UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 31, 2010

OR

o		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		36-6169860
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
333 S. Wabash
Chicago, Illinois		60604
(Address of principal executive offices)		(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 þ       No o

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 o       No o

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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a 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 o       No þ

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 April 29, 2010
Common Stock, Par value $2.50		269,074,878

 

 

CNA Financial Corporation
Index

Item				Page
Number				Number
		PART I. Financial Information
1.		Condensed Consolidated Financial Statements (Unaudited):
		Condensed Consolidated Statements of Operations for the Three months ended March 31, 2010 and 2009			3
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three months ended March 31, 2010 and 2009			5
		Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009			6
		Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2010 and 2009			7
		Condensed Consolidated Statements of Equity for the Three months ended March 31, 2010 and 2009			9
		Notes to Condensed Consolidated Financial Statements			10
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			42
3.		Quantitative and Qualitative Disclosures About Market Risk			58
4.		Controls and Procedures			59
		PART II. Other Information
1.		Legal Proceedings			60
6.		Exhibits			60
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CNA Financial Corporation

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Operations (Unaudited)

Three months ended March 31		2010				2009
(In millions, except per share data)
Revenues
Net earned premiums		$	1,615			$	1,672
Net investment income			590				420
Net realized investment gains (losses), net of participating policyholders’ interests:
Other-than-temporary impairment losses			(90	)			(614	)
Portion of other-than-temporary impairment losses recognized in Other comprehensive income			30				—
Net other-than-temporary impairment losses recognized in earnings			(60	)			(614	)
Other net realized investment gains			94				82
Net realized investment gains (losses), net of participating policyholders’ interests			34				(532	)
Other revenues			76				78
Total revenues			2,315				1,638
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits			1,308				1,342
Amortization of deferred acquisition costs			342				349
Other operating expenses			272				251
Interest			36				31
Total claims, benefits and expenses			1,958				1,973
Income (loss) from continuing operations before income tax			357				(335	)
Income tax (expense) benefit			(102	)			150
Income (loss) from continuing operations			255				(185	)
Income (loss) from discontinued operations, net of income tax (expense) benefit of $0 and $0			—				—
Net income (loss)			255				(185	)
Net income attributable to noncontrolling interests			(10	)			(10	)
Net income (loss) attributable to CNA		$	245			$	(195	)
Income (Loss) Attributable to CNA Common Stockholders
Income (loss) from continuing operations attributable to CNA		$	245			$	(195	)
Dividends on 2008 Senior Preferred			(25	)			(31	)
Income (loss) from continuing operations attributable to CNA common stockholders			220				(226	)
Income (loss) from discontinued operations attributable to CNA common stockholders			—				—
Income (loss) attributable to CNA common stockholders		$	220			$	(226	)

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

Three months ended March 31		2010				2009
(In millions, except per share data)
Basic and Diluted Earnings (Loss) Per Share Attributable to CNA Common Stockholders
Income (loss) from continuing operations attributable to CNA common stockholders		$	0.82			$	(0.84	)
Income (loss) from discontinued operations attributable to CNA common stockholders			—				—
Basic and diluted earnings (loss) per share attributable to CNA common stockholders		$	0.82			$	(0.84	)
Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic			269.1				269.0
Diluted			269.2				269.0

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

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Three months ended March 31		2010				2009
(In millions)
Other Comprehensive Income (Loss), Net of Tax
Changes in:
Net unrealized gains (losses) on investments with other-than-temporary impairments		$	25			$	—
Net unrealized gains (losses) on other investments			323				401
Net unrealized gains (losses) on investments			348				401
Net unrealized gains (losses) on discontinued operations and other			7				(2	)
Foreign currency translation adjustment			(10	)			(8	)
Pension and postretirement benefits			1				2
Allocation to participating policyholders			(23	)			—
Other comprehensive income, net of tax			323				393
Net income (loss)			255				(185	)
Comprehensive income			578				208
Changes in:
Net unrealized (gains) losses on investments attributable to noncontrolling interests			(6	)			(5	)
Pension and postretirement benefits attributable to noncontrolling interests			(3	)			—
Other comprehensive income attributable to noncontrolling interests			(9	)			(5	)
Net income attributable to noncontrolling interests			(10	)			(10	)
Comprehensive income attributable to noncontrolling interests			(19	)			(15	)
Total comprehensive income attributable to CNA		$	559			$	193

