10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-6169860
(I.R.S. Employer
Identification No.)
333 S. Wabash
Chicago, Illinois
(Address of principal executive offices)
 
60604
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x]
 
Accelerated filer [ ]
 
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
 
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 30, 2015
Common Stock, Par value $2.50
 
270,260,625



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


2


Table of Contents

Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions, except per share data)
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,751

 
$
1,810

 
$
5,173

 
$
5,427

Net investment income
354

 
480

 
1,412

 
1,556

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

 

 

 

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

 
47

 
60

 
86

Net realized investment gains (losses)
(49
)
 
37

 
(39
)
 
69

Other revenues
97

 
84

 
286

 
262

Total revenues
2,153

 
2,411

 
6,832

 
7,314

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

 
1,354

 
4,008

 
4,241

Amortization of deferred acquisition costs
319

 
332

 
936

 
996

Other operating expenses
362

 
384

 
1,061

 
984

Interest
39

 
48

 
117

 
138

Total claims, benefits and expenses
1,920

 
2,118

 
6,122

 
6,359

Income from continuing operations before income tax
233

 
293

 
710

 
955

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

 
209

 
549

 
690

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

 
4

 

 
(197
)
Net income
$
178

 
$
213

 
$
549

 
$
493

 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.66

 
$
0.77

 
$
2.03

 
$
2.56

Income (loss) from discontinued operations

 
0.02

 

 
(0.73
)
Basic earnings per share
$
0.66

 
$
0.79

 
$
2.03

 
$
1.83

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.66

 
$
0.77

 
$
2.03

 
$
2.55

Income (loss) from discontinued operations

 
0.02

 

 
(0.73
)
Diluted earnings per share
$
0.66

 
$
0.79

 
$
2.03

 
$
1.82

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.25

 
$
0.25

 
$
2.75

 
$
1.75

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
270.3

 
269.9

 
270.2

 
269.9

Diluted
270.8

 
270.6

 
270.7

 
270.6


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



3


Table of Contents

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

 
$
1

 
$
(3
)
 
$
15

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

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

Net unrealized gains on discontinued operations

 
(37
)
 

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

 
3

 
52

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

Net income
178

 
213

 
549

 
493

Total comprehensive income
$
95

 
$
24

 
$
209

 
$
824


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

4


Table of Contents

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

 
$
40,768

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

 
222

Limited partnership investments
2,738

 
2,937

Other invested assets
45

 
41

Mortgage loans
640

 
588

Short term investments
1,482

 
1,706

Total investments
45,318

 
46,262

Cash
236

 
190

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

 
4,694

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

 
1,936

Accrued investment income
439

 
405

Deferred acquisition costs
606

 
600

Deferred income taxes
279

 
191

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

 
295

Goodwill
151

 
152

Other assets
915

 
841

Total assets
$
54,812

 
$
55,566

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,867

 
$
23,271

Unearned premiums
3,706

 
3,592

Future policy benefits
9,520

 
9,490

Policyholders' funds

 
27

Short term debt
350

 

Long term debt
2,211

 
2,559

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

 
3,833

Total liabilities
42,547

 
42,772

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

 
 

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

 
683

Additional paid-in capital
2,150

 
2,151

Retained earnings
9,450

 
9,645

Accumulated other comprehensive income
60

 
400

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

 
(1
)
Total stockholders’ equity
12,265

 
12,794

Total liabilities and stockholders' equity
$
54,812

 
$
55,566


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


5


Table of Contents

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

 
$
493

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

 
251

Deferred income tax expense
27

 
81

Trading portfolio activity
17

 
16

Net realized investment (gains) losses
39

 
(72
)
Equity method investees
127

 
65

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

 
62

Changes in:
 
 
 
Receivables, net
70

 
611

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

 
14

Insurance reserves
195

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

 
(32
)
Total adjustments
496

 
554

Net cash flows provided by operating activities
1,045

 
1,047

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
3,590

 
4,005

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

 
2,901

Equity securities
43

 
23

Limited partnerships
156

 
133

Mortgage loans
22

 
36

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

 
10

Change in short term investments
222

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

 
198

Other, net
7

 
8

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

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


6


Table of Contents

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

 
546

Other, net
5

 
22

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

95

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

 
52

Cash, beginning of year
190

 
195

Cash, end of period
$
236

 
$
247


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



7


Table of Contents

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

 
$
683

Balance, end of period
683

 
683

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

 
2,145

Stock-based compensation
(1
)
 
