CNA 2013 Q3

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-6169860
(I.R.S. Employer
Identification No.)
333 S. Wabash
Chicago, Illinois
(Address of principal executive offices)
 
60604
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x]
 
Accelerated filer [ ]
 
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
 
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 25, 2013
Common Stock, Par value $2.50
 
269,702,799



Item Number
PART I. Financial Information
Page
Number
1.
 


Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012



 
2.
3.
4.
 
PART II. Other Information
 
1.
4.
6.


2

Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions, except per share data)
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,825

 
$
1,781

 
$
5,389

 
$
5,098

Net investment income
597

 
601

 
1,808

 
1,719

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(15
)
 
(62
)
 
(49
)
 
(89
)
Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
(2
)
 
(2
)
 
(2
)
 
(25
)
Net other-than-temporary impairment losses recognized in earnings
(17
)
 
(64
)
 
(51
)
 
(114
)
Other net realized investment gains
21

 
72

 
69

 
180

Net realized investment gains
4

 
8

 
18

 
66

Other revenues
78

 
76

 
285

 
230

Total revenues
2,504

 
2,466

 
7,500

 
7,113

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,414

 
1,435

 
4,364

 
4,164

Amortization of deferred acquisition costs
341

 
333

 
1,004

 
937

Other operating expenses
332

 
341

 
993

 
976

Interest
42

 
43

 
125

 
128

Total claims, benefits and expenses
2,129

 
2,152

 
6,486

 
6,205

Income before income tax
375

 
314

 
1,014

 
908

Income tax expense
(103
)
 
(93
)
 
(298
)
 
(271
)
Net income
$
272

 
$
221

 
$
716

 
$
637

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.01

 
$
0.82

 
$
2.66

 
$
2.37

 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.01

 
$
0.82

 
$
2.65

 
$
2.36

 
 
 
 
 
 
 
 
Dividends per share
$
0.20

 
$
0.15

 
$
0.60

 
$
0.45

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
269.7

 
269.4

 
269.6

 
269.4

Diluted
270.2

 
269.8

 
270.1

 
269.8

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


3

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments with other-than-temporary impairments
$
(3
)
 
$
36

 
$
3

 
$
73

Net unrealized gains (losses) on other investments
(70
)
 
191

 
(717
)
 
528

Net unrealized gains (losses) on investments
(73
)
 
227

 
(714
)
 
601

Foreign currency translation adjustment
56

 
33

 
(18
)
 
37

Pension and postretirement benefits
4

 
3

 
14

 
12

Other comprehensive income (loss), net of tax
(13
)
 
263

 
(718
)
 
650

Net income
272

 
221

 
716

 
637

Total comprehensive income (loss)
$
259

 
$
484

 
$
(2
)
 
$
1,287

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

4

CNA Financial Corporation
Condensed Consolidated Balance Sheets (Unaudited)
 
September 30,
2013
 
December 31,
2012
(In millions, except share data)
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $39,129 and $38,170)
$
41,274

 
$
42,633

Equity securities at fair value (cost of $189 and $228)
199

 
249

Limited partnership investments
2,790

 
2,462

Other invested assets
55

 
59

Mortgage loans
440

 
401

Short term investments
1,475

 
1,832

Total investments
46,233

 
47,636

Cash
185

 
156

Reinsurance receivables (less allowance for uncollectible receivables of $72 and $73)
5,731

 
6,158

Insurance receivables (less allowance for uncollectible receivables of $90 and $101)
1,993

 
1,882

Accrued investment income
482

 
434

Deferred acquisition costs
642

 
598

Deferred income taxes
331

 
93

Property and equipment at cost (less accumulated depreciation of $358 and $404)
334

 
326

Goodwill
154

 
154

Other assets (includes $0 and $4 due from Loews Corporation)
889

 
773

Separate account business
213

 
312

Total assets
$
57,187

 
$
58,522

Liabilities
 

 
 

Insurance reserves:
 

 
 

