CNA 2014 Q3


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, 2014
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 31, 2014
Common Stock, Par value $2.50
 
269,947,912



Item Number
PART I. Financial Information
Page
Number
1.
 
 
 
 
 
 
 
2.
3.
4.
 
PART II. Other Information
 
1.
4.
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)
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,810

 
$
1,825

 
$
5,427

 
$
5,389

Net investment income
480

 
555

 
1,556

 
1,680

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(10
)
 
(15
)
 
(17
)
 
(49
)
Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
—

 
(1
)
 
—

 
(1
)
Net other-than-temporary impairment losses recognized in earnings
(10
)

(16
)
 
(17
)
 
(50
)
Other net realized investment gains
47

 
17

 
86

 
60

Net realized investment gains
37

 
1

 
69

 
10

Other revenues
84

 
77

 
262

 
284

Total revenues
2,411

 
2,458

 
7,314

 
7,363

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,354

 
1,378

 
4,241

 
4,259

Amortization of deferred acquisition costs
332

 
341

 
996

 
1,004

Other operating expenses
384

 
326

 
984

 
985

Interest
48

 
42

 
138

 
125

Total claims, benefits and expenses
2,118

 
2,087

 
6,359

 
6,373

Income from continuing operations before income tax
293

 
371

 
955

 
990

Income tax expense
(84
)
 
(100
)
 
(265
)
 
(288
)
Income from continuing operations
209

 
271

 
690

 
702

Income (loss) from discontinued operations, net of income tax (expense) benefit of $(3), $(3), $34, and $(10)
4

 
1

 
(197
)
 
14

Net income
$
213

 
$
272

 
$
493

 
$
716

 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.77

 
$
1.00

 
$
2.56

 
$
2.60

Income (loss) from discontinued operations
0.02

 
0.01

 
(0.73
)
 
0.06

Basic earnings per share
$
0.79

 
$
1.01

 
$
1.83

 
$
2.66

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.77

 
$
1.00

 
$
2.55

 
$
2.60

Income (loss) from discontinued operations
0.02

 
0.01

 
(0.73
)
 
0.05

Diluted earnings per share
$
0.79

 
$
1.01

 
$
1.82

 
$
2.65

 
 
 
 
 
 
 
 
Dividends per share
$
0.25

 
$
0.20

 
$
1.75

 
$
0.60

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
269.9

 
269.7

 
269.9

 
269.6

Diluted
270.6

 
270.2

 
270.6

 
270.1


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 (Loss) (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments with other-than-temporary impairments
$
1

 
$
(3
)
 
$
15

 
$
3

Net unrealized gains (losses) on other investments
(83
)
 
(70
)
 
424

 
(717
)
Net unrealized gains (losses) on investments
(82
)
 
(73
)
 
439

 
(714
)
Net unrealized losses on discontinued operations
(37
)
 
—

 
(22
)
 
—

Foreign currency translation adjustment
(73
)
 
56

 
(39
)
 
(18
)
Pension and postretirement benefits
3

 
4

 
(47
)
 
14

Other comprehensive income (loss), net of tax
(189
)
 
(13
)
 
331

 
(718
)
Net income
213

 
272

 
493

 
716

Total comprehensive income (loss)
$
24

 
$
259

 
$
824

 
$
(2
)
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 (Unaudited)
 
 
 
 
(In millions, except share data)
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $37,510 and $39,311)
$
40,700

 
$
41,233

Equity securities at fair value (cost of $197 and $179)
211

 
185

Limited partnership investments
2,931

 
2,720

Other invested assets
44

 
54

Mortgage loans
556

 
508

Short term investments
1,878

 
1,407

Total investments
46,320

 
46,107

Cash
247

 
195

Reinsurance receivables (less allowance for uncollectible receivables of $49 and $71)
4,801

 
6,017

Insurance receivables (less allowance for uncollectible receivables of $67 and $84)
1,962

 
1,979

Accrued investment income
442

 
443

Deferred acquisition costs
627

 
624

Deferred income taxes
—

 
220

Property and equipment at cost (less accumulated depreciation of $362 and $365)
287

 
304

Goodwill
154

 
155

Other assets
891

 
969

Separate account business
—

 
181

Total assets
$
55,731

 
$
57,194

Liabilities
 

 
 