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

CNA Financial Corporation
Condensed Consolidated Balance Sheets (Unaudited)

		March 31,				December 31,
		2010				2009
(In millions, except share data)
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $37,185 and $35,602)		$	37,711			$	35,612
Equity securities at fair value (cost of $651 and $633)			681				644
Limited partnership investments			1,947				1,787
Other invested assets			3				4
Short term investments			2,484				3,949
Total investments			42,826				41,996
Cash			95				140
Reinsurance receivables (less allowance for uncollectible receivables of $350 and $351)			6,328				6,581
Insurance receivables (less allowance for doubtful accounts of $197 and $202)			1,645				1,656
Accrued investment income			457				416
Deferred acquisition costs			1,109				1,108
Deferred income taxes			1,098				1,333
Property and equipment at cost (less accumulated depreciation of $511 and $498)			350				360
Goodwill and other intangible assets			141				141
Other assets			1,188				1,144
Separate account business			442				423
Total assets		$	55,679			$	55,298
Liabilities and Equity
Liabilities:
Insurance reserves:
Claim and claim adjustment expenses		$	26,559			$	26,816
Unearned premiums			3,283				3,274
Future policy benefits			8,090				7,981
Policyholders’ funds			177				192
Participating policyholders’ funds			54				56
Long term debt			2,304				2,303
Other liabilities			3,046				3,087
Separate account business			442				423
Total liabilities			43,955				44,132
Commitments and contingencies (Notes D, E, G, H, and J)
Equity:
Preferred stock (12,500,000 shares authorized) 2008 Senior Preferred (no par value; $100,000 stated value; 10,000 shares issued and outstanding held by Loews Corporation)			1,000				1,000
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; and 269,074,878 and 269,026,759 shares outstanding)			683				683
Additional paid-in capital			2,198				2,177
Retained earnings			7,484				7,264
Accumulated other comprehensive loss			(11	)			(325	)
Treasury stock (3,965,365 and 4,013,484 shares), at cost			(107	)			(109	)
Notes receivable for the issuance of common stock			(30	)			(30	)
Total CNA stockholders’ equity			11,217				10,660
Noncontrolling interests			507				506
Total equity			11,724				11,166
Total liabilities and equity		$	55,679			$	55,298

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

CNA Financial Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three months ended March 31
(In millions)		2010				2009
Cash Flows from Operating Activities
Net income (loss)		$	255			$	(185	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Deferred income tax expense (benefit)			45				(139	)
Trading portfolio activity			99				(3	)
Net realized investment (gains) losses, net of participating policyholders’ interests			(34	)			532
Equity method investees			13				104
Amortization of investments			(33	)			(58	)
Depreciation			21				21
Changes in:
Receivables, net			264				223
Accrued investment income			(41	)			(31	)
Deferred acquisition costs			(1	)			(7	)
Insurance reserves			(135	)			(139	)
Other assets			(7	)			(31	)
Other liabilities			(74	)			(97	)
Other, net			(3	)			6
Total adjustments			114				381
Net cash flows provided by operating activities-continuing operations		$	369			$	196
Net cash flows used by operating activities-discontinued operations		$	(5	)		$	(9	)
Net cash flows provided by operating activities-total		$	364			$	187
Cash Flows from Investing Activities
Purchases of fixed maturity securities		$	(5,351	)		$	(7,079	)
Proceeds from fixed maturity securities:
Sales			2,737				7,046
Maturities, calls and redemptions			846				827
Purchases of equity securities			(42	)			(134	)
Proceeds from sales of equity securities			25				146
Change in short term investments			1,474				(1,041	)
Change in other investments			(51	)			55
Purchases of property and equipment			(12	)			(17	)
Other, net			—				38
Net cash flows used by investing activities-continuing operations		$	(374	)		$	(159	)
Net cash flows provided by investing activities-discontinued operations		$	5			$	9
Net cash flows used by investing activities-total		$	(369	)		$	(150	)

