Document




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 June 30, 2016
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 July 28, 2016
Common Stock, Par value $2.50
 
270,483,164






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 June 30
Three Months
 
Six Months
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,730

 
$
1,735

 
$
3,429

 
$
3,422

Net investment income
502

 
500

 
937

 
1,058

Net realized investment gains (losses)
 
 
 
 
 
 
 

Other-than-temporary impairment losses
(15
)
 
(31
)
 
(38
)
 
(43
)
Other net realized investment gains
31

 
31

 
18

 
53

Net realized investment gains (losses)
16

 
—

 
(20
)
 
10

Other revenues
100

 
92

 
197

 
189

Total revenues
2,348

 
2,327

 
4,543

 
4,679

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,339

 
1,469

 
2,747

 
2,808

Amortization of deferred acquisition costs
305

 
314

 
612

 
617

Other operating expenses
378

 
341

 
759

 
699

Interest
38

 
39

 
80

 
78

Total claims, benefits and expenses
2,060

 
2,163

 
4,198

 
4,202

Income before income tax
288

 
164

 
345

 
477

Income tax expense
(79
)
 
(26
)
 
(70
)
 
(106
)
Net income
$
209

 
$
138

 
$
275

 
$
371

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.77

 
$
0.51

 
$
1.02

 
$
1.37

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.77

 
$
0.51

 
$
1.02

 
$
1.37

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.25

 
$
0.25

 
$
2.50

 
$
2.50

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
270.5

 
270.3

 
270.4

 
270.2

Diluted
270.9

 
270.7

 
270.9

 
270.7


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 June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Comprehensive Income (Loss)
 
 
 
 
 
 
 
Net income
$
209

 
$
138

 
$
275

 
$
371

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
(1
)
 
(4
)
 
4

 
(5
)
Net unrealized gains on other investments
310

 
(365
)
 
544

 
(253
)
Net unrealized gains on investments
309

 
(369
)
 
548

 
(258
)
Foreign currency translation adjustment
(48
)
 
49

 
(34
)
 
(47
)
Pension and postretirement benefits
5

 
42

 
11

 
48

Other comprehensive income (loss), net of tax
266

 
(278
)
 
525

 
(257
)
Total comprehensive income (loss)
$
475

 
$
(140
)
 
$
800

 
$
114

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)
June 30,
2016 (Unaudited)
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $37,838 and $37,253)
$
41,857

 
$
39,572

Equity securities at fair value (cost of $117 and $191)
123

 
197

Limited partnership investments
2,542

 
2,548

Other invested assets
33

 
44

Mortgage loans
610

 
678

Short term investments
1,384

 
1,660

Total investments
46,549

 
44,699

Cash
289

 
387

Reinsurance receivables (less allowance for uncollectible receivables of $37 and $38)
4,683

 
4,453

Insurance receivables (less allowance for uncollectible receivables of $45 and $51)
2,368

 
2,078

Accrued investment income
400

 
404

Deferred acquisition costs
620

 
598

Deferred income taxes
293

 
638

Property and equipment at cost (less accumulated depreciation of $224 and $382)
276

 
343

Goodwill
147

 
150

Other assets (includes $2 and $- due from Loews Corporation)
1,281

 
1,295

Total assets
$
56,906

 
$
55,045

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,975

 
$
22,663

Unearned premiums
3,865

 
3,671

Future policy benefits
11,140

 
10,152

Short term debt
—

 
350

Long term debt
2,708

 
2,210

Other liabilities (includes $12 and $82 due to Loews Corporation)
4,332

 
4,243

Total liabilities
45,020

 
43,289

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; 270,483,164 and 270,274,361 shares outstanding)
683

 
683

Additional paid-in capital
2,155

 
2,153

Retained earnings
8,911

 
9,313

Accumulated other comprehensive income (loss)
210

 
(315
)
Treasury stock (2,557,079 and 2,765,882 shares), at cost
(73
)
 
(78
)
Total stockholders’ equity
11,886

 
11,756

Total liabilities and stockholders' equity
$
56,906

 
$
55,045

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)
Six months ended June 30
 
 
 
(In millions)
2016
 
2015
Cash Flows from Operating Activities
 

 
 
Net income
$
275

 
$
371

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax expense
63

 
32

Trading portfolio activity
(7
)
 
1

Net realized investment losses (gains)
20

 
(10
)
Equity method investees
230

 
(48
)
Net amortization of investments
(10
)
 
(13
)
Depreciation and amortization
39

 
39

Changes in:
 
 
 
Receivables, net
(540
)
 
(211
)
Accrued investment income
4

 
8

Deferred acquisition costs
(25
)
 
(8
)
Insurance reserves
666

 
451

Other assets
(106
)
 
(60
)
Other liabilities
(27
)
 
(94
)
Other, net
31

 
82

Total adjustments
338

 
169

Net cash flows provided by operating activities
613

 
540

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
3,066

 
2,859

Fixed maturity securities - maturities, calls and redemptions
1,247

 
2,304

Equity securities
72

 
33

Limited partnerships
124

 
85

Mortgage loans
109

 
19

Purchases:
 
 
 
Fixed maturity securities
(4,874
)
 
(5,029
)
Equity securities
—

 
(30
)
Limited partnerships
(206
)
 
(78
)
Mortgage loans
(41
)
 
(60
)
Change in other investments
11

 
8

Change in short term investments
281

 
33

Purchases of property and equipment
(65
)
 
(57
)
Disposals of property and equipment
107

 
—

Other, net
2

 
—

Net cash flows (used) provided by investing activities
$
(167
)
 
$
87

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

6
Table of Contents

Six months ended June 30
 
 
 
(In millions)
2016
 
2015
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(677
)
 
$
(676
)
Proceeds from the issuance of debt
498

 
—

Repayment of debt
(358
)
 
—

Other, net
(1
)
 
6

Net cash flows used by financing activities
(538
)

(670
)
Effect of foreign exchange rate changes on cash
(6
)
 
(2
)
Net change in cash
(98
)
 
(45
)
Cash, beginning of year
387

 
190

Cash, end of period
$
289

 
$
145

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)
Six months ended June 30
 
 
 
(In millions)
2016
 
2015
Common Stock
 
 
 
Balance, beginning of year
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of year
2,153

 
2,151

Stock-based compensation
2

 
(5
)
Balance, end of period
2,155

 
2,146

Retained Earnings
 
 
 
Balance, beginning of year
9,313

 
9,645

Dividends paid to common stockholders
(677
)
 
(676
)
Net income
275

 
371

Balance, end of period
8,911

 
9,340

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of year
(315
)
 
400

Other comprehensive income (loss)
525

 
(257
)
Balance, end of period
210

 
143

Treasury Stock
 
 
 
Balance, beginning of year
(78
)
 
(84
)
Stock-based compensation
5

 
6

Balance, end of period
(73
)
 
(78
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of year
—

 
(1
)
Decrease in notes receivable for common stock
—

 
1

Balance, end of period
—

 
—

Total stockholders' equity
$
11,886

 
$
12,234

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 June 30, 2016.
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, 2015, 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 period. Actual results may differ from those estimates.
The interim financial data as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 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.
Recently Adopted Accounting Standards Updates (ASU)
In April 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated accounting guidance requires debt issuance costs to be presented as a deduction from the corresponding debt liability instead of the historical presentation as an unamortized debt issuance asset. As of January 1, 2016, the Company adopted the updated accounting guidance retrospectively. The Company adjusted its previously reported financial information included herein to reflect the change in accounting guidance for debt issuance costs. The impacts of adopting the new accounting standard on the Company’s Consolidated Balance Sheet as of December 31, 2015, were a decrease in Other assets and a decrease in Long term debt of $2 million.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The updated accounting guidance removes the requirement to categorize assets measured at fair value utilizing the net asset value per share (or equivalent) practical expedient within the fair value hierarchy. As of January 1, 2016, the Company adopted the updated accounting guidance retrospectively. The Company adjusted its previously reported financial information included herein to reflect the change in accounting guidance for assets measured using the net asset value. The impact of adopting the new accounting standard resulted in excluding overseas deposits of $28 million and $27 million from the fair value level disclosure as of June 30, 2016 and December 31, 2015.

9
Table of Contents

Accounting Standards Pending Adoption
In May 2015, the FASB 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 guidance is effective for annual periods 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 but expects to provide additional incurred and paid claims development information by accident year, quantitative information about claim frequency and the history of claims duration for significant lines of business within the Company’s annual financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, and expects the primary change for the Company to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated accounting guidance simplifies the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on the Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, but expects the primary changes to be the use of the expected credit loss model for its mortgage loan portfolio and reinsurance receivables and the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses when the estimate of credit losses declines.


10
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 six months ended June 30, 2016, approximately 409 thousand and 473 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 178 thousand and 180 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 six months ended June 30, 2015, approximately 423 thousand and 543 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 238 thousand and 208 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.


