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Fair Value

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value

3. Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

● Level 1 – Quoted prices for identical instruments in active markets.

● Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

● Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include: (i) the review of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.

The fair values of CNA’s life settlement contracts are included in Other assets on the Consolidated Condensed Balance Sheets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are presented in the following tables:

September 30, 2016		Level 1				Level 2				Level 3				Total
(In millions)
Fixed maturity securities:
Corporate and other bonds						$	19,555			$	261			$	19,816
States, municipalities and political subdivisions							13,500				1				13,501
Asset-backed:
Residential mortgage-backed							5,286				79				5,365
Commercial mortgage-backed							2,120				24				2,144
Other asset-backed							916				43				959
Total asset-backed							8,322				146				8,468
U.S. Treasury and obligations of government-sponsored enterprises		$	76												76
Foreign government							438								438
Redeemable preferred stock			20												20
Fixed maturities available-for-sale			96				41,815				408				42,319
Fixed maturities trading							569				6				575
Total fixed maturities		$	96			$	42,384			$	414			$	42,894
Equity securities available-for-sale		$	97							$	19			$	116
Equity securities trading			469								1				470
Total equity securities		$	566			$	-			$	20			$	586
Short term investments		$	3,902			$	911							$	4,813
Other invested assets			54				5								59
Life settlement contracts										$	67				67
Payable to brokers			(215	)											(215)

December 31, 2015		Level 1				Level 2				Level 3				Total
(In millions)
Fixed maturity securities:
Corporate and other bonds						$	17,601			$	168			$	17,769
States, municipalities and political subdivisions							13,172				2				13,174
Asset-backed:
Residential mortgage-backed							4,938				134				5,072
Commercial mortgage-backed							2,175				22				2,197
Other asset-backed							868				53				921
Total asset-backed							7,981				209				8,190
U.S. Treasury and obligations of government-sponsored enterprises		$	66				1								67
Foreign government							346								346
Redeemable preferred stock			35												35
Fixed maturities available-for-sale			101				39,101				379				39,581
Fixed maturities trading							35				85				120
Total fixed maturities		$	101			$	39,136			$	464			$	39,701
Equity securities available-for-sale		$	177							$	20			$	197
Equity securities trading			554								1				555
Total equity securities		$	731			$	-			$	21			$	752
Short term investments		$	3,600			$	1,134							$	4,734
Other invested assets			102				44								146
Receivables							9			$	3				12
Life settlement contracts											74				74
Payable to brokers			(196	)											(196)

The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016 and 2015:

																																						Unrealized
																																						Gains
																																						(Losses)
																																						Recognized in
						Net Realized Gains																																Net Income
						(Losses) and Net Change																																on Level
						in Unrealized Gains																																3 Assets and
						(Losses)																				Transfers				Transfers								Liabilities
		Balance,				Included in				Included in																into				out of				Balance,				Held at
2016		July 1				Net Income				OCI				Purchases				Sales				Settlements				Level 3				Level 3				September 30				September 30
(In millions)
Fixed maturity securities:
Corporate and other bonds		$	242			$	1			$	7			$	16							$	(5)											$	261
States, municipalities and political subdivisions			2																				(1)												1
Asset-backed:
Residential mortgage-backed			134								(1	)			5								(1)							$	(58	)			79
Commercial mortgage- backed			11												23								(8)								(2	)			24
Other asset-backed			45												34																(36	)			43
Total asset-backed			190				-				(1	)			62			$	-				(9)			$	-				(96	)			146			$	-
Fixed maturities available-for-sale			434				1				6				78								(15)								(96	)			408
Fixed maturities trading			6																																6				(1)
Total fixed maturities		$	440			$	1			$	6			$	78			$	-			$	(15)			$	-			$	(96	)		$	414			$	(1)
Equity securities available-for-sale		$	19			$	(1	)		$	1																							$	19			$	(2)
Equity securities trading			2											$	(1)																				1				(1)
Total equity securities		$	21			$	(1	)		$	1			$	(1)			$	-			$	-			$	-			$	-			$	20			$	(3)
Life settlement contracts		$	67																															$	67
Derivative financial instruments, net			1			$	(1	)																											-

						Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)																				Transfers into Level 3				Transfers out of Level 3				Balance, September 30				Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities
2015		Balance, July 1				Included in Net Income				Included in OCI				Purchases				Sales				Settlements																Held at September 30
(In millions)
Fixed maturity securities:
Corporate and other bonds		$	141											$	27			$	(1	)		$	(11	)						$	(3	)		$	153
States, municipalities and political subdivisions			85																												(24	)			61
Asset-backed:
Residential mortgage-backed			207			$	2			$	(2	)			4								(7	)											204
Commercial mortgage-backed			87				5				(4	)			8								(15	)							(10	)			71
Other asset-backed			490								(6	)			43				(20	)			(32	)							(4	)			471
Total asset-backed			784				7				(12	)			55				(20	)			(54	)		$	-				(14	)			746			$	-
Fixed maturities available-for-sale			1,010				7				(12	)			82				(21	)			(65	)							(41	)			960
Fixed maturities trading			89				(2	)											(1	)															86			$	(2)
Total fixed maturities		$	1,099			$	5			$	(12	)		$	82			$	(22	)		$	(65	)		$	-			$	(41	)		$	1,046			$	(2)
Equity securities available-for-sale		$	16							$	(1	)																						$	15
Equity securities trading			1			$	1											$	(2	)															-			$	1
Total equity securities		$	17			$	1			$	(1	)		$	-			$	(2	)		$	-			$	-			$	-			$	15			$	1
Life settlement contracts		$	75			$	5															$	(6	)										$	74			$	2

																																						Unrealized
																																						Gains
																																						(Losses)
																																						Recognized in
						Net Realized Gains																																Net Income
						(Losses) and Net Change																																on Level
						in Unrealized Gains																																3 Assets and
						(Losses)																				Transfers				Transfers								Liabilities
		Balance,				Included in				Included in																into				out of				Balance,				Held at
2016		January 1				Net Income				OCI				Purchases				Sales				Settlements				Level 3				Level 3				September 30				September 30
(In millions)
Fixed maturity securities:
Corporate and other bonds		$	168			$	1			$	14			$	163			$	(36	)		$	(15)							$	(34)			$	261
States, municipalities and political subdivisions			2																				(1)												1
Asset-backed:
Residential mortgage-backed			134				2				(2)				15								(10)								(60)				79
Commercial mortgage-backed			22												32								(17)			$	3				(16)				24
Other asset-backed			53								2				69				(25	)			(1)				2				(57)				43
Total asset-backed			209				2				-				116				(25	)			(28)				5				(133)				146			$	-
Fixed maturities available-for-sale			379				3				14				279				(61	)			(44)				5				(167)				408
Fixed maturities trading			85				5								2				(86	)															6				3
Total fixed maturities		$	464			$	8			$	14			$	281			$	(147	)		$	(44)			$	5			$	(167)			$	414			$	3
Equity securities available-for-sale		$	20			$	(1	)																										$	19			$	(2)
Equity securities trading			1				1											$	(1	)															1
Total equity securities		$	21			$	-			$	-			$	-			$	(1	)		$	-			$	-			$	-			$	20			$	(2)
Life settlement contracts		$	74			$	10															$	(17)											$	67			$	2
Derivative financial instruments, net			3				(4	)										$	(2	)						$	3								-				(3)

