CNA 2014 Q3


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-6169860
(I.R.S. Employer
Identification No.)
333 S. Wabash
Chicago, Illinois
(Address of principal executive offices)
 
60604
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x]
 
Accelerated filer [ ]
 
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
 
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2014
Common Stock, Par value $2.50
 
269,947,912



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


2
Table of Contents

Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions, except per share data)
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,810

 
$
1,825

 
$
5,427

 
$
5,389

Net investment income
480

 
555

 
1,556

 
1,680

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

 
(1
)
 
—

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

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

 
17

 
86

 
60

Net realized investment gains
37

 
1

 
69

 
10

Other revenues
84

 
77

 
262

 
284

Total revenues
2,411

 
2,458

 
7,314

 
7,363

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

 
1,378

 
4,241

 
4,259

Amortization of deferred acquisition costs
332

 
341

 
996

 
1,004

Other operating expenses
384

 
326

 
984

 
985

Interest
48

 
42

 
138

 
125

Total claims, benefits and expenses
2,118

 
2,087

 
6,359

 
6,373

Income from continuing operations before income tax
293

 
371

 
955

 
990

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

 
271

 
690

 
702

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

 
1

 
(197
)
 
14

Net income
$
213

 
$
272

 
$
493

 
$
716

 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.77

 
$
1.00

 
$
2.56

 
$
2.60

Income (loss) from discontinued operations
0.02

 
0.01

 
(0.73
)
 
0.06

Basic earnings per share
$
0.79

 
$
1.01

 
$
1.83

 
$
2.66

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.77

 
$
1.00

 
$
2.55

 
$
2.60

Income (loss) from discontinued operations
0.02

 
0.01

 
(0.73
)
 
0.05

Diluted earnings per share
$
0.79

 
$
1.01

 
$
1.82

 
$
2.65

 
 
 
 
 
 
 
 
Dividends per share
$
0.25

 
$
0.20

 
$
1.75

 
$
0.60

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
269.9

 
269.7

 
269.9

 
269.6

Diluted
270.6

 
270.2

 
270.6

 
270.1


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

3
Table of Contents

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

 
$
(3
)
 
$
15

 
$
3

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

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

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

 
(22
)
 
—

Foreign currency translation adjustment
(73
)
 
56

 
(39
)
 
(18
)
Pension and postretirement benefits
3

 
4

 
(47
)
 
14

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

 
(718
)
Net income
213

 
272

 
493

 
716

Total comprehensive income (loss)
$
24

 
$
259

 
$
824

 
$
(2
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

4
Table of Contents

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

 
$
41,233

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

 
185

Limited partnership investments
2,931

 
2,720

Other invested assets
44

 
54

Mortgage loans
556

 
508

Short term investments
1,878

 
1,407

Total investments
46,320

 
46,107

Cash
247

 
195

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

 
6,017

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

 
1,979

Accrued investment income
442

 
443

Deferred acquisition costs
627

 
624

Deferred income taxes
—

 
220

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

 
304

Goodwill
154

 
155

Other assets
891

 
969

Separate account business
—

 
181

Total assets
$
55,731

 
$
57,194

Liabilities
 

 
 

Insurance reserves:
 

 
 

Claim and claim adjustment expenses
$
23,475

 
$
24,089

Unearned premiums
3,703

 
3,718

Future policy benefits
8,890

 
10,471

Policyholders’ funds
27

 
116

Short term debt
549

 
549

Long term debt
2,559

 
2,011

Deferred income taxes
59

 
—

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

 
3,408

Separate account business
—

 
181

Total liabilities
42,697

 
44,543

Commitments and contingencies (Notes C, G and J)


 


Stockholders' Equity
 

 
 

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

 
683

Additional paid-in capital
2,149

 
2,145

Retained earnings
9,515

 
9,495

Accumulated other comprehensive income
773

 
442

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

 
12,651

Total liabilities and stockholders' equity
$
55,731

 
$
57,194

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

5
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2014
 
2013
Cash Flows from Operating Activities
 
 
 
Net income
$
493

 
$
716

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

 
—

Deferred income tax expense
81

 
141

Trading portfolio activity
16

 
2

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

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

 
80

Changes in:
 
 
 
Receivables, net
611

 
316

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

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

Other, net
(32
)
 
—

Total adjustments
554

 
205

Net cash flows provided by operating activities
1,047

 
921

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
4,005

 
4,830

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

 
2,496

Equity securities
23

 
82

Limited partnerships
133

 
91

Mortgage loans
36

 
20

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

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

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

 
—

Other, net
8

 
9

Net cash flows used by investing activities
(1,087
)
 
(689
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6
Table of Contents

Nine months ended September 30
 
 
 
(In millions)
2014
 
2013
Cash Flows from Financing Activities

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

 
—

Repayment of debt
—

 
(13
)
Stock options exercised
4

 
1

Other, net
18

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

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

 
29

Cash, beginning of year
195

 
156

Cash, end of period
$
247

 
$
185

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


7
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2014
 
2013
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

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

 
2,146

Stock-based compensation
4

 
(4
)
Balance, end of period
2,149

 
2,142

Retained Earnings
 
 
 
Balance, beginning of period
9,495

 
8,774

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

 
716

Balance, end of period
9,515

 
9,328

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of period
442

 
831

Other comprehensive income (loss)
331

 
(718
)
Balance, end of period
773

 
113

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

 
8

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

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

 
$
12,153

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


8
Table of Contents

CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements
Note A. General
Basis of Presentation
The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2014.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013, including the summary of significant accounting policies in Note A. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
The interim financial data as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Intercompany amounts have been eliminated.
Sale of Continental Assurance Company (CAC)
On August 1, 2014, the Company completed the sale of the common stock of CAC. The sale price is subject to a customary post-closing review by the purchaser. The business sold, which was previously reported within the Life & Group Non-Core segment, is reported as discontinued operations. Further information is provided in Note M to the Condensed Consolidated Financial Statements.
In connection with the sale of CAC, the Company entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The coinsurance agreement required the transfer of assets with a book value equal to the ceded reserves on the inception date of the contract. Because a substantial portion of the assets supporting these liabilities are held in trust for the benefit of the original cedant, those assets were transferred on a funds withheld basis. Under this approach the Company maintains legal ownership of the assets, but the investment income and realized gains and losses on those assets inure to the reinsurer. As a result, the $34 million difference between market value and book value of the funds withheld assets at the coinsurance contract's inception was recognized as a loss in Other operating expenses. The funds withheld aspect of the agreement is considered an embedded derivative. The embedded derivative is separately accounted for at fair value and reported with the host contract in Other liabilities on the Company's Condensed Consolidated Balance Sheet. The Company recognizes Other operating expense equal to the Net investment income generated by these trust assets.


9
Table of Contents

Note B. Earnings Per Share
Earnings per share is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For the three and nine months ended September 30, 2014, approximately 668 thousand and 654 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 180 thousand and 167 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three and nine months ended September 30, 2013, approximately 515 thousand and 501 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 110 thousand and 115 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.


10
Table of Contents

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

 
$
461

 
$
1,356

 
$
1,372

Short term investments
1

 
1

 
2

 
3

Limited partnership investments
29

 
93

 
199

 
303

Equity securities
2

 
3

 
7

 
9

Mortgage loans
7

 
6

 
22

 
17

Trading portfolio
2

 
3

 
8

 
13

Other
—

 
1

 
3

 
2

Gross investment income
494

 
568

 
1,597

 
1,719

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

 
$
555

 
$
1,556

 
$
1,680

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

 
$
47

 
$
124

 
$
119

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

 
2

 
58

 
22

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
1

 
3

 
6

 
10

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

 
(17
)
Derivatives
—

 
(1
)
 
1

 
(4
)
Short term investments and other
1

 
2

 
8

 
9

Net realized investment gains (losses)
$
37

 
$
1

 
$
69

 
$
10


11
Table of Contents

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

 
$
8

 
$
9

 
$
16

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
2

 
2

 
4

 
5

Other asset-backed
—

 
1

 
1

 
2

Total asset-backed
2

 
3

 
5

 
7

Total fixed maturity securities available-for-sale
8

 
11

 
14

 
23

Equity securities available-for-sale:
 
 
 
 
 
 
 
Common stock
2

 
3

 
3

 
5

Preferred stock
—

 
2

 
—

 
22

Total equity securities available-for-sale
2

 
5

 
3

 
27

Net OTTI losses recognized in earnings
$
10

 
$
16

 
$
17

 
$
50


12
Table of Contents

The following tables provide a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
September 30, 2014
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
(In millions)
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
17,480

 
$
1,704

 
$
40

 
$
19,144

 
$
—

States, municipalities and political subdivisions
11,217

 
1,295

 
53

 
12,459

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,972

 
187

 
13

 
5,146

 
(54
)
Commercial mortgage-backed
2,079

 
87

 
8

 
2,158

 
(2
)
Other asset-backed
1,222

 
13

 
5

 
1,230

 
—

Total asset-backed
8,273

 
287

 
26

 
8,534

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

 
5

 
—

 
30

 
—

Foreign government
456

 
16

 
1

 
471

 
—

Redeemable preferred stock
39

 
3

 
—

 
42

 
—

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

 
3,310

 
120

 
40,680

 
$
(56
)
Total fixed maturity securities trading
20

 


 


 
20

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
35

 
11

 
—

 
46

 
 
Preferred stock
162

 
4

 
1

 
165

 
 
Total equity securities available-for-sale
197

 
15

 
1

 
211

 
 
Total
$
37,707

 
$
3,325

 
$
121

 
$
40,911

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

 
$
1,645

 
$
135

 
$
20,862

 
$
—

States, municipalities and political subdivisions
11,281

 
548

 
272

 
11,557

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,940

 
123

 
92

 
4,971

 
(37
)
Commercial mortgage-backed
1,995

 
90

 
22

 
2,063

 
(3
)
Other asset-backed
945

 
13

 
3

 
955

 
—

Total asset-backed
7,880

 
226

 
117

 
7,989

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

 
6

 
1

 
144

 
—

Foreign government
531

 
15

 
3

 
543

 
—

Redeemable preferred stock
92

 
10

 
—

 
102

 
—

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

 
2,450

 
528

 
41,197

 
$
(40
)
Total fixed maturity securities trading
36

 


 


 
36

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
36

 
9

 
—

 
45

 
 
Preferred stock
143

 
1

 
4

 
140

 
 
Total equity securities available-for-sale
179

 
10

 
4

 
185

 
 
Total
$
39,490

 
$
2,460

 
$
532

 
$
41,418

 
 

13
Table of Contents

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. At September 30, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $972 million and $532 million. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs and/or increase in Insurance reserves are recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).


