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CNA FINANCIAL CORP - Quarter Report: 2015 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, 2015
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 30, 2015
Common Stock, Par value $2.50
 
270,260,625


Item Number
 
Page
Number
 
PART I. Financial Information
 
1.
 
 
 
 
 
 
 
2.
3.
4.
 
PART II. Other Information
 
1.
6.


2

Table of Contents

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)
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,751

 
$
1,810

 
$
5,173

 
$
5,427

Net investment income
354

 
480

 
1,412

 
1,556

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(56
)
 
(10
)
 
(99
)
 
(17
)
Portion of other-than-temporary impairments recognized in Other comprehensive income
—

 
—

 
—

 
—

Net other-than-temporary impairment losses recognized in earnings
(56
)
 
(10
)
 
(99
)
 
(17
)
Other net realized investment gains (losses)
7

 
47

 
60

 
86

Net realized investment gains (losses)
(49
)
 
37

 
(39
)
 
69

Other revenues
97

 
84

 
286

 
262

Total revenues
2,153

 
2,411

 
6,832

 
7,314

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,200

 
1,354

 
4,008

 
4,241

Amortization of deferred acquisition costs
319

 
332

 
936

 
996

Other operating expenses
362

 
384

 
1,061

 
984

Interest
39

 
48

 
117

 
138

Total claims, benefits and expenses
1,920

 
2,118

 
6,122

 
6,359

Income from continuing operations before income tax
233

 
293

 
710

 
955

Income tax expense
(55
)
 
(84
)
 
(161
)
 
(265
)
Income from continuing operations
178

 
209

 
549

 
690

Income (loss) from discontinued operations, net of income tax (expense) benefit of $-, $(3), $- and $34
—

 
4

 
—

 
(197
)
Net income
$
178

 
$
213

 
$
549

 
$
493

 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.66

 
$
0.77

 
$
2.03

 
$
2.56

Income (loss) from discontinued operations
—

 
0.02

 
—

 
(0.73
)
Basic earnings per share
$
0.66

 
$
0.79

 
$
2.03

 
$
1.83

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.66

 
$
0.77

 
$
2.03

 
$
2.55

Income (loss) from discontinued operations
—

 
0.02

 
—

 
(0.73
)
Diluted earnings per share
$
0.66

 
$
0.79

 
$
2.03

 
$
1.82

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.25

 
$
0.25

 
$
2.75

 
$
1.75

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
270.3

 
269.9

 
270.2

 
269.9

Diluted
270.8

 
270.6

 
270.7

 
270.6


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



3

Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
$
2

 
$
1

 
$
(3
)
 
$
15

Net unrealized gains on other investments
(36
)
 
(83
)
 
(289
)
 
424

Net unrealized gains on investments
(34
)
 
(82
)
 
(292
)
 
439

Net unrealized gains on discontinued operations
—

 
(37
)
 
—

 
(22
)
Foreign currency translation adjustment
(53
)
 
(73
)
 
(100
)
 
(39
)
Pension and postretirement benefits
4

 
3

 
52

 
(47
)
Other comprehensive income (loss), net of tax
(83
)
 
(189
)
 
(340
)
 
331

Net income
178

 
213

 
549

 
493

Total comprehensive income
$
95

 
$
24

 
$
209

 
$
824


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

4

Table of Contents

CNA Financial Corporation
Condensed Consolidated Balance Sheets
(In millions, except share data)
September 30, 2015 (Unaudited)
 
December 31,
2014
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $37,568 and $37,335)
$
40,201

 
$
40,768

Equity securities at fair value (cost of $207 and $210)
212

 
222

Limited partnership investments
2,738

 
2,937

Other invested assets
45

 
41

Mortgage loans
640

 
588

Short term investments
1,482

 
1,706

Total investments
45,318

 
46,262

Cash
236

 
190

Reinsurance receivables (less allowance for uncollectible receivables of $48 and $48)
4,491

 
4,694

Insurance receivables (less allowance for uncollectible receivables of $54 and $61)
2,057

 
1,936

Accrued investment income
439

 
405

Deferred acquisition costs
606

 
600

Deferred income taxes
279

 
191

Property and equipment at cost (less accumulated depreciation of $387 and $364)
320

 
295

Goodwill
151

 
152

Other assets
915

 
841

Total assets
$
54,812

 
$
55,566

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,867

 
$
23,271

Unearned premiums
3,706

 
3,592

Future policy benefits
9,520

 
9,490

Policyholders' funds
—

 
27

Short term debt
350

 
—

Long term debt
2,211

 
2,559

Other liabilities (includes $119 and $153 due to Loews Corporation)
3,893

 
3,833

Total liabilities
42,547

 
42,772

Commitments and contingencies (Notes C, F and H)
 
 
 
Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 270,260,625 and 269,980,202 shares outstanding)
683

 
683

Additional paid-in capital
2,150

 
2,151

Retained earnings
9,450

 
9,645

Accumulated other comprehensive income
60

 
400

Treasury stock (2,779,618 and 3,060,041 shares), at cost
(78
)
 
(84
)
Notes receivable for the issuance of common stock
—

 
(1
)
Total stockholders’ equity
12,265

 
12,794

Total liabilities and stockholders' equity
$
54,812

 
$
55,566


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


5

Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2015
 
2014
Cash Flows from Operating Activities
 
 
 
Net income
$
549

 
$
493

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Loss on sale of subsidiaries
—

 
251

Deferred income tax expense
27

 
81

Trading portfolio activity
17

 
16

Net realized investment (gains) losses
39

 
(72
)
Equity method investees
127

 
65

Net amortization of investments
(17
)
 
(1
)
Depreciation and amortization
62

 
62

Changes in:
 
 
 
Receivables, net
70

 
611

Accrued investment income
(34
)
 
(37
)
Deferred acquisition costs
11

 
14

Insurance reserves
195

 
(222
)
Other assets
(61
)
 
(49
)
Other liabilities
(32
)
 
(133
)
Other, net
92

 
(32
)
Total adjustments
496

 
554

Net cash flows provided by operating activities
1,045

 
1,047

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
3,590

 
4,005

Fixed maturity securities - maturities, calls and redemptions
3,101

 
2,901

Equity securities
43

 
23

Limited partnerships
156

 
133

Mortgage loans
22

 
36

Purchases:
 
 
 
Fixed maturity securities
(7,055
)
 
(7,457
)
Equity securities
(60
)
 
(44
)
Limited partnerships
(120
)
 
(218
)
Mortgage loans
(81
)
 
(84
)
Change in other investments
5

 
10

Change in short term investments
222

 
(556
)
Purchases of property and equipment
(84
)
 
(42
)
Proceeds from sale of subsidiaries
—

 
198

Other, net
7

 
8

Net cash flows used by investing activities
$
(254
)
 
$
(1,087
)

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


6

Table of Contents

Nine months ended September 30
 
 
 
(In millions)
2015
 
2014
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(744
)
 
$
(473
)
Proceeds from the issuance of debt
—

 
546

Other, net
5

 
22

Net cash flows provided (used) by financing activities
(739
)

95

Effect of foreign exchange rate changes on cash
(6
)
 
(3
)
Net change in cash
46

 
52

Cash, beginning of year
190

 
195

Cash, end of period
$
236

 
$
247


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



7

Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2015
 
2014
Common Stock
 
 
 
Balance, beginning of year
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of year
2,151

 
2,145

Stock-based compensation
(1
)
 
4

Balance, end of period
2,150

 
2,149

Retained Earnings
 
 
 
Balance, beginning of year
9,645

 
9,495

Dividends paid to common stockholders
(744
)
 
(473
)
Net income
549

 
493

Balance, end of period
9,450

 
9,515

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of year
400

 
442

Other comprehensive income (loss)
(340
)
 
331

Balance, end of period
60

 
773

Treasury Stock
 
 
 
Balance, beginning of year
(84
)
 
(91
)
Stock-based compensation
6

 
6

Balance, end of period
(78
)
 
(85
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of year
(1
)
 
(23
)
Decrease in notes receivable for common stock
1

 
22

Balance, end of period
—

 
(1
)
Total stockholders' equity
$
12,265

 
$
13,034


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




8

Table of Contents

CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2015.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements, 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, 2014, 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 as of 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, 2015 and for the three and nine months ended September 30, 2015 and 2014 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Sale of Continental Assurance Company (CAC)
On August 1, 2014, the Company completed the sale of the common stock of CAC, the Company's former life insurance subsidiary. The Company elected to include CAC cash flow activity in the comparative Condensed Consolidated Statement of Cash Flows. Further information on discontinued operations is provided in Note K to the Condensed Consolidated Financial Statements.
In connection with the sale of CAC, the Company entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. As a result of the coinsurance agreement, the $34 million difference between market value and book value of the funds withheld assets at the coinsurance contract's inception was recognized as a loss in Other operating expenses in the third quarter of 2014.
Recently Issued Accounting Standards Update (ASU) - Disclosures about Short-Duration Contracts
In May of 2015, the Financial Accounting Standards Board issued ASU No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The updated guidance is effective for annual financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within the annual periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statement disclosures.

9

Table of Contents

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 effect 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, 2015, approximately 514 thousand and 545 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 106 thousand and 107 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, 2014, approximately 668 thousand and 654 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 180 thousand and 167 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.

