CNA 2014 Q2


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 2014
Common Stock, Par value $2.50
 
269,946,268



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 June 30
Three Months
 
Six Months
(In millions, except per share data)
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,811

 
$
1,800

 
$
3,617

 
$
3,564

Net investment income
550

 
534

 
1,076

 
1,125

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(5
)
 
(16
)
 
(7
)
 
(34
)
Portion of other-than-temporary impairments recognized in Other comprehensive income
—

 
—

 
—

 
—

Net other-than-temporary impairment losses recognized in earnings
(5
)

(16
)
 
(7
)
 
(34
)
Other net realized investment gains (losses)
(9
)
 
2

 
39

 
43

Net realized investment gains (losses)
(14
)
 
(14
)
 
32

 
9

Other revenues
93

 
130

 
178

 
207

Total revenues
2,440

 
2,450

 
4,903

 
4,905

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,441

 
1,485

 
2,887

 
2,881

Amortization of deferred acquisition costs
335

 
335

 
664

 
663

Other operating expenses
254

 
319

 
600

 
659

Interest
46

 
41

 
90

 
83

Total claims, benefits and expenses
2,076

 
2,180

 
4,241

 
4,286

Income from continuing operations before income tax
364

 
270

 
662

 
619

Income tax expense
(103
)
 
(80
)
 
(181
)
 
(188
)
Income from continuing operations
261

 
190

 
481

 
431

Income (loss) from discontinued operations, net of income tax (expense) benefit of $(1), $(2), $37, and $(7)
6

 
4

 
(201
)
 
13

Net income
$
267

 
$
194

 
$
280

 
$
444

 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.97

 
$
0.71

 
$
1.78

 
$
1.60

Income (loss) from discontinued operations
0.02

 
0.01

 
(0.74
)
 
0.05

Basic earnings per share
$
0.99

 
$
0.72

 
$
1.04

 
$
1.65

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations
$
0.97

 
$
0.71

 
$
1.78

 
$
1.60

Income (loss) from discontinued operations
0.01

 
0.01

 
(0.75
)
 
0.04

Diluted earnings per share
$
0.98

 
$
0.72

 
$
1.03

 
$
1.64

 
 
 
 
 
 
 
 
Dividends per share
$
0.25

 
$
0.20

 
$
1.50

 
$
0.40

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
269.9

 
269.7

 
269.9

 
269.6

Diluted
270.6

 
270.1

 
270.5

 
270.0


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

3
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Periods ended June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments with other-than-temporary impairments
$
2

 
$
(8
)
 
$
14

 
$
6

Net unrealized gains (losses) on other investments
270

 
(585
)
 
507

 
(647
)
Net unrealized gains (losses) on investments
272

 
(593
)
 
521

 
(641
)
Net unrealized gains on discontinued operations
7

 
—

 
15

 
—

Foreign currency translation adjustment
42

 
(13
)
 
34

 
(74
)
Pension and postretirement benefits
(51
)
 
5

 
(50
)
 
10

Other comprehensive income (loss), net of tax
270

 
(601
)
 
520

 
(705
)
Net income
267

 
194

 
280

 
444

Total comprehensive income (loss)
$
537

 
$
(407
)
 
$
800

 
$
(261
)
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)
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $37,212 and $39,311)
$
40,468

 
$
41,233

Equity securities at fair value (cost of $175 and $179)
194

 
185

Limited partnership investments
2,831

 
2,720

Other invested assets
45

 
54

Mortgage loans
518

 
508

Short term investments
2,024

 
1,407

Total investments
46,080

 
46,107

Cash
204

 
195

Reinsurance receivables (less allowance for uncollectible receivables of $65 and $71)
5,050

 
6,017

Insurance receivables (less allowance for uncollectible receivables of $73 and $84)
2,142

 
1,979

Accrued investment income
411

 
443

Deferred acquisition costs
650

 
624

Deferred income taxes
—

 
220

Property and equipment at cost (less accumulated depreciation of $365 and $365)
289

 
304

Goodwill
156

 
155

Assets held for sale
3,593

 
—

Other assets
862

 
969

Separate account business
—

 
181

Total assets
$
59,437

 
$
57,194

Liabilities
 

 
 

Insurance reserves:
 

 
 

Claim and claim adjustment expenses
$
23,996

 
$
24,089

Unearned premiums
3,851

 
3,718

Future policy benefits
8,696

 
10,471

Policyholders’ funds
27

 
116

Short term debt
549

 
549

Long term debt
2,558

 
2,011

Deferred income taxes
94

 
—

Liabilities held for sale
3,343

 
—

Other liabilities (includes $68 and $178 due to Loews Corporation)
3,249

 
3,408

Separate account business
—

 
181

Total liabilities
46,363

 
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; 269,946,268 and 269,717,583 shares outstanding)
683

 
683

Additional paid-in capital
2,146

 
2,145

Retained earnings
9,369

 
9,495

Accumulated other comprehensive income
962

 
442

Treasury stock (3,093,975 and 3,322,660 shares), at cost
(85
)
 
(91
)
Notes receivable for the issuance of common stock
(1
)
 
(23
)
Total stockholders’ equity
13,074

 
12,651

Total liabilities and stockholders' equity
$
59,437

 
$
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)
Six months ended June 30
 
 
 
(In millions)
2014
 
2013
Cash Flows from Operating Activities
 
 
 
Net income
$
280

 
$
444

Adjustments to reconcile net income to net cash flows provided by operating activities:

 


Impairment loss on pending sale of subsidiary
255

 
—

Deferred income tax expense
48

 
122

Trading portfolio activity
17

 
(7
)
Net realized investment gains
(34
)
 
(14
)
Equity method investees
75

 
(151
)
Amortization of investments
—

 
(14
)
Depreciation and amortization
42

 
58

Changes in:

 


Receivables, net
6

 
(83
)
Accrued investment income
(3
)
 
(12
)
Deferred acquisition costs
(10
)
 
(43
)
Insurance reserves
234

 
198

Other assets
(50
)
 
(69
)
Other liabilities
(201
)
 
134

Other, net
(72
)
 
6

Total adjustments
307

 
125

Net cash flows provided by operating activities
587

 
569

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
2,919

 
3,143

Fixed maturity securities - maturities, calls and redemptions
1,954

 
1,820

Equity securities
14

 
60

Limited partnerships
118

 
77

Mortgage loans
33

 
18

Purchases:


 


Fixed maturity securities
(4,921
)
 
(5,656
)
Equity securities
(11
)
 
(33
)
Limited partnerships
(109
)
 
(103
)
Mortgage loans
(43
)
 
(54
)
Change in other investments
10

 
—

Change in short term investments
(678
)
 
293

Purchases of property and equipment
(27
)
 
(42
)
Other, net
7

 
6

Net cash flows used by investing activities
(734
)
 
(471
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6
Table of Contents

Six months ended June 30
 
 
 
(In millions)
2014
 
2013
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
(406
)
 
(108
)
Proceeds from the issuance of debt
546

 
—

Stock options exercised
4

 
1

Other, net
19

 
(20
)
Net cash flows provided (used) by financing activities
163

 
(127
)
Effect of foreign exchange rate changes on cash
2

 
(6
)
Transfer of cash to assets held for sale
(9
)
 
—

Net change in cash
9

 
(35
)
Cash, beginning of year
195

 
156

Cash, end of period
$
204

 
$
121

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


7
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Six months ended June 30
 
 
 
(In millions)
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
1

 
(6
)
Balance, end of period
2,146

 
2,140

Retained Earnings
 
 
 
Balance, beginning of period
9,495

 
8,774

Dividends paid to common stockholders
(406
)
 
(108
)
Net income
280

 
444

Balance, end of period
9,369

 
9,110

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of period
442

 
831

Other comprehensive income (loss)
520

 
(705
)
Balance, end of period
962

 
126

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

 
(3
)
Balance, end of period
(1
)
 
(24
)
Total Stockholders’ Equity
$
13,074

 
$
11,944

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 June 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 June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 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. Intercompany amounts have been eliminated.
Sale of Continental Assurance Company (CAC)
On February 10, 2014, the Company entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC. The sale closed on August 1, 2014. The business sold, which was previously reported within the Life & Group Non-Core segment, is reported as discontinued operations and assets and liabilities held for sale. The Company has elected not to present these assets and liabilities as held for sale on the comparative Condensed Consolidated Balance Sheet. Further information on the assets and liabilities held for sale and discontinued operations is provided in Note M to the Condensed Consolidated Financial Statements.
The definitive agreement includes a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The assets and liabilities related to the coinsurance agreement do not qualify as held for sale presentation, therefore they are not reflected as held for sale on the Condensed Consolidated Balance Sheet.



