Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x

  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                          to                        

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2646102
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

667 Madison Avenue, New York, N.Y. 10065-8087

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

  Yes        x          No      ¨  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

  Yes        x          No      ¨       Not Applicable      ¨  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

  x      Accelerated filer    ¨      Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

  Yes      ¨       No        x     

 

Class

     

Outstanding at October 22, 2010

Common stock, $0.01 par value     416,215,016 shares

 

 

 


Table of Contents

 

INDEX

 

     Page
No.
 

Part I.  Financial Information

  

Item 1.  Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
September 30, 2010 and December 31, 2009

     3   

Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2010 and 2009

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September  30, 2010 and 2009

     5   

Consolidated Condensed Statement of Equity
Nine months ended September 30, 2010

     6   

Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2010 and 2009

     7   

Notes to Consolidated Condensed Financial Statements

     9   

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     76   

Item 4.  Controls and Procedures

     76   

Part II.  Other Information

     76   

Item 1.  Legal Proceedings

     76   

Item 1A.  Risk Factors

     76   

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     79   

Item 6.  Exhibits

     79   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

      September 30,
2010
    December 31,
2009
 
(Dollar amounts in millions, except per share data)             

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $36,668 and $35,824

   $ 38,919      $ 35,816   

Equity securities, cost of $937 and $943

     1,078        1,007   

Limited partnership investments

     2,648        1,996   

Other invested assets

     98     

Short term investments

     6,099        7,215   
   

Total investments

     48,842        46,034   

Cash

     132        190   

Receivables

     11,091        10,212   

Property, plant and equipment

     12,619        13,274   

Deferred income taxes

       627   

Goodwill

     856        856   

Other assets

     1,723        1,346   

Deferred acquisition costs of insurance subsidiaries

     1,096        1,108   

Separate account business

     462        423   
   

Total assets

   $ 76,821      $ 74,070   
   

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 25,783      $ 26,816   

Future policy benefits

     8,372        7,981   

Unearned premiums

     3,265        3,274   

Policyholders’ funds

     164        192   
   

Total insurance reserves

     37,584        38,263   

Payable to brokers

     968        540   

Short term debt

     647        10   

Long term debt

     8,829        9,475   

Deferred income taxes

     557     

Other liabilities

     4,275        4,274   

Separate account business

     462        423   
   

Total liabilities

     53,322        52,985   
   

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 425,805,625 and 425,497,522 shares

     4        4   

Additional paid-in capital

     3,758        3,637   

Retained earnings

     14,433        13,693   

Accumulated other comprehensive income (loss)

     1,017        (419
   
     19,212        16,915   

Less treasury stock, at cost (9,613,700 and 427,200 shares)

     (353     (16
   

Total shareholders’ equity

     18,859        16,899   

Noncontrolling interests

     4,640        4,186   
   

Total equity

     23,499        21,085   
   

Total liabilities and equity

   $ 76,821      $ 74,070   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2010     2009     2010     2009  
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,645      $ 1,707      $ 4,868      $ 5,035   

Net investment income

     654        726        1,797        1,908   

Investment gains (losses):

        

Other-than-temporary impairment losses

     (41     (232     (189     (1,330

Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss)

     (3     84        28        173   
   

Net impairment losses recognized in earnings

     (44     (148     (161     (1,157

Other net investment gains

     106        48        255        229   
   

Total investment gains (losses)

     62        (100     94        (928

Contract drilling revenues

     749        885        2,405        2,664   

Other

     591        520        1,736        1,616   
   

Total

     3,701        3,738        10,900        10,295   
   

Expenses:

        

Insurance claims and policyholders’ benefits

     1,343        1,282        3,798        3,919   

Amortization of deferred acquisition costs

     351        365        1,038        1,063   

Contract drilling expenses

     355        307        1,009        907   

Impairment of natural gas and oil properties

           1,036   

Other operating expenses (Note 5)

     1,267        709        2,714        2,202   

Interest

     127        117        384        321   
   

Total

     3,443        2,780        8,943        9,448   
   

Income before income tax

     258        958        1,957        847   

Income tax expense

     (84     (266     (619     (68
   

Income from continuing operations

     174        692        1,338        779   

Discontinued operations, net (Note 5)

     (22     (1     (21     (2
   

Net income

     152        691        1,317        777   

Amounts attributable to noncontrolling interests

     (116     (223     (495     (616
   

Net income attributable to Loews Corporation

   $ 36      $ 468      $ 822      $ 161   
   

Net income attributable to:

        

Loews common stock:

        

Income from continuing operations

   $ 56      $ 469      $ 841      $ 163   

Discontinued operations, net

     (20     (1     (19     (2
   

Net income

   $ 36      $ 468      $ 822      $ 161   
   

Basic and diluted net income per share:

        

Income from continuing operations

   $ 0.13      $ 1.08      $ 2.00      $ 0.37   

Discontinued operations, net

     (0.04       (0.04  
   

Net income

   $ 0.09      $ 1.08      $ 1.96      $ 0.37   
   

Dividends per share

   $ 0.0625      $ 0.0625      $ 0.1875      $ 0.1875   
   

Weighted-average shares outstanding:

        

Common stock

     417.67        432.75        419.67        434.30   

Dilutive potential shares of common stock

     0.80        0.73        0.80        0.59   
   

Total weighted-average shares outstanding assuming dilution

     418.47        433.48        420.47        434.89   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2010     2009     2010     2009  
(In millions)                         

Net income

   $ 152      $ 691      $ 1,317      $ 777   
   

Other comprehensive income (loss)

        

Changes in:

        

Net unrealized gains (losses) on investments with other- than-temporary impairments

     39        (36     81        (70

Net other unrealized gains on investments

     720        1,893        1,400        3,784   
   

Total unrealized gains on available-for-sale investments

     759        1,857        1,481        3,714   

Unrealized gains (losses) on cash flow hedges

     15        (55     82        (52

Foreign currency

     38        39        44        109   

Pension liability

     (2     3        2        3   
   

Other comprehensive income

     810        1,844        1,609        3,774   
   

Comprehensive income

     962        2,535        2,926        4,551   

Amounts attributable to noncontrolling interests

     (206     (424     (671     (1,024
   

Total comprehensive income attributable to Loews Corporation

   $ 756      $ 2,111      $ 2,255      $ 3,527   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

(Unaudited)

 

           Loews Corporation Shareholders        
      Total     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Stock
Held in
Treasury
    Noncontrolling
Interests
 
(In millions)                                             

Balance, January 1, 2010

   $ 21,085      $ 4       $ 3,637       $ 13,693      $ (419   $ (16   $ 4,186   

Sale of subsidiary common units

     279           83           1          195   

Net income

     1,317              822            495   

Other comprehensive income

     1,609                1,433          176   

Dividends paid

     (476           (79         (397

Purchase of Loews treasury stock

     (337               (337  

Issuance of Loews common stock

     5           5            

Stock-based compensation

     17           15               2   

Other

               18         (3     2          (17
   

Balance, September 30, 2010

   $ 23,499      $ 4       $ 3,758       $ 14,433      $ 1,017      $ (353   $ 4,640   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2010     2009  
(In millions)             

Operating Activities:

    

Net income

   $ 1,317      $ 777   

Adjustments to reconcile net income to net cash provided by operating activities, net

     640        2,183   

Changes in operating assets and liabilities, net:

    

Reinsurance receivables

     (545     760   

Other receivables

     (38     (217

Deferred acquisition costs

     12        (13

Insurance reserves

     (563     (488

Other liabilities

     28        (184

Trading securities

     243        96   

Other, net

     (110     (134
   

Net cash flow operating activities – continuing operations

     984        2,780   

Net cash flow operating activities – discontinued operations

     (89     (16
   

Net cash flow operating activities – total

     895        2,764   
   

Investing Activities:

    

