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





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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.


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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.

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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


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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


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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

 
$
—






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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-back