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 September 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 October 27, 2016
Common Stock, Par value $2.50
 
270,489,350






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 September 30
Three Months
 
Nine Months
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,767

 
$
1,751

 
$
5,196

 
$
5,173

Net investment income
524

 
354

 
1,461

 
1,412

Net realized investment gains (losses)
 
 
 
 
 
 
 

Other-than-temporary impairment losses
(18
)
 
(56
)
 
(56
)
 
(99
)
Other net realized investment gains
64

 
7

 
82

 
60

Net realized investment gains (losses)
46

 
(49
)
 
26

 
(39
)
Other revenues
96

 
97

 
293

 
286

Total revenues
2,433

 
2,153

 
6,976

 
6,832

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,202

 
1,200

 
3,949

 
4,008

Amortization of deferred acquisition costs
314

 
319

 
926

 
936

Other operating expenses
403

 
362

 
1,162

 
1,061

Interest
39

 
39

 
119

 
117

Total claims, benefits and expenses
1,958

 
1,920

 
6,156

 
6,122

Income before income tax
475

 
233

 
820

 
710

Income tax expense
(132
)
 
(55
)
 
(202
)
 
(161
)
Net income
$
343

 
$
178

 
$
618

 
$
549

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.27

 
$
0.66

 
$
2.28

 
$
2.03

 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.26

 
$
0.66

 
$
2.28

 
$
2.03

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.25

 
$
0.25

 
$
2.75

 
$
2.75

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
270.5

 
270.3

 
270.4

 
270.2

Diluted
271.2

 
270.8

 
271.0

 
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 (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2016
 
2015
 
2016
 
2015
Comprehensive Income
 
 
 
 
 
 
 
Net income
$
343

 
$
178

 
$
618

 
$
549

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
Net unrealized gains on investments with other-than-temporary impairments
3

 
2

 
7

 
(3
)
Net unrealized gains on other investments
42

 
(36
)
 
586

 
(289
)
Net unrealized gains on investments
45

 
(34
)
 
593

 
(292
)
Foreign currency translation adjustment
(24
)
 
(53
)
 
(58
)
 
(100
)
Pension and postretirement benefits
6

 
4

 
17

 
52

Other comprehensive income (loss), net of tax
27

 
(83
)
 
552

 
(340
)
Total comprehensive income
$
370

 
$
95

 
$
1,170

 
$
209

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)
September 30,
2016 (Unaudited)
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $38,240 and $37,253)
$
42,321

 
$
39,572

Equity securities at fair value (cost of $108 and $191)
116

 
197

Limited partnership investments
2,456

 
2,548

Other invested assets
35

 
44

Mortgage loans
629

 
678

Short term investments
1,423

 
1,660

Total investments
46,980

 
44,699

Cash
290

 
387

Reinsurance receivables (less allowance for uncollectible receivables of $37 and $38)
4,577

 
4,453

Insurance receivables (less allowance for uncollectible receivables of $46 and $51)
2,235

 
2,078

Accrued investment income
434

 
404

Deferred acquisition costs
619

 
598

Deferred income taxes
221

 
638

Property and equipment at cost (less accumulated depreciation of $236 and $382)
287

 
343

Goodwill
146

 
150

Other assets
1,070

 
1,295

Total assets
$
56,859

 
$
55,045

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,672

 
$
22,663

Unearned premiums
3,862

 
3,671

Future policy benefits
11,219

 
10,152

Short term debt
—

 
350

Long term debt
2,709

 
2,210

Other liabilities (includes $87 and $82 due to Loews Corporation)
4,202

 
4,243

Total liabilities
44,664

 
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; 270,489,350 and 270,274,361 shares outstanding)
683

 
683

Additional paid-in capital
2,163

 
2,153

Retained earnings
9,185

 
9,313

Accumulated other comprehensive income (loss)
237

 
(315
)
Treasury stock (2,550,893 and 2,765,882 shares), at cost
(73
)
 
(78
)
Total stockholders’ equity
12,195

 
11,756

Total liabilities and stockholders' equity
$
56,859

 
$
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)
Nine months ended September 30
 
 
 
(In millions)
2016
 
2015
Cash Flows from Operating Activities
 

 
 
