10-Q 1 c54348e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
     
o   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 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   36-6169860
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
333 S. Wabash    
Chicago, Illinois   60604
(Address of principal executive offices)   (Zip Code)
(312) 822-5000
(Registrant’s telephone number, including area code)
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 þ No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a 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 o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at October 29, 2009
Common Stock, Par value $2.50   269,026,759
 
 

 


 

CNA Financial Corporation
Index
                 
Item         Page  
Number         Number  
PART I. Financial Information
       
 
       
1.          
       
 
       
            3  
       
 
       
            5  
       
 
       
            6  
       
 
       
            7  
       
 
       
            9  
       
 
       
            10  
       
 
       
2.       55  
       
 
       
3.       78  
       
 
       
4.       79  
       
 
       
PART II. Other Information
       
 
       
1.       80  
       
 
       
6.       80  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

CNA Financial Corporation (CNAF)
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions, except per share data)   2009     2008     2009     2008  
Revenues
                               
Net earned premiums
  $ 1,707     $ 1,799     $ 5,035     $ 5,386  
Net investment income
    660       439       1,755       1,449  
Net realized investment losses, net of participating policyholders’ interests:
                               
Other-than-temporary impairment losses
    (232 )     (584 )     (1,330 )     (840 )
Portion of other-than-temporary impairment losses recognized in Other comprehensive income
    84             173        
 
                       
 
Net impairment losses recognized in earnings
    (148 )     (584 )     (1,157 )     (840 )
Other net realized investment gains (losses)
    48       (67 )     228       27  
 
                       
 
                               
Net realized investment losses, net of participating policyholders’ interests
    (100 )     (651 )     (929 )     (813 )
 
                               
Other revenues
    73       72       213       240  
 
                       
 
                               
Total revenues
    2,340       1,659       6,074       6,262  
 
                       
 
                               
Claims, Benefits and Expenses
                               
Insurance claims and policyholders’ benefits
    1,283       1,519       3,919       4,380  
Amortization of deferred acquisition costs
    365       355       1,063       1,083  
Other operating expenses
    272       294       814       724  
Interest
    34       33       95       100  
 
                       
 
                               
Total claims, benefits and expenses
    1,954       2,201       5,891       6,287  
 
                       
 
                               
Income (loss) from continuing operations before income tax
    386       (542 )     183       (25 )
Income tax (expense) benefit
    (108 )     218       30       92  
 
                       
 
                               
Income (loss) from continuing operations
    278       (324 )     213       67  
Income (loss) from discontinued operations, net of income tax (expense) benefit of $0, $9, $0 and $9
    (1 )     9       (2 )     10  
 
                       
 
                               
Net income (loss)
    277       (315 )     211       77  
Net income attributable to noncontrolling interests
    (14 )     (16 )     (38 )     (40 )
 
                       
 
                               
Net income (loss) attributable to CNAF
  $ 263     $ (331 )   $ 173     $ 37  
 
                       
 
                               
Income (Loss) Attributable to CNAF Common Stockholders
                               
 
                               
Income (loss) from continuing operations attributable to CNAF
  $ 264     $ (340 )   $ 175     $ 27  
Less: Dividends on 2008 Senior Preferred
    (31 )           (94 )      
 
                       
 
                               
Income (loss) from continuing operations attributable to CNAF common stockholders
    233       (340 )     81       27  
Income (loss) from discontinued operations attributable to CNAF common stockholders
    (1 )     9       (2 )     10  
 
                       
 
                               
Income (loss) attributable to CNAF common stockholders
  $ 232     $ (331 )   $ 79     $ 37  
 
                       
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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Periods ended September 30   Three Months     Nine Months  
(In millions, except per share data)   2009     2008     2009     2008  
Basic and Diluted Earnings (Loss) Per Share Attributable to CNAF Common Stockholders
                               
 
                               
Income (loss) from continuing operations attributable to CNAF common stockholders
  $ 0.86     $ (1.26 )   $ 0.30     $ 0.10  
Income (loss) from discontinued operations attributable to CNAF common stockholders
          0.03       (0.01 )     0.04  
 
                       
 
                               
Basic and diluted earnings (loss) per share attributable to CNAF common stockholders
  $ 0.86     $ (1.23 )   $ 0.29     $ 0.14  
 
                       
 
                               
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                               
 
                               
Basic
    269.0       269.0       269.0       269.6  
 
                       
 
                               
Diluted
    269.2       269.1       269.1       269.6  
 
                       
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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Table of Contents

CNA Financial Corporation (CNAF)
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Net income (loss)
  $ 277     $ (315 )   $ 211     $ 77  
 
                       
 
                               
Other comprehensive income (loss), net of tax
                               
Changes in:
                               
Net unrealized losses on investments with other-than-temporary impairments
    (36 )           (70 )      
Net other unrealized gains (losses) on investments
    1,906       (1,212 )     3,815       (2,246 )
 
                       
Net unrealized gains (losses) on investments
    1,870       (1,212 )     3,745       (2,246 )
Unrealized gains (losses) on discontinued operations and other
    5       (3 )     5       (3 )
Foreign currency translation adjustment
    39       (44 )     110       (53 )
Pension and postretirement benefits
    1       (2 )     4       (5 )
Allocation to participating policyholders
    (17 )     10       (36 )     24  
 
                       
 
                               
Other comprehensive income (loss), net of tax
    1,898       (1,251 )     3,828       (2,283 )
 
                       
 
                               
Comprehensive income (loss)
    2,175       (1,566 )     4,039       (2,206 )
Net income attributable to noncontrolling interests
    (14 )     (16 )     (38 )     (40 )
Other comprehensive (income) loss attributable to noncontrolling interests
    (18 )     9       (29 )     17  
 
                       
 
                               
Total comprehensive income (loss) attributable to CNAF
  $ 2,143     $ (1,573 )   $ 3,972     $ (2,229 )
 
                       
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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Table of Contents

CNA Financial Corporation (CNAF)
Condensed Consolidated Balance Sheets (Unaudited)
                 
    September 30,     December 31,  
(In millions, except share data)   2009     2008  
Assets
               
Investments:
               
Fixed maturity securities at fair value (amortized cost of $34,880 and $34,155)
  $ 34,718     $ 28,887  
Equity securities at fair value (cost of $639 and $1,016)
    972       871  
Limited partnership investments
    1,890       1,683  
Other invested assets
    6       28  
Short term investments
    4,075       3,534  
 
           
Total investments
    41,661       35,003  
Cash
    128       85  
Reinsurance receivables (less allowance for uncollectible receivables of $357 and $366)
    6,644       7,395  
Insurance receivables (less allowance for doubtful accounts of $211 and $221)
    1,720       1,818  
Accrued investment income
    429       356  
Receivables for securities sold and collateral
    235       402  
Deferred acquisition costs
    1,138       1,125  
Prepaid reinsurance premiums
    223       237  
Federal income tax recoverable (includes $428 and $299 due from Loews Corporation)
    434       294  
Deferred income taxes
    1,383       3,493  
Property and equipment at cost (less accumulated depreciation of $488 and $641)
    363       393  
Goodwill and other intangible assets
    141       141  
Other assets
    624       562  
Separate account business
    452       384  
 
           
Total assets
  $ 55,575     $ 51,688  
 
           
 
               
Liabilities and Equity
               
Liabilities:
               
Insurance reserves:
               
Claim and claim adjustment expenses
  $ 26,906     $ 27,593  
Unearned premiums
    3,392       3,406  
Future policy benefits
    7,864       7,529  
Policyholders’ funds
    200       243  
Collateral on loaned securities and derivatives
    1       6  
Payables for securities purchased
    502       12  
Participating policyholders’ funds
    55       20  
Long term debt
    2,056       2,058  
Reinsurance balances payable
    339       316  
Other liabilities
    2,553       2,824  
Separate account business
    452       384  
 
           
Total liabilities
    44,320       44,391  
 
           
 
               
Commitments and contingencies (Notes D, E, G, H, and J)
               
 
               
Equity:
               
Preferred stock (12,500,000 shares authorized)
2008 Senior Preferred (no par value; $100,000 stated value; 12,500 shares issued;
held by Loews Corporation)
    1,250       1,250  
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued;
and 269,026,759 and 269,024,408 shares outstanding)
    683       683  
Additional paid-in capital
    2,176       2,174  
Retained earnings
    7,046       6,845  
Accumulated other comprehensive loss
    (247 )     (3,924 )
Treasury stock (4,013,484 and 4,015,835 shares), at cost
    (109 )     (109 )
Notes receivable for the issuance of common stock
    (30 )     (42 )
 
           
Total CNAF stockholders’ equity
    10,769       6,877  
Noncontrolling interests
    486       420  
 
           
Total equity
    11,255       7,297  
 
           
Total liabilities and equity
  $ 55,575     $ 51,688  
 
           
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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CNA Financial Corporation (CNAF)
Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
Nine months ended September 30            
(In millions)   2009     2008  
Cash Flows from Operating Activities
               
Net income
  $ 211     $ 77  
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
(Income) loss from discontinued operations
    2       (10 )
Loss on disposal of property and equipment
    13       1  
Deferred income tax provision
    81       6  
Trading portfolio activity
    (621 )     472  
Net realized investment losses, net of participating policyholders’ interests
    929       813  
Undistributed (earnings) losses of equity method investees
    (151 )     137  
Net amortization of investment discount
    (169 )     (217 )
Depreciation
    63       56  
Changes in:
               
Receivables, net
    849       712  
Accrued investment income
    (73 )     (54 )
Deferred acquisition costs
    (13 )     4  
Prepaid reinsurance premiums
    14       (6 )
Federal income taxes recoverable
    (140 )     (276 )
Insurance reserves
    (488 )     (238 )
Reinsurance balances payable
    23       (34 )
Other assets
    (66 )     (6 )
Other liabilities
    (177 )     (174 )
Other, net
    4       5  
 
           
 
               
Total adjustments
    80       1,191  
 
           
 
               
Net cash flows provided by operating activities-continuing operations
  $ 291     $ 1,268  
 
           
Net cash flows used by operating activities-discontinued operations
  $ (16 )   $ (7 )
 
           
Net cash flows provided by operating activities-total
  $ 275     $ 1,261  
 
           
 
               
Cash Flows from Investing Activities
               
Purchases of fixed maturity securities
  $ (18,099 )   $ (39,989 )
Proceeds from fixed maturity securities:
               
Sales
    15,507       36,545  
Maturities, calls and redemptions
    2,568       3,374  
Purchases of equity securities
    (262 )     (170 )
Proceeds from sales of equity securities
    510       177  
Change in short term investments
    (460 )     (165 )
Change in collateral on loaned securities and derivatives
    (5 )     (57 )
Change in other investments
    101       (153 )
Purchases of property and equipment
    (46 )     (90 )
Other, net
    2       3  
 
           
 
               
Net cash flows used by investing activities-continuing operations
  $ (184 )   $ (525 )
 
           
Net cash flows provided by investing activities-discontinued operations
  $ 16     $ 17  
 
           
Net cash flows used by investing activities-total
  $ (168 )   $ (508 )
 
           
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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Nine months ended September 30            
(In millions)   2009     2008  
Cash Flows from Financing Activities
               
Dividends paid to common stockholders
  $     $ (122 )
Dividends paid to Loews Corporation for 2008 Senior Preferred
    (94 )      
Principal payments on debt
          (150 )
Return of investment contract account balances
    (10 )     (421 )
Receipts on investment contract account balances
    3       3  
Stock options exercised
    1       1  
Purchase of treasury stock
          (70 )
Other, net
    28       26  
 
           
 
               
Net cash flows used by financing activities-continuing operations
  $ (72 )   $ (733 )
 
           
Net cash flows provided (used) by financing activities-discontinued operations
  $     $  
 
           
Net cash flows used by financing activities-total
  $ (72 )   $ (733 )
 
           
 
               
Effect of foreign exchange rate changes on cash-continuing operations
    8       (6 )
 
           
 
               
Net change in cash
    43       14  
 
               
Net cash transactions from continuing operations to discontinued operations
          17  
Net cash transactions from discontinued operations to continuing operations
          (17 )
 
               
Cash, beginning of year
    85       101  
 
           
 
               
Cash, end of period
  $ 128     $ 115  
 
           
 
               
Cash-continuing operations
  $ 128     $ 115  
Cash-discontinued operations
           
 
           
Cash-total
  $ 128     $ 115  
 
           
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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CNA Financial Corporation (CNAF)
Condensed Consolidated Statements of Equity (Unaudited)
                 
Nine months ended September 30            
(In millions)   2009     2008  
Preferred Stock
               
Balance, beginning and end of period
  $ 1,250     $  
 
           
 
               
Common Stock
               
Balance, beginning and end of period
    683       683  
 
           
 
               
Additional Paid-in Capital
               
Balance, beginning of period
    2,174       2,169  
Stock-based compensation and other
    2       3  
 
           
 
               
Balance, end of period
    2,176       2,172  
 
           
 
               
Retained Earnings
               
Balance, beginning of period
    6,845       7,285  
Cumulative effect adjustment from change in impairment accounting guidance
    122        
Dividends paid to common stockholders
          (122 )
Dividends paid to Loews Corporation for 2008 Senior Preferred
    (94 )      
Net income attributable to CNAF
    173       37  
 
           
 
               
Balance, end of period
    7,046       7,200  
 
           
 
               
Accumulated Other Comprehensive Income (Loss)
               
Balance, beginning of period
    (3,924 )     103  
Cumulative effect adjustment from change in impairment accounting guidance
    (122 )      
Other comprehensive income (loss) attributable to CNAF
    3,799       (2,266 )
 
           
 
               
Balance, end of period
    (247 )     (2,163 )
 
           
 
               
Treasury Stock
               
Balance, beginning of period
    (109 )     (39 )
Purchase of treasury stock
          (70 )
 
           
 
               
Balance, end of period
    (109 )     (109 )
 
           
 
               
Notes Receivable for the Issuance of Common Stock
               
Balance, beginning of period
    (42 )     (51 )
Decrease in notes receivable for the issuance of common stock
    12       4  
 
           
 
               
Balance, end of period
    (30 )     (47 )
 
           
 
               
Total CNAF Stockholders’ Equity
    10,769       7,736  
 
           
 
               
Noncontrolling Interests
               
Balance, beginning of period
    420       385  
Net income
    38       40  
Other comprehensive income (loss)
    29       (17 )
Other
    (1 )     (4 )
 
           
 
               
Balance, end of period
    486       404  
 
           
 
               
Total Equity
  $ 11,255     $ 8,140  
 
           
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
(Unaudited).

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CNA Financial Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A. Basis of Presentation
The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty and remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC), Continental Assurance Company (CAC) and CNA Surety Corporation (CNA Surety). The Company owned approximately 62% of the outstanding common stock of CNA Surety as of September 30, 2009. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of September 30, 2009.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in CNAF’s Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2008. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
The interim financial data as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated. For the period ended September 30, 2009, management has evaluated all subsequent events through the filing date of November 2, 2009.
Note B. Accounting Standards Updates
Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the Financial Accounting Standards Board issued updated accounting guidance, which amended the other-than-temporary impairment (OTTI) loss model for fixed maturity securities. A fixed maturity security is impaired if the fair value of the security is less than its amortized cost basis, which is its cost adjusted for accretion, amortization and previously recorded OTTI losses. The updated accounting guidance requires an OTTI loss equal to the difference between fair value and amortized cost to be recognized in earnings if the Company intends to sell the fixed maturity security or if it is more likely than not the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis.
The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. If the Company does not expect to recover the entire amortized cost basis of a fixed maturity security, the security is deemed to be other-than-temporarily impaired for credit reasons. For these securities, the bifurcation of OTTI losses into a credit component and a non-credit component is required by the updated accounting guidance. The credit component is recognized in earnings and represents the difference between the present value of the future cash flows that the Company expects to collect and a fixed maturity security’s amortized cost basis. The non-credit component is recognized in other

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comprehensive income and represents the difference between fair value and the present value of the future cash flows that the Company expects to collect.
Prior to the adoption of the updated accounting guidance, 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 adoption of this updated accounting guidance as of April 1, 2009 resulted in a cumulative effect adjustment of $122 million, net of tax, which was reclassified to Accumulated other comprehensive income (AOCI) from Retained earnings on the Condensed Consolidated Statement of Equity. The cumulative effect adjustment represents the non-credit component of those previously impaired fixed maturity securities that are still considered OTTI, and the entire amount previously recorded as an OTTI loss on fixed maturity securities no longer considered OTTI as of April 1, 2009.
Note C. Earnings (Loss) Per Share
Earnings (loss) per share attributable to CNAF’s common stockholders is based on weighted average outstanding shares. Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to CNAF 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.
For the three and nine months ended September 30, 2009, approximately 160 thousand and 90 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 1.7 million and 2.0 million potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
For the three months ended September 30, 2008, as a result of the net loss, no potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of loss per share as the effect would have been antidilutive. For the nine months ended September 30, 2008, approximately 60 thousand potential shares attributable to exercises under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For that same period, approximately 1.1 million potential shares attributable to exercises under stock-based employee compensation plans were not included in the calculation of diluted earnings per share because the effect would have been antidilutive.
The 2008 Senior Preferred Stock (2008 Senior Preferred) was issued in November 2008 and accrues cumulative dividends at an initial rate of 10% per year. If declared, dividends are payable quarterly and any dividends not declared or paid when due will be compounded quarterly. Dividends of $31 million and $94 million on the 2008 Senior Preferred were declared and paid for the three and nine months ended September 30, 2009.
No common stock dividends were declared or paid for the three or nine months ended September 30, 2009. Dividends of $0.15 and $0.45 per share of common stock were declared and paid for the three and nine months ended September 30, 2008.

