Document




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, 2016
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 July 28, 2016
Common Stock, Par value $2.50
 
270,483,164






Item Number
 
Page
Number
 
PART I. Financial Information
 
1.
 
 
 
 
 
 
 
2.
3.
4.
 
PART II. Other Information
 
1.
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)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,730

 
$
1,735

 
$
3,429

 
$
3,422

Net investment income
502

 
500

 
937

 
1,058

Net realized investment gains (losses)
 
 
 
 
 
 
 

Other-than-temporary impairment losses
(15
)
 
(31
)
 
(38
)
 
(43
)
Other net realized investment gains
31

 
31

 
18

 
53

Net realized investment gains (losses)
16

 
—

 
(20
)
 
10

Other revenues
100

 
92

 
197

 
189

Total revenues
2,348

 
2,327

 
4,543

 
4,679

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

 
1,469

 
2,747

 
2,808

Amortization of deferred acquisition costs
305

 
314

 
612

 
617

Other operating expenses
378

 
341

 
759

 
699

Interest
38

 
39

 
80

 
78

Total claims, benefits and expenses
2,060

 
2,163

 
4,198

 
4,202

Income before income tax
288

 
164

 
345

 
477

Income tax expense
(79
)
 
(26
)
 
(70
)
 
(106
)
Net income
$
209

 
$
138

 
$
275

 
$
371

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.77

 
$
0.51

 
$
1.02

 
$
1.37

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.77

 
$
0.51

 
$
1.02

 
$
1.37

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.25

 
$
0.25

 
$
2.50

 
$
2.50

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
270.5

 
270.3

 
270.4

 
270.2

Diluted
270.9

 
270.7

 
270.9

 
270.7


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)
2016
 
2015
 
2016
 
2015
Comprehensive Income (Loss)
 
 
 
 
 
 
 
Net income
$
209

 
$
138

 
$
275

 
$
371

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
(1
)
 
(4
)
 
4

 
(5
)
Net unrealized gains on other investments
310

 
(365
)
 
544

 
(253
)
Net unrealized gains on investments
309

 
(369
)
 
548

 
(258
)
Foreign currency translation adjustment
(48
)
 
49

 
(34
)
 
(47
)
Pension and postretirement benefits
5

 
42

 
11

 
48

Other comprehensive income (loss), net of tax
266

 
(278
)
 
525

 
(257
)
Total comprehensive income (loss)
$
475

 
$
(140
)
 
$
800

 
$
114

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)
June 30,
2016 (Unaudited)
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $37,838 and $37,253)
$
41,857

 
$
39,572

Equity securities at fair value (cost of $117 and $191)
123

 
197

Limited partnership investments
2,542

 
2,548

Other invested assets
33

 
44

Mortgage loans
610

 
678

Short term investments
1,384

 
1,660

Total investments
46,549

 
44,699

Cash
289

 
387

Reinsurance receivables (less allowance for uncollectible receivables of $37 and $38)
4,683

 
4,453

Insurance receivables (less allowance for uncollectible receivables of $45 and $51)
2,368

 
2,078

Accrued investment income
400

 
404

Deferred acquisition costs
620

 
598

Deferred income taxes
293

 
638

Property and equipment at cost (less accumulated depreciation of $224 and $382)
276

 
343

Goodwill
147

 
150

Other assets (includes $2 and $- due from Loews Corporation)
1,281

 
1,295

Total assets
$
56,906

 
$
55,045

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,975

 
$
22,663

Unearned premiums
3,865

 
3,671

Future policy benefits
11,140

 
10,152

Short term debt
—

 
350

Long term debt
2,708

 
2,210

Other liabilities (includes $12 and $82 due to Loews Corporation)
4,332

 
4,243

Total liabilities
45,020

 
43,289

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; 270,483,164 and 270,274,361 shares outstanding)
683

 
683

Additional paid-in capital
2,155

 
2,153

Retained earnings
8,911

 
9,313

Accumulated other comprehensive income (loss)
210

 
(315
)
Treasury stock (2,557,079 and 2,765,882 shares), at cost
(73
)
 
(78
)
Total stockholders’ equity
11,886

 
11,756

Total liabilities and stockholders' equity
$
56,906

 
$
55,045

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)
2016
 
2015
Cash Flows from Operating Activities
 

 
 
Net income
$
275

 
$
371

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax expense
63

 
32

Trading portfolio activity
(7
)
 
1

Net realized investment losses (gains)
20

 
(10
)
Equity method investees
230

 
(48
)
Net amortization of investments
(10
)
 
