Investments

12 Months Ended

Dec. 31, 2011

Investments [Abstract]

Investments

Note 3. Investments

Net investment income is as follows:

Year Ended December 31	2011			2010			2009
(In millions)
Fixed maturity securities	$	2,011		$	2,052		$	1,941
Short term investments		16			22			42
Limited partnerships		97			315			324
Equity securities		20			32			49
Income (loss) from trading portfolio (a)		(39	)		131			187
Other		16			10			6
Total investment income		2,121			2,562			2,549
Investment expenses		(58	)		(54	)		(50	)
Net investment income	$	2,063		$	2,508		$	2,499

(a) Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(58), $88 and $94 for the years ended December 31, 2011, 2010 and 2009.

As of December 31, 2011, the Company held nine non-income producing fixed maturity securities aggregating $3 million of fair value. As of December 31, 2010, the Company held seven non-income producing fixed maturity securities aggregating $3 million of fair value. As of December 31, 2011 and 2010, no investments in a single issuer exceeded 10% of shareholders' equity other than investments in U.S. Treasury and obligations of government-sponsored enterprises.

Investment gains (losses) are as follows:

Year Ended December 31	2011			2010			2009
(In millions)
Fixed maturity securities	$	(22	)	$	92			$  (1,167)
Equity securities		(1	)		(2	)		243
Derivative instruments		(34	)		(31	)		51
Short term investments					7			14
Other		5			(10	)		6
Investment gains (losses) (a)	$	(52	)	$	56			$     (853)

(a) Includes gross realized gains of $299, $525 and $973 and gross realized losses of $322, $435 and $1,897 on available-for-sale securities for the years ended December 31, 2011, 2010 and 2009.

Net change in unrealized gains (losses) on available-for-sale investments is as follows:

Fixed maturity securities	$	1,442		$	1,140		$	5,278
Equity securities		(2	)		7			156
Other		(3	)		(1	)		(4	)
Total net change in unrealized gains on available-for-sale investments	$	1,437		$	1,146		$	5,430

The components of OTTI losses recognized in earnings by asset type are as follows:

Year Ended December 31	2011		2010		2009
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	95	$	68	$	357
States, municipalities and political subdivisions				62		79
Asset-backed:
Residential mortgage-backed		105		71		461
Commercial mortgage-backed				3		193
Other asset-backed		6		3		31
Total asset-backed		111		77		685
Redeemable preferred stock						9
Total fixed maturity securities available-for-sale		206		207		1,130
Equity securities available-for-sale:
Common stock		8		11		5
Preferred stock		1		14		217
Total equity securities available-for-sale		9		25		222
Short term investments		1
Net OTTI losses recognized in earnings	$	216	$	232	$	1,352

A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by CNA's Chief Financial Officer. The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.

The Impairment Committee's assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include: (i) the financial condition and near term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities. The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.

CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches.

CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.

Prior to the adoption of the updated accounting guidance related to OTTI in the second quarter of 2009, CNA applied the impairment model described in the paragraph above to both fixed maturity and equity securities.

The amortized cost and fair values of securities are as follows:

December 31, 2011	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)
Fixed maturity securities:
Corporate and other bonds	$	19,086	$	1,946	$	154	$	20,878
States, municipalities and political subdivisions		9,018		900		136		9,782
Asset-backed:
Residential mortgage-backed		5,786		172		183		5,775	$	99
Commercial mortgage-backed		1,365		48		59		1,354		(2	)
Other asset-backed		946		13		4		955
Total asset-backed		8,097		233		246		8,084		97
U.S. Treasury and obligations of government-sponsored enterprises		479		14				493
Foreign government		608		28				636
Redeemable preferred stock		51		7				58
Fixed maturities available-for-sale		37,339		3,128		536		39,931		97
Fixed maturities, trading		127				18		109
Total fixed maturities		37,466		3,128		554		40,040		97
Equity securities:
Common stock		30		17				47
Preferred stock		258		4		5		257
Equity securities available-for-sale		288		21		5		304		-
Equity securities, trading		614		76		67		623
Total equity securities		902		97		72		927		-
Total	$	38,368	$	3,225	$	626	$	40,967	$	97