14
Table of Contents

The following tables summarize the estimated fair value and gross unrealized losses of available-for-sale fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
Securities in a Gross Unrealized Loss Position
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 2014
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
1,726

 
$
23

 
$
402

 
$
17

 
$
2,128

 
$
40

States, municipalities and political subdivisions
176

 
2

 
435

 
51

 
611

 
53

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
208

 
3

 
254

 
10

 
462

 
13

Commercial mortgage-backed
506

 
4

 
112

 
4

 
618

 
8

Other asset-backed
507

 
4

 
13

 
1

 
520

 
5

Total asset-backed
1,221

 
11

 
379

 
15

 
1,600

 
26

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

 
—

 
5

 
—

 
5

 
—

Foreign government
35

 
—

 
8

 
1

 
43

 
1

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

 
36

 
1,229

 
84

 
4,387

 
120

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
32

 
1

 
1

 
—

 
33

 
1

Total
$
3,190

 
$
37

 
$
1,230

 
$
84

 
$
4,420

 
$
121

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

 
$
129

 
$
72

 
$
6

 
$
3,664

 
$
135

States, municipalities and political subdivisions
3,251

 
197

 
129

 
75

 
3,380

 
272

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,293

 
29

 
343

 
63

 
1,636

 
92

Commercial mortgage-backed
640

 
22

 
—

 
—

 
640

 
22

Other asset-backed
269

 
3

 
—

 
—

 
269

 
3

Total asset-backed
2,202

 
54

 
343

 
63

 
2,545

 
117

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

 
1

 
—

 
—

 
13

 
1

Foreign government
111

 
3

 
—

 
—

 
111

 
3

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

 
384

 
544

 
144

 
9,713

 
528

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
87

 
4

 
—

 
—

 
87

 
4

Total
$
9,256

 
$
388

 
$
544

 
$
144

 
$
9,800

 
$
532





15
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2014 Securities in a Gross Unrealized Loss Position table above, are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads, market illiquidity and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2014.
The following table summarizes the activity for the three and nine months ended September 30, 2014 and 2013 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at September 30, 2014 and 2013 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Beginning balance of credit losses on fixed maturity securities
$
66

 
$
89

 
$
74

 
$
95

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

 
1

 
—

 
2

Reductions for securities sold during the period
(2
)
 
(7
)
 
(7
)
 
(14
)
Reductions for securities the Company intends to sell or more likely than not will be required to sell
—

 
—

 
(3
)
 
—

Ending balance of credit losses on fixed maturity securities
$
64

 
$
83

 
$
64

 
$
83

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

 
$
2,368

 
$
2,420

 
$
2,455

Due after one year through five years
8,888

 
9,455

 
9,496

 
10,068

Due after five years through ten years
12,446

 
12,951

 
11,667

 
11,954

Due after ten years
13,827

 
15,906

 
15,692

 
16,720

Total
$
37,490

 
$
40,680

 
$
39,275

 
$
41,197

Investment Commitments
As of September 30, 2014, the Company had committed approximately $365 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of September 30, 2014, the Company had mortgage loan commitments of $19 million representing signed loan applications received and accepted.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of September 30, 2014, the Company had commitments to purchase or fund additional amounts of $140 million and sell $103 million under the terms of such securities.



16
Table of Contents

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

 
$
—

 
$
—

Currency forwards
6

 
1

 
—

Equity warrants
5

 
—

 
—

Embedded derivative on funds withheld liability
185

 
—

 
(1
)
Total
 
 
$
1

 
$
(1
)

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

 
$
—

 
$
—


17
Table of Contents

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

18
Table of Contents

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

 
$
18,948

 
$
173

 
$
19,154

States, municipalities and political subdivisions
—

 
12,389

 
80

 
12,469

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,986

 
160

 
5,146

Commercial mortgage-backed
—

 
2,061

 
97

 
2,158

Other asset-backed
—

 
588

 
642

 
1,230

Total asset-backed
—

 
7,635

 
899

 
8,534

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

 
3

 
—

 
30

Foreign government
47

 
424

 
—

 
471

Redeemable preferred stock
30

 
12

 
—

 
42

Total fixed maturity securities
137

 
39,411

 
1,152

 
40,700

Equity securities
141

 
53

 
17

 
211

Other invested assets
—

 
44

 
—

 
44

Short term investments
1,199

 
612

 
—

 
1,811

Life settlement contracts, included in Other assets
—

 
—

 
86

 
86

Total assets
$
1,477

 
$
40,120

 
$
1,255

 
$
42,852

Liabilities
 
 
 
 
 
 
 
Other liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)
Total liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)

19
Table of Contents

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

 
$
20,661

 
$
204

 
$
20,898

States, municipalities and political subdivisions
—

 
11,486

 
71

 
11,557

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
4,640

 
331

 
4,971

Commercial mortgage-backed
—

 
1,912

 
151

 
2,063

Other asset-backed
—

 
509

 
446

 
955

Total asset-backed
—

 
7,061

 
928

 
7,989

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

 
28

 
—

 
144

Foreign government
81

 
462

 
—

 
543

Redeemable preferred stock
45

 
57

 
—

 
102

Total fixed maturity securities
275

 
39,755

 
1,203

 
41,233

Equity securities
126

 
48

 
11

 
185

Other invested assets
—

 
54

 
—

 
54

Short term investments
769

 
563

 
—

 
1,332

Life settlement contracts, included in Other assets
—

 
—

 
88

 
88

Separate account business
9

 
171

 
1

 
181

Total assets
$
1,179

 
$
40,591

 
$
1,303

 
$
43,073


20
Table of Contents

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2014 and 2013.
Level 3
(In millions)
Balance at
July 1,
2014
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at September 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2014 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
194

 
$
—

 
$
(1
)
 
$
4

 
$
—

 
$
(3
)
 
$
—

 
$
(21
)
 
$
173

 
$
—

States, municipalities and political subdivisions
79

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
80

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
185

 
1

 
—

 
—

 
—

 
(17
)
 
11

 
(20
)
 
160

 
—

Commercial mortgage-backed
59

 
2

 
(2
)
 
28

 
—

 
(21
)
 
31

 
—

 
97

 
—

Other asset-backed
626

 
1

 
(4
)
 
80

 
—

 
(25
)
 
—

 
(36
)
 
642

 
—

Total asset-backed
870

 
4

 
(6
)
 
108

 
—

 
(63
)
 
42

 
(56
)
 
899

 
—

Total fixed maturity securities
1,143

 
4

 
(6
)
 
112

 
—

 
(66
)
 
42

 
(77
)
 
1,152

 
—

Equity securities
2

 
—

 
(1
)
 
16

 
—

 
—

 
—

 
—

 
17

 
—

Life settlement contracts
86

 
1

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
86

 
1

Total
$
1,231

 
$
5

 
$
(7
)
 
$
128

 
$
—

 
$
(67
)
 
$
42

 
$
(77
)
 
$
1,255

 
$
1






21
Table of Contents

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

 
$
1

 
$
—

 
$
6

 
$
(6
)
 
$
(8
)
 
$
17

 
$
(1
)
 
$
211

 
$
—

States, municipalities and political subdivisions
140

 
—

 
(3
)
 
—

 
—

 
(15
)
 
—

 
(27
)
 
95

 
—

Asset-backed:
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 


 
 
Residential mortgage-backed
428

 
—

 
(20
)
 
5

 
—

 
(21
)
 
—

 
(22
)
 
370

 
(1
)
Commercial mortgage-backed
165

 
(1
)
 
(2
)
 
10

 
—

 
(1
)
 
—

 
(14
)
 
157

 
—

Other asset-backed
387

 
—

 
1

 
56

 
—

 
(6
)
 
—

 
(5
)
 
433

 
(1
)
Total asset-backed
980

 
(1
)
 
(21
)
 
71

 
—

 
(28
)
 
—

 
(41
)
 
960

 
(2
)
Redeemable preferred stock
25

 
(1
)
 
1

 
—

 
—

 
(25
)
 
—

 
—

 
—

 
—

Total fixed maturity securities
1,347


(1
)

(23
)

77


(6
)

(76
)

17


(69
)

1,266


(2
)
Equity securities
13

 
(2
)
 
2

 
—

 
—

 
—

 
—

 
—

 
13

 
(2
)
Life settlement contracts
91

 
3

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
90

 
—

Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,453

 
$
—

 
$
(21
)
 
$
77

 
$
(6
)
 
$
(80
)
 
$
17

 
$
(69
)
 
$
1,371

 
$
(4
)









    


    

22
Table of Contents

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 and 2013.

