Note 3. Investments

Net investment income is as follows:


Year Ended December 31	2015			2014		2013

(In millions)

Fixed maturity securities	$	1,751		$	1,803	$	1,827
Limited partnership investments		119			304		519
Short term investments		11			4		5
Equity securities		12			12		12
Income from trading portfolio (a)		2			64		90
Other		34			34		25

Total investment income		1,929			2,221		2,478
Investment expenses		(63	)		(58)		(53	)

Net investment income	$	1,866		$	2,163	$	2,425

(a)	Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(46), $42 and $(2) for the years ended December 31, 2015, 2014 and 2013.

As of December 31, 2015, the Company held $54 million of non-income producing fixed maturity securities. As of December 31, 2014, the Company held no non-income producing fixed maturity securities. As of December 31, 2015 and 2014, no investments in a single issuer exceeded 10% of shareholders’ equity other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.

Investment gains (losses) are as follows:


Year Ended December 31	2015		2014			2013

(In millions)

Fixed maturity securities	$	(66)	$	41		$	41
Equity securities		(23)		1			(22	)
Derivative instruments		10		(1	)		(9	)
Short term investments and other		8		13			6

Investment gains (losses) (a)	$	(71)	$	54		$	16

(a)	Includes gross realized gains of $133, $178 and $198 and gross realized losses of $222, $136 and $179 on available-for-sale securities for the years ended December 31, 2015, 2014 and 2013.

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


Year Ended December 31	2015		2014		2013

(In millions)

Fixed maturity securities	$	(1,114)	$	1,511	$	(2,541	)
Equity securities		(6)		6		(15	)
Other		1

Total net change in unrealized gains (losses) on available-for-sale investments	$	(1,119)	$	1,517	$	(2,556	)

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


Year Ended December 31	2015		2014		2013

(In millions)

Fixed maturity securities available-for-sale:
Corporate and other bonds	$	104	$	18	$	20
States, municipalities and political subdivisions		18		46
Asset-backed:
Residential mortgage-backed		8		5		19
Other asset-backed		1		1		2

Total asset-backed		9		6		21

Total fixed maturities available-for-sale		131		70		41

Equity securities available-for-sale:
Common stock		25		7		8
Preferred stock						26

Total equity securities available-for-sale		25		7		34

Short term investments						1

Net OTTI losses recognized in earnings	$	156	$	77	$	76

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


December 31, 2015	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	$	17,097	$	1,019	$	347	$	17,769
States, municipalities and political subdivisions		11,729		1,453		8		13,174	$	(4	)
Asset-backed:
Residential mortgage-backed		4,935		154		17		5,072		(37	)
Commercial mortgage-backed		2,154		55		12		2,197
Other asset-backed		923		6		8		921

Total asset-backed		8,012		215		37		8,190		(37	)
U.S. Treasury and obligations of government- sponsored enterprises		62		5				67
Foreign government		334		13		1		346
Redeemable preferred stock		33		2				35

Fixed maturities available-for-sale		37,267		2,707		393		39,581		(41	)
Fixed maturities, trading		140				20		120

Total fixed maturities		37,407		2,707		413		39,701		(41	)

Equity securities:
Common stock		46		3		1		48
Preferred stock		145		7		3		149

Equity securities available-for-sale		191		10		4		197		-
Equity securities, trading		633		56		134		555

Total equity securities		824		66		138		752		-

Total	$	38,231	$	2,773	$	551	$	40,453	$	(41	)


December 31, 2014


Fixed maturity securities:
Corporate and other bonds	$	17,226	$	1,721	$	61	$	18,886
States, municipalities and political subdivisions		11,285		1,463		8		12,740
Asset-backed:
Residential mortgage-backed		5,028		218		13		5,233	$	(53	)
Commercial mortgage-backed		2,056		93		5		2,144		(2	)
Other asset-backed		1,234		11		10		1,235

Total asset-backed		8,318		322		28		8,612		(55	)
U.S. Treasury and obligations of government-sponsored enterprises		26		5				31
Foreign government		438		16				454
Redeemable preferred stock		39		3				42

Fixed maturities available-for-sale		37,332		3,530		97		40,765		(55	)
Fixed maturities, trading		137				17		120

Total fixed maturities		37,469		3,530		114		40,885		(55	)

Equity securities:
Common stock		38		9				47
Preferred stock		172		5		2		175

Equity securities available-for-sale		210		14		2		222		-
Equity securities, trading		523		96		113		506

Total equity securities		733		110		115		728		-

Total	$	38,202	$	3,640	$	229	$	41,613	$	(55	)

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, 2015	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	$	4,882	$	302	$	174	$	45	$	5,056	$	347
States, municipalities and political subdivisions		338		8		75				413		8
Asset-backed:
Residential mortgage-backed		963		9		164		8		1,127		17
Commercial mortgage-backed		652		10		96		2		748		12
Other asset-backed		552		8		5				557		8

Total asset-backed		2,167		27		265		10		2,432		37
U.S. Treasury and obligations of government- sponsored enterprises		4								4
Foreign government		54		1						54		1
Redeemable preferred stock		3								3

Total fixed maturity securities		7,448		338		514		55		7,962		393
Common stock		3		1						3		1
Preferred stock		13		3						13		3