10

Table of Contents

Note C. Investments
The significant components of Net investment income are presented in the following table.
Periods ended September 30
Three Months

Nine Months
(In millions)
2015

2014

2015

2014
Fixed maturity securities
$
449

 
$
453

 
$
1,344

 
$
1,356

Equity securities
3

 
2

 
9

 
7

Limited partnership investments
(93
)
 
29

 
69

 
199

Mortgage loans
8

 
7

 
25

 
22

Short term investments
2

 
1

 
4

 
2

Trading portfolio
1

 
2

 
6

 
8

Other
1

 
—

 
1

 
3

Gross investment income
371

 
494

 
1,458

 
1,597

Investment expense
(17
)
 
(14
)
 
(46
)
 
(41
)
Net investment income
$
354

 
$
480

 
$
1,412

 
$
1,556

Net realized investment gains (losses) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
22

 
$
51

 
$
91

 
$
124

Gross realized losses
(51
)
 
(12
)
 
(120
)
 
(66
)
Net realized investment gains (losses) on fixed maturity securities
(29
)
 
39

 
(29
)
 
58

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
1

 
1

 
2

 
6

Gross realized losses
(19
)
 
(4
)
 
(21
)
 
(4
)
Net realized investment gains (losses) on equity securities
(18
)
 
(3
)
 
(19
)
 
2

Derivative financial instruments
(1
)
 
—

 
9

 
1

Short term investments and other
(1
)
 
1

 
—

 
8

Net realized investment gains (losses)
$
(49
)
 
$
37

 
$
(39
)
 
$
69

The components of Net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
36

 
$
6

 
$
52

 
$
9

States, municipalities and political subdivisions
—

 
—

 
18

 
—

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
1

 
2

 
7

 
4

Other asset-backed
—

 
—

 
1

 
1

Total asset-backed
1

 
2

 
8

 
5

Total fixed maturity securities available-for-sale
37

 
8

 
78

 
14

Equity securities available-for-sale -- Common stock
19

 
2

 
20

 
3

Short term investments
—

 
—

 
1

 
—

Net OTTI losses recognized in earnings
$
56

 
$
10

 
$
99

 
$
17


11

Table of Contents

The following tables present a summary of fixed maturity and equity securities.
September 30, 2015
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
$
17,155

 
$
1,237

 
$
207

 
$
18,185

 
$
—

States, municipalities and political subdivisions
11,978

 
1,336

 
17

 
13,297

 
(5
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,850

 
204

 
13

 
5,041

 
(46
)
Commercial mortgage-backed
2,183

 
77

 
9

 
2,251

 
—

Other asset-backed
1,009

 
11

 
4

 
1,016

 
—

Total asset-backed
8,042

 
292

 
26

 
8,308

 
(46
)
U.S. Treasury and obligations of government-sponsored enterprises
24

 
5

 
—

 
29

 
—

Foreign government
333

 
12

 
1

 
344

 
—

Redeemable preferred stock
33

 
2

 
—

 
35

 
—

Total fixed maturity securities available-for-sale
37,565

 
2,884

 
251

 
40,198

 
$
(51
)
Total fixed maturity securities trading
3

 


 


 
3

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
62

 
3

 
—

 
65

 


Preferred stock
145

 
4

 
2

 
147

 


Total equity securities available-for-sale
207

 
7

 
2

 
212

 


Total
$
37,775

 
$
2,891

 
$
253

 
$
40,413

 



December 31, 2014
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
$
17,210

 
$
1,721

 
$
61

 
$
18,870

 
$
—

States, municipalities and political subdivisions
11,285

 
1,463

 
8

 
12,740

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,028

 
218

 
13

 
5,233

 
(53
)
Commercial mortgage-backed
2,056

 
93

 
5

 
2,144

 
(2
)
Other asset-backed
1,234

 
11

 
10

 
1,235

 
—

Total asset-backed
8,318

 
322

 
28

 
8,612

 
(55
)
U.S. Treasury and obligations of government-sponsored enterprises
26

 
5

 
—

 
31

 
—

Foreign government
438

 
16

 
—

 
454

 
—

Redeemable preferred stock
39

 
3

 
—

 
42

 
—

Total fixed maturity securities available-for-sale
37,316

 
3,530

 
97

 
40,749

 
$
(55
)
Total fixed maturity securities trading
19

 


 


 
19

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
38

 
9

 
—

 
47

 


Preferred stock
172

 
5

 
2

 
175

 


Total equity securities available-for-sale
210

 
14

 
2

 
222

 


Total
$
37,545

 
$
3,544

 
$
99

 
$
40,990

 




12

Table of Contents

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. As of September 30, 2015 and December 31, 2014, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $1,046 million and $1,288 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).

13

Table of Contents

The following tables present the estimated fair value and gross unrealized losses of 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.
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 2015
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
$
3,744

 
$
177

 
$
188

 
$
30

 
$
3,932

 
$
207

States, municipalities and political subdivisions
655

 
11

 
131

 
6

 
786

 
17

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
308

 
3

 
211

 
10

 
519

 
13

Commercial mortgage-backed
479

 
6

 
81

 
3

 
560

 
9

Other asset-backed
354

 
4

 
9

 
—

 
363

 
4

Total asset-backed
1,141

 
13

 
301

 
13

 
1,442

 
26

U.S. Treasury and obligations of government-sponsored enterprises
1

 
—

 
—

 
—

 
1

 
—

Foreign government
23

 
—

 
3

 
1

 
26

 
1

Redeemable preferred stock
3

 
—

 
—

 
—

 
3

 
—

Total fixed maturity securities available-for-sale
5,567

 
201

 
623

 
50

 
6,190

 
251

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
3

 
—

 
14

 
2

 
17

 
2

Total
$
5,570

 
$
201

 
$
637

 
$
52

 
$
6,207

 
$
253


 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2014
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
1,330

 
$
46

 
$
277

 
$
15

 
$
1,607

 
$
61

States, municipalities and political subdivisions
335

 
5

 
127

 
3

 
462

 
8

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
293

 
5

 
189

 
8

 
482

 
13

Commercial mortgage-backed
264

 
2

 
99

 
3

 
363

 
5

Other asset-backed
607

 
10

 
7

 
—

 
614

 
10

Total asset-backed
1,164

 
17

 
295

 
11

 
1,459

 
28

U.S. Treasury and obligations of government-sponsored enterprises
3

 
—

 
4

 
—

 
7

 
—

   Foreign government
3

 
—

 
3

 
—

 
6

 
—

Redeemable preferred stock
3

 
—

 
—

 
—

 
3

 
—

Total fixed maturity securities available-for-sale
2,838

 
68

 
706

 
29

 
3,544

 
97

Equity securities available-for-sale:


 


 


 


 


 


   Preferred stock
17

 
2

 
1

 
—

 
18

 
2

Total
$
2,855

 
$
70

 
$
707

 
$
29

 
$
3,562

 
$
99




14

Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2015 table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of September 30, 2015.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of September 30, 2015 and 2014 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)
2015
 
2014
 
2015
 
2014
Beginning balance of credit losses on fixed maturity securities
$
59

 
$
66

 
$
62

 
$
74

Reductions for securities sold during the period
(2
)
 
(2
)
 
(5
)
 
(7
)
Reductions for securities the Company intends to sell or more likely than not will be required to sell
—

 
—

 
—

 
(3
)
Ending balance of credit losses on fixed maturity securities
$
57

 
$
64

 
$
57

 
$
64

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
September 30, 2015
 
December 31, 2014
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,406

 
$
1,425

 
$
2,479

 
$
2,511

Due after one year through five years
7,772

 
8,186

 
9,054

 
9,605

Due after five years through ten years
14,149

 
14,577

 
12,055

 
12,584

Due after ten years
14,238

 
16,010

 
13,728

 
16,049

Total
$
37,565

 
$
40,198

 
$
37,316

 
$
40,749

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.

15

Table of Contents

Derivative Financial Instruments
The following tables present the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments.
September 30, 2015
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
Liability
Without hedge designation
 
 
 
 
 
Equity warrants
$
5

 
$
—

 
$
—

Embedded derivative on funds withheld liability
182

 
—

 
(5
)
Total
 
 
$
—

 
$
(5
)

December 31, 2014
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
Liability
Without hedge designation
 
 
 
 
 
Currency forwards
$
9

 
$
—

 
$
—

Equity warrants
5

 
—

 
—

Embedded derivative on funds withheld liability
184

 
—

 
3

Total
 
 
$
—

 
$
3

Derivative financial instruments are presented gross 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 as of September 30, 2015 and December 31, 2014. The embedded derivative on funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As of September 30, 2015, the Company had committed approximately $414 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of September 30, 2015, the Company had mortgage loan commitments of $29 million representing signed loan applications received and accepted.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of September 30, 2015, the Company had commitments to purchase or fund additional amounts of $81 million and sell $43 million under the terms of such securities.

16

Table of Contents

Note D. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are not observable.
Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures 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 period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

17

Table of Contents

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are presented in the following tables.
September 30, 2015
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
28

 
$
18,007

 
$
153

 
$
18,188

States, municipalities and political subdivisions
—

 
13,236

 
61

 
13,297

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,837

 
204

 
5,041

Commercial mortgage-backed
—

 
2,180

 
71

 
2,251

Other asset-backed
—

 
545

 
471

 
1,016

Total asset-backed
—

 
7,562

 
746

 
8,308

U.S. Treasury and obligations of government-sponsored enterprises
28

 
1

 
—

 
29

Foreign government
28

 
316

 
—

 
344

Redeemable preferred stock
24

 
11

 
—

 
35

Total fixed maturity securities
108

 
39,133

 
960

 
40,201

Equity securities
154

 
43

 
15

 
212

Other invested assets
—

 
45

 
—

 
45

Short term investments
624

 
773

 
—

 
1,397

Life settlement contracts, included in Other assets
—

 
—

 
74

 
74

Total assets
$
886

 
$
39,994

 
$
1,049

 
$
41,929

Liabilities
 
 
 
 
 
 
 
Other liabilities
$
—

 
$
(5
)
 
$
—

 
$
(5
)
Total liabilities
$
—

 
$
(5
)
 
$
—

 
$
(5
)
December 31, 2014
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
32

 
$
18,695

 
$
162

 
$
18,889

States, municipalities and political subdivisions
—

 
12,646

 
94

 
12,740

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
5,044

 
189

 
5,233

Commercial mortgage-backed
—

 
2,061

 
83

 
2,144

Other asset-backed
—

 
580

 
655

 
1,235

Total asset-backed
—

 
7,685

 
927

 
8,612

U.S. Treasury and obligations of government-sponsored enterprises
28

 
3

 
—

 
31

Foreign government
41

 
413

 
—

 
454

Redeemable preferred stock
30

 
12

 
—

 
42

Total fixed maturity securities
131

 
39,454

 
1,183

 
40,768

Equity securities
145

 
61

 
16

 
222

Other invested assets
—

 
41

 
—

 
41

Short term investments
681

 
963

 
—

 
1,644

Life settlement contracts, included in Other assets
—

 
—

 
82

 
82

Total assets
$
957

 
$
40,519

 
$
1,281

 
$
42,757

Liabilities
 
 
 
 
 
 
 
Other liabilities
$
—

 
$
3

 
$
—

 
$
3

Total liabilities
$
—

 
$
3

 
$
—

 
$
3


18

Table of Contents

The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Level 3
(In millions)
Balance as of
July 1,
2015
 
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 as of
September 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2015 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
141

 
$
—

 
$
—

 
$
27

 
$
(1
)
 
$
(11
)
 
$
—

 
$
(3
)
 
$
153

 
$
—

States, municipalities and political subdivisions
85

 
—

 
—

 
—

 
—

 
—

 
—

 
(24
)
 