Claim and claim adjustment expenses
$
23,962

 
$
24,763

Unearned premiums
3,820

 
3,610

Future policy benefits
10,681

 
11,475

Policyholders’ funds
127

 
157

Short term debt
—

 
13

Long term debt
2,559

 
2,557

Other liabilities (includes $129 and $0 due to Loews Corporation)
3,672

 
3,321

Separate account business
213

 
312

Total liabilities
45,034

 
46,208

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; 269,701,999 and 269,399,390 shares outstanding)
683

 
683

Additional paid-in capital
2,142

 
2,146

Retained earnings
9,328

 
8,774

Accumulated other comprehensive income
113

 
831

Treasury stock (3,338,244 and 3,640,853 shares), at cost
(91
)
 
(99
)
Notes receivable for the issuance of common stock
(22
)
 
(21
)
Total stockholders’ equity
12,153

 
12,314

Total liabilities and stockholders' equity
$
57,187

 
$
58,522

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

5

CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2013
 
2012
Cash Flows from Operating Activities
 
 
 
Net income
$
716

 
$
637

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Loss on disposal of property and equipment
—

 
1

Deferred income tax expense
141

 
95

Trading portfolio activity
2

 
(13
)
Net realized investment gains
(18
)
 
(66
)
Equity method investees
(230
)
 
(68
)
Amortization of investments
(20
)
 
(43
)
Depreciation and amortization
80

 
83

Changes in:
 
 


Receivables, net
316

 
348

Accrued investment income
(48
)
 
(46
)
Deferred acquisition costs
(23
)
 
(27
)
Insurance reserves
(166
)
 
(53
)
Other assets
(62
)
 
90

Other liabilities
233

 
47

Other, net
—

 
8

Total adjustments
205

 
356

Net cash flows provided by operating activities
$
921

 
$
993

Cash Flows from Investing Activities
 
 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
$
4,830

 
$
4,761

Fixed maturity securities - maturities, calls and redemptions
2,496

 
2,655

Equity securities
82

 
72

Limited partnerships
91

 
153

Mortgage loans
20

 
6

Purchases:
 
 
 
Fixed maturity securities
(8,205
)
 
(7,369
)
Equity securities
(61
)
 
(30
)
Limited partnerships
(163
)
 
(119
)
Mortgage loans
(59
)
 
(129
)
Change in other investments
(19
)
 
1

Change in short term investments
357

 
(505
)
Purchase of Hardy
—

 
(197
)
Purchases of property and equipment
(67
)
 
(60
)
Other, net
9

 
14

Net cash flows used by investing activities
$
(689
)
 
$
(747
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6

Nine months ended September 30
 
 
 
(In millions)
2013
 
2012
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(162
)
 
$
(122
)
Repayment of debt
(13
)
 
(70
)
Stock options exercised
1

 
1

Other, net
(26
)
 
(4
)
Net cash flows used by financing activities
$
(200
)
 
$
(195
)
Effect of foreign exchange rate changes on cash
$
(3
)
 
$
3

Net change in cash
$
29

 
$
54

Cash, beginning of year
156

 
75

Cash, end of period
$
185

 
$
129

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


7

CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Nine months ended September 30
 
 
 
(In millions)
2013
 
2012
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,146

 
2,141

Stock-based compensation
(4
)
 
3

Balance, end of period
2,142

 
2,144

Retained Earnings
 
 
 
Balance, beginning of period
8,774

 
8,308

Dividends paid to common stockholders
(162
)
 
(122
)
Net income
716

 
637

Balance, end of period
9,328

 
8,823

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of period
831

 
480

Other comprehensive income (loss)
(718
)
 
650

Balance, end of period
113

 
1,130

Treasury Stock
 
 
 
Balance, beginning of period
(99
)
 
(102
)
Stock-based compensation
8

 
3

Balance, end of period
(91
)
 
(99
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of period
(21
)
 
(22
)
(Increase) decrease in notes receivable for the issuance of common stock
(1
)
 