Insurance reserves:
 

 
 

Claim and claim adjustment expenses
$
23,475

 
$
24,089

Unearned premiums
3,703

 
3,718

Future policy benefits
8,890

 
10,471

Policyholders’ funds
27

 
116

Short term debt
549

 
549

Long term debt
2,559

 
2,011

Deferred income taxes
59

 
—

Other liabilities (includes $91 and $178 due to Loews Corporation)
3,435

 
3,408

Separate account business
—

 
181

Total liabilities
42,697

 
44,543

Commitments and contingencies (Notes C, G and J)


 


Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 269,947,912 and 269,717,583 shares outstanding)
683

 
683

Additional paid-in capital
2,149

 
2,145

Retained earnings
9,515

 
9,495

Accumulated other comprehensive income
773

 
442

Treasury stock (3,092,331 and 3,322,660 shares), at cost
(85
)
 
(91
)
Notes receivable for the issuance of common stock
(1
)
 
(23
)
Total stockholders’ equity
13,034

 
12,651

Total liabilities and stockholders' equity
$
55,731

 
$
57,194

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)
2014
 
2013
Cash Flows from Operating Activities
 
 
 
Net income
$
493

 
$
716

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Loss on sale of subsidiaries
251

 
—

Deferred income tax expense
81

 
141

Trading portfolio activity
16

 
2

Net realized investment gains
(72
)
 
(18
)
Equity method investees
65

 
(230
)
Amortization of investments
(1
)
 
(20
)
Depreciation and amortization
62

 
80

Changes in:
 
 
 
Receivables, net
611

 
316

Accrued investment income
(37
)
 
(48
)
Deferred acquisition costs
14

 
(23
)
Insurance reserves
(222
)
 
(166
)
Other assets
(49
)
 
(62
)
Other liabilities
(133
)
 
233

Other, net
(32
)
 
—

Total adjustments
554

 
205

Net cash flows provided by operating activities
1,047

 
921

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
4,005

 
4,830

Fixed maturity securities - maturities, calls and redemptions
2,901

 
2,496

Equity securities
23

 
82

Limited partnerships
133

 
91

Mortgage loans
36

 
20

Purchases:
 
 
 
Fixed maturity securities
(7,457
)
 
(8,205
)
Equity securities
(44
)
 
(61
)
Limited partnerships
(218
)
 
(163
)
Mortgage loans
(84
)
 
(59
)
Change in other investments
10

 
(19
)
Change in short term investments
(556
)
 
357

Purchases of property and equipment
(42
)
 
(67
)
Proceeds from sale of subsidiaries
198

 
—

Other, net
8

 
9

Net cash flows used by investing activities
(1,087
)
 
(689
)
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)
2014
 
2013
Cash Flows from Financing Activities

 
 
Dividends paid to common stockholders
$
(473
)
 
$
(162
)
Proceeds from the issuance of debt
546

 
—

Repayment of debt
—

 
(13
)
Stock options exercised
4

 
1

Other, net
18

 
(26
)
Net cash flows provided (used) by financing activities
95

 
(200
)
Effect of foreign exchange rate changes on cash
(3
)
 
(3
)
Net change in cash
52

 
29

Cash, beginning of year
195

 
156

Cash, end of period
$
247

 
$
185

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)
2014
 
2013
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,145

 
2,146

Stock-based compensation
4

 
(4
)
Balance, end of period
2,149

 
2,142

Retained Earnings
 
 
 
Balance, beginning of period
9,495

 
8,774

Dividends paid to common stockholders
(473
)
 
(162
)
Net income
493

 
716

Balance, end of period
9,515

 
9,328

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of period
442

 
831

Other comprehensive income (loss)
331

 
(718
)
Balance, end of period
773

 
113

Treasury Stock
 
 
 
Balance, beginning of period
(91
)
 
(99
)
Stock-based compensation
6

 
8

Balance, end of period
(85
)
 
(91
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of period
(23
)
 
(21
)
Decrease (increase) in notes receivable for common stock
22

 
(1
)
Balance, end of period
(1
)
 