61

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
207

 
2

 
(2
)
 
4

 
—

 
(7
)
 
—

 
—

 
204

 
—

Commercial mortgage-backed
87

 
5

 
(4
)
 
8

 
—

 
(15
)
 
—

 
(10
)
 
71

 
—

Other asset-backed
490

 
—

 
(6
)
 
43

 
(20
)
 
(32
)
 
—

 
(4
)
 
471

 
—

Total asset-backed
784

 
7

 
(12
)
 
55

 
(20
)
 
(54
)
 
—

 
(14
)
 
746

 
—

Total fixed maturity securities
1,010

 
7

 
(12
)
 
82

 
(21
)
 
(65
)
 
—

 
(41
)
 
960

 
—

Equity securities
16

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
15

 
—

Life settlement contracts
75

 
5

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
74

 
2

Total
$
1,101

 
$
12

 
$
(13
)
 
$
82

 
$
(21
)
 
$
(71
)
 
$
—

 
$
(41
)
 
$
1,049

 
$
2


19

Table of Contents

Level 3
(In millions)
Balance as of
July 1,
2014
 
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 as of
September 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2014 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
194

 
$
—

 
$
(1
)
 
$
4

 
$
—

 
$
(3
)
 
$
—

 
$
(21
)
 
$
173

 
$
—

States, municipalities and political subdivisions
79

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
80

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
185

 
1

 
—

 
—

 
—

 
(17
)
 
11

 
(20
)
 
160

 
—

Commercial mortgage-backed
59

 
2

 
(2
)
 
28

 
—

 
(21
)
 
31

 
—

 
97

 
—

Other asset-backed
626

 
1

 
(4
)
 
80

 
—

 
(25
)
 
—

 
(36
)
 
642

 
—

Total asset-backed
870

 
4

 
(6
)
 
108

 
—

 
(63
)
 
42

 
(56
)
 
899

 
—

Total fixed maturity securities
1,143

 
4

 
(6
)
 
112

 
—

 
(66
)
 
42

 
(77
)
 
1,152

 
—

Equity securities
2

 
—

 
(1
)
 
16

 
—

 
—

 
—

 
—

 
17

 
—

Life settlement contracts
86

 
1

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
86

 
1

Total
$
1,231

 
$
5

 
$
(7
)
 
$
128

 
$
—

 
$
(67
)
 
$
42

 
$
(77
)
 
$
1,255

 
$
1






20

Table of Contents

Level 3
(In millions)
Balance as of
January 1,
2015
 
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 as of
September 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2015 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
162

 
$
(1
)
 
$
(1
)
 
$
39

 
$
(13
)
 
$
(32
)
 
$
37

 
$
(38
)
 
$
153

 
$
—

States, municipalities and political subdivisions
94

 
1

 
—

 
—

 
—

 
(10
)
 
—

 
(24
)
 
61

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
189

 
4

 
(4
)
 
76

 
—

 
(28
)
 
—

 
(33
)
 
204

 
—

Commercial mortgage-backed
83

 
7

 
(4
)
 
23

 
—

 
(17
)
 
17

 
(38
)
 
71

 
—

Other asset-backed
655

 
3

 
4

 
125

 
(254
)
 
(52
)
 
—

 
(10
)
 
471

 
(1
)
Total asset-backed
927

 
14

 
(4
)
 
224

 
(254
)
 
(97
)
 
17

 
(81
)
 
746

 
(1
)
Total fixed maturity securities
1,183

 
14

 
(5
)
 
263

 
(267
)
 
(139
)
 
54

 
(143
)
 
960

 
(1
)
Equity securities
16

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
15

 
—

Life settlement contracts
82

 
22

 
—

 
—

 
—

 
(30
)
 
—

 
—

 
74

 
1

Total
$
1,281

 
$
36

 
$
(6
)
 
$
263

 
$
(267
)
 
$
(169
)
 
$
54

 
$
(143
)
 
$
1,049

 
$
—


21

Table of Contents

Level 3
(In millions)
Balance as of
January 1,
2014
 
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 as of
September 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2014 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
204

 
$
2

 
$
—

 
$
30

 
$
(10
)
 
$
(13
)
 
$
8

 
$
(48
)
 
$
173

 
$
—

States, municipalities and political subdivisions
71

 
1

 
3

 
1

 
(10
)
 
—

 
14

 
—

 
80

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
331

 
(22
)
 
62

 
47

 
(174
)
 
(57
)
 
32

 
(59
)
 
160

 
—

Commercial mortgage-backed
151

 
4

 
(2
)
 
28

 
(60
)
 
(23
)
 
43

 
(44
)
 
97

 
—

Other asset-backed
446

 
2

 
—

 
457

 
(111
)
 
(115
)
 
—

 
(37
)
 
642

 
(1
)
Total asset-backed
928

 
(16
)
 
60

 
532

 
(345
)
 
(195
)
 
75

 
(140
)
 
899

 
(1
)
Total fixed maturity securities
1,203

 
(13
)
 
63

 
563

 
(365
)
 
(208
)
 
97

 
(188
)
 
1,152

 
(1
)
Equity securities
11

 
3

 
(5
)
 
16

 
(8
)
 
—

 
—

 
—

 
17

 
—

Life settlement contracts
88

 
23

 
—

 
—

 
—

 
(25
)
 
—

 
—

 
86

 
3

Separate account business
1

 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

Total
$
1,303

 
$
13

 
$
58

 
$
579

 
$
(373
)
 
$
(233
)
 
$
97

 
$
(189
)
 
$
1,255

 
$
2





22

Table of Contents

Net realized and unrealized gains and losses, including those 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
Other liabilities - Derivative financial instruments
 
Net realized investment gains (losses)
Securities shown on the previous pages may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended September 30, 2015 there were $10 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the three months ended September 30, 2014 there were no transfers between Level 1 and Level 2. During the nine months ended September 30, 2014, there were $24 million of transfers from Level 2 to Level 1 and $1 million from Level 1 to Level 2. 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
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. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are 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 private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

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Derivative Financial Investments
Level 2 securities primarily include the embedded derivative on funds withheld liability and currency forwards. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs. Currency forwards are valued using observable market forward rates.
Overseas Deposits
Overseas deposits, which can be redeemed at net asset value in 90 days or less, are classified as Level 2.
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.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the 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.
September 30, 2015
Estimated Fair Value
 (In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
121

 
Discounted cash flow
 
Credit spread
 
2% - 31% (3%)
Life settlement contracts
74

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
55% - 1676% (164%)
December 31, 2014
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
101

 
Discounted cash flow
 
Credit spread
 
2% - 13% (3%)
Equity securities
16

 
Market approach
 
Private offering price
 
$12 - $4,391 per share ($600)
Life settlement contracts
82

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
55% - 1676% (163%)
For fixed maturity securities, an increase to the 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.

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Table of Contents

Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
September 30, 2015
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
640

 
$
—

 
$
—

 
$
660

 
$
660

Liabilities
 
 
 
 
 
 
 
 
 
Short term debt
$
350

 
$
—

 
$
366

 
$
—

 
$
366

Long term debt
2,211

 
—

 
2,478

 
—

 
2,478


December 31, 2014
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Notes receivable for the issuance of common stock
$
1

 
$
—

 
$
—

 
$
1

 
$
1

Mortgage loans
588

 
—

 
—

 
608

 
608

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,559

 
$
—

 
$
2,883

 
$
—

 
$
2,883

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair values of Mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.
The 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.


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Table of Contents

Note E. 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 incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to 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 can contribute 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 $14 million and $103 million for the three and nine months ended September 30, 2015. Catastrophe losses in 2015 related primarily to U.S. weather-related events. The Company reported catastrophe losses, net of reinsurance, of $17 million and $147 million for the three and nine months ended September 30, 2014.

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Net Prior Year Development
The following tables and discussion present net prior year development recorded for Specialty, Commercial, International and Corporate & Other Non-Core segments.
Three months ended September 30, 2015
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(130
)
 
$
(11
)
 
$
(34
)
 
$
—

 
$
(175
)
Pretax (favorable) unfavorable premium development
(2
)
 
(5
)
 
2

 
—

 
(5
)
Total pretax (favorable) unfavorable net prior year development
$
(132
)
 
$
(16
)
 
$
(32
)
 
$
—

 
$
(180
)

Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(79
)
 
$
71

 
$
(17
)
 
$
(1
)
 
$
(26
)
Pretax (favorable) unfavorable premium development
(4
)
 
—

 
7

 
—

 
3

Total pretax (favorable) unfavorable net prior year development
$
(83
)
 
$
71

 
$
(10
)
 
$
(1
)
 
$
(23
)

Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(141
)
 
$
—

 
$
(46
)
 
$
—

 
$
(187
)
Pretax (favorable) unfavorable premium development
(10
)
 
(17
)
 
16

 
—

 
(11
)
Total pretax (favorable) unfavorable net prior year development
$
(151
)
 
$
(17
)
 
$
(30
)
 
$
—

 
$
(198
)

Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(123
)
 
$
179

 
$
(32
)
 
$
(1
)
 
$
23

Pretax (favorable) unfavorable premium development
(12
)
 
(24
)
 
6

 
—

 
(30
)
Total pretax (favorable) unfavorable net prior year development
$
(135
)
 
$
155

 
$
(26
)
 
$
(1
)
 
$
(7
)



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Table of Contents

Specialty
The following table presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the Specialty segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Medical Professional Liability
$
(19
)
 
$
16

 
$
(11
)
 
$
17

Other Professional Liability and Management Liability
(37
)
 
(9
)
 
(41
)
 
(59
)
Surety
(70
)
 
(79
)
 
(69
)
 
(78
)
Warranty
—

 
—

 
1

 
—

Other
(4
)
 
(7
)
 
(21
)
 
(3
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(130
)
 
$
(79
)
 
$
(141
)
 
$
(123
)
Three Months
2015
Favorable development in medical professional liability was related to lower than expected severity in accident years 2008 through 2013.
Favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions in accident years 2012 and prior. Additional favorable development related to lower than expected severity in accident years 2009 through 2013 for directors and officers liability.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.
2014
Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.

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Table of Contents

Nine Months
2015
Overall, favorable development for medical professional liability was related to lower than expected severity in accident years 2008 through 2013. Unfavorable development was recorded related to increased claim frequency in the aging services business for accident years 2013 and 2014.
Overall, favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions in accident years 2012 and prior. Additional favorable development related to lower than expected severity in accident years 2009 through 2013 for directors and officers liability and lower than expected severity in accident years 2010 and prior for professional services. Unfavorable development was related to increased claim frequency on public company management liability in accident years 2012 through 2014.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.
Favorable development for other coverages was due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.
2014
Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.
Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was better than expected severity in accident years 2008 through 2011.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.