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

Three months ended March 31
(In millions)		2010				2009
Cash Flows from Financing Activities
Dividends paid to Loews Corporation for 2008 Senior Preferred		$	(25	)		$	(31	)
Policyholders’ investment contract net deposits (withdrawals)			(2	)			(7	)
Other, net			(11	)			12
Net cash flows used by financing activities-continuing operations		$	(38	)		$	(26	)
Net cash flows provided (used) by financing activities-discontinued operations		$	—			$	—
Net cash flows used by financing activities-total		$	(38	)		$	(26	)
Effect of foreign exchange rate changes on cash-continuing operations			(2	)			(2	)
Net change in cash			(45	)			9
Cash, beginning of year			140				85
Cash, end of period		$	95			$	94
Cash-continuing operations		$	95			$	94
Cash-discontinued operations			—				—
Cash-total		$	95			$	94

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

CNA Financial Corporation

Condensed Consolidated Statements of Equity (Unaudited)

Three months ended March 31
(In millions)		2010				2009
Preferred Stock
Balance, beginning and end of period		$	1,000			$	1,250
Common Stock
Balance, beginning and end of period			683				683
Additional Paid-in Capital
Balance, beginning of period			2,177				2,174
Stock-based compensation			(1	)			1
Other			22				—
Balance, end of period			2,198				2,175
Retained Earnings
Balance, beginning of period			7,264				6,845
Dividends paid to Loews Corporation for 2008 Senior Preferred			(25	)			(31	)
Net income (loss) attributable to CNA			245				(195	)
Balance, end of period			7,484				6,619
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period			(325	)			(3,924	)
Other comprehensive income attributable to CNA			314				388
Balance, end of period			(11	)			(3,536	)
Treasury Stock
Balance, beginning of period			(109	)			(109	)
Stock based compensation			2				—
Balance, end of period			(107	)			(109	)
Notes Receivable for the Issuance of Common Stock
Balance, beginning of period			(30	)			(42	)
Decrease in notes receivable for the issuance of common stock			—				12
Balance, end of period			(30	)			(30	)
Total CNA Stockholders’ Equity			11,217				7,052
Noncontrolling Interests
Balance, beginning of period			506				420
Net income			10				10
Other comprehensive income			9				5
Other			(18	)			2
Balance, end of period			507				437
Total Equity		$	11,724			$	7,489

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

CNA Financial Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty and remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC), Continental Assurance Company (CAC) and CNA Surety Corporation (CNA Surety). The Company owned approximately 62% of the outstanding common stock of CNA Surety as of March 31, 2010. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of March 31, 2010.

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 Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2009. 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 March 31, 2010 and for the three months ended March 31, 2010 and 2009 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, 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. All significant intercompany amounts have been eliminated.

Note B. Accounting Standards Updates

Adopted

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (FASB) issued updated accounting guidance which amended the requirements for determination of the primary beneficiary of a variable interest entity, required an ongoing assessment of whether an entity is the primary beneficiary and required enhanced interim and annual disclosures. The updated accounting guidance was effective for annual reporting periods beginning after November 15, 2009, except for investment company type entities for which the requirements under this guidance have been deferred indefinitely. The adoption of this updated accounting guidance as of January 1, 2010 had no impact on the Company’s financial condition or results of operations.

Recognition and Presentation of Other-Than-Temporary Impairments

In April 2009, the FASB issued updated accounting guidance, which amended the other-than-temporary impairment (OTTI) loss model for fixed maturity securities. A fixed maturity security is impaired if the fair value of the security is less than its amortized cost basis, which is its cost adjusted for accretion, amortization and previously recorded OTTI losses. The updated accounting guidance requires an OTTI loss equal to the difference between fair value and amortized cost to be recognized in earnings if the Company intends to sell the fixed maturity security or if it is more likely than not the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis.

The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. If the Company does not expect to recover the entire amortized cost basis of a fixed maturity security, the security is deemed to be other-than-temporarily impaired for credit reasons. For these securities, the bifurcation of OTTI losses into a credit component and a non-credit component is required by the updated accounting guidance. The credit component is recognized in earnings and represents the difference between the present value of the future cash flows that the Company expects to collect and a fixed maturity security’s amortized cost basis. The non-credit component is recognized in other comprehensive income and represents the difference between fair value and the present value of the future cash flows that the Company expects to collect.

Prior to the adoption of the updated accounting guidance, OTTI losses were not bifurcated between credit and non-credit components. The difference between fair value and amortized cost was recognized in earnings for all securities for which the Company did not expect to recover the amortized cost basis, or for which the Company did not have the ability and intent to hold until recovery of fair value to amortized cost.