Level 3
(In millions)
Balance at
January 1,
2014
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2014 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
204

 
$
2

 
$
—

 
$
30

 
$
(10
)
 
$
(13
)
 
$
8

 
$
(48
)
 
$
173

 
$
—

States, municipalities and political subdivisions
71

 
1

 
3

 
1

 
(10
)
 
—

 
14

 
—

 
80

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
331

 
(22
)
 
62

 
47

 
(174
)
 
(57
)
 
32

 
(59
)
 
160

 
—

Commercial mortgage-backed
151

 
4

 
(2
)
 
28

 
(60
)
 
(23
)
 
43

 
(44
)
 
97

 
—

Other asset-backed
446

 
2

 
—

 
457

 
(111
)
 
(115
)
 
—

 
(37
)
 
642

 
(1
)
Total asset-backed
928

 
(16
)
 
60

 
532

 
(345
)
 
(195
)
 
75

 
(140
)
 
899

 
(1
)
Total fixed maturity securities
1,203

 
(13
)
 
63

 
563

 
(365
)
 
(208
)
 
97

 
(188
)
 
1,152

 
(1
)
Equity securities
11

 
3

 
(5
)
 
16

 
(8
)
 
—

 
—

 
—

 
17

 
—

Life settlement contracts
88

 
23

 
—

 
—

 
—

 
(25
)
 
—

 
—

 
86

 
3

Separate account business
1

 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

Total
$
1,303

 
$
13

 
$
58

 
$
579

 
$
(373
)
 
$
(233
)
 
$
97

 
$
(189
)
 
$
1,255

 
$
2





23
Table of Contents

Level 3
(In millions)
Balance at
January 1,
2013
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2013
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
219

 
$
2

 
$
(1
)
 
$
129

 
$
(96
)
 
$
(34
)
 
$
43

 
$
(51
)
 
$
211

 
$
(2
)
States, municipalities and political subdivisions
96

 
(3
)
 
1

 
122

 
(79
)
 
(20
)
 
5

 
(27
)
 
95

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Residential mortgage-backed
413

 
2

 
(21
)
 
116

 
(10
)
 
(53
)
 
4

 
(81
)
 
370

 
(3
)
Commercial mortgage-backed
129

 
—

 
7

 
88

 
—

 
(10
)
 
21

 
(78
)
 
157

 
—

Other asset-backed
368

 
3

 
(1
)
 
230

 
(132
)
 
(30
)
 
—

 
(5
)
 
433

 
(2
)
Total asset-backed
910

 
5

 
(15
)
 
434

 
(142
)
 
(93
)
 
25

 
(164
)
 
960

 
(5
)
Redeemable preferred stock
26

 
(1
)
 
—

 
—

 
—

 
(25
)
 
—

 
—

 
—

 
—

Total fixed maturity securities
1,251


3


(15
)

685


(317
)

(172
)

73


(242
)

1,266


(7
)
Equity securities
34

 
(22
)
 
2

 
—

 
—

 
—

 
—

 
(1
)
 
13

 
(22
)
Other invested assets, including derivatives, net
—

 
—

 
—

 
—

 
(1
)
 
1

 
—

 
—

 
—

 
—

Short term investments
6

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
—

 
—

 
—

Life settlement contracts
100

 
14

 
—

 
—

 
—

 
(24
)
 
—

 
—

 
90

 
(1
)
Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,393

 
$
(5
)
 
$
(13
)
 
$
685

 
$
(324
)
 
$
(195
)
 
$
73

 
$
(243
)
 
$
1,371

 
$
(30
)


24
Table of Contents

* Net realized and unrealized gains and losses shown above are reported in Net income (loss) as follows:
Major Category of Assets and Liabilities
 
Condensed Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale
 
Net realized investment gains (losses)
Fixed maturity securities trading
 
Net investment income
Equity securities
 
Net realized investment gains (losses)
Other invested assets - Derivative financial instruments held in a trading portfolio
 
Net investment income
Other invested assets - Derivative financial instruments not held in a trading portfolio
 
Net realized investment gains (losses)
Other invested assets - Overseas deposits
 
Net investment income
Life settlement contracts
 
Other revenues
Other liabilities - Derivative financial instruments
 
Net realized investment gains (losses)
Securities shown on the previous pages may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three months ended September 30, 2014 there were no transfers between Level 1 and Level 2. During the nine months ended September 30, 2014 there were $24 million of transfers from Level 2 to Level 1 and $1 million from Level 1 to Level 2. There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2013. 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
Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer 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.
Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

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Table of Contents

Derivative Financial Instruments
Level 1 securities include exchange traded derivatives, primarily futures, valued using quoted market prices. Level 2 securities primarily include the embedded derivative on funds withheld liability and currency forwards. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld payable, which are fixed maturity securities valued with observable inputs. Currency forwards are valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 3 of the valuation hierarchy due to a lack of transparency as to whether these quotes are based on information that is observable in the marketplace.
Overseas Deposits
Overseas deposits, which can be redeemed at net asset value in 90 days or less, are classified as Level 2.
Short Term Investments
Securities that are actively traded and have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as the Company's own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
Separate Account Business
Separate account business included fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.
Significant Unobservable Inputs
The tables below present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company.
Assets
(In millions)
Fair Value at September 30, 2014
 
Valuation Technique
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
95

 
Discounted cash flow
 
Credit spread
 
2% - 12% (3%)
Equity securities
18

 
Market approach
 
Private offering price
 
$13 - $4,388 per share ($554)
Life settlement contracts
86

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
70% - 743% (193%)

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Table of Contents

Assets
(In millions)
Fair Value at December 31, 2013
 
Valuation Technique
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
142

 
Discounted cash flow
 
Credit spread
 
2% - 20% (4%)
Equity securities
10

 
Market approach
 
Private offering price
 
$360 - $4,268 per share ($1,148)
Life settlement contracts
88

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
70% - 743% (192%)
For fixed maturity securities, an increase in the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price, earnings projections and earnings multiple would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company's financial instrument assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are listed in the tables below.
September 30, 2014
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Notes receivable for the issuance of common stock
$
1

 
$
—

 
$
—

 
$
1

 
$
1

Mortgage loans
556

 
—

 
—

 
576

 
576

Financial liabilities
 
 
 
 
 
 
 
 
 
Short term debt
$
549

 
$
—

 
$
555

 
$
—

 
$
555

Long term debt
2,559

 
—

 
2,889

 
—

 
2,889


December 31, 2013
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Notes receivable for the issuance of common stock
$
23

 
$
—

 
$
—

 
$
23

 
$
23

Mortgage loans
508

 
—

 
—

 
515

 
515

Financial liabilities
 
 
 
 
 
 
 
 
 
Premium deposits and annuity contracts
$
57

 
$
—

 
$
—

 
$
58

 
$
58

Short term debt
549

 
—

 
575

 
—

 
575

Long term debt
2,011

 
—

 
2,328

 
—

 
2,328

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair values of Notes receivable for the issuance of common stock were estimated using discounted cash flows utilizing interest rates currently offered for obligations securitized with similar collateral, adjusted for specific note receivable risk.
The fair values of Mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.
Premium deposits and annuity contracts were valued based on cash surrender values or estimated fair values of policyholder liabilities, net of amounts ceded related to sold business.
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.

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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.


28
Table of Contents

Note F. 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 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 $17 million and $147 million for the three and nine months ended September 30, 2014. Catastrophe losses in 2014 related primarily to U.S. weather-related events. The Company reported catastrophe losses, net of reinsurance, of $42 million and $146 million for the three and nine months ended September 30, 2013.

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Net Prior Year Development
The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments.
Net Prior Year Development
Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
(In millions)
CNA
Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(82
)
 
$
57

 
$
—

 
$
(1
)
 
$
(26
)
Pretax (favorable) unfavorable premium development
(2
)
 
(1
)
 
6

 
—

 
3

Total pretax (favorable) unfavorable net prior year development
$
(84
)
 
$
56

 
$
6

 
$
(1
)
 
$
(23
)

Three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
(In millions)
CNA
Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(74
)
 
$
(3
)
 
$
(6
)
 
$
2

 
$
(81
)
Pretax (favorable) unfavorable premium development
(3
)
 
7

 
1

 
—

 
5

Total pretax (favorable) unfavorable net prior year development
$
(77
)
 
$
4

 
$
(5
)
 
$
2

 
$
(76
)
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
(In millions)
CNA Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(139
)
 
$
153

 
$
10

 
$
(1
)
 
$
23

Pretax (favorable) unfavorable premium development
(11
)
 
(25
)
 
6

 
—

 
(30
)
Total pretax (favorable) unfavorable net prior year development
$
(150
)
 
$
128

 
$
16

 
$
(1
)
 
$
(7
)
Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
(In millions)
CNA Specialty
 
CNA Commercial
 
Hardy
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(130
)
 
$
13

 
$
5

 
$
—

 
$
(112
)
Pretax (favorable) unfavorable premium development
(16
)
 
(8
)
 
7

 
1

 
(16
)
Total pretax (favorable) unfavorable net prior year development
$
(146
)
 
$
5

 
$
12

 
$
1

 
$
(128
)









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Table of Contents

CNA Specialty
The following table provides further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the CNA Specialty segment for the three and nine months ended September 30, 2014 and 2013.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Medical Professional Liability
$
13

 
$
9

 
$
15

 
$
(11
)
Other Professional Liability and Management Liability
(9
)
 
(4
)
 
(73
)
 
(28
)
Surety
(79
)
 
(76
)
 
(78
)
 
(74
)
Warranty
—

 
—

 
—

 
—

Other
(7
)
 
(3
)
 
(3
)
 
(17
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(82
)
 
$
(74
)
 
$
(139
)
 
$
(130
)
Three Months
2014
Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.
2013
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
Nine Months
2014
Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.
Favorable development for other professional liability and management liability was related to better than expected severity in accident years 2008 through 2011, including favorable outcomes on individual large claims.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.
2013
Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.
Overall, favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2007 through 2009. Unfavorable development was recorded in accident years 2010 through 2012 related to an increase in severity.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.

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Table of Contents

CNA Commercial
The following table provides further detail of the development recorded for the CNA Commercial segment for the three and nine months ended September 30, 2014 and 2013. A significant amount of the unfavorable development for the nine months ended September 30, 2014 relates to business classes which the Company has exited, but also includes Small Business where the Company is taking underwriting actions in an effort to improve profitability.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Commercial Auto
$
12

 
$
4

 
$
52

 
$
1

General Liability
39

 
(18
)
 
64

 
(24
)
Workers' Compensation
24

 
26

 
74

 
96

Property and Other
(18
)
 
(15
)
 
(37
)
 
(60
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
57

 
$
(3
)
 
$
153

 
$
13

Three Months
2014
Overall, unfavorable development for general liability coverages was primarily related to higher than expected severity in accident years 2010, 2011 and 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.
Overall, unfavorable development for workers’ compensation was primarily related to increased medical severity in accident years 2010 and prior and higher than expected severity related to Defense Base Act (DBA) contractors in accident years 2010 through 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers' compensation reinsurance pool.
Favorable development for property and other first-party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.
2013
Favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2005 through 2007 and 2012.
Unfavorable development for workers’ compensation was primarily due to increased frequency and severity on claims related to DBA contractors in accident year 2012.
Favorable development for property and other coverages was primarily related to favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.