Purchases of fixed maturities

     (12,981     (18,099

Proceeds from sales of fixed maturities

     9,263        15,507   

Proceeds from maturities of fixed maturities

     2,891        2,568   

Purchases of equity securities

     (92     (262

Proceeds from sales of equity securities

     215        511   

Purchases of property, plant and equipment

     (670     (2,170

Dispositions

     789        37   

Change in short term investments

     629        (799

Change in other investments

     (552     6   

Other, net

     7        (2
   

Net cash flow investing activities – continuing operations

     (501     (2,703

Net cash flow investing activities – discontinued operations

     75        16   
   

Net cash flow investing activities – total

     (426     (2,687
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2010     2009  
(In millions)             

Financing Activities:

    

Dividends paid

   $ (79   $ (81

Dividends paid to noncontrolling interests

     (397     (482

Purchases of treasury shares

     (351     (143

Issuance of common stock

     5        5   

Proceeds from sale of subsidiary stock

     337        180   

Principal payments on debt

     (659     (568

Issuance of debt

     645        1,014   

Policyholders’ investment contract net deposits (withdrawals)

     (8     (7

Other, net

     (20     22   
   

Net cash flow financing activities – continuing operations

     (527     (60

Net cash flow financing activities – discontinued operations

    
   

Net cash flow financing activities – total

     (527     (60
   

Effect of foreign exchange rate on cash

       8   
   

Net change in cash

     (58     25   

Net cash transactions:

    

From continuing operations to discontinued operations

     (14  

To discontinued operations from continuing operations

     14     

Cash, beginning of period

     190        131   
   

Cash, end of period

   $ 132      $ 156   
   

Cash, end of period:

    

Continuing operations

   $ 132      $ 156   

Discontinued operations

    
   

Total

   $ 132      $ 156   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned subsidiary); exploration, production and marketing of natural gas and natural gas liquids (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); the operation of interstate natural gas pipeline systems (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 66% owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). In the first quarter of 2010 the Company sold 11.5 million common units of its subsidiary, Boardwalk Pipeline, for $333 million, reducing the Company’s ownership interest from 72% to 66%. Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) – Loews” as used herein means Net income (loss) attributable to Loews Corporation.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2010 and December 31, 2009 and the results of operations and comprehensive income for the three and nine months ended September 30, 2010 and 2009 and changes in cash flows for the nine months ended September 30, 2010 and 2009.

Net income for the third quarter and first nine months of each of the years is not necessarily indicative of net income for that entire year.

Reference is made to the Notes to Consolidated Financial Statements in the 2009 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

The Company presents basic and diluted earnings per share on the Consolidated Condensed Statements of Income. Basic earnings per share excludes dilution and is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock appreciation rights (“SARs”) of 2.6 million shares were not included in the diluted weighted average shares amount for the three and nine months ended September 30, 2010 due to the exercise price being greater than the average stock price. For the three and nine months ended September 30, 2009, 3.1 and 3.3 million shares, consisting of stock options and SARs, are not included in the diluted weighted average shares amount as their effects are antidilutive.

In August of 2010, CNA issued $500 million of 5.875% senior notes due August 15, 2020.

Sale of Assets – On April 30, 2010, HighMount completed the sale of exploration and production assets located in the Antrim Shale in Michigan and on May 28, 2010, HighMount completed the sale of exploration and production assets located in the Black Warrior Basin in Alabama. These sales did not have a material impact on the Consolidated Condensed Statements of Income. HighMount used the net proceeds from the sale, of approximately $500 million, to reduce the outstanding debt under its term loans.

On July 7, 2010, Diamond Offshore completed the sale of one of its high performance, premium jack-up drilling rigs, the Ocean Shield, and recognized a pretax gain of approximately $31 million in the third quarter of 2010.

Accounting changes – In March of 2010, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance which amended the accounting and reporting requirements related to derivatives to provide clarifying language regarding when embedded credit derivative features, including those in synthetic collateralized debt and loan obligations, are considered embedded derivatives subject to potential bifurcation. The adoption of this updated accounting guidance as of July 1, 2010 did not have a material impact on the Company’s financial condition or results of operations.

 

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In June of 2009, the FASB issued updated accounting guidance which amended the requirements for determination of the primary beneficiary of a variable interest entity, required an ongoing assessment of whether an entity is the primary beneficiary and required enhanced interim and annual disclosures. The updated accounting guidance became effective for quarterly and annual reporting periods beginning after November 15, 2009, except for investment company type entities for which the requirements under this guidance have been deferred indefinitely. The adoption of this updated accounting guidance as of January 1, 2010 had no impact on the Company’s financial condition or results of operations.

New accounting standards not yet adopted – In October of 2010, the FASB issued updated accounting guidance which limits the capitalization of costs incurred to acquire or renew insurance contracts to those that are incremental direct costs of successful contract acquisitions. The updated accounting guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 with prospective or retrospective application allowed. The Company is currently assessing the impact this updated accounting guidance will have on its financial condition and results of operations, and expects that amounts capitalized under the updated guidance will be less than under the Company’s current accounting practice.

2. Investments

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2010     2009     2010     2009  
(In millions)                         

Net investment income consisted of:

        

Fixed maturity securities

   $ 511      $ 496      $ 1,540      $ 1,458   

Short term investments

     4        9        18        33   

Limited partnerships

     91        156        178        245   

Equity securities

     7        11        26        39   

Income from trading portfolio (a)

     52        65        68        163   

Other

     3        2        8        6   
   

Total investment income

     668        739        1,838        1,944   

Investment expenses

     (14     (13     (41     (36
   

Net investment income

   $ 654      $ 726      $ 1,797      $ 1,908   
   

(a)     Includes net unrealized gains related to changes in fair value on trading securities still held of $55 million, $67 million, $52 million and $104 million for the respective periods.

    

Investment gains (losses) are as follows:

    

Fixed maturity securities

   $ 76      $ (112   $ 169      $ (862

Equity securities

     (17     19        (42     (133

Derivative instruments

     (1     (13     (32     51   

Short term investments

     1        2        5        11   

Other

     3        4        (6     5   
   

Investment gains (losses) (a)

   $ 62      $ (100   $ 94      $ (928
   

(a)     Includes gross realized gains of $124 million, $168 million, $359 million and $449 million and gross realized losses of $65 million, $261 million, $232 million and $1,444 million on available-for-sale securities for the respective periods.

    

 

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

 

      Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
      2010      2009      2010      2009  
(In millions)                            

Fixed maturity securities available-for-sale:

           

Asset-backed securities:

           

Residential mortgage-backed securities

   $ 18       $ 108       $ 55       $ 376   

Commercial mortgage-backed securities

        4         2         185   

Other asset-backed securities

           2         31   
   

Total asset-backed securities

     18         112         59         592   

States, municipalities and political subdivisions securities

        12         20         27   

Corporate and other bonds

     17         24         59         308   

Redeemable preferred stock

              9   
   

Total fixed maturities available-for-sale

     35         148         138         936   
   

Equity securities available-for-sale:

           

Common stock

     5            10         4   

Preferred stock

     4            13         217   
   

Total equity securities available-for-sale

     9                 23         221   
   

Net OTTI losses recognized in earnings

   $ 44       $ 148       $ 161       $ 1,157   
   

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 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. In order 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 an OTTI loss in Other comprehensive income.

 

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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, credit support from lower level tranches and impacts of rating agency downgrades.

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.

Prior to adoption of the updated accounting guidance related to OTTI in the second quarter of 2009, OTTI losses were not bifurcated between credit and non-credit components. The difference between fair value and amortized cost was recognized in earnings for all securities for which the Company did not expect to recover the amortized cost basis, or for which the Company did not have the ability and intent to hold until recovery of fair value to amortized cost.

