CNA 2015 Q1


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 March 31, 2015
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 May 1, 2015
Common Stock, Par value $2.50
 
270,245,346


Item Number
 
Page
Number
 
PART I. Financial Information
 
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)
Three months ended March 31
 
 
 
(In millions, except per share data)
2015
 
2014
Revenues
 
 
 
Net earned premiums
$
1,687

 
$
1,806

Net investment income
558

 
526

Net realized investment gains:
 
 
 
Other-than-temporary impairment losses
(12
)
 
(2
)
Portion of other-than-temporary impairments recognized in Other comprehensive income
—

 
—

Net other-than-temporary impairment losses recognized in earnings
(12
)
 
(2
)
Other net realized investment gains
22

 
48

Net realized investment gains
10

 
46

Other revenues
97

 
85

Total revenues
2,352

 
2,463

Claims, Benefits and Expenses
 
 
 
Insurance claims and policyholders’ benefits
1,339

 
1,446

Amortization of deferred acquisition costs
303

 
329

Other operating expenses
358

 
346

Interest
39

 
44

Total claims, benefits and expenses
2,039

 
2,165

Income from continuing operations before income tax
313

 
298

Income tax expense
(80
)
 
(78
)
Income from continuing operations
233

 
220

Loss from discontinued operations, net of income tax benefit of $0 and $38
—

 
(207
)
Net income
$
233

 
$
13

 
 
 
 
Basic Earnings Per Share
 
 
 
Income from continuing operations
$
0.86

 
$
0.82

Loss from discontinued operations
—

 
(0.77
)
Basic earnings per share
$
0.86

 
$
0.05

 
 
 
 
Diluted Earnings Per Share
 
 
 
Income from continuing operations
$
0.86

 
$
0.81

Loss from discontinued operations
—

 
(0.76
)
Diluted earnings per share
$
0.86

 
$
0.05

 
 
 
 
Dividends per share
$
2.25

 
$
1.25

 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
Basic
270.1

 
269.8

Diluted
270.7

 
270.5


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 (Unaudited)
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Other Comprehensive Income, Net of Tax
 
 
 
Changes in:
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
$
(1
)
 
$
12

Net unrealized gains on other investments
112

 
237

Net unrealized gains on investments
111

 
249

Net unrealized gains on discontinued operations
—

 
8

Foreign currency translation adjustment
(96
)
 
(8
)
Pension and postretirement benefits
6

 
1

Other comprehensive income, net of tax
21

 
250

Net income
233

 
13

Total comprehensive income
$
254

 
$
263


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
(In millions, except share data)
March 31, 2015 (Unaudited)
 
December 31,
2014
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $36,875 and $37,335)
$
40,605

 
$
40,768

Equity securities at fair value (cost of $213 and $210)
225

 
222

Limited partnership investments
2,967

 
2,937

Other invested assets
43

 
41

Mortgage loans
586

 
588

Short term investments
1,506

 
1,706

Total investments
45,932

 
46,262

Cash
201

 
190

Reinsurance receivables (less allowance for uncollectible receivables of $48 and $48)
4,720

 
4,694

Insurance receivables (less allowance for uncollectible receivables of $59 and $61)
2,050

 
1,936

Accrued investment income
430

 
405

Deferred acquisition costs
616

 
600

Deferred income taxes
57

 
191

Property and equipment at cost (less accumulated depreciation of $364 and $364)
298

 
295

Goodwill
151

 
152

Other assets
1,010

 
841

Total assets
$
55,465

 
$
55,566

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
23,248

 
$
23,271

Unearned premiums
3,710

 
3,592

Future policy benefits
9,747

 
9,490

Policyholders' funds
—

 
27

Long term debt
2,560

 
2,559

Other liabilities (includes $6 and $153 due to Loews Corporation)
3,763

 
3,833

Total liabilities
43,028

 
42,772

Commitments and contingencies (Notes C, F and H)
 
 
 
Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 270,241,545 and 269,980,202 shares outstanding)
683

 
683

Additional paid-in capital
2,143

 
2,151

Retained earnings
9,270

 
9,645

Accumulated other comprehensive income
421

 
400

Treasury stock (2,798,698 and 3,060,041 shares), at cost
(79
)
 