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Note D. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Fixed maturity securities
  $ 496     $ 501     $ 1,458     $ 1,495  
Short term investments
    7       29       28       94  
Limited partnerships
    145       (77 )     240       (70 )
Equity securities
    11       18       39       62  
Trading portfolio – indexed group annuity (a)
          (22 )           (103 )
Trading portfolio – other (b)
    12       (1 )     20       (1 )
Other
    2       3       6       14  
 
                       
 
                               
Gross investment income
    673       451       1,791       1,491  
Investment expense
    (13 )     (12 )     (36 )     (42 )
 
                       
 
                               
Net investment income
  $ 660     $ 439     $ 1,755     $ 1,449  
 
                       
 
(a)
 
The gains (losses) related to the indexed group annuity trading portfolio, including net unrealized gains (losses), were substantially offset by a corresponding change in the policyholders’ funds reserves supported by this trading portfolio, which was included in Insurance claims and policyholders’ benefits on the Condensed Consolidated Statements of Operations.
 
(b)
 
Net unrealized gains on trading securities still held included in net investment income were $6 million for the three and nine months ended September 30, 2009.
Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Net realized investment gains (losses):
                               
 
                               
Fixed maturity securities:
                               
Gross realized gains
  $ 148     $ 75     $ 352     $ 275  
Gross realized losses
    (260 )     (390 )     (1,214 )     (750 )
 
                       
 
                               
Net realized investment losses on fixed maturity securities
    (112 )     (315 )     (862 )     (475 )
 
                               
Equity securities:
                               
Gross realized gains
    20       10       97       21  
Gross realized losses
    (1 )     (386 )     (230 )     (426 )
 
                       
 
                               
Net realized investment gains (losses) on equity securities
    19       (376 )     (133 )     (405 )
 
                               
Derivatives
    (13 )     35       51       47  
Short term investments and other
    6       5       15       20  
 
                       
 
                               
Net realized investment losses, net of participating policyholders’ interests
  $ (100 )   $ (651 )   $ (929 )   $ (813 )
 
                       

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The components of OTTI losses recognized in earnings by asset type are summarized in the following table.
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Fixed maturity securities available-for-sale:
                               
 
                               
Asset-backed securities:
                               
Residential mortgage-backed securities
  $ 108     $ 29     $ 376     $ 142  
Commercial mortgage-backed securities
    4       1       185       57  
Other asset-backed securities
                31       10  
 
                       
Total asset-backed securities
    112       30       592       209  
 
                               
States, municipalities and political subdivisions – tax-exempt securities
    12       1       27       1  
Corporate and other taxable bonds
    24       247       308       288  
Redeemable preferred stock
                9        
 
                       
 
                               
Total fixed maturity securities available-for-sale
    148       278       936       498  
 
                       
 
                               
Equity securities available-for-sale:
                               
Common stock
          51       4       79  
Preferred stock
          255       217       263  
 
                       
 
                               
Total equity securities available-for-sale
          306       221       342  
 
                       
 
                               
Net OTTI losses recognized in earnings
  $ 148     $ 584     $ 1,157     $ 840  
 
                       
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. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company 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 the Company’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 the Company 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 (a) the financial condition and near term prospects of the issuer, (b) whether the debtor is current on interest and principal payments, (c) credit ratings of the securities and (d) general market conditions and industry or sector specific outlook. The Company 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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The Company performs the discounted cash flow analysis using distressed 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. The discount rate utilized is either the yield at acquisition or, for lower rated structured securities, the current yield.
The Company applies the same impairment model as described above for the majority of the non-redeemable preferred stock securities. 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: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (d) general market conditions and industry or sector specific outlook.
Prior to the adoption of the updated accounting guidance related to OTTI in the second quarter of 2009 as further discussed in Note B, the Company applied the impairment model described in the paragraph above to both fixed maturity and equity securities.
The following table provides a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
                                                 
    Cost or     Gross     Gross Unrealized Losses     Estimated     Unrealized  
September 30, 2009   Amortized     Unrealized     Less than     12 Months     Fair     OTTI  
(In millions)   Cost     Gains     12 Months     or Greater     Value     Losses  
Fixed maturity securities available-for-sale:
                                               
U.S. Treasury securities and obligations of government agencies
  $ 223     $ 27     $ 1     $     $ 249     $  
 
                                               
Asset-backed securities:
                                               
Residential mortgage-backed securities
    7,345       81       371       500       6,555       190  
Commercial mortgage-backed securities
    760       4       4       161       599       6  
Other asset-backed securities
    701       12       1       40       672        
 
                                   
Total asset-backed securities
    8,806       97       376       701       7,826       196  
 
                                               
States, municipalities and political subdivisions – tax-exempt securities
    7,434       295       75       168       7,486        
Corporate and other taxable bonds
    17,752       1,233       281       214       18,490       25  
Redeemable preferred stock
    49       3             1       51        
 
                                   
 
                                               
Total fixed maturity securities available-for-sale
    34,264       1,655       733       1,084       34,102     $ 221  
 
                                   
 
                                               
Total fixed maturity securities trading
    616                         616          
 
                                   
 
                                               
Equity securities available-for-sale:
                                               
Common stock
    60       381             2       439          
Preferred stock
    579       39       18       67       533          
 
                                   
 
                                               
Total equity securities available-for-sale
    639       420       18       69       972          
 
                                   
 
                                               
Total
  $ 35,519     $ 2,075     $ 751     $ 1,153     $ 35,690          
 
                                   

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Summary of Fixed Maturity and Equity Securities
                                         
    Cost or     Gross     Gross Unrealized Losses     Estimated  
December 31, 2008   Amortized     Unrealized     Less than     12 Months     Fair  
(In millions)   Cost     Gains     12 Months     or Greater     Value  
Fixed maturity securities available-for-sale:
                                       
U.S. Treasury securities and obligations of government agencies
  $ 2,862     $ 69     $ 1     $     $ 2,930  
Asset-backed securities
    9,670       24       961       969       7,764  
States, municipalities and political subdivisions – tax-exempt securities
    8,557       90       609       623       7,415  
Corporate and other taxable bonds
    12,993       275       1,164       1,374       10,730  
Redeemable preferred stock
    72       1       23       3       47  
 
                             
 
                                       
Total fixed maturity securities available-for-sale
    34,154       459       2,758       2,969       28,886  
 
                             
 
                                       
Total fixed maturity securities trading
    1                         1  
 
                             
 
                                       
Equity securities available-for-sale:
                                       
Common stock
    134       190       1       3       320  
Preferred stock
    882       5       15       321       551  
 
                             
 
                                       
Total equity securities available-for-sale
    1,016       195       16       324       871  
 
                             
 
                                       
Total
  $ 35,171     $ 654     $ 2,774     $ 3,293     $ 29,758  
 
                             
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 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.
                 
            Period from  
    Three Months ended     April 1, 2009 to  
(In millions)   September 30, 2009     September 30, 2009  
Beginning balance of credit losses on fixed maturity securities
  $ 212     $ 192  
 
               
Additional credit losses for which an OTTI loss was previously recognized
    57       78  
Additional 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 September 30, 2009 Summary of Fixed Maturity and Equity Securities 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 the three major providers, Standard & Poors (S&P), Moody’s Investor Services, Inc. (Moody’s) and Fitch Ratings (Fitch) in that order of preference. If a security is not rated by any of the three, 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.
The market disruption that emerged during 2008 has significantly subsided in the third quarter of 2009. The government has initiated programs intended to stabilize and improve markets and the economy. While

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the ultimate impact of these programs remains uncertain and economic conditions in the U.S. remain challenging, financial markets have shown improvement in the third quarter. Risk free interest rates approached multi-year lows and corporate credit spreads continued to narrow resulting in improvement in the Company’s unrealized position. However, fair market values in the asset-backed sector continue to be depressed due to continued concerns with underlying residential and commercial collateral.
Common stock holdings at September 30, 2009 were in a gross unrealized gain of $381 million. The majority of this gain was the Company’s common stock holdings in Verisk Analytics Inc. (Verisk), which began trading on October 7, 2009 after an initial public offering (IPO). The gross unrealized gain reflects this security valued using the IPO price as a significant input. The Company sold all of its common stock holdings in the IPO resulting in a pretax realized investment gain of $370 million that will be reflected in the fourth quarter of 2009.
Asset-Backed Securities
The fair value of total asset-backed holdings at September 30, 2009 was $7,826 million which was comprised of over 2,125 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, 224 have underlying collateral that is either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage (sub-prime) collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation (Alt-A) collateral is measured by the original deal structure.
Residential mortgage-backed securities include 315 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 was approximately 17% of amortized cost.
Commercial mortgage-backed securities include 41 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 24% of amortized cost.
Other asset-backed securities include 27 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 12% of amortized cost.
The following table summarizes asset-backed securities in a gross unrealized loss position by ratings distribution at September 30, 2009.
Gross Unrealized Losses by Ratings Distribution
September 30, 2009
(In millions)
                         
                    Gross  
    Amortized     Estimated     Unrealized  
Rating   Cost     Fair Value     Loss  
U.S. Government Agencies
  $ 409     $ 400     $ 9  
AAA
    2,730       2,363       367  
AA
    490       384       106  
A
    457       342       115  
BBB
    422       336       86  
Non-investment grade and equity tranches
    1,652       1,258       394  
 
                 
Total
  $ 6,160     $ 5,083     $ 1,077  
 
                 
The Company believes the unrealized losses are primarily attributable to broader economic conditions, liquidity concerns and wider than historical bid/ask spreads brought about as a result of portfolio liquidations and is not indicative of the quality of the underlying collateral. The Company has no current

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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 credit worthiness, 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, 2009.
States, Municipalities and Political Subdivisions – Tax-Exempt Securities
The tax-exempt portfolio consists primarily of special revenue and assessment bonds, representing 82% of the overall portfolio, followed by general obligation political subdivision bonds at 15% and state general obligation bonds at 3%.
The unrealized losses on the Company’s investments in tax-exempt municipal securities are due to market conditions in certain sectors or states that continue to lag behind the broader municipal market recovery. Market conditions in the tax-exempt sector have improved during 2009. However, yields for certain issuers and types of securities, such as auction rate and tobacco securitizations, continue to be higher than historical norms relative to after-tax returns on other fixed income alternatives. The holdings for all tax-exempt securities in this category include 249 securities in a gross unrealized loss position. The aggregate severity of the total gross unrealized losses was approximately 8% of amortized cost.
The following table summarizes the ratings distribution of tax-exempt securities in a gross unrealized loss position at September 30, 2009.
Gross Unrealized Losses by Ratings Distribution
September 30, 2009
(In millions)
                         
                    Gross  
    Amortized     Estimated     Unrealized  
Rating   Cost     Fair Value     Loss  
AAA
  $ 1,127     $ 1,089     $ 38  
AA
    664       591       73  
A
    333       315       18  
BBB
    712       600       112  
Non-investment grade
    48       46       2  
 
                 
Total
  $ 2,884     $ 2,641     $ 243  
 
                 
The largest exposures at September 30, 2009 as measured by gross unrealized losses were special revenue bonds issued by several states backed by tobacco settlement funds with gross unrealized losses of $106 million, and several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $45 million. All of these securities are 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 credit worthiness; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2009.
Corporate and Other Taxable Bonds
The holdings in this category include 405 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized losses was approximately 12% of amortized cost.

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The following tables summarize corporate and other taxable bonds in a gross unrealized loss position at September 30, 2009 across industry sectors and by ratings distribution.
                         
September 30, 2009           Estimated     Gross  
(In millions)   Amortized Cost     Fair Value     Unrealized Loss  
Communications
  $ 287     $ 276     $ 11  
Consumer, Cyclical
    490       434       56  
Consumer, Non-cyclical
    275       256       19  
Energy
    315       296       19  
Financial
    1,962       1,670       292  
Industrial
    235       211       24  
Utilities
    469       419       50  
Other
    252       228       24  
 
                 
 
                       
Total
  $ 4,285     $ 3,790     $ 495  
 
                 
Gross Unrealized Losses by Ratings Distribution
September 30, 2009
(In millions)
                         
            Estimated     Gross  
Rating   Amortized Cost     Fair Value     Unrealized Loss  
AAA
  $ 63     $ 57     $ 6  
AA
    80       79       1  
A
    951       864       87  
BBB
    1,900       1,686       214  
Non-investment grade
    1,291       1,104       187  
 
                 
Total
  $ 4,285     $ 3,790     $ 495  
 
                 
The unrealized losses on corporate and other taxable bonds are primarily attributable to lingering impacts of the broader credit market deterioration throughout 2008 that resulted in widening of credit spreads over risk free interest rates beyond historical norms. These conditions continue in certain sectors, such as financial, that the market continues to view as out of favor. Overall conditions in the corporate bond market have significantly improved throughout 2009 resulting in improvement in the Company’s unrealized position. 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 were not due to factors regarding credit worthiness; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2009.
The Company has invested in securities with characteristics of both debt and equity investments, often referred to as hybrid debt securities. Such securities are typically debt instruments issued with long or extendable maturity dates, may provide for the ability to defer interest payments without defaulting and are usually lower in the capital structure of the issuer than traditional bonds. The financial industry sector presented above includes hybrid debt securities with an aggregate fair value of $711 million and an aggregate amortized cost of $899 million.
Non-Redeemable Preferred Stock
The unrealized losses on the Company’s investments in non-redeemable preferred stock were caused by factors similar to those that affected the Company’s corporate bond portfolio. Approximately 79% of the gross unrealized losses in this category come from securities issued by financial institutions and 21% from utilities. The holdings in this category include 23 securities in a gross unrealized loss position. The following table summarizes non-redeemable preferred stocks in a gross unrealized loss position at September 30, 2009 by ratings distribution.