1

Balance, end of period
(22
)
 
(21
)
Total Stockholders' Equity
$
12,153

 
$
12,660

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


8

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. The Company acquired Hardy Underwriting Bermuda Limited and its subsidiaries on July 2, 2012. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2013.
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, 2012, including the summary of significant accounting policies in Note A. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
The interim financial data as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 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.
Note B. Earnings Per Share
Earnings per share is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For the three and nine months ended September 30, 2013, approximately 515 thousand and 501 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 110 thousand and 115 thousand potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three and nine months ended September 30, 2012, approximately 450 thousand and 400 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 693 thousand and 740 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.

9

Note C. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Fixed maturity securities
$
504

 
$
507

 
$
1,501

 
$
1,528

Short term investments
1

 
2

 
3

 
5

Limited partnership investments
93

 
89

 
303

 
184

Equity securities
3

 
4

 
9

 
10

Mortgage loans
6

 
5

 
17

 
13

Trading portfolio (a)
3

 
7

 
13

 
18

Other
1

 
—

 
2

 
3

Gross investment income
611

 
614

 
1,848

 
1,761

Investment expense
(14
)
 
(13
)
 
(40
)
 
(42
)
Net investment income
$
597

 
$
601

 
$
1,808

 
$
1,719

___________________
(a)
There were no net unrealized gains (losses) related to changes in fair value of trading securities still held included in net investment income for the three or nine months ended September 30, 2013 or 2012.
Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
51

 
$
75

 
$
132

 
$
193

Gross realized losses
(44
)
 
(49
)
 
(98
)
 
(120
)
Net realized investment gains (losses) on fixed maturity securities
7

 
26

 
34

 
73

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
3

 
5

 
10

 
10

Gross realized losses
(5
)
 
(20
)
 
(27
)
 
(24
)
Net realized investment gains (losses) on equity securities
(2
)
 
(15
)
 
(17
)
 
(14
)
Derivatives
(1
)
 
(1
)
 
(4
)
 
(1
)
Short term investments and other
—

 
(2
)
 
5

 
8

Net realized investment gains (losses)
$
4

 
$
8

 
$
18

 
$
66


10

The components of net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are summarized in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Corporate and other bonds
$
9

 
$
7

 
$
17

 
$
23

States, municipalities and political subdivisions
—

 
17

 
—

 
17

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
2

 
20

 
5

 
49

Other asset-backed
1

 
—

 
2

 
—

Total asset-backed
3

 
20

 
7

 
49

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

 
—

 
—

 
1

Total fixed maturity securities available-for-sale
12

 
44

 
24

 
90

Equity securities available-for-sale:
 
 
 
 
 
 
 
Common stock
3

 
1

 
5

 
5

Preferred stock
2

 
19

 
22

 
19

Total equity securities available-for-sale
5

 
20

 
27

 
24

Net OTTI losses recognized in earnings
$
17

 
$
64

 
$
51

 
$
114

The following tables provide a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
September 30, 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
$
19,616

 
$
1,695

 
$
151

 
$
21,160

 
$
—

States, municipalities and political subdivisions
11,000

 
672

 
233

 
11,439

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,779

 
141

 
101

 
4,819

 
(33
)
Commercial mortgage-backed
1,942

 
99

 
24

 
2,017

 
(3
)
Other asset-backed
942

 
16

 
2

 
956

 
—

Total asset-backed
7,663

 
256

 
127

 
7,792

 
(36
)
U.S. Treasury and obligations of government-sponsored enterprises
166

 
8

 
1

 
173

 
—

Foreign government
547

 
17

 
3

 
561

 
—

Redeemable preferred stock
94

 
12

 
—

 
106

 
—

Total fixed maturity securities available-for-sale
39,086

 
2,660

 
515

 
41,231

 
$
(36
)
Total fixed maturity securities trading
43

 
—

 
—

 
43

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
41

 
12

 
—

 
53

 
 