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

 

September 30, 2010    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI
Losses
 
(In millions)                                   

Fixed maturity securities:

              

U.S. Treasury securities and obligations of government agencies

   $ 130       $ 18       $ 1       $ 147      

Asset-backed securities:

              

Residential mortgage-backed securities

     6,090         154         267         5,977       $ 214   

Commercial mortgage-backed securities

     1,032         34         65         1,001      

Other asset-backed securities

     650         23         8         665      
   

Total asset-backed securities

     7,772         211         340         7,643         214   

States, municipalities and political subdivisions securities

     7,782         472         246         8,008      

Foreign government securities

     590         25            615      

Corporate and other bonds

     20,035         2,189         69         22,155      

Redeemable preferred stock

     47         6            53      
   

Fixed maturities available- for-sale

     36,356         2,921         656         38,621         214   

Fixed maturities, trading

     312         2         16         298      
   

Total fixed maturities

     36,668         2,923         672         38,919         214   
   

Equity securities:

              

Common stock

     94         19         1         112      

Preferred stock

     371         55         7         419      
   

Equity securities available-for-sale

     465         74         8         531      

Equity securities, trading

     472         110         35         547      
   

Total equity securities

     937         184         43         1,078           
   

Total

   $ 37,605       $ 3,107       $ 715       $ 39,997       $ 214   
   

 

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December 31, 2009
   Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI
Losses
 
(In millions)                                   

Fixed maturity securities:

              

U.S. Treasury securities and obligations of government agencies

   $ 184       $ 16       $ 1       $ 199      

Asset-backed securities:

              

Residential mortgage-backed securities

     7,470         72         604         6,938       $ 246   

Commercial mortgage-backed securities

     709         10         135         584         3   

Other asset-backed securities

     858         14         40         832      
   

Total asset-backed securities

     9,037         96         779         8,354         249   

States, municipalities and political subdivisions securities

     7,280         203         359         7,124      

Foreign government securities

     467         14         2         479      

Corporate and other bonds

     18,410         1,107         288         19,229         26   

Redeemable preferred stock

     51         4         1         54      
   

Fixed maturities available-for-sale

     35,429         1,440         1,430         35,439         275   

Fixed maturities, trading

     395         3         21         377      
   

Total fixed maturities

     35,824         1,443         1,451         35,816         275   
   

Equity securities:

              

Common stock

     61         14         2         73      

Preferred stock

     572         40         41         571      
   

Equity securities available-for-sale

     633         54         43         644         —     

Equity securities, trading

     310         109         56         363      
   

Total equity securities

     943         163         99         1,007         —     
   

Total

   $ 36,767       $ 1,606       $ 1,550       $ 36,823       $ 275   
   

The available-for-sale securities in a gross unrealized loss position are as follows:

 

     Less than 12 Months      Greater than 12 Months      Total  
September 30, 2010    Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                                          

Fixed maturity securities:

                 

U.S. Treasury securities and obligations of government agencies

         $ 10       $ 1       $ 10       $ 1   

Asset-backed securities:

                 

Residential mortgage-backed securities

   $ 636       $ 10         2,086         257         2,722         267   

Commercial mortgage-backed securities

     122         1         321         64         443         65   

Other asset-backed securities

     24            60         8         84         8   
   

Total asset-backed securities

     782         11         2,467         329         3,249         340   

States, municipalities and political subdivisions securities

     151         4         1,344         242         1,495         246   

Corporate and other bonds

     472         9         745         60         1,217         69   
   

Total fixed maturities available-for-sale

     1,405         24         4,566         632         5,971         656   
   

Equity securities available-for-sale:

                 

Common stock

     13         1         1            14         1   

Preferred stock

     64         1         135         6         199         7   
   

Total equity securities available-for-sale

     77         2         136         6         213         8   
   

Total

   $ 1,482       $ 26       $ 4,702       $ 638       $ 6,184       $ 664   
   

 

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     Less than 12 Months      Greater than 12 Months      Total  
December 31, 2009    Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                                          

Fixed maturity securities:

                 

U.S. Treasury securities and obligations of government agencies

   $ 21       $ 1             $ 21       $ 1   

Asset-backed securities:

                 

Residential mortgage-backed securities

     1,945         43       $ 3,069       $ 561         5,014         604   

Commercial mortgage-backed securities

     21         1         456         134         477         135   

Other asset-backed securities

     170         1         119         39         289         40   
   

Total asset-backed securities

     2,136         45         3,644         734         5,780         779   

States, municipalities and political subdivisions securities

     1,036         30         2,086         329         3,122         359   

Foreign government securities

     154         1         7         1         161         2   

Corporate and other bonds

     2,395         44         1,948         244         4,343         288   

Redeemable preferred stock

     3            14         1         17         1   
   

Total fixed maturities available- for-sale

     5,745         121         7,699         1,309         13,444         1,430   
   

Equity securities available-for-sale:

                 

Common stock

     8         1         12         1         20         2   

Preferred stock

           426         41         426         41   
   

Total equity securities available- for-sale

     8         1         438         42         446         43   
   

Total

   $ 5,753       $ 122       $ 8,137       $ 1,351       $ 13,890       $ 1,473   
   

The amount of pretax net unrealized gains on available-for-sale securities reclassified out of Accumulated other comprehensive income (“AOCI”) into earnings was $62 million and $133 million for the three and nine months ended September 30, 2010. The amount of pretax net unrealized losses on available-for-sale securities reclassified out of AOCI into earnings was $92 million and $989 million for the three and nine months ended September 30, 2009.

Activity for the three and nine months ended September 30, 2010 related to the pretax fixed maturity credit loss component reflected within Retained earnings for securities still held at September 30, 2010 was as follows:

 

      Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2010
 
(In millions)             

Beginning balance of credit losses on fixed maturity securities

   $ 171      $ 164   

Additional credit losses for which an OTTI loss was previously recognized

     4        26   

Credit losses for which an OTTI loss was not previously recognized

     1        9   

Reductions for securities sold during the period

     (27     (50

Reductions for securities the Company intends to sell or more likely than not will be required to sell

     (8     (8
   

Ending balance of credit losses on fixed maturity securities

   $ 141      $ 141   
   

 

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Activity for the three months ended September 30, 2009 and for the period from April 1, 2009 to September 30, 2009 related to the pretax fixed maturity credit loss component reflected within Retained earnings for securities still held at September 30, 2009 was as follows:

 

      Three Months
Ended
September 30,
2009
    Period from
April 1, 2009 to
September 30,
2009
 
(In millions)             

Beginning balance of credit losses on fixed maturity securities

   $ 212      $ 192   

Additional credit losses for which an OTTI loss was previously recognized

     57        78   

Credit losses for which an OTTI loss was not previously recognized

     65        149   

Reductions for securities sold during the period

     (114     (150

Reductions for securities the Company intends to sell or more likely than not will be required to sell

     (11     (60
   

Ending balance of credit losses on fixed maturity securities

   $ 209      $ 209   
   

Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.

The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from two major providers, Standard & Poor’s and Moody’s Investors Service, Inc. in that order of preference. If a security is not rated by these providers, the Company formulates an internal rating. For securities with credit support from third party guarantees, the rating reflects the greater of the underlying rating of the issuer or the insured rating.

Asset-Backed Securities

The fair value of total asset-backed holdings at September 30, 2010 was $7,643 million which was comprised of 2,095 different asset-backed structured securities. The fair value of these securities does not tend to be influenced by the credit of the issuer but rather the characteristics and projected cash flows of the underlying collateral. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently. Of these securities, 173 have underlying collateral that is either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation collateral is measured by the original deal structure.

Residential mortgage-backed securities include 185 non-agency structured securities in a gross unrealized loss position. In addition, there were 49 agency mortgage-backed pass-through securities which are guaranteed by agencies of the U.S. Government in a gross unrealized loss position. The aggregate severity of the gross unrealized loss for residential mortgage-backed securities was approximately 8.9% of amortized cost.

Commercial mortgage-backed securities include 29 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 12.8% of amortized cost. Other asset-backed securities include 10 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 8.7% of amortized cost.

 

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The asset-backed securities in a gross unrealized loss position by ratings distribution are as follows:

 

September 30, 2010    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                     

U.S. Government Agencies

   $ 492       $ 486       $ 6   

AAA

     1,307         1,217         90   

AA

     235         204         31   

A

     286         240         46   

BBB

     243         210         33   

Non-investment grade and equity tranches

     1,026         892         134   
   

Total

   $ 3,589       $ 3,249       $ 340   
   

The Company believes the unrealized losses are primarily attributable to broader economic conditions and wider than historical bid/ask spreads, and are not indicative of the quality of the underlying collateral. 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. Generally, non-investment grade securities consist of investments which were investment grade at the time of purchase but have subsequently been downgraded and primarily consist of holdings senior to the equity tranche. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of amortized cost and interest, collateral shortfalls, or substantial changes in future cash flow expectations; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2010.