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Gross Unrealized Losses by Ratings Distribution
September 30, 2009
(In millions)
                         
                    Gross  
            Estimated     Unrealized  
Rating   Amortized Cost     Fair Value     Loss  
A
  $ 95     $ 81     $ 14  
BBB
    396       331       65  
Non-investment grade
    18       12       6  
 
                 
Total
  $ 509     $ 424     $ 85  
 
                 
The majority of securities in this category relate to the banking and mortgage industries. These securities continue to experience what the Company believes to be temporarily depressed valuations. The Company has no current intent to sell these securities, nor is it more likely than not 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 credit worthiness; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2009. This evaluation was made on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends.
Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 30, 2009 and December 31, 2008. 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, 2009     December 31, 2008  
    Cost or     Estimated     Cost or     Estimated  
Contractual Maturity   Amortized     Fair     Amortized     Fair  
(In millions)   Cost     Value     Cost     Value  
Due in one year or less
  $ 1,206     $ 1,176     $ 3,105     $ 2,707  
Due after one year through five years
    10,058       9,990       10,295       9,210  
Due after five years through ten years
    8,998       8,928       5,929       4,822  
Due after ten years
    14,002       14,008       14,825       12,147  
 
                       
 
                               
Total
  $ 34,264     $ 34,102     $ 34,154     $ 28,886  
 
                       
Auction Rate Securities
The investment portfolio includes auction rate securities which are primarily issued by student loan agencies from ten states and are substantially guaranteed by the Federal Family Education Loan Program (FFELP). The fair value of auction rate securities held at September 30, 2009 was $945 million, with no gross unrealized gains and gross unrealized losses of $75 million. The average rating on these holdings was AAA. At September 30, 2009, three auction rate securities, with a fair value of $68 million and gross unrealized losses of $20 million, were paying below market penalty rates.

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Limited Partnerships
The carrying value of limited partnerships as of September 30, 2009 and December 31, 2008 was approximately $1.9 billion and $1.7 billion. At September 30, 2009, limited partnerships comprising 47% of the total carrying value are reported on a current basis through September 30, 2009 with no reporting lag, 43% are reported on a one month lag and the remainder are reported on more than a one month lag. As of September 30, 2009 and December 31, 2008, the Company had 78 and 82 active limited partnership investments. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio. The Company generally does not invest in highly leveraged partnerships.
Of the limited partnerships held, 90% or approximately $1.7 billion in carrying value at September 30, 2009 and 89% or approximately $1.5 billion in carrying value at December 31, 2008, employ strategies that generate returns through investing in securities that are marketable while engaging in various management techniques primarily in public fixed income and equity markets. These hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. The hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation, or various arbitrage disciplines. Within hedge fund strategies, approximately 46% are equity related, 28% pursue a multi-strategy approach, 21% are focused on distressed investments and 5% are fixed income related.
Limited partnerships representing 6% or $117 million at September 30, 2009 and 7% or $126 million at December 31, 2008 were invested in private equity. The remaining were invested in various other partnerships including real estate. The ten largest limited partnership positions held totaled $1,164 million and $915 million as of September 30, 2009 and December 31, 2008. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Condensed Consolidated Balance Sheets represents approximately 4% and 3% of the aggregate partnership equity at September 30, 2009 and December 31, 2008, and the related income reflected on the Condensed Consolidated Statements of Operations represents approximately 4% of the changes in partnership equity for all limited partnership investments for the nine months ended September 30, 2009 and 2008.
The risks associated with limited partnership investments may include losses due to leveraging, short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.
Investment Commitments
As of September 30, 2009, the Company had committed approximately $254 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 multiple bank loan participations 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 settlement is made. As of September 30, 2009, the Company had commitments to purchase $295 million and sell $214 million of various bank loan participations. When loan participation purchases are settled and recorded they may contain both funded and unfunded amounts. An unfunded loan represents an obligation by the Company to provide additional amounts under the terms of the loan participation. The funded portions are reflected on the Condensed Consolidated Balance Sheets, while any unfunded amounts are not recorded until a draw is made under the loan facility. As of September 30, 2009, the Company had obligations on unfunded bank loan participations in the amount of $9 million.

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Note E. Derivative Financial Instruments
The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, equity stock 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. The Company infrequently applies hedge accounting treatment to derivative hedging transactions.
The Company’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 is exposed 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. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments.
Foreign exchange rate 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 British pounds, Euros and Canadian dollars. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards.
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

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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.
The tables below summarize CDS contracts where the Company sold credit protection as of September 30, 2009 and December 31, 2008. The fair value of the contracts represents the amount that the Company would have to 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. The largest single reference obligation as of September 30, 2009 represented 76% of the total notional value and was rated BBB. The largest single reference obligation as of December 31, 2008 represented 20% of the total notional value and was rated AAA.
Credit Ratings of Underlying Reference
   Obligations
                         
    Fair Value of     Maximum Amount of     Weighted  
September 30, 2009   Credit Default     Future Payments under     Average Years  
(In millions)   Swaps     Credit Default Swaps     to Maturity  
BBB
  $     $ 25       0.2  
B
          8       3.4  
 
                 
Total
  $     $ 33       1.0  
 
                 
Credit Ratings of Underlying Reference
   Obligations
                         
    Fair Value of     Maximum Amount of     Weighted  
December 31, 2008   Credit Default     Future Payments under     Average Years  
(In millions)   Swaps     Credit Default Swaps     to Maturity  
AAA/AA/A
  $ (8 )   $ 40       12.3  
BBB
    (4 )     55       3.1  
B
    (2 )     8       4.1  
CCC and lower
    (29 )     45       4.5  
 
                 
Total
  $ (43 )   $ 148       6.1  
 
                 
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 Condensed Consolidated 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 $9 million and $74 million at September 30, 2009 and December 31, 2008. The fair value of cash collateral received from counterparties was $1 million and $6 million at September 30, 2009 and December 31, 2008.
See Note F for information regarding the fair value of derivatives securities. The Company’s accounting for changes in the fair value of derivatives not held in a trading portfolio is reported in Net realized investment gains (losses) on the Condensed Consolidated Statements of Operations.

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A summary of the recognized gains (losses) related to derivative financial instruments follows.
Recognized Gains (Losses)
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Without hedge designation
                               
Interest rate swaps
  $     $ 4     $ 61     $ 6  
Credit default swaps — purchased protection
    (11 )     53       (46 )     64  
Credit default swaps — sold protection
          (4 )     2       (13 )
Total return swaps
                (2 )      
Futures sold, not yet purchased
    (2 )     (23 )     21       (12 )
Commitments to purchase government and municipal securities (TBAs)
          3             3  
Options embedded in convertible debt securities
          1             1  
Equity warrants
                      (2 )
Options written
                15        
 
                               
Trading activities
                               
Futures purchased
          (18 )           (96 )
Futures sold, not yet purchased
    (4 )           (5 )     1  
Currency forwards
                      1  
 
                       
 
                               
Total
  $ (17 )   $ 16     $ 46     $ (47 )
 
                       
The derivatives held for trading purposes are carried at fair value with the related gains and losses included within Net investment income on the Condensed Consolidated Statements of Operations. The Company’s derivative activities in the trading portfolio in 2009 are associated with the resumption of a trading portfolio for income enhancement purposes. The Company’s derivative activities in the trading portfolio in 2008 were associated with its pension deposit business, through which the Company was exposed to equity price risk associated with its indexed group annuity contracts. A corresponding increase or decrease was reflected in the Policyholders’ funds reserves supported by this trading portfolio, which was included in Insurance claims and policyholders’ benefits on the Condensed Consolidated Statements of Operations. During 2008, the Company exited the indexed group annuity portion of its pension deposit business.
A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments reported as Other invested assets or Other liabilities on the Condensed Consolidated Balance Sheets follows. Embedded derivative instruments subject to bifurcation are reported together with the host contract, at fair value. 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.

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Derivative Financial Instruments
                         
    Contractual/        
September 30, 2009   Notional     Estimated Fair Value  
(In millions)   Amount     Asset     (Liability)  
Without hedge designation
                       
Credit default swaps — purchased protection
  $ 159     $ 2     $ (12 )
Credit default swaps — sold protection
    33              
Futures sold, not yet purchased
    174              
Equity warrants
    2              
 
                       
Trading activities
                       
Futures sold, not yet purchased
    130              
 
                 
 
                       
Total
  $ 498     $ 2     $ (12 )
 
                 
Derivative Financial Instruments
                         
    Contractual/        
December 31, 2008   Notional     Estimated Fair Value  
(In millions)   Amount     Asset     (Liability)  
Without hedge designation
                       
Interest rate swaps
  $ 900     $     $ (66 )
Credit default swaps — purchased protection
    405       24       (2 )
Credit default swaps — sold protection
    148             (43 )
Equity warrants
    4              
 
                 
 
                       
Total
  $ 1,457     $ 24     $ (111 )
 
                 
During the three and nine months ended September 30, 2009, new derivative transactions entered into totaled approximately $8 billion and $18 billion in notional value while derivative termination activity totaled approximately $8 billion and $19 billion. The activity during the three months ended September 30, 2009 was primarily attributable to interest rate futures. The activity during the nine months ended September 30, 2009 was primarily attributable to interest rate futures, interest rate options and interest rate swaps.

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Note F. 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.
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.

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Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are summarized below.
                                 
                            Total  
September 30, 2009                           assets/(liabilities)  
(in millions)   Level 1     Level 2     Level 3     at fair value  
Assets
                               
Fixed maturity securities:
                               
U.S. Treasury securities and obligations of government agencies
  $ 731     $ 96     $     $ 827  
 
                               
Asset-backed securities:
                               
Residential mortgage-backed securities
          5,818       737       6,555  
Commercial mortgage-backed securities
          388       211       599  
Other asset-backed securities
          384       288       672  
 
                       
Total asset-backed securities
          6,590       1,236       7,826  
 
                               
States, municipalities and political subdivisions - tax-exempt securities
          6,716       770       7,486  
Corporate and other taxable bonds
    139       17,617       772       18,528  
Redeemable preferred stock
          49       2       51  
 
                       
Total fixed maturity securities
    870       31,068       2,780       34,718  
 
                               
Equity securities
    478       484       10       972  
Derivative financial instruments, included in Other invested assets
                2       2  
Short term investments
    3,036       1,031       8       4,075  
Life settlement contracts, included in Other assets
                129       129  
Discontinued operations investments, included in Other liabilities
    25       107       16       148  
Separate account business
    59       353       40       452  
 
                       
Total assets
  $ 4,468     $ 33,043     $ 2,985     $ 40,496  
 
                       
 
                               
Liabilities
                               
Derivative financial instruments, included in Other liabilities
  $     $     $ (12 )   $ (12 )
 
                       
Total liabilities
  $     $     $ (12 )   $ (12 )
 
                       

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                            Total  
December 31, 2008                           assets/(liabilities)  
(in millions)   Level 1     Level 2     Level 3     at fair value  
Assets
                               
Fixed maturity securities
  $ 2,028     $ 24,367     $ 2,492     $ 28,887  
Equity securities
    567       94       210       871  
Derivative financial instruments, included in Other invested assets
                24       24  
Short term investments
    2,926       608             3,534  
Life settlement contracts, included in Other assets
                129       129  
Discontinued operations investments, included in Other liabilities
    83       59       15       157  
Separate account business
    40       306       38       384  
 
                       
Total assets
  $ 5,644     $ 25,434     $ 2,908     $ 33,986  
 
                       
 
                               
Liabilities
                               
Derivative financial instruments, included in Other liabilities
  $     $     $ (111 )   $ (111 )
 
                       
Total liabilities
  $     $     $ (111 )   $ (111 )
 
                       

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The tables below present a reconciliation 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, 2009 and 2008.
                                                                 
                    Net realized                                        
                    investment                                        
            Net realized     gains (losses)                                        
            investment     and net                                        
            gains (losses)     change in                                        
            and net     unrealized                                     Unrealized gains  
            change in     appreciation                                     (losses) on Level  
            unrealized     (depreciation)     Purchases,                             3 assets and  
            appreciation     included in     sales,                             liabilities held at  
            (depreciation)     other     issuances     Transfers     Transfers     Balance at     September 30,  
Level 3   Balance at     included in     comprehensive     and     into     out of     September 30,     2009 recognized  
(in millions)   July 1, 2009     net income*     income     settlements     Level 3     Level 3     2009     in net income*  
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-tax-exempt securities
    785             19       (34 )                 770        
Corporate and other taxable bonds
    730       (10 )     67       63       5       (83 )     772       (10 )
Redeemable preferred stock
    1             1                         2        
 
                                               
Total fixed maturity securities
    2,640       (11 )     191       192       5       (237 )     2,780       (14 )
 
                                                               
Equity securities
    209                               (199 )     10        
Derivative financial instruments, net
    (10 )     (10 )           10                   (10 )     (4 )
Short term investments
                1       7                   8        
Life settlement contracts
    126       8             (5 )                 129       5  
Discontinued operations investments
    13             3                         16        
Separate account business
    38                   3             (1 )     40        
 
                                               
Total
  $ 3,016     $ (13 )   $ 195     $ 207     $ 5     $ (437 )   $ 2,973     $ (13 )
 
                                               

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            Net realized     Net realized                                        
            investment     investment gains                                        
            gains (losses)     (losses) and net                                     Unrealized  
            and net     change in                                     gains (losses) on  
            change in     unrealized                                     Level 3 assets  
            unrealized     appreciation     Purchases,                             and liabilities  
            appreciation     (depreciation)     sales,                             held at  
            (depreciation)     included in other     issuances     Transfers     Transfers     Balance at     September 30,  
Level 3   Balance at     included in     comprehensive     and     into     out of     September 30,     2008 recognized  
(in millions)   July 1, 2008     net loss*     loss     settlements     Level 3     Level 3     2008     in net loss*  
Fixed maturity securities
  $ 3,213     $ (27 )   $ (103 )   $ (152 )   $ 138     $ (87 )   $ 2,982     $ (23 )
Equity securities
    261             (1 )     (23 )           (23 )     214        
Derivative financial instruments, net
    (67 )     54             22                   9       76  
Short term investments
                                               
Life settlement contracts
    118       4             (1 )                 121       3  
Discontinued operations investments
    23             (2 )     (1 )                 20        
Separate account business
    45             (7 )     (1 )     6             43        
 
                                               
Total
  $ 3,593     $ 31     $ (113 )   $ (156 )   $ 144     $ (110 )   $ 3,389     $ 56  
 
                                               

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The tables below present a reconciliation 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, 2009 and 2008.
                                                                 
            Net realized     Net realized                                        
            investment     investment gains                                        
            gains (losses)     (losses) and net                                     Unrealized  
            and net     change in                                     gains (losses) on  
            change in     unrealized                                     Level 3 assets  
            unrealized     appreciation     Purchases,                             and liabilities  
            appreciation     (depreciation)     sales,                             held at  
            (depreciation)     included in other     issuances     Transfers     Transfers     Balance at     September 30,  
Level 3   Balance at     included in     comprehensive     and     into     out of     September 30,     2009 recognized  
(in millions)   January 1, 2009     net income*     income     settlements     Level 3     Level 3     2009     in net income*  
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-tax-exempt securities
    750             74       (54 )                 770        
Corporate and other taxable bonds
    622       (15 )     113       130       23       (101 )     772       (15 )
Redeemable preferred stock
    13       (9 )     9       7             (18 )     2       (9 )
 
                                               
Total fixed maturity securities
    2,492       (243 )     518       142       273       (402 )     2,780       (234 )
 
                                                               
Equity securities
    210             (1 )                 (199 )     10        
Derivative financial instruments, net
    (87 )     15             62                   (10 )     (11 )
Short term investments
                1       7                   8        
Life settlement contracts
    129       24             (24 )                 129       7  
Discontinued operations investments
    15             3       (2 )                 16        
Separate account business
    38                   3             (1 )     40        
 
                                               
Total
  $ 2,797     $ (204 )   $ 521     $ 188     $ 273     $ (602 )   $ 2,973     $ (238 )
 
                                               

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            Net realized                                              
            investment     Net realized                                        
            gains (losses)     investment gains                                        
            and net     (losses) and net                                     Unrealized gains  
            change in     change in                                     (losses) on Level  
            unrealized     unrealized     Purchases,                             3 assets and  
            appreciation     appreciation     sales,                             liabilities held at  
    Balance at     (depreciation)     (depreciation)     issuances     Transfers     Transfers     Balance at     September 30,  
Level 3   January 1,     included in     included in other     and     into     out of     September 30,     2008 recognized  
(in millions)   2008     net income*     comprehensive loss     settlements     Level 3     Level 3     2008     in net income*  
Fixed maturity securities
  $ 2,684     $ (150 )   $ (373 )   $ (68 )   $ 1,392     $ (503 )   $ 2,982     $ (158 )
Equity securities
    196       (2 )     (4 )     25       22       (23 )     214       (4 )
Derivative financial instruments, net
    2       55             (48 )                 9       7  
Short term investments
    85                               (85 )            
Life settlement contracts
    115       34             (28 )                 121       8  
Discontinued operations investments
    42             (2 )     (3 )           (17 )     20        
Separate account business
    30             (11 )     (2 )     26             43        
 