Net income
$
618

 
$
549

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax expense
112

 
27

Trading portfolio activity
—

 
17

Net realized investment (gains) losses
(26
)
 
39

Equity method investees
265

 
127

Net amortization of investments
(17
)
 
(17
)
Depreciation and amortization
57

 
62

Changes in:
 
 
 
Receivables, net
(311
)
 
70

Accrued investment income
(30
)
 
(34
)
Deferred acquisition costs
(24
)
 
11

Insurance reserves
464

 
195

Other assets
(96
)
 
(61
)
Other liabilities
61

 
(32
)
Other, net
47

 
92

Total adjustments
502

 
496

Net cash flows provided by operating activities
1,120

 
1,045

Cash Flows from Investing Activities
 

 
 

Dispositions:
 
 
 
Fixed maturity securities - sales
4,234

 
3,590

Fixed maturity securities - maturities, calls and redemptions
2,263

 
3,101

Equity securities
79

 
43

Limited partnerships
200

 
156

Mortgage loans
137

 
22

Purchases:
 
 
 
Fixed maturity securities
(7,472
)
 
(7,055
)
Equity securities
(1
)
 
(60
)
Limited partnerships
(222
)
 
(120
)
Mortgage loans
(88
)
 
(81
)
Change in other investments
10

 
5

Change in short term investments
241

 
222

Purchases of property and equipment
(94
)
 
(84
)
Disposals of property and equipment
107

 
—

Other, net
2

 
7

Net cash flows (used) by investing activities
$
(604
)
 
$
(254
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

6
Table of Contents

Nine months ended September 30
 
 
 
(In millions)
2016
 
2015
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(746
)
 
$
(744
)
Proceeds from the issuance of debt
498

 
—

Repayment of debt
(358
)
 
—

Other, net
1

 
5

Net cash flows (used) by financing activities
(605
)

(739
)
Effect of foreign exchange rate changes on cash
(8
)
 
(6
)
Net change in cash
(97
)
 
46

Cash, beginning of year
387

 
190

Cash, end of period
$
290

 
$
236

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)
Nine months ended September 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
10

 
(1
)
Balance, end of period
2,163

 
2,150

Retained Earnings
 
 
 
Balance, beginning of year
9,313

 
9,645

Dividends paid to common stockholders
(746
)
 
(744
)
Net income
618

 
549

Balance, end of period
9,185

 
9,450

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

Other comprehensive income (loss)
552

 
(340
)
Balance, end of period
237

 
60

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
$
12,195

 
$
12,265

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 September 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 September 30, 2016 and for the three and nine months ended September 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 $30 million and $27 million from the fair value level disclosure as of September 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. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date, however, this is not expected to be material to the Company's results of operations or financial position.
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 and interim periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on the Company’s financial statements, but anticipates the primary change to be the recognition of excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense, respectively, within net income and the related cash flows classified within operating activities.
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 if 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 nine months ended September 30, 2016, approximately 707 thousand and 549 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 175 thousand and 178 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three and nine months ended September 30, 2015, approximately 514 thousand and 545 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 106 thousand and 107 thousand potential shares attributable to exercises or conversions into common stock 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 September 30
Three Months
 
Nine Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities
$
457

 
$
449

 
$
1,352

 
$
1,344

Equity securities
1

 
3

 
8

 
9

Limited partnership investments
65

 
(93
)
 
97

 
69

Mortgage loans
8

 
8

 
30

 
25

Short term investments
2

 
2

 
6

 
4

Trading portfolio
1

 
1

 
7

 
6

Other
4

 
1

 
4

 
1

Gross investment income
538

 
371

 
1,504

 
1,458

Investment expense
(14
)
 
(17
)
 
(43
)
 
(46
)
Net investment income
$
524

 
$
354

 
$
1,461

 
$
1,412

Net realized investment gains (losses) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2016
 
2015
 
2016
 
2015
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
67

 
$
22

 
$
152

 
$
91

Gross realized losses
(20
)
 
(51
)
 
(106
)
 
(120
)
Net realized investment gains (losses) on fixed maturity securities
47

 
(29
)
 
46

 
(29
)
Equity securities:
 
 
 

 
 
 
 
Gross realized gains
1

 
1

 
5

 
2

Gross realized losses
(4
)
 