(84
)
Notes receivable for the issuance of common stock
(1
)
 
(1
)
Total stockholders’ equity
12,437

 
12,794

Total liabilities and stockholders' equity
$
55,465

 
$
55,566


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)
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Cash Flows from Operating Activities
 
 
 
Net income
$
233

 
$
13

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Impairment loss on sale of subsidiary
—

 
255

Deferred income tax expense
71

 
25

Trading portfolio activity
13

 
21

Net realized investment gains
(10
)
 
(47
)
Equity method investees
(91
)
 
132

Net amortization of investments
—

 
(1
)
Depreciation and amortization
19

 
20

Changes in:
 
 
 
Receivables, net
(157
)
 
126

Accrued investment income
(25
)
 
(36
)
Deferred acquisition costs
(13
)
 
(21
)
Insurance reserves
304

 
85

Other assets
(34
)
 
(35
)
Other liabilities
(235
)
 
(372
)
Other, net
19

 
3

Total adjustments
(139
)
 
155

Net cash flows provided by operating activities
94

 
168

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
1,144

 
1,550

Fixed maturity securities - maturities, calls and redemptions
1,144

 
851

Equity securities
2

 
11

Limited partnerships
20

 
68

Mortgage loans
3

 
13

Purchases:


 
 
Fixed maturity securities
(1,919
)
 
(2,072
)
Equity securities
(5
)
 
(5
)
Limited partnerships
(34
)
 
(73
)
Mortgage loans
(8
)
 
—

Change in other investments
7

 
—

Change in short term investments
190

 
(688
)
Purchases of property and equipment
(20
)
 
(10
)
Other, net
2

 
1

Net cash flows provided (used) by investing activities
$
526

 
$
(354
)

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


6
Table of Contents

Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(608
)
 
$
(338
)
Proceeds from the issuance of debt
—

 
546

Other, net
5

 
2

Net cash flows provided (used) by financing activities
(603
)

210

Effect of foreign exchange rate changes on cash
(6
)
 
1

Transfer of cash to assets held for sale
—

 
(14
)
Net change in cash
11

 
11

Cash, beginning of year
190

 
195

Cash, end of period
$
201

 
$
206


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)
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,151

 
2,145

Stock-based compensation
(8
)
 
(1
)
Balance, end of period
2,143

 
2,144

Retained Earnings
 
 
 
Balance, beginning of period
9,645

 
9,495

Dividends paid to common stockholders
(608
)
 
(338
)
Net income
233

 
13

Balance, end of period
9,270

 
9,170

Accumulated Other Comprehensive Income
 
 
 
Balance, beginning of period
400

 
442

Other comprehensive income
21

 
250

Balance, end of period
421

 
692

Treasury Stock
 
 
 
Balance, beginning of period
(84
)
 
(91
)
Stock-based compensation
5

 
6

Balance, end of period
(79
)
 
(85
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of period
(1
)
 
(23
)
Decrease in notes receivable for common stock
—

 
1

Balance, end of period
(1
)
 
(22
)
Total Stockholders' Equity
$
12,437

 
$
12,582


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 (Unaudited)
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 March 31, 2015.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. 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, 2014, 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 March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, necessary for a fair statement of the Company's results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Sale of Continental Assurance Company (CAC)
On August 1, 2014, the Company completed the sale of the common stock of CAC, the Company's former life insurance subsidiary. In the first quarter of 2014, the Company recorded an after-tax impairment loss of $214 million related to the sale. The Company elected to include CAC cash flow activity in the comparative Condensed Consolidated Statement of Cash Flows. Further information on discontinued operations is provided in Note K to the Condensed Consolidated Financial Statements.
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 effect 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 months ended March 31, 2015 and 2014, approximately 654 thousand and 660 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 182 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.