(13
)
Depreciation and amortization
39

 
39

Changes in:
 
 
 
Receivables, net
(540
)
 
(211
)
Accrued investment income
4

 
8

Deferred acquisition costs
(25
)
 
(8
)
Insurance reserves
666

 
451

Other assets
(106
)
 
(60
)
Other liabilities
(27
)
 
(94
)
Other, net
31

 
82

Total adjustments
338

 
169

Net cash flows provided by operating activities
613

 
540

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
3,066

 
2,859

Fixed maturity securities - maturities, calls and redemptions
1,247

 
2,304

Equity securities
72

 
33

Limited partnerships
124

 
85

Mortgage loans
109

 
19

Purchases:
 
 
 
Fixed maturity securities
(4,874
)
 
(5,029
)
Equity securities
—

 
(30
)
Limited partnerships
(206
)
 
(78
)
Mortgage loans
(41
)
 
(60
)
Change in other investments
11

 
8

Change in short term investments
281

 
33

Purchases of property and equipment
(65
)
 
(57
)
Disposals of property and equipment
107

 
—

Other, net
2

 
—

Net cash flows (used) provided by investing activities
$
(167
)
 
$
87

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)
2016
 
2015
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(677
)
 
$
(676
)
Proceeds from the issuance of debt
498

 
—

Repayment of debt
(358
)
 
—

Other, net
(1
)
 
6

Net cash flows used by financing activities
(538
)

(670
)
Effect of foreign exchange rate changes on cash
(6
)
 
(2
)
Net change in cash
(98
)
 
(45
)
Cash, beginning of year
387

 
190

Cash, end of period
$
289

 
$
145

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)
2016
 
2015
Common Stock
 
 
 
Balance, beginning of year
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of year
2,153

 
2,151

Stock-based compensation
2

 
(5
)
Balance, end of period
2,155

 
2,146

Retained Earnings
 
 
 
Balance, beginning of year
9,313

 
9,645

Dividends paid to common stockholders
(677
)
 
(676
)
Net income
275

 
371

Balance, end of period
8,911

 
9,340

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of year
(315
)
 
400

Other comprehensive income (loss)
525

 
(257
)
Balance, end of period
210

 
143

Treasury Stock
 
 
 
Balance, beginning of year
(78
)
 
(84
)
Stock-based compensation
5

 
6

Balance, end of period
(73
)
 
(78
)
Notes Receivable for the Issuance of Common Stock
 
 
 
Balance, beginning of year
—

 
(1
)
Decrease in notes receivable for common stock
—

 
1

Balance, end of period
—

 
—

Total stockholders' equity
$
11,886

 
$
12,234

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 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, 2016.
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, 2015, 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 period. Actual results may differ from those estimates.
The interim financial data as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 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.
Recently Adopted Accounting Standards Updates (ASU)
In April 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated accounting guidance requires debt issuance costs to be presented as a deduction from the corresponding debt liability instead of the historical presentation as an unamortized debt issuance asset. As of January 1, 2016, the Company adopted the updated accounting guidance retrospectively. The Company adjusted its previously reported financial information included herein to reflect the change in accounting guidance for debt issuance costs. The impacts of adopting the new accounting standard on the Company’s Consolidated Balance Sheet as of December 31, 2015, were a decrease in Other assets and a decrease in Long term debt of $2 million.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The updated accounting guidance removes the requirement to categorize assets measured at fair value utilizing the net asset value per share (or equivalent) practical expedient within the fair value hierarchy. As of January 1, 2016, the Company adopted the updated accounting guidance retrospectively. The Company adjusted its previously reported financial information included herein to reflect the change in accounting guidance for assets measured using the net asset value. The impact of adopting the new accounting standard resulted in excluding overseas deposits of $28 million and $27 million from the fair value level disclosure as of June 30, 2016 and December 31, 2015.

9
Table of Contents

Accounting Standards Pending Adoption
In May 2015, the FASB issued ASU No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about
Short-Duration Contracts. The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods within the annual periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statement disclosures but expects to provide additional incurred and paid claims development information by accident year, quantitative information about claim frequency and the history of claims duration for significant lines of business within the Company’s annual financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, and expects the primary change for the Company to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated accounting guidance simplifies the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on the Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, but expects the primary changes to be the use of the expected credit loss model for its mortgage loan portfolio and reinsurance receivables and the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses when the estimate of credit losses declines.


10
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 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 and six months ended June 30, 2016, approximately 409 thousand and 473 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 178 thousand and 180 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, 2015, approximately 423 thousand and 543 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 238 thousand and 208 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.