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Table of Contents

Commercial
The following table presents further detail of the development recorded for the Commercial segment. A significant amount of the unfavorable development for the nine months ended September 30, 2014 relates to business classes which the Company has exited, but also includes Small Business where the Company has taken underwriting actions in an effort to improve profitability.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015

2014
 
2015
 
2014
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Commercial Auto
$
—

 
$
13

 
$
7

 
$
52

General Liability
3

 
44

 
8

 
76

Workers' Compensation
(1
)
 
25

 
22

 
75

Property and Other
(13
)
 
(11
)
 
(37
)
 
(24
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(11
)
 
$
71

 
$
—

 
$
179

Three Months
2015
Favorable development for property and other was primarily due to better than expected loss emergence on catastrophe events in accident year 2014.
2014
Overall, unfavorable development for general liability coverages was primarily related to higher than expected severity in accident years 2010, 2011 and 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.
Overall, unfavorable development for workers’ compensation was primarily related to increased medical severity in accident years 2010 and prior and higher than expected severity related to Defense Base Act (DBA) contractors in accident years 2010 through 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers' compensation reinsurance pool.
Favorable development for property and other first-party coverages was recorded in accident years 2010 and prior, primarily related to lower than expected frequency and favorable individual claim settlements.

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Table of Contents

Nine Months
2015
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2008 through 2013.
Favorable development for property and other was primarily due to better than expected loss emergence from 2012 and 2014 catastrophe events and better than expected frequency of large claims in accident year 2014.
The nine months also included unfavorable loss development related to an extra contractual obligation loss and losses associated with premium development.
2014
Unfavorable development for commercial auto was primarily related to increased claim frequency of large losses in accident years 2010 through 2013.
Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to DBA contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers' compensation reinsurance pool.
Overall, favorable development for property and other coverages in accident years 2011 and prior primarily related to lower than expected frequency and favorable individual claim settlements. Additionally, there was favorable development due to better than expected loss emergence in catastrophe losses in accident year 2013. Unfavorable development was recorded in accident year 2012 primarily related to higher than expected loss emergence in catastrophe losses.




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Table of Contents

International
The following table presents further detail of the development recorded for the International segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Medical Professional Liability
$
(8
)
 
$
(3
)
 
$
(8
)
 
$
(2
)
Other Professional Liability
(11
)
 
1

 
(16
)
 
(14
)
Liability
(5
)
 
(3
)
 
(12
)
 
(9
)
Property & Marine
(5
)
 
(11
)
 
(19
)
 
(10
)
Other
(5
)
 
(1
)
 
9

 
(7
)
Commutations
—

 
—

 
—

 
10

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(34
)
 
$
(17
)
 
$
(46
)
 
$
(32
)
Three Months
2015
Favorable development in medical professional liability was due to better than expected loss emergence on accident years 2011 to 2013.
Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.
Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.
Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.
2014
Favorable development for property and marine coverages was primarily related to better than expected severity in accident year 2013.

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Table of Contents

Nine Months
2015
Favorable development in medical professional liability was due to better than expected loss emergence on accident years 2011 to 2013.
Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.
Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.
Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.
Unfavorable development in other is due to higher than expected large losses in financial institutions and political risk, primarily in accident year 2014.
2014
Favorable development for other professional liability was primarily related to lower than expected severity in accident years 2011 and prior.
Favorable development for property and marine coverages was primarily related to better than expected severity in accident year 2013.
Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for uncollectible reinsurance.

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Table of Contents

Asbestos and Environmental Pollution (A&EP) Reserves
In 2010, Continental Casualty Company (CCC) together with several of the Company’s insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO (Loss Portfolio Transfer or LPT). At the transaction effective date, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.
Through December 31, 2013, the Company recorded $0.9 billion of additional amounts ceded under LPT. As a result, the cumulative amounts ceded under the Loss Portfolio Transfer exceeded the $2.2 billion consideration paid, resulting in a deferred retroactive reinsurance gain. This deferred gain is recognized in earnings in proportion to actual recoveries under the Loss Portfolio Transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within the limit under the contract. In a period in which the estimate of ceded losses is changed, the required change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the inception of the LPT.
The following table displays the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.

Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Net A&EP adverse development before consideration of LPT
$
—

 
$
—

 
$
150

 
$
—

Provision for uncollectible third-party reinsurance on A&EP
—

 
—

 
—

 
—

Additional amounts ceded under LPT
—

 
—

 
150

 
—

Retroactive reinsurance benefit recognized
(4
)
 
(4
)
 
(75
)
 
(9
)
Pretax impact of deferred retroactive reinsurance benefit
$
(4
)
 
$
(4
)
 
$
75

 
$
(9
)

The fourth quarter of 2014 A&EP reserve review was not completed in 2014 because additional information and analysis on inuring third-party reinsurance recoveries were needed to finalize the review. The review was finalized in the second quarter of 2015. Unfavorable development was due to a decrease in anticipated future reinsurance recoveries related to asbestos claims and higher than expected severity on pollution claims. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.
As of September 30, 2015 and December 31, 2014, the cumulative amounts ceded under the LPT were $2.6 billion and $2.5 billion. The unrecognized deferred retroactive reinsurance benefit was $251 million and $176 million as of September 30, 2015 and December 31, 2014.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $2.8 billion and $3.4 billion as of September 30, 2015 and December 31, 2014. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the Company’s A&EP claims.



34

Table of Contents

Note F. 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 G. Benefit Plans
The components of net periodic cost (benefit) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Pension cost (benefit)
 
 
 
 
 
 
 
Service cost
$
—

 
$
3

 
$
4

 
$
7

Interest cost on projected benefit obligation
29

 
33

 
85

 
99

Expected return on plan assets
(44
)
 
(48
)
 
(131
)
 
(144
)
Amortization of net actuarial loss
7

 
6

 
26

 
19

Net periodic pension cost (benefit)
$
(8
)
 
$
(6
)
 
$
(16
)
 
$
(19
)
 
 
 
 
 
 
 
 
Postretirement cost (benefit)
 
 
 
 
 
 
 
Interest cost on projected benefit obligation
$
—

 
$
—

 
$
—

 
$
1

Amortization of prior service credit
(1
)
 
—

 
(2
)
 
(9
)
Amortization of net actuarial loss
—

 
—

 
1

 
—

Curtailment gain
—

 
—

 
—

 
(86
)
Net periodic postretirement cost (benefit)
$
(1
)
 
$
—

 
$
(1
)
 
$
(94
)
In the second quarter of 2015, the Company eliminated future benefit accruals associated with the CNA Retirement Plan (Plan) effective June 30, 2015.  Employees who were continuing to accrue under this Plan up until that date are entitled to an accrued benefit payable based on their eligible compensation and accrued service through June 30, 2015, in accordance with the terms of the Plan. Starting with the first pay period after July 1, 2015, affected employees began receiving enhanced employer contributions in the CNA 401(k) Plus Plan similar to employees who elected to cease accruals effective December 31, 1999. Employees who elected to cease accruals effective December 31, 1999 are not affected by this curtailment. This curtailment resulted in a $55 million decrease in the Plan benefit obligation liability and a reduction of the unrecognized actuarial losses included in AOCI. In connection with the curtailment, the Company remeasured the plan benefit obligation which resulted in an increase in the discount rate used to determine the benefit obligation from 3.85% to 4.00%.
In the second quarter of 2014, the Company eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change was a negative plan amendment that resulted in an $86 million curtailment gain which was included in Other operating expenses within the Corporate & Other Non-Core segment. In connection with the plan amendment, the Company remeasured the plan benefit obligation which resulted in a decrease in the discount rate used to determine the benefit obligation from 3.60% to 3.10%.


35

Table of Contents

Note H. 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, as of September 30, 2015, the maximum potential future lease payments and other related costs that the Company could be required to pay under this guarantee, in excess of amounts already recorded, were approximately $28 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
As of September 30, 2015 and December 31, 2014, the Company had recorded liabilities of $5 million related to guarantee and indemnification agreements. Management believes that it is not likely that any future indemnity claims will be significantly greater than the amounts recorded.
In the course of selling business entities and assets to third parties, the Company agreed to guarantee the performance of certain obligations of a previously owned subsidiary and 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 guarantee and indemnification agreements in effect for sales of business entities, assets and third-party loans may include provisions that survive indefinitely. As of September 30, 2015, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $260 million. Should the Company be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of the previously owned subsidiary.
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, 2015, 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. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire or until the agreed-upon contract terms expire.
In the normal course of business, the Company also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary, which are estimated to mature through 2120. The potential amount of future payments the Company could be required to pay under these guarantees was approximately $2.0 billion as of September 30, 2015. The Company does not believe a payable is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

36

Table of Contents

Note I. Accumulated Other Comprehensive Income (Loss) by Component
The following tables present the changes in Accumulated other comprehensive income (loss) by component.
(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 as of July 1, 2015
$
31

 
$
689

 
$
(585
)
 
$
8

 
$
143

Other comprehensive income (loss) before reclassifications
2

 
(67
)
 
—

 
(53
)
 
(118
)
Amounts reclassified from Accumulated other comprehensive income (loss) after tax (expense) benefit of $-, $17, $2, $- and $19
—

 
(31
)
 
(4
)
 
—

 
(35
)
Other comprehensive income (loss) after tax (expense) benefit of $(1), $21, $(2), $- and $18
2

 
(36
)
 
4

 
(53
)
 
(83
)
Balance as of September 30, 2015
$
33

 
$
653

 
$
(581
)
 
$
(45
)
 
$
60

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Net unrealized gains (losses) on discontinued operations
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of July 1, 2014
$
35

 
$
1,182

 
$
37

 
$
(476
)
 
$
184

 
$
962

Other comprehensive income (loss) before reclassifications
1

 
(59
)
 
(3
)
 
(2
)
 
(73
)
 
(136
)
Amounts reclassified from Accumulated other comprehensive income (loss) after tax (expense) benefit of $-, $(12), $(23), $2, $- and $(33)
—

 
24

 
34

 
(5
)
 
—

 
53

Other comprehensive income (loss) after tax (expense) benefit of $(1), $64, $25, $(1), $- and $87
1

 
(83
)
 
(37
)
 
3

 
(73
)
 
