3.	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.

The type of financial instruments being measured and the methodologies and inputs used at September 30, 2012 were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.

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:

September 30, 2012

Level 1

Level 2

Level 3

Total

(In millions)

Fixed maturity securities:

Corporate and other bonds

21,552

259

21,811

States, municipalities and political subdivisions

10,723

10,812

Asset-backed:

Residential mortgage-backed

5,653

437

6,090

Commercial mortgage-backed

1,571

117

1,688

Other asset-backed

595

371

966

Total asset-backed

7,819

925

8,744

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

168

192

Foreign government

139

475

614

Redeemable preferred stock

115

Fixed maturities available-for-sale

336

40,653

1,299

42,288

Fixed maturities, trading

141

Total fixed maturities

336

40,701

1,392

42,429

Equity securities available-for-sale

112

260

Equity securities, trading

748

759

Total equity securities

846

112

1,019

Short term investments

4,833

1,223

6,064

Other invested assets

Receivables

Life settlement contracts

113

Separate account business

338

345

Payable to brokers

(69

)

(18

)

(93

)


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	)

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 three and nine months ended September 30, 2012 and 2011:


	Balance, July 1		Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)						Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, September 30		Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at September 30
2012	Balance, July 1		Included in Net Income			Included in OCI			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, September 30
(In millions)

Fixed maturity securities:
Corporate and other bonds	$	488	$	1		$	(4	)	$	50	$	(5	)	$	(11	)	$		$	(260	)	$	259	$	(1	)
States, municipalities and political subdivisions		89																					89
Asset-backed:
Residential mortgage-backed		443		(17	)		20			21					(8	)				(22	)		437		(18	)
Commercial mortgage-backed		166		4			6			12					(17	)		11		(65	)		117
Other asset-backed		434		2			5			143		(117	)		(34	)				(62	)		371

Total asset-backed		1,043		(11	)		31			176		(117	)		(59	)		11		(149	)		925		(18	)
Redeemable preferred stock		27					(1	)															26

Fixed maturities available-for-sale		1,647		(10	)		26			226		(122	)		(70	)		11		(409	)		1,299		(19	)
Fixed maturities, trading		94										(1	)										93

Total fixed maturities	$	1,741	$	(10	)	$	26		$	226	$	(123	)	$	(70	)	$	11	$	(409	)	$	1,392	$	(19	)


Equity securities available-for-sale	$	93	$	(19	)	$	(10	)											$	(14	)	$	50	$	(19	)
Equity securities trading		9		2																			11		3

Total equity securities	$	102	$	(17	)	$	(10	)	$	—	$	—		$	—		$	—	$	(14	)	$	61	$	(16	)


Short term investments	$	4							$	7	$	(4	)				$	1				$	8
Other invested assets		11																					11
Life settlement contracts		116	$	7										$	(10	)							113
Separate account business		3																					3
Derivative financial instruments, net		12		(1	)	$	(5	)							(1	)							5	$	(2	)


2011	Balance, July 1			Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)						Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, September 30			Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at September 30
2011	Balance, July 1			Included in Net Income			Included in OCI			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, September 30
(In millions)

Fixed maturity securities:
Corporate and other bonds	$	812		$	(7	)	$	(3	)	$	113	$	(107	)	$	(47	)	$	12	$	(154	)	$	619		$	(10	)
States, municipalities and political subdivisions		179									3													182
Asset-backed:
Residential mortgage-backed		687			1			(5	)		73		(81	)		(13	)				(31	)		631
Commercial mortgage-backed		95						(7	)		76										(5	)		159
Other asset-backed		491			(5	)		(6	)		114		(105	)		(25	)		2		(37	)		429			(4	)

Total asset-backed		1,273			(4	)		(18	)		263		(186	)		(38	)		2		(73	)		1,219			(4	)

Fixed maturities available-for-sale		2,264			(11	)		(21	)		379		(293	)		(85	)		14		(227	)		2,020			(14	)
Fixed maturities, trading		114			(3	)																		111			(3	)

Total fixed maturities	$	2,378		$	(14	)	$	(21	)	$	379	$	(293	)	$	(85	)	$	14	$	(227	)	$	2,131		$	(17	)


Equity securities available-for-sale	$	36										$	(1	)						$	(3	)	$	32
Equity securities trading		16		$	(4	)																		12		$	(4	)

Total equity securities	$	52		$	(4	)	$	—		$	—	$	(1	)	$	—		$	—	$	(3	)	$	44		$	(4	)


Short term investments	$	6																					$	6
Other invested assets		10																						10
Life settlement contracts		129		$	11										$	(15	)							125		$	(1	)
Separate account business		37										$	(2	)										35
Derivative financial instruments, net		(37	)		(13	)	$	11								11								(28	)		(1	)


	Balance, January 1			Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)						Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, September 30		Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at September 30
2012	Balance, January 1			Included in Net Income			Included in OCI			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance, September 30
(In millions)

Fixed maturity securities:
Corporate and other bonds	$	482		$	7		$	2		$	196	$	(117	)	$	(43	)	$	42	$	(310	)	$	259	$	(1	)
States, municipalities and political subdivisions		171						3								(85	)							89
Asset-backed:
Residential mortgage-backed		452			(15	)		(2	)		81					(24	)				(55	)		437		(18	)
Commercial mortgage-backed		59			6			14			141		(12	)		(21	)		11		(81	)		117
Other asset-backed		343			8			8			501		(293	)		(93	)				(103	)		371

