Investments

12 Months Ended

Dec. 31, 2016

Text Block [Abstract]

Investments

Note 3.  Investments

Net investment income is as follows:

Year Ended December 31	2016		2015		2014
(In millions)
Fixed maturity securities	$	1,819	$	1,751	$	1,803
Limited partnership investments		199		119		304
Short term investments		9		11		4
Equity securities		10		12		12
Income from trading portfolio (a)		112		2		64
Other		45		34		34
Total investment income		2,194		1,929		2,221
Investment expenses		(59)		(63)		(58)
Net investment income	$	2,135	$	1,866	$	2,163

(a) Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $44, $(46) and $42 for the years ended December 31, 2016, 2015 and 2014.

As of December 31, 2016, the Company held no non-income producing fixed maturity securities. As of December 31, 2015, the Company held $54 million of non-income producing fixed maturity securities. As of December 31, 2016 and 2015, no investments in a single issuer exceeded 10% of shareholders’ equity other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.

Investment gains (losses) are as follows:

Year Ended December 31	2016			2015			2014
(In millions)
Fixed maturity securities	$	54		$	(66	)	$         41
Equity securities		(5	)		(23	)	1
Derivative instruments		(2	)		10		(1)
Short term investments and other		3			8		13
Investment gains (losses) (a)	$	50		$	(71	)	$         54
(a)    Includes gross realized gains of $209, $133 and $178 and gross realized losses of $160, $222 and $136 on available-for-sale securities for the years ended December 31, 2016, 2015 and 2014.
Net change in unrealized gains (losses) on available-for-sale investments is as follows:
Year Ended December 31	2016			2015			2014
(In millions)
Fixed maturity securities	$	225		$	(1,114	)	$    1,511
Equity securities		(2	)		(6	)	6
Other		1			1
Total net change in unrealized gains (losses) on available-for-sale investments	$	224		$	(1,119	)	$    1,517
The components of OTTI losses recognized in earnings by asset type are as follows:
Year Ended December 31	2016			2015			2014
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	59		$	104		$         18
States, municipalities and political subdivisions					18		46
Asset-backed:
Residential mortgage-backed		10			8		5
Other asset-backed		3			1		1
Total asset-backed		13			9		6
Total fixed maturities available-for-sale		72			131		70
Equity securities available-for-sale - common stock		9			25		7
Net OTTI losses recognized in earnings	$	81		$	156		$         77

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

	Cost or		Gross		Gross				Unrealized
	Amortized		Unrealized		Unrealized		Estimated		OTTI Losses
December 31, 2016	Cost		Gains		Losses		Fair Value		(Gains)
(In millions)
Fixed maturity securities:
Corporate and other bonds		$    17,711		$    1,323		$      76		$    18,958		$       (1)
States, municipalities and political subdivisions		12,060		1,213		33		13,240		(16)
Asset-backed:
Residential mortgage-backed		5,004		120		51		5,073		(28)
Commercial mortgage-backed		2,016		48		24		2,040
Other asset-backed		1,022		8		5		1,025
Total asset-backed		8,042		176		80		8,138		(28)
U.S. Treasury and obligations of government-sponsored enterprises		83		10				93
Foreign government		435		13		3		445
Redeemable preferred stock		18		1				19
Fixed maturities available-for-sale		38,349		2,736		192		40,893		(45)
Fixed maturities, trading		598		3				601
Total fixed maturities		38,947		2,739		192		41,494		(45)
Equity securities:
Common stock		13		6				19
Preferred stock		93		2		4		91
Equity securities available-for-sale		106		8		4		110		-
Equity securities, trading		465		60		86		439
Total equity securities		571		68		90		549		-
Total		$    39,518		$    2,807		$    282		$    42,043		$      (45)
December 31, 2015
(In millions)
Fixed maturity securities:
Corporate and other bonds		$    17,097		$    1,019		$    347		$    17,769
States, municipalities and political subdivisions		11,729		1,453		8		13,174		$       (4)
Asset-backed:
Residential mortgage-backed		4,935		154		17		5,072		(37)
Commercial mortgage-backed		2,154		55		12		2,197
Other asset-backed		923		6		8		921
Total asset-backed		8,012		215		37		8,190		(37)
U.S. Treasury and obligations of government-sponsored enterprises		62		5				67
Foreign government		334		13		1		346
Redeemable preferred stock		33		2				35
Fixed maturities available-for-sale		37,267		2,707		393		39,581		(41)
Fixed maturities, trading		140				20		120
Total fixed maturities		37,407		2,707		413		39,701		(41)
Equity securities:
Common stock		46		3		1		48
Preferred stock		145		7		3		149
Equity securities available-for-sale		191		10		4		197		-
Equity securities, trading		633		56		134		555
Total equity securities		824		66		138		752		-
Total		$    38,231		$    2,773		$    551		$    40,453		$      (41)