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 six months ended June 30, 2014 , approximately 622 thousand and 644 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 110 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three and six months ended June 30, 2013, approximately 407 thousand and 446 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 114 thousand and 478 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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities
$
451

 
$
454

 
$
903

 
$
911

Short term investments
—

 
1

 
1

 
2

Limited partnership investments
97

 
79

 
170

 
210

Equity securities
3

 
3

 
5

 
6

Mortgage loans
9

 
6

 
15

 
11

Trading portfolio
3

 
5

 
6

 
10

Other
1

 
—

 
3

 
1

Gross investment income
564

 
548

 
1,103

 
1,151

Investment expense
(14
)
 
(14
)
 
(27
)
 
(26
)
Net investment income
$
550

 
$
534

 
$
1,076

 
$
1,125

Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
Periods ended June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
20

 
$
33

 
$
73

 
$
72

Gross realized losses
(39
)
 
(40
)
 
(54
)
 
(52
)
Net realized investment gains (losses) on fixed maturity securities
(19
)
 
(7
)
 
19

 
20

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
—

 
5

 
5

 
7

Gross realized losses
—

 
(7
)
 
—

 
(22
)
Net realized investment gains (losses) on equity securities
—

 
(2
)
 
5

 
(15
)
Derivatives
1

 
(5
)
 
1

 
(3
)
Short term investments and other
4

 
—

 
7

 
7

Net realized investment gains (losses)
$
(14
)
 
$
(14
)
 
$
32

 
$
9


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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
2

 
$
5

 
$
3

 
$
8

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
1

 
3

 
2

 
3

Other asset-backed
1

 
1

 
1

 
1

Total asset-backed
2

 
4

 
3

 
4

Total fixed maturity securities available-for-sale
4

 
9

 
6

 
12

Equity securities available-for-sale:
 
 
 
 
 
 
 
Common stock
1

 
2

 
1

 
2

Preferred stock
—

 
5

 
—

 
20

Total equity securities available-for-sale
1

 
7

 
1

 
22

Net OTTI losses recognized in earnings
$
5

 
$
16

 
$
7

 
$
34


12
Table of Contents

The following tables provide a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
June 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
$
17,276

 
$
1,852

 
$
30

 
$
19,098

 
$
—

States, municipalities and political subdivisions
11,215

 
1,178

 
70

 
12,323

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,882

 
202

 
14

 
5,070

 
(51
)
Commercial mortgage-backed
1,999

 
107

 
7

 
2,099

 
(3
)
Other asset-backed
1,172

 
16

 
3

 
1,185

 
—

Total asset-backed
8,053

 
325

 
24

 
8,354

 
(54
)
U.S. Treasury and obligations of government-sponsored enterprises
61

 
6

 
1

 
66

 
—

Foreign government
533

 
18

 
1

 
550

 
—

Redeemable preferred stock
39

 
3

 
—

 
42

 
—

Total fixed maturity securities available-for-sale
37,177

 
3,382

 
126

 
40,433

 
$
(54
)
Total fixed maturity securities trading
35

 
—

 
—

 
35

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
46

 
14

 
—

 
60

 
 
Preferred stock
129

 
5

 
—

 
134

 
 
Total equity securities available-for-sale
175

 
19

 
—

 
194

 
 
Total
$
37,387

 
$
3,401

 
$
126

 
$
40,662

 
 
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 June 30, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $937 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
June 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
$
813

 
$
12

 
$
548

 
$
18

 
$
1,361

 
$
30

States, municipalities and political subdivisions
316

 
2

 
587

 
68

 
903

 
70

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
125

 
1

 
332

 
13

 
457

 
14

Commercial mortgage-backed
205

 
2

 
171

 
5

 
376

 
7

Other asset-backed
269

 
3

 
12

 
—

 
281

 
3

Total asset-backed
599

 
6

 
515

 
18

 
1,114

 
24

U.S. Treasury and obligations of government-sponsored enterprises
2

 
1

 
4

 
—

 
6

 
1

Foreign government
39

 
1

 
9

 
—

 
48

 
1

Total fixed maturity securities available-for-sale
1,769

 
22

 
1,663

 
104

 
3,432

 
126

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
10

 
—

 
2

 
—

 
12

 
—

Total
$
1,779

 
$
22

 
$
1,665

 
$
104

 
$
3,444

 
$
126

 
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 June 30, 2014 Securities in a Gross Unrealized Loss Position table above, are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. 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 June 30, 2014.
The following table summarizes the activity for the three and six months ended June 30, 2014 and 2013 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2014 and 2013 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Beginning balance of credit losses on fixed maturity securities
$
69

 
$
92

 
$
74

 
$
95

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

 
1

 
—

 
1

Reductions for securities sold during the period
(3
)
 
(4
)
 
(5
)
 
(7
)
Reductions for securities the Company intends to sell or more likely than not will be required to sell
—

 
—

 
(3
)
 
—

Ending balance of credit losses on fixed maturity securities
$
66

 
$
89

 
$
66

 
$
89

Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 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
 
June 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
$
2,832

 
$
2,883

 
$
2,420

 
$
2,455

Due after one year through five years
9,251

 
9,893

 
9,496

 
10,068

Due after five years through ten years
11,206

 
11,792

 
11,667

 
11,954

Due after ten years
13,888

 
15,865

 
15,692

 
16,720

Total
$
37,177

 
$
40,433

 
$
39,275

 
$
41,197

Investment Commitments
As of June 30, 2014, the Company had committed approximately $348 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of June 30, 2014, the Company had mortgage loan commitments of $40 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 June 30, 2014, the Company had commitments to purchase or fund additional amounts of $244 million and sell $158 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 June 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
June 30, 2014
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
(Liability)
Without hedge designation
 
 
 
 
 
Currency forwards
$
6

 
$
—

 
$
—

Equity warrants
5

 
—

 
—

Total
$
11

 
$
—

 
$
—


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

 
$
—

 
$
—


During the three and six months ended June 30, 2014, new derivative transactions entered into totaled $181 million and $248 million in notional value while derivative termination activity totaled $175 million and $242 million. This activity was primarily attributable to forward commitments for mortgage-backed securities as well as interest rate futures. During the three and six months ended June 30, 2013, new derivative transactions entered into totaled $1,443 million and $2,047 million in notional value while derivative termination activity totaled $1,523 million and $2,065 million. This activity was attributable to forward commitments for mortgage-backed securities, interest rate futures and foreign currency forwards.

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 and nonrecurring basis are summarized below.
June 30, 2014
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
34

 
$
18,891

 
$
194

 
$
19,119

States, municipalities and political subdivisions
—

 
12,258

 
79

 
12,337

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,885

 
185

 
5,070

Commercial mortgage-backed
—

 
2,040

 
59

 
2,099

Other asset-backed
—

 
559

 
626

 
1,185

Total asset-backed
—

 
7,484

 
870

 
8,354

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

 
4

 
—

 
66

Foreign government
60

 
490

 
—

 
550

Redeemable preferred stock
30

 
12

 
—

 
42

Total fixed maturity securities
186

 
39,139

 
1,143

 
40,468

Equity securities
137

 
55

 
2

 
194

Other invested assets
—

 
45

 
—

 
45

Short term investments
1,323

 
606

 
—

 
1,929

Life settlement contracts, included in Other assets
—

 
—

 
86

 
86

     Total recurring basis assets
1,646

 
39,845

 
1,231

 
42,722

Assets held for sale - nonrecurring basis
—

 
3,593

 
—

 
3,593

Total assets
$
1,646

 
$
43,438

 
$
1,231

 
$
46,315

Liabilities
 
 
 
 
 

 
 

Liabilities held for sale - nonrecurring basis
$
—

 
$
3,343

 
$
—

 
$
3,343

Total liabilities
$
—

 
$
3,343

 
$
—

 
$
3,343


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 June 30, 2014 and 2013.
Level 3
(In millions)
Balance at
April 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 June 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2014 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
189

 
$
1

 
$
—

 
$
21

 
$
(6
)
 
$
(5
)
 
$
5

 
$
(11
)
 
$
194

 
$
—

States, municipalities and political subdivisions
86

 
1

 
1

 
1

 
(10
)
 
—

 
—

 
—

 
79

 
—

Asset-backed:


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


Residential mortgage-backed
359

 
(24
)
 
47

 
22

 
(174
)
 
(19
)
 
—

 
(26
)
 
185

 
—

Commercial mortgage-backed
126

 
1

 
1

 
—

 
(60
)
 
(1
)
 
12

 
(20
)
 
59

 
—

Other asset-backed
439

 
—

 
4

 
229

 
(28
)
 
(18
)
 
—

 
—

 
626

 
(1
)
Total asset-backed
924

 
(23
)
 
52

 
251

 
(262
)
 
(38
)
 
12

 
(46
)
 