11
Table of Contents

Note C. Investments
The significant components of Net investment income are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities
$
449

 
$
452

 
$
895

 
$
895

Equity securities
4

 
3

 
7

 
6

Limited partnership investments
46

 
48

 
32

 
162

Mortgage loans
13

 
9

 
22

 
17

Short term investments
1

 
—

 
4

 
2

Trading portfolio
4

 
3

 
6

 
5

Gross investment income
517

 
515

 
966

 
1,087

Investment expense
(15
)
 
(15
)
 
(29
)
 
(29
)
Net investment income
$
502

 
$
500

 
$
937

 
$
1,058

Net realized investment gains (losses) are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
40

 
$
36

 
$
85

 
$
69

Gross realized losses
(24
)
 
(48
)
 
(86
)
 
(69
)
Net realized investment gains (losses) on fixed maturity securities
16

 
(12
)
 
(1
)
 
—

Equity securities:
 
 
 

 
 
 
 
Gross realized gains
4

 
—

 
4

 
1

Gross realized losses
(1
)
 
(1
)
 
(6
)
 
(2
)
Net realized investment gains (losses) on equity securities
3

 
(1
)
 
(2
)
 
(1
)
Derivative financial instruments
(6
)
 
11

 
(13
)
 
10

Short term investments and other
3

 
2

 
(4
)
 
1

Net realized investment gains (losses)
$
16

 
$
—

 
$
(20
)
 
$
10

Net realized investment losses for the six months ended June 30, 2016 include $8 million related to the redemption of the Company's $350 million senior notes due August 2016.
The components of Net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are presented in the following table.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities available-for-sale:

 
 
 
 
 
 
Corporate and other bonds
$
13

 
$
11

 
$
29

 
$
16

States, municipalities and political subdivisions
—

 
13

 
—

 
18

Asset-backed:
 
 
 

 
 
 
 
Residential mortgage-backed
1

 
5

 
1

 
6

Other asset-backed
1

 
1

 
3

 
1

Total asset-backed
2

 
6

 
4

 
7

Total fixed maturity securities available-for-sale
15

 
30

 
33

 
41

Equity securities available-for-sale -- Common stock
—

 
—

 
5

 
1

Short term investments
—

 
1

 
—

 
1

OTTI losses recognized in earnings
$
15

 
$
31

 
$
38

 
$
43


12
Table of Contents

The following tables present a summary of fixed maturity and equity securities.
June 30, 2016
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
$
17,613

 
$
1,684

 
$
93

 
$
19,204

 
$
(1
)
States, municipalities and political subdivisions
11,661

 
2,114

 
2

 
13,773

 
(25
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,994

 
215

 
20

 
5,189

 
(21
)
Commercial mortgage-backed
2,080

 
91

 
8

 
2,163

 
—

Other asset-backed
928

 
8

 
5

 
931

 
—

Total asset-backed
8,002

 
314

 
33

 
8,283

 
(21
)
U.S. Treasury and obligations of government-sponsored enterprises
81

 
11

 
—

 
92

 
—

Foreign government
438

 
22

 
—

 
460

 
—

Redeemable preferred stock
33

 
2

 
—

 
35

 
—

Total fixed maturity securities available-for-sale
37,828

 
4,147

 
128

 
41,847

 
$
(47
)
Total fixed maturity securities trading
10

 


 


 
10

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
20

 
5

 
2

 
23

 
 
Preferred stock
97

 
6

 
3

 
100

 
 
Total equity securities available-for-sale
117

 
11

 
5

 
123

 
 
Total
$
37,955

 
$
4,158

 
$
133

 
$
41,980

 



December 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
$
17,080

 
$
1,019

 
$
342

 
$
17,757

 
$
—

States, municipalities and political subdivisions
11,729

 
1,453

 
8

 
13,174

 
(4
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,935

 
154

 
17

 
5,072

 
(37
)
Commercial mortgage-backed
2,154

 
55

 
12

 
2,197

 
—

Other asset-backed
923

 
6

 
8

 
921

 
—

Total asset-backed
8,012

 
215

 
37

 
8,190

 
(37
)
U.S. Treasury and obligations of government-sponsored enterprises
62

 
5

 
—

 
67

 
—

Foreign government
334

 
13

 
1

 
346

 
—

Redeemable preferred stock
33

 
2

 
—

 
35

 
—

Total fixed maturity securities available-for-sale
37,250

 
2,707

 
388

 
39,569

 
$
(41
)
Total fixed maturity securities trading
3

 


 


 
3

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
46

 
3

 
1

 
48

 
 
Preferred stock
145

 
7

 
3

 
149

 
 
Total equity securities available-for-sale
191

 
10

 
4

 
197

 
 
Total
$
37,444

 
$
2,717

 
$
392

 
$
39,769

 
 

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. 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 increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of June 30, 2016 and December 31, 2015, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,682 million and $1,111 million.