Recently issued accounting standards to be adopted

Scope Exception Related To Credit Derivatives

In March 2009, the FASB issued updated accounting guidance which amends the accounting and reporting requirements related to derivatives to provide clarifying language regarding when embedded credit derivative features, including those in collateralized debt obligations (CDOs) and synthetic CDOs, are considered embedded derivatives subject to potential bifurcation. The updated accounting guidance is effective for the first quarter beginning after June 15, 2010. The Company is currently assessing the impact this updated accounting guidance will have on its financial condition and results of operations.

Note C. Earnings (Loss) Per Share

Earnings (loss) per share attributable to the Company’s common stockholders is based on weighted average outstanding shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing net income (loss) attributable to CNA 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 months ended March 31, 2010, approximately 170 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For that same period, approximately 1.3 million 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 months ended March 31, 2009, as a result of the net loss, none of the 2.0 million potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of loss per share as the effect would have been antidilutive.

The 2008 Senior Preferred Stock (2008 Senior Preferred) was issued in November 2008 and accrues cumulative dividends at an initial rate of 10% per year. If declared, dividends are payable quarterly and any dividends not declared or paid when due will be compounded quarterly.

Note D. Investments

The significant components of net investment income are presented in the following table.

Net Investment Income

Three months ended March 31		2010				2009
(In millions)
Fixed maturity securities		$	510			$	475
Short term investments			6				10
Limited partnerships			72				(70	)
Equity securities			10				14
Trading portfolio (a)			4				—
Other			2				3
Gross investment income			604				432
Investment expense			(14	)			(12	)
Net investment income		$	590			$	420

Net realized investment gains (losses) are presented in the following table.

Net Realized Investment Gains (Losses)

Three months ended March 31		2010				2009
(In millions)
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains		$	98			$	104
Gross realized losses			(71	)			(462	)
Net realized investment gains (losses) on fixed maturity securities			27				(358	)
Equity securities:
Gross realized gains			4				4
Gross realized losses			(1	)			(220	)
Net realized investment gains (losses) on equity securities			3				(216	)
Derivatives			—				31
Short term investments and other			4				11
Net realized investment gains (losses), net of participating policyholders’ interests		$	34			$	(532	)

The components of net OTTI losses recognized in earnings by asset type are summarized in the following table.

Three months ended March 31		2010				2009
(In millions)
Fixed maturity securities available-for-sale:
Asset-backed securities:
Residential mortgage-backed securities		$	26			$	149
Commercial mortgage-backed securities			2				16
Other asset-backed securities			—				31
Total asset-backed securities			28				196
States, municipalities and political subdivisions – tax-exempt securities			14				—
Corporate and other taxable bonds			18				190
Redeemable preferred stock			—				9
Total fixed maturity securities available-for-sale			60				395
Equity securities available-for-sale:
Common stock			—				3
Preferred stock			—				216
Total equity securities available-for-sale			—				219
Net OTTI losses recognized in earnings		$	60			$	614

A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by the Company’s Chief Financial Officer. The Impairment Committee is responsible for evaluating securities in an unrealized loss position on at least a quarterly basis.

The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that the Company intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. In order to determine if a credit loss exists, the factors considered by the Impairment Committee include (a) the financial condition and near term prospects of the issuer, (b) whether the debtor is current on interest and principal payments, (c) credit ratings of the securities and (d) general market conditions and industry or sector specific outlook. The Company also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities. The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as an OTTI loss in Other comprehensive income.

The Company performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers, credit support from lower level tranches and impacts of rating

agency downgrades. The discount rate utilized is either the yield at acquisition or, for lower rated structured securities, the current yield.

The Company applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (d) general market conditions and industry or sector specific outlook.

Prior to the adoption of the updated accounting guidance related to OTTI in the second quarter of 2009 as further discussed in Note B, the Company applied the impairment model described in the paragraph above to both fixed maturity and equity securities.

The following tables provide a summary of fixed maturity and equity securities.