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Table of Contents

Nine Months
2014
Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected severity for liability coverages in accident years 2009 through 2013.
Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2010, 2011 and 2013, including unfavorable development in accident year 2013 related to Small Business. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to DBA contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers' compensation reinsurance pool.
Favorable development for property and other first-party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.
2013
Favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2009 and prior and 2012.
Unfavorable development for workers’ compensation includes the Company's response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers’ compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013. Additional unfavorable development was recorded in accident year 2012 related to increased frequency and severity on claims related to DBA contractors and in accident year 2010 due to higher than expected large losses and increased severity in the state of California.
Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 and favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.








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Table of Contents

Hardy
The following table provides further detail of the development recorded for the Hardy segment for the three and nine months ended September 30, 2014 and 2013.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Marine and Aviation
$
2

 
$
—

 
$
8

 
$
3

Non-Marine Property
2

 
1

 
3

 
8

Property Treaty
(1
)
 
(5
)
 
(5
)
 
(3
)
Specialty
(3
)
 
(2
)
 
(6
)
 
(3
)
 Commutations
—

 
—

 
10

 
—

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
—

 
$
(6
)
 
$
10

 
$
5

Three Months
2013
Favorable development for property treaty was due to favorable emergence of losses from catastrophe events in 2011 and 2012. Favorable development for specialty was primarily due to favorable outcomes on several large losses.
Nine Months
2014
Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for uncollectible reinsurance.
2013
Unfavorable development for non-marine property was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake.
Favorable development for property treaty was due to favorable emergence of losses from catastrophe events in 2011 and 2012. Favorable development for specialty was primarily due to favorable outcomes on several large losses.




34
Table of Contents

Note G. 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 H. Benefit Plans
The components of net periodic cost (benefit) are presented in the following table.
Net Periodic Cost (Benefit)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Pension cost (benefit)
 
 
 
 
 
 
 
Service cost
$
3

 
$
3

 
$
7

 
$
9

Interest cost on projected benefit obligation
33

 
30

 
99

 
90

Expected return on plan assets
(48
)
 
(45
)
 
(144
)
 
(135
)
Amortization of net actuarial loss
6

 
10

 
19

 
34

   Settlement loss
—

 
3

 
—

 
3

Net periodic pension cost (benefit)
$
(6
)

$
1


$
(19
)

$
1

 
 
 
 
 
 
 
 
Postretirement cost (benefit)
 
 
 
 
 
 
 
Interest cost on projected benefit obligation
$
—

 
$
—

 
$
1

 
$
1

Amortization of prior service credit
—

 
(4
)
 
(9
)
 
(13
)
Amortization of net actuarial loss
—

 
1

 
—

 
1

Curtailment gain
—


—


(86
)

—

Net periodic postretirement cost (benefit)
$
—

 
$
(3
)
 
$
(94
)
 
$
(11
)
In the second quarter of 2014, the Company eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change was a negative plan amendment and also resulted in an $86 million curtailment gain which is included in Other operating expenses within the Corporate & Other Non-Core segment. In connection with the plan amendment, the Company remeasured the plan benefit obligation which resulted in a decrease in the discount rate used to determine the benefit obligation from 3.60% to 3.10%.

35

Note I. Other Intangible Assets
Other intangible assets are presented in the following table.
 
 
 
September 30, 2014
 
December 31, 2013
(In millions)
Economic Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
Value of business acquired
1 - 4 years
 
$
63

 
$
63

 
$
64

 
$
63

Trade name
8 years
 
8

 
2

 
8

 
2

Distribution channel
15 years
 
13

 
2

 
13

 
1

Total finite-lived intangible assets
 
 
84

 
67

 
85

 
66

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
Syndicate capacity
 
 
57

 
 
 
58

 
 
Agency force
 
 
16

 
 
 
16

 
 
Total indefinite-lived intangible assets
 
 
73

 
 
 
74

 
 
Total other intangible assets
 
 
$
157

 
$
67

 
$
159

 
$
66

For the three and nine months ended September 30, 2014, amortization expense of $1 million and $2 million was included in Amortization of deferred acquisition costs. For the nine months ended September 30, 2014, $1 million was recorded in Other operating expenses in the Statement of Operations for the Hardy segment. For the three and nine months ended September 30, 2013, amortization expense of $1 million and $14 million was included in Amortization of deferred acquisition costs and $(1) million and $4 million was included in Other operating expenses in the Statement of Operations for the Hardy segment. The gross carrying amounts and accumulated amortization in the table above may change from period to period as a result of foreign currency translation. Estimated future amortization expense for intangible assets is $1 million for the remainder of 2014, $1 million in 2015 and $2 million in years 2016, 2017, 2018 and 2019.

36
Table of Contents

Note J. Commitments, Contingencies, and Guarantees
Commitments and Contingencies
The Company holds an investment in a real estate joint venture. In the normal course of business, the Company, on a joint and several basis with other unrelated insurance company shareholders, has committed to continue funding the operating deficits of this joint venture. Additionally, the Company and the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016. The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as long as the joint venture continues to be funded by its shareholders which provide liquidity to make its annual lease payments.
In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, the Company would be required to assume the obligation for the entire office building operating lease. The Company does not believe it is likely that it will be required to do so.  However, the maximum potential future lease payments and other related costs at September 30, 2014 that the Company could be required to pay under this guarantee, in excess of amounts already recorded, were approximately $60 million. If the Company were required to assume the entire lease obligation, the Company would have the right to pursue reimbursement from the other shareholders and the right to all sublease revenues.
Guarantees
As of September 30, 2014 and December 31, 2013, the Company had recorded liabilities of approximately $12 million and $7 million related to 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 has agreed to guarantee the performance of certain obligations of a previously owned subsidiary and to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation.  Such guarantee and indemnification agreements may include provisions that survive indefinitely. As of September 30, 2014, the aggregate amount of quantifiable guarantee and indemnification agreements in effect for sales of business entities, assets and third-party loans was $375 million and $324 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 September 30, 2014, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser's ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire or until the agreed-upon contract terms expire.
In the normal course of business, the Company also provided indemnifications, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary, which are estimated to mature through 2120. The potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.9 billion at September 30, 2014. The Company does not believe a payable is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.


37
Table of Contents

Note K. Business Segments
The Company's core property and casualty commercial insurance operations are reported in three business segments: CNA Specialty, CNA Commercial and Hardy. The Company's non-core operations are managed 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 of the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2013. 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 (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, 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 (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 (losses).
Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains (losses), 2) income (loss) from discontinued operations and 3) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains (losses) because net realized investment gains (losses) are largely discretionary, except for some losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.
The results of the Company's continuing operations and selected balance sheet items are presented in the following tables.


38
Table of Contents

Three months ended September 30, 2014
CNA
Specialty
 
CNA
Commercial
 
Hardy
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
775

 
$
808

 
$
88

 
$
139

 
$
—

 
$
—

 
$
1,810

Net investment income
133

 
163

 
2

 
177

 
5

 
—

 
480

Other revenues
76

 
11

 
(1
)
 
(3
)
 
3

 
(2
)
 
84

Total operating revenues
984

 
982

 
89

 
313

 
8

 
(2
)
 
2,374

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
398

 
595

 
57

 
319

 
(18
)
 
—

 
1,351

Policyholders’ dividends
2

 
1

 
—

 
—

 
—

 
—

 
3

Amortization of deferred acquisition costs
159

 
139

 
27

 
7

 
—

 
—

 
332

Other insurance related expenses
73

 
139

 
15

 
33

 
—

 
—

 
260

Other expenses
65

 
12

 
6

 
36

 
55

 
(2
)
 
172

Total claims, benefits and expenses
697


886


105


395


37


(2
)

2,118

Operating income (loss) before income tax
287

 
96


(16
)

(82
)

(29
)

—


256

Income tax (expense) benefit on operating income (loss)
(95
)
 
(32
)
 
1

 
40

 
12

 
—

 
(74
)
Net operating income (loss)
192

 
64


(15
)

(42
)

(17
)

—


182

Net realized investment gains (losses), pretax
3

 
3

 
—

 
30

 
1

 
—

 
37

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

 
—

 
(9
)
 
(1
)
 
—

 
(10
)
Net realized investment gains (losses)
2

 
4


—


21


—


—


27

Net income (loss) from continuing operations
$
194

 
$
68


$
(15
)

$
(21
)

$
(17
)

$
—


$
209

















39
Table of Contents

Three months ended September 30, 2013
CNA
Specialty

CNA
Commercial

Hardy

Life &
Group
Non-Core

Corporate
& Other
Non-Core

 

 
(In millions)





Eliminations

Total
Operating revenues
 


 





 


 


 


 

Net earned premiums
$
768


$
832


$
86


$
140


$
—


$
(1
)

$
1,825

Net investment income
159


219


1


167


9


—


555

Other revenues
67


10


1


(4
)

3


—


77

Total operating revenues
994


1,061


88


303


12


(1
)

2,457

Claims, Benefits and Expenses
 


 





 


 


 


 

Net incurred claims and benefits
427


565


35


343


4


—


1,374

Policyholders’ dividends
3


1


—


—


—


—


4

Amortization of deferred acquisition costs
161


148


25


7


—


—


341

Other insurance related expenses
64


141


14


33


1


(1
)

252

Other expenses
58


7


2


—


49


—


116

Total claims, benefits and expenses
713


862


76


383


54


(1
)

2,087

Operating income (loss) before income tax
281


199

 
12

 
(80
)
 
(42
)
 
—


370

Income tax (expense) benefit on operating income (loss)
(94
)

(68
)

—


47


16


—


(99
)
Net operating income (loss) 
187


131


12


(33
)

(26
)

—


271

Net realized investment gains (losses), pretax
2


1


—


(3
)

1


—


1

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

—


1


—


(1
)

—


(1
)
Net realized investment gains (losses)
1


1


1


(3
)

—


—


—

Net income (loss) from continuing operations
$
188


$
132


$
13


$
(36
)

$
(26
)

$
—


$
271
















40
Table of Contents

Nine months ended September 30, 2014
CNA
Specialty

CNA
Commercial

Hardy

Life &
Group
Non-Core

Corporate
& Other
Non-Core

 