Preferred stock
148

 
1

 
3

 
146

 
 
Total equity securities available-for-sale
189

 
13

 
3

 
199

 
 
Total
$
39,318

 
$
2,673

 
$
518

 
$
41,473

 
 

11

December 31, 2012
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
$
19,530

 
$
2,698

 
$
21

 
$
22,207

 
$
—

States, municipalities and political subdivisions
9,372

 
1,455

 
44

 
10,783

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,745

 
246

 
71

 
5,920

 
(28
)
Commercial mortgage-backed
1,692

 
147

 
17

 
1,822

 
(3
)
Other asset-backed
929

 
23

 
—

 
952

 
—

Total asset-backed
8,366

 
416

 
88

 
8,694

 
(31
)
U.S. Treasury and obligations of government-sponsored enterprises
172

 
11

 
1

 
182

 
—

Foreign government
588

 
25

 
—

 
613

 
—

Redeemable preferred stock
113

 
13

 
1

 
125

 
—

Total fixed maturity securities available-for-sale
38,141

 
4,618

 
155

 
42,604

 
$
(31
)
Total fixed maturity securities trading
29

 
—

 
—

 
29

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
38

 
14

 
—

 
52

 
 
Preferred stock
190

 
7

 
—

 
197

 
 
Total equity securities available-for-sale
228

 
21

 
—

 
249

 
 
Total
$
38,398

 
$
4,639

 
$
155

 
$
42,882

 
 
The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. At September 30, 2013 and December 31, 2012, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $723 million and $1,511 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).

12

The following tables summarize the estimated fair value and gross unrealized losses of available-for-sale fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.
Securities in a Gross Unrealized Loss Position
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 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
$
3,521

 
$
146

 
$
45

 
$
5

 
$
3,566

 
$
151

States, municipalities and political subdivisions
2,413

 
179

 
122

 
54

 
2,535

 
233

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,289

 
40

 
287

 
61

 
1,576

 
101

Commercial mortgage-backed
449

 
20

 
79

 
4

 
528

 
24

Other asset-backed
207

 
2

 
—

 
—

 
207

 
2

Total asset-backed
1,945

 
62

 
366

 
65

 
2,311

 
127

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

 
1

 
—

 
—

 
21

 
1

Foreign government
76

 
3

 
—

 
—

 
76

 
3

Total fixed maturity securities available-for-sale
7,976

 
391

 
533

 
124

 
8,509

 
515

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
86

 
3

 
—

 
—

 
86

 
3

Total
$
8,062

 
$
394

 
$
533

 
$
124

 
$
8,595

 
$
518

 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2012
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
$
846

 
$
13

 
$
108

 
$
8

 
$
954

 
$
21

States, municipalities and political subdivisions
254

 
5

 
165

 
39

 
419

 
44

Asset-backed:
 
 
 
 
 
 
 
 
 

 
 

Residential mortgage-backed
583

 
5

 
452

 
66

 
1,035

 
71

Commercial mortgage-backed
85

 
2

 
141

 
15

 
226

 
17

Total asset-backed
668

 
7

 
593

 
81

 
1,261

 
88

U.S. Treasury and obligations of government-sponsored enterprises
23

 
1

 
—

 
—

 
23

 
1

Redeemable preferred stock
28

 
1

 
—

 
—

 
28

 
1

Total
$
1,819

 
$
27

 
$
866

 
$
128

 
$
2,685

 
$
155

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $3 million and $15 million for the three and nine months ended September 30, 2013 and $12 million and $59 million for the three and nine months ended September 30, 2012.
Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2013 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 investments with longer duration, primarily included within the states, municipalities and political subdivision asset category, were more significantly impacted by changes in market interest rates. The Company has no current intent to sell these

13

securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2013.
The following table summarizes the activity for the three and nine months ended September 30, 2013 and 2012 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at September 30, 2013 and 2012 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2013
 
2012
 
2013
 
2012
Beginning balance of credit losses on fixed maturity securities
$
89

 
$
99

 
$
95

 
$
92

Additional credit losses for securities for which an OTTI loss was previously recognized
1