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

	Less than				12 Months
	12 Months				or Longer				Total
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2016	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(In millions)
Fixed maturity securities:
Corporate and other bonds		$    2,615		$      61		$    254		$    15		$    2,869		$      76
States, municipalities and political subdivisions		959		32		23		1		982		33
Asset-backed:
Residential mortgage-backed		2,136		44		201		7		2,337		51
Commercial mortgage-backed		756		22		69		2		825		24
Other asset-backed		398		5		24				422		5
Total asset-backed		3,290		71		294		9		3,584		80
U.S. Treasury and obligations of government-sponsored enterprises		5								5
Foreign government		108		3						108		3
Total fixed maturity securities		6,977		167		571		25		7,548		192
Equity securities		12				13		4		25		4
Total		$    6,989		$    167		$    584		$    29		$    7,573		$    196
December 31, 2015
(In millions)
Fixed maturity securities:
Corporate and other bonds		$    4,882		$    302		$    174		$    45		$    5,056		$    347
States, municipalities and political subdivisions		338		8		75				413		8
Asset-backed:
Residential mortgage-backed		963		9		164		8		1,127		17
Commercial mortgage-backed		652		10		96		2		748		12
Other asset-backed		552		8		5				557		8
Total asset-backed		2,167		27		265		10		2,432		37
U.S. Treasury and obligations of government-sponsored enterprises		4								4
Foreign government		54		1						54		1
Redeemable preferred stock		3								3
Total fixed maturity securities		7,448		338		514		55		7,962		393
Equity securities:
Common stock		3		1						3		1
Preferred stock		13		3						13		3
Total equity securities		16		4						16		4
Total		$    7,464		$    342		$    514		$    55		$    7,978		$    397

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at December 31, 2016.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2016, 2015 and 2014 for which a portion of an OTTI loss was recognized in Other comprehensive income.

Year Ended December 31	2016			2015			2014
(In millions)
Beginning balance of credit losses on fixed maturity securities	$	53		$	62		$	74
Reductions for securities sold during the period		(16	)		(9	)		(9	)
Reductions for securities the Company intends to sell or more likely than not will be required to sell		(1	)					(3	)
Ending balance of credit losses on fixed maturity securities	$	36		$	53		$	62

Contractual Maturity

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

December 31	2016				2015
	Cost or				Cost or
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
(In millions)
Due in one year or less		$    1,779		$    1,828		$    1,574		$    1,595
Due after one year through five years		7,566		7,955		7,738		8,082
Due after five years through ten years		15,892		16,332		14,652		14,915
Due after ten years		13,112		14,778		13,303		14,989
Total		$  38,349		$  40,893		$  37,267		$  39,581

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

Limited Partnerships

The carrying value of limited partnerships as of December 31, 2016 and 2015 was approximately $3.2 billion and $3.3 billion, which includes undistributed earnings of $820 million and $952 million. Limited partnerships comprising 70.4% of the total carrying value are reported on a current basis through December 31, 2016 with no reporting lag, 13.4% of the total carrying value are reported on a one month lag and the remainder are reported on more than a one month lag. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.

Limited partnerships comprising 76.6% of the carrying value as of December 31, 2016 and 2015 employ hedge fund strategies. Limited partnerships comprising 19.8% and 23.4% of the carrying value at December 31, 2016 and 2015 were invested in private debt and equity and the remainder were primarily invested in real estate strategies. Hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. These hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation or various arbitrage disciplines. Within hedge fund strategies, approximately 59.8% were equity related, 25.5% pursued a multi-strategy approach, 11.1% were focused on distressed investments and 3.6% were fixed income related as of December 31, 2016.

The ten largest limited partnership positions held totaled $1.5 billion as of December 31, 2016 and 2015. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 3.5% and 2.8% of the aggregate partnership equity at December 31, 2016 and 2015, and the related income reflected on the Consolidated Statements of Income represents approximately 4.0%, 2.8% and 4.3% of the changes in aggregate partnership equity for the years ended December 31, 2016, 2015 and 2014.

While the Company generally does not invest in highly leveraged partnerships, there are risks inherent in limited partnership investments which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.

The Company’s limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advance written notice of up to 90 days.

Derivative Financial Instruments

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

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

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

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

December 31	2016			2015
	Contractual/			Contractual/
	Notional	Estimated Fair Value		Notional	Estimated Fair Value
	Amount	Asset	(Liability)	Amount	Asset	(Liability)
(In millions)
Without hedge designation:
Equity markets:
Options  – purchased	$ 223	$   14		$ 501	$   16
– written	267		$   (8)	614		$  (28)
Futures – long				312		(1)
Futures – short	225	1
Interest rate risk:
Futures – long				63
Foreign exchange:
Currency forwards – long				133	2
– short				152
Currency options – long				550	7
Commodities:
Futures – long	42
Embedded derivative on funds withheld liability	174	3		179	5

Investment Commitments

As of December 31, 2016, the Company had committed approximately $380 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. Purchases and sales of privately placed debt securities are recorded once funded. As of December 31, 2016, the Company had commitments to purchase or fund additional amounts of $130 million and sell $121 million under the terms of such securities.

Investments on Deposit

Securities with carrying values of approximately $2.3 billion and $2.8 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2016 and 2015.

Cash and securities with carrying values of approximately $514 million and $364 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2016 and 2015. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance and other obligations with various third parties. The carrying values of these deposits were approximately $261 million and $263 million as of December  31, 2016 and 2015.