(22
)
Total Stockholders’ Equity
$
13,034

 
$
12,153

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
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2014.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013, including the summary of significant accounting policies in Note A. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
The interim financial data as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 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. Intercompany amounts have been eliminated.
Sale of Continental Assurance Company (CAC)
On August 1, 2014, the Company completed the sale of the common stock of CAC. The sale price is subject to a customary post-closing review by the purchaser. The business sold, which was previously reported within the Life & Group Non-Core segment, is reported as discontinued operations. Further information is provided in Note M 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. The coinsurance agreement required the transfer of assets with a book value equal to the ceded reserves on the inception date of the contract. Because a substantial portion of the assets supporting these liabilities are held in trust for the benefit of the original cedant, those assets were transferred on a funds withheld basis. Under this approach the Company maintains legal ownership of the assets, but the investment income and realized gains and losses on those assets inure to the reinsurer. As a result, 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. The funds withheld aspect of the agreement is considered an embedded derivative. The embedded derivative is separately accounted for at fair value and reported with the host contract in Other liabilities on the Company's Condensed Consolidated Balance Sheet. The Company recognizes Other operating expense equal to the Net investment income generated by these trust assets.


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 impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For the three and nine months ended September 30, 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.
For the three and nine months ended September 30, 2013, approximately 515 thousand and 501 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 110 thousand and 115 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.


10
Table of Contents

Note C. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities
$
453

 
$
461

 
$
1,356

 
$
1,372

Short term investments
1

 
1

 
2

 
3

Limited partnership investments
29

 
93

 
199

 
303

Equity securities
2

 
3

 
7

 
9

Mortgage loans
7

 
6

 
22

 
17

Trading portfolio
2

 
3

 
8

 
13

Other
—

 
1

 
3

 
2

Gross investment income
494

 
568

 
1,597

 
1,719

Investment expense
(14
)
 
(13
)
 
(41
)
 
(39
)
Net investment income
$
480

 
$
555

 
$
1,556

 
$
1,680

Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
51

 
$
47

 
$
124

 
$
119

Gross realized losses
(12
)
 
(45
)
 
(66
)
 
(97
)
Net realized investment gains (losses) on fixed maturity securities
39

 
2

 
58

 
22

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
1

 
3

 
6

 
10

Gross realized losses
(4
)
 
(5
)
 
(4
)
 
(27
)
Net realized investment gains (losses) on equity securities
(3
)
 
(2
)
 
2

 
(17
)
Derivatives
—

 
(1
)
 
1

 
(4
)
Short term investments and other
1

 
2

 
8

 
9

Net realized investment gains (losses)
$
37

 
$
1

 
$
69

 
$
10


11
Table of Contents

The components of net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are summarized in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
6

 
$
8

 
$
9

 
$
16

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
2

 
2

 
4

 
5

Other asset-backed
—

 
1

 
1

 
2

Total asset-backed
2

 
3

 
5

 
7

Total fixed maturity securities available-for-sale
8

 
11

 
14

 
23

Equity securities available-for-sale:
 
 
 
 
 
 
 
Common stock
2

 
3

 
3

 
5

Preferred stock
—

 
2

 
—

 
22

Total equity securities available-for-sale
2

 
5

 
3

 
27

Net OTTI losses recognized in earnings
$
10

 
$
16

 
$
17

 
$
50


12
Table of Contents

The following tables provide a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
September 30, 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
$
17,480

 
$
1,704

 
$
40

 
$
19,144

 
$
—

States, municipalities and political subdivisions
11,217

 
1,295

 
53

 
12,459

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,972

 
187

 
13

 
5,146

 
(54
)
Commercial mortgage-backed
2,079

 
87

 
8

 
2,158

 
(2
)
Other asset-backed
1,222

 
13

 
5

 
1,230

 
—

Total asset-backed
8,273

 
287

 
26

 
8,534

 
(56
)
U.S. Treasury and obligations of government-sponsored enterprises
25

 
5

 
—

 
30

 
—

Foreign government
456

 
16

 
1

 
471

 
—

Redeemable preferred stock
39

 
3

 
—

 
42

 
—

Total fixed maturity securities available-for-sale
37,490

 
3,310

 
120

 
40,680

 
$
(56
)
Total fixed maturity securities trading
20

 


 


 
20

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
35

 
11

 
—

 
46

 
 
