Investments

3 Months Ended

Mar. 31, 2013

Investments Debt And Equity Securities [Abstract]

Investments

2.  Investments

Net investment income is as follows:

Three Months Ended March 31	2013			2012
(In millions)
Fixed maturity securities	$	499		$	516
Short term investments		2			3
Limited partnership investments		146			143
Equity securities		3			4
Income (loss) from trading portfolio (a)		(3	)		70
Other		6			4
Total investment income		653			740
Investment expenses		(12	)		(14)
Net investment income	$	641		$	726

(a) Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(15) million and $36 million for the three months ended March 31, 2013 and 2012.

Investment gains (losses) are as follows:

Three Months Ended March 31	2013			2012
(In millions)
Fixed maturity securities	$	32		$	30
Equity securities		(13	)		1
Derivative instruments		2			(1)
Short term investments and other		3			2
Investment gains (a)	$	24		$	32

(a) Includes gross realized gains of $46 million and $72 million and gross realized losses of $27 million and $41 million on available-for-sale securities for the three months ended March 31, 2013 and 2012.

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

Three Months Ended March 31	2013		2012
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	3	$	10
Asset-backed:
Residential mortgage-backed				14
U.S. Treasury and obligations of government-sponsored enterprises				1
Total fixed maturities available-for-sale		3		25
Equity securities available-for-sale:
Common stock				2
Preferred stock		15
Total equity securities available-for-sale		15		2
Net OTTI losses recognized in earnings	$	18	$	27

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:

March 31, 2013	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		$    19,747		$ 2,562		$    18		$22,291
States, municipalities and political subdivisions		9,599		1,408		59		10,948
Asset-backed:
Residential mortgage-backed		5,518		235		70		5,683		$      (49)
Commercial mortgage-backed		1,853		147		10		1,990		(3)
Other asset-backed		932		23				955
Total asset-backed		8,303		405		80		8,628		(52)
U.S. Treasury and obligations of government-sponsored enterprises		170		11				181
Foreign government		528		24				552
Redeemable preferred stock		123		14		1		136
Fixed maturities available-for-sale		38,470		4,424		158		42,736		(52)
Fixed maturities, trading		198				22		176
Total fixed maturities		38,668		4,424		180		42,912		(52)
Equity securities:
Common stock		38		17				55
Preferred stock		139		7				146
Equity securities available-for-sale		177		24		-		201		-
Equity securities, trading		532		51		93		490
Total equity securities		709		75		93		691		-
Total		$    39,377		$ 4,499		$    273		$43,603		$      (52)

December 31, 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	$	19,530		$  2,698	$	21	$	22,207
States, municipalities and political subdivisions		9,372		1,455		44		10,783
Asset-backed:
Residential mortgage-backed		5,745		246		71		5,920	$	(28)
Commercial mortgage-backed		1,692		147		17		1,822		(3)
Other asset-backed		929		23				952
Total asset-backed		8,366		416		88		8,694		(31)
U.S. Treasury and obligations of government-sponsored enterprises		172		11		1		182
Foreign government		588		25				613
Redeemable preferred stock		113		13		1		125
Fixed maturities available-for-sale		38,141		4,618		155		42,604		(31)
Fixed maturities, trading		183				22		161
Total fixed maturities		38,324		4,618		177		42,765		(31)
Equity securities:
Common stock		38		14				52
Preferred stock		190		7				197
Equity securities available-for-sale		228		21		-		249		-
Equity securities, trading		665		80		96		649
Total equity securities		893		101		96		898		-
Total	$	39,217		$  4,719	$	273	$	43,663	$	(31)

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 noncontrolling interests and any required Shadow Adjustments. At March 31, 2013 and December 31, 2012, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $1.3 billion and $1.4 billion. 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 of net unrealized gains (losses) 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
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
March 31, 2013	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(In millions)
Fixed maturity securities:
Corporate and other bonds	$	951	$	13	$	50	$	5	$	1,001	$	18
States, municipalities and political subdivisions		683		16		121		43		804		59
Asset-backed:
Residential mortgage-backed		920		19		347		51		1,267		70
Commercial mortgage-backed		155		2		141		8		296		10
Total asset-backed		1,075		21		488		59		1,563		80
Redeemable preferred stock		34		1						34		1
Total	$	2,743	$	51	$	659	$	107	$	3,402	$	158

	Less than				12 Months
	12 Months				or Longer				Total
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2012	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(In millions)
Fixed maturity securities:
Corporate and other bonds	$	846	$	13	$	108	$	8	$	954	$	21
States, municipalities and political subdivisions		254		5		165		39		419		44
Asset-backed:
Residential mortgage-backed		583		5		452		66		1,035		71
Commercial mortgage-backed		85		2		141		15		226		17
Total asset-backed		668		7		593		81		1,261		88
U.S. Treasury and obligations of government- sponsored enterprises		23		1						23		1
Redeemable preferred stock		28		1						28		1
Total	$	1,819	$	27	$	866	$	128	$	2,685	$	155

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $19 million and $32 million for the three months ended March 31, 2013 and 2012.

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost 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 March 31, 2013.

The following table summarizes the activity for the three months ended March 31, 2013 and 2012 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at March 31, 2013 and 2012 for which a portion of an OTTI loss was recognized in Other comprehensive income.

Three Months Ended March 31	2013			2012
(In millions)
Beginning balance of credit losses on fixed maturity securities	$	95		$	92
Additional credit losses for securities for which an OTTI loss was previously recognized					11
Credit losses for securities for which an OTTI loss was not previously recognized					1
Reductions for securities sold during the period		(3	)		(4)
Ending balance of credit losses on fixed maturity securities	$	92		$	100

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2013 and December 31, 2012. 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.

	March 31, 2013				December 3 1, 2012
	Cost or		Estimated		Cost or		Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
(In millions)
Due in one year or less	$	1,783	$	1,819	$	1,648	$	1,665
Due after one year through five years		12,916		13,731		13,603		14,442
Due after five years through ten years		9,430		10,267		8,726		9,555
Due after ten years		14,341		16,919		14,164		16,942
Total	$	38,470	$	42,736	$	38,141	$	42,604

Investment Commitments

As of March 31, 2013, the Company had committed approximately $247 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. As of March 31, 2013, the Company had commitments to purchase or fund additional amounts of $167 million and sell $210 million under the terms of such securities.