                                               
Total
  $ 3,154     $ (63 )   $ (390 )   $ (124 )   $ 1,440     $ (628 )   $ 3,389     $ (147 )
 
                                               

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*   Net realized and unrealized gains and losses shown above are reported in Net income (loss) as follows:
     
Major Category of Assets and Liabilities   Condensed Consolidated Statement of Operations Line Items
Fixed maturity securities available-for-sale
  Net realized investment gains (losses)
 
   
Fixed maturity securities trading
  Net investment income
 
   
Equity securities
  Net realized investment gains (losses)
 
   
Derivative financial instruments held in a trading portfolio
  Net investment income
 
   
Derivative financial instruments, other
  Net realized investment gains (losses)
 
   
Life settlement contracts
  Other revenues
Securities shown in the Level 3 tables on the previous pages 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.
For the nine months ended September 30, 2009, transfers into Level 3 related primarily to structured securities with underlying auto loan collateral and structured securities with residential and commercial mortgage collateral. These were previously valued using observable prices for similar securities, but due to decreased market activity, fair value is determined by cash flow models using market observable and unobservable inputs. Unobservable inputs include estimates of future cash flows and the maturity assumption.
Securities transferred out of Level 3 included a large common stock holding in Verisk, which began trading on October 7, 2009 after an IPO as discussed in Note D. The Verisk holding had been previously valued using a discounted cash flow analysis model, adjusted for the Company’s assumption regarding an inherent lack of liquidity in the security. This security has been transferred to Level 2 based on the use of the observable IPO price as a significant input.
In addition, for the nine months ended September 30, 2009, transfers out of Level 3 related primarily to structured securities with underlying auto loan collateral and structured securities with residential mortgage collateral. These structured securities with underlying auto loan and residential mortgage loan collateral are currently valued using observable market information and inputs from external pricing sources.
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.
Fixed Maturity Securities
Level 1 securities include highly liquid government bonds within the U.S. Treasury securities and corporate and other taxable bond categories for which quoted market prices are available. Level 1 securities may also include securities that have firm sale commitments and prices that are not recorded until the settlement date. 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, municipal bonds, asset-backed securities, mortgage-backed pass-through securities and redeemable preferred stock. 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, municipal bonds and redeemable preferred stock. Within corporate bonds and municipal bonds, Level 3 securities also include tax-exempt 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.

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Equity Securities
Level 1 securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred securities 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 primarily include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 3 of the valuation hierarchy due to a lack 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 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 estimated using discounted cash flows based on the Company’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 the Company’s discontinued operations include fixed maturity securities and short term investments. The valuation methodologies for these asset types have been described above.
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 Condensed Consolidated Balance Sheets are listed in the table below.
                                 
    September 30, 2009   December 31, 2008
    Carrying   Estimated   Carrying   Estimated
(In millions)   Amount   Fair Value   Amount   Fair Value
Financial assets
                               
Notes receivable for the issuance of common stock
  $ 30     $ 30     $ 42     $ 42  
 
                               
Financial liabilities
                               
Premium deposits and annuity contracts
  $ 107     $ 110     $ 111     $ 113  
Long term debt
    2,056       1,953       2,058       1,585  

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The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
The fair values of notes receivable for the issuance of common stock were estimated using discounted cash flows utilizing interest rates currently offered for obligations securitized with similar collateral.
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.
CNAF’s senior notes and debentures were valued based on quoted market prices. The fair value for other long term debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.
The carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Accrued investment income, Receivables for securities sold, Federal income taxes recoverable/payable, Collateral on loaned securities and derivatives, Payables for securities purchased, and certain other assets and other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the table above.
Note G. 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. The Company’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 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. The Company reported catastrophe losses, net of reinsurance, of $23 million and $79 million for the three and nine months ended September 30, 2009 for events occurring in those periods. Catastrophe losses in 2009 related primarily to tornadoes, floods, hail and wind. The Company reported catastrophe losses, net of reinsurance, of $248 million and $348 million for the three and nine months ended September 30, 2008 for events occurring in those periods. Catastrophe losses in 2008 related primarily to Hurricanes Gustav and Ike. There can be no assurance that CNA’s ultimate cost for catastrophes will not exceed current estimates.
The following provides discussion of the Company’s Asbestos and Environmental Pollution (A&E) reserves.

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A&E Reserves
CNA’s property and casualty insurance subsidiaries have actual and potential exposures related to A&E claims. The following table provides data related to CNA’s A&E claim and claim adjustment expense reserves.
A&E Reserves
                                 
    September 30, 2009     December 31, 2008  
            Environmental             Environmental  
(In millions)   Asbestos     Pollution     Asbestos     Pollution  
Gross reserves
  $ 1,912     $ 345     $ 2,112     $ 392  
Ceded reserves
    (821 )     (119 )     (910 )     (130 )
 
                       
 
                               
Net reserves
  $ 1,091     $ 226     $ 1,202     $ 262  
 
                       
Asbestos
There was no asbestos-related net claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2009. The Company recorded $18 million of unfavorable asbestos-related net claim and claim adjustment expense reserve development for the nine months ended September 30, 2008. The Company paid asbestos-related claims, net of reinsurance recoveries, of $111 million and $125 million for the nine months ended September 30, 2009 and 2008.
The ultimate cost of reported claims, and in particular A&E claims, is subject to a great many uncertainties, including future developments of various kinds that CNA does not control and that are difficult or impossible to foresee accurately. With respect to the litigation identified, pending rulings are critical to the evaluation of the ultimate cost to the Company. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. CNA’s policies also contain other limits applicable to these claims and the Company has additional coverage defenses to certain claims. CNA has attempted to manage its asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Where the Company cannot settle a claim on acceptable terms, CNA aggressively litigates the claim. However, adverse developments with respect to such matters could have a material adverse effect on the Company’s results of operations and/or equity.
Certain asbestos claim litigation in which CNA is currently engaged is described below:
A.P. Green: On February 13, 2003, CNA announced it had resolved asbestos-related coverage litigation and claims involving A.P. Green Industries, A.P. Green Services and Bigelow-Liptak Corporation. Under the agreement, CNA is required to pay $70 million, net of reinsurance recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of reorganization. The settlement received initial bankruptcy court approval on August 18, 2003. The debtor’s plan of reorganization includes an injunction to protect CNA from any future claims. The bankruptcy court issued an opinion on September 24, 2007 recommending confirmation of that plan. On July 25, 2008, the District Court affirmed the Bankruptcy

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Court’s ruling. Several insurers have appealed that ruling to the Third Circuit Court of Appeals; that appeal was argued on May 21, 2009 and the parties are awaiting the court’s decision.
Keasbey: CNA is engaged in insurance coverage litigation in New York State Court, filed in 2003, with a defendant class of underlying plaintiffs who have asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03 (N.Y. County)). Keasbey, currently a dissolved corporation, was a seller and installer of asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have filed bodily injury claims against Keasbey. However, under New York court rules, asbestos claims are not cognizable unless they meet certain minimum medical impairment standards. Since 2002, when these court rules were adopted, only a small portion of such claims have met medical impairment criteria under New York court rules and as to the remaining claims, Keasbey’s involvement at a number of work sites is a highly contested issue.
CNA issued Keasbey primary policies for 1970-1987 and excess policies for 1971-1978. CNA has paid an amount substantially equal to the policies’ aggregate limits for products and completed operations claims in the confirmed CNA policies. Claimants against Keasbey allege, among other things, that CNA owes coverage under sections of the policies not subject to the aggregate limits, an allegation CNA vigorously contests in the lawsuit. In the litigation, CNA and the claimants seek declaratory relief as to the interpretation of various policy provisions.
On December 30, 2008, a New York appellate court entered a unanimous decision in favor of CNA on multiple alternative grounds including findings that claims arising out of Keasbey’s asbestos insulating activities are included within the products hazard/completed operations coverage, which has been exhausted; and that the defendant claimant class is subject to the affirmative defenses that CNA may have had against Keasbey, barring all coverage claims. The New York Court of Appeals has denied leave for a further appeal and, subject to a motion to reargue, the December 30, 2008 ruling in favor of CNA is final.
Burns & Roe: CNA has insurance coverage disputes related to asbestos bodily injury claims against a bankrupt insured, Burns & Roe Enterprises, Inc. (Burns & Roe). CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974, along with certain project-specific policies from 1964-1970. In September of 2007, CNA entered into an agreement in the Burns & Roe bankruptcy proceeding which provides that claims allegedly covered by CNA policies will be adjudicated in the tort system, with any coverage disputes related to those claims to be decided in coverage litigation. That agreement was included in the Burns & Roe Bankruptcy Plan which became final on June 15, 2009 and was not appealed. The potential outcome will depend on whether the plaintiffs can successfully prosecute their claims in the tort system and, further, whether those claims are covered by the CNA policies. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
Direct Action Case — Montana: On March 22, 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty, et al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland Casualty and the State of Montana. This action alleges that the carriers failed to warn of or otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R. Grace’s pending bankruptcy. On April 7, 2008, W.R. Grace announced a settlement in principle with the asbestos personal injury claimants committee subject to confirmation of a plan of reorganization by the bankruptcy court. The confirmation hearing is held in two phases. The first phase was held in June 2009. The second phase began in September 2009 and will continue through January 2010. The settlement in principle with the asbestos claimants has no present impact on the stay currently imposed on the Montana direct action and with respect to such claims, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the potential application of Statutes of Limitation to many of the claims which may be made depending on the nature and scope of the alleged

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duties; (c) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) the extent that such liability would be shared with other potentially responsible parties; and (f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CNA is vigorously defending these and other cases and believes that it has meritorious defenses to the claims asserted. However, there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial exposure represented by these matters. Adverse developments with respect to any of these matters could have a material adverse effect on CNA’s business, insurer financial strength and debt ratings, results of operations and/or equity.
Environmental Pollution
There was no environmental pollution net claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2009. The Company recorded $3 million of unfavorable environmental pollution net claim and claim adjustment expense reserve development for the nine months ended September 30, 2008. The Company paid environmental pollution-related claims, net of reinsurance recoveries, of $36 million and $51 million for the nine months ended September 30, 2009 and 2008.
Net Prior Year Development
The following tables and discussion include the net prior year development recorded for Standard Lines, Specialty Lines and Corporate & Other Non-Core. Favorable net prior year development of $75 million was recorded in the Life & Group Non-Core segment for the nine months ended September 30, 2009. Included in this amount is the impact of a settlement reached in September 2009 with Willis Limited that resolves litigation related to the placement of personal accident reinsurance. Under the settlement agreement, Willis Limited agreed to pay the Company a total of $130 million, which is reported as a loss recovery of $94 million, net of reinsurance. For the nine months ended September 30, 2008 for the Life & Group Non-Core segment, unfavorable net prior year development of $10 million was recorded.
The net prior year development presented below includes premium development due to its direct relationship to claim and allocated claim adjustment expense reserve development. The net prior year development presented below includes the impact of commutations, but excludes the impact of increases or decreases in the allowance for uncollectible reinsurance.

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Three Month Comparison
Net Prior Year Development
Three months ended September 30, 2009
                                 
                    Corporate &        
    Standard     Specialty     Other Non-        
(In millions)   Lines     Lines     Core     Total  
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
                               
 
                               
Core (Non-A&E)
  $ (13 )   $ (47 )   $ 1     $ (59 )
A&E
                       
 
                       
 
                               
Pretax (favorable) unfavorable net prior year development before impact of premium development
    (13 )     (47 )     1       (59 )
 
                       
 
                               
Pretax (favorable) unfavorable premium development
    12                   12  
 
                       
 
                               
Total pretax (favorable) unfavorable net prior year development
  $ (1 )   $ (47 )   $ 1     $ (47 )
 
                       
Net Prior Year Development
Three months ended September 30, 2008
                                 
                    Corporate &        
    Standard     Specialty     Other Non-        
(In millions)   Lines     Lines     Core     Total  
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
                               
 
                               
Core (Non-A&E)
  $ (4 )   $ (68 )   $ 1     $ (71 )
A&E
                13       13  
 
                       
 
                               
Pretax (favorable) unfavorable net prior year development before impact of premium development
    (4 )     (68 )     14       (58 )
 
                       
 
                               
Pretax (favorable) unfavorable premium development
    3       (2 )     (3 )     (2 )
 
                       
 
                               
Total pretax (favorable) unfavorable net prior year development
  $ (1 )   $ (70 )   $ 11     $ (60 )
 
                       
2009 Net Prior Year Development
Standard Lines
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.

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Approximately $47 million of unfavorable 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.
Specialty Lines
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in professional liability, directors and 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 and 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.
2008 Net Prior Year Development
Standard Lines
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in general liability and property coverages offset by unfavorable experience in workers’ compensation (including excess workers’ compensation coverages) and large account business.
For general liability excluding construction defect, $228 million in favorable claim and allocated claim adjustment expense reserve development was due to decreased frequency and severity of claims across multiple accident years. The improvement was due to underwriting initiatives and favorable outcomes on individual claims. Favorable development of $207 million associated with construction defect exposures was due to lower severity resulting from various claim handling initiatives and lower than expected frequency of claims, primarily in accident years 1999 and prior. Claims handling initiatives have resulted in an increase in the number of claims closed without payment and increased recoveries from other parties involved in the claims. The lower construction defect frequency is due to underwriting initiatives designed to limit the exposure to future construction defect claims. For property exposures, $31 million of favorable development was primarily the result of decreased frequency and severity in recent years. The remaining favorable development was the result of favorable experience across several miscellaneous coverages in Standard Lines.
Unfavorable development of $248 million for workers’ compensation was primarily the result of the impact of claim cost inflation on lifetime medical and home health care claims in accident years 1999 and prior. The changes were driven by increased life expectancy due to advances in medical care and increasing medical inflation. Unfavorable development of $161 million for large account business was also driven primarily by workers’ compensation claim cost inflation primarily in accident years 2001 and prior. Unfavorable development of $90 million on excess workers’ compensation was due to claims in accident years 2002 and prior. Increasing medical inflation, increased life expectancy resulting from advances in medical care, and reviews of individual claims have resulted in higher cost estimates of existing claims and a higher estimate of the number of claims expected to reach excess layers. The remaining unfavorable development was driven primarily by commercial auto liability coverages in recent accident years due to an increase in frequency.

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Specialty Lines
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in medical professional liability and surety business, partially offset by unfavorable experience in professional liability coverages.
Favorable claim and allocated claim adjustment expense reserve development of approximately $52 million for medical professional liability was primarily due to better than expected frequency of large losses in accident years 2005 and 2006 for healthcare facilities and medical technology firms. Favorable development of approximately $22 million for surety coverages was due to better than expected frequency in accident years 2002 through 2006. The remaining favorable development was due primarily to favorable outcomes on individual claims in accident years 2004 through 2006 for miscellaneous professional and general liability coverages.
Unfavorable development of approximately $18 million for professional liability coverages was primarily due to an increase in the frequency of large claims in older accident years.
Corporate & Other Non-Core
The unfavorable claim and allocated claim adjustment expense reserve development was primarily related to the commutation of a ceded reinsurance arrangement. The unfavorable development was offset by a release of a previously established allowance for uncollectible reinsurance.