Preferred stock
162

 
4

 
1

 
165

 
 
Total equity securities available-for-sale
197

 
15

 
1

 
211

 
 
Total
$
37,707

 
$
3,325

 
$
121

 
$
40,911

 
 
December 31, 2013
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
19,352

 
$
1,645

 
$
135

 
$
20,862

 
$
—

States, municipalities and political subdivisions
11,281

 
548

 
272

 
11,557

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,940

 
123

 
92

 
4,971

 
(37
)
Commercial mortgage-backed
1,995

 
90

 
22

 
2,063

 
(3
)
Other asset-backed
945

 
13

 
3

 
955

 
—

Total asset-backed
7,880

 
226

 
117

 
7,989

 
(40
)
U.S. Treasury and obligations of government-sponsored enterprises
139

 
6

 
1

 
144

 
—

Foreign government
531

 
15

 
3

 
543

 
—

Redeemable preferred stock
92

 
10

 
—

 
102

 
—

Total fixed maturity securities available-for-sale
39,275

 
2,450

 
528

 
41,197

 
$
(40
)
Total fixed maturity securities trading
36

 


 


 
36

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
36

 
9

 
—

 
45

 
 
Preferred stock
143

 
1

 
4

 
140

 
 
Total equity securities available-for-sale
179

 
10

 
4

 
185

 
 
Total
$
39,490

 
$
2,460

 
$
532

 
$
41,418

 
 

13
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. At September 30, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $972 million and $532 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).


14
Table of Contents

The following tables summarize the estimated fair value and gross unrealized losses of available-for-sale fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
Securities in a Gross Unrealized Loss Position
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 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
$
1,726

 
$
23

 
$
402

 
$
17

 
$
2,128

 
$
40

States, municipalities and political subdivisions
176

 
2

 
435

 
51

 
611

 
53

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
208

 
3

 
254

 
10

 
462

 
13

Commercial mortgage-backed
506

 
4

 
112

 
4

 
618

 
8

Other asset-backed
507

 
4

 
13

 
1

 
520

 
5

Total asset-backed
1,221

 
11

 
379

 
15

 
1,600

 
26

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

 
—

 
5

 
—

 
5

 
—

Foreign government
35

 
—

 
8

 
1

 
43

 
1

Total fixed maturity securities available-for-sale
3,158

 
36

 
1,229

 
84

 
4,387

 
120

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
32

 
1

 
1

 
—

 
33

 
1

Total
$
3,190

 
$
37

 
$
1,230

 
$
84

 
$
4,420

 
$
121

 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2013
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
3,592

 
$
129

 
$
72

 
$
6

 
$
3,664

 
$
135

States, municipalities and political subdivisions
3,251

 
197

 
129

 
75

 
3,380

 
272

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,293

 
29

 
343

 
63

 
1,636

 
92

Commercial mortgage-backed
640

 
22

 
—

 
—

 
640

 
22

Other asset-backed
269

 
3

 
—

 
—

 
269

 
3

Total asset-backed
2,202

 
54

 
343

 
63

 
2,545

 
117

U.S. Treasury and obligations of government-sponsored enterprises
13

 
1

 
—

 
—

 
13

 
1

Foreign government
111

 
3

 
—

 
—

 
111

 
3

Total fixed maturity securities available-for-sale
9,169

 
384

 
544

 
144

 
9,713

 
528

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
87

 
4

 
—

 
—

 
87

 
4

Total
$
9,256

 
$
388

 
$
544

 
$
144

 
$
9,800

 
$
532





15
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2014 Securities in a Gross Unrealized Loss Position table above, are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads, market illiquidity 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 at September 30, 2014.
The following table summarizes the activity for the three and nine months ended September 30, 2014 and 2013 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at September 30, 2014 and 2013 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)
2014
 
2013
 
2014
 
2013
Beginning balance of credit losses on fixed maturity securities
$
66

 
$
89

 
$
74

 
$
95

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

 
1

 
—

 
2

Reductions for securities sold during the period
(2
)
 
(7
)
 
(7
)
 
(14
)
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
$
64

 
$
83

 
$
64

 
$
83

Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 30, 2014 and December 31, 2013. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.
Contractual Maturity
 