States, Municipalities and Political Subdivisions Securities

The holdings in this portfolio consist of both tax-exempt and taxable special revenue and assessment bonds, representing 71.1% of the overall portfolio, followed by general obligation political subdivision bonds at 20.1% and state general obligation bonds at 8.8%.

The unrealized losses on the Company’s investments in this portfolio are due to market conditions in certain sectors or states that continued to lag behind the broader municipal market performance. Yields for certain issuers and types of securities, such as zero coupon bonds, auction rate securities and tobacco securitizations, continue to be higher than historical norms relative to after tax returns on similar fixed income alternatives. The holdings for all securities in this category include 148 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized losses was approximately 14.1% of amortized cost.

The states, municipalities and political subdivisions securities in a gross unrealized loss position by ratings distribution are as follows:

 

September 30, 2010    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                     

AAA

   $ 632       $ 597       $ 35   

AA

     447         359         88   

A

     156         148         8   

BBB

     484         370         114   

Non-investment grade

     22         21         1   
   

Total

   $ 1,741       $ 1,495       $ 246   
   

 

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The largest exposures at September 30, 2010 as measured by gross unrealized losses were special revenue bonds issued by several states backed by tobacco settlement funds with gross unrealized losses of $109 million, and several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $70 million. All of these securities are rated investment grade.

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. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2010.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 30, 2010 and December 31, 2009. 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.

 

      September 30, 2010      December 31, 2009  
      Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
(In millions)                            

Due in one year or less

   $ 1,198       $ 1,200       $ 1,240       $ 1,219   

Due after one year through five years

     10,948         11,528         10,046         10,244   

Due after five years through ten years

     10,234         10,830         10,647         10,539   

Due after ten years

     13,976         15,063         13,496         13,437   
   

Total

   $ 36,356       $ 38,621       $ 35,429       $ 35,439   
   

Investment Commitments

As of September 30, 2010, the Company had committed approximately $210 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 and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of September 30, 2010, the Company had commitments to purchase $242 million and sell $85 million of such investments.

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.

 

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The Company attempts to establish fair value as an exit price in an orderly transaction consistent with normal settlement market conventions. The Company is responsible for the valuation process and seeks to obtain quoted market prices for all securities. When quoted market prices in active markets are not available, the Company uses a number of methodologies to establish fair value estimates, including discounted cash flow models, prices from recently executed transactions of similar securities or broker/dealer quotes, utilizing market observable information to the extent possible. In conjunction with modeling activities, the Company may use external data as inputs. The modeled inputs are consistent with observable market information, when available, or with the Company’s assumptions as to what market participants would use to value the securities. The Company also uses pricing services as a significant source of data. The Company monitors all the pricing inputs to determine if the markets from which the data is gathered are active. As further validation of the Company’s valuation process, the Company samples past fair value estimates and compares the valuations to actual transactions executed in the market on similar dates.

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, 2010    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

U.S. Treasury securities and obligations of government agencies

   $ 87      $ 60        $ 147   

Asset-backed securities:

        

Residential mortgage-backed securities

       5,331      $ 646        5,977   

Commercial mortgage-backed securities

       923        78        1,001   

Other asset-backed securities

       419        246        665   
   

Total asset-backed securities

     —          6,673        970        7,643   

States, municipalities and political subdivisions securities

       7,550        458        8,008   

Foreign government securities

     115        500          615   

Corporate and other bonds

       21,555        600        22,155   

Redeemable preferred stock

     3        49        1        53   
   

Fixed maturities available-for-sale

     205        36,387        2,029        38,621   

Fixed maturities, trading

     25        85        188        298   
   

Total fixed maturities

   $ 230      $ 36,472      $ 2,217      $ 38,919   
   

Equity securities available-for-sale

   $ 376      $ 133      $ 22      $ 531   

Equity securities, trading

     547            547   
   

Total equity securities

   $ 923      $ 133      $ 22      $ 1,078   
   

Short term investments

   $ 5,252      $ 845      $ 2      $ 6,099   

Other invested assets

         28        28   

Receivables

       104        3        107   

Life settlement contracts

         136        136   

Separate account business

     36        385        41        462   

Payable to brokers

     (84     (90     (16     (190

Discontinued operations investments, included in Other liabilities

     7        66          73   

 

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Table of Contents

 

December 31, 2009    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

U.S. Treasury securities and obligations of government agencies

   $ 145      $ 54        $ 199   

Asset-backed securities:

        

Residential mortgage-backed securities

       6,309      $ 629        6,938   

Commercial mortgage-backed securities

       461        123        584   

Other asset-backed securities

       484        348        832   
   

Total asset-backed securities

     —          7,254        1,100        8,354   

States, municipalities and political subdivisions securities

       6,368        756        7,124   

Foreign government securities

     139        340          479   

Corporate and other bonds

       18,620        609        19,229   

Redeemable preferred stock

     3        49        2        54   
   

Fixed maturities available-for-sale

     287        32,685        2,467        35,439   

Fixed maturities, trading

     102        78        197        377   
   

Total fixed maturities

   $ 389      $ 32,763      $ 2,664      $ 35,816   
   

Equity securities available-for-sale

   $ 503      $ 130      $ 11      $ 644   

Equity securities, trading

     363            363   
   

Total equity securities

   $ 866      $ 130      $ 11      $ 1,007   
   

Short term investments

   $ 6,818      $ 397        $ 7,215   

Receivables

       53      $ 2        55   

Life settlement contracts

         130        130   

Separate account business

     43        342        38        423   

Payable to brokers

     (87     (135     (50     (272

Discontinued operations investments, included in Other liabilities

     19        106        16        141   

 

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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 months ended September 30, 2010 and 2009:

 

2010

  

Balance,
July 1

     Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
   

Purchases,
Sales,
Issuances

and
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

 
      Included in
Net Income
    Included
in OCI
            
(In millions)                                                           

Fixed maturity securities:

                  

Asset-backed securities:

                  

Residential mortgage-backed securities

   $ 659       $ 1      $ (9   $ (5        $ 646     

Commercial mortgage-backed securities

     95           3           $ (20     78     

Other asset-backed securities

     306         (1     7        (66          246     
   

Total asset-backed securities

     1,060           1        (71        (20     970     

States, municipalities and political subdivisions securities

     539           3        (84          458     

Corporate and other bonds

     718         1        18        (83        (54     600      $ (1

Redeemable preferred stock

     1                    1     
   

Fixed maturities available-for-sale

     2,318         1        22        (238        (74     2,029        (1

Fixed maturities, trading

     191         (2       (1          188        (2
   

Total fixed maturities

   $ 2,509       $ (1   $ 22      $ (239   $       $ (74   $ 2,217      $ (3
   

Equity securities available-for-sale

   $ 4       $ (3     $ 15      $ 6         $ 22      $ (4

Short term investments

     21             (8      $ (11     2     

Other invested assets

             2          26             28        2   

Life settlement contracts

     134         8          (6          136        4   

Separate account business

     37             4             41     

Derivative financial instruments, net

     4         (3   $ (15     1             (13  

 

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Balance,
July 1

    Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
   

Purchases,
Sales,
Issuances

and
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

 
2009      Included in
Net Income
    Included in
OCI
            
(In millions)                                                          

Fixed maturity securities:

                 

Asset-backed securities:

                 