Total	$	7,464	$	342	$	514	$	55	$	7,978	$	397



December 31, 2014


Fixed maturity securities:
Corporate and other bonds	$	1,330	$	46	$	277	$	15	$	1,607	$	61
States, municipalities and political subdivisions		335		5		127		3		462		8
Asset-backed:
Residential mortgage-backed		293		5		189		8		482		13
Commercial mortgage-backed		264		2		99		3		363		5
Other asset-backed		607		10		7				614		10

Total asset-backed		1,164		17		295		11		1,459		28
U.S. Treasury and obligations of government- sponsored enterprises		3				4				7
Foreign government		3				3				6
Redeemable preferred stock		3								3

Total fixed maturity securities		2,838		68		706		29		3,544		97
Preferred stock		17		2		1				18		2

Total	$	2,855	$	70	$	707	$	29	$	3,562	$	99

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors, including volatility in the energy and metals and mining sectors due to declines in the price of oil and other commodities. As of December 31, 2015, the Company held fixed maturity securities and equity securities with an estimated fair value of $2.5 billion and a cost or amortized cost of $2.7 billion in the energy and metals and mining sectors. The portion of these securities in a gross unrealized loss position had an estimated fair value of $1.4 billion and a cost or amortized cost of $1.6 billion. The Company has no current intent to sell securities with unrealized losses, 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, 2015.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2015, 2014 and 2013 for which a portion of an OTTI loss was recognized in Other comprehensive income.


Year Ended December 31	2015			2014			2013

(In millions)

Beginning balance of credit losses on fixed maturity securities	$	62		$	74		$	95
Additional credit losses for securities for which an OTTI loss was previously recognized								2
Reductions for securities sold during the period		(9	)		(9	)		(23	)
Reductions for securities the Company intends to sell or more likely than not will be required to sell					(3	)

Ending balance of credit losses on fixed maturity securities	$	53		$	62		$	74

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity.


December 31	2015				2014

	Cost or				Cost or
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value

(In millions)

Due in one year or less	$	1,574	$	1,595	$	2,479	$	2,511
Due after one year through five years		7,738		8,082		9,070		9,621
Due after five years through ten years		14,652		14,915		12,055		12,584
Due after ten years		13,303		14,989		13,728		16,049

Total	$	37,267	$	39,581	$	37,332	$	40,765

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.

Limited Partnerships

The carrying value of limited partnerships as of December 31, 2015 and 2014 was approximately $3.3 billion and $3.7 billion which includes undistributed earnings of $952 million and $1.3 billion. Limited partnerships comprising 70.8% of the total carrying value are reported on a current basis through December 31, 2015 with no reporting lag, 12.8% are reported on a one month lag and the remainder are reported on more than a one month lag. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.

Limited partnerships comprising 76.6% and 78.6% of the carrying value at December 31, 2015 and 2014 employ hedge fund strategies that generate returns through investing in marketable securities in the public fixed income and equity markets. Limited partnerships comprising 23.4% and 18.6% of the carrying value at December 31, 2015 and 2014 were invested in private debt and equity, and the remaining limited partnerships were primarily invested in real estate strategies. Hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. These 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 56.4% were equity related, 28.9% pursued a multi-strategy approach, 11.4% were focused on distressed investments and 3.3% were fixed income related at December 31, 2015.

The ten largest limited partnership positions held totaled $1.5 billion and $1.8 billion as of December 31, 2015 and 2014. 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 2.8% and 3.9% of the aggregate partnership equity at December 31, 2015 and 2014, and the related income reflected on the Consolidated Statements of Income represents approximately 2.8%, 4.3% and 3.7% of the changes in total partnership equity for the years ended December 31, 2015, 2014 and 2013.

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 advance written notice of up to 90 days.

Derivative Financial Instruments

The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, credit risk, equity price risk, commodity price risk and foreign currency risk) stemming from various assets and liabilities. The Company’s principal objective under such strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

The Company enters into interest rate swaps, futures and forward commitments to purchase securities to manage interest rate risk. Credit derivatives such as credit default swaps are entered into to modify the credit risk inherent in certain investments. Forward contracts, futures, swaps and options are used primarily to manage foreign currency and commodity price risk.

In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions include but are not limited to interest rate swaps, call options, put options, credit default swaps, index futures and foreign currency forwards. See Note 4 for information regarding the fair value of derivative instruments.

The following tables present the aggregate contractual or notional amount and estimated fair value related to derivative financial instruments.


December 31	2015							2014

	Contractual/							Contractual/
	Notional		Estimated Fair Value					Notional		Estimated Fair Value
	Amount		Asset		(Liability)			Amount		Asset		(Liability)

(In millions)

With hedge designation:

Foreign exchange:
Currency forwards – short								$	70			$	(5	)

Without hedge designation:

Equity markets:
Options – purchased	$	501	$	16					544	$	24
– written		614			$	(28	)		292				(21	)
Futures – long		312				(1	)
Futures – short									130		2
Interest rate risk:
Futures – long		63
Foreign exchange:
Currency forwards – long		133		2					109				(3	)
– short		152							88		2
Currency options – long		550		7					151		7
Embedded derivative on funds
withheld liability		179		5					184				(3	)

Investment Commitments

As of December 31, 2015, the Company had committed approximately $398 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 December 31, 2015, the Company had commitments to purchase or fund additional amounts of $138 million and sell $67 million under the terms of such securities.

Investments on Deposit

Securities with carrying values of approximately $2.8 billion and $3.0 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2015 and 2014.

Cash and securities with carrying values of approximately $364 million and $361 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2015 and 2014. 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 $263 million and $302 million as of December 31, 2015 and 2014.