(189
)
Balance as of September 30, 2014
$
36

 
$
1,099

 
$
—

 
$
(473
)
 
$
111

 
$
773














37

Table of Contents

(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 as of January 1, 2015
$
36

 
$
942

 
$
(633
)
 
$
55

 
$
400

Other comprehensive income (loss) before reclassifications
(3
)
 
(318
)
 
36

 
(100
)
 
(385
)
Amounts reclassified from Accumulated other comprehensive income (loss) after tax (expense) benefit of $-, $22, $9, $- and $31
—

 
(29
)
 
(16
)
 
—

 
(45
)
Other comprehensive income (loss) after tax (expense) benefit of $1, $140, $(28), $- and $113
(3
)
 
(289
)
 
52

 
(100
)
 
(340
)
Balance as of September 30, 2015
$
33

 
$
653

 
$
(581
)
 
$
(45
)
 
$
60

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Net unrealized gains (losses) on discontinued operations
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of January 1, 2014
$
26

 
$
692

 
$
—

 
$
(426
)
 
$
150

 
$
442

Transfer to net assets held for sale
(5
)
 
(17
)
 
22

 
—

 
—

 
—

Other comprehensive income (loss) before reclassifications
15

 
462

 
12

 
(2
)
 
(39
)
 
448

Amounts reclassified from Accumulated other comprehensive income (loss) after tax (expense) benefit of $-, $(20), $(23), $(25), $- and $(68)
—

 
38

 
34

 
45

 
—

 
117

Other comprehensive income (loss) after tax (expense) benefit of $(8), $(209), $15, $26, $- and $(176)
15

 
424

 
(22
)
 
(47
)
 
(39
)
 
331

Balance as of September 30, 2014
$
36

 
$
1,099

 
$
—

 
$
(473
)
 
$
111

 
$
773

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)
Net unrealized gains (losses) on discontinued operations
 
Income (loss) from discontinued operations
Pension and postretirement benefits
 
Other operating expenses

38

Table of Contents

Note J. Business Segments
The Company's core property and casualty commercial insurance operations are aggregated and reported in three business segments: Specialty, Commercial and International. The Company's non-core operations are managed and reported 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 to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2014. 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 (loss), 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, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains (losses) because net realized investment gains (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.

39

Table of Contents

The Company's results of continuing operations and selected balance sheet items by segment are presented in the following tables.
Three months ended September 30, 2015

Specialty
 

Commercial
 
International
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
706

 
$
705

 
$
203

 
$
137

 
$
—

 
$
—

 
$
1,751

Net investment income
76

 
82

 
13

 
182

 
1

 
—

 
354

Other revenues
86

 
9

 
1

 
(1
)
 
4

 
(2
)
 
97

Total operating revenues
868

 
796

 
217

 
318

 
5

 
(2
)
 
2,202

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
307

 
427

 
106

 
361

 
(3
)
 
—

 
1,198

Policyholders’ dividends
1

 
1

 
—

 
—

 
—

 
—

 
2

Amortization of deferred acquisition costs
150

 
118

 
45

 
6

 
—

 
—

 
319

Other insurance related expenses
67

 
128

 
33

 
35

 
—

 
—

 
263

Other expenses
73

 
10

 
9

 
1

 
47

 
(2
)
 
138

Total claims, benefits and expenses
598

 
684

 
193

 
403

 
44

 
(2
)
 
1,920

Operating income (loss) before income tax
270

 
112

 
24

 
(85
)
 
(39
)
 
—

 
282

Income tax (expense) benefit on operating income (loss)
(91
)
 
(37
)
 
(15
)
 
55

 
16

 
—

 
(72
)
Net operating income (loss)
179

 
75

 
9

 
(30
)
 
(23
)
 
—

 
210

Net realized investment gains (losses)
(22
)
 
(29
)
 
(1
)
 
2

 
1

 
—

 
(49
)
Income tax (expense) benefit on net realized investment gains (losses)
8

 
8

 
1

 
—

 
—

 
—

 
17

Net realized investment gains (losses), after tax
(14
)
 
(21
)
 
—

 
2

 
1

 
—

 
(32
)
Net income (loss) from continuing operations
$
165

 
$
54

 
$
9

 
$
(28
)
 
$
(22
)
 
$
—

 
$
178


















40

Table of Contents


Three months ended September 30, 2014

Specialty
 

Commercial
 
International
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
725

 
$
721

 
$
225

 
$
139

 
$
—

 
$
—

 
$
1,810

Net investment income
126

 
157

 
15

 
177

 
5

 
—

 
480

Other revenues
76

 
10

 
—

 
(3
)
 
3

 
(2
)
 
84

Total operating revenues
927

 
888

 
240

 
313

 
8

 
(2
)
 
2,374

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
367

 
549

 
134

 
319

 
(18
)
 
—

 
1,351

Policyholders’ dividends
2

 
1

 
—

 
—

 
—

 
—

 
3

Amortization of deferred acquisition costs
151

 
122

 
52

 
7

 
—

 
—

 
332

Other insurance related expenses
65

 
125

 
37

 
33

 
—

 
—

 
260

Other expenses
65

 
10

 
8

 
36

 
55

 
(2
)
 
172

Total claims, benefits and expenses
650

 
807

 
231

 
395

 
37

 
(2
)
 
2,118

Operating income (loss) before income tax
277

 
81

 
9

 
(82
)
 
(29
)
 
—

 
256

Income tax (expense) benefit on operating income (loss)
(93
)
 
(29
)
 
(4
)
 
40

 
12

 
—

 
(74
)
Net operating income (loss)
184

 
52

 
5

 
(42
)
 
(17
)
 
—

 
182

Net realized investment gains (losses)
3

 
2

 
1

 
30

 
1

 
—

 
37

Income tax (expense) benefit on net realized investment gains (losses)
(1
)
 
3

 
(2
)
 
(9
)
 
(1
)
 
—

 
(10
)
Net realized investment gains (losses), after tax
2

 
5

 
(1
)
 
21

 
—

 
—

 
27

Net income (loss) from continuing operations
$
186

 
$
57

 
$
4

 
$
(21
)
 
$
(17
)
 
$
—

 
$
209












41

Table of Contents

Nine months ended September 30, 2015

Specialty
 

Commercial
 
International
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
2,075

 
$
2,086

 
$
601

 
$
412

 
$
—

 
$
(1
)
 
$
5,173

Net investment income
365

 
455

 
40

 
540

 
12

 
—

 
1,412

Other revenues
245

 
27

 
—

 
8

 
9

 
(3
)
 
286

Total operating revenues
2,685

 
2,568

 
641

 
960

 
21

 
(4
)
 
6,871

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
1,152

 
1,388

 
336

 
1,045

 
78

 
—

 
3,999

Policyholders’ dividends
3

 
6

 
—

 
—

 
—

 
—

 
9

Amortization of deferred acquisition costs
440

 
352

 
125

 
19

 
—

 
—

 
936

Other insurance related expenses
202

 
385

 
101

 
104

 
(1
)
 
(1
)
 
790

Other expenses
209

 
23

 
9

 
10

 
140

 
(3
)
 
388

Total claims, benefits and expenses
2,006

 
2,154

 
571

 
1,178

 
217

 
(4
)
 
6,122

Operating income (loss) before income tax
679

 
414

 
70

 
(218
)
 
(196
)
 
—

 
749

Income tax (expense) benefit on operating income (loss)
(228
)
 
(141
)
 
(30
)
 
147

 
70

 
—

 
(182
)
Net operating income (loss)
451

 
273

 
40

 
(71
)
 
(126
)
 
—

 
567

Net realized investment gains (losses)
(18
)
 
(23
)
 
1

 
(2
)
 
3

 
—

 
(39
)
Income tax (expense) benefit on net realized investment gains (losses)
7

 
7

 
—

 
8

 
(1
)
 
—

 
21

Net realized investment gains (losses), after tax
(11
)
 
(16
)
 
1

 
6

 
2

 
—

 
(18
)
Net income (loss) from continuing operations
$
440

 
$
257

 
$
41

 
$
(65
)
 
$
(124
)
 
$
—

 
$
549



September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
619

 
$
664

 
$
172

 
$
517

 
$
2,567

 
$
—

 
$
4,539

Insurance receivables
851

 
996

 
252

 
10

 
2

 
—

 
2,111

Deferred acquisition costs
305

 
216

 
85

 
—

 
—

 
—

 
606

Goodwill
117

 
—

 
34

 
—

 
—

 
—

 
151

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
6,199

 
9,283

 
1,365

 
3,286

 
2,734

 
—

 
22,867

Unearned premiums
1,817

 
1,307

 
455

 
127

 
—

 
—

 
3,706

Future policy benefits
—

 
—

 
—

 
9,520

 
—

 
—

 
9,520


42

Table of Contents

Nine months ended September 30, 2014

Specialty
 

Commercial
 
International
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
2,126

 
$
2,188

 
$
697

 
$
417

 
$
—

 
$
(1
)
 
$
5,427

Net investment income
423

 
549

 
46

 
521

 
17

 
—

 
1,556

Other revenues
218

 
28

 
—

 
10

 
10

 
(4
)
 
262

Total operating revenues
2,767

 
2,765

 
743

 
948

 
27

 
(5
)
 
7,245

Claims, Benefits and Expenses
 

 
 
 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
1,213

 
1,727

 
382

 
929

 
(20
)
 
—

 
4,231

Policyholders’ dividends
4

 
6

 
—

 
—

 
—

 
—

 
10

Amortization of deferred acquisition costs
442

 
371

 
161

 
22

 
—

 
—

 
996

Other insurance related expenses
197

 
376

 
113

 
96

 
—

 
(1
)
 
781

Other expenses
191

 
25

 
20

 
34

 
75

 
(4
)
 
341

Total claims, benefits and expenses
2,047

 
2,505

 
676

 
1,081

 
55

 
(5
)
 
6,359

Operating income (loss) before income tax
720

 
260

 
67

 
(133
)
 
(28
)
 
—

 
886

Income tax (expense) benefit on operating income (loss)
(240
)
 
(85
)
 
(26
)
 
98

 
11

 
—

 
(242
)
Net operating income (loss)
480

 
175

 
41

 
(35
)
 
(17
)
 
—

 
644

Net realized investment gains (losses)
9

 
7

 
1

 
42

 
10

 
—

 
69

Income tax (expense) benefit on net realized investment gains (losses)
(3
)
 
(1
)
 
(1
)
 
(14
)
 
(4
)
 
