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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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 [ ]
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 26, 2017
Common Stock, Par value $2.50
 
271,176,870


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)
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,806

 
$
1,767

 
$
5,185

 
$
5,196

Net investment income
509

 
524

 
1,529

 
1,461

Net realized investment (losses) gains:
 
 
 
 
 
 
 

Other-than-temporary impairment losses
(5
)
 
(18
)
 
(9
)
 
(56
)
Other net realized investment (losses) gains
(19
)
 
64

 
71

 
82

Net realized investment (losses) gains
(24
)

46

 
62

 
26

Other revenues
107

 
96

 
318

 
293

Total revenues
2,398


2,433


7,094

 
6,976

Claims, Benefits and Expenses
 
 
 
 
 
 
 
Insurance claims and policyholders’ benefits
1,480

 
1,202

 
4,053

 
3,949

Amortization of deferred acquisition costs
309

 
314

 
926

 
926

Other operating expenses
381

 
403

 
1,091

 
1,162

Interest
41

 
39

 
124

 
119

Total claims, benefits and expenses
2,211


1,958


6,194

 
6,156

Income before income tax
187

 
475

 
900

 
820

Income tax expense
(43
)
 
(132
)
 
(224
)
 
(202
)
Net income
$
144


$
343


$
676

 
$
618

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.53

 
$
1.27

 
$
2.49

 
$
2.28

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.53

 
$
1.26

 
$
2.48

 
$
2.28

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.30

 
$
0.25

 
$
2.80

 
$
2.75

 
 
 
 
 
 
 
 
Weighted Average Outstanding Common Stock and Common Stock Equivalents
 
 
 
 
 
 
 
Basic
271.2

 
270.5

 
271.1

 
270.4

Diluted
272.1

 
271.2

 
272.0

 
271.0

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


3
Table of Contents

CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2017
 
2016
 
2017
 
2016
Comprehensive Income
 
 
 
 
 
 
 
Net income
$
144

 
$
343

 
$
676

 
$
618

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

 
3

 
(3
)
 
7

Net unrealized gains on other investments
23

 
42

 
167

 
586

Net unrealized gains on investments
24

 
45

 
164

 
593

Foreign currency translation adjustment
41

 
(24
)
 
94

 
(58
)
Pension and postretirement benefits
10

 
6

 
22

 
17

Other comprehensive income, net of tax
75

 
27

 
280

 
552

Total comprehensive income
$
219

 
$
370

 
$
956

 
$
1,170

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, 2017 (Unaudited)
 
December 31,
2016
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities at fair value (amortized cost of $38,814 and $38,361)
$
42,090

 
$
40,905

Equity securities at fair value (cost of $118 and $106)
129

 
110

Limited partnership investments
2,311

 
2,371

Other invested assets
42

 
36

Mortgage loans
722

 
591

Short term investments
1,453

 
1,407

Total investments
46,747

 
45,420

Cash
283

 
271

Reinsurance receivables (less allowance for uncollectible receivables of $37 and $37)
4,332

 
4,416

Insurance receivables (less allowance for uncollectible receivables of $46 and $46)
2,294

 
2,209

Accrued investment income
436

 
405

Deferred acquisition costs
643

 
600

Deferred income taxes
141

 
379

Property and equipment at cost (less accumulated depreciation of $275 and $254)
325

 
310

Goodwill
147

 
145

Other assets
1,234

 
1,078

Total assets
$
56,582

 
$
55,233

Liabilities
 

 
 

Insurance reserves:
 
 
 

Claim and claim adjustment expenses
$
22,209

 
$
22,343

Unearned premiums
4,060

 
3,762

Future policy benefits
11,040

 
10,326

Short term debt
150

 
—

Long term debt
2,707

 
2,710

Other liabilities (includes $25 and $50 due to Loews Corporation)
4,247

 
4,123

Total liabilities
44,413

 
43,264

Commitments and contingencies (Notes C and F)


 


Stockholders' Equity
 

 
 

Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,176,870 and 270,495,998 shares outstanding)
683

 
683

Additional paid-in capital
2,167

 
2,173

Retained earnings
9,273

 
9,359

Accumulated other comprehensive income (loss)
107

 
(173
)
Treasury stock (1,863,373 and 2,544,245 shares), at cost
(61
)
 
(73
)
Total stockholders’ equity
12,169

 
11,969

Total liabilities and stockholders' equity
$
56,582

 
$
55,233

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)
2017
 
2016
Cash Flows from Operating Activities
 
 
 
