Investments

12 Months Ended

Dec. 31, 2017

Text Block [Abstract]

Investments

Note 3. Investments

Net investment income is as follows:

Year Ended December 31	2017			2016			2015
(In millions)
Fixed maturity securities	$	1,812		$	1,819		$         1,751
Limited partnership investments		277			199		119
Short term investments		18			9		11
Equity securities		12			10		12
Income from trading portfolio (a)		87			112		2
Other		35			45		34
Total investment income		2,241			2,194		1,929
Investment expenses		(59	)		(59	)	(63)
Net investment income	$	2,182		$	2,135		$         1,866

(a) Net unrealized gains (losses) related to changes in fair value on trading securities still held were $39, $44 and $(46) for the years ended December 31, 2017, 2016 and 2015.

As of December 31, 2017, the Company held $2 million of non-income producing fixed maturity securities. As of December 31, 2016, the Company held no non-income producing fixed maturity securities. As of December 31, 2017 and 2016, 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	2017			2016			2015
(In millions)
Fixed maturity securities	$	122		$	54		$         (66)
Equity securities					(5	)	(23)
Derivative instruments		(4	)		(2	)	10
Short term investments and other		4			3		8
Investment gains (losses) (a)	$	122		$	50		$         (71)

(a) Gross realized gains on available-for-sale securities were $187, $209 and $133 for the years ended December 31, 2017, 2016 and 2015. Gross realized losses on available-for-sale securities were $65, $160 and $222 for the years ended December 31, 2017, 2016 and 2015.

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

Year Ended December 31	2017			2016			2015
(In millions)
Fixed maturity securities	$	728		$	225		$         (1,114)
Equity securities		32			(2	)	(6)
Other		(2	)		1		1
Total net change in unrealized gains (losses) on available-for-sale investments	$	758		$	224		$         (1,119)

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

Year Ended December 31	2017		2016		2015
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	12	$	59	$         104
States, municipalities and political subdivisions					18
Asset-backed:
Residential mortgage-backed		1		10	8
Other asset-backed				3	1
Total asset-backed		1		13	9
Total fixed maturities available-for-sale		13		72	131
Equity securities available-for-sale		1		9	25
Net OTTI losses recognized in earnings	$	14	$	81	$         156

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

	Cost or		Gross		Gross				Unrealized
	Amortized		Unrealized		Unrealized		Estimated		OTTI Losses
December 31, 2017	Cost		Gains		Losses		Fair Value		(Gains)
(In millions)
Fixed maturity securities:
Corporate and other bonds	$	17,210	$	1,625	$	28	$	18,807
States, municipalities and political subdivisions		12,478		1,551		2		14,027		$      (11)
Asset-backed:
Residential mortgage-backed		5,043		109		32		5,120		(27)
Commercial mortgage-backed		1,840		46		14		1,872
Other asset-backed		1,083		16		5		1,094
Total asset-backed		7,966		171		51		8,086		(27)
U.S. Treasury and obligations of government- sponsored enterprises		111		2		4		109
Foreign government		437		9		2		444
Redeemable preferred stock		10		1				11
Fixed maturities available-for-sale		38,212		3,359		87		41,484		(38)
Fixed maturities trading		649		2		2		649
Total fixed maturities		38,861		3,361		89		42,133		(38)
Equity securities:
Common stock		21		7		1		27
Preferred stock		638		31		1		668
Equity securities available-for-sale		659		38		2		695		-
Equity securities trading		518		92		81		529
Total equity securities		1,177		130		83		1,224		-
Total	$	40,038	$	3,491	$	172	$	43,357		$      (38)

December 31, 2016	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		$    17,711		$  1,323		$    76		$    18,958		$       (1)
States, municipalities and political subdivisions		12,060		1,213		33		13,240		(16)
Asset-backed:
Residential mortgage-backed		5,004		120		51		5,073		(28)
Commercial mortgage-backed		2,016		48		24		2,040
Other asset-backed		1,022		8		5		1,025
Total asset-backed		8,042		176		80		8,138		(28)
U.S. Treasury and obligations of government-sponsored enterprises		83		10				93
Foreign government		435		13		3		445
Redeemable preferred stock		18		1				19
Fixed maturities available-for-sale		38,349		2,736		192		40,893		(45)
Fixed maturities trading		598		3				601
Total fixed maturities		38,947		2,739		192		41,494		(45)
Equity securities:
Common stock		13		6				19
Preferred stock		93		2		4		91
Equity securities available-for-sale		106		8		4		110		-
Equity securities trading		465		60		86		439
Total equity securities		571		68		90		549		-
Total		$    39,518		$  2,807		$    282		$    42,043		$    (45)

