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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
23
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.
24
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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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 | ) | $ | <||||||||||