Residential mortgage-backed securities

   $ 808      $ 1      $ 62      $ 20         $ (154   $ 737      $ (1

Commercial mortgage-backed securities

     175        (3     28        11             211        (3

Other asset-backed securities

     141        1        14        132             288     
   

Total asset-backed securities

     1,124        (1     104        163           (154     1,236        (4

States, municipalities and political subdivisions securities

     785          19        (34          770     

Corporate and other bonds

     730        (10     67        43      $ 5         (83     752        (10

Redeemable preferred stock

     1          1               2     
   

Fixed maturities available-for-sale

     2,640        (11     191        172        5         (237     2,760        (14

Fixed maturities, trading

     229        5          (18          216        3   
   

Total fixed maturities

   $ 2,869      $ (6   $ 191      $ 154      $ 5       $ (237   $ 2,976      $ (11
   

Equity securities available-for-sale

   $ 209               $ (199   $ 10     

Short term investments

     —          $ 1      $ 7             8     

Life settlement contracts

     126      $ 8          (5          129      $ 5   

Separate account business

     38            3           (1     40     

Discontinued operations investments

     13          3               16     

Derivative financial instruments, net

     (7     (12     (10     12             (17     (4

 

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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 nine months ended September 30, 2010 and 2009:

 

2010

  

Balance,
January 1

    Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
    

Purchases,
Sales,
Issuances

and
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

 
     Included in
Net Income
    Included in
OCI
             
(In millions)                                                           

Fixed maturity securities:

                  

Asset-backed securities:

                  

Residential mortgage-backed securities

   $ 629      $ (7   $ 20       $ 50         $ (46   $ 646      $ (10

Commercial mortgage-backed securities

     123        (1     1         6      $ 7         (58     78        (2

Other asset-backed securities

     348        3        29         (89        (45     246        (1
   

Total asset-backed securities

     1,100        (5     50         (33     7         (149     970        (13

States, municipalities and political subdivisions securities

     756          9         (307          458     

Corporate and other bonds

     609        10        56         29        23         (127     600        (2

Redeemable preferred stock

     2        6           (7          1     
   

Fixed maturities available-for-sale

     2,467        11        115         (318     30         (276     2,029        (15

Fixed maturities, trading

     197        6           (15          188        5   
   

Total fixed maturities

   $ 2,664      $ 17      $ 115       $ (333   $ 30       $ (276   $ 2,217      $ (10
   

Equity securities available-for-sale

   $ 11      $ (4      $ 14      $ 8       $ (7   $ 22      $ (5

Short term investments

                 12        1         (11     2     

Other invested assets

            2           26             28        2   

Life settlement contracts

     130        25           (19          136        11   

Separate account business

     38             3             41     

Discontinued operations investments

     16        $ 1         (2        (15         

Derivative financial instruments, net

     (48     (18     27         26             (13  

 

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           Net Realized Gains
(Losses) and Net Change
in Unrealized  Gains
(Losses)
   

Purchases,
Sales,

Issuances
and
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

 
2009    Balance,
January 1
    Included in
Net Income
    Included in
OCI
            
(In millions)                                                          

Fixed maturity securities:

                 

Asset-backed securities:

                 

Residential mortgage-backed securities

   $ 782      $ (22   $ 98      $ (28   $ 71       $ (164   $ 737      $ (13

Commercial mortgage-backed securities

     186        (168     170        (3     26           211        (166

Other asset-backed securities

     139        (29     54        90        153         (119     288        (31
   

Total asset-backed securities

     1,107        (219     322        59        250         (283     1,236        (210

States, municipalities and political subdivisions securities

     750          74        (54          770     

Foreign government securities

     6                 (6    

Corporate and other bonds

     616        (15     113        110        23         (95     752        (15

Redeemable preferred stock

     13        (9     9        7           (18     2        (9
   

Fixed maturities available-for-sale

     2,492        (243     518        122        273         (402     2,760        (234

Fixed maturities, trading

     218        14          (20     4           216        7   
   

Total fixed maturities

   $ 2,710      $ (229   $ 518      $ 102      $ 277       $ (402   $ 2,976      $ (227
   

Equity securities available-for-sale

   $ 210        $ (1        $ (199   $ 10     

Short term investments

              1      $ 7             8     

Life settlement contracts

     129      $ 24          (24          129      $ 7   

Separate account business

     38            3           (1     40     

Discontinued operations investments

     15          3        (2          16     

Derivative financial instruments, net

     (72     23        (22     54             (17     (11

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 based on the availability of observable market information used to verify pricing sources or used in pricing models. 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. The Company’s policy is to recognize transfers between levels at the beginning of the reporting period.

The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified.

 

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Fixed Maturity Securities

Level 1 securities include highly liquid government bonds within the U.S. Treasury securities category and securities issued by foreign governments for which quoted market prices are available. The remaining fixed maturity securities are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves, broker/dealer quotes and other pricing models utilizing observable inputs. The valuation for most fixed maturity securities is classified as Level 2. Securities within Level 2 include certain corporate bonds, states, municipalities and political subdivisions securities, foreign provincial and local government bonds, asset-backed securities, mortgage-backed pass-through securities and redeemable preferred stock. Level 2 securities may also include securities that have firm sale commitments and prices that are not recorded until the settlement date. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. These securities include certain corporate bonds, asset-backed securities, states, municipalities and political subdivisions securities and redeemable preferred stock. Within corporate bonds and states, municipalities and political subdivisions securities, Level 3 securities also include tax-exempt and taxable auction rate certificates. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the maturity date assumption is unobservable due to the uncertain nature of the principal prepayments prior to maturity.

Equity Securities

Level 1 securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing observable inputs. Level 3 securities include equity securities that are priced using internal models with inputs that are not market observable.

Derivative Financial Instruments

Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, credit default swaps, equity warrants and options are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.

Short Term Investments

The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are observable. Level 3 securities include bank debt securities purchased within one year of maturity where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency to the market inputs used.

Life Settlement Contracts

The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.

Discontinued Operations Investments

Assets relating to CNA’s discontinued operations include fixed maturity securities and short term investments. The valuation methodologies for these asset types have been described above.

 

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Separate Account Business

Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies for these asset types have been described above.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value 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 table below.

 

     September 30, 2010      December 31, 2009  
   
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 
   
(In millions)                            

Financial assets:

           

Other invested assets

   $ 70       $ 71             

Financial liabilities:

           

Premium deposits and annuity contracts

   $ 100       $ 105           $ 105       $ 106       

Short term debt

     647         669             10         10       

Long term debt

     8,829         9,463             9,475         9,574       

The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.

The fair value of other invested assets is based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments.

Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.

Fair value of debt was based on quoted market prices when available. When quoted market prices were not available, the fair value for debt was based on quoted market prices of comparable instruments adjusted for differences between the quoted instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.

4. Derivative Financial Instruments

The Company invests in certain derivative instruments for a number of purposes, including: (i) asset and liability management activities, (ii) income enhancements for its portfolio management strategy and (iii) to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur.

Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with the Company’s portfolio strategy.

The Company does not believe that any of the derivative instruments utilized by it are unusually complex, nor do these instruments contain embedded leverage features which would expose the Company to a higher degree of risk.

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, equity price risk, commodity price risk and foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of an obligor to make timely payment of principal and/or interest). The Company’s principal objective under such risk strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

 

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CNA’s use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. Derivatives entered into for hedging, regardless of the choice to designate hedge accounting, shall have a maturity that effectively correlates to the underlying hedged asset or liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through securities lending, to engage in derivative transactions.

The Company has exposure to economic losses due to interest rate risk arising from changes in the level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to interest rate risk in the normal course of portfolio management, which includes rebalancing its existing portfolios of assets and liabilities. In addition, various derivative financial instruments are used to modify the interest rate risk exposures of certain assets and liabilities. These strategies include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards and commitments to purchase securities. These instruments are generally used to lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities or investment contracts, or to hedge (on an economic basis) interest rate risks associated with investments and variable rate debt. The Company infrequently designates these types of instruments as hedges against specific assets or liabilities.

The Company has exposure to equity price risk as a result of its investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities, or instruments that derive their value from such securities. The Company attempts to mitigate its exposure to such risks by limiting its investment in any one security or index. The Company may also manage this risk by utilizing instruments such as options, swaps, futures and collars to protect appreciation in securities held.

The Company has exposure to credit risk arising from the uncertainty associated with a financial instrument obligor’s ability to make timely principal and/or interest payments. The Company attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and frequently monitoring the credit quality of issuers and counterparties. In addition, the Company may utilize credit derivatives such as credit default swaps (“CDS”) to modify the credit risk inherent in certain investments. CDS involve a transfer of credit risk from one party to another in exchange for periodic payments.