Net income
$
676

 
$
618

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Deferred income tax expense
125

 
112

Trading portfolio activity
8

 
—

Net realized investment gains
(62
)
 
(26
)
Equity method investees
89

 
265

Net amortization of investments
(30
)
 
(17
)
Depreciation and amortization
66

 
57

Changes in:
 
 
 
Receivables, net
18

 
(311
)
Accrued investment income
(31
)
 
(30
)
Deferred acquisition costs
(34
)
 
(24
)
Insurance reserves
248

 
464

Other assets
(121
)
 
(96
)
Other liabilities
(106
)
 
61

Other, net
48

 
47

Total adjustments
218

 
502

Net cash flows provided by operating activities
894

 
1,120

Cash Flows from Investing Activities
 
 
 
Dispositions:
 
 
 
Fixed maturity securities - sales
4,167

 
4,234

Fixed maturity securities - maturities, calls and redemptions
2,635

 
2,263

Equity securities
22

 
79

Limited partnerships
160

 
200

Mortgage loans
22

 
137

Purchases:
 
 
 
Fixed maturity securities
(6,877
)
 
(7,472
)
Equity securities
(18
)
 
(1
)
Limited partnerships
(85
)
 
(222
)
Mortgage loans
(153
)
 
(88
)
Change in other investments
(2
)
 
10

Change in short term investments
(29
)
 
241

Purchases of property and equipment
(80
)
 
(94
)
Disposals of property and equipment
—

 
107

Other, net
20

 
2

Net cash flows used by investing activities
$
(218
)
 
$
(604
)

6
Table of Contents

Nine months ended September 30
 
 
 
(In millions)
2017
 
2016
Cash Flows from Financing Activities
 
 
 
Dividends paid to common stockholders
$
(761
)
 
$
(746
)
Proceeds from the issuance of debt
496

 
498

Repayment of debt
(391
)
 
(358
)
Other, net
(17
)
 
1

Net cash flows used by financing activities
(673
)

(605
)
Effect of foreign exchange rate changes on cash
9

 
(8
)
Net change in cash
12

 
(97
)
Cash, beginning of year
271

 
387

Cash, end of period
$
283

 
$
290

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)
2017
 
2016
Common Stock
 
 
 
Balance, beginning of period
$
683

 
$
683

Balance, end of period
683

 
683

Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,173

 
2,153

Stock-based compensation
(6
)
 
10

Balance, end of period
2,167

 
2,163

Retained Earnings
 
 
 
Balance, beginning of period
9,359

 
9,313

Dividends paid to common stockholders
(762
)
 
(746
)
Net income
676

 
618

Balance, end of period
9,273

 
9,185

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of period
(173
)
 
(315
)
Other comprehensive income
280

 
552

Balance, end of period
107

 
237

Treasury Stock
 
 
 
Balance, beginning of period
(73
)
 
(78
)
Stock-based compensation
12

 
5

Balance, end of period
(61
)
 
(73
)
Total stockholders' equity
$
12,169

 
$
12,195

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 89% of the outstanding common stock of CNAF as of September 30, 2017.
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 prepared in accordance with GAAP, including certain financial statement notes, 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, 2016, 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, 2017 and for the three and nine months ended September 30, 2017 and 2016 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 March 2016, the Financial Accounting Standards Board (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. As of January 1, 2017, the Company adopted the updated accounting guidance and began recognizing excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense within net income, instead of additional paid-in capital as required under previous guidance. The related cash flows are now classified within operating activities. As a result of this change, excess tax benefits are no longer included in assumed proceeds under the treasury stock method of calculating earnings per share. The impact of the accounting change resulted in a decrease of $2 million and $5 million to income tax expense for the three and nine months ended September 30, 2017.