870

 
(1
)
Total fixed maturity securities
1,199

 
(21
)
 
53

 
273

 
(278
)
 
(43
)
 
17

 
(57
)
 
1,143

 
(1
)
Equity securities
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Life settlement contracts
87

 
12

 
—

 
—

 
—

 
(13
)
 
—

 
—

 
86

 
1

Total
$
1,288

 
$
(9
)
 
$
53

 
$
273

 
$
(278
)
 
$
(56
)
 
$
17

 
$
(57
)
 
$
1,231

 
$
—






21
Table of Contents

Level 3
(In millions)
Balance at
April 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
June 30,
2013
 
Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
302

 
$
1

 
$
(3
)
 
$
13

 
$
(73
)
 
$
(6
)
 
$
—

 
$
(32
)
 
$
202

 
$
(1
)
States, municipalities and political subdivisions
129

 
—

 
4

 
37

 
(32
)
 
(3
)
 
5

 
—

 
140

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
450

 
(1
)
 
(1
)
 
50

 
(10
)
 
(21
)
 
4

 
(43
)
 
428

 
(2
)
Commercial mortgage-backed
177

 
—

 
4

 
5

 
—

 
(2
)
 
21

 
(40
)
 
165

 
—

Other asset-backed
396

 
—

 
(3
)
 
38

 
(33
)
 
(11
)
 
—

 
—

 
387

 
(1
)
Total asset-backed
1,023

 
(1
)
 
—

 
93

 
(43
)
 
(34
)
 
25

 
(83
)
 
980

 
(3
)
Redeemable preferred stock
26

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
25

 
—

Total fixed maturity securities
1,480

 
—

 
—

 
143

 
(148
)
 
(43
)
 
30

 
(115
)
 
1,347

 
(4
)
Equity securities
19

 
(5
)
 
(1
)
 
—

 
—

 
—

 
—

 
—

 
13

 
(5
)
Other invested assets, including derivatives, net
(1
)
 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
—

 
—

Short term investments
5

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
—

 
—

 
—

Life settlement contracts
95

 
4

 
—

 
—

 
—

 
(8
)
 
—

 
—

 
91

 
(1
)
Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,600

 
$
(1
)
 
$
(1
)
 
$
143

 
$
(153
)
 
$
(50
)
 
$
30

 
$
(115
)
 
$
1,453

 
$
(10
)









    



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 six months ended June 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
June 30,
2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2014 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
204

 
$
2

 
$
1

 
$
26

 
$
(10
)
 
$
(10
)
 
$
8

 
$
(27
)
 
$
194

 
$
—

States, municipalities and political subdivisions
71

 
1

 
2

 
1

 
(10
)
 
—

 
14

 
—

 
79

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
331

 
(23
)
 
62

 
47

 
(174
)
 
(40
)
 
21

 
(39
)
 
185

 
—

Commercial mortgage-backed
151

 
2

 
—

 
—

 
(60
)
 
(2
)
 
12

 
(44
)
 
59

 
—

Other asset-backed
446

 
1

 
4

 
377

 
(111
)
 
(90
)
 
—

 
(1
)
 
626

 
(1
)
Total asset-backed
928

 
(20
)
 
66

 
424

 
(345
)
 
(132
)
 
33

 
(84
)
 
870

 
(1
)
Total fixed maturity securities
1,203

 
(17
)
 
69

 
451

 
(365
)
 
(142
)
 
55

 
(111
)
 
1,143

 
(1
)
Equity securities
11

 
3

 
(4
)
 
—

 
(8
)
 
—

 
—

 
—

 
2

 
—

Life settlement contracts
88

 
22

 
—

 
—

 
—

 
(24
)
 
—

 
—

 
86

 
2

Separate account business
1

 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

Total
$
1,303

 
$
8

 
$
65

 
$
451

 
$
(373
)
 
$
(166
)
 
$
55

 
$
(112
)
 
$
1,231

 
$
1





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
June 30,
2013
 
Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
219

 
$
1

 
$
(1
)
 
$
123

 
$
(90
)
 
$
(26
)
 
$
26

 
$
(50
)
 
$
202

 
$
(2
)
States, municipalities and political subdivisions
96

 
(3
)
 
4

 
122

 
(79
)
 
(5
)
 
5

 
—

 
140

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
413

 
2

 
(1
)
 
111

 
(10
)
 
(32
)
 
4

 
(59
)
 
428

 
(2
)
Commercial mortgage-backed
129

 
1

 
9

 
78

 
—

 
(9
)
 
21

 
(64
)
 
165

 
—

Other asset-backed
368

 
3

 
(2
)
 
174

 
(132
)
 
(24
)
 
—

 
—

 
387

 
(1
)
Total asset-backed
910

 
6

 
6

 
363

 
(142
)
 
(65
)
 
25

 
(123
)
 
980

 
(3
)
Redeemable preferred stock
26

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
25

 
—

Total fixed maturity securities
1,251

 
4

 
8

 
608

 
(311
)
 
(96
)
 
56

 
(173
)
 
1,347

 
(5
)
Equity securities
34

 
(20
)
 
—

 
—

 
—

 
—

 
—

 
(1
)
 
13

 
(20
)
Other invested assets, including derivatives, net
—

 
—

 
—

 
—

 
(1
)
 
1

 
—

 
—

 
—

 
—

Short term investments
6

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
—

 
—

 
—

Life settlement contracts
100

 
11

 
—

 
—

 
—

 
(20
)
 
—

 
—

 
91

 
(1
)
Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,393

 
$
(5
)
 
$
8

 
$
608

 
$
(318
)
 
$
(115
)
 
$
56

 
$
(174
)
 
$
1,453

 
$
(26
)


24
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* 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
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 June 30, 2014 there were $1 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the six months ended June 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 or six months ended June 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.
Other Invested Assets
Level 1 securities include exchange traded derivatives, primarily futures, valued using quoted market prices. Level 2 securities include overseas deposits, which can be redeemed at net asset value in 90 days or less, and derivatives,

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primarily currency forwards 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.
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 includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.
Assets and Liabilities Held for Sale on a Nonrecurring Basis
Assets and liabilities held for sale include assets and liabilities of CAC. These assets and liabilities are valued using the agreed upon transaction price for the sale of the common stock of CAC and are classified within Level 2 of the fair value hierarchy. See Notes A and M to the Condensed Consolidated Financial Statements for further discussion of the assets and liabilities classified as held for sale.
Significant Unobservable Inputs
The table below presents 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 June 30, 2014
 
Valuation Technique
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
115

 
Discounted cash flow
 
Credit spread
 
2% - 15% (4%)
Equity securities
$
2

 
Market approach
 
Private offering price
 
$4,334 per share
Life settlement contracts
$
86

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
70% - 743% (194%)
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%)

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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.
June 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
518

 
—

 
—

 
540

 
540

Financial liabilities
 
 
 
 
 
 
 
 
 
Short term debt
$
549

 
$
—

 
$
563

 
$
—

 
$
563

Long term debt
2,558

 
—

 
2,947

 
—

 
2,947


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.
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.


27
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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 $56 million and $130 million for the three and six months ended June 30, 2014. Catastrophe losses in 2014 related primarily to U.S. weather-related events. The Company reported catastrophe losses, net of reinsurance, of $65 million and $104 million for the three and six months ended June 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 June 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
$
(55
)
 
$
79

 
$
—

 
$
—

 
$
24

Pretax (favorable) unfavorable premium development
(1
)
 
(5
)
 
4

 
—

 
(2
)
Total pretax (favorable) unfavorable net prior year development
$
(56
)
 
$
74

 
$
4

 
$
—

 
$
22


Three months ended June 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
$
(41
)
 
$
27

 
$
12

 
$
(3
)
 
$
(5
)
Pretax (favorable) unfavorable premium development
(5
)
 
(5
)
 
2

 
—

 
(8
)
Total pretax (favorable) unfavorable net prior year development
$
(46
)
 
$
22

 
$
14

 
$
(3
)
 
$
(13
)
Six months ended June 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
$
(57
)
 
$
96

 
$
10

 
$
—

 
$
49

Pretax (favorable) unfavorable premium development
(9
)
 
(24
)
 
—

 
—

 
(33
)
Total pretax (favorable) unfavorable net prior year development
$
(66
)
 
$
72

 
$
10

 
$
—

 
$
16

Six months ended June 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
$
(56
)
 
$
16

 
$
11

 
$
(2
)
 
$
(31
)
Pretax (favorable) unfavorable premium development
(13
)
 
(15
)
 
6

 
1

 
(21
)
Total pretax (favorable) unfavorable net prior year development
$
(69
)
 
$
1

 
$
17

 
$
(1
)
 
$
(52
)









29
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 six months ended June 30, 2014 and 2013.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Medical Professional Liability
$
1

 
$
(17
)
 
$
2

 
$
(20
)
Other Professional Liability and Management Liability
(58
)
 
(23
)
 
(64
)
 
(24
)
Surety
—

 
1

 
1

 
2

Warranty
—

 
—

 
—

 
—

Other
2

 
(2
)
 
4

 
(14
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(55
)
 
$
(41
)
 
$
(57
)
 
$
(56
)
Three Months
2014
Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was better than expected severity in accident years 2008 through 2011.
2013
Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2009 and prior.
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.
Six Months
2014
Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was better than expected severity in accident years 2008 through 2011.
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 other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.