December 31, 2010
Fixed maturity securities:
Corporate and other bonds	$	19,503	$	1,603	$	70	$	21,036
States, municipalities and political subdivisions		8,157		142		410		7,889
Asset-backed:
Residential mortgage-backed		6,255		101		265		6,091	$	114
Commercial mortgage-backed		994		40		41		993		(2	)
Other asset-backed		753		18		8		763
Total asset-backed		8,002		159		314		7,847		112
U.S. Treasury and obligations of government-sponsored enterprises		122		16		1		137
Foreign government		602		18				620
Redeemable preferred stock		47		7				54
Fixed maturities available-for-sale		36,433		1,945		795		37,583		112
Fixed maturities, trading		244				13		231
Total fixed maturities		36,677		1,945		808		37,814		112
Equity securities:
Common stock		90		25				115
Preferred stock		332		2		9		325
Equity securities available-for-sale		422		27		9		440		-
Equity securities, trading		557		123		34		646
Total equity securities		979		150		43		1,086		-
Total	$	37,656	$	2,095	$	851	$	38,900	$	112

The available-for-sale securities in a gross unrealized loss position are as follows:

	Less than 12 Months				12 Months or Longer				Total
December 31, 2011	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities:
Corporate and other bonds		$2,552		$    126		$    159		$      28		$2,711		$    154
States, municipalities and political subdivisions		67		1		721		135		788		136
Asset-backed:
Residential mortgage-backed		719		36		874		147		1,593		183
Commercial mortgage-backed		431		39		169		20		600		59
Other asset-backed		389		4						389		4
Total asset-backed		1,539		79		1,043		167		2,582		246
Total fixed maturities available-for-sale		4,158		206		1,923		330		6,081		536
Equity securities available-for-sale:
Preferred stock		117		5						117		5
Total		$4,275		$    211		$1,923		$    330		$6,198		$    541

December 31, 2010
Fixed maturity securities:
Corporate and other bonds	$1,719	$    34	$    405	$     36	$  2,124	$      70
States, municipalities and political subdivisions	3,339	164	745	246	4,084	410
Asset-backed:
Residential mortgage-backed	1,800	52	1,801	213	3,601	265
Commercial mortgage-backed	164	3	333	38	497	41
Other asset-backed	122	1	60	7	182	8
Total asset-backed	2,086	56	2,194	258	4,280	314
U.S. Treasury and obligations of government-sponsored enterprises	8	1			8	1
Total fixed maturities available-for-sale	7,152	255	3,344	540	10,496	795
Equity securities available-for-sale:
Preferred stock	175	5	70	4	245	9
Total	$7,327	$    260	$3,414	$    544	$10,741	$    804

The following table summarizes the activity for the years ended December 31, 2011 and 2010 and for the period from April 1, 2009 to December 31, 2009 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2011, 2010 and 2009 for which a portion of an OTTI loss was recognized in Other comprehensive income.

	Year ended December 31,		Period from April 1, 2009 to December 31, 2009
	2011	2010
(In millions)
Beginning balance of credit losses on fixed maturity securities	$        141	$      164	$        192
Additional credit losses for securities for which an OTTI loss was previously recognized	39	37	93
Credit losses for securities for which an OTTI loss was not previously recognized	11	11	183
Reductions for securities sold during the period	(67)	(62)	(239)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	(32)	(9)	(65)
Ending balance of credit losses on fixed maturity securities	$        92	$      141	$      164

Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.

The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from two major providers, Standard & Poor's and Moody's Investors Service, Inc. in that order of preference. If a security is not rated by these providers, the Company formulates an internal rating.

Corporate and Other Bonds

The unrealized losses on the Company's investments in this category primarily relate to bonds within the financial industry sector. The financial industry sector holdings in this category include bonds with an aggregate fair value of $1.7 billion and an aggregate amortized cost of $1.8 billion as of December 31, 2011.

The corporate and other bonds in a gross unrealized loss position by ratings distribution are as follows:

December 31, 2011	Amortized Cost	Estimated Fair Value	Gross Unrealized Losses
(In millions)
AAA	$      112	$      111	$            1
AA	97	94	3
A	895	853	42
BBB	1,275	1,196	79
Non-investment grade	486	457	29
Total	$    2,865	$    2,711	$        154

The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at December 31, 2011.

States, Municipalities and Political Subdivisions

The unrealized losses on the Company's investments in this category are primarily due to market conditions for zero coupon bonds, particularly for those with maturity dates that exceed 20 years. Yields for these securities continue to be higher than historical norms relative to after-tax returns on similar fixed income securities. Securities that comprise 83.1% of the gross unrealized losses in this category are rated AA or higher.

The largest exposures at December 31, 2011 as measured by gross unrealized losses were several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $80 million. All of these securities are rated investment grade.

The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at December 31, 2011.