9
Table of Contents

Note C. Investments
The significant components of Net investment income are presented in the following table.
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Fixed maturity securities
$
443

 
$
452

Short term investments
2

 
1

Limited partnership investments
114

 
73

Equity securities
3

 
2

Mortgage loans
8

 
6

Trading portfolio
2

 
3

Other
—

 
2

Gross investment income
572

 
539

Investment expense
(14
)
 
(13
)
Net investment income
$
558

 
$
526

Net realized investment gains (losses) are presented in the following table.
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Net realized investment gains (losses):
 
 
 
Fixed maturity securities:
 
 
 
Gross realized gains
$
33

 
$
53

Gross realized losses
(21
)
 
(15
)
Net realized investment gains (losses) on fixed maturity securities
12

 
38

Equity securities:
 
 
 

Gross realized gains
1

 
5

Gross realized losses
(1
)
 
—

Net realized investment gains (losses) on equity securities
—

 
5

Derivatives
(1
)
 
—

Short term investments and other
(1
)
 
3

Net realized investment gains (losses)
$
10

 
$
46

The components of Net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Fixed maturity securities available-for-sale:
 
 
 
Corporate and other bonds
$
5

 
$
1

States, municipalities and political subdivisions
5

 
—

Asset-backed - residential mortgage-backed
1

 
1

Total fixed maturity securities available-for-sale
11

 
2

Equity securities available-for-sale:
 
 
 
Common stock
1

 
—

Net OTTI losses recognized in earnings
$
12

 
$
2


10
Table of Contents

The following tables present a summary of fixed maturity and equity securities.
March 31, 2015
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
$
16,721

 
$
1,867

 
$
43

 
$
18,545

 
$
—

States, municipalities and political subdivisions
11,407

 
1,536

 
9

 
12,934

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,998

 
241

 
13

 
5,226

 
(51
)
Commercial mortgage-backed
2,151

 
114

 
5

 
2,260

 
(3
)
Other asset-backed
1,109

 
15

 
1

 
1,123

 
—

Total asset-backed
8,258

 
370

 
19

 
8,609

 
(54
)
U.S. Treasury and obligations of government-sponsored enterprises
24

 
6

 
—

 
30

 
—

Foreign government
390

 
19

 
—

 
409

 
—

Redeemable preferred stock
39

 
3

 
—

 
42

 
—

Total fixed maturity securities available-for-sale
36,839

 
3,801

 
71

 
40,569

 
$
(54
)
Total fixed maturity securities trading
36

 


 


 
36

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
41

 
9

 
—

 
50

 
 
Preferred stock
172

 
7

 
4

 
175

 
 
Total equity securities available-for-sale
213

 
16

 
4

 
225

 
 
Total
$
37,088

 
$
3,817

 
$
75

 
$
40,830

 
 

December 31, 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
$
17,210

 
$
1,721

 
$
61

 
$
18,870

 
$
—

States, municipalities and political subdivisions
11,285

 
1,463

 
8

 
12,740

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,028

 
218

 
13

 
5,233

 
(53
)
Commercial mortgage-backed
2,056

 
93

 
5

 
2,144

 
(2
)
Other asset-backed
1,234

 
11

 
10

 
1,235

 
—

Total asset-backed
8,318

 
322

 
28

 
8,612

 
(55
)
U.S. Treasury and obligations of government-sponsored enterprises
26

 
5

 
—

 
31

 
—

Foreign government
438

 
16

 
—

 
454

 
—

Redeemable preferred stock
39

 
3

 
—

 
42

 
—

Total fixed maturity securities available-for-sale
37,316

 
3,530

 
97

 
40,749

 
$
(55
)
Total fixed maturity securities trading
19

 


 


 
19

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
38

 
9

 
—

 
47

 
 
Preferred stock
172

 
5

 
2

 
175

 
 
Total equity securities available-for-sale
210

 
14

 
2

 
222

 
 
Total
$
37,545

 
$
3,544

 
$
99

 
$
40,990

 
 


11
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. As of March 31, 2015 and December 31, 2014, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $1,370 million and $1,288 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
Table of Contents

The following tables present the estimated fair value and gross unrealized losses of 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.
 