September 30, 2014
 
December 31, 2013
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
2,329

 
$
2,368

 
$
2,420

 
$
2,455

Due after one year through five years
8,888

 
9,455

 
9,496

 
10,068

Due after five years through ten years
12,446

 
12,951

 
11,667

 
11,954

Due after ten years
13,827

 
15,906

 
15,692

 
16,720

Total
$
37,490

 
$
40,680

 
$
39,275

 
$
41,197

Investment Commitments
As of September 30, 2014, the Company had committed approximately $365 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, 2014, the Company had mortgage loan commitments of $19 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, 2014, the Company had commitments to purchase or fund additional amounts of $140 million and sell $103 million under the terms of such securities.



16
Table of Contents

Note D. Derivative Financial Instruments
Gross estimated fair values of derivative positions are presented in Other invested assets and Other liabilities on the Condensed Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net at September 30, 2014 and December 31, 2013. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.
Derivative Financial Instruments
September 30, 2014
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
(Liability)
Without hedge designation
 
 
 
 
 
Forward commitments for mortgage-backed securities
$
30

 
$
—

 
$
—

Currency forwards
6

 
1

 
—

Equity warrants
5

 
—

 
—

Embedded derivative on funds withheld liability
185

 
—

 
(1
)
Total
 
 
$
1

 
$
(1
)

December 31, 2013
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
(Liability)
Without hedge designation
 
 
 
 
 
Equity warrants
$
5

 
$
—

 
$
—


17
Table of Contents

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

18
Table of Contents

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are summarized below.
September 30, 2014
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
33

 
$
18,948

 
$
173

 
$
19,154

States, municipalities and political subdivisions
—

 
12,389

 
80

 
12,469

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,986

 
160

 
5,146

Commercial mortgage-backed
—

 
2,061

 
97

 
2,158

Other asset-backed
—

 
588

 
642

 
1,230

Total asset-backed
—

 
7,635

 
899

 
8,534

U.S. Treasury and obligations of government-sponsored enterprises
27

 
3

 
—

 
30

Foreign government
47

 
424

 
—

 
471

Redeemable preferred stock
30

 
12

 
—

 
42

Total fixed maturity securities
137

 
39,411

 
1,152

 
40,700

Equity securities
141

 
53

 
17

 
211

Other invested assets
—

 
44

 
—

 
44

Short term investments
1,199

 
612

 
—

 
1,811

Life settlement contracts, included in Other assets
—

 
—

 
86

 
86

Total assets
$
1,477

 
$
40,120

 
$
1,255

 
$
42,852

Liabilities
 
 
 
 
 
 
 
Other liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)
Total liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)

19
Table of Contents

December 31, 2013
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
33

 
$
20,661

 
$
204

 
$
20,898

States, municipalities and political subdivisions
—

 
11,486

 
71

 
11,557

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
4,640

 
331

 
4,971

Commercial mortgage-backed
—

 
1,912

 
151

 
2,063

Other asset-backed
—

 
509

 
446

 
955

Total asset-backed
—

 
7,061

 
928

 
7,989

U.S. Treasury and obligations of government-sponsored enterprises
116

 
28

 
—

 
144

Foreign government
81

 
462

 
—

 
543

Redeemable preferred stock
45

 
57

 
—

 
102

Total fixed maturity securities
275

 
39,755

 
1,203

 
41,233

Equity securities
126

 
48

 
11

 
185

Other invested assets
—

 
54

 
—

 
54

Short term investments
769

 
563

 
—

 
1,332

Life settlement contracts, included in Other assets
—

 
—

 
88

 
88

Separate account business
9

 
171

 
1

 
181

Total assets
$
1,179

 
$
40,591

 
$
1,303

 
$
43,073


20
Table of Contents

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2014 and 2013.
Level 3
(In millions)
Balance at
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 at September 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held at 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






21
Table of Contents

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

 
$
1

 
$
—

 
$
6

 
$
(6
)
 
$
(8
)
 
$
17

 
$
(1
)
 
$
211

 
$
—

States, municipalities and political subdivisions
140

 
—

 
(3
)
 
—

 
—

 
(15
)
 
—

 
(27
)
 
95

 
—

Asset-backed:
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 


 
 
Residential mortgage-backed
428

 
—