Investments

6 Months Ended

Jun. 30, 2012

Investments

2. Investments

Net investment income is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
(In millions)
Fixed maturity securities	$	505		$	505		$	1,021		$	1,011
Short term investments		4			4			7			7
Limited partnerships		(43	)		22			100			156
Equity securities		2			6			6			12
Income (loss) from trading portfolio (a)		(74	)		(8	)		(4	)		15
Other		7			5			11			9
Total investment income		401			534			1,141			1,210
Investment expenses		(15	)		(15	)		(29	)		(30	)
Net investment income	$	386		$	519		$	1,112		$	1,180
(a)    Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(90), $(17), $(60) and $1 for the three and six months ended June 30, 2012 and 2011. Investment gains (losses) are as follows:
Fixed maturity securities	$	17		$	20		$	47		$	40
Equity securities					(2	)		1			(2	)
Derivative instruments		(1	)					(2	)		(1	)
Short term investments					1						3
Other		4						6			2
Investment gains (a)	$	20		$	19		$	52		$	42

(a) Includes gross realized gains of $51, $90, $123 and $183 and gross realized losses of $34, $72, $75 and $145 on available-for-sale securities for the three and six months ended June 30, 2012 and 2011.

The components of other-than-temporary impairment (“OTTI”) losses recognized in earnings by asset type are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	6	$	15	$	16	$	24
Asset-backed:
Residential mortgage-backed		15		46		29		74
U.S. Treasury and obligations of government - sponsored enterprises						1
Total fixed maturities available-for-sale		21		61		46		98
Equity securities available-for-sale:
Common stock		2		1		4		4
Preferred stock								1
Total equity securities available-for-sale		2		1		4		5
Net OTTI losses recognized in earnings	$	23	$	62	$	50	$	103

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.

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

June 30, 2012	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	$	19,350	$	2,209	$	79	$	21,480
States, municipalities and political subdivisions		9,225		1,225		66		10,384
Asset-backed:
Residential mortgage-backed		5,817		215		141		5,891	$	42
Commercial mortgage-backed		1,514		82		27		1,569		(2	)
Other asset-backed		1,046		20		1		1,065
Total asset-backed		8,377		317		169		8,525		40
U.S. Treasury and obligations of government-sponsored enterprises		172		12				184
Foreign government		616		23				639
Redeemable preferred stock		101		10				111
Fixed maturities available-for-sale		37,841		3,796		314		41,323		40
Fixed maturities, trading		200				25		175
Total fixed maturities		38,041		3,796		339		41,498		40
Equity securities:
Common stock		27		21				48
Preferred stock		225		17				242
Equity securities available-for-sale		252		38				290		—
Equity securities, trading		647		67		115		599
Total equity securities		899		105		115		889		—
Total	$	38,940	$	3,901	$	454	$	42,387	$	40
December 31, 2011
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

The net unrealized gains on investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At June 30, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $846 million and $651 million. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction through Other comprehensive income (Shadow Adjustments).

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

	Less than 12 Months				12 Months or Longer				Total
June 30, 2012	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	$	1,550	$	53	$	192	$	26	$	1,742	$	79
States, municipalities and political subdivisions		174		2		301		64		475		66
Asset-backed:
Residential mortgage-backed		276		13		923		128		1,199		141
Commercial mortgage-backed		158		5		153		22		311		27
Other asset-backed		181		1						181		1
Total asset-backed		615		19		1,076		150		1,691		169
Total	$	2,339	$	74	$	1,569	$	240	$	3,908	$	314
December 31, 2011
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

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $15 million, $20 million, $47 million and $41 million for the three and six months ended June 30, 2012 and 2011.

The following table summarizes the activity for the three and six months ended June 30, 2012 and 2011 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2012 and 2011 for which a portion of an OTTI loss was recognized in Other comprehensive income.

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
(In millions)
Beginning balance of credit losses on fixed maturity securities	$	100		$	113		$	92		$	141
Additional credit losses for securities for which an OTTI loss was previously recognized		10			8			21			18
Credit losses for securities for which an OTTI loss was not previously recognized		1						2			1
Reductions for securities sold during the period		(4	)		(21	)		(8	)		(46	)
Reductions for securities the Company intends to sell or more likely than not will be required to sell		(8	)		(18	)		(8	)		(32	)
Ending balance of credit losses on fixed maturity securities	$	99		$	82		$	99		$	82

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.

Asset-Backed Securities

Asset-backed securities include residential mortgage-backed securities, both agency and non-agency, commercial mortgage-backed securities and other asset-backed securities. The fair value of total asset-backed holdings at June 30, 2012 was $8.5 billion which was comprised of 2,035 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.

The gross unrealized losses on residential mortgage-backed securities included $63 million related to securities guaranteed by a U.S. government agency or sponsored enterprise and $78 million related to non-agency structured securities. Non-agency structured securities included 94 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 8.9% of amortized cost.

Commercial mortgage-backed securities included 44 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 7.9% of amortized cost.

The following table summarizes asset-backed securities in a gross unrealized loss position by ratings distribution at June 30, 2012.

June 30, 2012	Amortized Cost		Estimated Fair Value		Gross Unrealized Losses
(In millions)
U.S. Government, Government Agencies and Government-Sponsored Enterprises	$	468	$	405	$	63
AAA		247		241		6
AA		163		155		8
A		141		134		7
BBB		162		148		14
Non-investment grade		679		608		71
Total	$	1,860	$	1,691	$	169

The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity 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 June 30, 2012.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 2012 and December 31, 2011. 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.

	June 30, 2012				December 31, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
(In millions)
Due in one year or less	$	1,889	$	1,904	$	1,802	$	1,812
Due after one year through five years		13,118		13,728		13,110		13,537
Due after five years through ten years		8,561		9,228		8,410		8,890
Due after ten years		14,273		16,463		14,017		15,692
Total	$	37,841	$	41,323	$	37,339	$	39,931

Investment Commitments

As of June 30, 2012, the Company had committed approximately $141 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 June 30, 2012, the Company had commitments to purchase $145 million and sell $124 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 June 30, 2012, the Company had obligations on unfunded bank loan participations in the amount of $12 million.