 
(In millions)





Eliminations

Total
Operating revenues
 


 





 


 


 


 

Net earned premiums
$
2,286


$
2,447

 
$
278

 
$
417

 
$
—

 
$
(1
)

$
5,427

Net investment income
445


569

 
4

 
521

 
17

 
—


1,556

Other revenues
218


29

 
(1
)
 
10

 
10

 
(4
)

262

Total operating revenues
2,949


3,045


281


948


27


(5
)

7,245

Claims, Benefits and Expenses
 


 





 


 


 


 

Net incurred claims and benefits
1,304


1,871

 
147

 
929

 
(20
)
 
—


4,231

Policyholders’ dividends
4


6

 
—

 
—

 
—

 
—


10

Amortization of deferred acquisition costs
470


423

 
81

 
22

 
—

 
—


996

Other insurance related expenses
219


416

 
51

 
96

 
—

 
(1
)

781

Other expenses
191


31

 
14

 
34

 
75

 
(4
)

341

Total claims, benefits and expenses
2,188


2,747


293


1,081


55


(5
)

6,359

Operating income (loss) before income tax
761


298

 
(12
)
 
(133
)
 
(28
)
 
—


886

Income tax (expense) benefit on operating income (loss)
(253
)

(97
)
 
(1
)
 
98

 
11

 
—


(242
)
Net operating income (loss)
508


201


(13
)

(35
)

(17
)

—


644

Net realized investment gains (losses), pretax
10


8

 
(1
)
 
42

 
10

 
—


69

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

(2
)
 
—

 
(14
)
 
(4
)
 
—


(23
)
Net realized investment gains (losses)
7


6


(1
)

28


6


—


46

Net income (loss) from continuing operations
$
515


$
207


$
(14
)

$
(7
)

$
(11
)

$
—


$
690



September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
636

 
$
689

 
$
151

 
$
549

 
$
2,825

 
$
—

 
$
4,850

Insurance receivables
799

 
1,035

 
181

 
12

 
2

 
—

 
2,029

Deferred acquisition costs
320

 
253

 
54

 
—

 
—

 
—

 
627

Goodwill
117

 
—

 
37

 
—

 
—

 
—

 
154

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
6,861

 
10,156

 
380

 
3,113

 
2,965

 
—

 
23,475

Unearned premiums
1,858

 
1,466

 
249

 
130

 
—

 
—

 
3,703

Future policy benefits
—

 
—

 
—

 
8,890

 
—

 
—

 
8,890

Policyholders’ funds
10

 
17

 
—

 
—

 
—

 
—

 
27


41
Table of Contents

Nine months ended September 30, 2013
CNA
Specialty
 
CNA
Commercial
 
Hardy
 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 
 
 
 
(In millions)
 
 
 
 
 
Eliminations
 
Total
Operating revenues
 

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
2,237

 
$
2,509

 
$
226

 
$
419

 
$
—

 
$
(2
)
 
$
5,389

Net investment income
480

 
680

 
3

 
492

 
25

 
—

 
1,680

Other revenues
190

 
85

 
1

 
1

 
8

 
(1
)
 
284

Total operating revenues
2,907

 
3,274

 
230

 
912

 
33

 
(3
)
 
7,353

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
1,344

 
1,809

 
107

 
983

 
6

 
—

 
4,249

Policyholders’ dividends
5

 
5

 
—

 
—

 
—

 
—

 
10

Amortization of deferred acquisition costs
467

 
450

 
66

 
21

 
—

 
—

 
1,004

Other insurance related expenses
200

 
426

 
43

 
97

 
1

 
(2
)
 
765

Other expenses
172

 
18

 
15

 
7

 
134

 
(1
)
 
345

Total claims, benefits and expenses
2,188

 
2,708

 
231

 
1,108

 
141

 
(3
)
 
6,373

Operating income (loss) before income tax
719

 
566

 
(1
)
 
(196
)
 
(108
)
 
—

 
980

Income tax (expense) benefit on operating income (loss)
(244
)
 
(198
)
 
3

 
116

 
38

 
—

 
(285
)
Net operating income (loss)
475

 
368

 
2

 
(80
)
 
(70
)
 
—

 
695

Net realized investment gains (losses), pre-tax
(1
)
 
(7
)
 
2

 
6

 
10

 
—

 
10

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

 
3

 
—

 
(2
)
 
(4
)
 
—

 
(3
)
Net realized investment gains (losses)
(1
)
 
(4
)
 
2

 
4

 
6

 
—

 
7

Net income (loss)
$
474

 
$
364

 
$
4

 
$
(76
)
 
$
(64
)
 
$
—

 
$
702


December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
546

 
$
1,075

 
$
197

 
$
1,203

 
$
3,067

 
$
—

 
$
6,088

Insurance receivables
775

 
1,099

 
176

 
11

 
2

 
—

 
2,063

Deferred acquisition costs
318

 
257

 
49

 
—

 
—

 
—

 
624

Goodwill
117

 
—

 
38

 
—

 
—

 
—

 
155

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
6,689

 
10,649

 
386

 
3,058

 
3,307

 
—

 
24,089

Unearned premiums
1,805

 
1,536

 
249

 
128

 
—

 
—

 
3,718

Future policy benefits
—

 
—

 
—

 
10,471

 
—

 
—

 
10,471

Policyholders’ funds
9

 
15

 
—

 
92

 
—

 
—

 
116





42
Table of Contents

The following table provides revenue by line of business for each reportable segment. Revenues are comprised of operating revenues and net realized investment gains (losses).
Revenues by Line of Business
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
CNA Specialty
 
 
 
 
 
 
 
International
$
57

 
$
59

 
$
183

 
$
177

Management & Professional Liability
699

 
720

 
2,113

 
2,107

Surety
133

 
126

 
380

 
365

Warranty & Alternative Risks
98

 
91

 
283

 
257

CNA Specialty revenues
987

 
996

 
2,959

 
2,906

CNA Commercial
 
 
 
 
 

 
 

Commercial Insurance
720

 
776

 
2,237

 
2,429

International
95

 
93

 
281

 
276

Small Business
170

 
193

 
535

 
562

CNA Commercial revenues
985

 
1,062

 
3,053

 
3,267

Hardy revenues
89

 
88

 
280

 
232

Life & Group Non-Core revenues
343

 
300

 
990

 
918

Corporate & Other Non-Core revenues
9

 
13

 
37

 
43

Eliminations
(2
)
 
(1
)
 
(5
)
 
(3
)
Total revenues
$
2,411

 
$
2,458

 
$
7,314

 
$
7,363



43
Table of Contents

Note L. Accumulated Other Comprehensive Income (Loss) by Component
The tables below display the changes in Accumulated other comprehensive income (loss) by component for the three months ended September 30, 2014 and 2013.
(In millions)
Net unrealized gains (losses) on investments with OTTI losses
 
Net unrealized gains (losses) on other investments
 
Net unrealized gains (losses) on discontinued operations
 
Pension and postretirement benefits
 
Cumulative foreign currency translation adjustment
 
Total
Balance at July 1, 2014
$
35

 
$
1,182

 
$
37

 
$
(476
)
 
$
184

 
$
962

Other comprehensive income (loss) before reclassifications
1

 
(59
)
 
(3
)
 
(2
)
 
(73
)
 
(136
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(12), $(23), $2, $0, and $(33)
—

 
24

 
34

 
(5
)
 
—

 
53

Other comprehensive income (loss) after tax (expense) benefit of $(1), $64, $25, $(1), $0 and $87
1

 
(83
)

(37
)
 
3


(73
)
 
(189
)
Balance at September 30, 2014
$
36

 
$
1,099

 
$
—

 
$
(473
)
 
$
111

 
$
773

(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 at July 1, 2013
$
26

 
$
724

 
$
(711
)
 
$
87

 
$
126

Other comprehensive income (loss) before reclassifications
(4
)
 
(68
)
 
—

 
56

 
(16
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(2), $3, $0, and $1
(1
)
 
2

 
(4
)
 
—

 
(3
)
Other comprehensive income (loss) after tax (expense) benefit of $1, $38, $(3), $0, and $36
(3
)
 
(70
)
 
4

 
56

 
(13
)
Balance at September 30, 2013
$
23

 
$
654

 
$
(707
)
 
$
143

 
$
113












44
Table of Contents

The tables below display the changes in Accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2014 and 2013.
(In millions)
Net unrealized gains (losses) on investments with OTTI losses

Net unrealized gains (losses) on other investments

Net unrealized gains (losses) on discontinued operations

Pension and postretirement benefits

Cumulative foreign currency translation adjustment

Total
Balance at January 1, 2014
$
26


$
692


$
—


$
(426
)

$
150


$
442

Transfer to net assets held for sale
(5
)

(17
)

22


—


—


—

Other comprehensive income (loss) before reclassifications
15


462


12


(2
)

(39
)

448

Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(20), $(23), $(25), $0, and $(68)
—


38


34


45


—


117

Other comprehensive income (loss) after tax (expense) benefit of $(8), $(209), $15, $26, $0 and $(176)
15


424


(22
)

(47
)

(39
)

331

Balance at September 30, 2014
$
36


$
1,099


$
—


$
(473
)

$
111


$
773

(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 at January 1, 2013
$
20

 
$
1,371

 
$
(721
)
 
$
161

 
$
831

Other comprehensive income (loss) before reclassifications
2

 
(706
)
 
—

 
(18
)
 
(722
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(5), $8, $0, and $3
(1
)
 
11

 
(14
)
 
—

 
(4
)
Other comprehensive income (loss) after tax (expense) benefit of $(2), $387, $(8), $0, and $377
3


(717
)

14


(18
)

(718
)
Balance at September 30, 2013
$
23


$
654


$
(707
)

$
143


$
113

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


45
Table of Contents

Note M. Discontinued Operations

The results of discontinued operations reflected in the Condensed Consolidated Statements of Operations were as follows:

Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014

2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net investment income
$
14

 
$
42

 
$
94

 
$
128

Net realized investment gains
1

 
3

 
3

 
8

Other revenues
—

 
1

 
—

 
1

Total revenues
15

 
46

 
97

 
137

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

 
36

 
75

 
105

Other operating expenses
—

 
6

 
2

 
8

Total claims, benefits and expenses
12

 
42

 
77

 
113

Income before income tax
3

 
4

 
20

 
24

Income tax expense
(2
)
 
(3
)
 
(6
)
 
(10
)
Income from operations of discontinued operations, net of income tax
1

 
1

 
14

 
14

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

 
—

 
(211
)
 
—

Income (loss) from discontinued operations
$
4

 
$
1

 
$
(197
)
 
$
14


The disposal group included $3,550 million of assets and $3,297 million of liabilities.