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Nine Month Comparison
Net Prior Year Development
Nine months ended September 30, 2009
                                 
                    Corporate &        
    Standard     Specialty     Other Non-        
(In millions)   Lines     Lines     Core     Total  
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
                               
 
                               
Core (Non-A&E)
  $ (123 )   $ (128 )   $ 6     $ (245 )
A&E
                       
 
                       
 
                               
Pretax (favorable) unfavorable net prior year development before impact of premium development
    (123 )     (128 )     6       (245 )
 
                       
 
                               
Pretax (favorable) unfavorable premium development
    88       (3 )     (3 )     82  
 
                       
 
                               
Total pretax (favorable) unfavorable net prior year development
  $ (35 )   $ (131 )   $ 3     $ (163 )
 
                       
Net Prior Year Development
Nine months ended September 30, 2008
                                 
                    Corporate &        
    Standard     Specialty     Other Non-        
(In millions)   Lines     Lines     Core     Total  
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
                               
 
                               
Core (Non-A&E)
  $ (54 )   $ (50 )   $ 9     $ (95 )
A&E
                21       21  
 
                       
 
                               
Pretax (favorable) unfavorable net prior year development before impact of premium development
    (54 )     (50 )     30       (74 )
 
                       
 
                               
Pretax (favorable) unfavorable premium development
    4       (20 )     (3 )     (19 )
 
                       
 
                               
Total pretax (favorable) unfavorable net prior year development
  $ (50 )   $ (70 )   $ 27     $ (93 )
 
                       
2009 Net Prior Year Development
Standard Lines
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.
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.

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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.
Specialty Lines
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in medical professional liability, professional liability, directors and 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 and 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.
2008 Net Prior Year Development
Standard Lines
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in general liability and property coverages including marine exposures, partially offset by unfavorable experience in workers’ compensation (including excess workers’ compensation coverages) and large account business.
For general liability excluding construction defect, $254 million in favorable claim and allocated claim adjustment expense reserve development was due to decreased frequency and severity of claims across multiple accident years. The improvement was due to underwriting initiatives and favorable outcomes on individual claims. Favorable development of $207 million associated with construction defect exposures was due to lower severity resulting from various claim handling initiatives and lower than expected frequency of claims, primarily in accident years 1999 and prior. Claims handling initiatives have resulted in an increase in the number of claims closed without payment and increased recoveries from other parties involved in the claims. The lower construction defect frequency is due to underwriting initiatives designed to limit the exposure to future construction defect claims. For property coverages including marine exposures, approximately $95 million of favorable development was primarily the result of decreased frequency and severity in recent years. The $95 million of favorable property and marine development

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includes approximately $29 million due to favorable outcomes on claims relating to catastrophes, primarily in accident year 2005.
Unfavorable development of $248 million for workers’ compensation was primarily the result of the impact of claim cost inflation on lifetime medical and home health care claims in accident years 1999 and prior. The changes were driven by increased life expectancy due to advances in medical care and increasing medical inflation. Unfavorable development of $161 million for large account business was also driven primarily by workers’ compensation claim cost inflation primarily in accident years 2001 and prior. Unfavorable development of $114 million on excess workers’ compensation was due to claims in accident years 2002 and prior. Increasing medical inflation, increased life expectancy resulting from advances in medical care, and reviews of individual claims have resulted in higher cost estimates of existing claims and a higher estimate of the number of claims expected to reach excess layers.
Specialty Lines
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in medical professional liability, professional liability coverages in recent years, and surety business, partially offset by unfavorable experience in professional liability coverages in older years.
Favorable claim and allocated claim adjustment expense reserve development of approximately $52 million for medical professional liability was primarily due to better than expected frequency of large losses in accident years 2005 and 2006 for healthcare facilities and medical technology firms. Approximately $22 million of favorable development was recorded for professional liability coverages due primarily to favorable outcomes on individual claims in accident years 2004 through 2006. Favorable development of approximately $14 million for surety coverages was due to better than expected frequency in accident years 2002 through 2006.
Unfavorable development of approximately $33 million for professional liability coverages was primarily due to an increase in the frequency of large claims in older accident years.
The favorable premium development is primarily the result of a change in ultimate premiums within a foreign affiliate’s property and financial lines.
Corporate & Other Non-Core
The unfavorable claim and allocated claim adjustment expense reserve development was primarily related to commutations of certain ceded reinsurance arrangements. The unfavorable development was offset by a release of a previously established allowance for uncollectible reinsurance.

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Note H. Legal Proceedings and Contingent Liabilities
Insurance Brokerage Antitrust Litigation
On August 1, 2005, CNAF and several of its insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (FSH). The plaintiffs allege bid rigging and improprieties in the payment of contingent commissions in connection with the sale of insurance that violated federal and state antitrust laws, the federal Racketeer Influenced and Corrupt Organizations (RICO) Act and state common law. After discovery, the District Court dismissed the federal antitrust claims and the RICO claims, and declined to exercise supplemental jurisdiction over the state law claims. The plaintiffs have appealed the dismissal of their complaint to the Third Circuit Court of Appeals. The parties have filed their briefs on the appeal. Oral argument was held on April 21, 2009, and the Court took the matter under advisement. The Company believes it has meritorious defenses to this action and intends to defend the case vigorously.
The extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known, in the opinion of management, an unfavorable outcome will not materially affect the equity of the Company, although results of operations may be adversely affected.
California Long Term Care Litigation
Shaffer v. Continental Casualty Company, et al., U.S. District Court, Central District of California, CV06-2235 RGK, is a class action on behalf of certain California individual long term health care policyholders, alleging that CCC and CNAF knowingly or negligently used unrealistic actuarial assumptions in pricing these policies. On January 8, 2008, CCC, CNAF and the plaintiffs entered into a binding agreement settling the case on a nationwide basis for the policy forms potentially affected by the allegations of the complaint. Following a fairness hearing, the Court entered an order approving the settlement. This order was appealed to the Ninth Circuit Court of Appeals. The appeal has been fully briefed. Oral argument has been scheduled for November 2009. The Company believes it has meritorious defenses to this appeal and intends to defend the appeal vigorously. The agreement did not have a material impact on the Company’s results of operations, however it still remains subject to the favorable resolution of the appeal.
Asbestos and Environmental Pollution (A&E) Reserves
The Company is also a party to litigation and claims related to A&E cases arising in the ordinary course of business. See Note G for further discussion.
Other Litigation
The Company is also a party to other litigation arising in the ordinary course of business. Based on the facts and circumstances currently known, such other litigation will not, in the opinion of management, materially affect the equity or results of operations of the Company.

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Note I. Benefit Plans
The components of net periodic benefit plan cost (benefit) are presented in the following table.
Net Periodic Cost (Benefit)
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Pension cost (benefit)
                               
Service cost
  $ 4     $ 5     $ 12     $ 15  
Interest cost on projected benefit obligation
    38       37       115       110  
Expected return on plan assets
    (37 )     (45 )     (109 )     (134 )
Actuarial loss
    7       1       19       3  
 
                       
 
                               
Net periodic pension cost (benefit)
  $ 12     $ (2 )   $ 37     $ (6 )
 
                       
 
                               
Postretirement benefit
                               
Service cost
  $     $     $ 1     $ 1  
Interest cost on projected benefit obligation
    3       2       7       6  
Prior service cost amortization
    (4 )     (3 )     (12 )     (11 )
Actuarial loss
                      1  
 
                       
 
                               
Net periodic postretirement benefit
  $ (1 )   $ (1 )   $ (4 )   $ (3 )
 
                       

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Note J. Commitments, Contingencies, and Guarantees
Commitments and Contingencies
The Company holds an investment in a real estate joint venture. In the normal course of business, CNA, on a joint and several basis with other unrelated insurance company shareholders, has committed to continue funding the operating deficits of this joint venture. Additionally, CNA and the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016. The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as long as the joint venture continues to be funded by its shareholders and continues to make its annual lease payments.
In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, the Company would be required to assume the obligation for the entire office building operating lease. The Company does not believe it is likely that it will be required to do so. However, the maximum potential future lease payments at September 30, 2009 that the Company could be required to pay under this guarantee are approximately $133 million. If CNA were required to assume the entire lease obligation, the Company would have the right to pursue reimbursement from the other shareholders and the right to all sublease revenues.
In the normal course of business, CNA has provided letters of credit in favor of various unaffiliated insurance companies, regulatory authorities and other entities. At September 30, 2009, there were approximately $5 million of outstanding letters of credit.
The Company has entered into a limited number of guaranteed payment contracts, primarily relating to software and telecommunication services, amounting to approximately $15 million at September 30, 2009. Estimated future minimum payments under these contracts are $9 million in 2009, $3 million in 2010 and $3 million in 2011.
Guarantees
In the course of selling business entities and assets to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of September 30, 2009, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $819 million.
In addition, the Company has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 2009, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
As of September 30, 2009 and December 31, 2008, the Company has recorded liabilities of approximately $16 million and $22 million related to indemnification agreements and management believes that it is not likely that any future indemnity claims will be significantly greater than the amounts recorded.
CNAF has also guaranteed certain collateral obligations of a large national contractor’s letters of credit. As of September 30, 2009, these guarantees aggregated $4 million. Payment under these guarantees is reasonably possible based on various factors, including the underlying credit worthiness of the contractor.

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In connection with the issuance of preferred securities by CNA Surety Capital Trust I (Issuer Trust), CNA Surety has also guaranteed the dividend payments and redemption of the preferred securities issued by the Issuer Trust. The maximum amount of undiscounted future payments the Company could make under the guarantee is approximately $58 million, consisting of annual dividend payments of approximately $1.1 million through April 2034 and the redemption value of $30 million. Because payment under the guarantee would only be required if the Company does not fulfill its obligations under the debentures held by the Issuer Trust, the Company has not recorded any additional liabilities related to this guarantee. There has been no change in the underlying assets of the trust and the Company does not believe that a payment is likely under this guarantee.

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Note K. Business Segments
CNA’s core property and casualty commercial insurance operations are reported in two business segments: Standard Lines and Specialty Lines. CNA’s non-core operations are managed in two segments: Life & Group Non-Core and Corporate & Other Non-Core.
The accounting policies of the segments are the same as those described in Note A of the Consolidated Financial Statements within CNA’s Form 10-K. The Company manages most of its assets on a legal entity basis, while segment operations are conducted across legal entities. As such, only insurance and reinsurance receivables, insurance reserves and deferred acquisition costs are readily identifiable by individual segment. Distinct investment portfolios are not maintained for each segment; accordingly, allocation of assets to each segment is not performed. Therefore, net investment income and realized investment gains or losses are allocated primarily based on each segment’s net carried insurance reserves, as adjusted. All significant intrasegment income and expense has been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.
In the following tables, certain financial measures are presented to provide information used by management to monitor the Company’s operating performance. Management utilizes these financial measures to monitor the Company’s insurance operations and investment portfolio. Net operating income, which is derived from certain income statement amounts, is used by management to monitor performance of the Company’s insurance operations. The Company’s investment portfolio is monitored through analysis of various quantitative and qualitative factors and certain decisions related to the sale or impairment of investments that produce realized gains and losses.
Net operating income (loss) is calculated by excluding from net income (loss) attributable to CNAF the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains or losses because net realized investment gains or losses are largely discretionary, except for losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.
The Company’s investment portfolio is monitored by management through analyses of various factors including unrealized gains and losses on securities, portfolio duration and exposure to interest rate, market and credit risk. Based on such analyses, the Company may impair an investment security in accordance with its policy, or sell a security. Such activities will produce realized gains and losses.
The significant components of the Company’s continuing operations and selected balance sheet items are presented in the following tables.

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Three months ended                           Corporate              
September 30, 2009   Standard     Specialty     Life & Group     & Other              
(In millions)   Lines     Lines     Non-Core     Non-Core     Eliminations     Total  
Revenues
                                               
Net earned premiums
  $ 702     $ 859     $ 149     $ (3 )   $     $ 1,707  
Net investment income
    243       187       169       61             660  
Other revenues
    12       54       2       5             73  
 
                                   
Total operating revenues
    957       1,100       320       63             2,440  
 
                                               
Claims, benefits and expenses
                                               
Net incurred claims and benefits
    519       533       199       25             1,276  
Policyholders’ dividends
    4       1       2                   7  
Amortization of deferred acquisition costs
    169       191       5                   365  
Other insurance related expenses
    95       63       45       1             204  
Other expenses
    9       59       7       27             102  
 
                                   
Total claims, benefits and expenses
    796       847       258       53             1,954  
 
                                               
Operating income from continuing operations before income tax
    161       253       62       10             486  
Income tax expense on operating income
    (49 )     (81 )     (11 )     (1 )           (142 )
Net operating income, after-tax, attributable to noncontrolling interests
          (13 )                       (13 )
 
                                   
 
                                               
Net operating income from continuing operations attributable to CNAF
    112       159       51       9             331  
 
                                               
Net realized investment gains (losses), net of participating policyholders’ interests
    (69 )     (35 )     21       (17 )           (100 )
Income tax (expense) benefit on net realized investment gains (losses)
    24       11       (7 )     6             34  
Net realized investment gains, after-tax, attributable to noncontrolling interests
          (1 )                       (1 )
 
                                   
 
                                               
Net realized investment gains (losses) attributable to CNAF
    (45 )     (25 )     14       (11 )           (67 )
 
                                   
 
                                               
Net income (loss) from continuing operations attributable to CNAF
  $ 67     $ 134     $ 65     $ (2 )   $     $ 264  
 
                                   

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Three months ended                           Corporate              
September 30, 2008   Standard     Specialty     Life & Group     & Other              
(In millions)   Lines     Lines     Non-Core     Non-Core     Eliminations     Total  
Revenues
                                               
Net earned premiums
  $ 762     $ 882     $ 154     $ 2     $ (1 )   $ 1,799  
Net investment income
    136       121       135       47             439  
Other revenues
    13       59       (1 )     1             72  
 
                                   
Total operating revenues
    911       1,062       288       50       (1 )     2,310  
 
                                               
Claims, benefits and expenses
                                               
Net incurred claims and benefits
    734       516       294       (19 )           1,525  
Policyholders’ dividends
    (10 )     2       2                   (6 )
Amortization of deferred acquisition costs
    174       177       4                   355  
Other insurance related expenses
    87       79       51       6       (1 )     222  
Other expenses
    20       52       7       26             105  
 
                                   
Total claims, benefits and expenses
    1,005       826       358       13       (1 )     2,201  
 
                                               
Operating income (loss) from continuing operations before income tax
    (94 )     236       (70 )     37             109  
Income tax (expense) benefit on operating income (loss)
    41       (74 )     34       (11 )           (10 )
Net operating (income) loss, after-tax, attributable to noncontrolling interests
          (17 )           1             (16 )
 
                                   
 
                                               
Net operating income (loss) from continuing operations attributable to CNAF
    (53 )     145       (36 )     27             83  
 
                                               
Net realized investment losses, net of participating policyholders’ interests
    (178 )     (116 )     (298 )     (59 )           (651 )
Income tax benefit on net realized investment losses
    63       41       104       20             228  
Net realized investment (gains) losses, after-tax, attributable to noncontrolling interests
                                   
 
                                   
 
                                               
Net realized investment losses attributable to CNAF
    (115 )     (75 )     (194 )     (39 )           (423 )
 
                                   
 
                                               
Net income (loss) from continuing operations attributable to CNAF
  $ (168 )   $ 70     $ (230 )   $ (12 )   $     $ (340 )
 
                                   

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Nine months ended                           Corporate              
September 30, 2009   Standard     Specialty     Life & Group     & Other              
(In millions)   Lines     Lines     Non-Core     Non-Core     Eliminations     Total  
Revenues
                                               
Net earned premiums
  $ 2,083     $ 2,505     $ 447     $ 2     $ (2 )   $ 5,035  
Net investment income
    615       483       496       161             1,755  
Other revenues
    41       159       7       6             213  
 
                                   
Total operating revenues
    2,739       3,147       950       169       (2 )     7,003  
 
                                               
Claims, benefits and expenses
                                               
Net incurred claims and benefits
    1,507       1,554       773       69             3,903  
Policyholders’ dividends
    6       7       3                   16  
Amortization of deferred acquisition costs
    498       550       15                   1,063  
Other insurance related expenses
    239       185       138       3       (2 )     563  
Other expenses
    40       155       64       87             346  
 
                                   
Total claims, benefits and expenses
    2,290       2,451       993       159       (2 )     5,891  
 
                                               
Operating income (loss) from continuing operations before income tax
    449       696       (43 )     10             1,112  
Income tax (expense) benefit on operating income (loss)
    (131 )     (207 )     46       3             (289 )
Net operating income, after-tax, attributable to noncontrolling interests
          (38 )                       (38 )
 
                                   
 
                                               
Net operating income from continuing operations attributable to CNAF
    318       451       3       13             785  
 