30
Table of Contents

CNA Commercial
The following table provides further detail of the development recorded for the CNA Commercial segment for the three and six months ended June 30, 2014 and 2013. The majority of the 2014 unfavorable development 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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Commercial Auto
$
20

 
$
2

 
$
40

 
$
(3
)
General Liability
30

 
15

 
25

 
(6
)
Workers' Compensation
40

 
45

 
50

 
70

Property and Other
(11
)
 
(35
)
 
(19
)
 
(45
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
79

 
$
27

 
$
96

 
$
16

Three Months
2014
Unfavorable development for commercial auto was primarily related to higher than expected frequency of large losses in accident years 2010 through 2013.
Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013.
Favorable development for property and other first-party coverages was recorded in accident years 2012 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.
2013
Unfavorable development for general liability coverages was primarily related to increased incurred loss severity in accident years 2010 through 2012.
Unfavorable development for workers' compensation was primarily in 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.
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 on non-catastrophe losses in accident year 2012.








31
Table of Contents


Six Months
2014
Unfavorable development for commercial auto was primarily related to higher than expected frequency of large losses in accident years 2010 through 2013. Additionally, unfavorable development was recorded for higher than expected frequency in accident years 2012 and 2013 and higher than expected severity in accident years 2010 and 2011.
Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013 and the recognition of losses related to favorable premium development in accident year 2013.
Favorable development for property and other first-party coverages was recorded in accident years 2012 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.
2013
Overall, favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2002 and prior. Unfavorable development was recorded in accident years 2010 through 2012 primarily related to increased incurred loss severity.
Unfavorable development for workers' compensation was recorded in response to legislation in New York as discussed above. Additional unfavorable development was primarily due to higher than expected large losses and increased severity in the state of California in accident year 2010.
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 on non-catastrophe losses in accident year 2012.







32
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Hardy
The following table provides further detail of the development recorded for the Hardy segment for the three and six months ended June 30, 2014 and 2013.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
 
 
Marine and Aviation
$
1

 
$
4

 
$
6

 
$
3

Non-Marine Property
3

 
7

 
1

 
7

Property Treaty
(2
)
 
2

 
(4
)
 
2

Specialty
(2
)
 
(1
)
 
(3
)
 
(1
)
 Commutations
—

 
—

 
10

 
—

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

 
$
12

 
$
10

 
$
11

Three Months
2013
Unfavorable development for non-marine property was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake.
Six 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.



33
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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Pension benefit
 
 
 
 
 
 
 
Service cost
$
1

 
$
3

 
$
4

 
$
6

Interest cost on projected benefit obligation
33

 
30

 
66

 
60

Expected return on plan assets
(48
)
 
(45
)
 
(96
)
 
(90
)
Amortization of net actuarial loss
7

 
12

 
13

 
24

Net periodic pension benefit
$
(7
)
 
$
—

 
$
(13
)
 
$
—

 
 
 
 
 
 
 
 
Postretirement benefit
 
 
 
 
 
 
 
Interest cost on projected benefit obligation
$
1

 
$
1

 
$
1

 
$
1

Amortization of prior service credit
(5
)
 
(5
)
 
(9
)
 
(9
)
Curtailment gain
(86
)

—


(86
)

—

Net periodic postretirement benefit
$
(90
)
 
$
(4
)
 
$
(94
)
 
$
(8
)
In the second quarter of 2014, the Company eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change is 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%.

34

Note I. Other Intangible Assets
Other intangible assets are presented in the following table.
 
 
 
June 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
 
$
66

 
$
66

 
$
64

 
$
63

Trade name
8 years
 
8

 
2

 
8

 
2

Distribution channel
15 years
 
14

 
2

 
13

 
1

Total finite-lived intangible assets
 
 
88

 
70

 
85

 
66

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
Syndicate capacity
 
 
60

 
 
 
58

 
 
Agency force
 
 
16

 
 
 
16

 
 
Total indefinite-lived intangible assets
 
 
76

 
 
 
74

 
 
Total other intangible assets
 
 
$
164

 
$
70

 
$
159

 
$
66

For the three and six months ended June 30, 2014, amortization expense of $1 million was included in Amortization of deferred acquisition costs and $1 million was recorded in Other operating expenses in the Statement of Operations for the Hardy segment. For the three and six months ended June 30, 2013, amortization expense of $4 million and $13 million was included in Amortization of deferred acquisition costs and $2 million and $5 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 in 2015 and $2 million in years 2016, 2017 and 2018.

35
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 June 30, 2014 that the Company could be required to pay under this guarantee, in excess of amounts already recorded, were approximately $72 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
In the course of selling business entities and assets to third parties, the Company has agreed 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 indemnification agreements may include provisions that survive indefinitely. As of June 30, 2014, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third-party loans was $699 million.
In addition, the Company has agreed to provide indemnification to third-party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of June 30, 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.
As of June 30, 2014 and December 31, 2013, the Company had recorded liabilities of approximately $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.

36
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 or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense has been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.
In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio. Net operating income, which is derived from certain income statement amounts, is used by management to monitor performance of the Company's insurance operations. The Company's investment portfolio is monitored by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk. Based on such analyses, the Company may recognize an OTTI loss on an investment security in accordance with its policy, or sell a security, which may produce realized gains and losses.
Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses, 2) income or 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 or losses because net realized investment gains or 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.


37
Table of Contents

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

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
763

 
$
817

 
$
92

 
$
139

 
$
—

 
$
—

 
$
1,811

Net investment income
161

 
208

 
1

 
173

 
7

 
—

 
550

Other revenues
74

 
9

 
(1
)
 
8

 
5

 
(2
)
 
93

Total operating revenues
998

 
1,034

 
92

 
320

 
12

 
(2
)
 
2,454

Claims, Benefits and Expenses
 

 
 

 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
426

 
654

 
52

 
304

 
1

 
—

 
1,437

Policyholders’ dividends
1

 
3

 
—

 
—

 
—

 
—

 
4

Amortization of deferred acquisition costs
158

 
144

 
26

 
7

 
—

 
—

 
335

Other insurance related expenses
74

 
138

 
16

 
31

 
—

 
—

 
259

Other expenses
65

 
8

 
4

 
(3
)
 
(31
)
 
(2
)
 
41

Total claims, benefits and expenses
724


947


98


339


(30
)

(2
)

2,076

Operating income (loss) before income tax
274

 
87


(6
)

(19
)

42


—


378

Income tax (expense) benefit on operating income (loss)
(92
)
 
(28
)
 
1

 
28

 
(15
)
 
—

 
(106
)
Net operating income (loss)
182

 
59


(5
)

9


27


—


272

Net realized investment gains (losses), pretax
(5
)
 
(7
)
 
(1
)
 
(4
)
 
3

 
—

 
(14
)
Income tax (expense) benefit on net realized investment gains (losses)
2

 
1

 
—

 
1

 
(1
)
 
—

 
3

Net realized investment gains (losses)
(3
)
 
(6
)

(1
)

(3
)

2


—


(11
)
Net income (loss) from continuing operations
$
179

 
$
53


$
(6
)

$
6


$
29


$
—


$
261

















38
Table of Contents

Three months ended June 30, 2013
CNA
Specialty

CNA
Commercial

Hardy

Life &
Group
Non-Core

Corporate
& Other
Non-Core

 

 
(In millions)





Eliminations

Total
Operating revenues
 


 





 


 


 


 

Net earned premiums
$
746


$
840


$
76


$
138


$
—


$
—


$
1,800

Net investment income
151


211


1


163


8


—


534

Other revenues
63


65


(1
)

2


2


(1
)

130

Total operating revenues
960


1,116


76


303


10


(1
)

2,464

Claims, Benefits and Expenses
 


 





 


 


 


 

Net incurred claims and benefits
452


644


41


347


(2
)

—


1,482

Policyholders’ dividends
1


2


—


—


—


—


3

Amortization of deferred acquisition costs
156


153


20


6


—


—


335

Other insurance related expenses
65


142


13


32


—


—


252

Other expenses
60


2


6


2


39


(1
)

108

Total claims, benefits and expenses
734


943


80


387


37


(1
)