Foreign currency risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value of financial instruments denominated in a foreign currency. The Company’s foreign transactions are primarily denominated in Australian dollars, Brazilian reais, British pounds, Canadian dollars and the European Monetary Unit. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards. In May of 2009, Diamond Offshore began a hedging strategy and designated certain of its qualifying foreign currency forward exchange contracts as cash flow hedges.

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 are entered into with the intention of providing additional income or yield to a particular portfolio segment or instrument. Income enhancement transactions are limited in scope and primarily involve the sale of covered options in which the Company receives a premium in exchange for selling a call or put option.

The Company will also use CDS to sell credit protection against a specified credit event. In selling credit protection, CDS are used to replicate fixed income securities when credit exposure to certain issuers is not available or when it is economically beneficial to transact in the derivative market compared to the cash market alternative. Credit risk includes both the default event risk and market value exposure due to fluctuations in credit spreads. In selling CDS protection, the Company receives a periodic premium in exchange for providing credit protection on a single name reference obligation or a credit derivative index. If there is an event of default as defined by the CDS agreement, the Company is required to pay the counterparty the referenced notional amount of the CDS contract and in exchange the Company is entitled to receive the referenced defaulted security or the cash equivalent.

 

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The tables below summarize open CDS contracts where the Company sold credit protection as of September 30, 2010 and December 31, 2009. The fair value of the contracts represents the amounts that the Company would receive or pay at those dates to exit the derivative positions. The maximum amount of future payments assumes no residual value in the defaulted securities that the Company would receive as part of the contract terminations and is equal to the notional value of the CDS contracts.

 

September 30, 2010    Fair Value
of Credit
Default
Swaps
     Maximum
Amount of
Future
Payments
under Credit
Default
Swaps
     Weighted
Average
Years
To Maturity
 
   
(In millions)                     

BB-rated

      $ 5         2.7   

B-rated

        3         1.7   
   

Total

   $ —         $ 8         2.4   
   

December 31, 2009

        
   

B-rated

      $ 8         3.1   
   

Total

   $ —         $ 8         3.1   
   

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Consolidated Condensed Balance Sheets. The Company attempts to mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. The Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of cash collateral provided by the Company was $2 million at September 30, 2010 and $7 million at December 31, 2009. The fair value of cash collateral received from counterparties was $1 million at September 30, 2010 and December 31, 2009.

The agreements governing HighMount’s derivative instruments contain certain covenants, including a maximum debt to capitalization ratio reviewed quarterly. If HighMount does not comply with these covenants, the counterparties to the derivative instruments could terminate the agreements and request payment on those derivative instruments in net liability positions. The aggregate fair value of HighMount’s derivative instruments that are in a liability position was $103 million at September 30, 2010. HighMount was not required to post any collateral under the governing agreements. At September 30, 2010, HighMount was in compliance with all of its covenants under the derivatives agreements.

See Note 3 for information regarding the fair value of derivative instruments.

 

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A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. Equity options purchased are included in Equity securities, and all other derivative assets are reported as Receivables. Derivative liabilities are included in Payable to brokers on the Consolidated Condensed Balance Sheets. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.

 

     September 30, 2010     December 31, 2009  
   
    

Contractual/

Notional

     Estimated Fair Value    

Contractual/

Notional

     Estimated Fair Value  
     Amount      Asset      (Liability)     Amount      Asset      (Liability)  
   
(In millions)                                         

With hedge designation

                

Interest rate risk:

                

Interest rate swaps

   $ 1,095          $ (90   $ 1,600          $ (135

Commodities:

                

Forwards – short

     492       $ 105         (12     715       $ 50         (39

Foreign exchange:

                

Currency forwards – short

     27         2           114         3      

Other

             13         2      

Without hedge designation

                

Equity markets:

                

Options – purchased

     170         29           242         45      

Options – written

     263            (10     282            (9

Interest rate risk:

                

Interest rate swaps

     5            (1     9         

Credit default swaps – purchased protection

     25            (3     116            (11

Credit default swaps – sold protection

     8              8         

Futures – short

     28              132         

Derivatives without hedge designation – For derivatives not held in a trading portfolio, new derivative transactions entered into totaled approximately $342 million and $1.1 billion in notional value while derivative termination activity totaled approximately $361 million and $1.1 billion during the three and nine months ended September 30, 2010. This activity was primarily attributable to interest rate futures and forward commitments for mortgage-backed securities. During the three and nine months ended September 30, 2009, new derivative transactions entered into totaled approximately $7.7 billion and $18.2 billion in notional value while derivative termination activity totaled approximately $8.1 billion and $19.5 billion. This activity was primarily attributable to interest rate futures, interest rate options and interest rate swaps.

 

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A summary of the recognized gains (losses) related to derivative financial instruments without hedge designation follows. Changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Condensed Statements of Income.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       
    2010     2009     2010     2009  
   
(In millions)                        

Included in Net investment income:

       

Equity risk:

       

Equity options – purchased

  $ (7   $ (19   $ (10   $ (39

Equity options – written

    10        17        15        47   

Futures – long

    (3     2        (6     13   

Futures – short

    (1       (4  

Foreign exchange:

       

Currency forwards – long

    2            (6

Currency forwards – short

    (8     1        (9     8   

Currency options – short

    1          (1  

Interest rate risk:

       

Credit default swaps – purchased protection

      (20       (8

Credit default swaps – sold protection

      20          12   

Options on government securities – short

    (66     (7     (66     7   

Futures – long

    4          (14     5   

Futures – short

    14        (5     14        (16

Other

      (9     (2     (3
   
    (54     (20     (83     20   
   

Included in Investment gains (losses):

       

Equity options – written

          15   

Interest rate risk:

       

Interest rate swaps

        (44     59   

Credit default swaps – purchased protection

    (1     (11     (1     (46

Credit default swaps – sold protection

          2   

Futures – short

      (2       21   

Commodity forwards – short

        13     
   
    (1     (13     (32     51   
   

Included in Other revenues:

       

Currency forwards – short

          9   
   

Total

  $ (55   $ (33   $ (115   $ 80   
   

Cash flow hedges – A significant portion of the Company’s hedge strategies represents cash flow hedges of the variable price risk associated with the purchase and sale of natural gas and other energy-related products. As of September 30, 2010, approximately 78.6 billion cubic feet of natural gas equivalents was hedged by qualifying cash flow hedges. The effective portion of these commodity hedges is reclassified from AOCI into earnings when the anticipated transaction affects earnings. Approximately 19% of these derivatives have settlement dates in 2010 and 61% have settlement dates in 2011. As of September 30, 2010, the estimated amount of net unrealized gains associated with commodity contracts that will be reclassified into earnings during the next twelve months was $78 million. However, these amounts are likely to vary materially as a result of changes in market conditions. Diamond Offshore uses foreign currency forward exchange contracts to reduce exposure to foreign currency losses on future foreign currency expenditures. The effective portion of these hedges is reclassified from AOCI into earnings when the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. As of

 

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September 30, 2010, the estimated amount of net unrealized gains associated with these contracts that will be reclassified into earnings over the next twelve months was $2 million. The Company also uses interest rate swaps to hedge its exposure to variable interest rates or risk attributable to changes in interest rates on long term debt. The effective portion of the hedges is amortized to interest expense over the term of the related notes. As of September 30, 2010, the estimated amount of net unrealized losses associated with interest rate swaps that will be reclassified into earnings during the next twelve months was $54 million. However, this is likely to vary as a result of changes in LIBOR. For the three and nine months ended September 30, 2010 and 2009, the net amounts recognized due to ineffectiveness were less than $1 million.

In the first quarter of 2010, HighMount determined that a portion of the expected underlying transactions related to its hedging activities were no longer probable of occurring and discontinued hedge accounting treatment for a portion of its interest rate cash flow hedges and its commodity price swaps. HighMount entered into definitive sales agreements for exploration and production assets in the Antrim Shale in Michigan in March 2010 and Black Warrior Basin in Alabama in April 2010. As a result, HighMount recognized losses of $36 million in Investment gains (losses) in the Consolidated Condensed Statements of Income for the nine months ended September 30, 2010, reflecting the reclassification of net derivative losses from AOCI to earnings. These amounts are reflected in the table below.