                                               
Net realized investment losses, net of participating policyholders’ interests
    (418 )     (247 )     (156 )     (108 )           (929 )
Income tax benefit on net realized investment losses
    146       80       55       38             319  
Net realized investment (gains) losses, after-tax, attributable to noncontrolling interests
                                   
 
                                   
 
                                               
Net realized investment losses attributable to CNAF
    (272 )     (167 )     (101 )     (70 )           (610 )
 
                                   
 
                                               
Net income (loss) from continuing operations attributable to CNAF
  $ 46     $ 284     $ (98 )   $ (57 )   $     $ 175  
 
                                   
                                                 
September 30, 2009                                                
(In millions)                                                
Reinsurance receivables
  $ 2,135     $ 1,388     $ 1,759     $ 1,719     $     $ 7,001  
Insurance receivables
  $ 1,157     $ 767     $ 8     $ (1 )   $     $ 1,931  
Deferred acquisition costs
  $ 300     $ 381     $ 457     $     $     $ 1,138  
Insurance reserves
                                               
Claim and claim adjustment expenses
  $ 11,658     $ 8,618     $ 2,866     $ 3,764     $     $ 26,906  
Unearned premiums
    1,395       1,850       145       3       (1 )     3,392  
Future policy benefits
                7,864                   7,864  
Policyholders’ funds
    10       13       177                   200  

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Nine months ended                           Corporate              
September 30, 2008   Standard     Specialty     Life & Group     & Other              
(In millions)   Lines     Lines     Non-Core     Non-Core     Eliminations     Total  
Revenues
                                               
Net earned premiums
  $ 2,313     $ 2,614     $ 460     $ 2     $ (3 )   $ 5,386  
Net investment income
    499       408       376       166             1,449  
Other revenues
    42       166       20       12             240  
 
                                   
Total operating revenues
    2,854       3,188       856       180       (3 )     7,075  
 
                                               
Claims, benefits and expenses
                                               
Net incurred claims and benefits
    1,877       1,641       822       28             4,368  
Policyholders’ dividends
    (3 )     10       5                   12  
Amortization of deferred acquisition costs
    528       545       10                   1,083  
Other insurance related expenses
    193       182       152       8       (3 )     532  
Other expenses
    44       144       17       87             292  
 
                                   
Total claims, benefits and expenses
    2,639       2,522       1,006       123       (3 )     6,287  
 
                                               
Operating income (loss) from continuing operations before income tax
    215       666       (150 )     57             788  
Income tax (expense) benefit on operating income (loss)
    (49 )     (212 )     81       (14 )           (194 )
Net operating income, after-tax, attributable to noncontrolling interests
          (40 )                       (40 )
 
                                   
 
                                               
Net operating income (loss) from continuing operations attributable to CNAF
    166       414       (69 )     43             554  
 
                                               
Net realized investment losses, net of participating policyholders’ interests
    (254 )     (154 )     (321 )     (84 )           (813 )
Income tax benefit on net realized investment losses
    89       55       112       30             286  
Net realized investment (gains) losses, after-tax, attributable to noncontrolling interests
                                   
 
                                   
 
                                               
Net realized investment losses attributable to CNAF
    (165 )     (99 )     (209 )     (54 )           (527 )
 
                                   
 
                                               
Net income (loss) from continuing operations attributable to CNAF
  $ 1     $ 315     $ (278 )   $ (11 )   $     $ 27  
 
                                   
                                                 
December 31, 2008                                                
(In millions)                                                
Reinsurance receivables
  $ 2,266     $ 1,496     $ 1,907     $ 2,092     $     $ 7,761  
Insurance receivables
  $ 1,264     $ 765     $ 6     $ 4     $     $ 2,039  
Deferred acquisition costs
  $ 293     $ 360     $ 472     $     $     $ 1,125  
Insurance reserves
                                               
Claim and claim adjustment expenses
  $ 12,048     $ 8,282     $ 2,862     $ 4,401     $     $ 27,593  
Unearned premiums
    1,401       1,848       152       5             3,406  
Future policy benefits
                7,529                   7,529  
Policyholders’ funds
    14       10       219                   243  

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The following table provides revenue by line of business for each reportable segment. Revenues are comprised of operating revenues and net realized investment gains and losses, net of participating policyholders’ interests.
Revenue by Line of Business
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Standard Lines
                               
Business Insurance
  $ 150     $ 140     $ 393     $ 450  
Commercial Insurance
    738       593       1,928       2,150  
 
                       
 
                               
Standard Lines revenue
    888       733       2,321       2,600  
 
                       
 
                               
Specialty Lines
                               
U.S. Specialty Lines
    667       547       1,786       1,834  
Surety
    123       121       355       356  
Warranty
    70       70       191       218  
CNA Global
    205       208       568       626  
 
                       
 
                               
Specialty Lines revenue
    1,065       946       2,900       3,034  
 
                       
 
                               
Life & Group Non-Core
                               
Life & Annuity
    80       (18 )     167       15  
Health
    257       11       620       491  
Other
    4       (3 )     7       29  
 
                       
 
                               
Life & Group Non-Core revenue
    341       (10 )     794       535  
 
                       
 
                               
Corporate & Other Non-Core
                               
CNA Re
    13             22       32  
Other
    33       (9 )     39       64  
 
                       
 
                               
Corporate & Other Non-Core revenue
    46       (9 )     61       96  
 
                       
 
                               
Eliminations
          (1 )     (2 )     (3 )
 
                       
 
                               
Total revenue
  $ 2,340     $ 1,659     $ 6,074     $ 6,262  
 
                       

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Note L. Discontinued Operations
CNA has discontinued operations, which consist of run-off insurance and reinsurance operations acquired in its merger with The Continental Corporation in 1995. The remaining run-off business is administered by Continental Reinsurance Corporation International, Ltd., a wholly-owned Bermuda subsidiary. The business consists of facultative property and casualty, treaty excess casualty and treaty pro-rata reinsurance with underlying exposure to a diverse, multi-line domestic and international book of business encompassing property, casualty and marine liabilities.
Results of the discontinued operations were as follows.
Discontinued Operations
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Revenues:
                               
Net investment income
  $ 1     $ 2     $ 4     $ 6  
Net realized investment gains and other
    1       1       1       3  
 
                       
Total revenues
    2       3       5       9  
Insurance related expenses
    3       3       7       8  
 
                       
Income (loss) before income taxes
    (1 )           (2 )     1  
Income tax (expense) benefit
          9             9  
 
                       
Income (loss) from discontinued operations, net of tax
  $ (1 )   $ 9     $ (2 )   $ 10  
 
                       
In the third quarter of 2008, the Company recognized a change in estimate of the tax benefit related to the 2007 sale of the Company’s United Kingdom discontinued operations subsidiary.
Net liabilities of discontinued operations, included in Other liabilities on the Condensed Consolidated Balance Sheets, were as follows.
Discontinued Operations
                 
(In millions)   September 30, 2009     December 31, 2008  
Assets:
               
Investments
  $ 148     $ 157  
Reinsurance receivables
    4       6  
Cash
           
Other assets
    2       1  
 
           
Total assets
    154       164  
 
               
Liabilities:
               
Insurance reserves
    150       162  
Other liabilities
    6       8  
 
           
Total liabilities
    156       170  
 
           
 
               
Net liabilities of discontinued operations
  $ (2 )   $ (6 )
 
           
At September 30, 2009 and December 31, 2008, the insurance reserves are net of discount of $58 million and $75 million. The net income (loss) from discontinued operations reported above primarily represents the net investment income, realized investment gains and losses, foreign currency transaction gains and losses, effects of the accretion of the loss reserve discount and re-estimation of the ultimate claim and claim adjustment expense of the discontinued operations.

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CNA Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion highlights significant factors impacting the consolidated operations and financial condition of CNA Financial Corporation (CNAF) and its controlled subsidiaries (collectively CNA or the Company). References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNA and its subsidiaries. Based on 2008 statutory net written premiums, we are the seventh largest commercial insurance writer and the thirteenth largest property and casualty insurance organization in the United States of America. References to net operating income (loss), net realized investment gains (losses) and net income (loss) used in this MD&A reflect amounts attributable to CNAF, unless otherwise noted.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q and Item 1A Risk Factors and Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in our Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2008.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the impact of related acquisition expenses. Further information on our reserves is provided in Note G of the Condensed Consolidated Financial Statements included under Item 1.

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CONSOLIDATED OPERATIONS
Results of Operations
The following table includes our consolidated results of operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A.
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Revenues
                               
Net earned premiums
  $ 1,707     $ 1,799     $ 5,035     $ 5,386  
Net investment income
    660       439       1,755       1,449  
Other revenues
    73       72        213       240  
 
                       
 
                               
Total operating revenues
    2,440       2,310       7,003       7,075  
 
                       
 
                               
Claims, benefits and expenses
                               
Net incurred claims and benefits
    1,276       1,525       3,903       4,368  
Policyholders’ dividends
    7       (6 )     16       12  
Amortization of deferred acquisition costs
    365       355       1,063       1,083  
Other insurance related expenses
    204       222       563       532  
Other expenses
    102       105       346       292  
 
                       
 
                               
Total claims, benefits and expenses
    1,954       2,201       5,891       6,287  
 
                       
 
                               
Operating income from continuing operations before income tax
    486       109       1,112       788  
Income tax expense on operating income
    (142 )     (10 )     (289 )     (194 )
Net operating income, after-tax, attributable to noncontrolling interests
    (13 )     (16 )     (38 )     (40 )
 
                       
 
                               
Net operating income from continuing operations attributable to CNAF
    331       83       785       554  
 
                               
Net realized investment losses, net of participating policyholders’ interests
    (100 )     (651 )     (929 )     (813 )
Income tax benefit on net realized investment losses
    34       228       319       286  
Net realized investment gains, after-tax, attributable to noncontrolling interests
    (1 )                  
 
                       
Net realized investment losses attributable to CNAF
    (67 )     (423 )     (610 )     (527 )
 
                               
Income (loss) from continuing operations attributable to CNAF
    264       (340 )     175       27  
 
                               
Income (loss) from discontinued operations attributable to CNAF, net of income tax (expense) benefit of $0, $9, $0 and $9
    (1 )     9       (2 )     10  
 
                       
 
                               
Net income (loss) attributable to CNAF
  $ 263     $ (331 )   $ 173     $ 37  
 
                       
Three Month Comparison
Net results improved $594 million for the three months ended September 30, 2009 as compared with the same period in 2008. This improvement was due to lower net realized investment losses and higher net operating income.
Net realized investment losses were $356 million lower for the three months ended September 30, 2009 as compared with the same period in 2008, driven by lower other-than-temporary-impairment (OTTI) losses recognized in earnings. See the Investments section of this MD&A for further discussion of net realized investment results.

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Net operating income improved $248 million for the three months ended September 30, 2009 as compared with the same period in 2008. Net operating results improved $179 million for Standard and Specialty Lines and $69 million for our non-core operations. The improvement was primarily due to lower catastrophe losses and higher net investment income. Results were also favorably impacted by the after-tax gain of $61 million related to the Willis Limited settlement as further discussed in the Life & Group Non-Core segment discussion of this MD&A. Catastrophe losses were $15 million after-tax in the third quarter of 2009, as compared to catastrophe impacts of $168 million after-tax in the third quarter of 2008. Partially offsetting these favorable items was an unfavorable change in current accident year underwriting results excluding catastrophes. See the Investments section of this MD&A for further discussion of net investment income.
Favorable net prior year development of $47 million was recorded for the three months ended September 30, 2009 related to our Standard Lines, Specialty Lines and Corporate & Other Non-Core segments. This amount reflected $59 million of favorable claim and allocated claim adjustment expense reserve development and $12 million of unfavorable premium development. Favorable net prior year development of $60 million was recorded for the three months ended September 30, 2008 related to our Standard Lines, Specialty Lines and Corporate & Other Non-Core segments. This amount reflected $58 million of favorable claim and allocated claim adjustment expense reserve development and $2 million of favorable premium development. Further information on net prior year development for the three months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Net earned premiums decreased $92 million for the three months ended September 30, 2009 as compared with the same period in 2008, including a $60 million decrease related to Standard Lines and a $23 million decrease related to Specialty Lines. See the Segment Results section of this MD&A for further discussion.
Results from discontinued operations decreased $10 million for the three months ended September 30, 2009 as compared to the same period in 2008, primarily driven by the recognition in 2008 of a change in estimate of the tax benefit related to the 2007 sale of our United Kingdom discontinued operations subsidiary.
Nine Month Comparison
Net income improved $136 million for the nine months ended September 30, 2009 as compared with the same period in 2008. This increase was primarily due to higher net operating income, partially offset by higher net realized investment losses.
Net realized investment losses increased $83 million for the nine months ended September 30, 2009 as compared with the same period in 2008.
Net operating income improved $231 million for the nine months ended September 30, 2009 as compared with the same period in 2008. Net operating income increased $189 million for Standard and Specialty Lines and net results increased $42 million for our non-core operations. This improvement was primarily due to lower catastrophe losses, higher net investment income and the Willis Limited settlement referenced above. Catastrophe losses were $51 million after-tax for the nine months ended September 30, 2009, as compared to catastrophe impacts of $233 million after-tax for the same period in 2008. Partially offsetting these favorable items was an unfavorable change in current accident year underwriting results excluding catastrophes. Net investment income for the nine months ended September 30, 2008 included indexed group annuity trading portfolio losses of $103 million. This trading portfolio supported the indexed group annuity portion of our pension deposit business which was exited during 2008. Excluding the trading portfolio losses in 2008, net investment income increased $203 million.
Results for the nine months ended September 30, 2009 included expense of $33 million related to our pension and postretirement plans, compared with a benefit of $9 million for the nine months ended September 30, 2008. Based on our current assumptions and pension trust investment performance in 2008, our estimated expense for pension and postretirement plans is approximately $45 million for the year ending December 31, 2009 as compared with a benefit of $14 million for the year ended December 31, 2008.

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Favorable net prior year development of $163 million was recorded for the nine months ended September 30, 2009 related to our Standard Lines, Specialty Lines and Corporate & Other Non-Core segments. This amount reflected $245 million of favorable claim and allocated claim adjustment expense reserve development and $82 million of unfavorable premium development. Favorable net prior year development of $93 million was recorded for the nine months ended September 30, 2008 related to our Standard Lines, Specialty Lines and Corporate & Other Non-Core segments. This amount reflected $74 million of favorable claim and allocated claim adjustment expense reserve development and $19 million of favorable premium development. Further information on net prior year development for the nine months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Net earned premiums decreased $351 million for the nine months ended September 30, 2009 as compared with the same period in 2008, including a $230 million decrease related to Standard Lines and a $109 million decrease related to Specialty Lines. See the Segment Results section of this MD&A for further discussion.
Results from discontinued operations decreased $12 million for the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease was primarily due to the same reason discussed above in the three month comparison.
Critical Accounting Estimates
The preparation of the Condensed Consolidated Financial Statements (Unaudited) in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates below are considered by us to be critical to an understanding of our Condensed Consolidated Financial Statements as their application places the most significant demands on our judgment.
 
Insurance Reserves
 
 
Reinsurance
 
 
Valuation of Investments and Impairment of Securities
 
 
Long Term Care Products
 
 
Pension and Postretirement Benefit Obligations
 
 
Legal Proceedings
 
 
Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Form 10-K for further information. During the second quarter of 2009, the Company adopted updated accounting guidance, which amended the OTTI loss model for fixed maturity securities, as discussed in Note B of the Condensed Consolidated Financial Statements included under Item 1.