2,180

Operating income (loss) before income tax
226


173


(4
)

(84
)

(27
)

—


284

Income tax (expense) benefit on operating income (loss)
(78
)

(61
)

2


43


9


—


(85
)
Net operating income (loss) 
148


112


(2
)

(41
)

(18
)

—


199

Net realized investment gains (losses), pretax
(6
)

(12
)

1


—


3


—


(14
)
Income tax (expense) benefit on net realized investment gains (losses)
2


4


(1
)

1


(1
)

—


5

Net realized investment gains (losses)
(4
)

(8
)

—


1


2


—


(9
)
Net income (loss) from continuing operations
$
144


$
104


$
(2
)

$
(40
)

$
(16
)

$
—


$
190
















39
Table of Contents

Six months ended June 30, 2014
CNA
Specialty

CNA
Commercial

Hardy

Life &
Group
Non-Core

Corporate
& Other
Non-Core

 

 
(In millions)





Eliminations

Total
Operating revenues
 


 





 


 


 


 

Net earned premiums
$
1,511


$
1,639

 
$
190

 
$
278

 
$
—

 
$
(1
)

$
3,617

Net investment income
312


406

 
2

 
344

 
12

 
—


1,076

Other revenues
142


18

 
—

 
13

 
7

 
(2
)

178

Total operating revenues
1,965


2,063


192


635


19


(3
)

4,871

Claims, Benefits and Expenses
 


 





 


 


 


 

Net incurred claims and benefits
906


1,276

 
90

 
610

 
(2
)
 
—


2,880

Policyholders’ dividends
2


5

 
—

 
—

 
—

 
—


7

Amortization of deferred acquisition costs
311


284

 
54

 
15

 
—

 
—


664

Other insurance related expenses
146


277

 
36

 
63

 
—

 
(1
)

521

Other expenses
126


19

 
8

 
(2
)
 
20

 
(2
)

169

Total claims, benefits and expenses
1,491


1,861


188


686


18


(3
)

4,241

Operating income (loss) before income tax
474


202


4


(51
)

1


—


630

Income tax (expense) benefit on operating income (loss)
(158
)

(65
)
 
(2
)
 
58

 
(1
)
 
—


(168
)
Net operating income
316


137


2


7


—


—


462

Net realized investment gains (losses), pretax
7


5

 
(1
)
 
12

 
9

 
—


32

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

(3
)
 
—

 
(5
)
 
(3
)
 
—


(13
)
Net realized investment gains (losses)
5


2


(1
)

7


6


—


19

Net income from continuing operations
$
321


$
139


$
1


$
14


$
6


$
—


$
481



June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance receivables
$
666

 
$
1,032

 
$
146

 
$
367

 
$
2,904

 
$
—

 
$
5,115

Insurance receivables
$
853

 
$
1,137

 
$
214

 
$
7

 
$
4

 
$
—

 
$
2,215

Deferred acquisition costs
$
323

 
$
267

 
$
60

 
$
—

 
$
—

 
$
—

 
$
650

Goodwill
$
117

 
$
—

 
$
39

 
$
—

 
$
—

 
$
—

 
$
156

Insurance reserves
 
 
 
 
 
 
 
 
 
 
 
 
 

Claim and claim adjustment expenses
$
6,939

 
$
10,537

 
$
386

 
$
3,092

 
$
3,042

 
$
—

 
$
23,996

Unearned premiums
1,857

 
1,576

 
283

 
136

 
—

 
(1
)
 
3,851

Future policy benefits
—

 
—

 
—

 
8,696

 
—

 
—

 
8,696

Policyholders’ funds
9

 
18

 
—

 
—

 
—

 
—

 
27


40
Table of Contents

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

 
 

 
 
 
 

 
 

 
 

 
 

Net earned premiums
$
1,469

 
$
1,677

 
$
140

 
$
279

 
$
—

 
$
(1
)
 
$
3,564

Net investment income
321

 
461

 
2

 
325

 
16

 
—

 
1,125

Other revenues
123

 
75

 
—

 
5

 
5

 
(1
)
 
207

Total operating revenues
1,913

 
2,213

 
142

 
609

 
21

 
(2
)
 
4,896

Claims, Benefits and Expenses
 

 
 
 
 
 
 

 
 

 
 

 
 

Net incurred claims and benefits
917

 
1,244

 
72

 
640

 
2

 
—

 
2,875

Policyholders’ dividends
2

 
4

 
—

 
—

 
—

 
—

 
6

Amortization of deferred acquisition costs
306

 
302

 
41

 
14

 
—

 
—

 
663

Other insurance related expenses
136

 
285

 
29

 
64

 
—

 
(1
)
 
513

Other expenses
114

 
11

 
13

 
7

 
85

 
(1
)
 
229

Total claims, benefits and expenses
1,475

 
1,846

 
155

 
725

 
87

 
(2
)
 
4,286

Operating income (loss) before income tax
438

 
367

 
(13
)
 
(116
)
 
(66
)
 
—

 
610

Income tax (expense) benefit on operating income (loss)
(150
)
 
(130
)
 
3

 
69

 
22

 
—

 
(186
)
Net operating income (loss)
288

 
237

 
(10
)
 
(47
)
 
(44
)
 
—

 
424

Net realized investment gains (losses), pretax
(3
)
 
(8
)
 
2

 
9

 
9

 
—

 
9

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

 
3

 
(1
)
 
(2
)
 
(3
)
 
—

 
(2
)
Net realized investment gains (losses) 
(2
)
 
(5
)
 
1

 
7

 
6

 
—

 
7

Net income (loss) from continuing operations
$
286

 
$
232

 
$
(9
)
 
$
(40
)
 
$
(38
)
 
$
—

 
$
431


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





41
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 and losses.
Revenues by Line of Business
Periods ended June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
CNA Specialty
 
 
 
 
 
 
 
International
$
62

 
$
59

 
$
126

 
$
118

Management & Professional Liability
710

 
687

 
1,414

 
1,387

Surety
125

 
123

 
247

 
239

Warranty & Alternative Risks
96

 
85

 
185

 
166

CNA Specialty revenues
993

 
954

 
1,972

 
1,910

CNA Commercial
 
 
 
 
 

 
 

Commercial Insurance
755

 
827

 
1,517

 
1,653

International
91

 
90

 
186

 
183

Small Business
181

 
187

 
365

 
369

CNA Commercial revenues
1,027

 
1,104

 
2,068

 
2,205

Hardy revenues
91

 
77

 
191

 
144

Life & Group Non-Core revenues
316

 
303

 
647

 
618

Corporate & Other Non-Core revenues
15

 
13

 
28

 
30

Eliminations
(2
)
 
(1
)
 
(3
)
 
(2
)
Total revenues
$
2,440

 
$
2,450

 
$
4,903

 
$
4,905



42
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 June 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 April 1, 2014
$
33

 
$
912

 
$
30

 
$
(425
)
 
$
142

 
$
692

Other comprehensive income (loss) before reclassifications
2

 
257

 
7

 
—

 
42

 
308

Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $6, $0, $(28), $0, and $(22)
—

 
(13
)
 
—

 
51

 
—

 
38

Other comprehensive income (loss) after tax (expense) benefit of $(1), $(146), $(5), $28, $0 and $(124)
2

 
270


7

 
(51
)

42

 
270

Balance at June 30, 2014
$
35

 
$
1,182

 
$
37

 
$
(476
)
 
$
184

 
$
962

(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 April 1, 2013
$
34

 
$
1,309

 
$
(716
)
 
$
100

 
$
727

Other comprehensive income (loss) before reclassifications
(8
)
 
(589
)
 
—

 
(13
)
 
(610
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $3, $2, $0, and $5
—

 
(4
)
 
(5
)
 
—

 
(9
)
Other comprehensive income (loss) after tax (expense) benefit of $4, $314, $(2), $0, and $316
(8
)
 
(585
)
 
5

 
(13
)
 
(601
)
Balance at June 30, 2013
$
26

 
$
724

 
$
(711
)
 
$
87

 
$
126












43
Table of Contents

The tables below display the changes in Accumulated other comprehensive income (loss) by component for the six months ended June 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
14


521


15


—


34


584

Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(8), $0, $(27), $0, and $(35)
—


14


—


50


—


64

Other comprehensive income (loss) after tax (expense) benefit of $(7), $(273), $(10), $27, $0 and $(263)
14


507


15


(50
)

34


520

Balance at June 30, 2014
$
35


$
1,182


$
37


$
(476
)

$
184


$
962

(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
6

 
(638
)
 
—

 
(74
)
 
(706
)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(3), $5, $0, and $2
—

 
9

 
(10
)
 
—

 
(1
)
Other comprehensive income (loss) after tax (expense) benefit of $(3), $349, $(5), $0, and $341
6


(647
)