Less than 12 Months
 
12 Months or Longer
 
Total
March 31, 2015
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
$
840

 
$
31

 
$
139

 
$
12

 
$
979

 
$
43

States, municipalities and political subdivisions
479

 
6

 
100

 
3

 
579

 
9

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
318

 
5

 
148

 
8

 
466

 
13

Commercial mortgage-backed
175

 
3

 
62

 
2

 
237

 
5

Other asset-backed
187

 
1

 
5

 
—

 
192

 
1

Total asset-backed
680

 
9

 
215

 
10

 
895

 
19

U.S. Treasury and obligations of government-sponsored enterprises
3

 
—

 
—

 
—

 
3

 
—

Foreign government
13

 
—

 
1

 
—

 
14

 
—

Total fixed maturity securities available-for-sale
2,015

 
46

 
455

 
25

 
2,470

 
71

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
15

 
4

 
—

 
—

 
15

 
4

Total
$
2,030

 
$
50

 
$
455

 
$
25

 
$
2,485

 
$
75


 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2014
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
(In millions)
 
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
1,330

 
$
46

 
$
277

 
$
15

 
$
1,607

 
$
61

States, municipalities and political subdivisions
335

 
5

 
127

 
3

 
462

 
8

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
293

 
5

 
189

 
8

 
482

 
13

Commercial mortgage-backed
264

 
2

 
99

 
3

 
363

 
5

Other asset-backed
607

 
10

 
7

 
—

 
614

 
10

Total asset-backed
1,164

 
17

 
295

 
11

 
1,459

 
28

U.S. Treasury and obligations of government-sponsored enterprises
3

 
—

 
4

 
—

 
7

 
—

   Foreign government
3

 
—

 
3

 
—

 
6

 
—

Redeemable preferred stock
3

 
—

 
—

 
—

 
3

 
—

Total fixed maturity securities available-for-sale
2,838

 
68

 
706

 
29

 
3,544

 
97

Equity securities available-for-sale:


 


 


 


 


 


   Preferred stock
17

 
2

 
1

 
—

 
18

 
2

Total
$
2,855

 
$
70

 
$
707

 
$
29

 
$
3,562

 
$
99




13
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the March 31, 2015 table above, are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads, market illiquidity and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of March 31, 2015.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of March 31, 2015 and 2014 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Three months ended March 31
 
 
 
(In millions)
2015
 
2014
Beginning balance of credit losses on fixed maturity securities
$
62

 
$
74

Reductions for securities sold during the period
(1
)
 
(2
)
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
$
61

 
$
69

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
March 31, 2015
 
December 31, 2014
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
2,011

 
$
2,043

 
$
2,479

 
$
2,511

Due after one year through five years
8,760

 
9,340

 
9,054

 
9,605

Due after five years through ten years
12,401

 
13,108

 
12,055

 
12,584

Due after ten years
13,667

 
16,078

 
13,728

 
16,049

Total
$
36,839

 
$
40,569

 
$
37,316

 
$
40,749

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.

14
Table of Contents

Derivative Financial Instruments
The following tables present the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments.
March 31, 2015
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
Liability
Without hedge designation
 
 
 
 
 
Currency forwards
$
18

 
$
2

 
$
—

Equity warrants
5

 
—

 
—

Embedded derivative on funds withheld liability
184

 
—

 
5

Total
 
 
$
2

 
$
5


December 31, 2014
Contractual/
Notional
Amount
 
Estimated Fair Value
(In millions)
 
Asset
 
Liability
Without hedge designation
 
 
 
 
 
Currency forwards
$
9

 
$
—

 
$
—

Equity warrants
5

 
—

 
—

Embedded derivative on funds withheld liability
184

 
—

 
3

Total
 
 
$
—

 
$
3

Derivative financial instruments are presented gross 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 as of March 31, 2015 and December 31, 2014.
Investment Commitments
As of March 31, 2015, the Company had committed approximately $338 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of March 31, 2015, the Company had mortgage loan commitments of $41 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 March 31, 2015, the Company had commitments to purchase or fund additional amounts of $82 million and sell $71 million under the terms of such securities.

15
Table of Contents

Note D. 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.