11
Table of Contents

Note C. Investments
The significant components of Net investment income are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities
$
449

 
$
452

 
$
895

 
$
895

Equity securities
4

 
3

 
7

 
6

Limited partnership investments
46

 
48

 
32

 
162

Mortgage loans
13

 
9

 
22

 
17

Short term investments
1

 
—

 
4

 
2

Trading portfolio
4

 
3

 
6

 
5

Gross investment income
517

 
515

 
966

 
1,087

Investment expense
(15
)
 
(15
)
 
(29
)
 
(29
)
Net investment income
$
502

 
$
500

 
$
937

 
$
1,058

Net realized investment gains (losses) are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
40

 
$
36

 
$
85

 
$
69

Gross realized losses
(24
)
 
(48
)
 
(86
)
 
(69
)
Net realized investment gains (losses) on fixed maturity securities
16

 
(12
)
 
(1
)
 
—

Equity securities:
 
 
 

 
 
 
 
Gross realized gains
4

 
—

 
4

 
1

Gross realized losses
(1
)
 
(1
)
 
(6
)
 
(2
)
Net realized investment gains (losses) on equity securities
3

 
(1
)
 
(2
)
 
(1
)
Derivative financial instruments
(6
)
 
11

 
(13
)
 
10

Short term investments and other
3

 
2

 
(4
)
 
1

Net realized investment gains (losses)
$
16

 
$
—

 
$
(20
)
 
$
10

Net realized investment losses for the six months ended June 30, 2016 include $8 million related to the redemption of the Company's $350 million senior notes due August 2016.
The components of Net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities available-for-sale:

 
 
 
 
 
 
Corporate and other bonds
$
13

 
$
11

 
$
29

 
$
16

States, municipalities and political subdivisions
—

 
13

 
—

 
18

Asset-backed:
 
 
 

 
 
 
 
Residential mortgage-backed
1

 
5

 
1

 
6

Other asset-backed
1

 
1

 
3

 
1

Total asset-backed
2

 
6

 
4

 
7

Total fixed maturity securities available-for-sale
15

 
30

 
33

 
41

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

 
—

 
5

 
1

Short term investments
—

 
1

 
—

 
1

OTTI losses recognized in earnings
$
15

 
$
31

 
$
38

 
$
43


12
Table of Contents

The following tables present a summary of fixed maturity and equity securities.
June 30, 2016
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
$
17,613

 
$
1,684

 
$
93

 
$
19,204

 
$
(1
)
States, municipalities and political subdivisions
11,661

 
2,114

 
2

 
13,773

 
(25
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,994

 
215

 
20

 
5,189

 
(21
)
Commercial mortgage-backed
2,080

 
91

 
8

 
2,163

 
—

Other asset-backed
928

 
8

 
5

 
931

 
—

Total asset-backed
8,002

 
314

 
33

 
8,283

 
(21
)
U.S. Treasury and obligations of government-sponsored enterprises
81

 
11

 
—

 
92

 
—

Foreign government
438

 
22

 
—

 
460

 
—

Redeemable preferred stock
33

 
2

 
—

 
35

 
—

Total fixed maturity securities available-for-sale
37,828

 
4,147

 
128

 
41,847

 
$
(47
)
Total fixed maturity securities trading
10

 


 


 
10

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
20

 
5

 
2

 
23

 
 
Preferred stock
97

 
6

 
3

 
100

 
 
Total equity securities available-for-sale
117

 
11

 
5

 
123

 
 
Total
$
37,955

 
$
4,158

 
$
133

 
$
41,980

 



December 31, 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
$
17,080

 
$
1,019

 
$
342

 
$
17,757

 
$
—

States, municipalities and political subdivisions
11,729

 
1,453

 
8

 
13,174

 
(4
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,935

 
154

 
17

 
5,072

 
(37
)
Commercial mortgage-backed
2,154

 
55

 
12

 
2,197

 
—

Other asset-backed
923

 
6

 
8

 
921

 
—

Total asset-backed
8,012

 
215

 
37

 
8,190

 
(37
)
U.S. Treasury and obligations of government-sponsored enterprises
62

 
5

 
—

 
67

 
—

Foreign government
334

 
13

 
1

 
346

 
—

Redeemable preferred stock
33

 
2

 
—

 
35

 
—

Total fixed maturity securities available-for-sale
37,250

 
2,707

 
388

 
39,569

 
$
(41
)
Total fixed maturity securities trading
3

 


 


 
3

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
46

 
3

 
1

 
48

 
 
Preferred stock
145

 
7

 
3

 
149

 
 
Total equity securities available-for-sale
191

 
10

 
4

 
197

 
 
Total
$
37,444

 
$
2,717

 
$
392

 
$
39,769

 
 

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. 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 increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of June 30, 2016 and December 31, 2015, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,682 million and $1,111 million.

14
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
June 30, 2016
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
$
1,032

 
$
43

 
$
562

 
$
50

 
$
1,594

 
$
93

States, municipalities and political subdivisions
68

 
2

 
10

 
—

 
78

 
2

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
293

 
8

 
234

 
12

 
527

 
20

Commercial mortgage-backed
386

 
7

 
118

 
1

 
504

 
8

Other asset-backed
306

 
5

 
5

 
—

 
311

 
5

Total asset-backed
985

 
20

 
357

 
13

 
1,342

 
33

Foreign government
8

 
—

 
5

 
—

 
13

 
—

Total fixed maturity securities available-for-sale
2,093

 
65

 
934

 
63

 
3,027

 
128

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Common stock
4

 
2

 
—

 
—

 
4

 
2

Preferred stock
23

 
3

 
—

 
—

 
23

 
3

Total equity securities available-for-sale
27

 
5

 
—

 
—

 
27

 
5

Total
$
2,120

 
$
70

 
$
934

 
$
63

 
$
3,054

 
$
133


 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 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
$
4,882

 
$
302

 
$
162

 
$
40

 
$
5,044

 
$
342

States, municipalities and political subdivisions
338

 
8

 
75

 
—

 
413

 
8

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
963

 
9

 
164

 
8

 
1,127

 
17

Commercial mortgage-backed
652

 
10

 
96

 
2

 
748

 
12

Other asset-backed
552

 
8

 
5

 
—

 
557

 
8

Total asset-backed
2,167

 
27

 
265

 
10

 
2,432

 
37

U.S. Treasury and obligations of government-sponsored enterprises
4

 
—

 
—

 
—

 
4

 
—

   Foreign government
54

 
1

 
—

 
—

 
54

 
1

Redeemable preferred stock
3

 
—

 
—

 
—

 
3

 
—

Total fixed maturity securities available-for-sale
7,448

 
338

 
502

 
50

 
7,950

 
388

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Common stock
3

 
1

 
—

 
—

 
3

 
1

   Preferred stock
13

 
3

 
—

 
—

 
13

 
3

Total equity securities available-for-sale
16

 
4

 
—

 
—

 
16

 
4

Total
$
7,464

 
$
342

 
$
502

 
$
50

 
$
7,966

 
$
392



15
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2016 table above, are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, 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 June 30, 2016.
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 June 30, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Beginning balance of credit losses on fixed maturity securities
$
48

 
$
61

 
$
53

 
$
62

Reductions for securities sold during the period
(7
)
 
(2
)
 
(12
)
 
(3
)
Ending balance of credit losses on fixed maturity securities
$
41

 
$
59

 
$
41

 
$
59

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
June 30, 2016
 
December 31, 2015
(In millions)
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,817

 
$
1,855

 
$
1,574

 
$
1,595

Due after one year through five years
8,616

 
9,114

 
7,721

 
8,070

Due after five years through ten years
14,583

 
15,466

 
14,652

 
14,915

Due after ten years
12,812

 
15,412

 
13,303

 
14,989

Total
$
37,828

 
$
41,847

 
$
37,250

 
$
39,569

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
Derivative Financial Instruments
The Company holds an embedded derivative on funds withheld liability with a notional value of $177 million and $179 million as of June 30, 2016 and December 31, 2015 and a fair value of $8 million and $(5) million as of June 30, 2016 and December 31, 2015. 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 June 30, 2016, 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 June 30, 2016, the Company had mortgage loan commitments of $59 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. Purchases and sales of privately placed debt securities are recorded once funded. As of June 30, 2016, the Company had commitments to purchase or fund additional amounts of $198 million and sell $95 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.
June 30, 2016
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
18,972

 
$
242

 
$
19,214

States, municipalities and political subdivisions
—

 
13,771

 
2

 
13,773

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
5,055

 
134

 
5,189

Commercial mortgage-backed
—

 
2,152

 
11

 
2,163

Other asset-backed
—

 
886

 
45

 
931

Total asset-backed
—

 
8,093

 
190

 
8,283

U.S. Treasury and obligations of government-sponsored enterprises
91

 
1

 
—

 
92

Foreign government
—

 
460

 
—

 
460

Redeemable preferred stock
35

 
—

 
—

 
35

Total fixed maturity securities
126

 
41,297

 
434

 
41,857

Equity securities
104

 
—

 
19

 
123

Other invested assets
—

 
5

 
—

 
5

Short term investments
339

 
950

 
—

 
1,289

Life settlement contracts, included in Other assets
—

 
—

 
67

 
67

Total assets
$
569

 
$
42,252

 
$
520

 
$
43,341

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
8

 
$
—

 
$
8

Total liabilities
$
—

 
$
8

 
$
—

 
$
8

December 31, 2015
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
17,592

 
$
168

 
$
17,760

States, municipalities and political subdivisions
—

 
13,172

 
2

 
13,174

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
4,938

 
134

 
5,072

Commercial mortgage-backed
—

 
2,175

 
22

 
2,197

Other asset-backed
—

 
868

 
53

 
921

Total asset-backed
—

 
7,981

 
209

 
8,190

U.S. Treasury and obligations of government-sponsored enterprises
66

 
1

 
—

 
67

Foreign government
—

 
346

 
—

 
346

Redeemable preferred stock
35

 
—

 
—

 
35

Total fixed maturity securities
101

 
39,092

 
379

 
39,572

Equity securities
177

 
—

 
20

 
197

Other invested assets
—

 
17

 
—

 
17

Short term investments
448

 
1,134

 
—

 
1,582

Life settlement contracts, included in Other assets
—

 
—

 
74

 
74

Total assets
$
726

 
$
40,243

 
$
473

 
$
41,442

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
(5
)
 
$
—

 
$
(5
)
Total liabilities
$
—

 
$
(5
)
 
$
—

 
$
(5
)

18
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).
Level 3
(In millions)
Balance as of
April 1,
2016
 
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
June 30,
2016
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
193

 
$
1

 
$
3

 
$
94

 
$
(20
)
 
$
(7
)
 
$
—

 
$
(22
)
 
$
242

 
$
—

States, municipalities and political subdivisions
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
128

 
1

 
(1
)
 
10

 
—

 
(4
)
 
—

 
—

 
134

 
—

Commercial mortgage-backed
27

 
—

 
—

 
—

 
—

 
(9
)
 
3

 
(10
)
 
11

 
—

Other asset-backed
50

 
—

 
2

 
35

 
(25
)
 
(1
)
 
—

 
(16
)
 
45

 
—

Total asset-backed
205

 
1

 
1

 
45

 
(25
)
 
(14
)
 
3

 
(26
)
 
190

 
—

Total fixed maturity securities
400

 
2

 
4

 
139

 
(45
)
 
(21
)
 
3

 
(48
)
 
