative Risks
91

 
80

 
257

 
232

CNA Specialty revenues
996

 
957

 
2,906

 
2,798

CNA Commercial
 
 
 
 
 

 
 

Commercial Insurance
776

 
826

 
2,429

 
2,396

International
93

 
93

 
276

 
274

Small Business
193

 
172

 
562

 
493

CNA Commercial revenues
1,062

 
1,091

 
3,267

 
3,163

Hardy revenues
88

 
65

 
232

 
65

Life & Group Non-Core
 
 
 
 
 

 
 

Health
290

 
274

 
875

 
852

Life & Annuity
58

 
64

 
177

 
181

Other
(2
)
 
2

 
3

 
17

Life & Group Non-Core revenues
346

 
340

 
1,055

 
1,050

Corporate & Other Non-Core revenues
13

 
14

 
43

 
39

Eliminations
(1
)
 
(1
)
 
(3
)
 
(2
)
Total revenues
$
2,504

 
$
2,466

 
$
7,500

 
$
7,113


41

Note L. Changes in Accumulated Other Comprehensive Income (Loss) by Component
The tables below present the changes in Accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2013.
Changes in Accumulated Other Comprehensive Income (Loss)
(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance at June 30, 2013
$
26

 
$
724

 
$
(711
)
 
$
87

 
$
126

Other comprehensive income (loss) before reclassifications
(4
)
 
(68
)
 
—

 
56

 
(16
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(2), $3, $0, and $1
(1
)
 
2

 
(4
)
 
—

 
(3
)
Other comprehensive income (loss) after tax (expense) benefit of $1, $38, $(3), $0, and $36
(3
)
 
(70
)
 
4

 
56

 
(13
)
Balance at September 30, 2013
$
23

 
$
654

 
$
(707
)
 
$
143

 
$
113

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance at January 1, 2013
$
20

 
$
1,371

 
$
(721
)
 
$
161

 
$
831

Other comprehensive income (loss) before reclassifications
2


(706
)
 
—

 
(18
)
 
(722
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(5), $8, $0, and $3
(1
)
 
11

 
(14
)
 
—

 
(4
)
Other comprehensive income (loss) after tax (expense) benefit of $(2), $387, $(8), $0, and $377
3

 
(717
)
 
14

 
(18
)
 
(718
)
Balance at September 30, 2013
$
23

 
$
654

 
$
(707
)
 
$
143

 
$
113

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 OTTI losses
 
Net realized investment gains (losses)
Net unrealized gains (losses) on other investments
 
Net realized investment gains (losses)
Pension and postretirement benefits
 
Other operating expenses


42

Item 2. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
Overview
The following discussion highlights significant factors affecting the Company. References to “we,” “our,” “us” or like terms refer to the business of CNA. Based on 2012 statutory net written premiums, we are the eighth largest commercial insurance writer and the 13th largest property and casualty insurance organization in the United States of America.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q and Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012.
We utilize the net operating income financial measure to monitor our operations. Net operating income is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses and 2) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note K to the Condensed Consolidated Financial Statements included under Part I, Item 1. In the evaluation of the results of our CNA Specialty, CNA Commercial and Hardy segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the impact of related acquisition expenses. Further information on our reserves is provided in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.


43

CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations. Results for Hardy for 2012 are included from the date of acquisition. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,825

 
$
1,781

 
$
5,389

 
$
5,098

Net investment income
597

 
601

 
1,808

 
1,719

Other revenues
78

 
76

 
285

 
230

Total operating revenues
2,500

 
2,458

 
7,482

 
7,047

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Net incurred claims and benefits
1,408

 
1,430

 
4,348

 
4,150

Policyholders' dividends
6

 
5

 
16

 
14

Amortization of deferred acquisition costs
341

 
333

 
1,004

 
937

Other insurance related expenses
253

 
268

 
768

 
766

Other expenses
121

 
116

 
350

 
338

Total claims, benefits and expenses
2,129

 
2,152

 
6,486

 
6,205

Operating income before income tax
371

 
306

 
996

 
842

Income tax expense on operating income
(102
)
 
(90
)
 
(292
)
 
(248
)
Net operating income
269

 
216

 
704

 
594

Net realized investment gains, pre-tax
4

 
8

 
18

 
66

Income tax expense on net realized investment gains
(1
)
 