10


(74
)

(705
)
Balance at June 30, 2013
$
26


$
724


$
(711
)

$
87


$
126

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


44
Table of Contents

Note M. Assets and Liabilities Held for Sale and Discontinued Operations

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

Periods ended June 30
Three Months
 
Six Months
(In millions)
2014

2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net investment income
$
39

 
$
44

 
$
80

 
$
86

Net realized investment gains
1

 
—

 
2

 
5

Other revenues
—

 
(1
)
 
—

 
—

Total revenues
40

 
43

 
82

 
91

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders' benefits
32

 
36

 
63

 
69

Other operating expenses
1

 
1

 
2

 
2

Total claims, benefits and expenses
33

 
37

 
65

 
71

Income before income tax
7

 
6

 
17

 
20

Income tax expense
(1
)
 
(2
)
 
(4
)
 
(7
)
Income from operations of discontinued operations, net of income tax
6

 
4

 
13

 
13

Impairment loss related to sale, net of income tax benefit of -, -, $41 and -
—

 
—

 
(214
)
 
—

Income (loss) from discontinued operations
$
6

 
$
4

 
$
(201
)
 
$
13



The following table presents the detailed assets and liabilities held for sale as of June 30, 2014:
(In millions)
2014
Assets
 
Investments:
 
Fixed maturity securities at fair value
$
2,752

Equity securities at fair value
17

Short term investments
67

Total investments
2,836

Cash
9

Reinsurance receivables
811

Other assets
46

Separate account business
146

Assets held for sale
3,848

Less: Impairment related to sale
(255
)
Total assets held for sale
$
3,593

Liabilities
 
Insurance reserves
$
3,109

Other liabilities
88

Separate account business
146

Total liabilities held for sale
$
3,343


45
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 2012 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 or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note 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, the Company closed the previously announced sale of the majority of its run-off annuity and pension deposit business, through the sale of the common stock of CAC. The business sold, which was previously reported within the Life & Group Non-Core segment, is reported as discontinued operations and assets and liabilities held for sale. In connection with the then pending sale, the Company recorded an estimated after-tax impairment loss of $214 million in the first quarter of 2014, which is reflected in Income (loss) from discontinued operations. Further information on the sale is provided in Notes A and M to the Condensed Consolidated Financial Statements.
In connection with the sale of CAC, on August 1, 2014 the Company entered into a coinsurance agreement on a separate small block of annuity business outside of CAC. As a result of the funds withheld basis used in this reinsurance transaction, the Company estimates it will recognize an after-tax loss of approximately $35 million in the third quarter due to the difference between market value and book value of the funds withheld assets at the reinsurance contract's inception. In subsequent periods, the Company will recognize realized gains to the extent the funds withheld assets are sold or the market value of those assets reduces to the maturity value of the securities. A realized loss will be recognized if the market value of those assets increases.






46
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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Operating Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,811

 
$
1,800

 
$
3,617

 
$
3,564

Net investment income
550

 
534

 
1,076

 
1,125

Other revenues
93

 
130

 
178

 
207

Total operating revenues
2,454

 
2,464

 
4,871

 
4,896

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Net incurred claims and benefits
1,437

 
1,482

 
2,880

 
2,875

Policyholders' dividends
4

 
3

 
7

 
6

Amortization of deferred acquisition costs
335

 
335

 
664

 
663

Other insurance related expenses
259

 
252

 
521

 
513

Other expenses
41

 
108

 
169

 
229

Total claims, benefits and expenses
2,076

 
2,180

 
4,241

 
4,286

Operating income before income tax
378

 
284

 
630

 
610

Income tax expense on operating income
(106
)
 
(85
)
 
(168
)
 
(186
)
Net operating income
272

 
199

 
462

 
424

Net realized investment gains (losses), pretax
(14
)
 
(14
)
 
32

 
9

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

 
5

 
(13
)
 
(2
)
Net realized investment gains (losses)
(11
)
 
(9
)
 
19

 
7

Income from continuing operations
261

 
190

 
481

 
431

Income (loss) from discontinued operations, net of tax
6

 
$
4

 
(201
)
 
$
13

Net income
$
267

 
$
194

 
$
280

 
$
444

Three Month Comparison
Income from continuing operations increased $71 million for the three months ended June 30, 2014 as compared with the same period in 2013. This increase was driven by higher net operating income.
Net operating income increased $73 million for the three months ended June 30, 2014 as compared with the same period in 2013. Net operating income decreased $22 million for our core segments, CNA Specialty, CNA Commercial and Hardy. Improved current accident year underwriting results were substantially offset by unfavorable net prior year development. In addition, 2013 results included a legal settlement benefit of $30 million after-tax. Catastrophe losses were $37 million after-tax for the three months ended June 30, 2014 as compared with $43 million after-tax for the same period in 2013. Net operating results increased $95 million for our non-core segments, primarily related to a $56 million after-tax postretirement plan curtailment benefit as well as improved results in our Life & Group segment driven by our long term care business. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Unfavorable net prior year development of $22 million and favorable net prior year development of $13 million was recorded for the three months ended June 30, 2014 and 2013 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development for the three months ended June 30, 2014 and 2013 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net earned premiums were consistent as compared with the same period in 2013. See the Segment Results section of this MD&A for further discussion.

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Six Month Comparison
Income from continuing operations increased $50 million for the six months ended June 30, 2014 as compared with the same period in 2013. This increase was due to higher net operating income and increased net realized investment results.
Net realized investment gains increased $12 million for the six months ended June 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 increased $38 million for the six months ended June 30, 2014 as compared with the same period in 2013. Net operating income decreased $60 million for our core segments primarily due to lower net investment income, the unfavorable effect of net prior year development, and higher catastrophe losses partially offset by improved non-catastrophe current accident year underwriting results. In addition, 2013 results included a legal settlement benefit of $30 million after-tax. Catastrophe losses were $85 million after-tax for the six months ended June 30, 2014 as compared with $68 million after-tax for the same period in 2013. Net operating results improved $98 million for our non-core segments, due to the same reasons discussed above in the three month comparison.
Unfavorable net prior year development of $16 million and favorable net prior year development of $52 million was recorded for the six months ended June 30, 2014 and 2013 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development for the six months ended June 30, 2014 and 2013 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Net earned premiums increased $53 million for the six months ended June 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.

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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 and Payout Annuity Contracts
•
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.


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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 June 30
Three Months
 
Six Months
(In millions, except ratios)
2014
 
2013
 
2014
 
2013
Net written premiums
$
742

 
$
756

 
$
1,538

 
$
1,559

Net earned premiums
763

 
746

 
1,511

 
1,469

Net investment income
161

 
151

 
312

 
321

Net operating income
182

 
148

 
316

 
288

Net realized investment gains (losses)
(3
)
 
(4
)
 
5

 
(2
)
Net income
179

 
144

 
321

 
286

Ratios
 
 
 
 
 
 
 
Loss and loss adjustment expense
55.8
%
 
60.6
%
 
60.0
%
 
62.4
%
Expense
30.5

 
29.7

 
30.2

 
30.1

Dividend
0.1

 
0.1

 
0.1

 
0.2

Combined
86.4
%
 
90.4
%
 
90.3
%
 
92.7
%
Three Month Comparison
Net written premiums for CNA Specialty for the three months ended June 30, 2014 were largely consistent with the same period in 2013, although the level of new business has declined. Net earned premiums increased $17 million as compared with the same period in 2013, consistent with increased net written premiums over recent quarters.
CNA Specialty's average rate increased 4% for the three months ended June 30, 2014, as compared with an increase of 6% for the three months ended June 30, 2013 for the policies that renewed in each period. Retention of 82% and 85% was achieved in each period.
Net income increased $35 million for the three months ended June 30, 2014 as compared with the same period in 2013. This increase was primarily due to higher net operating income.
Net operating income increased $34 million for the three months ended June 30, 2014 as compared with the same period in 2013. This increase was primarily due to improved underwriting results.
The combined ratio decreased 4.0 points for the three months ended June 30, 2014 as compared with the same period in 2013. The loss ratio decreased 4.8 points, due primarily to an improved current accident year loss ratio as well as increased favorable net prior year development. Catastrophe losses were $5 million, or 0.6 points of the loss ratio, for the three months ended June 30, 2014, as compared with $6 million, or 0.7 points of the loss ratio, for the three months ended June 30, 2013.
Favorable net prior year development of $56 million and $46 million was recorded for the three months ended June 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.