—

 
(23
)
Net realized investment gains (losses), after tax
6

 
6

 
—

 
28

 
6

 
—

 
46

Net income (loss) from continuing operations
$
486

 
$
181

 
$
41

 
$
(7
)
 
$
(11
)
 
$
—

 
$
690



December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
567

 
$
690

 
$
207

 
$
525

 
$
2,753

 
$
—

 
$
4,742

Insurance receivables
778

 
954

 
250

 
13

 
2

 
—

 
1,997

Deferred acquisition costs
304

 
213

 
83

 
—

 
—

 
—

 
600

Goodwill
117

 
—

 
35

 
—

 
—

 
—

 
152

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
6,229

 
9,514

 
1,441

 
3,183

 
2,904

 
—

 
23,271

Unearned premiums
1,763

 
1,273

 
431

 
125

 
—

 
—

 
3,592

Future policy benefits
—

 
—

 
—

 
9,490

 
—

 
—

 
9,490

Policyholders’ funds
9

 
18

 
—

 
—

 
—

 
—

 
27





43

Table of Contents

The following table presents revenue by line of business for each reportable segment. Revenues are comprised of Operating revenues and Net realized investment gains and losses.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Specialty
 
 
 
 
 
 
 
Management & Professional Liability
$
605

 
$
699

 
$
1,976

 
$
2,113

Surety
132

 
133

 
377

 
380

Warranty & Alternative Risks
109

 
98

 
314

 
283

Specialty revenues
846

 
930

 
2,667

 
2,776

Commercial
 

 
 

 
 
 
 
Middle Market
386

 
404

 
1,207

 
1,219

Small Business
144

 
170

 
467

 
535

Other Commercial Insurance
237

 
316

 
871

 
1,018

Commercial revenues
767

 
890

 
2,545

 
2,772

International


 


 
 
 
 
Canada
52

 
69

 
161

 
210

CNA Europe
78

 
83

 
232

 
254

Hardy
86

 
89

 
249

 
280

International revenues
216

 
241

 
642

 
744

Life & Group Non-Core revenues
320

 
343

 
958

 
990

Corporate & Other Non-Core revenues
6

 
9

 
24

 
37

Eliminations
(2
)
 
(2
)
 
(4
)
 
(5
)
Total revenues
$
2,153

 
$
2,411

 
$
6,832

 
$
7,314



44

Table of Contents

Note K. Discontinued Operations
The results of discontinued operations reflected in the Condensed Consolidated Statements of Operations are presented in the following table.

Periods ended September 30, 2014
(In millions)
Three Months
 
Nine Months
Revenues
 
 
 
Net investment income
$
14

 
$
94

Net realized investment gains
1

 
3

Total revenues
15

 
97

Claims, Benefits and Expenses
 
 
 
Insurance claims and policyholders' benefits
12

 
75

Other operating expenses
—

 
2

Total claims, benefits and expenses
12

 
77

Income before income tax
3

 
20

Income tax expense
(2
)
 
(6
)
Income from discontinued operations, net of income tax
1

 
14

Loss on sale, net of income tax benefit (expense) of ($1) and $40
3

 
(211
)
Income (loss) from discontinued operations
$
4

 
$
(197
)

45

Table of Contents

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 2014 statutory net written premiums, we are the eighth largest commercial insurance writer and the 14th 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, 2014.
We utilize the net operating income financial measure to monitor our operations. Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note J to the Condensed Consolidated Financial Statements included under Part I, Item 1.
In the evaluation of the results of our core Specialty, Commercial and International 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. Rate represents the average change in price on policies that renew excluding exposure change. Retention represents the expiring premium dollars renewed in comparison to the renewal premium dollars available to renew.
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 effect of related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.





46

Table of Contents

CONSOLIDATED OPERATIONS
The following table presents the consolidated results of our operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A. See the Investments section of this MD&A for further discussion of Net investment income and Net realized investment results.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Operating Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,751

 
$
1,810

 
$
5,173

 
$
5,427

Net investment income
354

 
480

 
1,412

 
1,556

Other revenues
97

 
84

 
286

 
262

Total operating revenues
2,202

 
2,374

 
6,871

 
7,245

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Net incurred claims and benefits
1,198

 
1,351

 
3,999

 
4,231

Policyholders' dividends
2

 
3

 
9

 
10

Amortization of deferred acquisition costs
319

 
332

 
936

 
996

Other insurance related expenses
263

 
260

 
790

 
781

Other expenses
138

 
172

 
388

 
341

Total claims, benefits and expenses
1,920

 
2,118

 
6,122

 
6,359

Operating income before income tax
282

 
256

 
749

 
886

Income tax expense on operating income
(72
)
 
(74
)
 
(182
)
 
(242
)
Net operating income
210

 
182

 
567

 
644

Net realized investment gains (losses)
(49
)
 
37

 
(39
)
 
69

Income tax (expense) benefit on net realized investment gains (losses)
17

 
(10
)
 
21

 
(23
)
Net realized investment gains (losses), after tax
(32
)
 
27

 
(18
)
 
46

Income from continuing operations
178

 
209

 
549

 
690

Income (loss) from discontinued operations, net of tax
—

 
4

 
—

 
(197
)
Net income
$
178

 
$
213

 
$
549

 
$
493

Three Month Comparison
Income from continuing operations decreased $31 million for the three months ended September 30, 2015 as compared with the same period in 2014. Improved net operating income was more than offset by a $59 million decrease in net realized investment results, after tax, in the current period.
Net operating income improved $28 million for the three months ended September 30, 2015 as compared with the same period in 2014, driven by our core property and casualty segments. Net operating income increased $22 million for our core segments due to improved underwriting results, partially offset by lower limited partnership results. Catastrophe losses were $10 million after tax for the three months ended September 30, 2015 and 2014. Net operating results for our non-core segments improved $6 million. Results in 2014 included a $34 million loss on the coinsurance transaction, as further discussed in Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1, and a $9 million reduction in the allowance for uncollectible reinsurance receivables. Excluding these items, the decline in results for our non-core segments for the three months ended September 30, 2015 was driven by our long term care business.
Favorable net prior year development of $180 million and $23 million was recorded for the three months ended September 30, 2015 and 2014 in our Specialty, Commercial, International and Corporate & Other Non-Core segments. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Table of Contents

Nine Month Comparison
Income from continuing operations decreased $141 million for the nine months ended September 30, 2015 as compared with the same period in 2014. The decrease was due to lower net operating income and net realized investment results, after tax, in the current period.
Loss from discontinued operations, net of tax, for the nine months ended September 30, 2014 included a loss of $211 million related to the sale of CAC. Further information on discontinued operations is provided in Note K to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net operating income decreased $77 million for the nine months ended September 30, 2015 as compared with the same period in 2014. Net operating income increased $68 million in our core property and casualty segments due to improved underwriting results, partially offset by lower limited partnership results. Catastrophe losses were $68 million after tax for the nine months ended September 30, 2015 as compared to $95 million after tax for the same period in 2014. Net operating loss for our non-core segments increased $145 million. Results in 2015 for our non-core segments were negatively affected by decreased results in our long-term care business and a $54 million after-tax charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer, as further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Results in 2014 for our non-core segments benefited from a $56 million after-tax curtailment gain related to a change in postretirement benefits, as further discussed in Note G to the Condensed Consolidated Financial Statements included under Part I, Item 1. Results in 2014 also included the $34 million loss on the coinsurance transaction, as further discussed in Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Favorable net prior year development of $198 million and $7 million was recorded for the nine months ended September 30, 2015 and 2014 in our Specialty, Commercial, International and Corporate & Other Non-Core segments. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements 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 as of 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 Policies
•
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, 2014 for further information.


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Table of Contents

SEGMENT RESULTS
The following discusses the results of continuing operations for our operating segments. Our core property and casualty commercial insurance operations are aggregated and reported in three business segments: Specialty, Commercial and International. Our non-core operations are managed and reported in two segments: Life & Group Non-Core and Corporate & Other Non-Core.
Specialty
The following table presents the results of operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios, rate and retention)
2015
 
2014
 
2015
 
2014
Net written premiums
$
707

 
$
736

 
$
2,077

 
$
2,150

Net earned premiums
706

 
725

 
2,075

 
2,126

Net investment income
76

 
126

 
365

 
423

Net operating income
179

 
184

 
451

 
480

Net realized investment gains (losses), after tax
(14
)
 
2

 
(11
)
 
6

Net income
165

 
186

 
440

 
486

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
43.5
%
 
50.7
%
 
55.5
%
 
57.1
%
Expense ratio
30.8

 
29.8

 
30.9

 
30.1

Dividend ratio
0.1

 
0.3

 
0.2

 
0.2

Combined ratio
74.4
%
 
80.8
%
 
86.6
%
 
87.4
%
 
 
 
 
 
 
 
 
Rate
—
%
 
3
%
 
1
%
 
3
%
Retention
86
%
 
87
%
 
86
%
 
87
%
New Business
$
67

 
$
87

 
$
206

 
$
239

Three Month Comparison
Net written premiums for Specialty decreased $29 million for the three months ended September 30, 2015 as compared with the same period in 2014, driven by lower new business. The decrease in net earned premiums was consistent with the trend in net written premiums.
Net operating income decreased $5 million for the three months ended September 30, 2015 as compared with the same period in 2014. Improved underwriting results were more than offset by lower net investment income.
The combined ratio improved 6.4 points for the three months ended September 30, 2015 as compared with the same period in 2014. The loss ratio improved 7.2 points driven by higher favorable net prior year development. Catastrophe losses were $3 million, or 0.5 points of the loss ratio for the three months ended September 30, 2015, as compared to $5 million, or 0.7 points of the loss ratio for the three months ended September 30, 2014. The expense ratio increased 1.0 point for the three months ended September 30, 2015, as compared with the same period in 2014, due to the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $132 million and $83 million was recorded for the three months ended September 30, 2015 and 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Table of Contents

Nine Month Comparison
Net written premiums for Specialty decreased $73 million for the nine months ended September 30, 2015 as compared with the same period in 2014, due to lower new business and retention. The decrease in net earned premiums was consistent with the trend in net written premiums.
Net operating income decreased $29 million for the nine months ended September 30, 2015 as compared with the same period in 2014, primarily due to lower net investment income.
The combined ratio improved 0.8 points for the nine months ended September 30, 2015 as compared with the same period in 2014. The loss ratio improved 1.6 points due to higher favorable net prior year development and an improved current accident year loss ratio. Catastrophe losses were $15 million, or 0.7 points of the loss ratio for the nine months ended September 30, 2015, as compared to $21 million, or 1.0 point of the loss ratio for the nine months ended September 30, 2014. The expense ratio increased 0.8 points for the nine months ended September 30, 2015 as compared with the same period in 2014, primarily driven by increased underwriting expenses and the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $151 million and $135 million was recorded for the nine months ended September 30, 2015 and 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
 