14
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
June 30, 2016
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
$
1,032

 
$
43

 
$
562

 
$
50

 
$
1,594

 
$
93

States, municipalities and political subdivisions
68

 
2

 
10

 
—

 
78

 
2

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
293

 
8

 
234

 
12

 
527

 
20

Commercial mortgage-backed
386

 
7

 
118

 
1

 
504

 
8

Other asset-backed
306

 
5

 
5

 
—

 
311

 
5

Total asset-backed
985

 
20

 
357

 
13

 
1,342

 
33

Foreign government
8

 
—

 
5

 
—

 
13

 
—

Total fixed maturity securities available-for-sale
2,093

 
65

 
934

 
63

 
3,027

 
128

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Common stock
4

 
2

 
—

 
—

 
4

 
2

Preferred stock
23

 
3

 
—

 
—

 
23

 
3

Total equity securities available-for-sale
27

 
5

 
—

 
—

 
27

 
5

Total
$
2,120

 
$
70

 
$
934

 
$
63

 
$
3,054

 
$
133


 
Less than 12 Months
 
12 Months or Longer
 
Total
December 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
$
4,882

 
$
302

 
$
162

 
$
40

 
$
5,044

 
$
342

States, municipalities and political subdivisions
338

 
8

 
75

 
—

 
413

 
8

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
963

 
9

 
164

 
8

 
1,127

 
17

Commercial mortgage-backed
652

 
10

 
96

 
2

 
748

 
12

Other asset-backed
552

 
8

 
5

 
—

 
557

 
8

Total asset-backed
2,167

 
27

 
265

 
10

 
2,432

 
37

U.S. Treasury and obligations of government-sponsored enterprises
4

 
—

 
—

 
—

 
4

 
—

   Foreign government
54

 
1

 
—

 
—

 
54

 
1

Redeemable preferred stock
3

 
—

 
—

 
—

 
3

 
—

Total fixed maturity securities available-for-sale
7,448

 
338

 
502

 
50

 
7,950

 
388

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Common stock
3

 
1

 
—

 
—

 
3

 
1

   Preferred stock
13

 
3

 
—

 
—

 
13

 
3

Total equity securities available-for-sale
16

 
4

 
—

 
—

 
16

 
4

Total
$
7,464

 
$
342

 
$
502

 
$
50

 
$
7,966

 
$
392



15
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2016 table above, are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads 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 June 30, 2016.
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 June 30, 2016 and 2015 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)
2016
 
2015
 
2016
 
2015
Beginning balance of credit losses on fixed maturity securities
$
48

 
$
61

 
$
53

 
$
62

Reductions for securities sold during the period
(7
)
 
(2
)
 
(12
)
 
(3
)
Ending balance of credit losses on fixed maturity securities
$
41

 
$
59

 
$
41

 
$
59

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
June 30, 2016
 
December 31, 2015
(In millions)
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,817

 
$
1,855

 
$
1,574

 
$
1,595

Due after one year through five years
8,616

 
9,114

 
7,721

 
8,070

Due after five years through ten years
14,583

 
15,466

 
14,652

 
14,915

Due after ten years
12,812

 
15,412

 
13,303

 
14,989

Total
$
37,828

 
$
41,847

 
$
37,250

 
$
39,569

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
Derivative Financial Instruments
The Company holds an embedded derivative on funds withheld liability with a notional value of $177 million and $179 million as of June 30, 2016 and December 31, 2015 and a fair value of $8 million and $(5) million as of June 30, 2016 and December 31, 2015. The embedded derivative on funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.
Investment Commitments
As of June 30, 2016, the Company had committed approximately $365 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, 2016, the Company had mortgage loan commitments of $59 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. Purchases and sales of privately placed debt securities are recorded once funded. As of June 30, 2016, the Company had commitments to purchase or fund additional amounts of $198 million and sell $95 million under the terms of such securities.

16
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 methodology 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 a methodology 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 period-over-period changes in price 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.