Total asset-backed		854			(1	)		20			723		(305	)		(138	)		11		(239	)		925		(18	)
Redeemable preferred stock								(1	)		53		(26	)										26

Fixed maturities available-for-sale		1,507			6			24			972		(448	)		(266	)		53		(549	)		1,299		(19	)
Fixed maturities, trading		101			(7	)					1		(2	)										93		(7	)

Total fixed maturities	$	1,608		$	(1	)	$	24		$	973	$	(450	)	$	(266	)	$	53	$	(549	)	$	1,392	$	(26	)


Equity securities available-for-sale	$	67		$	(19	)	$	6		$	26	$	(16	)						$	(14	)	$	50	$	(21	)
Equity securities trading		14			(3	)																		11		(1	)

Total equity securities	$	81		$	(22	)	$	6		$	26	$	(16	)	$	—		$	—	$	(14	)	$	61	$	(22	)


Short term investments	$	27								$	23	$	(4	)	$	(39	)	$	1				$	8
Other invested assets		11																						11
Life settlement contracts		117		$	30											(34	)							113	$	3
Separate account business		23											(20	)										3
Derivative financial instruments, net		(15	)		(5	)	$	29					(6	)		2								5		(1	)


2011	Balance, January 1			Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)																						Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities
																		Transfers		Transfers
				Included in Net Income			Included in OCI			Purchases		Sales			Settlements			into Level 3		out of Level 3			Balance, September 30			Held at September 30
(In millions)

Fixed maturity securities:
Corporate and other bonds	$	624		$	(5	)	$	(6	)	$	459	$	(157	)	$	(144	)	$	52	$	(204	)	$	619		$	(11	)
States, municipalities and political subdivisions		266									3					(87	)							182
Asset-backed:
Residential mortgage-backed		767			(11	)		9			170		(164	)		(54	)				(86	)		631			(15	)
Commercial mortgage-backed		73			3			11			81		(4	)							(5	)		159
Other asset-backed		359						(6	)		441		(236	)		(80	)		2		(51	)		429			(4	)

Total asset-backed		1,199			(8	)		14			692		(404	)		(134	)		2		(142	)		1,219			(19	)
Redeemable preferred stock		3			3			(3	)				(3	)

Fixed maturities available-for-sale		2,092			(10	)		5			1,154		(564	)		(365	)		54		(346	)		2,020			(30	)
Fixed maturities, trading		184			(1	)							(72	)										111			6

Total fixed maturities	$	2,276		$	(11	)	$	5		$	1,154	$	(636	)	$	(365	)	$	54	$	(346	)	$	2,131		$	(24	)

Equity securities available-for-sale	$	26		$	(2	)	$	(1	)	$	19	$	(12	)				$	5	$	(3	)	$	32		$	(3	)
Equity securities trading		6			(9	)					1								14					12			(9	)

Total equity securities	$	32		$	(11	)	$	(1	)	$	20	$	(12	)	$	—		$	19	$	(3	)	$	44		$	(12	)

Short term investments	$	27								$	12				$	(23	)			$	(10	)	$	6
Other invested assets		26		$	3							$	(19	)										10		$	1
Life settlement contracts		129			20											(24	)							125			2
Separate account business		41											(6	)										35
Derivative financial instruments, net		(21	)		(32	)	$	(5	)							30								(28	)		(1	)

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


Major Category of Assets and Liabilities		Consolidated Condensed 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 $106 million of transfers from Level 2 to Level 1 during the three and nine months ended September 30, 2012 and no transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2011. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Significant Unobservable Inputs

The table below presents quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.


September 30, 2012	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
(In millions)

Assets

Fixed maturity securities	$	98	Discounted cash flow	Expected maturity date	3.6 – 5.6 years (4.6 years)
		61	Market approach	Private offering price	$60.00 – $105.00 ($101.49)
Equity securities		33	Market approach	Private offering price	$0.10 – $3,842.00 per share
					($583.95 per share)
		17	Income approach	EBITDA(a) projection	$80 million
				EBITDA(a) multiple	1.82
Life settlement contracts		113	Discounted cash flow	Discount rate risk premium	9%
				Mortality assumption	65% – 928% (185%)

(a)	Earnings before interest, tax, depreciation and amortization

For fixed maturity securities, an increase to the expected call date assumption or decrease in the private offering price would result in a lower fair value measurement. For equity securities, an increase in the private offering price, earnings projections, and earnings multiples would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

Financial Assets and Liabilities Not Measured at Fair Value

The methods and assumptions used to estimate the fair value for financial assets and liabilities not measured at fair value were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.

The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the tables below. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.

Carrying

Estimated Fair Value

September 30, 2012

Amount

Level 1

Level 2

Level 3

Total

(In millions)

Financial Assets:

Other invested assets, primarily

mortgage loans

358

374

Financial Liabilities:

Premium deposits and annuity contracts

103

108

Short term debt

Long term debt

8,848

9,693

285

9,978


December 31, 2011	Carrying Amount		Estimated Fair Value
(In millions)

Financial assets:
Other invested assets, primarily mortgage loans	$	234	$	247

Financial liabilities:
Premium deposits and annuity contracts		109		114
Short term debt		88		90
Long term debt		8,913		9,533