4

Balance, end of period
2,150

 
2,149

Retained Earnings
 
 
 
Balance, beginning of year
9,645

 
9,495

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

 
493

Balance, end of period
9,450

 
9,515

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of year
400

 
442

Other comprehensive income (loss)
(340
)
 
331

Balance, end of period
60

 
773

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

 
6

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

 
22

Balance, end of period

 
(1
)
Total stockholders' equity
$
12,265

 
$
13,034


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




8


Table of Contents

CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2015.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2014, including the summary of significant accounting policies in Note A. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
The interim financial data as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Sale of Continental Assurance Company (CAC)
On August 1, 2014, the Company completed the sale of the common stock of CAC, the Company's former life insurance subsidiary. The Company elected to include CAC cash flow activity in the comparative Condensed Consolidated Statement of Cash Flows. Further information on discontinued operations is provided in Note K to the Condensed Consolidated Financial Statements.
In connection with the sale of CAC, the Company entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. As a result of the coinsurance agreement, the $34 million difference between market value and book value of the funds withheld assets at the coinsurance contract's inception was recognized as a loss in Other operating expenses in the third quarter of 2014.
Recently Issued Accounting Standards Update (ASU) - Disclosures about Short-Duration Contracts
In May of 2015, the Financial Accounting Standards Board issued ASU No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The updated guidance is effective for annual financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within the annual periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statement disclosures.

9


Table of Contents

Note B. Earnings Per Share
Earnings per share is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the effect of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For the three and nine months ended September 30, 2015, approximately 514 thousand and 545 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 106 thousand and 107 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three and nine months ended September 30, 2014, approximately 668 thousand and 654 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 180 thousand and 167 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.

10


Table of Contents

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

Nine Months
(In millions)
2015

2014

2015

2014
Fixed maturity securities
$
449

 
$
453

 
$
1,344

 
$
1,356

Equity securities
3

 
2

 
9

 
7

Limited partnership investments
(93
)
 
29

 
69

 
199

Mortgage loans
8

 
7

 
25

 
22

Short term investments
2

 
1

 
4

 
2

Trading portfolio
1

 
2

 
6

 
8

Other
1

 

 
1

 
3

Gross investment income
371

 
494

 
1,458

 
1,597

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

 
$
480

 
$
1,412

 
$
1,556

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

 
$
51

 
$
91

 
$
124

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

 
(29
)
 
58

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
1

 
1

 
2

 
6

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

Derivative financial instruments
(1
)
 

 
9

 
1

Short term investments and other
(1
)
 
1

 

 
8

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

 
$
(39
)
 
$
69

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

 
$
6

 
$
52

 
$
9

States, municipalities and political subdivisions

 

 
18

 

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
1

 
2

 
7

 
4

Other asset-backed

 

 
1

 
1

Total asset-backed
1

 
2

 
8

 
5

Total fixed maturity securities available-for-sale
37

 
8

 
78

 
14

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

 
2

 
20

 
3

Short term investments

 

 
1

 

Net OTTI losses recognized in earnings
$
56

 
$
10

 
$
99

 
$
17


11


Table of Contents

The following tables present a summary of fixed maturity and equity securities.
September 30, 2015
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
17,155

 
$
1,237

 
$
207

 
$
18,185

 
$

States, municipalities and political subdivisions
11,978

 
1,336

 
17

 
13,297

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

 
204

 
13

 
5,041

 
(46
)
Commercial mortgage-backed
2,183

 
77

 
9

 
2,251

 

Other asset-backed
1,009

 
11

 
4

 
1,016

 

Total asset-backed
8,042

 
292

 
26

 
8,308

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

 
5

 

 
29

 

Foreign government
333

 
12

 
1

 
344

 

Redeemable preferred stock
33

 
2

 

 
35

 

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

 
2,884

 
251

 
40,198

 
$
(51
)
Total fixed maturity securities trading
3

 


 


 
3

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
62

 
3

 

 
65

 


Preferred stock
145

 
4

 
2

 
147

 