(19
)
 
(10
)
 
(21
)
Net realized investment gains (losses) on equity securities
(3
)
 
(18
)
 
(5
)
 
(19
)
Derivative financial instruments
1

 
(1
)
 
(12
)
 
9

Short term investments and other
1

 
(1
)
 
(3
)
 
—

Net realized investment gains (losses)
$
46

 
$
(49
)
 
$
26

 
$
(39
)
Net realized investment losses for the nine months ended September 30, 2016 include $8 million related to the first quarter 2016 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 September 30
Three Months
 
Nine Months
(In millions)
2016
 
2015
 
2016
 
2015
Fixed maturity securities available-for-sale:

 
 
 
 
 
 
Corporate and other bonds
$
14

 
$
36

 
$
43

 
$
52

States, municipalities and political subdivisions
—

 
—

 
—

 
18

Asset-backed:
 
 
 

 
 
 
 
Residential mortgage-backed
—

 
1

 
1

 
7

Other asset-backed
—

 
—

 
3

 
1

Total asset-backed
—

 
1

 
4

 
8

Total fixed maturity securities available-for-sale
14

 
37

 
47

 
78

Equity securities available-for-sale -- Common stock
4

 
19

 
9

 
20

Short term investments
—

 
—

 
—

 
1

OTTI losses recognized in earnings
$
18

 
$
56

 
$
56

 
$
99


12
Table of Contents

The following tables present a summary of fixed maturity and equity securities.
September 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
$
17,985

 
$
1,867

 
$
36

 
$
19,816

 
$
(1
)
States, municipalities and political subdivisions
11,566

 
1,937

 
2

 
13,501

 
(27
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,174

 
206

 
15

 
5,365

 
(24
)
Commercial mortgage-backed
2,064

 
88

 
8

 
2,144

 
—

Other asset-backed
948

 
12

 
1

 
959

 
—

Total asset-backed
8,186

 
306

 
24

 
8,468

 
(24
)
U.S. Treasury and obligations of government-sponsored enterprises
68

 
8

 
—

 
76

 
—

Foreign government
415

 
23

 
—

 
438

 
—

Redeemable preferred stock
18

 
2

 
—

 
20

 
—

Total fixed maturity securities available-for-sale
38,238

 
4,143

 
62

 
42,319

 
$
(52
)
Total fixed maturity securities trading
2

 


 


 
2

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
15

 
6

 
1

 
20

 
 
Preferred stock
93

 
5

 
2

 
96

 
 
Total equity securities available-for-sale
108

 
11

 
3

 
116

 
 
Total
$
38,348

 
$
4,154

 
$
65

 
$
42,437

 



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 September 30, 2016 and December 31, 2015, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,681 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
September 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
$
617

 
$
10

 
$
338

 
$
26

 
$
955

 
$
36

States, municipalities and political subdivisions
163

 
2

 
9

 
—

 
172

 
2

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
273

 
6

 
212

 
9

 
485

 
15

Commercial mortgage-backed
391

 
7

 
96

 
1

 
487

 
8

Other asset-backed
153

 
1

 
17

 
—

 
170

 
1

Total asset-backed
817

 
14

 
325

 
10

 
1,142

 
24

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

 
—

 
—

 
—

 
2

 
—

Foreign government
16

 
—

 
—

 
—

 
16

 
—

Total fixed maturity securities available-for-sale
1,615

 
26

 
672

 
36

 
2,287

 
62

Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Common stock
—

 
1

 
—

 
—

 
—

 
1

Preferred stock
15

 
2

 
—

 
—

 
15

 
2

Total equity securities available-for-sale
15

 
3

 
—

 
—

 
15

 
3

Total
$
1,630

 
$
29

 
$
672

 
$
36

 
$
2,302

 
$
65


 
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 September 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 September 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 September 30, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2016
 
2015
 
2016
 
2015
Beginning balance of credit losses on fixed maturity securities
$
41

 
$
59

 
$
53

 
$
62

Reductions for securities sold during the period
(2
)
 
(2
)
 
(14
)
 
(5
)
Reductions for securities the Company intends to sell or more likely than not will be required to sell
(1
)
 
—

 
(1
)
 