 
2

 
2

 
23

Credit losses for securities for which an OTTI loss was not previously recognized
—

 
—

 
—

 
2

Reductions for securities sold during the period
(7
)
 
(3
)
 
(14
)
 
(11
)
Reductions for securities the Company intends to sell or more likely than not will be required to sell
—

 
—

 
—

 
(8
)
Ending balance of credit losses on fixed maturity securities
$
83

 
$
98

 
$
83

 
$
98

Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 30, 2013 and December 31, 2012. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.
Contractual Maturity
 
September 30, 2013
 
December 31, 2012
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
2,475

 
$
2,516

 
$
1,648

 
$
1,665

Due after one year through five years
10,687

 
11,304

 
13,603

 
14,442

Due after five years through ten years
10,586

 
10,901

 
8,726

 
9,555

Due after ten years
15,338

 
16,510

 
14,164

 
16,942

Total
$
39,086

 
$
41,231

 
$
38,141

 
$
42,604

Investment Commitments
As of September 30, 2013, the Company had committed approximately $405 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of September 30, 2013, the Company had commitments to purchase or fund additional amounts of $172 million and sell $143 million under the terms of such securities.


14

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 for the periods ended September 30, 2013 and December 31, 2012. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.
Derivative Financial Instruments
September 30, 2013
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
(Liability)
Without hedge designation
 
 
 
 
 
Credit default swaps - purchased protection
$
20

 
$
—

 
$
—

Currency forwards
27

 
—

 
(1
)
Equity warrants
5

 
—

 
—

Total without hedge designation
52

 
—

 
(1
)
Trading activities
 
 
 
 
 
Futures sold, not yet purchased
17

 
—

 
—

Total
$
69

 
$
—

 
$
(1
)
December 31, 2012
Contractual/
Notional
Amount

Estimated Fair Value
(In millions)

Asset

(Liability)
Without hedge designation




 
Credit default swaps - purchased protection
$
20


$
—


$
(1
)
Currency forwards
59


—


(2
)
Equity warrants
5


—


—

Total
$
84


$
—


$
(3
)
During the three and nine months ended September 30, 2013, new derivative transactions entered into totaled $224 million and $2,271 million in notional value while derivative termination activity totaled $221 million and $2,286 million. This activity was attributable to forward commitments for mortgage-backed securities, interest rate futures and foreign currency forwards. During the three and nine months ended September 30, 2012, new derivative transactions entered into totaled $472 million and $1,251 million in notional value while derivative termination activity totaled $488 million and $1,200 million. This activity was primarily attributable to interest rate futures, forward commitments for mortgage-backed securities and foreign currency forwards.

15

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. Prices are determined by a dedicated group who ultimately report to the Company's Chief Financial Officer. This group is responsible for valuation policies and procedures. 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 independently validates detailed information regarding inputs and assumptions for individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

16

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are summarized below.
September 30, 2013
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
27

 
$
20,945

 
$
211

 
$
21,183

States, municipalities and political subdivisions
—

 
11,364

 
95

 
11,459

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,449

 
370

 
4,819

Commercial mortgage-backed
—

 
1,860

 
157

 
2,017

Other asset-backed
—

 
523

 
433

 
956

Total asset-backed
—

 
6,832

 
960

 
7,792

U.S. Treasury and obligations of government-sponsored enterprises
144

 
29

 
—

 
173

Foreign government
81

 
480

 
—

 
561

Redeemable preferred stock
48

 
58

 
—

 
106

Total fixed maturity securities
300

 
39,708

 
1,266

 
41,274

Equity securities
135

 
51

 
13

 
199

Other invested assets
—

 
55

 
—

 
55

Short term investments
992

 
430

 
—

 
1,422

Life settlement contracts, included in Other assets
—

 
—

 
90

 
90

Separate account business
12

 
199

 
2

 
213

Total assets
$
1,439

 
$
40,443

 
$
1,371

 
$
43,253

Liabilities
 
 
 