50
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Six Month Comparison
Net written premiums for CNA Specialty for the six months ended June 30, 2014 were largely consistent with the same period in 2013, although the level of new business has declined. Net earned premiums increased $42 million as compared with the same period in 2013, consistent with increased net written premiums over recent quarters.
CNA Specialty's average rate increased 4% for the six months ended June 30, 2014, as compared with an increase of 7% for the six months ended June 30, 2013 for the policies that renewed in each period. Retention of 83% and 85% was achieved in each respective period.
Net income increased $35 million for the six months ended June 30, 2014 as compared with the same period in 2013. This increase was primarily due to higher net operating income.
Net operating income increased $28 million for the six months ended June 30, 2014 as compared with the same period in 2013. This increase was primarily due to improved underwriting results.
The combined ratio decreased 2.4 points for the six months ended June 30, 2014 as compared with the same period in 2013. The loss ratio decreased 2.4 points, due to an improved non-catastrophe current accident year loss ratio, partially offset by higher catastrophe losses. Catastrophe losses were $16 million, or 1.0 points of the loss ratio, for the six months ended June 30, 2014, as compared with $7 million, or 0.5 points of the loss ratio, for the six months ended June 30, 2013.
Favorable net prior year development of $66 million and $69 million was recorded for the six months ended June 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 June 30, 2014 and December 31, 2013 for CNA Specialty.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
 
June 30,
2014
 
December 31,
2013
(In millions)
 
Gross Case Reserves
$
2,448

 
$
2,270

Gross IBNR Reserves
4,491

 
4,419

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,939

 
$
6,689

Net Case Reserves
$
2,204

 
$
2,024

Net IBNR Reserves
4,079

 
4,142

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
6,283

 
$
6,166



51
Table of Contents

CNA Commercial
The following table details the results of operations for CNA Commercial.
Results of Operations
Periods ended June 30
Three Months
 
Six Months
(In millions, except ratios)
2014
 
2013
 
2014
 
2013
Net written premiums
$
779

 
$
826

 
$
1,678

 
$
1,744

Net earned premiums
817

 
840

 
1,639

 
1,677

Net investment income
208

 
211

 
406

 
461

Net operating income
59

 
112

 
137

 
237

Net realized investment gains (losses)
(6
)
 
(8
)
 
2

 
(5
)
Net income
53

 
104

 
139

 
232

Ratios
 
 
 
 
 
 
 

Loss and loss adjustment expense
80.3
%
 
76.5
%
 
77.9
%
 
74.1
%
Expense
34.4

 
34.9

 
34.2

 
35.0

Dividend
0.3

 
0.3

 
0.3

 
0.2

Combined
115.0
%
 
111.7
%
 
112.4
%
 
109.3
%
Three Month Comparison
Net written premiums for CNA Commercial decreased $47 million for the three months ended June 30, 2014 as compared with the same period in 2013, primarily driven by underwriting actions taken in certain business classes and a decreased level of new business, partially offset by continued rate increases. Net earned premiums decreased $23 million for the three months ended June 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 June 30, 2014, as compared with an increase of 9% for the three months ended June 30, 2013 for the policies that renewed in each period. Retention of 70% and 75% was achieved in each respective period.
Net income decreased $51 million for the three months ended June 30, 2014 as compared with the same period in 2013. This decrease was primarily due to lower net operating income.
Net operating income decreased $53 million for the three months ended June 30, 2014 as compared with the same period in 2013. This decrease was due to higher unfavorable 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.
The combined ratio increased 3.3 points for the three months ended June 30, 2014 as compared with the same period in 2013. The loss ratio increased 3.8 points, primarily due to higher unfavorable net prior year development, partially offset by lower catastrophe losses and an improved non-catastrophe current accident year loss ratio. Catastrophe losses were $47 million, or 5.7 points of the loss ratio, for the three months ended June 30, 2014, as compared with $59 million, or 7.1 points of the loss ratio, for the three months ended June 30, 2013.
Unfavorable net prior year development of $74 million and $22 million was recorded for the three months ended June 30, 2014 and 2013. The majority of the 2014 unfavorable development relates to business classes which we have exited, but also includes Small Business where we are taking underwriting actions in an effort to improve profitability. Further information on net prior year development is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.





52
Table of Contents

Six Month Comparison
Net written premiums for CNA Commercial decreased $66 million for the six months ended June 30, 2014 as compared with the same period in 2013, primarily driven by underwriting actions taken in certain business classes and a decreased level of new business, partially offset by continued rate increases. Net earned premiums decreased $38 million for the six months ended June 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 six months ended June 30, 2014, as compared with an increase of 9% for the six months ended June 30, 2013 for the policies that renewed in each period. Retention of 73% and 76% was achieved in each period.
Net income decreased $93 million for the six months ended June 30, 2014 as compared with the same period in 2013, due to lower net operating income.
Net operating income decreased $100 million for the six months ended June 30, 2014 as compared with the same period in 2013. This decrease was primarily due to the same reasons discussed above in the three month comparison, as well as lower net investment income.
The combined ratio increased 3.1 points for the six months ended June 30, 2014 as compared with the same period in 2013. The loss ratio increased 3.8 points, primarily due to higher unfavorable net prior year development and higher catastrophe losses, partially offset by an improved non-catastrophe current accident year loss ratio. Catastrophe losses were $107 million, or 6.6 points of the loss ratio, for the six months ended June 30, 2014, as compared with $97 million, or 5.8 points of the loss ratio, for the six months ended June 30, 2013.
Unfavorable net prior year development of $72 million and $1 million was recorded for the six months ended June 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 June 30, 2014 and December 31, 2013 for CNA Commercial.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
June 30,
2014
 
December 31,
2013
Gross Case Reserves
$
5,999

 
$
5,829

Gross IBNR Reserves
4,538

 
4,820

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
10,537

 
$
10,649

Net Case Reserves
$
5,534

 
$
5,358

Net IBNR Reserves
4,015

 
4,269

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
9,549

 
$
9,627



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Table of Contents

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

Six Months
(In millions, except ratios)
2014
 
2013
 
2014
 
2013
Net written premiums
$
133

 
$
138

 
$
205

 
$
193

Net earned premiums
92

 
76

 
190

 
140

Net investment income
1

 
1

 
2

 
2

Net operating income (loss)
(5
)
 
(2
)
 
2

 
(10
)
Net realized investment gains (losses)
(1
)
 
—

 
(1
)
 
1

Net income (loss)
(6
)
 
(2
)
 
1

 
(9
)
Ratios
 
 
 
 
 
 
 

Loss and loss adjustment expense
56.2
%
 
53.9
%
 
47.2
%
 
51.5
%
Expense
46.7

 
44.5

 
47.5

 
50.1

Dividend
—

 
—

 
—

 
—

Combined
102.9
%
 
98.4
%
 
94.7
%
 
101.6
%
Three Month Comparison
Net written premiums for Hardy for the three months ended June 30, 2014 were largely consistent with the same period in 2013. Net earned premiums increased $16 million as compared with the same period in 2013. For the three months ended June 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 8% for the three months ended June 30, 2014, as compared with a decrease of 1% for the three months ended June 30, 2013 for the policies that renewed in the period. Retention of 67% and 69% was achieved in each respective period.
Net operating loss increased $3 million for the three months ended June 30, 2014 as compared with the same period in 2013, primarily due to underwriting results.
The combined ratio increased 4.5 points for the three months ended June 30, 2014 as compared with the same period in 2013. The loss ratio increased 2.3 points, due to deterioration in the current accident year loss ratio, including higher catastrophe losses, partially offset by lower unfavorable net prior year development. Catastrophe losses were $4 million, or 4.6 points of the loss ratio, for the three months ended June 30, 2014. There were no catastrophe losses for the three months ended June 30, 2013. The expense ratio increased 2.2 points driven by integration costs and the effect of foreign currency exchange rates.
Unfavorable net prior year development of $4 million and $14 million was recorded for the three months ended June 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.