(3
)
 
(6
)
 
(23
)
Net realized investment gains
3

 
5

 
12

 
43

Net income
$
272

 
$
221

 
$
716

 
$
637

Three Month Comparison
Net income increased $51 million for the three months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to higher net operating income.
Net realized investment gains decreased $2 million for the three months ended September 30, 2013 as compared with the same period in 2012. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income increased $53 million for the three months ended September 30, 2013 as compared with the same period in 2012. Net operating income increased $66 million for our core segments, CNA Specialty, CNA Commercial and Hardy. This increase was primarily due to improved non-catastrophe current accident year underwriting results and higher favorable net prior year development, partially offset by higher catastrophe losses. Catastrophe losses were $28 million after-tax for the three months ended September 30, 2013 as compared with $18 million after-tax for the same period in 2012. Net operating results decreased $13 million for our non-core segments, driven by results in our Life & Group Non-Core segment. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Favorable net prior year development of $76 million and $47 million was recorded for the three months ended September 30, 2013 and 2012 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development for the three months ended September 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

44

Net earned premiums increased $44 million for the three months ended September 30, 2013 as compared with the same period in 2012, driven by a $30 million increase in CNA Specialty and a $22 million increase in Hardy. See the Segment Results section of this MD&A for further discussion.
Nine Month Comparison
Net income increased $79 million for the nine months ended September 30, 2013 as compared with the same period in 2012. This increase was due to higher net operating income, partially offset by decreased net realized investment gains.
Net realized investment gains decreased $31 million for the nine months ended September 30, 2013 as compared with the same period in 2012.
Net operating income increased $110 million for the nine months ended September 30, 2013 as compared with the same period in 2012. Net operating income increased $147 million for our core segments, CNA Specialty, CNA Commercial and Hardy. This increase was primarily due to improved non-catastrophe current accident year underwriting results, higher net investment income and a settlement benefit of $30 million after-tax related to workers’ compensation residual market litigation. These favorable items were partially offset by lower favorable net prior year development and increased catastrophe losses. Catastrophe losses were $96 million after-tax for the nine months ended September 30, 2013 as compared with $80 million after-tax for the same period in 2012. Net operating results decreased $37 million for our non-core segments, driven by results in our Life & Group Non-Core segment. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Favorable net prior year development of $128 million and $165 million was recorded for the nine months ended September 30, 2013 and 2012 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development for the nine months ended September 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net earned premiums increased $291 million for the nine months ended September 30, 2013 as compared with the same period in 2012, driven by the acquisition of Hardy in July of 2012, a $74 million increase in CNA Specialty and a $57 million increase in CNA Commercial. See the Segment Results section of this MD&A for further discussion.

45

CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements (Unaudited) in conformity with GAAP requires us 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 amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment.
•
Insurance Reserves
•
Reinsurance and Insurance Receivables
•
Valuation of Investments and Impairment of Securities
•
Long Term Care Products and Payout Annuity Contracts
•
Pension and Postretirement Benefit Obligations
•
Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 for further information.


46

SEGMENT RESULTS
The following discusses the results of operations for our operating segments.
CNA Specialty
The following table details the results of operations for CNA Specialty.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios)
2013
 
2012
 
2013
 
2012
Net written premiums
$
778

 
$
723

 
$
2,337

 
$
2,206

Net earned premiums
768

 
738

 
2,237

 
2,163

Net investment income
159

 
159

 
480

 
446

Net operating income
187

 
136

 
475

 
374

Net realized investment gains (losses)
1

 
—

 
(1
)
 
12

Net income
188

 
136

 
474

 
386

Ratios
 
 
 
 
 
 
 