9
Table of Contents

Accounting Standards Pending Adoption
In May 2014, the FASB issued ASU No. 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in an amount that reflects the consideration the entity is entitled to receive for the transfer of the promised goods or services. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption.  While the Company continues to evaluate the impacts of this new guidance on the Consolidated financial statements, including disclosures, the Company expects that revenue on warranty products and services will be recognized more slowly than under the current revenue recognition pattern.  For a significant portion of warranty products, the Company also expects Other revenues and Other operating expenses to increase to reflect the gross amount paid by consumers to the auto dealer that acts as the Company's agent. The Company expects to adopt this guidance using the modified retrospective approach. While the cumulative effect of adoption using the modified retrospective approach may be significant, the Company does not expect the impact of the new guidance to be material to its results of operations or financial position.
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 expects the primary change 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. Upon adoption, the Company will recognize an adjustment for the cumulative amount of unrealized investment gains and losses related to available-for-sale equity securities within the opening balances of Retained earnings and Accumulated other comprehensive income (loss). The Company does not expect the impact of adopting ASU 2016-01 to have a material effect on the Company’s results of operations or financial position.
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 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.
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the income statement by requiring service cost to be presented with other employee compensation costs and other components of net periodic pension cost to be presented outside of any subtotal of operating income. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. 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.

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, 2017, approximately 907 thousand and 916 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, less than 1 thousand and approximately 4 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, 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.


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)
2017
 
2016
 
2017
 
2016
Fixed maturity securities
$
455

 
$
457

 
$
1,367

 
$
1,352

Equity securities
1

 
1

 
4

 
8

Limited partnership investments
51

 
65

 
157

 
97

Mortgage loans
9

 
8

 
24

 
30

Short term investments
4

 
2

 
10

 
6

Trading portfolio
3

 
1

 
9

 
7

Other
1

 
4

 
2

 
4

Gross investment income
524

 
538

 
1,573

 
1,504

Investment expense
(15
)
 
(14
)
 
(44
)
 
(43
)
Net investment income
$
509

 
$
524

 
$
1,529

 
$
1,461

Net realized investment gains (losses) are presented in the following table.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2017
 
2016
 
2017
 
2016
Net realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
34

 
$
67

 
$
139

 
$
152

Gross realized losses
(18
)
 
(20
)
 
(47
)
 
(106
)
Net realized investment gains (losses) on fixed maturity securities
16


47


92


46

Equity securities:
 
 
 
 
 
 
 

Gross realized gains
—

 
1

 
1

 
5

Gross realized losses
—

 
(4
)
 
(1
)
 
(10
)
Net realized investment gains (losses) on equity securities
—


(3
)

—


(5
)
Derivatives
(1
)
 
1

 
(3
)
 
(12
)
Short term investments and other
(39
)
 
1

 
(27
)
 
(3
)
Net realized investment gains (losses)
$
(24
)

$
46


$
62

 
$
26

Net realized investment gains (losses) for the three and nine months ended September 30, 2017 included a $42 million loss related to the redemption of the Company's $350 million senior notes due November 2019. Net realized investment gains (losses) for the nine months ended September 30, 2016 included a $8 million loss related to the first quarter 2016 redemption of the Company's $350 million senior notes due August 2016.
The components of 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)
2017
 
2016
 
2017
 
2016
Fixed maturity securities available-for-sale:
 
 
 
 

 
 
Corporate and other bonds
$
4

 
$
14

 
$
8

 
$
43

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
1

 
—

 
1

 
1

Other asset-backed
—

 
—

 
—

 
3

Total asset-backed
1


—


1

 
4

Total fixed maturity securities available-for-sale
5


14


9

 
47

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

 
4

 
—

 
9

OTTI losses recognized in earnings
$
5


$
18


$
9

 
$
56


12
Table of Contents

The following tables present a summary of fixed maturity and equity securities.
September 30, 2017
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
$
17,965

 
$
1,645

 
$
26

 
$
19,584

 
$
—

States, municipalities and political subdivisions
12,462

 
1,501

 
7

 
13,956

 
(14
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
4,906

 
127

 
28

 
5,005

 
(28
)
Commercial mortgage-backed
1,858

 
55

 
13

 
1,900

 
—

Other asset-backed
1,047

 
18

 
4

 
1,061

 
—

Total asset-backed
7,811

 
200

 
45

 
7,966

 
(28
)
U.S. Treasury and obligations of government-sponsored enterprises
115

 
3

 
3

 
115

 
—

Foreign government
439

 
10

 
4

 
445

 
—

Redeemable preferred stock
18

 
2

 
—

 
20

 
—

Total fixed maturity securities available-for-sale
38,810

 
3,361

 
85

 
42,086

 
$
(42
)
Total fixed maturity securities trading
4

 


 


 
4

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
16

 
7

 
1

 
22

 
 
Preferred stock
102

 
5

 
—

 
107

 
 
Total equity securities available-for-sale
118

 
12

 
1

 
129

 
 