434

 
—

Equity securities
19

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19

 
—

Life settlement contracts
72

 
6

 
—

 
—

 
—

 
(11
)
 
—

 
—

 
67

 
(3
)
Total
$
491

 
$
8

 
$
4

 
$
139

 
$
(45
)
 
$
(32
)
 
$
3

 
$
(48
)
 
$
520

 
$
(3
)


19
Table of Contents

Level 3
(In millions)
Balance as of
April 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
June 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2015 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
186

 
$
(2
)
 
$
(1
)
 
$
—

 
$
—

 
$
(7
)
 
$
—

 
$
(35
)
 
$
141

 
$
(3
)
States, municipalities and political subdivisions
86

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
85

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
232

 
1

 
(2
)
 
—

 
—

 
(11
)
 
—

 
(13
)
 
207

 
—

Commercial mortgage-backed
64

 
1

 
(1
)
 
9

 
—

 
(1
)
 
17

 
(2
)
 
87

 
—

Other asset-backed
553

 
2

 
1

 
47

 
(90
)
 
(17
)
 
—

 
(6
)
 
490

 
—

Total asset-backed
849

 
4

 
(2
)
 
56

 
(90
)
 
(29
)
 
17

 
(21
)
 
784

 
—

Total fixed maturity securities
1,121

 
2

 
(3
)
 
56

 
(90
)
 
(37
)
 
17

 
(56
)
 
1,010

 
(3
)
Equity securities
13

 
—

 
3

 
—

 
—

 
—

 
—

 
—

 
16

 
—

Life settlement contracts
79

 
4

 
—

 
—

 
—

 
(8
)
 
—

 
—

 
75

 
(2
)
Total
$
1,213

 
$
6

 
$
—

 
$
56

 
$
(90
)
 
$
(45
)
 
$
17

 
$
(56
)
 
$
1,101

 
$
(5
)


















20
Table of Contents

Level 3
(In millions)
Balance as of
January 1, 2016
 
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
June 30,
2016
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
168

 
$
—

 
$
7

 
$
147

 
$
(36
)
 
$
(10
)
 
$
—

 
$
(34
)
 
$
242

 
$
—

States, municipalities and political subdivisions
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
134

 
2

 
(1
)
 
10

 
—

 
(9
)
 
—

 
(2
)
 
134

 
—

Commercial mortgage-backed
22

 
—

 
—

 
9

 
—

 
(9
)
 
3

 
(14
)
 
11

 
—

Other asset-backed
53

 
—

 
2

 
35

 
(25
)
 
(1
)
 
2

 
(21
)
 
45

 
—

Total asset-backed
209

 
2

 
1

 
54

 
(25
)
 
(19
)
 
5

 
(37
)
 
190

 
—

Total fixed maturity securities
379

 
2

 
8

 
201

 
(61
)
 
(29
)
 
5

 
(71
)
 
434

 
—

Equity securities
20

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
19

 
—

Life settlement contracts
74

 
10

 
—

 
—

 
—

 
(17
)
 
—

 
—

 
67

 
(3
)
Total
$
473

 
$
12

 
$
7

 
$
201

 
$
(61
)
 
$
(46
)
 
$
5

 
$
(71
)
 
$
520

 
$
(3
)

















21
Table of Contents

Level 3
(In millions)
Balance as of
January 1, 2015
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in Net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
June 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2015 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
162

 
$
(1
)
 
$
(1
)
 
$
12

 
$
(12
)
 
$
(21
)
 
$
37

 
$
(35
)
 
$
141

 
$
(3
)
States, municipalities and political subdivisions
94

 
1

 
—

 
—

 
—

 
(10
)
 
—

 
—

 
85

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
189

 
2

 
(2
)
 
72

 
—

 
(21
)
 
—

 
(33
)
 
207

 
—

Commercial mortgage-backed
83

 
2

 
—

 
15

 
—

 
(2
)
 
17

 
(28
)
 
87

 
—

Other asset-backed
655

 
3

 
10

 
82

 
(234
)
 
(20
)
 
—

 
(6
)
 
490

 
—

Total asset-backed
927

 
7

 
8

 
169

 
(234
)
 
(43
)
 
17

 
(67
)
 
784

 
—

Total fixed maturity securities
1,183

 
7

 
7

 
181

 
(246
)
 
(74
)
 
54

 
(102
)
 
1,010

 
(3
)
Equity securities
16

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
16

 
—

Life settlement contracts
82

 
17

 
—

 
—

 
—

 
(24
)
 
—

 
—

 
75

 
(1
)
Total
$
1,281

 
$
24

 
$
7

 
$
181

 
$
(246
)
 
$
(98
)
 
$
54

 
$
(102
)
 
$
1,101

 
$
(4
)


22
Table of Contents

*Net realized and unrealized gains and losses from Level 3 securities and derivatives 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 (1)
 
Net realized investment gains (losses)
Fixed maturity securities trading
 
Net investment income
Equity securities (1)
 
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)
Life settlement contracts
 
Other revenues
Other liabilities - Derivative financial instruments
 
Net realized investment gains (losses)
(1) Unrealized gains and losses are reported within AOCI.
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 six months ended June 30, 2016 and 2015 there were no transfers between Level 1 and 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 highly liquid and exchange traded 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 primarily 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 primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.

23
Table of Contents

Other invested assets - Federal Home Loan Bank of Chicago (FHLBC) Stock
The fair value of FHLBC stock is equal to par because it can only be redeemed by the FHLBC at par or sold to another member of the FHLBC at par and is 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 valued 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.
Derivative Financial Investments
Level 2 securities primarily include the embedded derivative on funds withheld liability. 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.
Other invested assets - Overseas Deposits
As of June 30, 2016 and December 31, 2015, there were approximately $28 million and $27 million respectively of overseas deposits, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables 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.
June 30, 2016
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
226

 
Discounted cash flow
 
Credit spread
 
1% - 40% (6%)
Life settlement contracts
67

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
55% - 1676% (162%)
December 31, 2015
Estimated Fair Value
(In millions)
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
138

 
Discounted cash flow
 
Credit spread
 
3% - 184% (6%)
Life settlement contracts
74

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
55% - 1676% (164%)
For fixed maturity securities, an increase to the credit spread assumptions would result in a lower 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
Table of Contents

Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
June 30, 2016
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
610

 
$
—

 
$
—

 
$
638

 
$
638

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,708

 
$
—

 
$
3,024

 
$
—

 
$
3,024


December 31, 2015
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
678

 
$
—

 
$
—

 
$
688

 
$
688

Liabilities
 
 
 
 
 
 
 
 
 
Short term debt
$
350

 
$
—

 
$
360

 
$
—

 
$
360

Long term debt
2,210

 
—

 
2,433

 
—

 
2,433

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair value of Mortgage loans was 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.


25
Table of Contents

Note E. Claim and Claim Adjustment Expense Reserves
The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $85 million and $121 million for the three and six months ended June 30, 2016. Catastrophe losses in 2016 resulted primarily from U.S. weather-related events and the Fort McMurray wildfires. The Company reported catastrophe losses, net of reinsurance, of $60 million and $89 million for the three and six months ended June 30, 2015.

26
Table of Contents

Net Prior Year Development
The following tables and discussion present the net prior year development.
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
(In millions)
Specialty
 
Commercial
 
International
 
Corporate & Other Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(65
)
 
$
(18
)
 
$
(15
)
 
$
—

 
$
(98
)
Pretax (favorable) unfavorable premium development
(7
)
 
(2
)
 
1

 
—

 
(8
)
Total pretax (favorable) unfavorable net prior year development
$
(72
)
 
$
(20
)
 
$
(14
)
 
$
—

 
$
(106
)
Three months ended June 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
$
(13
)
 
$
16

 
$
(8
)
 
$
—

 
$
(5
)
Pretax (favorable) unfavorable premium development
(2
)
 
(11
)
 
(2
)
 
—

 
(15
)
Total pretax (favorable) unfavorable net prior year development
$
(15
)
 
$
5

 
$
(10
)
 
$
—

 
$
(20
)
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(99
)
 
$
(32
)
 
$
(19
)
 
$
—

 
$
(150
)
Pretax (favorable) unfavorable premium development
(18
)
 
(4
)
 
—

 
—

 
(22
)
Total pretax (favorable) unfavorable net prior year development
$
(117
)
 
$
(36
)
 
$
(19
)
 
$
—

 
$
(172
)
Six months ended June 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
$
(11
)
 
$
11

 
$
(12
)
 
$
—

 
$
(12
)
Pretax (favorable) unfavorable premium development
(8
)
 
(12
)
 
14

 
—

 
(6
)
Total pretax (favorable) unfavorable net prior year development
$
(19
)
 
$
(1
)
 
$
2

 
$
—

 
$
(18
)

27
Table of Contents

Specialty
The following table presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the Specialty segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Medical Professional Liability
$
(23
)
 
$
(6
)
 
$
(30
)
 
$
8

Other Professional Liability and Management Liability
(41
)
 
(1
)
 
(50
)
 
(4
)
Surety
—

 
—

 
—

 
1

Warranty
3

 
1

 
5

 
1

Other
(4
)
 
(7
)
 
(24
)
 
(17
)
Total pretax (favorable) unfavorable development
$
(65
)
 
$
(13
)
 
$
(99
)
 
$
(11
)
Three Months
2016
Favorable development in medical professional liability was due to lower than expected severity for individual healthcare professionals and allied facilities for accident years 2014 and prior.
Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims in accident years 2010 through 2015, mainly driven by professional services. This was partially offset by unfavorable development in accident year 2015 related to an increase in management liability frequency of larger claims.
2015
Overall, favorable development in medical professional liability was primarily due to lower than expected severity for individual healthcare professionals and allied facilities in accident years 2009 through 2012. Unfavorable development was recorded related to increased claim frequency in the aging services business in accident years 2009 and 2010.
Favorable development of $38 million was recorded in other professional liability and management liability related to lower than expected severity for professional services primarily in accident years 2010 and prior. Unfavorable development of $37 million was recorded primarily related to increased claim frequency on public company management liability in accident years 2012 through 2014.
Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.