Summary of Fixed Maturity and Equity Securities

		Cost or				Gross				Gross Unrealized Losses								Estimated				Unrealized
		Amortized				Unrealized				Less than				12 Months				Fair				OTTI
March 31, 2010		Cost				Gains				12 Months				or Greater				Value				Losses
(In millions)
Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies		$	165			$	16			$	1			$	—			$	180			$	—
Asset-backed securities:
Residential mortgage-backed securities			7,303				83				43				406				6,937				265
Commercial mortgage-backed securities			820				13				3				101				729				—
Other asset-backed securities			811				17				1				18				809				—
Total asset-backed securities			8,934				113				47				525				8,475				265
States, municipalities and political subdivisions – tax-exempt securities			6,458				191				24				316				6,309				—
Corporate and other taxable bonds			21,518				1,276				35				131				22,628				26
Redeemable preferred stock			51				9				—				—				60				—
Total fixed maturity securities available-for-sale			37,126				1,605				107				972				37,652			$	291
Total fixed maturity securities trading			59				—				—				—				59
Equity securities available-for-sale:
Common stock			79				15				—				2				92
Preferred stock			572				49				—				32				589
Total equity securities available-for-sale			651				64				—				34				681
Total		$	37,836			$	1,669			$	107			$	1,006			$	38,392

Summary of Fixed Maturity and Equity Securities

		Cost or				Gross				Gross Unrealized Losses								Estimated				Unrealized
		Amortized				Unrealized				Less than				12 Months				Fair				OTTI
December 31, 2009		Cost				Gains				12 Months				or Greater				Value				Losses
(In millions)
Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies		$	184			$	16			$	1			$	—			$	199			$	—
Asset-backed securities:
Residential mortgage-backed securities			7,469				72				43				561				6,937				246
Commercial mortgage-backed securities			709				10				1				134				584				3
Other asset-backed securities			858				14				1				39				832				—
Total asset-backed securities			9,036				96				45				734				8,353				249
States, municipalities and political subdivisions – tax-exempt securities			7,142				201				25				325				6,993				—
Corporate and other taxable bonds			19,015				1,123				50				249				19,839				26
Redeemable preferred stock			51				4				—				1				54				—
Total fixed maturity securities available-for-sale			35,428				1,440				121				1,309				35,438			$	275
Total fixed maturity securities trading			174				—				—				—				174
Equity securities available-for-sale:
Common stock			61				14				1				1				73
Preferred stock			572				40				—				41				571
Total equity securities available-for-sale			633				54				1				42				644
Total		$	36,235			$	1,494			$	122			$	1,351			$	36,256

The amount of pretax net unrealized gains on available-for-sale securities reclassified out of Accumulated other comprehensive income (AOCI) into earnings was $32 million for the three months ended March 31, 2010.

Activity for the three months ended March 31, 2010 related to the pretax fixed maturity credit loss component reflected within Retained earnings for securities still held at March 31, 2010 was as follows.

		Three Months ended
(In millions)		March 31, 2010
Beginning balance of credit losses on fixed maturity securities		$	164
Additional credit losses for which an OTTI loss was previously recognized			11
Additional credit losses for which an OTTI loss was not previously recognized			5
Reductions for securities sold during the period			(9	)
Ending balance of credit losses on fixed maturity securities		$	171

Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the March 31, 2010 Summary of Fixed Maturity and Equity Securities table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.

The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from the three major providers, Standard & Poor’s (S&P), Moody’s Investors Service, Inc. (Moody’s) and Fitch Ratings (Fitch) in that order of preference. If a security is not rated by any of the three, the Company formulates an internal rating. For securities with credit support from third party guarantees, the rating reflects the greater of the underlying rating of the issuer or the insured rating.

Asset-Backed Securities

The fair value of total asset-backed holdings at March 31, 2010 was $8,475 million which was comprised of 2,141 different asset-backed structured securities. The fair value of these securities does not tend to be influenced by the credit of the issuer but rather the characteristics and projected cash flows of the underlying collateral. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently. Of these securities, 202 have underlying collateral that is either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage (sub-prime) collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation (Alt-A) collateral is measured by the original deal structure.

Residential mortgage-backed securities include 270 structured securities in a gross unrealized loss position. In addition, there were 60 agency mortgage-backed pass-through securities which are guaranteed by agencies of the U.S. Government in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 9% of amortized cost.

Commercial mortgage-backed securities include 35 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 16% of amortized cost.

Other asset-backed securities include 40 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 6% of amortized cost.

The following table summarizes asset-backed securities in a gross unrealized loss position by ratings distribution at March 31, 2010.