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SEGMENT RESULTS
The following discusses the results of continuing operations for our operating segments. We utilize the net operating income financial measure to monitor our operations. Net operating income is calculated by excluding from net income (loss) attributable to CNAF the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note K of the Condensed Consolidated Financial Statements included under Item 1. In evaluating the results of our Standard Lines and Specialty Lines segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
STANDARD LINES
The following table details the results of operations for Standard Lines.
Results of Operations
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Net written premiums
  $ 632     $ 723     $ 2,156     $ 2,342  
Net earned premiums
    702       762       2,083       2,313  
Net investment income
    243       136       615       499  
Net operating income (loss)
    112       (53 )     318       166  
Net realized investment losses, after-tax
    (45 )     (115 )     (272 )     (165 )
Net income (loss) attributable to CNAF
    67       (168 )     46       1  
 
                               
Ratios
                               
Loss and loss adjustment expense
    74.0 %     96.3 %     72.4 %     81.1 %
Expense
    37.7       34.4       35.3       31.3  
Dividend
    0.5       (1.4 )     0.3       (0.2 )
 
                       
 
                               
Combined
    112.2 %     129.3 %     108.0 %     112.2 %
 
                       
Three Month Comparison
Net written premiums for Standard Lines decreased $91 million for the three months ended September 30, 2009 as compared with the same period in 2008. Despite favorable new business in the current three month period, premiums written declined in both our Business Insurance and Commercial Insurance groups primarily due to general economic conditions. Current economic conditions have led to decreased insured exposures, particularly in the construction industry due to smaller payrolls and reduced project volume. This, along with competitive market conditions, may continue to put ongoing pressure on premium and income levels and the expense ratio. Net earned premiums decreased $60 million for the three months ended September 30, 2009 as compared with the same period in 2008, consistent with the trend of lower net written premiums.
Standard Lines average rate was flat for the three months ended September 30, 2009, as compared to decreases of 5% for the three months ended September 30, 2008 for the policies that renewed during those periods. Retention rates of 80% and 81% were achieved for those policies that were available for renewal in each period.
Net results improved $235 million for the three months ended September 30, 2009 as compared with the same period in 2008, due to improved net operating results and lower net realized investment losses. See

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the Investments section of this MD&A for further discussion of the net realized investment results and net investment income.
Net operating results improved $165 million for the three months ended September 30, 2009 as compared with the same period in 2008. This improvement was primarily driven by lower catastrophe losses and higher net investment income. Partially offsetting these favorable items was an unfavorable change in current accident year underwriting results excluding catastrophes.
The combined ratio improved 17.1 points for the three months ended September 30, 2009 as compared with the same period in 2008. The loss ratio improved 22.3 points primarily due to decreased catastrophe losses, partially offset by the impact of higher current accident year non-catastrophe loss ratios. Catastrophe losses were $20 million, or 2.9 points of the loss ratio, for the three months ended September 30, 2009 as compared to $236 million, or 31.0 points of the loss ratio, for the same period in 2008.
Our estimates for the current accident year partially rely on the actuarial trends and results for recent accident years. The trends observed during the third quarter of 2009 indicated higher than anticipated claim costs in recent accident years, primarily in small and middle markets workers’ compensation lines of business, resulting in an increase in the full year 2009 accident year non-catastrophe loss ratio in the third quarter of 2009. The trends observed during the third quarter of 2008 were generally favorable across several lines of business, which resulted in a decrease in the full year 2008 accident year non-catastrophe loss ratio in the third quarter of 2008.
The expense ratio increased 3.3 points for the three months ended September 30, 2009 as compared with the same period in 2008, primarily related to higher underwriting expenses, unfavorable changes in estimates for insurance-related assessments, and the lower net earned premium base. Underwriting expenses increased primarily due to higher employee-related costs.
The dividend ratio increased 1.9 points for the three months ended September 30, 2009 as compared with the same period in 2008. This increase was primarily due to favorable dividend reserve development recorded on workers’ compensation coverages in the third quarter of 2008.
Favorable net prior year development of $1 million was recorded for the three months ended September 30, 2009, reflecting $13 million of favorable claim and allocated claim adjustment expense reserve development and $12 million of unfavorable premium development. Favorable net prior year development of $1 million, reflecting $4 million of favorable claim and allocated claim adjustment expense reserve development and $3 million of unfavorable premium development, was recorded for the three months ended September 30, 2008. Further information on Standard Lines net prior year development for the three months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Nine Month Comparison
Net written premiums for Standard Lines decreased $186 million and net earned premiums decreased $230 million for the nine months ended September 30, 2009 as compared with the same period in 2008, due primarily to the same reasons discussed above in the three month comparison as well as increased unfavorable premium development recorded in 2009.
Standard Lines rate on average decreased 1% for the nine months ended September 30, 2009, as compared to decreases of 5% for the nine months ended September 30, 2008 for the policies that renewed during those periods. Retention rates of 81% were achieved for those policies that were available for renewal in both periods.
Net income improved $45 million for the nine months ended September 30, 2009 as compared with the same period in 2008. This increase was due to improved net operating income, partially offset by higher net realized investment losses.
Net operating income improved $152 million for the nine months ended September 30, 2009 as compared with the same period in 2008. This improvement was due primarily to the same reasons discussed above in the three month comparison.

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The combined ratio improved 4.2 points for the nine months ended September 30, 2009 as compared with the same period in 2008. The loss ratio improved 8.7 points primarily due to decreased catastrophe losses, partially offset by the impact of higher current accident year non-catastrophe loss ratios. Catastrophe losses were $72 million, or 3.5 points of the loss ratio, for the nine months ended September 30, 2009 as compared to $334 million, or 14.5 points of the loss ratio, for the same period in 2008. The current accident year loss ratio, excluding catastrophe losses, was unfavorably impacted by large property losses in 2009 and the impact of higher loss ratios in the workers’ compensation line of business.
The expense ratio increased 4.0 points for the nine months ended September 30, 2009 as compared with the same period in 2008, primarily related to the reasons discussed above in the three month comparison.
Favorable net prior year development of $35 million was recorded for the nine months ended September 30, 2009, reflecting $123 million of favorable claim and allocated claim adjustment expense reserve development and $88 million of unfavorable premium development. Favorable net prior year development of $50 million, reflecting $54 million of favorable claim and allocated claim adjustment expense reserve development and $4 million of unfavorable premium development, was recorded for the nine months ended September 30, 2008. Further information on Standard Lines net prior year development for the nine months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2009 and December 31, 2008 for Standard Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
             
(In millions)   September 30, 2009     December 31, 2008  
Gross Case Reserves
  $ 5,933     $ 6,158  
Gross IBNR Reserves
    5,725       5,890  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 11,658     $ 12,048  
 
           
 
               
Net Case Reserves
  $ 4,765     $ 4,995  
Net IBNR Reserves
    4,853       4,875  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 9,618     $ 9,870  
 
           

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SPECIALTY LINES
The following table details the results of operations for Specialty Lines.
Results of Operations
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Net written premiums
  $ 845     $ 875     $ 2,508     $ 2,583  
Net earned premiums
     859       882       2,505       2,614  
Net investment income
    187       121       483       408  
Net operating income
    159       145       451       414  
Net realized investment losses, after-tax
    (25 )     (75 )     (167 )     (99 )
Net income attributable to CNAF
    134       70       284       315  
 
                               
Ratios
                               
Loss and loss adjustment expense
    62.1 %     58.5 %     62.0 %     62.8 %
Expense
    29.6       29.0       29.4       27.8  
Dividend
    0.2       0.3       0.3       0.4  
 
                       
 
                               
Combined
    91.9 %     87.8 %     91.7 %     91.0 %
 
                       
Three Month Comparison
Net written premiums for Specialty Lines decreased $30 million for the three months ended September 30, 2009 as compared with the same period in 2008. This decrease reflects lower net written premiums for CNA Global, partially offset by growth in U.S. Specialty lines. CNA Global written premiums were unfavorably impacted by current economic conditions and foreign exchange. Modest growth in U.S. Specialty written premiums was driven by strong rate increases in the financial institutions and directors and officers lines, partially offset by the impact of current economic conditions. The current economic conditions have led to decreased insured exposures in several lines, primarily the architects and engineers professional liability marketplace. This, along with the competitive market conditions, may continue to put ongoing pressure on premium and income levels and the expense ratio. Net earned premiums decreased $23 million for the three months ended September 30, 2009 as compared with the same period in 2008, consistent with the trend of lower net written premiums.
Specialty Lines average rate was flat for the three months ended September 30, 2009 as compared to decreases of 3% for the three months ended September 30, 2008 for the policies that renewed during those periods. Retention rates of 84% were achieved for those policies that were available for renewal in both periods.
Net income improved $64 million for the three months ended September 30, 2009 as compared with the same period in 2008. This improvement was primarily due to lower net realized investment losses. See the Investments section of this MD&A for further discussion of the net realized investment results and net investment income.
Net operating income improved $14 million for the three months ended September 30, 2009 as compared with the same period in 2008. This improvement was primarily due to higher net investment income, partially offset by decreased favorable net prior year development and an unfavorable change in current accident year underwriting results.
The combined ratio increased 4.1 points for the three months ended September 30, 2009 as compared with the same period in 2008. The loss ratio increased 3.6 points primarily due to less favorable net prior year development as discussed below and higher current accident year loss ratios recorded in several lines of business.
The expense ratio increased 0.6 points for the three months ended September 30, 2009 as compared with the same period in 2008, primarily related to the lower net earned premium base.

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Favorable net prior year development of $47 million, reflecting $47 million of favorable claim and allocated claim adjustment expense reserve development and no premium development, was recorded for the three months ended September 30, 2009. Favorable net prior year development of $70 million, reflecting $68 million of favorable claim and allocated claim adjustment expense reserve development and $2 million of favorable premium development, was recorded for the three months ended September 30, 2008. Further information on Specialty Lines net prior year development for the three months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Nine Month Comparison
Net written premiums for Specialty Lines decreased $75 million and net earned premiums decreased $109 million for the nine months ended September 30, 2009 as compared with the same period in 2008, due primarily to the same reasons discussed above in the three month comparison.
Specialty Lines rate on average decreased 1% for the nine months ended September 30, 2009 as compared to decreases of 3% for the same period in 2008 for the policies that renewed during those periods. Retention rates of 85% and 84% were achieved for those policies that were available for renewal in each period.
Net income decreased $31 million for the nine months ended September 30, 2009 as compared with the same period in 2008. This decrease was due to higher net realized investment losses, partially offset by improved net operating income.
Net operating income improved $37 million for the nine months ended September 30, 2009 as compared with the same period in 2008, primarily due to higher net investment income, increased favorable net prior year development and a $14 million favorable income tax adjustment related to our European operation. Partially offsetting these favorable items was an unfavorable change in current accident year underwriting results.
The combined ratio increased 0.7 points for the nine months ended September 30, 2009 as compared with the same period in 2008. The loss ratio improved 0.8 points due to increased favorable net prior year development as discussed below, partially offset by higher current accident year loss ratios recorded in several lines of business.
The expense ratio increased 1.6 points primarily due to increased underwriting expenses and the lower net earned premium base. Underwriting expenses increased primarily due to higher employee-related costs.
Favorable net prior year development of $131 million, reflecting $128 million of favorable claim and allocated claim adjustment expense reserve development and $3 million of favorable premium development, was recorded for the nine months ended September 30, 2009. Favorable net prior year development of $70 million, reflecting $50 million of favorable claim and allocated claim adjustment expense reserve development and $20 million of favorable premium development, was recorded for the nine months ended September 30, 2008. Further information on Specialty Lines net prior year development for the nine months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.

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The following table summarizes the gross and net carried reserves as of September 30, 2009 and December 31, 2008 for Specialty Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
             
(In millions)   September 30, 2009     December 31, 2008  
Gross Case Reserves
  $ 2,780     $ 2,719  
Gross IBNR Reserves
    5,838       5,563  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 8,618     $ 8,282  
 
           
 
               
Net Case Reserves
  $ 2,264     $ 2,149  
Net IBNR Reserves
    4,991       4,694  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 7,255     $ 6,843  
 
           
LIFE & GROUP NON-CORE
The following table summarizes the results of operations for Life & Group Non-Core.
Results of Operations
                                 
Periods ended September 30   Three Months   Nine Months
(In millions)   2009   2008   2009   2008
Net earned premiums
  $ 149     $ 154     $ 447     $ 460  
Net investment income
    169       135       496       376  
Net operating income (loss)
    51       (36 )     3       (69 )
Net realized investment gains (losses), after-tax
    14       (194 )     (101 )     (209 )
Net income (loss) attributable to CNAF
    65       (230 )     (98 )     (278 )
Three Month Comparison
Net earned premiums for Life & Group Non-Core decreased $5 million for the three months ended September 30, 2009 as compared with the same period in 2008. Net earned premiums relate primarily to the group and individual long term care businesses.
Net results improved $295 million for the three months ended September 30, 2009 as compared with the same period in 2008. The increase in net income was primarily due to improved net realized investment results and a settlement reached with Willis Limited that resolved litigation related to the placement of personal accident reinsurance. Under the settlement agreement, Willis Limited agreed to pay us a total of $130 million, which resulted in an after-tax gain of $61 million, net of reinsurance. Also impacting net income was favorable performance on our remaining pension deposit business. Certain of the separate account investment contracts related to our pension deposit business guarantee principal and an annual minimum rate of interest, for which we had previously recorded an additional pretax liability in Policyholders’ funds. Based on the increase in value of the investments supporting this business, we decreased this pretax liability by $18 million during the third quarter of 2009. During the third quarter of 2008 we increased this liability by $24 million. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results. Partially offsetting these favorable items were unfavorable results in our long term care business.
Nine Month Comparison
Net earned premiums for Life & Group Non-Core decreased $13 million for the nine months ended September 30, 2009 as compared with the same period in 2008.
Net loss decreased $180 million for the nine months ended September 30, 2009 as compared with the same period in 2008. The decrease in net loss was due to improved net realized investment results, the favorable

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Willis Limited settlement discussed above and favorable performance on our remaining pension deposit business. For the nine months ended September 30, 2009, the pretax liability related to principal and interest guarantees, as discussed above, was decreased by $36 million as compared with a $34 million increase for the nine months ended September 30, 2008. These favorable impacts were partially offset by a $28 million after-tax legal accrual recorded in the second quarter of 2009 related to a previously held limited partnership investment and unfavorable results in our long term care business. The limited partnership investment supported the indexed group annuity portion of our pension deposit business, which we exited during 2008.
Net investment income for the nine months ended September 30, 2008 included trading portfolio losses of $103 million, which were substantially offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. This trading portfolio supported the indexed group annuity portion of our pension deposit business which was exited during 2008. That business had a net loss of $10 million for the nine months ended September 30, 2008.
CORPORATE & OTHER NON-CORE
The following table summarizes the results of operations for the Corporate & Other Non-Core segment, including Asbestos and Environmental Pollution (A&E) and intrasegment eliminations.
Results of Operations
                                 
Periods ended September 30   Three Months   Nine Months
(In millions)   2009   2008   2009   2008
Net investment income
  $ 61     $ 47     $ 161     $ 166  
Net operating income
    9       27       13       43  
Net realized investment losses, after-tax
    (11 )     (39 )     (70 )     (54 )
Net loss attributable to CNAF
    (2 )     (12 )     (57 )     (11 )
Three Month Comparison
Net loss decreased $10 million for the three months ended September 30, 2009 as compared with the same period in 2008 due primarily to lower net realized investment losses and higher net investment income. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results. In the third quarter of 2008, net results were favorably impacted by a release from the allowance for uncollectible reinsurance receivables of $27 million after-tax arising from a change in estimate.
Unfavorable net prior year development of $1 million, reflecting $1 million of unfavorable claim and allocated claim adjustment expense reserve development and no premium development, was recorded for the three months ended September 30, 2009. Unfavorable net prior year development of $11 million, reflecting $14 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $3 million of favorable premium development, was recorded for the three months ended September 30, 2008. Further information on Corporate & Other Non-Core net prior year development for the three months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Nine Month Comparison
Net loss increased $46 million for the nine months ended September 30, 2009 as compared with the same period in 2008. This increase was primarily due to the release in allowance for uncollectible reinsurance receivables in 2008 and higher net realized investment losses in 2009.
Unfavorable net prior year development of $3 million, reflecting $6 million of unfavorable claim and allocated claim adjustment expense reserve development and $3 million of favorable premium development, was recorded for the nine months ended September 30, 2009. Unfavorable net prior year development of $27 million, reflecting $30 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $3 million of favorable premium development, was recorded

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for the nine months ended September 30, 2008. Further information on Corporate & Other Non-Core net prior year development for the nine months ended September 30, 2009 and 2008 is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
The following table summarizes the gross and net carried reserves as of September 30, 2009 and December 31, 2008 for Corporate & Other Non-Core.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
             
(In millions)   September 30, 2009     December 31, 2008  
Gross Case Reserves
  $ 1,596     $ 1,823  
Gross IBNR Reserves
    2,168       2,578  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 3,764     $ 4,401  
 
           
 
               
Net Case Reserves
  $ 1,000     $ 1,126  
Net IBNR Reserves
    1,408       1,561  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 2,408     $ 2,687  
 
           
A&E Reserves
Our property and casualty insurance subsidiaries have actual and potential exposures related to asbestos and environmental pollution (A&E) claims. Further information on A&E claim and claim adjustment expense reserves and net prior year development is included in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Asbestos
We have resolved a number of our large asbestos accounts by negotiating settlement agreements. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement.
In 1985, 47 asbestos producers and their insurers, including The Continental Insurance Company (CIC), executed the Wellington Agreement. The agreement was intended to resolve all issues and litigation related to coverage for asbestos exposures. Under this agreement, signatory insurers committed scheduled policy limits and made the limits available to pay asbestos claims based upon coverage blocks designated by the policyholders in 1985, subject to extension by policyholders. CIC was a signatory insurer to the Wellington Agreement.
We have also used coverage in place agreements to resolve large asbestos exposures. Coverage in place agreements are typically agreements with our policyholders identifying the policies and the terms for payment of asbestos related liabilities. Claim payments are contingent on presentation of documentation supporting the demand for claim payment. Coverage in place agreements may have annual payment caps. Coverage in place agreements are evaluated based on claim filing trends and severities.
We categorize active asbestos accounts as large or small accounts. We define a large account as an active account with more than $100 thousand of cumulative paid losses. We have made resolving large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less of cumulative paid losses. Approximately 80% and 81% of our total active asbestos accounts are classified as small accounts at September 30, 2009 and December 31, 2008.