28
Table of Contents

Six Months
2016
Favorable development for medical professional liability was primarily due to lower than expected severities for individual healthcare professionals, allied facilities, and hospitals in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected severity in accident years 2014 and 2015 in our aging services business.
Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims in accident years 2010 through 2015, mainly driven by professional services. Additional favorable development was related to favorable outcomes on larger claims in 2013 and prior in professional services. This was partially offset by unfavorable development in accident years 2014 and 2015 related to an increase in management liability frequency of larger claims.
Favorable development for other coverages was due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2015.
2015
Overall, unfavorable development for medical professional liability was primarily related to increased claim frequency in the aging services business for accident years 2009 through 2014, partially offset by lower than expected severity in accident years 2010 and prior. Additional favorable development was due to lower than expected severity for individual healthcare professionals and allied facilities in accident years 2009 through 2012.
Favorable development of $41 million was recorded in other professional liability and management liability primarily related to lower than expected severity in accident years 2010 and prior for professional services. Unfavorable development of $37 million was recorded primarily related to increased claim frequency on public company management liability in accident years 2012 through 2014.
Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.


29
Table of Contents

Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016

2015
 
2016
 
2015
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Commercial Auto
$
(20
)
 
$
7

 
$
(35
)
 
$
7

General Liability
(37
)
 
1

 
(52
)
 
5

Workers' Compensation
50

 
24

 
54

 
23

Property and Other
(11
)
 
(16
)
 
1

 
(24
)
Total pretax (favorable) unfavorable development
$
(18
)
 
$
16

 
$
(32
)
 
$
11

Three Months
2016
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014.
Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013.
Unfavorable development for workers’ compensation was due to a reduction in estimated recoveries on war hazard claims for Defense Base Act contractors, which was partially offset by favorable development related to lower than expected frequencies for our small and middle market businesses in accident years 2009 through 2014.
Favorable development for property and other was primarily due to better than expected loss emergence in accident years 2013 through 2015.
2015
In the aggregate, the unfavorable loss development of $16 million was driven by an extra contractual obligation loss and losses associated with premium development. The reserve development discussed below was largely offsetting.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2008 through 2013.
Favorable development for property and other was primarily due to better than expected loss emergence from 2012 catastrophe events and better than expected claim frequency of large claims in accident year 2014.

30
Table of Contents

Six Months
2016
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014.
Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013.
Unfavorable development for workers’ compensation was due to a reduction in estimated recoveries on war hazard claims for Defense Base Act contractors, which was partially offset by favorable development related to lower than expected frequencies for our small and middle market businesses in accident years 2009 through 2014.
Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event. Favorable development was primarily due to better than expected loss emergence in accident years 2013 through 2015.
2015
In addition to the favorable property development noted in the three month discussion, there was additional favorable development for property related to better than expected loss emergence from 2014 catastrophe events.


31
Table of Contents

International
The following table presents further detail of the development recorded for the International segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Medical Professional Liability
$
(1
)
 
$
—

 
$
(1
)
 
$
—

Other Professional Liability
18

 
(5
)
 
17

 
(5
)
Liability
(19
)
 
(2
)
 
(19
)
 
(7
)
Property & Marine
(3
)
 
(8
)
 
(7
)
 
(14
)
Other
(10
)
 
7

 
(9
)
 
14

Total pretax (favorable) unfavorable development
$
(15
)
 
$
(8
)
 
$
(19
)
 
$
(12
)
Three Months
2016
Unfavorable development for other professional liability was primarily due to higher than expected large loss emergence in accident years 2011 through 2015.
Favorable development for liability was primarily due to better than expected severity in accident years 2013 and prior.
Favorable development for other coverages was primarily due to better than expected severity in auto liability in accident years 2011 through 2015.
2015
Favorable development in property and marine was due to better than expected emergence in accident years 2012 through 2014.
Unfavorable development in other is due to large losses in financial institutions and political risk primarily in accident year 2014.
Six Months
2016
Unfavorable development for other professional liability was primarily due to higher than expected large loss emergence in accident years 2011 through 2015.
Favorable development for liability was primarily due to better than expected severity in accident years 2013 and prior.
Favorable development for other coverages was primarily due to better than expected severity in auto liability in accident years 2011 through 2015.
2015
Favorable development in property and marine was due to better than expected emergence in accident years 2012 through 2014.
Unfavorable development in other is due to large losses in financial institutions and political risk primarily in accident year 2014.


32
Table of Contents

Asbestos and Environmental Pollution Reserves (A&EP)
In 2010, Continental Casualty Company (CCC) together with several of the Company’s insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.
Through December 31, 2013, the Company recognized $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring deferred retroactive reinsurance accounting treatment. This deferred gain is recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which a change in the estimate of ceded incurred losses is recognized, the change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the effective date of the LPT.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Net A&EP adverse development before consideration of LPT
$
—

 
$
150

 
$
200

 
$
150

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

 
—

 
—

 
—

Additional amounts ceded under LPT
—

 
150

 
200

 
150

Retroactive reinsurance benefit recognized
(9
)
 
(66
)
 
(82
)
 
(71
)
Pretax impact of unrecognized deferred retroactive reinsurance benefit
$
(9
)
 
$
84

 
$
118

 
$
79

The Company completed its reserve review of A&EP reserves in the first quarter of 2016. Based upon the Company's review, net unfavorable development prior to cessions to the LPT of $200 million was recognized. The unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. This unfavorable development was ceded to NICO under the LPT; however, the Company’s reported earnings were negatively affected due to the application of retroactive reinsurance accounting, as only a portion of the additional amounts ceded under the LPT were recognized in that quarter. All amounts recognized related to the LPT are recorded within Insurance claims and policyholders’ benefits in the Condensed Consolidated Statement of Operations.
As of June 30, 2016 and December 31, 2015, the cumulative amounts ceded under the LPT were $2.8 billion and $2.6 billion. The unrecognized deferred retroactive reinsurance benefit was $359 million and $241 million as of June 30, 2016 and December 31, 2015.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $2.6 billion and $2.8 billion as of June 30, 2016 and December 31, 2015. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the Company’s A&EP claims.

33
Table of Contents

Note F. Legal Proceedings and Contingent Liabilities
The Company is a party to routine litigation incidental to its business, which, based on the facts and circumstances currently known, is not material to the Condensed Consolidated Financial Statements.
Note G. Benefit Plans
The components of net periodic cost (benefit) are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Pension cost (benefit)
 
 
 
 
 
 
 
Service cost
$
—

 
$
2

 
$
—

 
$
4

Interest cost on projected benefit obligation
28

 
28

 
56

 
56

Expected return on plan assets
(40
)
 
(44
)
 
(80
)
 
(87
)
Amortization of net actuarial loss
10

 
10

 
19

 
19

Net periodic pension cost (benefit)
$
(2
)
 
$
(4
)
 
$
(5
)
 
$
(8
)
In the second quarter of 2015, the Company eliminated future benefit accruals associated with the CNA Retirement Plan (Plan) effective June 30, 2015.  Employees who were continuing to accrue under this Plan up until that date are entitled to an accrued benefit payable based on their eligible compensation and accrued service through June 30, 2015, in accordance with the terms of the Plan. Starting with the first pay period after July 1, 2015, affected employees began receiving enhanced employer contributions in the CNA 401(k) Plus Plan similar to employees who elected to cease accruals effective December 31, 1999. Employees who elected to cease accruals effective December 31, 1999 are not affected by this curtailment. This curtailment resulted in a $55 million decrease in the Plan benefit obligation liability and a reduction of the unrecognized actuarial losses included in AOCI. In connection with the curtailment, the Company remeasured the plan benefit obligation which resulted in an increase in the discount rate used to determine the benefit obligation from 3.85% to 4.00%.


34
Table of Contents

Note H. Commitments, Contingencies and Guarantees
Commitments and Contingencies
The Company holds an investment in a real estate joint venture in which the Company, on a joint and several basis with the other unrelated shareholders guaranteed to fund operating deficits of the joint venture and an operating lease for an office building entered into by the venture. The lease was terminated in March 2016. In the event that the other parties to the joint venture are unable to meet their commitments in funding this joint venture, the Company would be required to assume future obligations, primarily related to the wind-down of the lease and joint venture. The Company does not believe it is likely that it will be required to do so. However, as of June 30, 2016, the maximum potential loss that the Company could be required to pay under this guarantee, in excess of amounts already recorded, was approximately $16 million. If the Company were required to assume future obligations, the Company would have the right to pursue reimbursement from the other shareholders.
Guarantees
As of June 30, 2016 and December 31, 2015, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements and management believes that it is not likely that any future indemnity claims will be significantly greater than the amounts recorded.
In the course of selling business entities and assets to third parties, the Company agreed to guarantee the performance of certain obligations of a previously owned subsidiary and to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third-party loans may include provisions that survive indefinitely. As of June 30, 2016, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $259 million. Should the Company be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of a previously owned subsidiary.
In addition, the Company has agreed to provide indemnification to third-party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of June 30, 2016, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser's ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely, while others survive until the applicable statutes of limitation expire, or until the agreed-upon contract terms expire.
The Company also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of June 30, 2016, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $2.0 billion, which will be paid over the lifetime of the annuitants. The Company does not believe any payment is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.