Loss and loss adjustment expense
55.6
%
 
62.5
%
 
60.1
%
 
63.6
%
Expense
29.4

 
31.0

 
29.8

 
31.5

Dividend
0.3

 
0.2

 
0.2

 
—

Combined
85.3
%
 
93.7
%
 
90.1
%
 
95.1
%
Three Month Comparison
Net written premiums for CNA Specialty increased $55 million for the three months ended September 30, 2013 as compared with the same period in 2012, driven by increased rate. Net earned premiums increased $30 million as compared with the same period in 2012, consistent with increased net written premiums over recent quarters.
CNA Specialty's average rate increased 6% for the three months ended September 30, 2013, as compared with an increase of 5% for the three months ended September 30, 2012, for the policies that renewed in each period. Retention of 85% was achieved in each period.
Net income increased $52 million for the three months ended September 30, 2013 as compared with the same period in 2012. This increase was due to higher net operating income.
Net operating income increased $51 million for the three months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to improved underwriting results.
The combined ratio improved 8.4 points for the three months ended September 30, 2013 as compared with the same period in 2012. The loss ratio improved 6.9 points, due to higher favorable net prior year development and an improved non-catastrophe current accident year loss ratio, partially offset by higher catastrophe losses. The expense ratio improved 1.6 points, primarily due to the impact of lower underwriting expenses and a higher net earned premium base.
Favorable net prior year development of $77 million and $40 million was recorded for the three months ended September 30, 2013 and 2012. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Comparison
Net written premiums for CNA Specialty increased $131 million for the nine months ended September 30, 2013 as compared with the same period in 2012, primarily driven by increased rate. Net earned premiums increased $74 million as compared with the same period in 2012, consistent with increased net written premiums over recent quarters.
CNA Specialty's average rate increased 6% for the nine months ended September 30, 2013, as compared with an increase of 4% for the nine months ended September 30, 2012, for the policies that renewed in each period. Retention of 85% and 86% was achieved in each period.

47

Net income increased $88 million for the nine months ended September 30, 2013 as compared with the same period in 2012, primarily due to higher net operating income, partially offset by decreased net realized investment results.
Net operating income increased $101 million for the nine months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to improved underwriting results and higher net investment income.
The combined ratio improved 5.0 points for the nine months ended September 30, 2013 as compared with the same period in 2012. The loss ratio improved 3.5 points, due to higher favorable net prior year development and an improved non-catastrophe current accident year loss ratio, partially offset by higher catastrophe losses. The expense ratio improved 1.7 points, primarily due to the impact of lower underwriting expenses and a higher net earned premium base.
Favorable net prior year development of $146 million and $95 million was recorded for the nine months ended September 30, 2013 and 2012. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2013 and December 31, 2012 for CNA Specialty.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
 
September 30,
2013
 
December 31, 2012
(In millions)
 
Gross Case Reserves
$
2,296

 
$
2,292

Gross IBNR Reserves
4,550

 
4,456

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,846

 
$
6,748

Net Case Reserves
$
2,023

 
$
2,008

Net IBNR Reserves
4,225

 
4,104

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
6,248

 
$
6,112



48

CNA Commercial
The following table details the results of operations for CNA Commercial.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios)
2013
 
2012
 
2013
 
2012
Net written premiums
$
760

 
$
811

 
$
2,504

 
$
2,543

Net earned premiums
832

 
840

 
2,509

 
2,452

Net investment income
219

 
230

 
680

 
646

Net operating income
131

 
125

 
368

 
321

Net realized investment gains (losses)
1

 
7

 
(4
)
 
22

Net income
132

 
132

 
364

 
343

Ratios
 
 
 
 
 
 
 

Loss and loss adjustment expense
67.9
%
 
70.5
%
 
72.1
%
 
71.3
%
Expense
34.8

 
35.2

 
34.9

 
35.2

Dividend
0.3

 
0.3

 
0.2

 
0.3

Combined
103.0
%
 
106.0
%
 
107.2
%
 
106.8
%
Three Month Comparison
Net written premiums for CNA Commercial decreased $51 million for the three months ended September 30, 2013 as compared with the same period in 2012, primarily driven by previous underwriting actions taken in certain business classes. These underwriting actions were partially offset by continued strong rate increases. Net earned premiums decreased $8 million for the three months ended September 30, 2013 as compared with the same period in 2012, consistent with the decrease in net written premiums in the most recent quarters.
CNA Commercial's average rate increased 8% for the three months ended September 30, 2013, as compared with an increase of 7% for the three months ended September 30, 2012, for the policies that renewed in each period. Retention of 71% and 77% was achieved in each period.
Net income for the three months ended September 30, 2013 was comparable with the same period in 2012. Increased net operating income was offset by lower net realized investment gains.
Net operating income increased $6 million for the three months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to improved current accident year underwriting results.
The combined ratio improved 3.0 points for the three months ended September 30, 2013 as compared with the same period in 2012. The loss ratio improved 2.6 points, primarily due to an improved current accident year loss ratio. Catastrophe losses were $24 million, or 2.9 points of the loss ratio, for the three months ended September 30, 2013, as compared with $24 million, or 2.8 points of the loss ratio, for the three months ended September 30, 2012. The expense ratio improved 0.4 points for the three months ended September 30, 2013 as compared with the same period in 2012, primarily due to the impact of lower underwriting expenses.
Unfavorable net prior year development of $4 million was recorded for the three months ended September 30, 2013, compared to favorable net prior year development of $3 million for the three months ended September 30, 2012. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