 
 

 
 

Derivative financial instruments, included in Other liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)
Total liabilities
$
—

 
$
(1
)
 
$
—

 
$
(1
)

17

December 31, 2012
 
 
 
 
 
 
Total
Assets/(Liabilities)
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
6

 
$
22,011

 
$
219

 
$
22,236

States, municipalities and political subdivisions
—

 
10,687

 
96

 
10,783

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
5,507

 
413

 
5,920

Commercial mortgage-backed
—

 
1,693

 
129

 
1,822

Other asset-backed
—

 
584

 
368

 
952

Total asset-backed
—

 
7,784

 
910

 
8,694

U.S. Treasury and obligations of government-sponsored enterprises
158

 
24

 
—

 
182

Foreign government
140

 
473

 
—

 
613

Redeemable preferred stock
40

 
59

 
26

 
125

Total fixed maturity securities
344

 
41,038

 
1,251

 
42,633

Equity securities
117

 
98

 
34

 
249

Other invested assets
—

 
58

 
1

 
59

Short term investments
987

 
799

 
6

 
1,792

Life settlement contracts, included in Other assets
—

 
—

 
100

 
100

Separate account business
4

 
306

 
2

 
312

Total assets
$
1,452

 
$
42,299

 
$
1,394

 
$
45,145

Liabilities
 

 
 

 
 

 
 

Derivative financial instruments, included in Other liabilities
$
—

 
$
(2
)
 
$
(1
)
 
$
(3
)
Total liabilities
$
—

 
$
(2
)
 
$
(1
)
 
$
(3
)

18

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2013 and 2012.
Level 3
(In millions)
Balance at
July 1,
2013
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2013
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
202

 
$
1

 
$
—

 
$
6

 
$
(6
)
 
$
(8
)
 
$
17

 
$
(1
)
 
$
211

 
$
—

States, municipalities and political subdivisions
140

 
—

 
(3
)
 
—

 
—

 
(15
)
 
—

 
(27
)
 
95

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
428

 
—

 
(20
)
 
5

 
—

 
(21
)
 
—

 
(22
)
 
370

 
(1
)
Commercial mortgage-backed
165

 
(1
)
 
(2
)
 
10

 
—

 
(1
)
 
—

 
(14
)
 
157

 
—

Other asset-backed
387

 
—

 
1

 
56

 
—

 
(6
)
 
—

 
(5
)
 
433

 
(1
)
Total asset-backed
980

 
(1
)
 
(21
)
 
71

 
—

 
(28
)
 
—

 
(41
)
 
960

 
(2
)
Redeemable preferred stock
25

 
(1
)
 
1

 
—

 
—

 
(25
)
 
—

 
—

 
—

 
—

Total fixed maturity securities
1,347

 
(1
)
 
(23
)
 
77

 
(6
)
 
(76
)
 
17

 
(69
)
 
1,266

 
(2
)
Equity securities
13

 
(2
)
 
2

 
—

 
—

 
—

 
—

 
—

 
13

 
(2
)
Life settlement contracts
91

 
3

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
90

 
—

Separate account business
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Total
$
1,453

 
$
—

 
$
(21
)
 
$
77

 
$
(6
)
 
$
(80
)
 
$
17

 
$
(69
)
 
$
1,371

 
$
(4
)

19

Level 3
(In millions)
Balance at
July 1,
2012
 
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*
 
Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)
 
Purchases
 
Sales
 
Settlements
 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance at
September 30,
2012
 
Unrealized gains (losses) on Level 3 assets and liabilities held at September 30, 2012 recognized in net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
488

 
$
1

 
$
(4
)
 
$
50

 
$
(5
)
 
$
(11
)
 
$
—

 
$
(260
)
 
$
259

 
$
(1
)
States, municipalities and political subdivisions
89

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
89

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
443

 
(17
)
 
20

 
21

 
—