Total equity securities available-for-sale
207

 
7

 
2

 
212

 


Total
$
37,775

 
$
2,891

 
$
253

 
$
40,413

 



December 31, 2014
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
17,210

 
$
1,721

 
$
61

 
$
18,870

 
$

States, municipalities and political subdivisions
11,285

 
1,463

 
8

 
12,740

 

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,028

 
218

 
13

 
5,233

 
(53
)
Commercial mortgage-backed
2,056

 
93

 
5

 
2,144

 
(2
)
Other asset-backed
1,234

 
11

 
10

 
1,235

 

Total asset-backed
8,318

 
322

 
28

 
8,612

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

 
5

 

 
31

 

Foreign government
438

 
16

 

 
454

 

Redeemable preferred stock
39

 
3

 

 
42

 

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

 
3,530

 
97

 
40,749

 
$
(55
)
Total fixed maturity securities trading
19

 


 


 
19

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
38

 
9

 

 
47

 


Preferred stock
172

 
5

 
2

 
175

 


Total equity securities available-for-sale
210

 
14

 
2

 
222

 


Total
$
37,545

 
$
3,544

 
$
99

 
$
40,990

 




12


Table of Contents

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. As of September 30, 2015 and December 31, 2014, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $1,046 million and $1,288 million. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs and/or increase in Insurance reserves are recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).

13


Table of Contents

The following tables present the estimated fair value and gross unrealized losses of fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 2015
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
3,744

 
$
177

 
$
188

 
$
30

 
$
3,932

 
$
207

States, municipalities and political subdivisions
655

 
11

 
131

 
6

 
786

 
17

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
308

 
3

 
211

 
10

 
519

 
13

Commercial mortgage-backed
479

 
6

 
81

 
3

 
560

 
9

Other asset-backed
354

 
4

 
9

 

 
363

 
4

Total asset-backed
1,141

 
13

 
301

 
13

 
1,442

 
26

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

 

 

 

 
1

 

Foreign government
23

 

 
3

 
1

 
26

 
1

Redeemable preferred stock
3

 

 

 

 
3

 

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

 
201

 
623

 
50

 
6,190

 
251

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
3

 

 
14

 
2

 
17

 
2

Total
$
5,570

 
$
201

 
$
637

 
$
52

 
$
6,207

 
$
253


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

 
$
46

 
$
277

 
$
15

 
$
1,607

 
$
61

States, municipalities and political subdivisions
335

 
5

 
127

 
3

 
462

 
8

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
293

 
5

 
189

 
8

 
482

 
13

Commercial mortgage-backed
264

 
2

 
99

 
3

 
363

 
5

Other asset-backed
607

 
10

 
7

 

 
614

 
10

Total asset-backed
1,164

 
17

 
295

 
11

 
1,459

 
28

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

 

 
4

 

 
7

 

   Foreign government
3

 

 
3

 

 
6

 

Redeemable preferred stock
3

 

 

 

 
3

 

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

 
68

 
706

 
29

 
3,544

 
97

Equity securities available-for-sale:


 


 


 


 


 


   Preferred stock
17

 
2

 
1

 

 
18

 
2

Total
$
2,855

 
$
70

 
$
707

 
$
29

 
$
3,562

 
$
99




14


Table of Contents

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

 
$
66

 
$
62

 
$
74

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

 

 

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

 
$
64

 
$
57

 
$
64

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

 
$
1,425

 
$
2,479

 
$
2,511

Due after one year through five years
7,772

 
8,186

 
9,054

 
9,605

Due after five years through ten years
14,149

 
14,577

 
12,055

 
12,584

Due after ten years
14,238

 
16,010

 
13,728

 
16,049

Total
$
37,565

 
$
40,198

 
$
37,316

 
$
40,749

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

15


Table of Contents

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

 
$

 
$

Embedded derivative on funds withheld liability
182

 

 
(5
)
Total
 
 
$

 
$
(5
)

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

 
$

 
$

Equity warrants
5

 

 

Embedded derivative on funds withheld liability
184

 

 
3

Total
 
 
$

 
$
3

Derivative financial instruments are presented gross in Other invested assets and Other liabilities on the Condensed Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net as of September 30, 2015 and December 31, 2014. The embedded derivative on funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As of September 30, 2015, the Company had committed approximately $414 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of September 30, 2015, the Company had mortgage loan commitments of $29 million representing signed loan applications received and accepted.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of September 30, 2015, the Company had commitments to purchase or fund additional amounts of $81 million and sell $43 million under the terms of such securities.