54
Table of Contents

Six Month Comparison
Net written premiums for Hardy increased $12 million for the six months ended June 30, 2014 as compared with the same period in 2013, helped by reduced reinsurance cost. Net earned premiums increased $50 million as compared with the same period in 2013. For the six months ended June 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 5% for the six months ended June 30, 2014, as compared with a flat rate for the six months ended June 30, 2013 for the policies that renewed in the period. Retention of 72% and 70% was achieved in each respective period.
Net results improved $10 million for the six months ended June 30, 2014 as compared with the same period in 2013. This improvement was primarily due to higher net operating income.
Net operating results improved $12 million for the six months ended June 30, 2014 as compared with the same period in 2013, primarily due to underwriting results.
The combined ratio improved 6.9 points for the six months ended June 30, 2014 as compared with the same period in 2013. The loss ratio improved 4.3 points, due to lower unfavorable net prior year development, partially offset by deterioration in the current accident year loss ratio. Catastrophe losses were $7 million, or 3.9 points of the loss ratio, for the six months ended June 30, 2014. There were no catastrophe losses for the six months ended June 30, 2013. The expense ratio improved 2.6 points, primarily due to a higher net earned premium base.
Unfavorable net prior year development of $10 million and $17 million was recorded for the six months ended June 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 June 30, 2014 and December 31, 2013 for Hardy.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
June 30,
2014
 
December 31,
2013
Gross Case Reserves
$
298

 
$
275

Gross IBNR Reserves
88

 
111

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
386

 
$
386

Net Case Reserves
$
178

 
$
159

Net IBNR Reserves
79

 
75

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
257

 
$
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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Net earned premiums
$
139

 
$
138

 
$
278

 
$
279

Net investment income
173

 
163

 
344

 
325

Net operating income (loss)
9

 
(41
)
 
7

 
(47
)
Net realized investment gains (losses)
(3
)
 
1

 
7

 
7

Net income (loss)
6

 
(40
)
 
14

 
(40
)
Three Month Comparison
Net earned premiums for Life & Group Non-Core increased $1 million for the three months ended June 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 results improved $46 million for the three months ended June 30, 2014 as compared with the same period in 2013, primarily driven by our long term care business which benefited from favorable morbidity and persistency as well as rate increase actions. Results were also affected by higher net investment income, driven by a higher invested asset base, and a gain on a life settlement contract in 2014.
Six Month Comparison
Net earned premiums for Life & Group Non-Core decreased $1 million for the six months ended June 30, 2014 as compared with the same period in 2013.
Net results improved $54 million for the six months ended June 30, 2014 as compared with the same period in 2013. The increase was primarily due to the same reasons discussed above in the three month comparison. Our long term care business benefited from favorable persistency, rate increase actions and favorable morbidity.

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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 June 30
Three Months
 
Six Months
(In millions)
2014

2013
 
2014
 
2013
Net investment income
$
7

 
$
8

 
$
12

 
$
16

Net operating income (loss)
27

 
(18
)
 
—

 
(44
)
Net realized investment gains
2

 
2

 
6

 
6

Net income (loss)
29

 
(16
)
 
6

 
(38
)
Three Month Comparison
Net results improved $45 million for the three months ended June 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. This favorable item was partially offset by higher interest expense from a new debt issuance in February 2014, in advance of the December 2014 maturity of our existing debt. In addition, 2013 results included a release of an allowance established for officer notes receivable.
No net prior year development was recorded for the three months ended June 30, 2014, as compared with favorable net prior year development of $3 million for the three months ended June 30, 2013.
Six Month Comparison
Net results improved $44 million for the six months ended June 30, 2014 as compared with the same period in 2013, primarily due to the same reasons discussed above in the three month comparison.
No net prior year development was recorded for the six months ended June 30, 2014, as compared with favorable net prior year development of $1 million for the six months ended June 30, 2013.
The following table summarizes the gross and net carried reserves as of June 30, 2014 and December 31, 2013 for Corporate & Other Non-Core.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
(In millions)
June 30,
2014
 
December 31,
2013
Gross Case Reserves
$
1,046

 
$
1,140

Gross IBNR Reserves
1,996

 
2,167

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
3,042

 
$
3,307

Net Case Reserves
$
160

 
$
283

Net IBNR Reserves
174

 
184

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
334

 
$
467



57
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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities:
 
 
 
 
 
 
 
Taxable
$
350

 
$
383

 
$
702

 
$
771

Tax-exempt
101

 
71

 
201

 
140

Total fixed maturity securities
451

 
454

 
903

 
911

Limited partnership investments
97

 
79

 
170

 
210

Other, net of investment expense
2

 
1

 
3

 
4

Pretax net investment income
$
550

 
$
534

 
$
1,076

 
$
1,125

After-tax net investment income
$
391

 
$
368

 
$
762

 
$
773

 
 
 
 
 
 
 
 
Effective income yield for the fixed maturity securities portfolio, pretax
4.9
%
 
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 months ended June 30, 2014 increased $23 million as compared with the same period in 2013. The increase was driven by limited partnership investment income, additional investments in tax-exempt securities and a higher invested asset base.
After-tax net investment income for the six months ended June 30, 2014 decreased $11 million as compared with the same period in 2013. The decrease was driven by limited partnership investment income, partially offset by additional investments in tax-exempt securities and a higher invested asset base.

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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 June 30
Three Months
 
Six Months
(In millions)
2014
 
2013
 
2014
 
2013
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
8

 
$
13

 
$
22

 
$
39

States, municipalities and political subdivisions
(5
)
 
—

 
18

 
(2
)
Asset-backed
(24
)
 
(21
)
 
(23
)
 
(18
)
   Foreign government
2

 
1

 
2

 
1

Total fixed maturity securities
(19
)
 
(7
)
 
19

 
20

Equity securities
—

 
(2
)
 
5

 
(15
)
Derivative securities
1

 
(5
)
 
1

 
(3
)
Short term investments and other
4

 
—

 
7

 
7

Net realized investment gains (losses), pretax
(14
)
 
(14
)
 
32

 
9

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

 
5

 
(13
)
 
(2
)
Net realized investment gains (losses)
$
(11
)
 
$
(9
)
 
$
19

 
$
7

Net realized investment gains increased $12 million for the six months ended June 30, 2014 as compared with the same period in 2013, driven by lower OTTI losses recognized in earnings. 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 June 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 June 30, 2014 and December 31, 2013, approximately 98% and 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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The following table summarizes the ratings of our fixed maturity portfolio at fair value.
Fixed Maturity Ratings
 
June 30,
2014
 
 
 
December 31,
2013
 
 
(In millions)
 
%
 
 
%
U.S. Government, Government agencies and Government-sponsored enterprises
$
3,693

 
9
%
 
$
3,683

 
9
%
AAA rated
2,825

 
7

 
2,776

 
7

AA and A rated
20,279

 
50

 
20,353

 
49

BBB rated
10,802

 
27

 
11,171

 
27

Non-investment grade
2,869

 
7

 
3,250

 
8

Total
$
40,468

 
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 $2,686 million and $3,097 million at June 30, 2014 and December 31, 2013. The following table summarizes the ratings of these securities at fair value.
Non-investment Grade
 
June 30,
2014
 
 
 
December 31,
2013
 
 
(In millions)
 
%
 
 
%
BB
$
1,145

 
40
%
 
$
1,393

 
43
%
B
819

 
29

 
967

 
30

CCC - C
666

 
23

 
649

 
20

D
239

 
8

 
241

 
7

Total
$
2,869

 
100
%
 
$
3,250

 
100
%
The following table summarizes available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution as of June 30, 2014.
Gross Unrealized Losses by Ratings Distribution
June 30, 2014
Estimated Fair Value
 
%
 
Gross Unrealized Losses
 
%
(In millions)
 
 
 
U.S. Government, Government agencies and Government-sponsored enterprises
$
193

 
6
%
 
$
6

 
5
%
 AAA
399

 
12

 
11

 
8

 AA
873

 
24

 
73

 
58

 A
742

 
22

 
12

 
10

 BBB
889

 
26

 
14

 
11

Non-investment grade
336

 
10

 
10

 
8

Total
$
3,432

 
100
%
 
$
126

 
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
June 30, 2014
Estimated Fair Value
 
%
 
Gross Unrealized Losses
 
%
Due in one year or less
$
255

 
7
%
 
$
6

 
5
%
Due after one year through five years
824

 
24

 
25

 
20

Due after five years through ten years
1,368

 
40

 
19

 
15

Due after ten years
985

 
29

 
76

 
60

Total
$
3,432

 
100
%
 
$
126

 
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
 
June 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
$
13,826

 
11.4

 
$
15,009

 
11.3

Other interest sensitive investments
28,521

 
4.2

 
27,766

 
4.4

Total
$
42,347

 
6.6

 
$
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
 
June 30,
2014
 
December 31,
2013
(In millions)
 
Short term investments:
 
 
 
Commercial paper
$
589

 
$
549

U.S. Treasury securities
1,126

 
636

Money market funds
166

 
94

Other
143

 
128

Total short term investments
$
2,024

 
$
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 six months ended June 30, 2014, net cash provided by operating activities was $587 million as compared with $569 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.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments. Additionally, cash flows from investing activities may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
For the six months ended June 30, 2014, net cash used by investing activities was $734 million as compared with $471 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 six months ended June 30, 2014, net cash provided by financing activities was $163 million as compared with net cash used of $127 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 $1.50 per share of our common stock, including a special dividend of $1.00 per share, were declared and paid in the first half of 2014. On August 1, 2014, our Board of Directors declared a quarterly dividend of $0.25 per share, payable September 3, 2014 to stockholders of record on August 18, 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 first half of 2014, Continental Casualty Company (CCC) paid dividends of $450 million to CNAF. As of June 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 six months ended June 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 June 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 June 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 June 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: August 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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