16
Table of Contents

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are presented in the following tables.
March 31, 2015
 
 
 
 
 
 
Total
Assets/ Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
29

 
$
18,337

 
$
186

 
$
18,552

States, municipalities and political subdivisions
—

 
12,877

 
86

 
12,963

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,994

 
232

 
5,226

Commercial mortgage-backed
—

 
2,196

 
64

 
2,260

Other asset-backed
—

 
570

 
553

 
1,123

Total asset-backed
—

 
7,760

 
849

 
8,609

U.S. Treasury and obligations of government-sponsored enterprises
29

 
1

 
—

 
30

Foreign government
37

 
372

 
—

 
409

Redeemable preferred stock
30

 
12

 
—

 
42

Total fixed maturity securities
125

 
39,359

 
1,121

 
40,605

Equity securities
149

 
63

 
13

 
225

Derivative financial instruments
—

 
2

 
—

 
2

Other invested assets, excluding derivative financial instruments
—

 
41

 
—

 
41

Short term investments
742

 
678

 
—

 
1,420

Life settlement contracts, included in Other assets
—

 
—

 
79

 
79

Total assets
$
1,016

 
$
40,143

 
$
1,213

 
$
42,372

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
5

 
$
—

 
$
5

Total liabilities
$
—

 
$
5

 
$
—

 
$
5


17
Table of Contents

December 31, 2014
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
32

 
$
18,695

 
$
162

 
$
18,889

States, municipalities and political subdivisions
—

 
12,646

 
94

 
12,740

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
5,044

 
189

 
5,233

Commercial mortgage-backed
—

 
2,061

 
83

 
2,144

Other asset-backed
—

 
580

 
655

 
1,235

Total asset-backed
—

 
7,685

 
927

 
8,612

U.S. Treasury and obligations of government-sponsored enterprises
28

 
3

 
—

 
31

Foreign government
41

 
413

 
—

 
454

Redeemable preferred stock
30

 
12

 
—

 
42

Total fixed maturity securities
131

 
39,454

 
1,183

 
40,768

Equity securities
145

 
61

 
16

 
222

Other invested assets
—

 
41

 
—

 
41

Short term investments
681

 
963

 
—

 
1,644

Life settlement contracts, included in Other assets
—

 
—

 
82

 
82

Total assets
$
957

 
$
40,519

 
$
1,281

 
$
42,757

Liabilities
 
 
 
 
 
 
 
Other liabilities
$
—

 
$
3

 
$
—

 
$
3

Total liabilities
$
—

 
$
3

 
$
—

 
$
3


18
Table of Contents

The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Level 3
(In millions)
Balance as of
January 1,
2015
 
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 as of
March 31,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2015 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
162

 
$
1

 
$
—

 
$
12

 
$
(12
)
 
$
(14
)
 
$
37

 
$
—

 
$
186

 
$
—

States, municipalities and political subdivisions
94

 
1

 
—

 
—

 
—

 
(9
)
 
—

 
—

 
86

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
189

 
1

 
—

 
72

 
—

 
(10
)
 
—

 
(20
)
 
232

 
—

Commercial mortgage-backed
83

 
1

 
1

 
6

 
—

 
(1
)
 
—

 
(26
)
 
64

 
—

Other asset-backed
655

 
1

 
9

 
35

 
(144
)
 
(3
)
 
—

 
—

 
553

 
—

Total asset-backed
927

 
3

 
10

 
113

 
(144
)
 
(14
)
 
—

 
(46
)
 
849

 
—

Total fixed maturity securities
1,183

 
5

 
10

 
125

 
(156
)
 
(37
)
 
37

 
(46
)
 
1,121

 
—

Equity securities
16

 
—

 
(3
)
 
—

 
—

 
—

 
—

 
—

 
13

 
—

Life settlement contracts
82

 
13

 
—

 
—

 
—

 
(16
)
 
—

 
—

 
79

 
1

Total
$
1,281

 
$
18

 
$
7

 
$
125

 
$
(156
)
 
$
(53
)
 
$
37

 
$
(46
)
 
$
1,213

 
$
1


19
Table of Contents

Level 3
(In millions)
Balance as of
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 as of
March 31, 2014
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of March 31, 2014 recognized in Net income (loss)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
204

 
$
1

 
$
1

 
$
5

 
$
(4
)
 
$
(5
)
 
$
3

 
$
(16
)
 
$
189

 
$
—

States, municipalities and political subdivisions
71

 
—

 
1

 
—

 
—

 
—

 
14

 
—

 
86

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
331

 
1

 
15

 
25

 
—

 
(21
)
 