49

Nine Month Comparison
Net written premiums for CNA Commercial decreased $39 million for the nine months ended September 30, 2013 as compared with the same period in 2012, primarily driven by previous underwriting actions taken in certain business classes, including a transfer of $44 million of in-force business. Net earned premiums increased $57 million for the nine months ended September 30, 2013 as compared with the same period in 2012, consistent with increased net written premiums in earlier quarters.
CNA Commercial's average rate increased 9% for the nine months ended September 30, 2013, as compared with an increase of 6% for the nine months ended September 30, 2012, for the policies that renewed in each period. Retention of 74% and 77% was achieved in each period.
Net income increased $21 million for the nine months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to higher net operating income, partially offset by lower net realized investment results.
Net operating income increased $47 million for the nine months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to improved current accident year underwriting results, a settlement benefit of $30 million after-tax and higher net investment income. These favorable items were partially offset by unfavorable net prior year development in 2013, which includes $23 million after-tax recorded for workers’ compensation in response to legislation related to the New York Fund for Reopened Cases.
The combined ratio increased 0.4 points for the nine months ended September 30, 2013 as compared with the same period in 2012. The loss ratio increased 0.8 points, primarily due to unfavorable net prior year development, partially offset by an improved current accident year loss ratio. Catastrophe losses were $121 million, or 4.8 points of the loss ratio, for the nine months ended September 30, 2013, as compared with $115 million, or 4.7 points of the loss ratio, for the nine months ended September 30, 2012.
Unfavorable net prior year development of $5 million was recorded for the nine months ended September 30, 2013, compared to favorable net prior year development of $66 million for the nine months ended September 30, 2012. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2013 and December 31, 2012 for CNA Commercial.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
September 30,
2013
 
December 31,
2012
Gross Case Reserves
$
6,003

 
$
6,146

Gross IBNR Reserves
4,760

 
5,180

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
10,763

 
$
11,326

Net Case Reserves
$
5,500

 
$
5,611

Net IBNR Reserves
4,207

 
4,600

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
9,707

 
$
10,211



50

Hardy
The following table details the results of operations for Hardy.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios)
2013
 
2012
 
2013
 
2012
Net written premiums
$
81

 
$
56

 
$
274

 
$
56

Net earned premiums
86

 
64

 
226

 
64

Net investment income
1

 
2

 
3

 
2

Net operating income
12

 
3

 
2

 
3

Net realized investment gains (losses)
1

 
(1
)
 
2

 
(1
)
Net income
13

 
2

 
4

 
2

Ratios
 
 
 
 
 
 
 