17
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.
June 30, 2016
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
18,972

 
$
242

 
$
19,214

States, municipalities and political subdivisions
—

 
13,771

 
2

 
13,773

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
5,055

 
134

 
5,189

Commercial mortgage-backed
—

 
2,152

 
11

 
2,163

Other asset-backed
—

 
886

 
45

 
931

Total asset-backed
—

 
8,093

 
190

 
8,283

U.S. Treasury and obligations of government-sponsored enterprises
91

 
1

 
—

 
92

Foreign government
—

 
460

 
—

 
460

Redeemable preferred stock
35

 
—

 
—

 
35

Total fixed maturity securities
126

 
41,297

 
434

 
41,857

Equity securities
104

 
—

 
19

 
123

Other invested assets
—

 
5

 
—

 
5

Short term investments
339

 
950

 
—

 
1,289

Life settlement contracts, included in Other assets
—

 
—

 
67

 
67

Total assets
$
569

 
$
42,252

 
$
520

 
$
43,341

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
8

 
$
—

 
$
8

Total liabilities
$
—

 
$
8

 
$
—

 
$
8

December 31, 2015
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
17,592

 
$
168

 
$
17,760

States, municipalities and political subdivisions
—

 
13,172

 
2

 
13,174

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
4,938

 
134

 
5,072

Commercial mortgage-backed
—

 
2,175

 
22

 
2,197

Other asset-backed
—

 
868

 
53

 
921

Total asset-backed
—

 
7,981

 
209

 
8,190

U.S. Treasury and obligations of government-sponsored enterprises
66

 
1

 
—

 
67

Foreign government
—

 
346

 
—

 
346

Redeemable preferred stock
35

 
—

 
—

 
35

Total fixed maturity securities
101

 
39,092

 
379

 
39,572

Equity securities
177

 
—

 
20

 
197

Other invested assets
—

 
17

 
—

 
17

Short term investments
448

 
1,134

 
—

 
1,582

Life settlement contracts, included in Other assets
—

 
—

 
74

 
74

Total assets
$
726

 
$
40,243

 
$
473

 
$
41,442

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
(5
)
 
$
—

 
$
(5
)
Total liabilities
$
—

 
$
(5
)
 
$
—

 
$
(5
)

18
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).
Level 3
(In millions)
Balance as of
April 1,
2016
 
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
June 30,
2016
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
193

 
$
1

 
$
3

 
$
94

 
$
(20
)
 
$
(7
)
 
$
—

 
$
(22
)
 
$
242

 
$
—

States, municipalities and political subdivisions
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
128

 
1

 
(1
)
 
10

 
—

 
(4
)
 
—

 
—

 
134

 
—

Commercial mortgage-backed
27

 
—

 
—

 
—

 
—

 
(9
)
 
3

 
(10
)
 
11

 
—

Other asset-backed
50

 
—

 
2

 
35

 
(25
)
 
(1
)
 
—

 
(16
)
 
45

 
—

Total asset-backed
205

 
1

 
1

 
45

 
(25
)
 
(14
)
 
3

 
(26
)
 
190

 
—

Total fixed maturity securities
400

 
2

 
4

 
139

 
(45
)
 
(21
)
 
3

 
(48
)
 
434

 
—

Equity securities
19

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19

 
—

Life settlement contracts
72

 
6

 
—

 
—

 
—

 
(11
)
 
—

 
—

 
67

 
(3
)
Total
$
491

 
$
8

 
$
4

 
$
139

 
$
(45
)
 
$
(32
)
 
$
3

 
$
(48
)
 
$
520

 
$
(3
)


19
Table of Contents

Level 3
(In millions)
Balance as of
April 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
June 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2015 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
186

 
$
(2
)
 
$
(1
)
 
$
—

 
$
—

 
$
(7
)
 
$
—

 
$
(35
)
 
$
141

 
$
(3
)
States, municipalities and political subdivisions
86

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
85

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
232

 
1

 
(2
)
 
—

 
—

 
(11
)
 
—

 
(13
)
 
207

 
—

Commercial mortgage-backed
64

 
1

 
(1
)
 
9

 
—

 
(1
)
 
17

 
(2
)
 
87

 
—

Other asset-backed
553

 
2

 
1

 
47

 
(90
)
 
(17
)
 
—

 
(6
)
 
490

 
—

Total asset-backed
849

 
4

 
(2
)
 
56

 
(90
)
 
(29
)
 
17

 
(21
)
 
784

 
—

Total fixed maturity securities
1,121

 
2

 
(3
)
 
56

 
(90
)
 
(37
)
 
17

 
(56
)
 
1,010

 
(3
)
Equity securities
13

 
—

 
3

 
—

 
—

 
—

 
—

 
—

 
16

 
—

Life settlement contracts
79

 
4

 
—