21

 
(13
)
 
359

 
—

Commercial mortgage-backed
151

 
1

 
(1
)
 
—

 
—

 
(1
)
 
—

 
(24
)
 
126

 
—

Other asset-backed
446

 
1

 
—

 
148

 
(83
)
 
(72
)
 
—

 
(1
)
 
439

 
—

Total asset-backed
928

 
3

 
14

 
173

 
(83
)
 
(94
)
 
21

 
(38
)
 
924

 
—

Total fixed maturity securities
1,203

 
4

 
16

 
178

 
(87
)
 
(99
)
 
38

 
(54
)
 
1,199

 
—

Equity securities
11

 
3

 
(4
)
 
—

 
(8
)
 
—

 
—

 
—

 
2

 
—

Life settlement contracts
88

 
10

 
—

 
—

 
—

 
(11
)
 
—

 
—

 
87

 
1

Separate account business
1

 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

Total
$
1,303

 
$
17

 
$
12

 
$
178

 
$
(95
)
 
$
(110
)
 
$
38

 
$
(55
)
 
$
1,288

 
$
1


20
Table of Contents

Net realized and unrealized gains and losses, including those shown above, are reported in Net income (loss) as follows:
Major Category of Assets and Liabilities
 
Condensed Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale
 
Net realized investment gains (losses)
Fixed maturity securities trading
 
Net investment income
Equity securities
 
Net realized investment gains (losses)
Other invested assets - Derivative financial instruments held in a trading portfolio
 
Net investment income
Other invested assets - Derivative financial instruments not held in a trading portfolio
 
Net realized investment gains (losses)
Other invested assets - Overseas deposits
 
Net investment income
Life settlement contracts
 
Other revenues
Other liabilities - Derivative financial instruments
 
Net realized investment gains (losses)
Securities shown on the previous pages may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three months ended March 31, 2015 there were no transfers between Level 1 and Level 2. During the three months ended March 31, 2014 there were $23 million of transfers from Level 2 to Level 1 and $1 million from Level 1 to Level 2. 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
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. All classes of Level 2 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 for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace 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. Fixed maturity 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.

21
Table of Contents

Derivative Financial Investments
Level 1 securities include exchange traded derivatives, primarily futures, valued using quoted market prices. Level 2 securities primarily include the embedded derivative on funds withheld liability and currency forwards. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld payable, which are fixed maturity securities valued with observable inputs. Currency forwards are valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 3 of the valuation hierarchy due to a lack of transparency as to whether these quotes are based on information that is observable in the marketplace.
Overseas Deposits
Overseas deposits, which can be redeemed at net asset value in 90 days or less, are classified as Level 2.
Short Term Investments
Securities that are actively traded or 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.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company.
March 31, 2015
 
 
 
 
 
 
 

(In millions)
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
102

 
Discounted cash flow
 
Credit spread
 
2% - 13% (3%)
Equity securities
13

 
Market approach
 
Private offering price
 
$10 - $4,400 per share ($682)
Life settlement contracts
79

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
55% - 1676% (164%)
December 31, 2014
 
 
 
 
 
 
 

(In millions)
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
 (Weighted Average)
Fixed maturity securities
$
101

 
Discounted cash flow
 
Credit spread
 
2% - 13% (3%)
Equity securities
16

 
Market approach
 
Private offering price
 
$12 - $4,391 per share ($600)
Life settlement contracts
82

 
Discounted cash flow
 
Discount rate risk premium
 
9%
 
 
 
 
 
Mortality assumption
 
55% - 1676% (163%)


22
Table of Contents

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price 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 assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.
March 31, 2015
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Notes receivable for the issuance of common stock
$
1

 
$
—

 
$
—

 
$
1

 
$
1

Mortgage loans
586

 
—

 
—

 
612

 
612

Liabilities
 
 
 
 
 
 
 
 
 
Long term debt
$
2,560

 
$
—

 
$
2,908

 
$
—

 
$
2,908


December 31, 2014
Carrying
Amount
 
Estimated Fair Value
(In millions)
 
Level 1
 
Level 2
 
Level 3