Loss and loss adjustment expense
40.5
%
 
33.3
%
 
47.3
%
 
33.3
%
Expense
44.6

 
52.5

 
48.1

 
52.5

Dividend
—

 
—

 
—

 
—

Combined
85.1
%
 
85.8
%
 
95.4
%
 
85.8
%
Three Month Comparison
Net written premiums for Hardy increased $25 million for the three months ended September 30, 2013 as compared with the same period in 2012, driven by growth of non-marine property and a reduction in the amount of reinsurance purchased across several business units. In addition, a change in Hardy's share of the results of Syndicate 382 contributed to the growth in the period. Hardy retains 100% of the results for the 2013 year of account, while 25% of the capital for the 2012 year of account was provided by third parties. Net earned premiums increased $22 million as compared with the same period in 2012, consistent with increased net written premiums.
Hardy's average rate decreased 5% for the three months ended September 30, 2013, as compared with an increase of 1% for the three months ended September 30, 2012, for the policies that renewed in each period. Retention of 75% and 73% was achieved in each period.
Net income increased $11 million for the three months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to higher net operating income.
Net operating income increased $9 million for the three months ended September 30, 2013 as compared with the same period in 2012, due to improved non-catastrophe underwriting results, partially offset by higher catastrophe losses. Pretax results in 2013 included $3 million of integration costs while results in 2012 included $6 million of non-run rate purchase accounting expenses. Further information on Hardy's amortization expense is included in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The combined ratio improved 0.7 points for the three months ended September 30, 2013 as compared with the same period in 2012. The loss ratio increased 7.2 points, primarily due to higher catastrophe losses. The expense ratio improved 7.9 points, primarily due to the higher net earned premium base.
Favorable net prior year development of $5 million and $6 million was recorded for the three months ended September 30, 2013 and 2012. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Nine Month Results
The composition of net earned premiums for Hardy was $100 million for marine and aviation, $69 million for non-marine property, $30 million for specialty lines and $27 million for property treaty reinsurance. Premiums in 2012 relate to amounts written and earned after Hardy was acquired on July 2.
Hardy's average rate decreased 1% for the nine months ended September 30, 2013 for the policies that renewed in the period. Retention of 71% was achieved in the period.

51

Results in 2013 include favorable non-catastrophe underwriting results and pretax unfavorable net prior year development of $12 million. The unfavorable development primarily related to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake. The net prior year development includes $7 million of unfavorable premium development. Catastrophe losses were $5 million, or 2.0 points of the loss ratio, for the nine months ended September 30, 2013. No catastrophe losses were incurred for the nine months ended September 30, 2012.
The following table summarizes the gross and net carried reserves as of September 30, 2013 and December 31, 2012 for Hardy.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
September 30,
2013
 
December 31,
2012
Gross Case Reserves
$
285

 
$
333

Gross IBNR Reserves
147

 
188

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
432

 
$
521

Net Case Reserves
$
159

 
$
192

Net IBNR Reserves
89

 
82

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
248

 
$
274


52

Life & Group Non-Core
The following table summarizes the results of operations for Life & Group Non-Core.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Net earned premiums
$
140

 
$
141

 
$
419

 
$
421

Net investment income
209

 
201

 
620

 
600

Net operating loss
(35
)
 
(22
)
 
(71
)
 
(38
)
Net realized investment gains (losses)
—

 
(2
)
 
9

 
9

Net loss
(35
)
 
(24
)
 
(62
)
 
(29
)
Three Month Comparison
Net earned premiums for Life & Group Non-Core decreased $1 million for the three months ended September 30, 2013 as compared with the same period in 2012. Net earned premiums relate primarily to the individual and group long term care businesses.
Net loss increased $11 million for the three months ended September 30, 2013 as compared with the same period in 2012. Results were affected by unfavorable morbidity in our long term care business, partially offset by the effect of rate increase actions and favorable persistency in that business.
Nine Month Comparison
Net earned premiums for Life & Group Non-Core decreased $2 million for the nine months ended September 30, 2013 as compared with the same period in 2012.
Net loss increased $33 million for the nine months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily due to the same reasons discussed above in the three month comparison. Additionally, results in 2012 included a significant gain related to a benefit on a life settlement contract.

53

Corporate & Other Non-Core
The following table summarizes the results of operations for the Corporate & Other Non-Core segment, including asbestos and environmental pollution (A&EP) and intersegment eliminations.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Net investment income
$
9

 
$
9

 
$
25

 
$
25

Net operating loss
(26
)
 
(26
)
 
(70
)
 
(66
)
Net realized investment gains
—

 
1

 
6

 
1

Net loss
(26
)
 
(25
)
 
(64
)
 
(65
)
Three Month Comparison
Corporate & Other Non-Core primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business in run-off, including CNA Re and A&EP. Results for the three months ended September 30, 2013 were comparable to the prior year period.
Unfavorable net prior year development of $2 million was recorded in each of the three months ended September 30, 2013 and 2012.
Nine Month Comparison
Net loss decreased $1 million for the nine months ended September 30, 2013 as compared with the same period in 2012. Both periods benefited from releases of previously established allowances for uncollectible amounts arising from changes in estimates. For the nine months ended September 30, 2013, results were positively affected by $6 million related to the release of an allowance established for officer notes receivable. For the nine months ended September 30, 2012, results were positively affected by $13 million related to the release of an allowance established for uncollectible reinsurance receivables.
Unfavorable net prior year development of $1 million and $2 million was recorded for the nine months ended September 30, 2013 and 2012.
The following table summarizes the gross and net carried reserves as of September 30, 2013 and December 31, 2012 for Corporate & Other Non-Core.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
September 30,
2013
 