Total
$
38,932

 
$
3,373

 
$
86

 
$
42,219

 
 

December 31, 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
$
17,711

 
$
1,323

 
$
76

 
$
18,958

 
$
(1
)
States, municipalities and political subdivisions
12,060

 
1,213

 
33

 
13,240

 
(16
)
Asset-backed:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
5,004

 
120

 
51

 
5,073

 
(28
)
Commercial mortgage-backed
2,016

 
48

 
24

 
2,040

 
—

Other asset-backed
1,022

 
8

 
5

 
1,025

 
—

Total asset-backed
8,042

 
176

 
80

 
8,138

 
(28
)
U.S. Treasury and obligations of government-sponsored enterprises
83

 
10

 
—

 
93

 
—

Foreign government
435

 
13

 
3

 
445

 
—

Redeemable preferred stock
18

 
1

 
—

 
19

 
—

Total fixed maturity securities available-for-sale
38,349

 
2,736

 
192

 
40,893

 
$
(45
)
Total fixed maturity securities trading
12

 


 


 
12

 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
Common stock
13

 
6

 
—

 
19

 
 
Preferred stock
93

 
2

 
4

 
91

 
 
Total equity securities available-for-sale
106

 
8

 
4

 
110

 
 
Total
$
38,467

 
$
2,744

 
$
196

 
$
41,015

 
 


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, 2017 and December 31, 2016, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,321 million and $1,014 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, 2017
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
$
1,216

 
$
21

 
$
91

 
$
5

 
$
1,307

 
$
26

States, municipalities and political subdivisions
583

 
6

 
56

 
1

 
639

 
7

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
1,522

 
25

 
106

 
3

 
1,628

 
28

Commercial mortgage-backed
378

 
6

 
138

 
7

 
516

 
13

Other asset-backed
129

 
4

 
10

 
—

 
139

 
4

Total asset-backed
2,029

 
35

 
254

 
10

 
2,283

 
45

U.S. Treasury and obligations of government-sponsored enterprises
67

 
3

 
6

 
—

 
73

 
3

Foreign government
191

 
4

 
5

 
—

 
196

 
4

Total fixed maturity securities available-for-sale
4,086

 
69

 
412

 
16

 
4,498

 
85

Equity securities available-for-sale:
 
 
 
 
 
 
 
 


 


Common stock
2

 
1

 
—

 
—

 
2

 
1

Preferred stock
16

 
—

 
—

 
—

 
16

 
—

Total equity securities available-for-sale
18

 
1

 
—

 
—

 
18

 
1

Total
$
4,104


$
70


$
412


$
16


$
4,516


$
86


 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 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
$
2,615

 
$
61

 
$
254

 
$
15

 
$
2,869

 
$
76

States, municipalities and political subdivisions
959

 
32

 
23

 
1

 
982

 
33

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
2,136

 
44

 
201

 
7

 
2,337

 
51

Commercial mortgage-backed
756

 
22

 
69

 
2

 
825

 
24

Other asset-backed
398

 
5

 
24

 
—

 
422

 
5

Total asset-backed
3,290

 
71

 
294

 
9

 
3,584

 
80

U.S. Treasury and obligations of government-sponsored enterprises
5

 
—

 
—

 
—

 
5

 
—

   Foreign government
108

 
3

 
—

 
—

 
108

 
3

Total fixed maturity securities available-for-sale
6,977

 
167

 
571

 
25

 
7,548

 
192

Equity securities available-for-sale -- Preferred stock
12

 
—

 
13

 
4

 
25

 
4

Total
$
6,989

 
$
167

 
$
584

 
$
29

 
$
7,573

 
$
196


15
Table of Contents

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2017 securities in a gross unrealized loss position 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, 2017.
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, 2017 and 2016 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)
2017
 
2016
 
2017
 
2016
Beginning balance of credit losses on fixed maturity securities
$
30

 
$
41

 
$
36

 
$
53

Reductions for securities sold during the period
(2
)
 
(2
)
 
(8
)
 
(14
)
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
$
28


$
38


$
28

 
$
38

Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
 
September 30, 2017
 
December 31, 2016
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less
$
1,374