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, 2017	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		$    1,354		$      21		$       168		$      7		$    1,522		$      28
States, municipalities and political subdivisions		72		1		85		1		157		2
Asset-backed:
Residential mortgage-backed		1,228		5		947		27		2,175		32
Commercial mortgage-backed		403		4		212		10		615		14
Other asset-backed		248		3		18		2		266		5
Total asset-backed		1,879		12		1,177		39		3,056		51
U.S. Treasury and obligations of government- sponsored enterprises		49		2		21		2		70		4
Foreign government		166		2		4				170		2
Total fixed maturity securities		3,520		38		1,455		49		4,975		87
Equity securities:
Common stock		7		1						7		1
Preferred stock		93		1						93		1
Total equity securities		100		2		-		-		100		2
Total		$      3,620		$    40		$    1,455		$    49		$    5,075		$    89

	Less than				12 Months
	12 Months				or Longer				Total
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2016	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Fixed maturity securities:
Corporate and other bonds		$    2,615		$      61		$    254		$    15		$    2,869		$      76
States, municipalities and political subdivisions		959		32		23		1		982		33
Asset-backed:
Residential mortgage-backed		2,136		44		201		7		2,337		51
Commercial mortgage-backed		756		22		69		2		825		24
Other asset-backed		398		5		24				422		5
Total asset-backed		3,290		71		294		9		3,584		80
U.S. Treasury and obligations of government- sponsored enterprises		5								5
Foreign government		108		3						108		3
Total fixed maturity securities		6,977		167		571		25		7,548		192
Equity securities		12				13		4		25		4
Total		$    6,989		$    167		$    584		$    29		$    7,573		$    196

Based on current facts and circumstances, the Company believes the unrealized losses presented in the December 31, 2017 securities in a gross unrealized loss position 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. 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, 2017.

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, 2017, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income.

Year Ended December 31	2017			2016			2015
(In millions)
Beginning balance of credit losses on fixed maturity securities	$	36		$	53		$	62
Reductions for securities sold during the period		(9	)		(16	)		(9)
Reductions for securities the Company intends to sell or more likely than not will be required to sell					(1	)
Ending balance of credit losses on fixed maturity securities	$	27		$	36		$	53

Contractual Maturity

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

December 31	2017				2016
	Cost or				Cost or
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
(In millions)
Due in one year or less		$    1,135		$    1,157		$    1,779		$    1,828
Due after one year through five years		8,165		8,501		7,566		7,955
Due after five years through ten years		16,060		16,718		15,892		16,332
Due after ten years		12,852		15,108		13,112		14,778
Total		$  38,212		$  41,484		$  38,349		$  40,893

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, 2017 and 2016 was approximately $3.3 billion and $3.2 billion, which includes undistributed earnings of $903 million and $820 million. Limited partnerships comprising 71.6% of the total carrying value are reported on a current basis through December 31, 2017 with no reporting lag, 13.2% of the total carrying value 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 78.8% and 76.6% of the carrying value as of December 31, 2017 and 2016 employ hedge fund strategies. Limited partnerships comprising 18.1% and 19.8% of the carrying value at December 31, 2017 and 2016 were invested in private debt and equity and the remainder 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 64.5% were equity related, 20.7% pursued a multi-strategy approach, 11.1% were focused on distressed investments and 3.7% were fixed income related as of December 31, 2017.

The ten largest limited partnership positions held totaled $1.5 billion as of December 31, 2017 and 2016. 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 2.9% and 3.5% of the aggregate partnership equity at December 31, 2017 and 2016, and the related income reflected on the Consolidated Statements of Income represents approximately 3.0%, 4.0% and 2.8% of the changes in aggregate partnership equity for the years ended December 31, 2017, 2016 and 2015.

While the Company generally does not invest in highly leveraged partnerships, there are risks inherent in limited partnership investments 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 may use derivatives in the normal course of business, primarily in an attempt to reduce 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 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 may enter into interest rate swaps, futures and forward commitments to purchase securities to manage interest rate risk. Credit derivatives such as credit default swaps may be entered into to modify the credit risk inherent in certain investments. Forward contracts, futures, swaps and options may be used 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	2017						2016
	Contractual/						Contractual/
	Notional		Estimated Fair Value				Notional		Estimated Fair Value
	Amount		Asset		(Liability)		Amount		Asset		(Liability)
(In millions)
With hedge designation:
Interest rate swaps	$	500	$	4
Without hedge designation:
Equity markets:
Options  – purchased		224		12				$ 223		$   14
– written		290				$    (7)		267				$  (8)
Futures – short		265		1				225		1
Commodity futures – long		44						42
Embedded derivative on funds withheld liability		167				(3)		174		3

Investment Commitments

As of December 31, 2017, the Company had committed approximately $384 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. Purchases and sales of privately placed debt securities are recorded once funded. As of December 31, 2017, the Company had commitments to purchase or fund additional amounts of $165 million and sell $108 million under the terms of such securities.

Investments on Deposit

Securities with carrying values of approximately $2.6 billion and $2.3 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2017 and 2016.

Cash and securities with carrying values of approximately $471 million and $514 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2017 and 2016. 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 $587 million and $261 million as of December  31, 2017 and 2016.