16


Table of Contents

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

17


Table of Contents

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

 
$
18,007

 
$
153

 
$
18,188

States, municipalities and political subdivisions

 
13,236

 
61

 
13,297

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed

 
4,837

 
204

 
5,041

Commercial mortgage-backed

 
2,180

 
71

 
2,251

Other asset-backed

 
545

 
471

 
1,016

Total asset-backed

 
7,562

 
746

 
8,308

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

 
1

 

 
29

Foreign government
28

 
316

 

 
344

Redeemable preferred stock
24

 
11

 

 
35

Total fixed maturity securities
108

 
39,133

 
960

 
40,201

Equity securities
154

 
43

 
15

 
212

Other invested assets

 
45

 

 
45

Short term investments
624

 
773

 

 
1,397

Life settlement contracts, included in Other assets

 

 
74

 
74

Total assets
$
886

 
$
39,994

 
$
1,049

 
$
41,929

Liabilities
 
 
 
 
 
 
 
Other liabilities
$

 
$
(5
)
 
$

 
$
(5
)
Total liabilities
$

 
$
(5
)
 
$

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

 
$
18,695

 
$
162

 
$
18,889

States, municipalities and political subdivisions

 
12,646

 
94

 
12,740

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed

 
5,044

 
189

 
5,233

Commercial mortgage-backed

 
2,061

 
83

 
2,144

Other asset-backed

 
580

 
655

 
1,235

Total asset-backed

 
7,685

 
927

 
8,612

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

 
3

 

 
31

Foreign government
41

 
413

 

 
454

Redeemable preferred stock
30

 
12

 

 
42

Total fixed maturity securities
131

 
39,454

 
1,183

 
40,768

Equity securities
145

 
61

 
16

 
222

Other invested assets

 
41

 

 
41

Short term investments
681

 
963

 

 
1,644

Life settlement contracts, included in Other assets

 

 
82

 
82

Total assets
$
957

 
$
40,519

 
$
1,281

 
$
42,757

Liabilities
 
 
 
 
 
 
 
Other liabilities
$

 
$
3

 
$

 
$
3

Total liabilities
$

 
$
3

 
$

 
$
3


18


Table of Contents

The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Level 3
(In millions)
Balance as of
July 1,
2015
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in Net income (loss)
 
Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
September 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2015 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
141

 
$

 
$

 
$
27

 
$
(1
)
 
$
(11
)
 
$

 
$
(3
)
 
$
153

 
$

States, municipalities and political subdivisions
85

 

 

 

 

 

 

 
(24
)
 
61

 

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
207

 
2

 
(2
)
 
4

 

 
(7
)
 

 

 
204

 

Commercial mortgage-backed
87

 
5

 
(4
)
 
8

 

 
(15
)
 

 
(10
)
 
71

 

Other asset-backed
490

 

 
(6
)
 
43

 
(20
)
 
(32
)
 

 
(4
)
 
471

 

Total asset-backed
784

 
7

 
(12
)
 
55

 
(20
)
 
(54
)
 

 
(14
)
 
746

 

Total fixed maturity securities
1,010

 
7

 
(12
)
 
82

 
(21
)
 
(65
)
 

 
(41
)
 
960

 

Equity securities
16

 

 
(1
)
 

 

 

 

 

 
15

 

Life settlement contracts
75

 
5

 

 

 

 
(6
)
 

 

 
74

 
2

Total
$
1,101

 
$
12

 
$
(13
)
 
$
82

 
$
(21
)
 
$
(71
)
 
$

 
$
(41
)
 
$
1,049

 
$
2


19


Table of Contents

Level 3
(In millions)
Balance as of
July 1,
2014
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in Net income (loss)
 
Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
September 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2014 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
194

 
$

 
$
(1
)
 
$
4

 
$

 
$
(3
)
 
$

 
$
(21
)
 
$
173

 
$

States, municipalities and political subdivisions
79

 

 
1