The following table summarizes the effective portion of the net derivative gains or losses included in OCI and the amount reclassified into Income for derivatives designated as cash flow hedges and for the de-designated hedges:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
        
     2010     2009     2010     2009  
   
(In millions)                         

Amount of gain (loss) recognized in OCI

        

Commodities

   $ 34      $ (13   $ 151      $ 90   

Foreign exchange

     6        2        1        8   

Interest rate

     (10     (23     (44     (19
   

Total

   $ 30      $ (34   $ 108      $ 79   
   

Amount of gain (loss) reclassified from AOCI into income

        

Commodities

   $ 23      $ 67      $ 71      $ 206   

Foreign exchange

       2        1        2   

Interest rate

     (13     (19     (92     (50
   

Total

   $ 10      $ 50      $ (20   $ 158   
   

Location of gain (loss) reclassified from AOCI into income:

 

Type of cash flow hedge    Consolidated Condensed Statements of Income line items
 
Commodities    Other revenues and Investment gains (losses)
Foreign exchange    Contract drilling expenses
Interest rate    Interest and Investment gains (losses)

The Company also enters into short sales as part of its portfolio management strategy. Short sales are commitments to sell a financial instrument not owned at the time of sale, usually done in anticipation of a price decline. Short sales of equity securities resulted in proceeds of $67 million and $66 million with fair value liabilities of $73 million and $78 million at September 30, 2010 and December 31, 2009. These positions are marked to market and investment gains or losses are included in Net investment income in the Consolidated Condensed Statements of Income.

 

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5. Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $12 million and $100 million for the three and nine months ended September 30, 2010. Catastrophe losses in 2010 related primarily to wind and thunderstorms. CNA reported catastrophe losses, net of reinsurance, of $23 million and $79 million for the three and nine months ended September 30, 2009. There can be no assurance that CNA’s ultimate cost for catastrophes will not exceed current estimates.

The following provides discussion of CNA’s Asbestos and Environmental Pollution (“A&EP”) reserves.

A&EP Reserves

On August 31, 2010, Continental Casualty Company together with several of CNA’s insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO.

Under the terms of the NICO transaction, effective January 1, 2010 CNA ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion (“Loss Portfolio Transfer”). Included in the $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves was approximately $90 million of net claim and allocated claim adjustment expense reserves relating to CNA’s discontinued operations. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO is net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities. However, unallocated claim adjustment expenses are not subject to the aggregate reinsurance limit.

CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million. As of August 31, 2010, NICO deposited approximately $2.2 billion in a collateral trust account as security for its obligations to CNA. This $2.2 billion will be reduced by the amount of net A&EP claim and allocated claim adjustment expense payments. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to CNA’s A&EP claims.

 

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The following table displays the impact of the Loss Portfolio Transfer on the Consolidated Condensed Statements of Income:

 

      2010  
(In millions)       

Other operating expenses

     $      (529

Income tax benefit

     185   
   

Loss from continuing operations, included in the Other Insurance segment

     (344

Loss from discontinued operations

     (21
   

Net loss

     (365

Amounts attributable to noncontrolling interests

     37   
   

Net loss attributable to Loews Corporation

     $      (328
   

In connection with the transfer of billed third party reinsurance receivables related to A&EP claims and the coverage of credit risk afforded under the terms of the Loss Portfolio Transfer, CNA reduced its allowance for uncollectible reinsurance receivables on billed third party reinsurance receivables and ceded claim and allocated claim adjustment expense reserves by $200 million. This reduction is reflected in Other operating expenses presented above.

At September 30, 2010, the gross A&EP claim and allocated claim adjustment expense reserves were $2.5 billion which were ceded under the Loss Portfolio Transfer and other existing third party reinsurance agreements. At September 30, 2010, the remaining amount available under the $4.0 billion aggregate limit of the Loss Portfolio Transfer was $2.4 billion on an incurred basis. The net ultimate losses paid under the Loss Portfolio Transfer were $172 million through September 30, 2010.

The Loss Portfolio Transfer is considered a retroactive reinsurance contract. In the event that the cumulative claim and allocated claim adjustment expenses ceded under the Loss Portfolio Transfer exceed the consideration paid, the resulting gain from such excess would be deferred. A cumulative amortization adjustment would be recognized in earnings in the period such excess arises so that the resulting deferred gain would reflect the balance that would have existed if the revised estimate was available at the inception date of the Loss Portfolio Transfer.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other Insurance. Unfavorable net prior year development of $26 million was recorded in the Life & Group Non-Core segment for the three months ended September 30, 2010. There was no net prior year development recorded in the Life & Group Non-Core segment for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2009 for the Life & Group Non-Core segment, favorable net prior year development of $81 million and $75 million was recorded. These amounts included the impact of a settlement reached in September 2009 with Willis Limited that resolved litigation related to the placement of personal accident reinsurance. Under the settlement agreement, Willis Limited agreed to pay CNA a total of $130 million, which was reported as a loss recovery of $94 million, net of reinsurance.

 

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Three Month Comparison

 

Three Months Ended September 30, 2010   CNA
Specialty
    CNA
Commercial
    Other
Insurance
    Total  
(In millions)                        

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:

       

Core (Non-A&EP)

  $ (65   $ (26   $ 2        $    (89

Pretax (favorable) unfavorable premium development

    (2     (2       (4
   

Total pretax (favorable) unfavorable net prior year development

  $ (67   $ (28   $ 2        $    (93
   

Three Months Ended September 30, 2009

                               

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:

       

Core (Non-A&EP)

  $ (39   $ (21   $ 1        $    (59

Pretax (favorable) unfavorable premium development

    3        9          12   
   

Total pretax (favorable) unfavorable net prior year development

  $ (36   $ (12   $ 1        $    (47
   

2010 Net Prior Year Development

CNA Specialty

The favorable claim and allocated claim adjustment expense reserve development was primarily due to surety and professional liability coverages.

Favorable claim and allocated claim adjustment expense reserve development of approximately $38 million was recorded for surety coverages primarily due to a decrease in the estimated loss on a large national contractor in accident year 2005 and lower than expected claim emergence in accident years 2007 and prior.

Favorable claim and allocated claim adjustment expense reserve development of approximately $27 million was recorded for directors & officers and errors & omissions coverages for large firms. This favorable development was primarily the result of reviews of large claims in accident years 2007 and prior.

Both favorable and unfavorable claim and allocated claim adjustment expense reserve development was recorded for medical professional liability coverages. Favorable development was recorded in nursing home liability business, primarily in accident years 2007 and prior due to favorable incurred emergence. Unfavorable development was recorded for products liability coverage in accident years 2008 and 2009 due to increased frequency of large losses related to medical products.

Both favorable and unfavorable claim and allocated claim adjustment expense reserve development occurred in professional liability lines primarily related to errors & omission and employment practice liability coverages. The favorable development primarily related to accident years 2007 and prior and was the result of decreased severity and a decrease in excess loss expectations. The unfavorable development in accident years 2008 and 2009 was driven by the economic recession and higher unemployment.

 

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CNA Commercial

The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in general liability, umbrella, property and marine coverages, partially offset by unfavorable experience in workers’ compensation.

Favorable claim and allocated claim adjustment expense reserve development of approximately $70 million was recorded for general liability and umbrella coverages primarily due to better than expected loss emergence in accident years 2006 and prior.

Favorable claim and allocated claim adjustment expense reserve development of approximately $28 million was recorded for property and marine coverages in CNA’s international commercial book due to lower than expected frequency of large claims primarily in accident year 2009.

Favorable claim and allocated claim adjustment expense reserve development of approximately $23 million was recorded for marine business. This development was primarily the result of decreased claim frequency, favorable salvage recoveries in accident year 2008 for cargo business and lower severity for excess liability in accident years 2005 and prior.