December 31,
2012
Gross Case Reserves
$
1,134

 
$
1,207

Gross IBNR Reserves
1,737

 
1,955

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
2,871

 
$
3,162

Net Case Reserves
$
287

 
$
292

Net IBNR Reserves
194

 
220

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
481

 
$
512



54

INVESTMENTS
Net Investment Income
The significant components of pretax net investment income are presented in the following table.
Net Investment Income
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Fixed maturity securities
$
504

 
$
507

 
$
1,501

 
$
1,528

Short term investments
1

 
2

 
3

 
5

Limited partnership investments
93

 
89

 
303

 
184

Equity securities
3

 
4

 
9

 
10

Mortgage loans
6

 
5

 
17

 
13

Trading portfolio
3

 
7

 
13

 
18

Other
1

 
—

 
2

 
3

Gross investment income
611

 
614

 
1,848

 
1,761

Investment expense
(14
)
 
(13
)
 
(40
)
 
(42
)
Net investment income
$
597

 
$
601

 
$
1,808

 
$
1,719

Net investment income was $597 million for the third quarter of 2013, essentially unchanged from $601 million in the prior year quarter.
Net investment income for the nine months ended September 30, 2013 increased $89 million as compared with the same period in 2012. The increase was primarily driven by a significant increase in limited partnership investment results, partially offset by a decrease in fixed maturity securities income.
The fixed maturity investment portfolio provided a pretax effective income yield of 5.2% and 5.4% for the nine months ended September 30, 2013 and 2012. Tax-exempt municipal bonds generated $83 million and $223 million of net investment income for the three and nine months ended September 30, 2013 compared with $70 million and $205 million of net investment income for the same periods in 2012.

55

Net Realized Investment Gains (Losses)
The components of net realized investment results are presented in the following table.
Net Realized Investment Gains (Losses)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
2

 
$
48

 
$
48

 
$
91

States, municipalities and political subdivisions
8

 
(16
)
 
6

 
11

Asset-backed
(6
)
 
(7
)
 
(24
)
 
(36
)
U.S. Treasury and obligations of government-sponsored enterprises
—

 
1

 
—

 
3

Foreign government
4

 
—

 
5

 
4

Redeemable preferred stock
(1
)
 
—

 
(1
)
 
—

Total fixed maturity securities
7

 
26

 
34

 
73

Equity securities
(2
)
 
(15
)
 
(17
)
 
(14
)
Derivative securities
(1
)
 
(1
)
 
(4
)
 
(1
)
Short term investments and other
—

 
(2
)
 
5

 
8

Net realized investment gains (losses), pre-tax
4

 
8

 
18

 
66

Income tax (expense) benefit on net realized investment gains (losses)
(1
)
 
(3
)
 
(6
)
 
(23
)
Net realized investment gains (losses)
$
3

 
$
5

 
$
12

 
$
43

Net realized investment results decreased $2 million and $31 million for the three and nine months ended September 30, 2013 as compared with the same periods in 2012, driven by lower net realized investment gains on sales of securities, partially offset by lower OTTI losses recognized in earnings. Further information on our realized gains and losses, including our OTTI losses, is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Portfolio Quality
Our fixed maturity portfolio consists primarily of high quality bonds, 92% of which were rated as investment grade (rated BBB- or higher) at September 30, 2013 and December 31, 2012. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody's), in that order of preference. If a security is not rated by these rating agencies, we formulate an internal rating. At September 30, 2013 and December 31, 2012, approximately 99% and 98% of the fixed maturity portfolio was rated by S&P or Moody's, or was issued or guaranteed by the U.S. Government, Government agencies or Government-sponsored enterprises.
The following table summarizes the ratings of our fixed maturity portfolio at fair value.
Fixed Maturity Ratings
(In millions)
September 30, 2013
 