September 30,
2015
 
December 31,
2014
(In millions)
 
Gross Case Reserves
$
2,108

 
$
2,136

Gross IBNR Reserves
4,091

 
4,093

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,199

 
$
6,229

Net Case Reserves
$
1,882

 
$
1,929

Net IBNR Reserves
3,706

 
3,726

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
5,588

 
$
5,655


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Table of Contents

Commercial
The following table presents the results of operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios, rate and retention)
2015
 
2014
 
2015
 
2014
Net written premiums
$
642

 
$
634

 
$
2,118

 
$
2,133

Net earned premiums
705

 
721

 
2,086

 
2,188

Net investment income
82

 
157

 
455

 
549

Net operating income
75

 
52

 
273

 
175

Net realized investment gains (losses), after tax
(21
)
 
5

 
(16
)
 
6

Net income
54

 
57

 
257

 
181

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 

 
 

 
 
Loss and loss adjustment expense ratio
60.6
%
 
75.9
%
 
66.5
%
 
78.9
%
Expense ratio
35.2

 
34.6

 
35.4

 
34.2

Dividend ratio
—

 
0.2

 
0.2

 
0.3

Combined ratio
95.8
%
 
110.7
%
 
102.1
%
 
113.4
%
 
 
 
 
 
 
 
 
Rate
2
%
 
4
%
 
2
%
 
5
%
Retention
76
%
 
74
%
 
77
%
 
72
%
New Business
$
135

 
$
116

 
$
422

 
$
396

Three Month Comparison
Net written premiums for Commercial increased $8 million for the three months ended September 30, 2015 as compared with the same period in 2014. Higher new business and retention as well as positive rate were substantially offset by the residual effect of previous underwriting actions undertaken in certain business classes. Net earned premiums decreased $16 million for the three months ended September 30, 2015 as compared with the same period in 2014, consistent with the trend in net written premiums in recent quarters.
Net operating income increased $23 million for the three months ended September 30, 2015 as compared with the same period in 2014, due to improved underwriting results partially offset by lower net investment income.
The combined ratio improved 14.9 points for the three months ended September 30, 2015 as compared with the same period in 2014. The loss ratio improved 15.3 points, due to favorable net prior year development for the three months ended September 30, 2015 as compared to unfavorable net prior year development for the same period in 2014 and an improved current accident year loss ratio. Catastrophe losses were $10 million, or 1.4 points of the loss ratio for the three months ended September 30, 2015, as compared to $14 million, or 2.0 points of the loss ratio for the three months ended September 30, 2014. The expense ratio increased 0.6 points for the three months ended September 30, 2015 as compared with the same period in 2014, due to the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $16 million was recorded for the three months ended September 30, 2015, as compared with unfavorable net prior year development of $71 million for the three months ended September 30, 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Table of Contents

Nine Month Comparison
Net written premiums for Commercial decreased $15 million for the nine months ended September 30, 2015 as compared with the same period in 2014, driven by the residual effect of previous underwriting actions undertaken in certain business classes, partially offset by positive rate and higher retention and new business. Net earned premiums decreased $102 million for the nine months ended September 30, 2015 as compared with the same period in 2014, consistent with the trend in net written premiums.
Net operating income increased $98 million for the nine months ended September 30, 2015 as compared with the same period in 2014, due to improved underwriting results, partially offset by lower net investment income.
The combined ratio improved 11.3 points for the nine months ended September 30, 2015 as compared with the same period in 2014. The loss ratio improved 12.4 points, due to favorable net prior year development and an improved current accident year loss ratio. Catastrophe losses were $83 million, or 4.0 points of the loss ratio for the nine months ended September 30, 2015, as compared to $121 million, or 5.6 points of the loss ratio for the nine months ended September 30, 2014. The expense ratio increased 1.2 points for the nine months ended September 30, 2015 as compared with the same period in 2014, due to the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $17 million was recorded for the nine months ended September 30, 2015, as compared with unfavorable net prior year development of $155 million for the nine months ended September 30, 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
 
September 30,
2015
 
December 31,
2014
(In millions)
 
Gross Case Reserves
$
5,105

 
$
5,298

Gross IBNR Reserves
4,178

 
4,216

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
9,283

 
$
9,514

Net Case Reserves
$
4,740

 
$
4,947

Net IBNR Reserves
3,909

 
3,906

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
8,649

 
$
8,853


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Table of Contents

International
The following table presents the results of operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios, rate and retention)
2015
 
2014
 
2015
 
2014
Net written premiums
$
180

 
$
190

 
$
641

 
$
698

Net earned premiums
203

 
225

 
601

 
697

Net investment income
13

 
15

 
40

 
46

Net operating income
9

 
5

 
40

 
41

Net realized investment gains (losses), after tax
—

 
(1
)
 
1

 
—

Net income
9

 
4

 
41

 
41

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
52.4
 %
 
59.7
 %
 
55.9
 %
 
54.8
 %
Expense ratio
38.0

 
39.3

 
37.6

 
39.3

Dividend ratio
—

 
—

 
—

 
—

Combined ratio
90.4
 %
 
99.0
 %
 
93.5
 %
 
94.1
 %
 
 
 
 
 
 
 
 
Rate
(1
)%
 
(1
)%
 
(1
)%
 
(1
)%
Retention
73
 %
 
72
 %
 
76
 %
 
77
 %
New Business
$
23

 
$
21

 
$
83

 
$
88

Three Month Comparison
Net written premiums for International decreased $10 million for the three months ended September 30, 2015 as compared with the same period in 2014. The decrease was driven by the unfavorable effect of foreign currency exchange rates. Excluding the effect of foreign currency exchange rates, net written premiums increased 5% for the three months ended September 30, 2015 as compared with the same period in 2014 driven by higher new business. Net earned premiums decreased $22 million for the three months ended September 30, 2015 as compared with the same period in 2014, consistent with the trend in net written premiums.
Net operating income increased $4 million for the three months ended September 30, 2015 as compared with the same period in 2014 due to improved underwriting results driven by higher favorable net prior year development.
The combined ratio improved 8.6 points for the three months ended September 30, 2015 as compared with the same period in 2014. The loss ratio improved 7.3 points. This improvement was due to higher favorable net prior year development, partially offset by a higher current accident year loss ratio. The deterioration in the current accident year loss ratio was driven by large losses, including losses related to the explosion in Tianjin, China. The expense ratio improved 1.3 points for the three months ended September 30, 2015 as compared with the same period in 2014 due to lower expenses, partially offset by the unfavorable effect of lower net earned premiums.
Favorable net prior year development of $32 million and $10 million was recorded for the three months ended September 30, 2015 and 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Table of Contents

Nine Month Comparison
Net written premiums for International decreased $57 million for the nine months ended September 30, 2015 as compared with the same period in 2014. The decrease was driven by the unfavorable effect of foreign currency exchange rates, the 2014 termination of a specialty product managing general underwriter relationship in Canada and unfavorable premium development at Hardy. Net earned premiums decreased $96 million for the nine months ended September 30, 2015 as compared with the same period in 2014, consistent with the trend in net written premiums.
The combined ratio improved 0.6 points for the nine months ended September 30, 2015 as compared with the same period in 2014. The loss ratio increased 1.1 points, primarily due to an increase in the non-catastrophe current accident year loss ratio driven by large losses. Catastrophe losses were $5 million, or 0.8 points of the loss ratio for the nine months ended September 30, 2015, as compared to $5 million, or 0.7 points of the loss ratio for the nine months ended September 30, 2014. The expense ratio improved 1.7 points for the nine months ended September 30, 2015 as compared with the same period in 2014 due to lower expenses, partially offset by the unfavorable effect of lower earned premiums.
Favorable net prior year development of $30 million and $26 million was recorded for the nine months ended September 30, 2015 and 2014. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
 
September 30,
2015
 
December 31,
2014
(In millions)
 
Gross Case Reserves
$
611

 
$
752

Gross IBNR Reserves
754

 
689

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
1,365

 
$
1,441

Net Case Reserves
$
503

 
$
598

Net IBNR Reserves
711

 
663

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
1,214

 
$
1,261


55

Table of Contents

Life & Group Non-Core
The following table presents the results of operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Net earned premiums
$
137

 
$
139

 
$
412

 
$
417

Net investment income
182

 
177

 
540

 
521

Net operating loss
(30
)
 
(42
)
 
(71
)
 
(35
)
Net realized investment gains (losses), after tax
2

 
21

 
6

 
28

Net loss
(28
)
 
(21
)
 
(65
)
 
(7
)
Three Month Comparison
Net earned premiums for Life & Group Non-Core were consistent for the three months ended September 30, 2015 as compared with the same period in 2014, as the effect of policy lapses was substantially offset by rate increases.
Net operating loss decreased $12 million for the three months ended September 30, 2015 as compared with the same period in 2014. Results in 2014 included a $34 million after-tax loss on the coinsurance transaction, as further discussed in Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1. The net operating loss for our long term care business increased $23 million. Long term care results in 2014 benefited from unusually favorable morbidity experience in our long term care business as compared to unfavorable morbidity experience in the current year period.
Nine Month Comparison
Net earned premiums for Life & Group Non-Core were consistent for the nine months ended September 30, 2015 as compared with the same period in 2014, due to the same reasons discussed in the three month comparison.
Net operating loss increased $36 million for the nine months ended September 30, 2015 as compared with the same period in 2014. The net operating loss for our long term care business increased $64 million. Long term care results in 2014 benefited from unusually favorable morbidity experience in our long term care business as compared to unfavorable morbidity experience in the current year period. Results in 2014 included the coinsurance transaction discussed above.