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We also evaluate our asbestos liabilities arising from our assumed reinsurance business and our participation in various pools, including Excess & Casualty Reinsurance Association (ECRA).
We carry unassigned IBNR reserves for asbestos. These reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.
The tables below depict our overall pending asbestos accounts and associated reserves at September 30, 2009 and December 31, 2008.
Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid Losses     Net Asbestos     Percent of  
    Number of     in 2009     Reserves     Asbestos  
September 30, 2009   Policyholders     (In millions)     (In millions)     Net Reserves  
Policyholders with settlement agreements
                               
Structured settlements
    18     $ 18     $ 136       12 %
Wellington
    3       1       14       1  
Coverage in place
    38       12       96       9  
 
                       
 
                               
Total with settlement agreements
    59       31       246       22  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    256       59       191       17  
Small asbestos accounts
    997       13       82       8  
 
                       
 
                               
Total other policyholders
    1,253       72       273       25  
 
                       
 
                               
Assumed reinsurance and pools
          8       107       10  
Unassigned IBNR
                465       43  
 
                       
 
                               
Total
    1,312     $ 111     $ 1,091       100 %
 
                       
Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid Losses     Net Asbestos     Percent of  
    Number of     in 2008     Reserves     Asbestos  
December 31, 2008   Policyholders     (In millions)     (In millions)     Net Reserves  
Policyholders with settlement agreements
                               
Structured settlements
    18     $ 17     $ 133       11 %
Wellington
    3       1       11       1  
Coverage in place
    36       16       94       8  
 
                       
 
                               
Total with settlement agreements
    57       34       238       20  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    236       62       234       19  
Small asbestos accounts
    1,009       32       91       8  
 
                       
 
                               
Total other policyholders
    1,245       94       325       27  
 
                       
 
                               
Assumed reinsurance and pools
          19       114       9  
Unassigned IBNR
                525       44  
 
                       
 
                               
Total
    1,302     $ 147     $ 1,202       100 %
 
                       
Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. We have such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject

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to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. Our policies also contain other limits applicable to these claims and we have additional coverage defenses to certain claims. We have attempted to manage our asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to us. Where we cannot settle a claim on acceptable terms, we aggressively litigate the claim. However, adverse developments with respect to such matters could have a material adverse effect on our results of operations and/or equity.
We are involved in significant asbestos-related claim litigation, which is described in Note G of the Condensed Consolidated Financial Statements included under Item 1.
Environmental Pollution
We classify our environmental pollution accounts into several categories, which include structured settlements, coverage in place agreements and active accounts. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement.
We have also used coverage in place agreements to resolve pollution exposures. Coverage in place agreements are typically agreements with our policyholders identifying the policies and the terms for payment of pollution related liabilities. Claim payments are contingent on presentation of adequate documentation of damages during the policy periods and other documentation supporting the demand for claim payment. Coverage in place agreements may have annual payment caps.
We categorize active accounts as large or small accounts in the pollution area. We define a large account as an active account with more than $100 thousand cumulative paid losses. We have made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less of cumulative paid losses. Approximately 74% and 73% of our total active pollution accounts are classified as small accounts as of September 30, 2009 and December 31, 2008.
We also evaluate our environmental pollution exposures arising from our assumed reinsurance and our participation in various pools, including ECRA.
We carry unassigned IBNR reserves for environmental pollution. These reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.

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The tables below depict our overall pending environmental pollution accounts and associated reserves at September 30, 2009 and December 31, 2008.
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid     Pollution     Environmental  
    Number of     Losses in 2009     Reserves     Pollution Net  
September 30, 2009   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with settlement agreements
                               
Structured settlements
    14     $ 9     $ 9       4 %
Coverage in place
    16       1       12       5  
 
                       
Total with settlement agreements
    30       10       21       9  
 
                               
Other policyholders with active accounts
                               
Large pollution accounts
    119       14       39       17  
Small pollution accounts
    335       11       44       20  
 
                       
Total other policyholders
    454       25       83       37  
 
                               
Assumed reinsurance and pools
          1       27       12  
Unassigned IBNR
                95       42  
 
                       
 
                               
Total
    484     $ 36     $ 226       100 %
 
                       
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid Losses     Pollution     Environmental  
    Number of     in 2008     Reserves     Pollution Net  
December 31, 2008   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with settlement agreements
                               
Structured settlements
    16     $ 5     $ 9       4 %
Coverage in place
    16       3       13       5  
 
                       
Total with settlement agreements
    32       8       22       9  
 
                               
Other policyholders with active accounts
                               
Large pollution accounts
    116       40       48       18  
Small pollution accounts
    320       11       41       16  
 
                       
Total other policyholders
    436       51       89       34  
 
                               
Assumed reinsurance and pools
          4       27       10  
Unassigned IBNR
                124       47  
 
                       
 
                               
Total
    468     $ 63     $ 262       100 %
 
                       

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INVESTMENTS
We maintain a large portfolio of fixed maturity and equity securities, including large amounts of corporate and government issued debt securities, residential and commercial mortgage-backed securities, and other asset-backed securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. Our investment portfolio supports our obligation to pay future insurance claims and provides investment returns which are an important part of our overall profitability.
For more than a year, capital and credit markets have experienced severe levels of volatility, illiquidity, uncertainty and overall disruption. This broader market disruption significantly subsided in the third quarter of 2009 in most asset sectors. The government has initiated programs intended to stabilize and improve markets and the economy. While the ultimate impact of these programs remains uncertain and economic conditions in the U.S. remain challenging, financial markets have shown improvement in the third quarter. Risk free interest rates approached multi-year lows and corporate credit spreads continued to narrow resulting in improvement in the Company’s unrealized position. However, fair market values in the asset-backed sector continue to be depressed due to continued concerns with underlying residential and commercial collateral.
Net Investment Income
The significant components of net investment income are presented in the following table.
Net Investment Income
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Fixed maturity securities
  $ 496     $ 501     $ 1,458     $ 1,495  
Short term investments
    7       29       28       94  
Limited partnerships
    145       (77 )     240       (70 )
Equity securities
    11       18       39       62  
Trading portfolio — indexed group annuity
          (22 )           (103 )
Trading portfolio — other
    12       (1 )     20       (1 )
Other
    2       3       6       14  
 
                       
 
                               
Gross investment income
    673       451       1,791       1,491  
Investment expense
    (13 )     (12 )     (36 )     (42 )
 
                       
 
                               
Net investment income
  $ 660     $ 439     $ 1,755     $ 1,449  
 
                       
Net investment income for the three months ended September 30, 2009 increased $221 million as compared with the same period in 2008. The increase was primarily driven by improved results from limited partnership investments. This increase was partially offset by the impact of lower risk free and short term interest rates. Limited partnership investments generally present greater volatility, higher illiquidity, and greater risk than fixed income investments.
Net investment income for the nine months ended September 30, 2009 increased $306 million as compared with the same period in 2008. Excluding indexed group annuity trading portfolio losses of $103 million in 2008, net investment income increased by $203 million driven by the same reasons discussed above in the three month comparison. The indexed group annuity trading portfolio losses were substantially offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio, which was included in Insurance claims and policyholders’ benefits on the Condensed Consolidated Statements of Operations. We exited the indexed group annuity business in 2008.
The fixed maturity investment portfolio and short term investments provided a pretax effective income yield of 5.1% and 5.7% for the nine months ended September 30, 2009 and 2008.

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Net Realized Investment Gains (Losses)
The components of net realized investment results are presented in the following table.
                                 
Periods ended September 30   Three Months     Nine Months  
(In millions)   2009     2008     2009     2008  
Fixed maturity securities:
                               
U.S. Treasury securities and obligations of government agencies
  $ (34 )   $ 34     $ (61 )   $ 20  
Corporate and other taxable bonds
    10       (289 )     (259 )     (328 )
States, municipalities and political subdivisions — tax-exempt securities
    16       1       70       51  
Asset-backed securities
    (104 )     (61 )     (603 )     (218 )
Redeemable preferred stock
                (9 )      
 
                       
Total fixed maturity securities
    (112 )     (315 )     (862 )     (475 )
 
                               
Equity securities
    19       (376 )     (133 )     (405 )
Derivative securities
    (13 )     35       51       47  
Short term investments
    2       4       10       11  
Other
    4       1       5       9  
 
                       
 
                               
Realized investment losses, net of participating policyholders’ interests
    (100 )     (651 )     (929 )     (813 )
Income tax benefit
    34       228       319       286  
Realized investment gains, after-tax, attributable to noncontrolling interests
    (1 )                  
 
                       
 
                               
Net realized investment losses attributable to CNAF
  $ (67 )   $ (423 )   $ (610 )   $ (527 )
 
                       
Net realized investment losses decreased by $356 million for the three months ended September 30, 2009 compared with the same period in 2008, driven by decreased OTTI losses recognized in earnings. Net realized investment losses increased by $83 million for the nine months ended September 30, 2009 compared with the same period in 2008, driven by increased OTTI losses recognized in earnings. Further information on our realized gains and losses, including our OTTI losses and impairment decision process, is set forth in Note D of the Condensed Consolidated Financial Statements included under Item 1. During the second quarter of 2009, the Company adopted updated accounting guidance, which amended the OTTI loss model for fixed maturity securities, as discussed in Note B of the Condensed Consolidated Financial Statements included under Item 1.
Verisk Analytics Inc. began trading on October 7, 2009 after an initial public offering (IPO) through which we sold our entire position for $370 million. Since our cost basis in this position was zero, the entire amount will be recognized as a pretax realized investment gain in the fourth quarter of 2009.
Our fixed maturity portfolio consists primarily of high quality bonds, 89% and 91% of which were rated as investment grade (rated BBB- or higher) at September 30, 2009 and December 31, 2008. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from the three major providers, Standard & Poors (S&P), Moody’s Investor Services, Inc. (Moody’s) and Fitch Ratings (Fitch) in that order of preference. If a security is not rated by any of the three, we formulate 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.
The following table summarizes the ratings of our fixed maturity portfolio at carrying value.
Fixed Maturity Ratings
                                 
    September 30,             December 31,        
(In millions)   2009     %     2008     %  
U.S. Government and Agencies
  $ 3,270       9 %   $ 4,611       16 %
AAA rated
    6,114       18       8,494       29  
AA and A rated
    12,142       35       8,166       29  
BBB rated
    9,429       27       5,029       17  
Non-investment grade
    3,763       11       2,587       9  
 
                       
 
                               
Total
  $ 34,718       100 %   $ 28,887       100 %
 
                       

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Non-investment grade fixed maturity securities, as presented in the table below, include high-yield securities rated below BBB- by bond rating agencies and other unrated securities that, according to our analysis, are below investment grade. Non-investment grade securities generally involve a greater degree of risk than investment grade securities. The increase in non-investment grade holdings primarily reflects the downgrade of previously investment grade rated asset-backed securities aggregating $1,226 million of fair value. The remaining change in non-investment grade was attributable to price appreciation and net sales. The amortized cost of our non-investment grade fixed maturity bond portfolio was $4,199 million and $3,709 million at September 30, 2009 and December 31, 2008. The following table summarizes the ratings of this portfolio at carrying value.
Non-investment Grade
                                 
Rating   September 30,             December 31,        
(In millions)   2009     %     2008     %  
BB
  $ 1,251       33 %   $ 1,585       61 %
B
    1,202       32       754       29  
CCC — C
    1,228       33       232       9  
D
    82       2       16       1  
 
                       
Total
  $ 3,763       100 %   $ 2,587       100 %
 
                       
Included within the fixed maturity portfolio are securities that contain credit support from third party guarantees from mono-line insurers. The ratings on these securities reflect the greater of the underlying rating of the issuer or the insured rating. At September 30, 2009, $623 million of the carrying value of the fixed maturity portfolio had a third party guarantee that increased the underlying average rating of those securities from A+ to AA+. Of this amount, 93% was within the tax-exempt bond segment. The third party credit support on tax-exempt bonds is provided by five mono-line insurers, the largest exposure based on fair value being Financial Security Assurance Inc. at 68%, National Re Corporation at 17% and Assured Guarantee Corporation at 10%.
At September 30, 2009 and December 31, 2008, approximately 98% and 97% of the fixed maturity portfolio was issued by U.S. Government and affiliated agencies or was rated by S&P or Moody’s. The remaining bonds were rated by other rating agencies or internally.
The carrying value of securities that are either subject to trading restrictions or trade in illiquid private placement markets at September 30, 2009 was $151 million, which represents less than 0.4% of our total investment portfolio. These securities were in a net unrealized gain position of $2 million at September 30, 2009.
The following table provides the composition of available-for-sale fixed maturity securities in a gross unrealized loss position at September 30, 2009 by maturity profile. Securities not due at a single date are allocated based on weighted average life.
Maturity Profile
                 
    Percent of   Percent of
    Fair Value   Unrealized Loss
Due in one year or less
    4 %     3 %
Due after one year through five years
    26       24  
Due after five years through ten years
    23       29  
Due after ten years
    47       44  
 
               
 
               
Total
    100 %     100 %
 
               

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Duration
A primary objective in the management of the fixed maturity and equity portfolios is to optimize return relative to underlying liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the underlying liabilities and the ability to align the duration of the portfolio to those liabilities to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes.
The segregated investments support liabilities primarily in the Life & Group Non-Core segment including annuities, structured benefit settlements and long term care products. The remaining investments are managed to support the Standard Lines, Specialty Lines and Corporate & Other Non-Core segments.
The effective durations of fixed maturity securities, short term investments, non-redeemable preferred stocks and interest rate derivatives are presented in the table below. Short term investments are net of securities lending collateral and accounts payable and receivable amounts for securities purchased and sold, but not yet settled.
Effective Durations
                                 
    September 30, 2009     December 31, 2008  
            Effective Duration             Effective Duration  
(In millions)   Fair Value     (In years)     Fair Value     (In years)  
Segregated investments
  $ 10,427       11.4     $ 8,168       9.9  
             
Other interest sensitive investments
    28,627       4.3       25,194       4.5  
 
                       
             
Total
  $ 39,054       6.2     $ 33,362       5.8  
 
                       
The investment portfolio is periodically analyzed for changes in duration and related price change risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures About Market Risk in Item 7A of our Form 10-K.

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Asset-Backed Mortgage Exposure
Asset-Backed Distribution