%
 
December 31,
2012
 
%
U.S. Government, Government agencies and Government-sponsored enterprises
$
3,506

 
9
%
 
$
4,540

 
11
%
AAA rated
2,915

 
7

 
3,224

 
8

AA and A rated
20,212

 
49

 
19,305

 
45

BBB rated
11,253

 
27

 
11,997

 
28

Non-investment grade
3,388

 
8

 
3,567

 
8

Total
$
41,274

 
100
%
 
$
42,633

 
100
%

56

Non-investment grade fixed maturity securities, as presented in the table below, include high-yield securities rated below BBB- by bond rating agencies and other unrated securities that, according to our analysis, are below investment grade. Non-investment grade securities generally involve a greater degree of risk than investment grade securities. The amortized cost of our non-investment grade fixed maturity bond portfolio was $3,259 million and $3,355 million at September 30, 2013 and December 31, 2012. The following table summarizes the ratings of this portfolio at fair value.
Non-investment grade
(In millions)
September 30,
2013
 
%
 
December 31,
2012
 
%
BB
$
1,379

 
41
%
 
$
1,529

 
43
%
B
1,070

 
31

 
1,075

 
30

CCC - C
665

 
20

 
724

 
20

D
274

 
8

 
239

 
7

Total
$
3,388

 
100
%
 
$
3,567

 
100
%
The following table summarizes available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution as of September 30, 2013.
Gross Unrealized Losses by Ratings Distribution
September 30, 2013
Estimated Fair Value
 
%
 
Gross Unrealized Losses
 
%
(In millions)
 
 
 
U.S. Government, Government agencies and Government-sponsored enterprises
$
1,117

 
13
%
 
$
82

 
16
%
AAA
612

 
7

 
26

 
5

AA
1,700

 
20

 
164

 
32

A
1,755

 
21

 
85

 
16

BBB
2,460

 
29

 
123

 
24

Non-investment grade
865

 
10

 
35

 
7

Total
$
8,509

 
100
%
 
$
515

 
100
%
The following table provides the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.
Gross Unrealized Losses by Maturity Profile
September 30, 2013
Estimated Fair Value
 
%
 
Gross Unrealized Losses
 
%
Due in one year or less
$
237

 
3
%
 
$
7

 
1
%
Due after one year through five years
1,214

 
14

 
34

 
7

Due after five years through ten years
3,811

 
45

 
198

 
38

Due after ten years
3,247

 
38

 
276

 
54

Total
$
8,509

 
100
%
 
$
515

 
100
%


57

Duration
A primary objective in the management of the investment portfolio is to optimize return relative to corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the liabilities in the Life & Group Non-Core segment including annuities, structured settlements and long term care products.
The effective durations of fixed maturity securities, short term investments and interest rate derivatives are presented in the table below. Short term investments are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
Effective Durations
 
September 30, 2013
 
December 31, 2012
(In millions)
Fair Value
 
Effective
Duration
(In years)
 
Fair Value
 
Effective
Duration
(In years)
Investments supporting Life & Group Non-Core
$
14,840

 
11.4

 
$
15,590

 
11.3

Other interest sensitive investments
27,803

 
4.4

 
28,855

 
3.9

Total
$
42,643

 
6.8

 
$
44,445

 
6.5

The investment portfolio is periodically analyzed for changes in duration and related price risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2012.
Short Term Investments
The carrying value of the components of the short term investment portfolio is presented in the following table.
Short Term Investments
(In millions)
September 30,
2013
 
December 31,
2012
Short term investments:
 
 
 