46
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 2013 statutory net written premiums, we are the eighth largest commercial insurance writer and the 13th 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, 2013.
We utilize the net operating income financial measure to monitor our operations. Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains (losses), 2) income (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 K to the Condensed Consolidated Financial Statements included under Part I, Item 1. In the evaluation of the results of our CNA Specialty, CNA Commercial and Hardy 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.
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 impact of related acquisition expenses. Further information on our reserves is provided in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Sale of CAC
On August 1, 2014, we closed the previously announced sale of the common stock of CAC. In connection with the sale, we recorded an after-tax loss on sale of $211 million, which is reflected in Income (loss) from discontinued operations. Further information is provided in Notes A and M to the Condensed Consolidated Financial Statements.
In connection with the sale of CAC, we entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. As a result of the funds withheld basis used in this transaction, we recognized an after-tax operating loss of $34 million. Further information is provided in Note A to the Condensed Consolidated Financial Statements.
Pension Settlement
In the third quarter of 2014, we offered a limited-time lump sum payment opportunity to the majority of the terminated vested participants in the CNA Retirement Plan (the Plan). Participants that elect to accept the lump sum offer will receive payment from the Plan's assets in December 2014. The lump sum settlements will reduce our risk and volatility related to funding the Plan.
We expect to record a settlement charge in the fourth quarter of 2014. The high end of the estimated range of the after-tax charge, which is dependent on the rate of participant acceptance, is approximately $65 million. This charge will affect net operating results as it will recognize amounts already included in Accumulated other comprehensive income, but it will have no effect on Total stockholders’ equity.

47
Table of Contents

CONSOLIDATED OPERATIONS
Results of 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.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Operating Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,810

 
$
1,825

 
$
5,427

 
$
5,389

Net investment income
480

 
555

 
1,556

 
1,680

Other revenues
84

 
77

 
262

 
284

Total operating revenues
2,374

 
2,457

 
7,245

 
7,353

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Net incurred claims and benefits
1,351

 
1,374

 
4,231

 
4,249

Policyholders' dividends
3

 
4

 
10

 
10

Amortization of deferred acquisition costs
332

 
341

 
996

 
1,004

Other insurance related expenses
260

 
252

 
781

 
765

Other expenses
172

 
116

 
341

 
345

Total claims, benefits and expenses
2,118

 
2,087

 
6,359

 
6,373

Operating income before income tax
256

 
370

 
886

 
980

Income tax expense on operating income
(74
)
 
(99
)
 
(242
)
 
(285
)
Net operating income
182

 
271

 
644

 
695

Net realized investment gains, pretax
37

 
1

 
69

 
10

Income tax expense on net realized investment gains
(10
)
 
(1
)
 
(23
)
 
(3
)
Net realized investment gains
27

 
—

 
46

 
7

Income from continuing operations
209

 
271

 
690

 
702

Income (loss) from discontinued operations, net of tax
4

 
1

 
(197
)
 
14

Net income
$
213

 
$
272

 
$
493

 
$
716

Three Month Comparison
Income from continuing operations decreased $62 million for the three months ended September 30, 2014 as compared with the same period in 2013. This decrease was driven by lower net operating income.
Net operating income decreased $89 million for the three months ended September 30, 2014 as compared with the same period in 2013, driven by our core segments, CNA Specialty, CNA Commercial and Hardy. Results of our core segments were affected by lower net investment income, driven by limited partnerships, and lower favorable net prior year development. Catastrophe losses were $10 million after-tax for the three months ended September 30, 2014 as compared with $28 million after-tax for the same period in 2013. Net operating results for our non-core segments included the $34 million loss on the annuity coinsurance transaction, as well as improved results in our long term care business and a reduction in the allowance for uncollectible reinsurance receivables. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Favorable net prior year development of $23 million and $76 million was recorded for the three months ended September 30, 2014 and 2013 related to our property and casualty segments. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net earned premiums were largely consistent as compared with the same period in 2013. See the Segment Results section of this MD&A for further discussion.


48
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Nine Month Comparison
Income from continuing operations decreased $12 million for the nine months ended September 30, 2014 as compared with the same period in 2013. This decrease was driven by lower net operating income, partially offset by increased net realized investment gains.
Net realized investment gains increased $39 million for the nine months ended September 30, 2014 as compared with the same period in 2013. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income decreased $51 million for the nine months ended September 30, 2014 as compared with the same period in 2013. Net operating income decreased $149 million for our core segments primarily due to lower net investment income and lower favorable net prior year development, partially offset by improved current accident year underwriting results. In addition, 2013 results included a legal settlement benefit of $30 million after-tax. Catastrophe losses were $95 million after-tax for the nine months ended September 30, 2014 as compared with $96 million after-tax for the same period in 2013. Net operating results improved $98 million for our non-core segments, primarily due to a $56 million after-tax postretirement plan curtailment benefit and improved results in our long term care business, partially offset by the loss on the annuity coinsurance transaction. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Favorable net prior year development of $7 million and $128 million was recorded for the nine months ended September 30, 2014 and 2013 related to our property and casualty segments. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net earned premiums increased $38 million for the nine months ended September 30, 2014 as compared with the same period in 2013, driven by increases in Hardy and CNA Specialty. See the Segment Results section of this MD&A for further discussion.

49
Table of Contents

CRITICAL ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Financial Statements (Unaudited) 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 Products
•
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, 2013 for further information.


50
Table of Contents

SEGMENT RESULTS
The following discusses the results of continuing operations for our operating segments.
CNA Specialty
The following table details the results of operations for CNA Specialty.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios)
2014
 
2013
 
2014
 
2013
Net written premiums
$
766

 
$
778

 
$
2,304

 
$
2,337

Net earned premiums
775

 
768

 
2,286

 
2,237

Net investment income
133

 
159

 
445

 
480

Net operating income
192

 
187

 
508

 
475

Net realized investment gains (losses)
2

 
1

 
7

 
(1
)
Net income
194

 
188

 
515

 
474

Ratios
 
 
 
 
 
 
 
Loss and loss adjustment expense
51.4
%
 
55.6
%
 
57.1
%
 
60.1
%
Expense
29.9

 
29.4

 
30.1

 
29.8

Dividend
0.3

 
0.3

 
0.2

 
0.2

Combined
81.6
%
 
85.3
%
 
87.4
%
 
90.1
%
Three Month Comparison
Net written and earned premiums for CNA Specialty for the three months ended September 30, 2014 were largely consistent with the same period in 2013, although the level of new business has declined.
CNA Specialty's average rate increased 3% for the three months ended September 30, 2014, as compared with an increase of 6% for the three months ended September 30, 2013 for the policies that renewed in each period. Retention of 84% and 85% was achieved in each period.
Net operating income increased $5 million for the three months ended September 30, 2014 as compared with the same period in 2013. This increase was driven by improved underwriting results, partially offset by lower net investment income.
The combined ratio decreased 3.7 points for the three months ended September 30, 2014 as compared with the same period in 2013. The loss ratio decreased 4.2 points, primarily due to an improved current accident year loss ratio, including lower catastrophe losses, and increased favorable net prior year development. Catastrophe losses were $5 million, or 0.6 points of the loss ratio, for the three months ended September 30, 2014, as compared with $13 million, or 1.7 points of the loss ratio, for the three months ended September 30, 2013.
Favorable net prior year development of $84 million and $77 million was recorded for the three months ended September 30, 2014 and 2013. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.










51
Table of Contents

Nine Month Comparison
Net written and earned premiums for CNA Specialty for the nine months ended September 30, 2014 were largely consistent with the same period in 2013, although the level of new business has declined.
CNA Specialty's average rate increased 3% for the nine months ended September 30, 2014, as compared with an increase of 6% for the nine months ended September 30, 2013 for the policies that renewed in each period. Retention of 85% was achieved in each respective period.
Net income increased $41 million for the nine months ended September 30, 2014 as compared with the same period in 2013. This increase was primarily due to higher net operating income.
Net operating income increased $33 million for the nine months ended September 30, 2014 as compared with the same period in 2013. This increase was primarily due to improved underwriting results, partially offset by lower net investment income.
The combined ratio decreased 2.7 points for the nine months ended September 30, 2014 as compared with the same period in 2013. The loss ratio decreased 3.0 points, due to an improved current accident year loss ratio. Catastrophe losses were $21 million and $20 million, or 0.9 points of the loss ratio, for the nine months ended September 30, 2014 and 2013.
Favorable net prior year development of $150 million and $146 million was recorded for the nine months ended September 30, 2014 and 2013. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2014 and December 31, 2013 for CNA Specialty.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
 
September 30,
2014
 
December 31,
2013
(In millions)
 
Gross Case Reserves
$
2,439

 
$
2,270

Gross IBNR Reserves
4,422

 
4,419

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,861

 
$
6,689

Net Case Reserves
$
2,203

 
$
2,024

Net IBNR Reserves
4,032

 
4,142

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
6,235

 
$
6,166



52
Table of Contents

CNA Commercial
The following table details the results of operations for CNA Commercial.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions, except ratios)
2014
 
2013
 
2014
 
2013
Net written premiums
$
709

 
$
760

 
$
2,387

 
$
2,504

Net earned premiums
808

 
832

 
2,447

 
2,509

Net investment income
163

 
219

 
569

 
680

Net operating income
64

 
131

 
201

 
368

Net realized investment gains (losses)
4

 
1

 
6

 
(4
)
Net income
68

 
132

 
207

 
364

Ratios
 
 
 
 
 
 
 

Loss and loss adjustment expense
73.4
%
 
67.9
%
 
76.4
%
 
72.1
%
Expense
34.7

 
34.8

 
34.4

 
34.9

Dividend
0.2

 
0.3

 
0.2

 
0.2

Combined
108.3
%
 
103.0
%
 
111.0
%
 
107.2
%
Three Month Comparison
Net written premiums for CNA Commercial decreased $51 million for the three months ended September 30, 2014 as compared with the same period in 2013, driven by a decreased level of new business and underwriting actions taken in certain business classes, partially offset by continued rate increases. Net earned premiums decreased $24 million for the three months ended September 30, 2014 as compared with the same period in 2013, consistent with the decrease in net written premiums over recent quarters.
CNA Commercial's average rate increased 4% for the three months ended September 30, 2014, as compared with an increase of 8% for the three months ended September 30, 2013 for the policies that renewed in each period. Retention of 74% and 72% was achieved in each period.
Net income decreased $64 million for the three months ended September 30, 2014 as compared with the same period in 2013. This decrease was primarily due to lower net operating income.
Net operating income decreased $67 million for the three months ended September 30, 2014 as compared with the same period in 2013. This decrease was due to lower net investment income and higher unfavorable net prior year development.
The combined ratio increased 5.3 points for the three months ended September 30, 2014 as compared with the same period in 2013. The loss ratio increased 5.5 points, primarily due to higher unfavorable net prior year development. Catastrophe losses were $15 million, or 1.9 points of the loss ratio, for the three months ended September 30, 2014, as compared with $24 million, or 2.9 points of the loss ratio, for the three months ended September 30, 2013.
Unfavorable net prior year development of $56 million and $4 million was recorded for the three months ended September 30, 2014 and 2013. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.