—

Ending balance of credit losses on fixed maturity securities
$
38

 
$
57

 
$
38

 
$
57

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
September 30, 2016
 
December 31, 2015
(In millions)
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,665

 
$
1,710

 
$
1,574

 
$
1,595

Due after one year through five years
9,052

 
9,584

 
7,721

 
8,070

Due after five years through ten years
14,659

 
15,625

 
14,652

 
14,915

Due after ten years
12,862

 
15,400

 
13,303

 
14,989

Total
$
38,238

 
$
42,319

 
$
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 $175 million and $179 million as of September 30, 2016 and December 31, 2015 and a fair value of $8 million and $(5) million as of September 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 September 30, 2016, the Company had committed approximately $393 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of September 30, 2016, 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. Purchases and sales of privately placed debt securities are recorded once funded. As of September 30, 2016, the Company had commitments to purchase or fund additional amounts of $205 million and sell $163 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.
September 30, 2016
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
19,557

 
$
261

 
$
19,818

States, municipalities and political subdivisions
—

 
13,500

 
1

 
13,501

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
5,286

 
79

 
5,365

Commercial mortgage-backed
—

 
2,120

 
24

 
2,144

Other asset-backed
—

 
916

 
43

 
959

Total asset-backed
—

 
8,322

 
146

 
8,468

U.S. Treasury and obligations of government-sponsored enterprises
76

 
—

 
—

 
76

Foreign government
—

 
438

 
—

 
438

Redeemable preferred stock
20

 
—

 
—

 
20

Total fixed maturity securities
96

 
41,817

 
408

 
42,321

Equity securities
97

 
—

 
19

 
116

Other invested assets
—

 
5

 
—

 
5

Short term investments
432

 
911

 
—

 
1,343

Life settlement contracts, included in Other assets
—

 
—

 
67

 
67

Total assets
$
625

 
$
42,733

 
$
494

 
$
43,852

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
July 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
September 30,
2016
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
242

 
$
1

 
$
7

 
$
16

 
$
—

 
$
(5
)
 
$
—

 
$
—

 
$
261

 
$
—

States, municipalities and political subdivisions
2

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
1

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
134

 
—

 
(1
)
 
5

 
—

 
(1
)
 
—

 
(58
)
 
79

 
—

Commercial mortgage-backed
11

 
—

 
—

 
23

 
—

 
(8
)
 
—

 
(2
)
 
24

 
—

Other asset-backed
45

 
—

 
—

 
34

 
—

 
—

 
—

 
(36
)
 
43

 
—

Total asset-backed
190

 
—

 
(1
)
 
62

 
—

 
(9
)
 
—

 
(96
)
 
146

 
—

Total fixed maturity securities
434

 
1

 
6

 
78

 
—

 
(15
)
 
—

 
(96
)
 
408

 
—

Equity securities
19

 
(1
)
 
1

 
—

 
—

 
—

 
—

 
—

 
19

 
(2
)
Life settlement contracts
67

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
67

 
—

Total
$
520

 
$
—

 
$
7

 
$
78

 
$
—

 
$
(15
)
 
$
—

 
$
(96
)
 
$
494

 
$
(2
)


19
Table of Contents

Level 3
(In millions)
Balance as of
July 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
September 30,
2015
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2015 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
141

 
$
—

 
$
—

 
$
27

 
$
(1
)
 
$
(11
)
 
$
—

 
$
(3
)
 
$
153

 
$
—

States, municipalities and political subdivisions
85

 
—

 
—

 
—

 
—

 
—

 
—

 
(24
)
 
61

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
207

 
2

 
(2
)
 
4

 
—

 
(7
)
 
—

 
—

 
204

 
—

Commercial mortgage-backed
87

 
5

 
(4
)
 
8

 
—

 
(15
)
 
—

 
(10
)
 
71

 
—

Other asset-backed
490

 
—

 
(6
)
 
43

 
(20
)
 
(32
)
 
—

 
(4
)
 
471

 
—

Total asset-backed
784

 
7

 
(12
)
 
55

 
(20
)
 
(54
)
 
—

 
(14
)
 
746

 
—

Total fixed maturity securities
1,010

 
7

 
(12
)
 
82

 
(21
)
 
(65
)
 
—

 
(41
)
 
960