Gross Unrealized Losses by Ratings Distribution

March 31, 2010
(In millions)

										Gross
										Unrealized
Rating		Amortized Cost				Estimated Fair Value				Losses
U.S. Government Agencies		$	1,568			$	1,549			$	19
AAA			1,933				1,752				181
AA			485				420				65
A			302				243				59
BBB			436				392				44
Non-investment grade and equity tranches			1,330				1,126				204
Total		$	6,054			$	5,482			$	572

The Company believes the unrealized losses are primarily attributable to broader economic conditions, liquidity concerns and wider than historical bid/ask spreads, and are not indicative of the quality of the underlying collateral. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Generally, non-investment grade securities consist of investments which were investment grade at the time of purchase but have subsequently been downgraded and primarily consist of holdings senior to the equity tranche. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest, collateral shortfalls, or substantial changes in future cash flow expectations; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2010.

States, Municipalities and Political Subdivisions — Tax-Exempt Securities

The tax-exempt portfolio consists primarily of special revenue and assessment bonds, representing 83% of the overall portfolio, followed by general obligation political subdivision bonds at 13% and state general obligation bonds at 4%.

The unrealized losses on the Company’s investments in tax-exempt municipal securities are due to market conditions in certain sectors or states that continued to lag behind the broader municipal market recovery. Market conditions in the tax-exempt sector continued to improve in the first quarter of 2010. However, yields for certain issuers and types of securities, such as zero coupon bonds, auction rate and tobacco securitizations, continue to be higher than historical norms relative to after-tax returns on other fixed income alternatives. The holdings for all tax-exempt securities in this category include 313 securities in a gross unrealized loss position. The aggregate severity of the total gross unrealized losses was approximately 12% of amortized cost.

The following table summarizes the ratings distribution of tax-exempt securities in a gross unrealized loss position at March 31, 2010.

Gross Unrealized Losses by Ratings Distribution

March 31, 2010
(In millions)

										Gross
		Amortized				Estimated				Unrealized
Rating		Cost				Fair Value				Losses
AAA		$	1,195			$	1,130			$	65
AA			801				666				135
A			424				402				22
BBB			480				363				117
Non-investment grade			21				20				1
Total		$	2,921			$	2,581			$	340

The largest exposures at March 31, 2010 as measured by gross unrealized losses were special revenue bonds issued by several states backed by tobacco settlement funds with gross unrealized losses of $105 million, and several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $79 million. All of these securities are rated investment grade.

The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2010.

Corporate and Other Taxable Bonds

The holdings in this category include 489 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized losses was approximately 3% of amortized cost.

The following table summarizes corporate and other taxable bonds in a gross unrealized loss position by ratings distribution at March 31, 2010.

Gross Unrealized Losses by Ratings Distribution

March 31, 2010
(In millions)

										Gross
		Amortized				Estimated				Unrealized
Rating		Cost				Fair Value				Losses
AAA		$	322			$	316			$	6
AA			791				785				6
A			1,368				1,332				36
BBB			1,691				1,617				74
Non-investment grade			680				636				44
Total		$	4,852			$	4,686			$	166

The unrealized losses on corporate and other taxable bonds are attributable to lingering impacts of the broader credit market deterioration primarily in the financial sector of the portfolio. Overall conditions in the corporate bond market have continued to improve in the first quarter of 2010, resulting in improvement in the Company’s unrealized position. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2010.

The Company has invested in securities with characteristics of both debt and equity investments, often referred to as hybrid debt securities. Such securities are typically debt instruments issued with long or extendable maturity dates, may provide for the ability to defer interest payments without defaulting and are usually lower in the capital structure of the issuer than traditional bonds. The data in the table above includes financial industry sector hybrid debt securities with an aggregate fair value of $670 million and an aggregate amortized cost of $700 million.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2010 and December 31, 2009. 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		March 31, 2010								December 31, 2009
		Cost or				Estimated				Cost or				Estimated
		Amortized				Fair				Amortized				Fair
(In millions)		Cost				Value				Cost				Value
Due in one year or less		$	1,333			$	1,325			$	1,240			$	1,219
Due after one year through five years			11,371				11,679				10,046				10,244
Due after five years through ten years			10,469				10,567				10,646				10,538
Due after ten years			13,953				14,081				13,496				13,437
Total		$	37,126			$	37,652			$	35,428			$	35,438

Investment Commitments

As of March 31, 2010, the Company had committed approximately $243 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in multiple bank loans as part of its overall investment strategy and has committed to additional future purchases and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of March 31, 2010, the Company had commitments to purchase $337 million and sell $110 million of various bank loans.