53
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Nine Month Comparison
Net written premiums for CNA Commercial decreased $117 million for the nine months ended September 30, 2014 as compared with the same period in 2013, driven by a decreased level of new business and underwriting actions taken in certain business classes, partially offset by continued rate increases. Net earned premiums decreased $62 million for the nine months ended September 30, 2014 as compared with the same period in 2013, consistent with decreased net written premiums over recent quarters.
CNA Commercial's average rate increased 5% for the nine months ended September 30, 2014, as compared with an increase of 9% for the nine months ended September 30, 2013 for the policies that renewed in each period. Retention of 73% and 75% was achieved in each period.
Net income decreased $157 million for the nine months ended September 30, 2014 as compared with the same period in 2013, due to lower net operating income.
Net operating income decreased $167 million for the nine months ended September 30, 2014 as compared with the same period in 2013. This decrease was primarily due to higher unfavorable net prior year development and lower net investment income. In addition, 2013 results included a legal settlement benefit of $30 million after-tax.
The combined ratio increased 3.8 points for the nine months ended September 30, 2014 as compared with the same period in 2013. The loss ratio increased 4.3 points, primarily due to higher unfavorable net prior year development, partially offset by an improved non-catastrophe current accident year loss ratio. Catastrophe losses were $122 million, or 5.0 points of the loss ratio, for the nine months ended September 30, 2014, as compared with $121 million, or 4.8 points of the loss ratio, for the nine months ended September 30, 2013.
Unfavorable net prior year development of $128 million and $5 million was recorded for the nine months ended September 30, 2014 and 2013. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2014 and December 31, 2013 for CNA Commercial.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
September 30,
2014
 
December 31,
2013
Gross Case Reserves
$
5,771

 
$
5,829

Gross IBNR Reserves
4,385

 
4,820

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
10,156

 
$
10,649

Net Case Reserves
$
5,389

 
$
5,358

Net IBNR Reserves
4,124

 
4,269

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
9,513

 
$
9,627



54
Table of Contents

Hardy
The following table details the results of operations for Hardy.
Results of Operations
Periods ended September 30
Three Months

Nine Months
(In millions, except ratios)
2014
 
2013
 
2014
 
2013
Net written premiums
$
85

 
$
81

 
$
290

 
$
274

Net earned premiums
88

 
86

 
278

 
226

Net investment income
2

 
1

 
4

 
3

Net operating income (loss)
(15
)
 
12

 
(13
)
 
2

Net realized investment gains (losses)
—

 
1

 
(1
)
 
2

Net income (loss)
(15
)
 
13

 
(14
)
 
4

Ratios
 
 
 
 
 
 
 

Loss and loss adjustment expense
65.7
%
 
40.5
%
 
53.1
%
 
47.3
%
Expense
47.2

 
44.6

 
47.4

 
48.1

Dividend
—

 
—

 
—

 
—

Combined
112.9
%
 
85.1
%
 
100.5
%
 
95.4
%
Three Month Comparison
Net written and earned premiums for Hardy for the three months ended September 30, 2014 were largely consistent with the same period in 2013.
Hardy's average rate decreased 6% for the three months ended September 30, 2014, as compared with a decrease of 4% for the three months ended September 30, 2013 for the policies that renewed in the period. Retention of 67% and 76% was achieved in each period.
Net operating results decreased $27 million for the three months ended September 30, 2014 as compared with the same period in 2013, primarily due to underwriting results.
The combined ratio increased 27.8 points for the three months ended September 30, 2014 as compared with the same period in 2013. The loss ratio increased 25.2 points, driven by several large aviation losses and higher than expected underlying losses in the current accident year. The expense ratio increased 2.6 points driven by costs related to moving to a service company operating model, including real estate costs, as well as the effect of foreign currency exchange rates.
Unfavorable net prior year development of $6 million was recorded for the three months ended September 30, 2014, as compared with favorable net prior year development of $5 million for the three months ended September 30, 2013. Development in 2014 related to premiums, while development in 2013 was substantially loss related. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.







55
Table of Contents

Nine Month Comparison
Net written premiums for Hardy increased $16 million for the nine months ended September 30, 2014 as compared with the same period in 2013, helped by reduced reinsurance costs. Net earned premiums increased $52 million as compared with the same period in 2013. For the nine months ended September 30, 2013, a third-party capital provider had a 15% share of the 2012 year of account, which was commuted later in 2013.
Hardy's average rate decreased 6% for the nine months ended September 30, 2014, as compared with a decrease of 1% for the nine months ended September 30, 2013 for the policies that renewed in the period. Retention of 73% and 72% was achieved in each period.
Net operating results decreased $15 million for the nine months ended September 30, 2014 as compared with the same period in 2013, primarily due to current accident year underwriting results.
The combined ratio increased 5.1 points for the nine months ended September 30, 2014 as compared with the same period in 2013. The loss ratio increased 5.8 points, due to deterioration in the non-catastrophe current accident year loss ratio.
Unfavorable net prior year development of $16 million and $12 million was recorded for the nine months ended September 30, 2014 and 2013. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2014 and December 31, 2013 for Hardy.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
September 30,
2014
 
December 31,
2013
Gross Case Reserves
$
262

 
$
275

Gross IBNR Reserves
118

 
111

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
380

 
$
386

Net Case Reserves
$
161

 
$
159

Net IBNR Reserves
90

 
75

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
251

 
$
234



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Table of Contents

Life & Group Non-Core
The Life and Group Non-Core segment primarily includes the results of our individual and group long term care business, as well as closed blocks of structured settlement liabilities, group accident and health reinsurance and life settlement contracts. These businesses are being managed as a run-off operation. Our group long term care business, while considered non-core, continues to accept new employees in existing groups.
The following table summarizes the results of operations for Life & Group Non-Core.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Net earned premiums
$
139

 
$
140

 
$
417

 
$
419

Net investment income
177

 
167

 
521

 
492

Net operating loss
(42
)
 
(33
)
 
(35
)
 
(80
)
Net realized investment gains (losses)
21

 
(3
)
 
28

 
4

Net loss
(21
)
 
(36
)
 
(7
)
 
(76
)
Three Month Comparison
Net earned premiums for Life & Group Non-Core decreased $1 million for the three months ended September 30, 2014 as compared with the same period in 2013. Net earned premiums relate primarily to the individual and group long term care businesses.
Net operating loss increased $9 million for the three months ended September 30, 2014 as compared with the same period in 2013, primarily driven by the $34 million after-tax loss on the previously discussed coinsurance transaction, partially offset by improved results in our long term care business. Our long term care business was favorably affected by morbidity, rate increase actions and higher net investment income.
Nine Month Comparison
Net earned premiums for Life & Group Non-Core decreased $2 million for the nine months ended September 30, 2014 as compared with the same period in 2013.
Net operating loss decreased $45 million for the nine months ended September 30, 2014 as compared with the same period in 2013. The decrease was primarily driven by our long term care business which benefited from favorable persistency and morbidity as well as rate increase actions. Results also included higher net investment income, partially offset by the loss on the coinsurance transaction.

57
Table of Contents

Corporate & Other Non-Core
The following table summarizes the results of operations for the Corporate & Other Non-Core segment, including asbestos and environmental pollution (A&EP) and intersegment eliminations.
Results of Operations
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014

2013
 
2014
 
2013
Net investment income
$
5

 
$
9

 
$
17

 
$
25

Net operating loss
(17
)
 
(26
)
 
(17
)
 
(70
)
Net realized investment gains
—

 
—

 
6

 
6

Net loss
(17
)
 
(26
)
 
(11
)
 
(64
)
Three Month Comparison
Net results improved $9 million for the three months ended September 30, 2014 as compared with the same period in 2013, primarily driven by a reduction in the allowance for uncollectible reinsurance receivables arising from a change in estimate. Results also included higher interest expense from a new debt issuance in February 2014, in advance of the December 2014 maturity of our existing debt.
Favorable net prior year development of $1 million was recorded for the three months ended September 30, 2014, as compared with unfavorable net prior year development of $2 million for the three months ended September 30, 2013.
Nine Month Comparison
Net results improved $53 million for the nine months ended September 30, 2014 as compared with the same period in 2013. Results in 2014 included a $56 million after-tax benefit related to a postretirement plan curtailment as further discussed in Note H to the Condensed Consolidated Financial Statements and the reduction in the allowance for uncollectible reinsurance receivables, partially offset by higher interest expense.
Favorable net prior year development of $1 million was recorded for the nine months ended September 30, 2014, as compared with unfavorable net prior year development of $1 million for the nine months ended September 30, 2013.
The following table summarizes the gross and net carried reserves as of September 30, 2014 and December 31, 2013 for Corporate & Other Non-Core.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
September 30,
2014
 
