Note 3. Investments

Net investment income is as follows:


Year Ended December 31	2018			2017			2016
(In millions)

Fixed maturity securities	$	1,795		$	1,812		$	1,819
Limited partnership investments		22			277			199
Short term investments		43			18			9
Equity securities		18			12			10
Income (loss) from trading portfolio (a)		(54	)		87			112
Other		54			35			45
Total investment income		1,878			2,241			2,194
Investment expenses		(61	)		(59	)		(59	)
Net investment income	$	1,817		$	2,182		$	2,135

(a)	Net unrealized gains (losses) related to changes in fair value on securities still held were $(121), $39 and $44 for the years ended December 31, 2018, 2017 and 2016.

As of December 31, 2018, the Company held no non-income producing fixed maturity securities. As of December 31, 2017, the Company held $2 million of non-income producing fixed maturity securities. As of December 31, 2018 and 2017, 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	2018			2017			2016
(In millions)

Fixed maturity securities	$	4		$	122		$	54
Equity securities		(74	)					(5	)
Derivative instruments		9			(4	)		(2	)
Short term investments and other		4			4			3
Investment gains (losses) (a)	$	(57	)	$	122		$	50

(a)

Gross realized gains on available-for-sale securities were $168, $187 and $209 for the years ended December 31, 2018, 2017 and 2016. Gross realized losses on available-for-sale securities were $164, $65 and $160 for the years ended December 31, 2018, 2017 and 2016. Net realized losses of $73 were recognized due to the change in fair value of non-redeemable preferred stock still held for the year ended December 31, 2018.

Net change in unrealized gains (losses) on investments is as follows:


Year Ended December 31	2018			2017			2016
(In millions)

Fixed maturity securities	$	(1,811)		$	728		$	225
Equity securities					32			(2)
Other					(2	)		1
Total net change in unrealized gains (losses) on investments	$	(1,811	)	$	758		$	224

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


Year Ended December 31	2018		2017		2016
(In millions)

Fixed maturity securities available-for-sale:
Corporate and other bonds	$	12	$	12	$	59
Asset-backed		9		1		13
Total fixed maturity securities available-for-sale		21		13		72
Equity securities available-for-sale				1		9
Net OTTI losses recognized in earnings	$	21	$	14	$	81

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


December 31, 2018	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	$	18,764	$	791	$	395	$	19,160
States, municipalities and political subdivisions		9,681		1,076		9		10,748
Asset-backed:
Residential mortgage-backed		4,815		68		57		4,826	$	(20	)
Commercial mortgage-backed		2,200		28		32		2,196
Other asset-backed		1,975		11		24		1,962
Total asset-backed		8,990		107		113		8,984		(20	)
U.S. Treasury and obligations of government-sponsored enterprises		156		3				159
Foreign government		480		5		4		481
Redeemable preferred stock		10						10
Fixed maturities available-for-sale		38,081		1,982		521		39,542		(20	)
Fixed maturities trading		153		4				157
Total fixed maturities	$	38,234	$	1,986	$	521	$	39,699	$	(20	)


December 31, 2017
(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 fixed maturity and equity securities	$	40,038	$	3,491	$	172	$	43,357	$	(38	)

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, 2018	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	$	8,543	$	340	$	825	$	55	$	9,368	$	395
States, municipalities and political subdivisions		517		8		5		1		522		9
Asset-backed:
Residential mortgage-backed		1,932		23		1,119		34		3,051		57
Commercial mortgage-backed		728		10		397		22		1,125		32
Other asset-backed		834		21		125		3		959		24
Total asset-backed		3,494		54		1,641		59		5,135		113
U.S. Treasury and obligations of government-sponsored enterprises		21				19				40
Foreign government		114		2		124		2		238		4
Total fixed maturity securities	$	12,689	$	404	$	2,614	$	117	$	15,303	$	521


December 31, 2017
(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 fixed maturity and equity securities	$	3,620	$	40	$	1,455	$	49	$	5,075	$	89

Based on current facts and circumstances, the Company believes the unrealized losses presented in the December 31, 2018 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, 2018.

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, 2018, 2017 and 2016 for which a portion of an OTTI loss was recognized in Other comprehensive income.


Year Ended December 31	2018			2017			2016
(In millions)

Beginning balance of credit losses on fixed maturity securities	$	27		$	36		$	53
Reductions for securities sold during the period		(9	)		(9	)		(16)
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	$	18		$	27		$	36

Contractual Maturity

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

December 31

2018

2017

Cost or
Amortized
Cost

Estimated
Fair Value

Cost or
Amortized
Cost

Estimated
Fair Value

(In millions)

Due in one year or less

$ 1,350

$ 1,359

$ 1,135

$ 1,157

Due after one year through five years

7,979

8,139

8,165

8,501

Due after five years through ten years

16,859

16,870

16,060

16,718

Due after ten years

11,893

13,174

12,852

15,108

Total

$ 38,081

$ 39,542

$ 38,212

$ 41,484

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, 2018 and 2017 was approximately $2.4 billion and $3.3 billion, which includes net undistributed earnings of $208 million and $903 million. Limited partnerships comprising 67.6% of the total carrying value are reported on a current basis through December 31, 2018 with no reporting lag, 11.4% 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 71.3% and 78.8% of the carrying value as of December 31, 2018 and 2017 employ hedge fund strategies. Limited partnerships comprising 24.3% and 18.1% of the carrying value at December 31, 2018 and 2017 were invested in private debt and equity. The remainder was 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 55.9% were equity related, 26.4% pursued a multi-strategy approach, 14.4% were focused on distressed investments and 3.3% were fixed income related as of December 31, 2018.

The ten largest limited partnership positions held totaled $1.1 billion and $1.5 billion as of December 31, 2018 and 2017. 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 2.6% and 2.9% of the aggregate partnership equity at December 31, 2018 and 2017, and the related income reflected on the Consolidated Statements of Income represents approximately 3.3%, 3.0% and 4.0% of the changes in aggregate partnership equity for the years ended December 31, 2018, 2017 and 2016.

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	2018						2017

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

(In millions)

With hedge designation:

Interest rate swaps	$	500	$	11			$	500	$	4

Without hedge designation:

Equity markets:
Options – purchased		213		18				224		12
– written		239				$ (17)		290				$ (7)
Futures – short								265		1
Commodity futures – long		32						44
Embedded derivative on funds withheld liability		172		4				167				(3)

Investment Commitments

As of December 31, 2018, the Company had committed approximately $574 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, 2018, the Company had commitments to purchase or fund additional amounts of $230 million and sell $78 million under the terms of such securities.

Investments on Deposit

Securities with carrying values of approximately $2.5 billion and $2.6 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2018 and 2017.

Cash and securities with carrying values of approximately $1.0 billion and $1.1 billion were deposited with financial institutions in trust accounts or as collateral for letters of credit to secure obligations with various third parties as of December 31, 2018 and 2017.