35
Table of Contents

Note I. Accumulated Other Comprehensive Income (Loss) by Component
The table below displays the changes in Accumulated other comprehensive income (loss) by component.
(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of April 1, 2016
$
32

 
$
624

 
$
(642
)
 
$
(70
)
 
$
(56
)
Other comprehensive income (loss) before reclassifications
(1
)
 
323

 
—

 
(48
)
 
274

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(6), $3, $- and $(3)
—

 
13

 
(5
)
 
—

 
8

Other comprehensive income (loss) net of tax (expense) benefit of $1, $(157), $(3), $- and $(159)
(1
)
 
310

 
5

 
(48
)
 
266

Balance as of June 30, 2016
$
31

 
$
934

 
$
(637
)
 
$
(118
)
 
$
210

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of April 1, 2015
$
35

 
$
1,054

 
$
(627
)
 
$
(41
)
 
$
421

Other comprehensive income (loss) before reclassifications
(4
)
 
(372
)
 
36

 
49

 
(291
)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $5, $4, $- and $9
—

 
(7
)
 
(6
)
 
—

 
(13
)
Other comprehensive income (loss) net of tax (expense) benefit of $2, $181, $(23), $- and $160
(4
)
 
(365
)
 
42

 
49

 
(278
)
Balance as of June 30, 2015
$
31

 
$
689

 
$
(585
)
 
$
8

 
$
143


36
Table of Contents

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of January 1, 2016
$
27

 
$
390

 
$
(648
)
 
$
(84
)
 
$
(315
)
Other comprehensive income (loss) before reclassifications
2

 
546

 
—

 
(34
)
 
514

Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $1, $6, $- and $8
(2
)
 
2

 
(11
)
 
—

 
(11
)
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(273), $(6), $- and $(281)
4

 
544

 
11

 
(34
)
 
525

Balance as of June 30, 2016
$
31

 
$
934

 
$
(637
)
 
$
(118
)
 
$
210

(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance as of January 1, 2015
$
36

 
$
942

 
$
(633
)
 
$
55

 
$
400

Other comprehensive income (loss) before reclassifications
(5
)
 
(251
)
 
36

 
(47
)
 
(267
)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $5, $7, $- and $12
—

 
2

 
(12
)
 
—

 
(10
)
Other comprehensive income (loss) net of tax (expense) benefit of $2, $119, $(26), $- and $95
(5
)
 
(253
)
 
48

 
(47
)
 
(257
)
Balance as of June 30, 2015
$
31

 
$
689

 
$
(585
)
 
$
8

 
$
143

Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:
Component of AOCI
 
Condensed Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with OTTI losses
 
Net realized investment gains (losses)
Net unrealized gains (losses) on other investments
 
Net realized investment gains (losses)
Pension and postretirement benefits
 
Other operating expenses

37
Table of Contents

Note J. Business Segments
The Company's core property and casualty commercial insurance operations are aggregated and reported in three business segments: Specialty, Commercial and International. The Company's non-core operations are managed and reported in two segments: Life & Group Non-Core and Corporate & Other Non-Core.
The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2015. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only Insurance and Reinsurance receivables, Insurance reserves, Deferred acquisition costs and Goodwill are readily identifiable for all individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of Net investment income and Realized investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense has been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.
In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio. Net operating income (loss), which is derived from certain income statement amounts, is used by management to monitor performance of the Company's insurance operations. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk. Based on such analyses, the Company may recognize an OTTI loss on an investment security in accordance with its policy, or sell a security, which may produce realized gains and losses.
Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net realized investment gains (losses) ii) income or loss from discontinued operations and iii) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains (losses) because net realized investment gains (losses) are largely discretionary, except for some losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.









38
Table of Contents

The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
Three months ended June 30, 2016

Specialty
 

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

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
702

 
$
696

 
$
197

 
$
136

 
$
—

 
$
(1
)
 
$
1,730

Net investment income
133

 
164

 
13

 
188

 
4

 
—

 
502

Other revenues
89

 
8

 
—

 
3

 
—

 
—

 
100

Total operating revenues
924

 
868

 
210

 
327

 
4

 
(1
)
 
2,332

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
377

 
469

 
157

 
340

 
(8
)
 
—

 
1,335

Policyholders’ dividends
1

 
3

 
—

 
—

 
—

 
—

 
4

Amortization of deferred acquisition costs
148

 
117

 
40

 
—

 
—

 
—

 
305

Other insurance related expenses
73

 
130

 
37

 
31

 
—

 
(1
)
 
270

Other expenses
79

 
11

 
7

 
2

 
47

 
—

 
146

Total claims, benefits and expenses
678

 
730

 
241

 
373

 
39

 
(1
)
 
2,060

Operating income (loss) before income tax
246

 
138

 
(31
)
 
(46
)
 
(35
)
 
—

 
272

Income tax (expense) benefit on operating income (loss)
(82
)
 
(46
)
 
4

 
42

 
11

 
—

 
(71
)
Net operating income (loss) 
164

 
92

 
(27
)
 
(4
)
 
(24
)
 
—

 
201

Net realized investment gains (losses)
4

 
8

 
4

 
(2
)
 
2

 
—

 
16

Income tax (expense) benefit on net realized investment gains (losses)
(2
)
 
(3
)
 
(1
)
 
(3
)
 
1

 
—

 
(8
)
Net realized investment gains (losses), after tax
2

 
5

 
3

 
(5
)
 
3

 
—

 
8

Net income (loss)
$
166

 
$
97

 
$
(24
)
 
$
(9
)
 
$
(21
)
 
$
—

 
$
209

















39
Table of Contents

Three months ended June 30, 2015

Specialty
 

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

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
689

 
$
703

 
$
207

 
$
137

 
$
—

 
$
(1
)
 
$
1,735

Net investment income
134

 
169

 
13

 
179

 
5

 
—

 
500

Other revenues
81

 
9

 
(1
)
 
—

 
3

 
—

 
92

Total operating revenues
904

 
881

 
219

 
316

 
8

 
(1
)
 
2,327

Claims, Benefits and Expenses
 

 
 
 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
416

 
507

 
114

 
344

 
85

 
—

 
1,466

Policyholders’ dividends
1

 
2

 
—

 
—

 
—

 
—

 
3

Amortization of deferred acquisition costs
146

 
117

 
45

 
6

 
—

 
—

 
314

Other insurance related expenses
66

 
130

 
31

 
34

 
(1
)
 
(1
)
 
259

Other expenses
69

 
5

 
(5
)
 
5

 
47

 
—

 
121

Total claims, benefits and expenses
698

 
761

 
185

 
389

 
131

 
(1
)
 
2,163

Operating income (loss) before income tax
206

 
120

 
34

 
(73
)
 
(123
)
 
—

 
164

Income tax (expense) benefit on operating income (loss)
(69
)
 
(42
)
 
(12
)
 
49

 
42

 
—

 
(32
)
Net operating income (loss)
137

 
78

 
22

 
(24
)
 
(81
)
 
—

 
132

Net realized investment gains (losses)
—

 
2

 
1

 
(5
)
 
2

 
—

 
—

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

 
2

 
(1
)
 
6

 
(1
)
 
—

 
6

Net realized investment gains (losses), after tax
—

 
4

 
—

 
1

 
1

 
—

 
6

Net income (loss)
$
137

 
$
82

 
$
22

 
$
(23
)
 
$
(80
)
 
$
—

 
$
138


















40
Table of Contents

Six months ended June 30, 2016

Specialty
 

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

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
1,384

 
$
1,384

 
$
395

 
$
267

 
$
—

 
$
(1
)
 
$
3,429

Net investment income
240

 
290

 
25

 
375

 
7

 
—

 
937

Other revenues
176

 
14

 
1

 
3

 
3

 
—

 
197

Total operating revenues
1,800

 
1,688

 
421

 
645

 
10

 
(1
)
 
4,563

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
767

 
911

 
278

 
663

 
120

 
—

 
2,739

Policyholders’ dividends
2

 
6

 
—

 
—

 
—

 
—

 
8

Amortization of deferred acquisition costs
292

 
233

 
87

 
—

 
—

 
—

 
612

Other insurance related expenses
148

 
271

 
65

 
64

 
—

 
(1
)
 
547

Other expenses
154

 
16

 
16

 
5

 
101

 
—

 
292

Total claims, benefits and expenses
1,363

 
1,437

 
446

 
732

 
221

 
(1
)
 
4,198

Operating income (loss) before income tax
437

 
251

 
(25
)
 
(87
)
 
(211
)
 
—

 
365

Income tax (expense) benefit on operating income (loss)
(146
)
 
(85
)
 
4

 
81

 
73

 
—

 
(73
)
Net operating income (loss) 
291

 
166

 
(21
)
 
(6
)
 
(138
)
 
—

 
292

Net realized investment gains (losses)
(7
)
 
(10
)
 
8

 
(5
)
 
(6
)
 
—

 
(20
)
Income tax (expense) benefit on net realized investment gains (losses)
2

 
3

 
(2
)
 
(3
)
 
3

 
—

 
3

Net realized investment gains (losses), after tax
(5
)
 
(7
)
 
6

 
(8
)
 
(3
)
 
—

 
(17
)
Net income (loss)
$
286

 
$
159

 
$
(15
)
 
$
(14
)
 
$
(141
)
 
$
—

 
$
275


June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
856

 
$
621

 
$
128

 
$
492

 
$
2,623

 
$
—

 
$
4,720

Insurance receivables
1,005

 
1,120

 
274

 
11

 
3

 
—

 
2,413

Deferred acquisition costs
308

 
228

 
84

 
—

 
—

 
—

 
620

Goodwill
117

 
—

 
30

 
—

 
—

 
—

 
147

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
6,414

 
8,973

 
1,409

 
3,382

 
2,797

 
—

 
22,975

Unearned premiums
1,871

 
1,417

 
450

 
128

 
—

 
(1
)
 
3,865

Future policy benefits
—

 
—

 
—

 
11,140

 
—

 
—

 
11,140





41
Table of Contents

Six months ended June 30, 2015

Specialty
 

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

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
1,369

 
$
1,381

 
$
398

 
$
275

 
$
—

 
$
(1
)
 
$
3,422

Net investment income
289

 
373

 
27

 
358

 
11

 
—

 
1,058

Other revenues
159

 
18

 
(1
)
 
9

 
5

 
(1
)
 
189

Total operating revenues
1,817

 
1,772

 
424

 
642

 
16

 
(2
)
 
4,669

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
845

 
961

 
230

 
684

 
81

 
—

 
2,801

Policyholders’ dividends
2

 
5

 
—

 
—

 
—

 
—

 
7

Amortization of deferred acquisition costs
290

 
234

 
80

 
13

 
—

 
—

 
617

Other insurance related expenses
135

 
257

 
68

 
69

 
(1
)
 
(1
)
 
527

Other expenses
136

 
13

 
—

 
9

 
93

 
(1
)
 
250

Total claims, benefits and expenses
1,408

 
1,470

 
378

 
775

 
173

 
(2
)
 
4,202

Operating income (loss) before income tax
409

 
302

 
46

 
(133
)
 
(157
)
 
—

 
467

Income tax (expense) benefit on operating income (loss)
(137
)
 