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Table of Contents

Corporate & Other Non-Core
The following table presents the results of operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Net investment income
$
1

 
$
5

 
$
12

 
$
17

Interest expense
39

 
48

 
117

 
138

Net operating loss
(23
)
 
(17
)
 
(126
)
 
(17
)
Net realized investment gains (losses), after tax
1

 
—

 
2

 
6

Net loss
(22
)
 
(17
)
 
(124
)
 
(11
)
Three Month Comparison
Net operating loss increased $6 million for the three months ended September 30, 2015 as compared with the same period in 2014. Results in 2015 included lower interest expense due to maturity of higher coupon debt in the fourth quarter of 2014. Results in 2014 were favorably affected by a $9 million after-tax reduction in the allowance for uncollectible reinsurance receivables arising from a change in estimate.
No net prior year development was recorded for the three months ended September 30, 2015, as compared with favorable net prior year development of $1 million for three months ended September 30, 2014.
Nine Month Comparison
Net operating loss increased $109 million for the nine months ended September 30, 2015 as compared with the same period in 2014. Results in 2015 were negatively affected by a $54 million after-tax charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer, as further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Results in 2014 benefited from a $56 million after-tax curtailment gain related to a change in postretirement benefits, as further discussed in Note G to the Condensed Consolidated Financial Statements included under Part I, Item 1. Additionally, 2015 benefited from lower interest expense due to the maturity of higher coupon debt in the fourth quarter of 2014, and results in 2014 were favorably affected by the reduction in the allowance for uncollectible reinsurance receivables arising from a change in estimate.
No net prior year development was recorded for the nine months ended September 30, 2015, as compared with favorable net prior year development of $1 million for the nine months ended September 30, 2014.
The following table presents the gross and net carried reserves.
(In millions)
September 30,
2015
 
December 31,
2014
Gross Case Reserves
$
1,555

 
$
1,189

Gross IBNR Reserves
1,179

 
1,715

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
2,734

 
$
2,904

Net Case Reserves
$
135

 
$
144

Net IBNR Reserves
163

 
171

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
298

 
$
315


57

Table of Contents

INVESTMENTS
Net Investment Income
The significant components of Net investment income are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions, except yields)
2015
 
2014
 
2015
 
2014
Fixed maturity securities:
 
 
 
 
 
 
 
    Taxable
$
346

 
$
352

 
$
1,040

 
$
1,054

    Tax-Exempt
103

 
101

 
304

 
302

Total fixed maturity securities
449

 
453

 
1,344

 
1,356

Limited partnership investments
(93
)
 
29

 
69

 
199

Other, net of investment expense
(2
)
 
(2
)
 
(1
)
 
1

Pretax net investment income
$
354

 
$
480

 
$
1,412

 
$
1,556

After-tax net investment income
$
265

 
$
346

 
$
1,015

 
$
1,108

 
 
 
 
 
 
 
 
Effective income yield for the fixed maturity securities portfolio, pretax
4.8
%
 
4.8
%
 
4.8
%
 
4.9
%
Effective income yield for the fixed maturity securities portfolio, after tax
3.5
%
 
3.5
%
 
3.5
%
 
3.5
%
After-tax net investment income for the three months ended September 30, 2015 decreased $81 million as compared with the same period in 2014. The decrease was driven by limited partnership investments, which returned (3.2)% as compared with 1.0% in the prior year period.
After-tax net investment income for the nine months ended September 30, 2015 decreased $93 million as compared with the same period in 2014. The decrease was driven by limited partnerships, which returned 2.2% as compared with 7.4% in the prior year period. Income from fixed maturity securities was unfavorably affected by a decline in the effective income yield, partially offset by favorable changes in estimates for prepayments for asset-backed securities.


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Net Realized Investment Gains (Losses)
The components of Net realized investment gains (losses) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2015
 
2014
 
2015
 
2014
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
(27
)
 
$
21

 
$
(11
)
 
$
43

States, municipalities and political subdivisions
(7
)
 
20

 
(27
)
 
38

Asset-backed
5

 
(2
)
 
8

 
(25
)
Foreign government
—

 
—

 
1

 
2

Total fixed maturity securities
(29
)
 
39

 
(29
)
 
58

Equity securities
(18
)
 
(3
)
 
(19
)
 
2

Derivative financial instruments
(1
)
 
—

 
9

 
1

Short term investments and other
(1
)
 
1

 
—

 
8

Net realized investment gains (losses)
(49
)
 
37

 
(39
)
 
69

Income tax (expense) benefit on net realized investment gains (losses)
17

 
(10
)
 
21

 
(23
)
Net realized investment gains (losses), after tax
$
(32
)
 
$
27

 
$
(18
)
 
$
46

Net realized investment results, after tax, decreased $59 million for the three months ended September 30, 2015 as compared with the same period in 2014. This decrease was driven by higher OTTI losses recognized in earnings and lower net realized investment gains on sales of securities.
Net realized investment results, after tax, decreased $64 million for the nine months ended September 30, 2015 as compared with the same period in 2014, driven by the same reasons as discussed above.
Further information on our realized gains and losses, including our OTTI losses and derivative gains, is included in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.



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Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by ratings distribution.
 
September 30, 2015
 
December 31, 2014
(In millions)
Estimated Fair Value
 
Net Unrealized Gains (Losses)
 
Estimated Fair Value
 
Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises
$
3,718

 
$
140

 
$
3,882

 
$
144

AAA
2,531

 
157

 
2,850

 
203

AA
9,709

 
948

 
9,404

 
1,016

A
9,749

 
836

 
10,594

 
1,064

BBB
11,363

 
495

 
11,093

 
889

Non-investment grade
3,131

 
57

 
2,945

 
117

Total
$
40,201

 
$
2,633

 
$
40,768

 
$
3,433

As of September 30, 2015 and December 31, 2014, only 1% of our fixed maturity portfolio was rated internally.
The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.
 
September 30, 2015
(In millions)
Estimated Fair Value
 
Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises
$
45

 
$
1

AAA
252

 
8

AA
783

 
16

A
1,045

 
17

BBB
2,851

 
146

Non-investment grade
1,214

 
63

Total
$
6,190

 
$
251

The following table presents 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.
 
September 30, 2015
(In millions)
Estimated Fair Value
 
Gross Unrealized Losses
Due in one year or less
$
114

 
$
4

Due after one year through five years
934

 
29

Due after five years through ten years
3,588

 
132

Due after ten years
1,554

 
86

Total
$
6,190

 
$
251



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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 long term care and structured settlement liabilities in the Life & Group Non-Core segment.
The effective durations of fixed maturity securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
 
September 30, 2015
 
December 31, 2014
(In millions)
Estimated Fair Value
 
Effective
Duration
(In years)
 
Estimated Fair Value
 
Effective
Duration
(In years)
Investments supporting Life & Group Non-Core
$
14,714

 
10.3

 
$
14,668

 
10.5

Other interest sensitive investments
26,877

 
4.4

 
27,748

 
4.0

Total
$
41,591

 
6.5

 
$
42,416

 
6.3

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, 2014.
Short Term Investments
The carrying values of the components of Short term investments are presented in the following table.
(In millions)
September 30,
2015
 
December 31,
2014
Short term investments:
 
 
 
Commercial paper
$
747

 
$
922

U.S. Treasury securities
453

 
466

Money market funds
129

 
206

Other
153

 
112

Total short term investments
$
1,482

 
$
1,706


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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. Cash receipts and cash payments resulting from purchases and sales of trading securities are reported as cash flows related to operating activities. Additionally, cash may be paid or received for income taxes.
For the nine months ended September 30, 2015, net cash provided by operating activities was $1,045 million as compared with $1,047 million for the same period in 2014. Lower premiums collected and decreased receipts relating to returns on limited partnerships were offset by lower net claim payments and lower taxes paid.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale. Net cash used by investing activities was $254 million for the nine months ended September 30, 2015, as compared with net cash used of $1,087 million for the same period in 2014. 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, 2015, net cash used by financing activities was $739 million as compared with net cash provided of $95 million for the same period in 2014. Cash used by financing activities reflected an increased special stockholder dividend in the first quarter of 2015 as compared to the same period in 2014. Additionally, in the first quarter of 2014, we issued $550 million of senior notes.
Common Stock Dividends
Dividends of $2.75 per share of our common stock, including a special dividend of $2.00 per share, were declared and paid during the nine months ended September 30, 2015. On October 30, 2015, our Board of Directors declared a quarterly dividend of $0.25 per share, payable December 2, 2015 to stockholders of record on November 16, 2015. 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 operating, investing 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.
During the third quarter of 2015, we entered into a new credit agreement with a syndicate of banks and simultaneously terminated our previous credit agreement. The new credit agreement established a five-year $250 million senior unsecured revolving credit facility which may be used for general corporate purposes. At our election, the commitments under the new credit agreement may be increased from time to time up to an additional aggregate amount of $100 million and the new credit agreement includes two optional one-year extensions prior to the first and second anniversary of the closing date, subject to applicable consents. Under the new credit agreement, we are required to pay a facility fee which would adjust automatically in the event of a change in our financial ratings. The new credit agreement includes several covenants, including maintenance of a minimum consolidated net worth and a defined ratio of consolidated indebtedness to consolidated total capitalization.
There are currently no amounts outstanding under our new $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home Loan Bank of Chicago.

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Dividends from Continental Casualty Company (CCC) are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by Illinois Department of Insurance (the Department), are determined based on statutory net income and surplus as well as timing of dividends paid in the preceding twelve months. Ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. During the nine months ended September 30, 2015, CCC paid a dividend of $800 million to its parent. As of September 30, 2015, CCC is able to pay approximately $216 million of dividends that would not be subject to the prior approval of the Department.
We have an effective automatic shelf registration statement under which we may issue debt, equity or hybrid securities.

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ACCOUNTING STANDARDS UPDATE
For discussion of an accounting standards update that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements.
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 A&EP 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 insurance 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 risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.
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 underpriced 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; 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 with respect to our ability to increase premium rates, and 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; 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 global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail 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, the unpredictability of the nature, targets, severity or frequency of such events and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; 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, 2015. 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, 2014 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, 2015, 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, 2015.
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, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. Other Information
Item 1. Legal Proceedings
Information on our legal proceedings is set forth in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Item 6. Exhibits
See Exhibit Index.

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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: November 3, 2015
By
/s/ D. Craig Mense
 
 
D. Craig Mense
Executive Vice President and
Chief Financial Officer

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EXHIBIT INDEX

Description of Exhibit
Exhibit Number
 
 
Credit Agreement among CNA Financial Corporation, Wells Fargo Securities, LLC, J.P. Morgan Securities LLC, Wells Fargo Bank, National Association, JPMorgan Chase Bank, N.A., Citibank, N.A., The Northern Trust Company, U.S. Bank National Association and other lenders named therein, dated August 28, 2015 (Exhibit 99.1 to August 28, 2015 Form 8-K incorporated herein by reference)
10.1
 
 
Second Amendment to the CNA Supplemental Executive Savings and Capital Accumulation Plan, dated July 22, 2015
10.6.2
 
 
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


69