																																						Unrealized
																																						Gains
																																						(Losses)
																																						Recognized in
						Net Realized Gains																																Net Income
						(Losses) and Net Change																																on Level
						in Unrealized Gains																																3 Assets and
						(Losses)																				Transfers				Transfers								Liabilities
		Balance,				Included in				Included in																into				out of				Balance,				Held at
2015		January 1				Net Income				OCI				Purchases				Sales				Settlements				Level 3				Level 3				September 30				September 30
(In millions)
Fixed maturity securities:
Corporate and other bonds		$	162			$	(1	)		$	(1	)		$	39			$	(13	)		$	(32)			$	37			$	(38	)		$	153
States, municipalities and political subdivisions			94				1																(10)								(24	)			61
Asset-backed:
Residential mortgage-backed			189				4				(4	)			76								(28)								(33	)			204
Commercial mortgage-backed			83				7				(4	)			23								(17)				17				(38	)			71
Other asset-backed			655				3				4				125				(254	)			(52)								(10	)			471			$	(1)
Total asset-backed			927				14				(4	)			224				(254	)			(97)				17				(81	)			746				(1)
Fixed maturities available-for-sale			1,183				14				(5	)			263				(267	)			(139)				54				(143	)			960				(1)
Fixed maturities trading			90				(2	)											(2	)															86				(2)
Total fixed maturities		$	1,273			$	12			$	(5	)		$	263			$	(269	)		$	(139)			$	54			$	(143	)		$	1,046			$	(3)
Equity securities available-for-sale		$	16							$	(1	)																						$	15
Equity securities trading			1			$	1											$	(2	)															-			$	1
Total equity securities		$	17			$	1			$	(1	)		$	-			$	(2	)		$	-			$	-			$	-			$	15			$	1
Life settlement contracts		$	82			$	22															$	(30)											$	74			$	1

Net realized and unrealized gains and losses are reported in Net income as follows:

Major Category of Assets and Liabilities		Consolidated Condensed Statements of Income Line Items
Fixed maturity securities available-for-sale		Investment gains (losses)
Fixed maturity securities, trading		Net investment income
Equity securities available-for-sale		Investment gains (losses)
Equity securities, trading		Net investment income
Other invested assets		Investment gains (losses) and Net investment income
Derivative financial instruments held in a trading portfolio		Net investment income
Derivative financial instruments, other		Investment gains (losses) and Other revenues
Life settlement contracts		Other revenues

Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended September 30, 2016 there were no transfers between Level 1 and Level 2. During the three and nine months ended September 30, 2015, there were $10 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

Level 1 securities include highly liquid and exchange traded bonds and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily 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. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and 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, total return swaps, commodity swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.

Short Term Investments

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are valued consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Condensed Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

Other Invested Assets

Level 1 securities include exchange traded open-end funds valued using quoted market prices.

Life Settlement Contracts

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

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.

September 30, 2016

Estimated Fair Value

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)

(In millions)

Fixed maturity securities

$

211

Discounted cash flow

Credit spread

2% – 40% (6%)

Life settlement contracts

67

Discounted cash flow

Discount rate risk premium

9%

Mortality assumption

55% – 1,676% (162%)

December 31, 2015

Fixed maturity securities

$

138

Discounted cash flow

Credit spread

3% – 184% (6%)

Life settlement contracts

74

Discounted cash flow

Discount rate risk premium

9%

Mortality assumption

55% – 1,676% (164%)

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are presented in the following tables. The carrying amounts and estimated fair values of short term debt and long term debt exclude capital lease obligations. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.

		Carrying				Estimated Fair Value
September 30, 2016		Amount				Level 1				Level 2				Level 3				Total
(In millions)
Assets:
Other invested assets, primarily mortgage loans		$	629											$	654			$	654
Liabilities:
Short term debt			185							$	182				3				185
Long term debt			10,722								10,428				646				11,074
December 31, 2015
Assets:
Other invested assets, primarily mortgage loans		$	678											$	688			$	688
Liabilities:
Short term debt			1,038							$	1,050				2				1,052
Long term debt			9,507								8,538				595				9,133

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

The fair value of mortgage loans, included in Other invested assets, was based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.

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

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- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 10
-Section 50
-Paragraph 30
-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612

Reference 3: http://www.xbrl.org/2003/role/presentationRef
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-Topic 825
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-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
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-URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611

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Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
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