(104
)
 
(15
)
 
92

 
54

 
—

 
(110
)
Net operating income (loss) 
272

 
198

 
31

 
(41
)
 
(103
)
 
—

 
357

Net realized investment gains (losses)
4

 
6

 
2

 
(4
)
 
2

 
—

 
10

Income tax (expense) benefit on net realized investment gains (losses)
(1
)
 
(1
)
 
(1
)
 
8

 
(1
)
 
—

 
4

Net realized investment gains (losses), after tax
3

 
5

 
1

 
4

 
1

 
—

 
14

Net income (loss)
$
275

 
$
203

 
$
32

 
$
(37
)
 
$
(102
)
 
$
—

 
$
371


December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
724

 
$
639

 
$
144

 
$
497

 
$
2,487

 
$
—

 
$
4,491

Insurance receivables
890

 
993

 
233

 
11

 
2

 
—

 
2,129

Deferred acquisition costs
307

 
213

 
78

 
—

 
—

 
—

 
598

Goodwill
117

 
—

 
33

 
—

 
—

 
—

 
150

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
6,269

 
9,183

 
1,347

 
3,220

 
2,644

 
—

 
22,663

Unearned premiums
1,839

 
1,297

 
415

 
120

 
—

 
—

 
3,671

Future policy benefits
—

 
—

 
—

 
10,152

 
—

 
—

 
10,152





42
Table of Contents

The following table presents revenue by line of business for each reportable segment. Revenues are comprised of Operating revenues and Net realized investment gains and losses.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Specialty
 
 
 
 
 
 
 
Management & Professional Liability
$
659

 
$
674

 
$
1,277

 
$
1,371

Surety
133

 
125

 
260

 
245

Warranty & Alternative Risks
136

 
105

 
256

 
205

Specialty revenues
928

 
904

 
1,793

 
1,821

Commercial
 
 
 
 
 

 
 

Middle Market
434

 
412

 
835

 
821

Small Business
151

 
158

 
294

 
323

Other Commercial Insurance
291

 
313

 
549

 
634

Commercial revenues
876

 
883

 
1,678

 
1,778

International


 
 
 
 
 


Canada
51

 
54

 
101

 
109

CNA Europe
81

 
77

 
159

 
154

Hardy
82

 
89

 
169

 
163

International revenues
214

 
220

 
429

 
426

Life & Group Non-Core revenues
325

 
311

 
640

 
638

Corporate & Other Non-Core revenues
6

 
10

 
4

 
18

Eliminations
(1
)
 
(1
)
 
(1
)
 
(2
)
Total revenues
$
2,348

 
$
2,327

 
$
4,543

 
$
4,679



43
Table of Contents

Item 2. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
Overview
The following discussion highlights significant factors affecting the Company. References to “we,” “our,” “us” or like terms refer to the business of CNA. Based on 2014 statutory net written premiums, we are the eighth largest commercial insurance writer and the 14th largest property and casualty insurance organization in the United States of America.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q and Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2015.
We utilize the net operating income (loss) financial measure to monitor our operations. Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note J to the Condensed Consolidated Financial Statements included under Part I, Item 1.
In the evaluation of the results of our core Specialty, Commercial and International segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition we also utilize rate, retention and new business in evaluating operating trends. Rate represents the average change in price on policies that renew excluding exposure change. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. New business represents premiums from policies written with new customers and additional policies written with existing customers.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the effect of related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.


44
Table of Contents

CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third-party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment.
•
Insurance Reserves
•
Reinsurance and Insurance Receivables
•
Valuation of Investments and Impairment of Securities
•
Long Term Care Policies
•
Pension and Postretirement Benefit Obligations
•
Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for further information.


45
Table of Contents

CONSOLIDATED OPERATIONS
The following table includes the consolidated results of our operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Operating Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,730

 
$
1,735

 
$
3,429

 
$
3,422

Net investment income
502

 
500

 
937

 
1,058

Other revenues
100

 
92

 
197

 
189

Total operating revenues
2,332

 
2,327

 
4,563

 
4,669

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Net incurred claims and benefits
1,335

 
1,466

 
2,739

 
2,801

Policyholders' dividends
4

 
3

 
8

 
7

Amortization of deferred acquisition costs
305

 
314

 
612

 
617

Other insurance related expenses
270

 
259

 
547

 
527

Other expenses
146

 
121

 
292

 
250

Total claims, benefits and expenses
2,060

 
2,163

 
4,198

 
4,202

Operating income before income tax
272

 
164

 
365

 
467

Income tax expense on operating income
(71
)
 
(32
)
 
(73
)
 
(110
)
Net operating income
201

 
132

 
292

 
357

Net realized investment gains (losses)
16

 
—

 
(20
)
 
10

Income tax (expense) benefit on net realized investment gains (losses)
(8
)
 
6

 
3

 
4

Net realized investment gains (losses), after tax
8

 
6

 
(17
)
 
14

Net income
$
209

 
$
138

 
$
275

 
$
371

Three Month Comparison
Net operating income increased $69 million for the three months ended June 30, 2016 as compared with the same period in 2015. Results in 2015 within our Corporate and Other Non-Core segment were negatively affected by a $54 million after-tax charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer, as further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Excluding the effect of the retroactive reinsurance charge, net operating results for our non-core segments improved $23 million primarily driven by our long term care business. Net operating income decreased $8 million for our core segments due to improved underwriting results, largely due to favorable net prior year development, which were more than offset by foreign currency exchange rate losses and lower investment income.
Favorable net prior year development of $106 million and $20 million was recorded for the three months ended June 30, 2016 and 2015 related to our Specialty, Commercial and International segments. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Catastrophe losses were $58 million after tax for the three months ended June 30, 2016 as compared to $39 million after tax for the same period in 2015.


46
Table of Contents

Six Month Comparison
Net operating income decreased $65 million for the six months ended June 30, 2016 as compared with the same period in 2015. Net operating income decreased $65 million for our core segments due to a decrease in net investment income, driven by lower limited partnership returns, and higher non-catastrophe current accident year losses, partially offset by higher net favorable prior year development. Results for our non-core segments were negatively affected in both periods by after tax charges related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer. The Loss Portfolio Transfer drove $25 million of the period over period change, as further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Excluding the effect of the retroactive reinsurance charges, net operating results for our non-core segments improved $29 million primarily driven by our long term care business.
Favorable net prior year development of $172 million and $18 million was recorded for the six months ended June 30, 2016 and 2015 related to our Specialty, Commercial and International segments. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Catastrophe losses were $82 million after tax for the six months ended June 30, 2016 as compared to $58 million after tax for the same period in 2015.


47
Table of Contents

SEGMENT RESULTS
The following discusses the results for our reporting segments. Our core property and casualty commercial insurance operations are aggregated and reported in three business segments: Specialty, Commercial and International. Our non-core operations are managed and reported in two segments: Life & Group Non-Core and Corporate & Other Non-Core.

48
Table of Contents

Specialty
The following table presents the results of operations.
Periods ended June 30
Three Months
 
Six Months
(In millions, except ratios, rate and retention)
2016
 
2015
 
2016
 
2015
Net written premiums
$
691

 
$
672

 
$
1,375

 
$
1,370

Net earned premiums
702

 
689

 
1,384

 
1,369

Net investment income
133

 
134

 
240

 
289

Net operating income
164

 
137

 
291

 
272

Net realized investment gains (losses), after tax
2

 
—

 
(5
)
 
3

Net income
166

 
137

 
286

 
275

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
53.9
%
 
60.3
%
 
55.5
%
 
61.7
%
Expense ratio
31.3

 
30.7

 
31.7

 
31.0

Dividend ratio
0.2

 
0.2

 
0.2

 
0.2

Combined ratio
85.4
%
 
91.2
%
 
87.4
%
 
92.9
%
 
 
 
 
 
 
 
 
Rate
1
%
 
1
%
 
1
%
 
1
%
Retention
86

 
86

 
87

 
86

New business
$
61

 
$
63

 
$
126

 
$
139

Three Month Comparison
Net written premiums for Specialty increased $19 million for the three months ended June 30, 2016 as compared with the same period in 2015, reflecting steady retention, positive rate and a modest amount of new business. The increase in net earned premiums was consistent with the trend in net written premiums.
Net operating income increased $27 million for the three months ended June 30, 2016 as compared with the same period in 2015, primarily due to higher favorable net prior year development.
The combined ratio improved 5.8 points for the three months ended June 30, 2016 as compared with the same period in 2015. The loss ratio improved 6.4 points primarily due to higher favorable net prior year reserve development partially offset by a higher non-catastrophe current accident year loss ratio. Catastrophe losses were $9 million, or 1.3 points of the loss ratio for the three months ended June 30, 2016, as compared to $5 million, or 0.7 points of the loss ratio for the three months ended June 30, 2015. The expense ratio increased 0.6 points for the three months ended June 30, 2016 as compared with the same period in 2015, primarily due to higher net commissions.
Favorable net prior year development of $72 million and $15 million was recorded in the three months ended June 30, 2016 and 2015. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

49
Table of Contents

Six Month Comparison
Net written premiums for Specialty increased $5 million for the six months ended June 30, 2016 as compared with the same period in 2015, reflecting steady retention, positive rate and a modest amount of new business. The increase in net earned premiums was consistent with the trend in net written premiums.
Net operating income increased $19 million for the six months ended June 30, 2016 as compared with the same period in 2015, primarily due to higher favorable net prior year development, partially offset by lower net investment income.
The combined ratio improved 5.5 points for the six months ended June 30, 2016 as compared with the same period in 2015. The loss ratio improved 6.2 points primarily due to higher favorable net prior year reserve development partially offset by a higher non-catastrophe current accident year loss ratio. Catastrophe losses were $13 million, or 1.0 points of the loss ratio for the six months ended June 30, 2016, as compared to $12 million, or 0.9 points of the loss ratio for the six months ended June 30, 2015. The expense ratio increased 0.7 points for the six months ended June 30, 2016 as compared with the same period in 2015, due to higher underwriting expenses and net commissions.
Favorable net prior year development of $117 million and $19 million was recorded for the six months ended June 30, 2016 and 2015. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
(In millions)
June 30,
2016
 