 
$
1,404

 
$
1,779

 
$
1,828

Due after one year through five years
7,931

 
8,293

 
7,566

 
7,955

Due after five years through ten years
15,853

 
16,574

 
15,892

 
16,332

Due after ten years
13,652

 
15,815

 
13,112

 
14,778

Total
$
38,810

 
$
42,086

 
$
38,349

 
$
40,893

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 a funds withheld liability with a notional value of $170 million and $174 million as of September 30, 2017 and December 31, 2016 and a fair value of $(1) million and $3 million as of September 30, 2017 and December 31, 2016. The embedded derivative on the 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, 2017, the Company had committed approximately $405 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of September 30, 2017, the Company had mortgage loan commitments of $68 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, 2017, the Company had commitments to purchase or fund additional amounts of $205 million and sell $185 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 may include i) the review of pricing service methodologies or broker pricing qualifications, 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, 2017
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
19,469

 
$
119

 
$
19,588

States, municipalities and political subdivisions
—

 
13,955

 
1

 
13,956

Asset-backed:
 
 
 
 
 
 
 
Residential mortgage-backed
—

 
4,829

 
176

 
5,005

Commercial mortgage-backed
—

 
1,876

 
24

 
1,900

Other asset-backed
—

 
915

 
146

 
1,061

Total asset-backed
—

 
7,620

 
346

 
7,966

U.S. Treasury and obligations of government-sponsored enterprises
115

 
—

 
—

 
115

Foreign government
—

 
445

 
—

 
445

Redeemable preferred stock
20

 
—

 
—

 
20

Total fixed maturity securities
135

 
41,489

 
466

 
42,090

Equity securities
110

 
—

 
19

 
129

Other invested assets
—

 
5

 
—

 
5

Short term investments
479

 
876

 
—

 
1,355

Total assets
$
724

 
$
42,370

 
$
485

 
$
43,579

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
1

 
$
—

 
$
1

Total liabilities
$
—

 
$
1

 
$
—

 
$
1

December 31, 2016
 
 
 
 
 
 
Total
Assets/Liabilities
at Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Corporate and other bonds
$
—

 
$
18,840

 
$
130

 
$
18,970

States, municipalities and political subdivisions
—

 
13,239

 
1

 
13,240

Asset-backed:
 
 
 
 
 
 
 

Residential mortgage-backed
—

 
4,944

 
129

 
5,073

Commercial mortgage-backed
—

 
2,027

 
13

 
2,040

Other asset-backed
—

 
968

 
57

 
1,025

Total asset-backed
—

 
7,939

 
199

 
8,138

U.S. Treasury and obligations of government-sponsored enterprises
93

 
—

 
—

 
93

Foreign government
—

 
445

 
—

 
445

Redeemable preferred stock
19

 
—

 
—

 
19

Total fixed maturity securities
112

 
40,463

 
330

 
40,905

Equity securities
91

 
—

 
19

 
110

Other invested assets
—

 
5

 
—

 
5

Short term investments
475

 
853

 
—

 
1,328

Life settlement contracts, included in Other assets
—

 
—

 
58

 
58

Total assets
$
678

 
$
41,321

 
$
407

 
$
42,406

Liabilities
 
 
 
 
 

 
 

Other liabilities
$
—

 
$
(3
)
 
$
—

 
$
(3
)
Total liabilities
$
—

 
$
(3
)
 
$
—

 
$
(3
)

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,
2017
 
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,
2017
 
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)*
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate and other bonds
$
100

 
$
1

 
$
1

 
$
13

 
$
—

 
$
(11
)
 
$
15

 
$
—

 
$
119

 
$
—

States, municipalities and political subdivisions
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Residential mortgage-backed
123

 
1

 
1

 
—

 
—

 
(7
)
 
58

 
—

 
176

 
—

Commercial mortgage-backed
13

 
—

 
(1
)
 
12

 
—

 
(2
)
 
2

 
—

 
24

 
—

Other asset-backed
82

 
(1
)
 
1

 
27

 
—

 
(4
)
 
41

 
—

 
146

 
—

Total asset-backed
218

 
—

 
1

 
39

 
—

 
(13
)
 
101

 
—

 
346

 
—

Total fixed maturity securities
319

 
1

 
2

 
52

 
—

 
(24
)
 
116

 
—

 
466

 
—

Equity securities
19

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19

 
—

Life settlement contracts
1

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

Total
$
339

 
$
1

 
$
2

 
$
52

 
$
(1
)
 
$
(24
)
 
$
116

 
$
—

 
$
485

 
$
—


19
Table of Contents

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
)

20
Table of Contents

Level 3
(In millions)
Balance as of
January 1,
2017
 
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
&