Commercial paper
$
392

 
$
751

U.S. Treasury securities
837

 
617

Money market funds
111

 
301

Other
135

 
163

Total short term investments
$
1,475

 
$
1,832


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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For the nine months ended September 30, 2013, net cash provided by operating activities was $921 million as compared with $993 million for the same period in 2012. Cash provided by operating activities in 2012 was favorably affected by a $75 million tax refund.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments. Additionally, cash flows from investing activities may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
For the nine months ended September 30, 2013, net cash used by investing activities was $689 million as compared with $747 million for the same period in 2012. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity instruments.
For the nine months ended September 30, 2013, net cash used by financing activities was $200 million as compared with $195 million for the same period in 2012. Net cash used by financing activities in both periods was substantially related to the payment of dividends to common stockholders.
Common Stock Dividends
Dividends of $0.60 per share of our common stock were declared and paid during the nine months ended September 30, 2013. On October 25, 2013, our Board of Directors declared a quarterly dividend of $0.20 per share, payable November 26, 2013 to stockholders of record on November 12, 2013. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs, and regulatory constraints.
Liquidity
We believe that our present cash flows from operations, investing activities and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility.
During the nine months ended September 30, 2013, CCC paid dividends of $300 million to CNAF. As of September 30, 2013, CCC is able to pay approximately $550 million of dividends during the remainder of 2013 that would not be subject to the prior approval of the Illinois Department of Insurance.
In August 2013, CCC became a member of the Federal Home Loan Bank of Chicago (FHLBC). FHLBC membership provides participants with access to additional sources of liquidity through various programs and services. As a requirement of membership in the FHLBC, CCC acquired $16 million of FHLBC stock giving it access to approximately $330 million of additional liquidity. Any funding above this level would require the purchase of additional shares of FHLBC stock. As of September 30, 2013, CCC has no outstanding borrowings from the FHLBC.
We have an effective automatic shelf registration statement under which we may issue debt, equity or hybrid securities.
Ratings
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by major rating agencies and these ratings reflect the rating agency's opinion of

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the insurance company's financial strength, operating performance, strategic position and ability to meet our obligations to policyholders. In June 2013, S&P upgraded our property and casualty insurance financial strength ratings to A with a stable outlook and upgraded the credit rating on the senior debt of CNAF to BBB. Further information on our ratings is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

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FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for asbestos and environmental pollution and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; expected cost savings and other results from our expense reduction activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:
Company-Specific Factors
•
the risks and uncertainties associated with our loss reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our Annual Report on Form 10-K, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;
•
the risk that the other parties to the transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;
•
the performance of reinsurance companies under reinsurance contracts with us; and
•
the consummation of contemplated transactions and the successful integration of acquired operations.
Industry and General Market Factors
•
the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;
•
product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew under priced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;
•
general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services, and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
•
conditions in the capital and credit markets, including continuing uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;
•
conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms, as well as restrictions on the ability or willingness of Loews to provide additional capital support to us; and
•
the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.

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Regulatory Factors
•
regulatory initiatives and compliance with governmental regulations, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation involving us, and rulings and changes in tax laws and regulations;
•
regulatory limitations, impositions and restrictions upon us, including the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies as well as the new federal financial regulatory reform of the insurance industry established by the Dodd-Frank Wall Street Reform and Consumer Protection Act;
•
increased operating costs and underwriting losses arising from the Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act, as well as health care reform proposals at the state level; and
•
regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards.
Impact of Catastrophic Events and Related Developments
•
weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow;
•
regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
•
man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;
•
the unpredictability of the nature, targets, severity or frequency of potential terrorist events, as well as the uncertainty as to our ability to contain our terrorism exposure effectively; and
•
the occurrence of epidemics.
Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the nine months ended September 30, 2013. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A on our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.

Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.
As of September 30, 2013, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2013.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


63

PART II. Other Information
Item 1. Legal Proceedings
Information on our legal proceedings is set forth in Note G to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Item 4. Mine Safety Disclosures
Not applicable.
Item 6. Exhibits
See Exhibit Index.

64

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CNA Financial Corporation
 
 
 
Dated: October 29, 2013
By
/s/ D. Craig Mense
 
 
D. Craig Mense
Executive Vice President and
Chief Financial Officer


65

EXHIBIT INDEX
Description of Exhibit
Exhibit Number
 
 
Certification of Chief Executive Officer
31.1
 
 
Certification of Chief Financial Officer
31.2
 
 
Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
32.1
 
 
Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
32.2
 
 
XBRL Instance Document
101.INS
 
 
XBRL Taxonomy Extension Schema
101.SCH
 
 
XBRL Taxonomy Extension Calculation Linkbase
101.CAL
 
 
XBRL Taxonomy Extension Definition Linkbase
101.DEF
 
 
XBRL Taxonomy Label Linkbase
101.LAB
 
 
XBRL Taxonomy Extension Presentation Linkbase
101.PRE


66