Note E. Derivative Financial Instruments

The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, equity stock price risk and foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of an obligor to make timely payment of principal and/or interest). The Company’s principal objective under such risk strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

The Company’s use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. Derivatives entered into for hedging, regardless of the choice to designate hedge accounting, shall have a maturity that effectively correlates to the underlying hedged asset or liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through securities lending, to engage in derivative transactions.

The Company has exposure to economic losses due to interest rate risk arising from changes in the level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to interest rate risk in the normal course of portfolio management which includes rebalancing its existing portfolios of assets and liabilities. In addition, various derivative financial instruments are used to modify the interest rate risk exposures of certain assets and liabilities. These strategies include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards and commitments to purchase securities. These instruments are generally used to lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities or investment contracts, or to hedge (on an economic basis) interest rate risks associated with investments and variable rate debt.

The Company is exposed to equity price risk as a result of its investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities, or instruments that derive their value from such securities. The Company attempts to mitigate its exposure to such risks by limiting its investment in any one security or index. The Company may also manage this risk by utilizing instruments such as options, swaps, futures and collars to protect appreciation in securities held.

The Company has exposure to credit risk arising from the uncertainty associated with a financial instrument obligor’s ability to make timely principal and/or interest payments. The Company attempts to mitigate this risk by limiting credit concentrations, practicing diversification and frequently monitoring the credit quality of issuers and counterparties. In addition, the Company may utilize credit derivatives such as credit default swaps (CDS) to modify the credit risk inherent in certain investments. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments.

Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value of financial instruments denominated in a foreign currency. The Company’s foreign transactions are primarily denominated in British pounds, Euros and Canadian dollars. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards.

In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions are entered into with the intention of providing additional income or yield to a particular portfolio segment or instrument. Income enhancement transactions are limited in scope and primarily involve the sale of covered options in which the Company receives a premium in exchange for selling a call or put option.

The Company will also use CDS to sell credit protection against a specified credit event. In selling credit protection, CDS are used to replicate fixed income securities when credit exposure to certain issuers is not available or when it is economically beneficial to transact in the derivative market compared to the cash market alternative. Credit risk includes both the default event risk and market value exposure due to fluctuations in credit spreads. In selling CDS protection, the Company receives a periodic premium in exchange for providing credit protection on a single name reference obligation or a credit derivative index. If there is an event of default as defined by the CDS agreement, the Company is required to pay the counterparty the referenced notional amount of the CDS contract and in exchange, the Company is entitled to receive the referenced defaulted security or the cash equivalent.

The tables below summarize CDS contracts where the Company sold credit protection as of March 31, 2010 and December 31, 2009. The fair value of the contracts represents the amount that the Company would receive at those dates to exit the derivative positions. The maximum amount of future payments assumes no residual value in the defaulted securities that the Company would receive as part of the contract terminations and is equal to the notional value of the CDS contracts.

Credit Ratings of Underlying Reference Obligations

March 31, 2010
(In millions)

		Fair Value of				Maximum Amount of				Weighted
		Credit Default				Future Payments under				Average Years
		Swaps				Credit Default Swaps				to Maturity
B		$	1			$	8				2.9
Total		$	1			$	8				2.9

Credit Ratings of Underlying Reference Obligations

December 31, 2009
(In millions)

		Fair Value of				Maximum Amount of				Weighted
		Credit Default				Future Payments under				Average Years
		Swaps				Credit Default Swaps				to Maturity
B		$	—			$	8				3.1
Total		$	—			$	8				3.1

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Condensed Consolidated Balance Sheets. The Company attempts to mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association (ISDA) Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. The Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of cash collateral provided by the Company was $3 million and $7 million at March 31, 2010 and December 31, 2009. The fair value of cash collateral received from counterparties was $1 million and $1 million at March 31, 2010 and December 31, 2009.

Derivative securities are recorded at fair value. See Note F for information regarding the fair value of derivatives securities. Changes in the fair value of derivatives not held in a trading portfolio are reported in Net realized investment gains (losses) on the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Condensed Consolidated Statements of Operations.