Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value [Abstract]

Fair Value

Note 4. Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

• Level 1 – Quoted prices for identical instruments in active markets.

• Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

• Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

Prices may fall within Level 1, 2 or 3 depending upon the methodologies and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using methodologies and inputs the Company believes market participants would use to value the assets.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include (i) the review of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analyses, where the Company independently validates information regarding inputs and assumptions for individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.

The fair values of CNA's life settlement contracts are included in Other assets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are summarized in the tables below:

December 31, 2011	Level 1			Level 2			Level 3			Total
(In millions)
Fixed maturity securities:
Corporate and other bonds				$	20,396		$	482		$	20,878
States, municipalities and political subdivisions					9,611			171			9,782
Asset-backed:
Residential mortgage-backed					5,323			452			5,775
Commercial mortgage-backed					1,295			59			1,354
Other asset-backed					612			343			955
Total asset-backed	$	-			7,230			854			8,084
U.S. Treasury and obligations of government-sponsored enterprises		451			42						493
Foreign government		92			544						636
Redeemable preferred stock		5			53						58
Fixed maturities available-for-sale		548			37,876			1,507			39,931
Fixed maturities, trading					8			101			109
Total fixed maturities	$	548		$	37,884		$	1,608		$	40,040
Equity securities available-for-sale	$	124		$	113		$	67		$	304
Equity securities, trading		609						14			623
Total equity securities	$	733		$	113		$	81		$	927
Short term investments	$	4,570		$	508		$	27		$	5,105
Other invested assets								11			11
Receivables					79			8			87
Life settlement contracts								117			117
Separate account business		21			373			23			417
Payable to brokers		(32	)		(20	)		(23	)		(75	)

December 31, 2010	Level 1			Level 2			Level 3			Total
(In millions)
Fixed maturity securities:
Corporate and other bonds				$	20,412		$	624		$	21,036
States, municipalities and political subdivisions					7,623			266			7,889
Asset-backed:
Residential mortgage-backed					5,324			767			6,091
Commercial mortgage-backed					920			73			993
Other asset-backed					404			359			763
Total asset-backed	$	-			6,648			1,199			7,847
U.S. Treasury and obligations of government-sponsored enterprises		76			61						137
Foreign government		115			505						620
Redeemable preferred stock		3			48			3			54
Fixed maturities available-for-sale		194			35,297			2,092			37,583
Fixed maturities, trading					47			184			231
Total fixed maturities	$	194		$	35,344		$	2,276		$	37,814
Equity securities available-for-sale	$	288		$	126		$	26		$	440
Equity securities, trading		640						6			646
Total equity securities	$	928		$	126		$	32		$	1,086
Short term investments	$	6,079		$	974		$	27		$	7,080
Other invested assets								26			26
Receivables					74			2			76
Life settlement contracts								129			129
Separate account business		28			381			41			450
Payable to brokers		(328	)		(79	)		(23	)		(430	)
Discontinued operations investments, included in Other liabilities		11			60						71

The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010:

																										Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at December 31
				Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)														Transfers into Level 3		Transfers out of Level 3
2011	Balance, January 1			Included in Net Income			Included in OCI			Purchases		Sales			Settlements								Balance, December 31
(In millions)
Fixed maturity securities:
Corporate and other bonds	$	624		$	(11	)	$	(1	)	$	484	$	(204	)	$	(149	)	$	79	$	(340	)	$	482		$	(12	)
States, municipalities and political subdivisions		266						(1	)		3					(92	)				(5	)		171
Asset-backed:
Residential mortgage-backed		767			(16	)		(11	)		225		(290	)		(60	)				(163	)		452			(6	)
Commercial mortgage- backed		73			20			(7	)		81		(27	)							(81	)		59
Other asset-backed		359			(9	)		5			537		(341	)		(99	)		2		(111	)		343			(5	)
Total asset-backed		1,199			(5	)		(13	)		843		(658	)		(159	)		2		(355	)		854			(11	)
Redeemable preferred stock		3			3			(3	)				(3	)										-
Fixed maturities available-for-sale		2,092			(13	)		(18	)		1,330		(865	)		(400	)		81		(700	)		1,507			(23	)
Fixed maturities, trading		184			(11	)							(72	)										101			(4	)
Total fixed maturities	$	2,276		$	(24	)	$	(18	)	$	1,330	$	(937	)	$	(400	)	$	81	$	(700	)	$	1,608		$	(27	)
Equity securities available-for-sale	$	26		$	(2	)	$	2		$	66	$	(27	)				$	5	$	(3	)	$	67		$	(3	)
Equity securities, trading		6			(7	)					1								14					14			(7	)
Total equity securities	$	32		$	(9	)	$	2		$	67	$	(27	)	$	-		$	19	$	(3	)	$	81		$	(10	)
Short term investments	$	27								$	39				$	(29	)			$	(10	)	$	27
Other invested assets		26		$	4							$	(19	)										11		$	1
Life settlement contracts		129			33											(45	)							117			5
Separate account business		41											(6	)							(12	)		23
Derivative financial instruments, net		(21	)		(42	)	$	(1	)		9					40								(15	)		1

				Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)					Purchases, Sales, Issuances and Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, December 31			Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at December 31
	Balance, January 1			Included in Net Income			Included in OCI
2010
(In millions)
Fixed maturity securities:
Corporate and other bonds	$	609		$	9		$	56	$	45		$	60	$	(155	)	$	624		$	(4	)
States, municipalities and political subdivisions		756						15		(507	)		2					266
Asset-backed:
Residential mortgage-backed		629			(10	)		15		181					(48	)		767			(13	)
Commercial mortgage- backed		123			10			13		(8	)		7		(72	)		73			(2	)
Other asset-backed		348			6			30		30					(55	)		359			(1	)
Total asset-backed		1,100			6			58		203			7		(175	)		1,199			(16	)
Redeemable preferred stock		2			6			2		(7	)							3
Fixed maturities available-for-sale		2,467			21			131		(266	)		69		(330	)		2,092			(20	)
Fixed maturities, trading		197			9					(22	)							184			5
Total fixed maturities	$	2,664		$	30		$	131	$	(288	)	$	69	$	(330	)	$	2,276		$	(15	)
Equity securities available-for-sale	$	11		$	(4	)	$	1	$	17		$	8	$	(7	)	$	26		$	(5	)
Equity securities, trading		-			2					4								6			2
Total equity securities	$	11		$	(2	)	$	1	$	21		$	8	$	(7	)	$	32		$	(3	)
Short term investments	$	-							$	37		$	1	$	(11	)	$	27
Other invested assets		-								26								26		$	(1	)
Life settlement contracts		130		$	29					(30	)							129			10
Separate account business		38								3								41
Discontinued operations investments		16					$	1		(2	)				(15	)		-
Derivative financial instruments, net		(48	)		(27	)		16		38								(21	)

Net realized and unrealized gains and losses are reported in Net income as follows:

Major Category of Assets and Liabilities	Consolidated Statements of Income Line Items
Fixed maturity securities available-for-sale	Investment gains (losses)
Fixed maturity securities, trading	Net investment income
Equity securities available-for-sale	Investment gains (losses)
Equity securities, trading	Net investment income
Other invested assets	Investment gains (losses)
Derivative financial instruments held in a trading portfolio	Net investment income
Derivative financial instruments, other	Investment gains (losses) and Other revenues
Life settlement contracts	Other revenues

Securities shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no significant transfers between Level 1 and Level 2 during the years ended December 31, 2011 and 2010. The Company's policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.

Fixed Maturity Securities

Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer quotes, benchmark yields, spreads off benchmark yields, interest rates, and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data.

Level 1 securities include highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include tax-exempt and taxable auction rate certificates. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the maturity date assumption is unobservable due to the uncertain nature of principal prepayments prior to maturity.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

Derivative Financial Instruments

Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.

Short Term Investments

The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above.

Life Settlement Contracts

The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA's own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.

Separate Account Business

Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value of the Company's financial instrument assets and liabilities which are not measured at fair value on the Consolidated Balance Sheets are listed in the table below.

December 31	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
(In millions)
Financial assets:
Other invested assets, primarily mortgage loans	$	234		$    247	$	87		$        86
Financial liabilities:
Premium deposits and annuity contracts	$	109		$    114	$	104		$      105
Short term debt		88		90		647		662
Long term debt		8,913		9,533		8,830		9,243

The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.

The fair values of Other invested assets were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments.

Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.

Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value for debt was based on observable market prices of comparable instruments adjusted for differences between the observed instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.