December 31,
2013
Gross Case Reserves
$
1,146

 
$
1,140

Gross IBNR Reserves
1,819

 
2,167

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
2,965

 
$
3,307

Net Case Reserves
$
152

 
$
283

Net IBNR Reserves
176

 
184

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
328

 
$
467



58
Table of Contents

INVESTMENTS
Net Investment Income
The significant components of net investment income are presented in the following table.
Net Investment Income
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities:
 
 
 
 
 
 
 
Taxable
$
352

 
$
378

 
$
1,054

 
$
1,149

Tax-exempt
101

 
83

 
302

 
223

Total fixed maturity securities
453

 
461

 
1,356

 
1,372

Limited partnership investments
29

 
93

 
199

 
303

Other, net of investment expense
(2
)
 
1

 
1

 
5

Pretax net investment income
$
480

 
$
555

 
$
1,556

 
$
1,680

After-tax net investment income
$
346

 
$
386

 
$
1,108

 
$
1,159

 
 
 
 
 
 
 
 
Effective income yield for the fixed maturity securities portfolio, pretax
4.8
%
 
5.0
%
 
4.9
%
 
5.0
%
Effective income yield for the fixed maturity securities portfolio, after-tax
3.5
%
 
3.5
%
 
3.5
%
 
3.5
%
After-tax net investment income for the three and nine months ended September 30, 2014 decreased $40 million and $51 million as compared with the same periods in 2013, reflecting reduced limited partnership returns. Fixed maturity securities investment income, after-tax, increased due to additional investments in tax-exempt securities.


59
Table of Contents

Net Realized Investment Gains (Losses)
The components of net realized investment results are presented in the following table.
Net Realized Investment Gains (Losses)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
21

 
$
(3
)
 
$
43

 
$
36

States, municipalities and political subdivisions
20

 
8

 
38

 
6

Asset-backed
(2
)
 
(6
)
 
(25
)
 
(24
)
   Foreign government
—

 
4

 
2

 
5

   Redeemable preferred stock
—

 
(1
)
 
—

 
(1
)
Total fixed maturity securities
39

 
2

 
58

 
22

Equity securities
(3
)
 
(2
)
 
2

 
(17
)
Derivative securities
—

 
(1
)
 
1

 
(4
)
Short term investments and other
1

 
2

 
8

 
9

Net realized investment gains (losses), pretax
37

 
1

 
69

 
10

Income tax (expense) benefit on net realized investment gains (losses)
(10
)
 
(1
)
 
(23
)
 
(3
)
Net realized investment gains (losses)
$
27

 
$
—

 
$
46

 
$
7

Net realized investment gains increased $27 million for the three months ended September 30, 2014 compared with the same period in 2013, driven by higher net realized investment gains on sales of securities.
Net realized investment gains increased $39 million for the nine months ended September 30, 2014 as compared with the same period in 2013, driven by lower OTTI losses recognized in earnings and higher net realized investment gains on sales of securities. 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.
Portfolio Quality
Our fixed maturity portfolio consists primarily of high quality bonds, 93% and 92% of which were rated as investment grade (rated BBB- or higher) at September 30, 2014 and December 31, 2013. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody's), in that order of preference. If a security is not rated by these agencies, we formulate an internal rating. At September 30, 2014 and December 31, 2013, approximately 99% of the fixed maturity portfolio was rated by S&P or Moody's, or was issued or guaranteed by the U.S. Government, Government agencies or Government-sponsored enterprises.

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Table of Contents

The following table summarizes the ratings of our fixed maturity portfolio at fair value.
Fixed Maturity Ratings
 
September 30,
2014
 
 
 
December 31,
2013
 
 
(In millions)
 
%
 
 
%
U.S. Government, Government agencies and Government-sponsored enterprises
$
3,785

 
9
%
 
$
3,683

 
9
%
AAA rated
2,890

 
7

 
2,776

 
7

AA and A rated
20,128

 
50

 
20,353

 
49

BBB rated
10,994

 
27

 
11,171

 
27

Non-investment grade
2,903

 
7

 
3,250

 
8

Total
$
40,700

 
100
%
 
$
41,233

 
100
%
Non-investment grade fixed maturity securities, as presented in the table below, include high-yield securities rated below BBB- by bond rating agencies and other unrated securities that, according to our analysis, are below investment grade. Non-investment grade securities generally involve a greater degree of risk than investment grade securities. The amortized cost of our non-investment grade fixed maturity securities was $2,761 million and $3,097 million at September 30, 2014 and December 31, 2013. The following table summarizes the ratings of these securities at fair value.
Non-Investment Grade
 
September 30,
2014
 
 
 
December 31,
2013
 
 
(In millions)
 
%
 
 
%
BB
$
1,183

 
41
%
 
$
1,393

 
43
%
B
833

 
29

 
967

 
30

CCC - C
667

 
23

 
649

 
20

D
220

 
7

 
241

 
7

Total
$
2,903

 
100
%
 
$
3,250

 
100
%
The following table summarizes available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.
Gross Unrealized Losses by Ratings Distribution
September 30, 2014
Estimated Fair Value
 
%
 
Gross Unrealized Losses
 
%
(In millions)
 
 
 
U.S. Government, Government agencies and Government-sponsored enterprises
$
200

 
5
%
 
$
5

 
4
%
 AAA
406

 
9

 
8

 
7

 AA
659

 
15

 
11

 
9

 A
1,000

 
23

 
13

 
11

 BBB
1,366

 
31

 
65

 
54

Non-investment grade
756

 
17

 
18

 
15

Total
$
4,387

 
100
%
 
$
120

 
100
%

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The following table provides 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.
Gross Unrealized Losses by Maturity Profile
September 30, 2014
Estimated Fair Value
 
%
 
Gross Unrealized Losses
 
%
Due in one year or less
$
111

 
3
%
 
$
4

 
3
%
Due after one year through five years
1,055

 
24

 
20

 
17

Due after five years through ten years
2,375

 
54

 
36

 
30

Due after ten years
846

 
19

 
60

 
50

Total
$
4,387

 
100
%
 
$
120

 
100
%

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 liabilities in the Life & Group Non-Core segment including long term care products and structured settlements.
The effective durations of fixed maturity securities, short term investments and interest rate derivatives are presented in the table below. Short term investments are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
Effective Durations
 
September 30, 2014
 
December 31, 2013
(In millions)
Fair Value
 
Effective
Duration
(In years)
 
Fair Value
 
Effective
Duration
(In years)
Investments supporting Life & Group Non-Core
$
14,261

 
11.1

 
$
15,009

 
11.3

Other interest sensitive investments
28,286

 
4.1

 
27,766

 
4.4

Total
$
42,547

 
6.5

 
$
42,775

 
6.9

The investment portfolio is periodically analyzed for changes in duration and related price risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2013.

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Short Term Investments
The carrying value of the components of the short term investment portfolio is presented in the following table.
Short Term Investments
 
September 30,
2014
 
December 31,
2013
(In millions)
 
Short term investments:
 
 
 
Commercial paper
$
569

 
$
549

U.S. Treasury securities
1,028

 
636

Money market funds
170

 
94

Other
111

 
128

Total short term investments
$
1,878

 
$
1,407


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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For the nine months ended September 30, 2014, net cash provided by operating activities was $1,047 million as compared with $921 million for the same period in 2013. Cash provided by operating activities reflected increased receipts relating to returns on limited partnerships, substantially offset by increased tax payments. Additionally, in the third quarter of 2013 we contributed $75 million to the CNA Retirement Plan.
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.
For the nine months ended September 30, 2014, net cash used by investing activities was $1,087 million as compared with $689 million for the same period in 2013. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity instruments.
For the nine months ended September 30, 2014, net cash provided by financing activities was $95 million as compared with net cash used of $200 million for the same period in 2013. In the first quarter of 2014 we issued $550 million of 3.95% senior notes due May 15, 2024 and invested the proceeds in short-term interest bearing securities. We intend to use the proceeds to repurchase, redeem, repay or otherwise retire the $549 million outstanding aggregate principal balance of the 5.85% senior notes due December 15, 2014. Additionally, cash provided by financing activities in 2014 included $23 million relating to repayments of officer loans.
Common Stock Dividends
Dividends of $1.75 per share of our common stock, including a special dividend of $1.00 per share, were declared and paid during the nine months ended September 30, 2014. On October 30, 2014, our Board of Directors declared a quarterly dividend of $0.25 per share, payable December 3, 2014 to stockholders of record on November 17, 2014. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs, and regulatory constraints.
Liquidity
We believe that our present cash flows from operations, investing activities 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.
During the nine months ended September 30, 2014, Continental Casualty Company (CCC) paid dividends of $550 million to CNAF. As of September 30, 2014, CCC is able to pay approximately $464 million of dividends during the remainder of 2014 that would not be subject to the prior approval of the Illinois Department of Insurance.
We have an effective automatic shelf registration statement under which we may issue debt, equity or hybrid securities.

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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 asbestos and environmental pollution 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 loss 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 consummation of contemplated transactions and the successful integration of acquired operations.
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 under priced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;
•
general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services, and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
•
conditions in the capital and credit markets, including continuing uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;
•
conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms; and
•
the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.

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Regulatory Factors
•
regulatory initiatives and compliance with governmental regulations, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation involving us, and rulings and changes in tax laws and regulations;
•
regulatory limitations, impositions and restrictions upon us, including 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 and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;
•
the unpredictability of the nature, targets, severity or frequency of potential terrorist events, as well as the uncertainty as to our ability to contain our terrorism exposure effectively; and
•
the occurrence of epidemics.
Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the nine months ended September 30, 2014. 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, 2013 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.

Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.
As of September 30, 2014, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2014.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II. Other Information
Item 1. Legal Proceedings
Information on our legal proceedings is set forth in Note G to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Item 4. Mine Safety Disclosures
Not applicable.
Item 6. Exhibits
See Exhibit Index.



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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CNA Financial Corporation
 
 
 
Dated: November 4, 2014
By
/s/ D. Craig Mense
 
 
D. Craig Mense
Executive Vice President and
Chief Financial Officer

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EXHIBIT INDEX

Description of Exhibit
Exhibit Number
 
 
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


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