Asset-Backed Securities

The fair value of total asset-backed holdings at December 31, 2011 was $8.1 billion which was comprised of 2,011 different securities. The fair value of these securities tends to be influenced by the characteristics and projected cash flows of the underlying collateral rather than the credit of the issuer. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently. Of these securities, 112 had underlying collateral that was either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation collateral is measured by the original deal structure.

The gross unrealized losses on residential mortgage-backed securities included $35 million related to securities guaranteed by a U.S. government agency or sponsored enterprise and $148 million related to non-agency structured securities. Non-agency structured securities included 131 securities that had at least one trade lot in a gross unrealized loss position and the aggregate severity of the gross unrealized loss was approximately 10.6% of amortized cost.

Commercial mortgage-backed securities included 61 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 8.9% of amortized cost. Other asset-backed securities included 51 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 1.0% of amortized cost.

The asset-backed securities in a gross unrealized loss position by ratings distribution are as follows:

December 31, 2011	Amortized Cost	Estimated Fair Value	Gross Unrealized Losses
(In millions)
U.S. Government, Government Agencies and Government-Sponsored Enterprises	$       382	$       347	$        35
AAA	364	355	9
AA	409	388	21
A	370	357	13
BBB	319	294	25
Non-investment grade	984	841	143
Total	$    2,828	$    2,582	$      246

The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates, wider than historical bid/ask spreads and uncertainty with regard to the timing and amount of ultimate collateral realization, but are not indicative of the ultimate collectibility of the current carrying values of the securities. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at December 31, 2011.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at December 31, 2011 and 2010. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

December 31	2011		2010
	Amortized Cost	Estimated Fair Value	Amortized Cost	Estimated Fair Value
(In millions)
Due in one year or less	$    1,802	$    1,812	$    1,515	$    1,506
Due after one year through five years	13,110	13,537	11,198	11,653
Due after five years through ten years	8,410	8,890	10,034	10,437
Due after ten years	14,017	15,692	13,686	13,987
Total	$  37,339	$  39,931	$  36,433	$  37,583

Limited Partnerships

The carrying value of limited partnerships as of December 31, 2011 and 2010 was approximately $2.7 billion and $2.8 billion which includes undistributed earnings of $607 million and $812 million. Limited partnerships comprising 62.7% of the total carrying value are reported on a current basis through December 31, 2011 with no reporting lag, 23.0% are reported on a one month lag and the remainder are reported on more than a one month lag. As of December 31, 2011 and 2010, the Company had 83 and 84 active limited partnership investments. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.

Of the limited partnerships held, 84.1% and 87.4% at December 31, 2011 and 2010, employ hedge fund strategies that generate returns through investing in securities that are marketable while engaging in various management techniques primarily in public fixed income and equity markets. These hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. The hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation, or various arbitrage disciplines. Within hedge fund strategies, approximately 41.4% were equity related, 39.5% pursued a multi-strategy approach, 15.2% were focused on distressed investments and 3.9% were fixed income related at December 31, 2011.

Limited partnerships representing 11.7% and 9.1% at December 31, 2011 and 2010 were invested in private debt and equity. The remaining were invested in various other partnerships including real estate. The ten largest limited partnership positions held totaled $1.3 billion and $1.4 billion as of December 31, 2011 and 2010. Based on the most recent information available regarding the Company's percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 4.1% and 4.2% of the aggregate partnership equity at December 31, 2011 and 2010, and the related income reflected on the Consolidated Statements of Income represents 3.9%, 3.5% and 4.4% of the changes in partnership equity for all limited partnership investments for the years ended December 31, 2011, 2010 and 2009.

While the Company generally does not invest in highly leveraged partnerships, there are risks which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.

The Company's limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advanced written notice of up to 90 days.

Investment Commitments

As of December 31, 2011, the Company had committed approximately $129 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.

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. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of December 31, 2011, the Company had commitments to purchase $95 million and sell $69 million of such investments. The Company has an obligation to fund additional amounts under the terms of current loan participations that may not be recorded until a draw is made. As of December 31, 2011, the Company had obligations on unfunded bank loan participations in the amount of $6 million.

As of December 31, 2011, the Company had mortgage loan commitments of $48 million representing signed loan applications received and accepted. The mortgage loans are recorded once funded.

Investments on Deposit

Securities with carrying values of approximately $3.5 billion and $2.9 billion were deposited by CNA's insurance subsidiaries under requirements of regulatory authorities as of December 31, 2011 and 2010.

Cash and securities with carrying values of approximately $5 million and $6 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2011 and 2010. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance and other obligations with various third parties. The carrying values of these deposits were approximately $288 million and $298 million as of December 31, 2011 and 2010.