December 31, 2015
Gross Case Reserves
$
1,988

 
$
2,011

Gross IBNR Reserves
4,426

 
4,258

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,414

 
$
6,269

Net Case Reserves
$
1,785

 
$
1,810

Net IBNR Reserves
3,781

 
3,758

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
5,566

 
$
5,568



50
Table of Contents

Commercial
The following table presents the results of operations.
Periods ended June 30
Three Months
 
Six Months
(In millions, except ratios, rate and retention)
2016
 
2015
 
2016
 
2015
Net written premiums
$
740

 
$
717

 
$
1,488

 
$
1,476

Net earned premiums
696

 
703

 
1,384

 
1,381

Net investment income
164

 
169

 
290

 
373

Net operating income
92

 
78

 
166

 
198

Net realized investment gains (losses), after tax
5

 
4

 
(7
)
 
5

Net income
97

 
82

 
159

 
203

 
 
 
 
 
 
 
 

Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
67.4
 %
 
72.1
%
 
65.8
%
 
69.6
%
Expense ratio
35.7

 
34.9

 
36.5

 
35.4

Dividend ratio
0.4

 
0.2

 
0.4

 
0.3

Combined ratio
103.5
 %
 
107.2
%
 
102.7
%
 
105.3
%
 
 
 
 
 
 
 
 
Rate
—
 %
 
2
%
 
—
%
 
2
%
Retention
83

 
79

 
83

 
77

New business
$
146

 
$
149

 
$
283

 
$
287


Three Month Comparison
Net written premiums for Commercial increased $23 million for the three months ended June 30, 2016 as compared with the same period in 2015, driven by higher retention and a steady level of new business. Net earned premiums decreased $7 million for the three months ended June 30, 2016 as compared with the same period in 2015. Excluding the effect of premium development, the increase in net earned premiums was consistent with the trend in net written premiums.
Net operating income increased $14 million for the three months ended June 30, 2016 as compared with the same period in 2015, primarily due to favorable net prior year reserve development.
The combined ratio improved 3.7 points for the three months ended June 30, 2016 as compared with the same period in 2015. The loss ratio improved 4.7 points due to favorable net prior year reserve development and an improved non-catastrophe current accident year loss ratio. Catastrophe losses were $55 million, or 8.0 points of the loss ratio for the three months ended June 30, 2016, as compared to $54 million, or 7.7 points of the loss ratio for the three months ended June 30, 2015. The expense ratio increased 0.8 points for the three months ended June 30, 2016 as compared with the same period in 2015, due to higher underwriting expenses.
Favorable net prior year development of $20 million was recorded for the three months ended June 30, 2016 as compared with unfavorable net prior year development of $5 million for the three months ended June 30, 2015. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

51
Table of Contents

Six Month Comparison
Net written premiums for Commercial increased $12 million for the six months ended June 30, 2016 as compared with the same period in 2015, driven by higher retention and a steady level of new business. The increase in net earned premiums was consistent with the trend in net written premiums.
Net operating income decreased $32 million for the six months ended June 30, 2016 as compared with the same period in 2015, due to lower net investment income partially offset by favorable net prior year reserve development.
The combined ratio improved 2.6 points for the six months ended June 30, 2016 as compared with the same period in 2015. The loss ratio improved 3.8 points due to favorable net prior year reserve development and an improved non-catastrophe current accident year loss ratio. Catastrophe losses were $83 million, or 6.1 points of the loss ratio for the six months ended June 30, 2016, as compared to $73 million, or 5.3 points of the loss ratio for the six months ended June 30, 2015. The expense ratio increased 1.1 points for the six months ended June 30, 2016 as compared with the same period in 2015, primarily due to higher underwriting expenses.
Favorable net prior year development of $36 million and $1 million was recorded for the six months ended June 30, 2016 and 2015. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
(In millions)
June 30,
2016
 
December 31, 2015
Gross Case Reserves
$
4,833

 
$
4,975

Gross IBNR Reserves
4,140

 
4,208

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
8,973

 
$
9,183

Net Case Reserves
$
4,521

 
$
4,651

Net IBNR Reserves
3,883

 
3,925

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
8,404

 
$
8,576


52
Table of Contents

International
The following table presents the results of operations.
Periods ended June 30
Three Months
 
Six Months
(In millions, except ratios, rate and retention)
2016
 
2015
 
2016
 
2015
Net written premiums
$
194

 
$
249

 
$
430

 
$
461

Net earned premiums
197

 
207

 
395

 
398

Net investment income
13

 
13

 
25

 
27

Net operating (loss) income
(27
)
 
22

 
(21
)
 
31

Net realized investment gains, after tax
3

 
—

 
6

 
1

Net (loss) income
(24
)
 
22

 
(15
)
 
32

 
 
 
 
 
 
 
 
Other performance metrics:
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
79.8
 %
 
55.0
 %
 
70.5
 %
 
57.7
 %
Expense ratio
38.8

 
37.2

 
38.3

 
37.4

Combined ratio
118.6
 %
 
92.2
 %
 
108.8
 %
 
95.1
 %
 
 
 
 
 
 
 
 
Rate
(2
)%
 
(2
)%
 
(1
)%
 
(1
)%
Retention
70

 
76

 
75

 
77

New business (1)
$
62

 
$
25

 
$
122

 
$
60

(1) Beginning in 2016, new business includes Hardy. New business for Hardy was $36 million and $67 million for the three and six months ended June 30, 2016.
Three Month Comparison
Net written premiums for International decreased $55 million for the three months ended June 30, 2016 as compared with the same period in 2015. Excluding the effect of foreign currency exchange rates and the timing of reinsurance spend, net written premiums for the three months ended June 30, 2016 decreased 12% primarily due to lower retention and rate. The decrease in net earned premiums was consistent with the trend in net written premiums.
Net operating results decreased $49 million for the three months ended June 30, 2016 as compared with the same period in 2015, primarily due to a higher level of large losses as well as higher catastrophe losses. Additionally, the comparison was negatively affected by $13 million due to fluctuations in foreign currency exchange rates.
The combined ratio increased 26.4 points for the three months ended June 30, 2016 as compared with the same period in 2015. The loss ratio increased 24.8 points due to an increase in the current accident year loss ratio driven by large losses related to political risk, property and financial institutions partially offset by higher favorable net prior year loss development. Catastrophe losses were $21 million, or 10.6 points of the loss ratio for the three months ended June 30, 2016, primarily driven by the Fort McMurray wildfires, as compared to $1 million, or 0.8 points of the loss ratio for the three months ended June 30, 2015. The expense ratio increased 1.6 points for the three months ended June 30, 2016 as compared with the same period in 2015, due to lower net earned premiums.
Favorable net prior year development of $14 million and $10 million was recorded for the three months ended June 30, 2016 and 2015. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

53
Table of Contents

Six Month Comparison
Net written premiums for International decreased $31 million for the six months ended June 30, 2016 as compared with the same period in 2015. Excluding the effect of foreign currency exchange rates and premium development, net written premiums for the six months ended June 30, 2016 decreased 6% primarily due to lower retention and rate. The decrease in net earned premiums was consistent with the trend in net written premiums.
Net operating results decreased $52 million for the six months ended June 30, 2016 as compared with the same period in 2015, primarily due to a higher level of large losses as well as higher catastrophe losses. Additionally, the comparison was negatively affected by $15 million due to fluctuations in foreign currency exchange rates.
The combined ratio increased 13.7 points for the six months ended June 30, 2016 as compared with the same period in 2015. The loss ratio increased 12.8 points due to an increase in the current accident year loss ratio driven by large losses related to political risk, property and financial institutions partially offset by favorable net prior year development. Catastrophe losses were $25 million, or 6.3 points of the loss ratio for the six months ended June 30, 2016, primarily driven by the Fort McMurray wildfires, as compared to $4 million, or 1.0 points of the loss ratio for the six months ended June 30, 2015. The expense ratio increased 0.9 points for the six months ended June 30, 2016 as compared with the same period in 2015, due to higher underwriting expenses and a decrease in net earned premiums.
Favorable net prior year development of $19 million was recorded for the six months ended June 30, 2016 as compared with unfavorable net prior year development of $2 million for the six months ended June 30, 2015. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
(In millions)
June 30, 2016
 
December 31, 2015
Gross Case Reserves
$
638

 
$
622

Gross IBNR Reserves
771

 
725

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
1,409

 
$
1,347

Net Case Reserves
$
567

 
$
531

Net IBNR Reserves
719

 
688

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
1,286

 
$
1,219


Referendum on the United Kingdom's Membership in the European Union
On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as "Brexit". As a result of the referendum, it is expected that the British government will formally commence the process to leave the E.U. and begin negotiating the terms of treaties that will govern the U.K.'s future relationship with the E.U. Although the terms of any future treaties are unknown, changes in our international operating platform may be required to continue to write business in the E.U. after the completion of Brexit. As a result of these changes, the complexity and cost of regulatory compliance of our European business is likely to increase.

54
Table of Contents

Life & Group Non-Core
The following table presents the results of operations.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Net earned premiums
$
136

 
$
137

 
$
267

 
$
275

Net investment income
188

 
179

 
375

 
358

Net operating loss
(4
)
 
(24
)
 
(6
)
 
(41
)
Net realized investment (losses) gains, after tax
(5
)
 
1

 
(8
)
 
4

Net loss
(9
)
 
(23
)
 
(14
)
 
(37
)
Due to the recognition of the premium deficiency and resetting of actuarial assumptions in the fourth quarter of 2015, the operating results for our long term care business in 2016 now reflect the variance between actual experience and the expected results contemplated in our best estimate reserves.
Three Month Comparison
The net operating loss of $4 million was generally in line with expectations, as the impact of unfavorable persistency in our long term care business was partially offset by favorable mortality experience in our structured settlements and life settlement contracts business.
Six Month Comparison
Results for the current year six month period were generally consistent with the three month summary above.




55
Table of Contents

Corporate & Other Non-Core
The following table presents the results of operations.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Net investment income
$
4

 
$
5

 
$
7

 
$
11

Interest expense
38

 
39

 
80

 
78

Net operating loss
(24
)
 
(81
)
 
(138
)
 
(103
)
Net realized investment gains (losses), after tax
3

 
1

 
(3
)
 
1

Net loss
(21
)
 
(80
)
 
(141
)
 
(102
)
Three Month Comparison
Net operating loss improved $57 million for the three months ended June 30, 2016 as compared with the same period in 2015. Results in 2015 were negatively affected by a $54 million after-tax charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer, as the Company completed the reserve review in the second quarter of 2015 and in the first quarter of 2016, which is further discussed in Note E to the Condensed Consolidated Financial Statements included under Part 1, Item 1.
Six Month Comparison
Net operating loss increased $35 million for the six months ended June 30, 2016 as compared with the same period in 2015. Results in both periods were negatively affected by after-tax charges related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP Loss Portfolio Transfer. The Loss Portfolio Transfer drove $25 million of the period over period change. This is further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1. Additionally, the 2016 net operating loss was negatively affected by the elimination of subtenant revenue and increased lease expenses due to the sale of the principal executive offices of CNAF in the first quarter of 2016.
The following table presents the gross and net carried reserves.
(In millions)
June 30,
2016
 
December 31, 2015
Gross Case Reserves
$
1,643

 
$
1,521

Gross IBNR Reserves
1,154

 
1,123

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
2,797

 
$
2,644

Net Case Reserves
$
106

 
$
130

Net IBNR Reserves
138

 
153

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
244

 
$
283


56
Table of Contents

INVESTMENTS
Net Investment Income
The significant components of Net investment income are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities:
 
 
 
 
 
 
 
    Taxable
$
349

 
$
352

 
$
694

 
$
694

    Tax-Exempt
100

 
100

 
201

 
201

Total fixed maturity securities
449

 
452

 
895

 
895

Limited partnership investments
46

 
48

 
32

 
162

Other, net of investment expense
7

 
—

 
10

 
1

Net investment income
$
502

 
$
500

 
$
937

 
$
1,058

Net investment income, after tax
$
362

 
$
356

 
$
677

 
$
750

 
 
 
 
 
 
 
 
Effective income yield for the fixed maturity securities portfolio, pretax
4.8
%
 
4.9
%
 
4.8
%
 
4.8
%
Effective income yield for the fixed maturity securities portfolio, after tax
3.5
%
 
3.5
%
 
3.4
%
 
3.5
%
Net investment income, after tax, for the three months ended June 30, 2016 was in line with the same period in 2015. Income from fixed maturity securities reflects an increase in the invested asset base. Limited partnerships returned 1.8% for the three months ended June 30, 2016 as compared with 1.6% for the same period in 2015.
Net investment income, after tax, for the six months ended June 30, 2016 decreased $73 million as compared with the same period in 2015. The decrease was driven by limited partnership investments, which returned 1.2% as compared with 5.5% in the prior year period.

57
Table of Contents

Net Realized Investment Gains (Losses)
The components of Net realized investment results are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
7

 
$
3

 
$
(8
)
 
$
16

States, municipalities and political subdivisions
—

 
(16
)
 
3

 
(20
)
Asset-backed
6

 
—

 
—

 
3

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

 
—

 
2

 
—

Foreign government
2

 
1

 
2

 
1

Total fixed maturity securities
16

 
(12
)
 
(1
)
 
—

Equity securities
3

 
(1
)
 
(2
)
 
(1
)
Derivative financial instruments
(6
)
 
11

 
(13
)
 
10

Short term investments and other
3

 
2

 
(4
)
 
1

Net realized investment gains (losses)
16

 
—

 
(20
)
 
10

Income tax (expense) benefit on net realized investment gains (losses)
(8
)
 
6

 
3

 
4

Net realized investment gains (losses), after tax
$
8

 
$
6

 
$
(17
)
 
$
14

Net realized investment gains, after tax, increased $2 million for the three months ended June 30, 2016 as compared with the same period in 2015, driven by higher net realized investment gains on sales of securities and lower OTTI losses recognized in earnings, partially offset by derivative results.
Net realized investment results, after tax, decreased $31 million for the six months ended June 30, 2016 as compared with the same period in 2015, driven by derivative results. Additionally, the current period net realized investment losses include $5 million, after tax, related to the redemption of our $350 million senior notes due August 2016.
Further information on our realized gains and losses, including our OTTI losses, is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.

58
Table of Contents

Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.
 
June 30, 2016
 
December 31, 2015

(In millions)
Estimated Fair Value
 
Net Unrealized Gains (Losses)
 
Estimated Fair Value
 
Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises
$
4,208

 
$
180

 
$
3,910

 
$
101

AAA
1,936

 
169

 
1,938

 
123

AA
9,153

 
1,295

 
8,919

 
900

A
10,567

 
1,343

 
10,044

 
904

BBB
12,790

 
953

 
11,595

 
307

Non-investment grade
3,203

 
79

 
3,166

 
(16
)
Total
$
41,857

 
$
4,019

 
$
39,572

 
$
2,319

As of June 30, 2016 and December 31, 2015, only 1% of our fixed maturity portfolio was rated internally.
The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.
 
June 30, 2016
(In millions)
Estimated Fair Value
 
Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises
$
27

 
$
1

AAA
139

 
2

AA
89

 
2

A
432

 
11

BBB
1,204

 
40

Non-investment grade
1,136

 
72

Total
$
3,027

 
$
128

The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.
 
June 30, 2016
(In millions)
Estimated Fair Value
 
Gross Unrealized Losses
Due in one year or less
$
239

 
$
2

Due after one year through five years
724

 
25

Due after five years through ten years
1,520

 
56

Due after ten years
544

 
45

Total
$
3,027

 
$
128


59
Table of Contents

Duration
A primary objective in the management of the investment portfolio is to optimize return relative to corresponding liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions and the domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group Non-Core segment.
The effective durations of fixed maturity securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
 
June 30, 2016
 
December 31, 2015
(In millions)
Estimated Fair Value
 
Effective
Duration
(In years)
 
Estimated Fair Value
 
Effective
Duration
(In years)
Investments supporting Life & Group Non-Core
$
16,288

 
8.7

 
$
14,879

 
9.6

Other interest sensitive investments
26,839

 
4.1

 
26,435

 
4.3

Total
$
43,127

 
5.9

 
$
41,314

 
6.2

The investment portfolio is periodically analyzed for changes in duration and related price risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015.
Short Term Investments
The carrying values of the components of the Short term investments are presented in the following table.
 
 
 
 
(In millions)
June 30,
2016
 
December 31, 2015
Short term investments:
 
 
 
Commercial paper
$
862

 
$
998

U.S. Treasury securities
277

 
411

Money market funds
79

 
60

Other
166

 
191

Total short term investments
$
1,384

 
$
1,660


60
Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For the six months ended June 30, 2016, net cash provided by operating activities was $613 million as compared with $540 million for the same period in 2015. Cash provided by operating activities reflected increased receipts relating to returns on limited partnerships.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.
Net cash used by investing activities was $167 million for the six months ended June 30, 2016, as compared with net cash provided of $87 million for the same period in 2015. In the first quarter of 2016, we sold the principal executive offices of CNAF for $107 million.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity instruments.
For the six months ended June 30, 2016, net cash used by financing activities was $538 million as compared with $670 million for the same period in 2015. In the first quarter of 2016, we issued $500 million of 4.50% senior notes due March 1, 2026 and redeemed the $350 million outstanding aggregate principal balance of the 6.50% senior notes due August 15, 2016.
Common Stock Dividends
Dividends of $2.50 per share of our common stock, including a special dividend of $2.00 per share, were declared and paid during the six months ended June 30, 2016. On July 29, 2016, our Board of Directors declared a quarterly dividend of $0.25 per share, payable August 31, 2016 to stockholders of record on August 15, 2016. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.

61
Table of Contents

Liquidity
We believe our present cash flows from operating, investing and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility and no borrowings outstanding through our membership in the Federal Home Loan Bank of Chicago (FHLBC).
Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of June 30, 2016 CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2016 that would not be subject to the Department's prior approval is $1,079 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $200 million during the six months ended December 31, 2015 and $565 million during the six months ended June 30, 2016. As of June 30, 2016 CCC is able to pay approximately $314 million of dividends that would not be subject to prior approval of the Department. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
We have an effective automatic shelf registration statement under which we may issue debt, equity or hybrid securities.

62
Table of Contents

ACCOUNTING STANDARDS UPDATES
For discussion of Accounting Standards Updates adopted as of January 1, 2016 and that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for A&EP and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; expected cost savings and other results from our expense reduction activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:
Company-Specific Factors
•
the risks and uncertainties associated with our insurance reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our Annual Report on Form 10-K, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;
•
the risk that the other parties to the transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;
•
the performance of reinsurance companies under reinsurance contracts with us; and
•
the risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.
Industry and General Market Factors
•
the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;
•
product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;
•
general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
•
conditions in the capital and credit markets, including continuing uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;
•
conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms; and
•
the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.

63
Table of Contents

Regulatory Factors
•
regulatory initiatives and compliance with governmental regulations, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, legislative actions that increase claimant activity, trends in litigation and the outcome of any litigation involving us and rulings and changes in tax laws and regulations;
•
regulatory limitations, impositions and restrictions upon us, including with respect to our ability to increase premium rates, and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies; and
•
regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards.
Impact of Catastrophic Events and Related Developments
•
weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow;
•
regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
•
man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; and
•
the occurrence of epidemics.
Referendum on the United Kingdom's Membership in the European Union
•
on June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as "Brexit". As a result of the referendum, it is expected that the British government will formally commence the process to leave the E.U. and begin negotiating the terms of treaties that will govern the U.K.'s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that a U.K. insurance entity's ability to transact insurance business in E.U. countries will be subject to increased regulatory complexities or may not be possible at all. Brexit related changes may adversely affect our operations and financial results.
Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

64
Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the six months ended June 30, 2016. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A on our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2015 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.
As of June 30, 2016, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of June 30, 2016.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

65
Table of Contents

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

66
Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CNA Financial Corporation
 
 
 
Dated: August 1, 2016
By
/s/ D. Craig Mense
 
 
D. Craig Mense
Executive Vice President and
Chief Financial Officer

67
Table of Contents

EXHIBIT INDEX

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





68