Unfavorable claim and allocated claim adjustment expense reserve development of approximately $60 million was recorded for excess workers’ compensation primarily due to increased frequency in accident years 2004 and prior.

Unfavorable claim and allocated claim adjustment expense reserve development of approximately $42 million was related to increased severity of indemnity losses relative to expectations on workers’ compensation claims related to Defense Base Act contractors primarily in accident years 2008 and prior.

2009 Net Prior Year Development

CNA Specialty

The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in professional liability, directors & officers and surety business.

Approximately $20 million of favorable development was recorded for professional liability coverages driven by lower than expected large claim frequency, primarily related to accountants and lawyers in accident years 2004 through 2006. Approximately $11 million of favorable development was primarily related to directors & officers coverages in accident years 2003 through 2006. This favorable development related primarily to lower than expected large claim frequency. An additional $7 million of favorable development was recorded for surety business primarily in accident years 2004, due to claims closing favorable to expectations, and 2006, due to lower than expected claim frequency.

CNA Commercial

The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in general liability, partially offset by unfavorable experience in workers’ compensation.

Approximately $56 million of favorable development was primarily due to claims closing favorable to expectations on non-construction defect general liability exposures in accident years 2003 and prior.

Approximately $47 million of unfavorable development was due to increased paid and incurred severity on worker’s compensation business, primarily in accident years 2004, 2007 and 2008 on small and middle market business.

 

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Nine Month Comparison

 

Nine Months Ended September 30, 2010   CNA
Specialty
    CNA
Commercial
    Other
Insurance
    Total  
(In millions)                        

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:

       

Core (Non-A&EP)

  $ (215   $ (229   $ 5        $    (439

Pretax (favorable) unfavorable premium development

    (5     54        (3     46   
   

Total pretax (favorable) unfavorable net prior year
development

  $ (220   $ (175   $ 2        $    (393
   

Nine Months Ended September 30, 2009

                               

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:

       

Core (Non-A&EP)

  $ (103   $ (148   $ 6        $    (245

Pretax (favorable) unfavorable premium development

      85        (3     82   
   

Total pretax (favorable) unfavorable net prior year development

  $ (103   $ (63   $ 3        $    (163
   

2010 Net Prior Year Development

CNA Specialty

The favorable claim and allocated claim adjustment expense reserve development was primarily due to professional liability and surety coverages.

Favorable claim and allocated claim adjustment expense reserve development of approximately $164 million was recorded for errors & omissions and directors & officers’ coverages due to several factors, including reduced frequency of large claims, primarily in accident years 2007 and prior, and the result of reviews of large claims in accident years 2007 and prior.

Favorable claim and allocated claim adjustment expense reserve development of approximately $52 million was recorded for medical professional liability coverages. Favorable development was primarily due to favorable incurred emergence, primarily in accident years 2007 and prior. Unfavorable development in accident years 2008 and 2009 was due to increased frequency of large losses related to medical products.

Favorable claim and allocated claim adjustment expense reserve development of approximately $49 million was recorded for surety coverages primarily due to a decrease in the estimated loss on a large national contractor in accident year 2005 and lower than expected claim emergence in accident years 2007 and prior.

Unfavorable claim and allocated claim adjustment expense reserve development of approximately $66 million was recorded for employment practices liability and errors & omissions coverages. The unfavorable development in accident years 2008 and 2009 was driven by the economic recession and higher unemployment.

CNA Commercial

The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in property, general liability, umbrella, auto and international casualty coverages.

Favorable claim and allocated claim adjustment expense reserve development of approximately $109 million was recorded for property coverages. Favorable development of $53 million was due to favorable incurred loss emergence, primarily in accident years 2008 and 2009 related to catastrophes. Additional favorable development of approximately $56 million was due to decreased severity in accident years 2009 and prior related to non-catastrophes.

 

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Favorable claim and allocated claim adjustment expense reserve development of approximately $79 million was recorded for international commercial coverages. Approximately $32 million of favorable development was recorded due to decreased frequency across several lines within CNA’s Hawaiian affiliate, primarily in accident years 2008 and prior. Approximately $23 million of favorable development was primarily due to a commutation within CNA’s European affiliate’s book of renewable energy business. Approximately $26 million of favorable development was recorded for property and marine coverages in CNA’s international commercial book due to lower than expected frequency of large claims primarily in accident year 2009.

Favorable claim and allocated claim adjustment expense reserve development of approximately $78 million was recorded for general liability and umbrella coverages primarily due to better than expected loss emergence in accident years 2006 and prior.

Favorable claim and allocated claim adjustment expense reserve development of approximately $62 million was recorded for commercial auto coverages primarily due to decreased frequency and severity trends in accident years 2009 and prior.

Favorable claim and allocated claim adjustment expense reserve development of approximately $25 million was recorded for marine business. This development was primarily the result of decreased claim frequency, favorable salvage recoveries in recent accident years and lower severity for excess liability in accident years 2005 and prior.

Unfavorable claim and allocated claim adjustment expense reserve development of approximately $60 million was recorded for excess workers’ compensation primarily due to increased frequency in accident years 2004 and prior.

Unfavorable claim and allocated claim adjustment expense reserve development of approximately $44 million was related to increased severity of indemnity losses relative to expectations on workers’ compensation claims related to Defense Base Act contractors primarily in accident years 2008 and prior.

Unfavorable claim and allocated claim adjustment expense reserve development of approximately $35 million was due to increased claim frequency in a portion of CNA’s primary casualty surplus lines book in accident years 2008 and 2009.

Unfavorable premium development of approximately $54 million was recorded due to a change in ultimate premium estimates relating to retrospectively rated policies and return premium on auditable policies due to reduced exposures.

2009 Net Prior Year Development

CNA Specialty

The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in medical professional liability, professional liability, directors & officers and surety business.

Favorable development of approximately $25 million for medical professional liability was primarily due to better than expected frequency and severity in accident years 2005 and prior, including claims closing favorable to expectations. Additional favorable development of $35 million was recorded for professional liability coverages. This favorable experience was related to several items, including favorable experience on a number of large claims related to financial institutions in accident years 2003 and prior, decreased frequency of large claims in accident years 2007 and prior related to financial institutions, and lower than expected large claim frequency related to accountants and lawyers in accident years 2004 through 2006. Approximately $30 million of favorable development was primarily related to directors & officers coverages in accident years 2003 through 2006. This favorable development related primarily to lower than expected large claim frequency. An additional $7 million of favorable development was recorded for surety business primarily in accident years 2004, due to claims closing favorable to expectations, and 2006, due to lower than expected claim frequency. An additional $4 million of favorable development was a result of favorable outcomes on claims relating to catastrophes in accident year 2005.

CNA Commercial

The favorable net prior year development was primarily due to favorable experience in property and general liability, partially offset by unfavorable experience in workers’ compensation.

 

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Favorable claim and allocated claim adjustment expense reserve development of approximately $81 million was primarily due to experience in property coverages. Prior year catastrophe reserves decreased approximately $64 million, driven by the favorable settlement of several claims primarily in accident years 2005 and 2007, and better than expected frequency and severity on claims relating to catastrophes in accident year 2008. An additional $17 million of favorable development was due to non-catastrophe related favorable loss emergence on large property coverages, primarily in accident years 2007 and 2008. Additional favorable development of approximately $81 million was related to general liability exposures. Of this, $25 million was due to decreased frequency and severity trends related to construction defect exposures in accident years 2003 and prior. The remaining favorable development was primarily due to claims closing favorable to expectations on non-construction defect general liability exposures in accident years 2003 and prior.

Approximately $51 million of unfavorable claim and allocated claim adjustment expense reserve development was due to increased paid and incurred severity on workers’ compensation business primarily in accident years 2004, 2007 and 2008 on small and middle markets business.

Approximately $40 million of unfavorable premium development was related to changes in estimated ultimate premium on retrospectively rated coverages. Additional unfavorable premium development was due to an estimated liability for an assessment related to a reinsurance association and less premium processing on auditable policies than expected.

6. Benefit Plans

Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participant’s age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which cover salaried employees are based on formulas which include, among others, years of service and average pay. The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements.