CNA Financial - 10-Q quarterly report FY2013 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



[ ] 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 (State or other jurisdiction of incorporation or organization)		36-6169860 (I.R.S. Employer Identification No.)



333 S. Wabash Chicago, Illinois (Address of principal executive offices)		60604 (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 [x] No [ ]

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

Yes [x] No [ ]

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 [x]	Accelerated filer [ ]	Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

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 July 26, 2013
Common Stock, Par value $2.50		269,698,289



Item Number	PART I. Financial Information	Page Number
1.	Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012	4
	Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	6
	Condensed Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2013 and 2012	8
	Notes to Condensed Consolidated Financial Statements	9
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43
3.	Quantitative and Qualitative Disclosures About Market Risk	62
4.	Controls and Procedures	62
	PART II. Other Information
1.	Legal Proceedings	63
4.	Mine Safety Disclosures	63
6.	Exhibits	63

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CNA Financial Corporation

Condensed Consolidated Statements of Operations (Unaudited)



Periods ended June 30	Three Months						Six Months
(In millions, except per share data)	2013			2012			2013			2012
Revenues
Net earned premiums	$	1,800		$	1,668		$	3,564		$	3,317
Net investment income	578			470			1,211			1,118
Net realized investment gains (losses):
Other-than-temporary impairment losses	(16		)	(12		)	(34		)	(27		)
Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)	—			(11		)	—			(23		)
Net other-than-temporary impairment losses recognized in earnings	(16		)	(23		)	(34		)	(50		)
Other net realized investment gains	2			45			48			108
Net realized investment gains (losses)	(14		)	22			14			58
Other revenues	129			86			207			154
Total revenues	2,493			2,246			4,996			4,647
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits	1,521			1,348			2,950			2,729
Amortization of deferred acquisition costs	335			309			663			604
Other operating expenses	320			316			661			635
Interest	41			43			83			85
Total claims, benefits and expenses	2,217			2,016			4,357			4,053
Income before income tax	276			230			639			594
Income tax expense	(82		)	(64		)	(195		)	(178		)
Net income	$	194		$	166		$	444		$	416

Basic earnings per share	$	0.72		$	0.62		$	1.65		$	1.55

Diluted earnings per share	$	0.72		$	0.62		$	1.64		$	1.54

Dividends per share	$	0.20		$	0.15		$	0.40		$	0.30

Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic	269.7			269.4			269.6			269.4
Diluted	270.1			269.8			270.0			269.7

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

(Unaudited).

CNA Financial Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Other Comprehensive Income (Loss), Net of Tax
Changes in:
Net unrealized gains (losses) on investments with other-than-temporary impairments	$	(8	)	$	(3	)	$	6		$	37
Net unrealized gains (losses) on other investments	(585		)	120			(647		)	337
Net unrealized gains (losses) on investments	(593		)	117			(641		)	374
Foreign currency translation adjustment	(13		)	(17		)	(74		)	4
Pension and postretirement benefits	5			3			10			9
Other comprehensive income (loss), net of tax	(601		)	103			(705		)	387
Net income	194			166			444			416
Total comprehensive income (loss)	$	(407	)	$	269		$	(261	)	$	803

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

(Unaudited).

CNA Financial Corporation

Condensed Consolidated Balance Sheets (Unaudited)



	June 30, 2013			December 31, 2012
(In millions, except share data)	June 30, 2013			December 31, 2012
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $38,928 and $38,170)	$	41,431		$	42,633
Equity securities at fair value (cost of $185 and $228)	199			249
Limited partnership investments	2,665			2,462
Other invested assets	36			59
Mortgage loans	437			401
Short term investments	1,531			1,832
Total investments	46,299			47,636
Cash	121			156
Reinsurance receivables (less allowance for uncollectible receivables of $71 and $73)	5,970			6,158
Insurance receivables (less allowance for uncollectible receivables of $94 and $101)	2,133			1,882
Accrued investment income	446			434
Deferred acquisition costs	650			598
Deferred income taxes	315			93
Property and equipment at cost (less accumulated depreciation of $379 and $404)	327			326
Goodwill	152			154
Other assets (includes $0 and $4 due from Loews Corporation)	907			773
Separate account business	247			312
Total assets	$	57,567		$	58,522
Liabilities
Insurance reserves:
Claim and claim adjustment expenses	$	24,339		$	24,763
Unearned premiums	3,869			3,610
Future policy benefits	10,787			11,475
Policyholders’ funds	133			157
Short term debt	13			13
Long term debt	2,558			2,557
Other liabilities (includes $65 and $0 due to Loews Corporation)	3,677			3,321
Separate account business	247			312
Total liabilities	45,623			46,208
Commitments and contingencies (Notes C, G and J)
Stockholders' Equity
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 269,697,889 and 269,399,390 shares outstanding)	683			683
Additional paid-in capital	2,140			2,146
Retained earnings	9,110			8,774
Accumulated other comprehensive income	126			831
Treasury stock (3,342,354 and 3,640,853 shares), at cost	(91		)	(99		)
Notes receivable for the issuance of common stock	(24		)	(21		)
Total stockholders’ equity	11,944			12,314
Total liabilities and stockholders' equity	$	57,567		$	58,522

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA Financial Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)



Six months ended June 30
(In millions)	2013			2012
Cash Flows from Operating Activities
Net income	$	444		$	416
Adjustments to reconcile net income to net cash flows provided by operating activities:
Loss on disposal of property and equipment	—			1
Deferred income tax expense	122			81
Trading portfolio activity	(7		)	(44		)
Net realized investment gains	(14		)	(58		)
Equity method investees	(151		)	(8		)
Amortization of investments	(14		)	(33		)
Depreciation and amortization	58			39
Changes in:
Receivables, net	(83		)	70
Accrued investment income	(12		)	(10		)
Deferred acquisition costs	(43		)	(17		)
Insurance reserves	198			121
Other assets	(69		)	43
Other liabilities	134			12
Other, net	6			5
Total adjustments	125			202
Net cash flows provided by operating activities	$	569		$	618
Cash Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales	$	3,143		$	3,303
Fixed maturity securities - maturities, calls and redemptions	1,820			1,566
Equity securities	60			61
Limited partnerships	77			64
Mortgage loans	18			5
Purchases:
Fixed maturity securities	(5,656		)	(5,169		)
Equity securities	(33		)	(27		)
Limited partnerships	(103		)	(53		)
Mortgage loans	(54		)	(109		)
Change in other investments	—			2
Change in short term investments	293			(123		)
Purchases of property and equipment	(42		)	(42		)
Other, net	6			12
Net cash flows used by investing activities	$	(471	)	$	(510	)

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).



Six months ended June 30
(In millions)	2013			2012
Cash Flows from Financing Activities
Dividends paid to common stockholders	$	(108	)	$	(81	)
Stock options exercised	1			1
Other, net	(20		)	(3		)
Net cash flows used by financing activities	$	(127	)	$	(83	)
Effect of foreign exchange rate changes on cash	$	(6	)	$	—
Net change in cash	$	(35	)	$	25
Cash, beginning of year	156			75
Cash, end of period	$	121		$	100

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA Financial Corporation

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)



Six months ended June 30
(In millions)	2013			2012
Common Stock
Balance, beginning of period	$	683		$	683
Balance, end of period	683			683
Additional Paid-in Capital
Balance, beginning of period	2,146			2,141
Stock-based compensation	(6		)	—
Balance, end of period	2,140			2,141
Retained Earnings
Balance, beginning of period	8,774			8,308
Dividends paid to common stockholders	(108		)	(81		)
Net income	444			416
Balance, end of period	9,110			8,643
Accumulated Other Comprehensive Income
Balance, beginning of period	831			480
Other comprehensive income (loss)	(705		)	387
Balance, end of period	126			867
Treasury Stock
Balance, beginning of period	(99		)	(102		)
Stock-based compensation	8			3
Balance, end of period	(91		)	(99		)
Notes Receivable for the Issuance of Common Stock
Balance, beginning of period	(21		)	(22		)
(Increase) decrease in notes receivable for the issuance of common stock	(3		)	1
Balance, end of period	(24		)	(21		)
Total Stockholders' Equity	$	11,944		$	12,214

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA Financial Corporation

Notes to Condensed Consolidated Financial Statements

Note A. General

Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. The Company acquired Hardy Underwriting Bermuda Limited and its subsidiaries on July 2, 2012. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of June 30, 2013.

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 Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012, including the summary of significant accounting policies in Note A. 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 June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 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. Intercompany amounts have been eliminated.

Note B. Earnings Per Share

Earnings per share is based on the weighted average number of outstanding common shares. Basic earnings (loss) per share excludes the impact of dilutive securities and is computed by dividing Net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) 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 six months ended June 30, 2013, approximately 407 thousand and 446 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 114 thousand and 478 thousand 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 and six months ended June 30, 2012, approximately 410 thousand and 368 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 622 thousand and 735 thousand 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.

Note C. Investments

The significant components of net investment income are presented in the following table.

Net Investment Income



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Fixed maturity securities	$	498		$	505		$	997		$	1,021
Short term investments	1			2			2			3
Limited partnership investments	79			(35		)	210			95
Equity securities	3			2			6			6
Mortgage loans	6			5			11			8
Trading portfolio (a)	5			4			10			11
Other	—			2			1			3
Gross investment income	592			485			1,237			1,147
Investment expense	(14		)	(15		)	(26		)	(29		)
Net investment income	$	578		$	470		$	1,211		$	1,118

___________________


(a)	There were no net unrealized gains (losses) related to changes in fair value of trading securities still held included in net investment income for the three or six months ended June 30, 2013 or 2012.

Net realized investment gains (losses) are presented in the following table.

Net Realized Investment Gains (Losses)



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	37		$	49		$	81		$	118
Gross realized losses	(42		)	(32		)	(54		)	(71		)
Net realized investment gains (losses) on fixed maturity securities	(5		)	17			27			47
Equity securities:
Gross realized gains	5			2			7			5
Gross realized losses	(7		)	(2		)	(22		)	(4		)
Net realized investment gains (losses) on equity securities	(2		)	—			(15		)	1
Derivatives	(5		)	1			(3		)	—
Short term investments and other	(2		)	4			5			10
Net realized investment gains (losses)	$	(14	)	$	22		$	14		$	58

The components of net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are summarized in the following table.



Periods ended June 30	Three Months				Six Months
(In millions)	2013		2012		2013		2012
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	5	$	6	$	8	$	16
Asset-backed:
Residential mortgage-backed	3		15		3		29
Other asset-backed	1		—		1		—
Total asset-backed	4		15		4		29
U.S. Treasury and obligations of government-sponsored enterprises	—		—		—		1
Total fixed maturity securities available-for-sale	9		21		12		46
Equity securities available-for-sale:
Common stock	2		2		2		4
Preferred stock	5		—		20		—
Total equity securities available-for-sale	7		2		22		4
Net OTTI losses recognized in earnings	$	16	$	23	$	34	$	50

The following tables provide a summary of fixed maturity and equity securities.

Summary of Fixed Maturity and Equity Securities



June 30, 2013	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	20,079	$	1,826	$	147	$	21,758	$	—
States, municipalities and political subdivisions	10,098		814		173		10,739		—
Asset-backed:
Residential mortgage-backed	5,031		153		88		5,096		(37		)
Commercial mortgage-backed	1,941		95		27		2,009		(3		)
Other asset-backed	933		16		2		947		—
Total asset-backed	7,905		264		117		8,052		(40		)
U.S. Treasury and obligations of government-sponsored enterprises	167		9		—		176		—
Foreign government	528		17		1		544		—
Redeemable preferred stock	121		13		2		132		—
Total fixed maturity securities available-for-sale	38,898		2,943		440		41,401		$	(40	)
Total fixed maturity securities trading	30		—		—		30
Equity securities available-for-sale:
Common stock	47		10		—		57
Preferred stock	138		4		—		142
Total equity securities available-for-sale	185		14		—		199
Total	$	39,113	$	2,957	$	440	$	41,630



December 31, 2012	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	19,530	$	2,698	$	21	$	22,207	$	—
States, municipalities and political subdivisions	9,372		1,455		44		10,783		—
Asset-backed:
Residential mortgage-backed	5,745		246		71		5,920		(28		)
Commercial mortgage-backed	1,692		147		17		1,822		(3		)
Other asset-backed	929		23		—		952		—
Total asset-backed	8,366		416		88		8,694		(31		)
U.S. Treasury and obligations of government-sponsored enterprises	172		11		1		182		—
Foreign government	588		25		—		613		—
Redeemable preferred stock	113		13		1		125		—
Total fixed maturity securities available-for-sale	38,141		4,618		155		42,604		$	(31	)
Total fixed maturity securities trading	29		—		—		29
Equity securities available-for-sale:
Common stock	38		14		—		52
Preferred stock	190		7		—		197
Total equity securities available-for-sale	228		21		—		249
Total	$	38,398	$	4,639	$	155	$	42,882

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. At June 30, 2013 and December 31, 2012, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $883 million and $1,511 million. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs and/or increase in Insurance reserves are recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).

The following tables summarize the estimated fair value and gross unrealized losses of available-for-sale fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.

Securities in a Gross Unrealized Loss Position



	Less than 12 Months				12 Months or Longer				Total
June 30, 2013	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	3,478	$	143	$	33	$	4	$	3,511	$	147
States, municipalities and political subdivisions	2,075		130		119		43		2,194		173
Asset-backed:
Residential mortgage-backed	1,462		33		321		55		1,783		88
Commercial mortgage-backed	593		23		79		4		672		27
Other asset-backed	235		2		—		—		235		2
Total asset-backed	2,290		58		400		59		2,690		117
Foreign government	65		1		—		—		65		1
Redeemable preferred stock	39		2		—		—		39		2
Total	$	7,947	$	334	$	552	$	106	$	8,499	$	440



	Less than 12 Months				12 Months or Longer				Total
December 31, 2012	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	846	$	13	$	108	$	8	$	954	$	21
States, municipalities and political subdivisions	254		5		165		39		419		44
Asset-backed:
Residential mortgage-backed	583		5		452		66		1,035		71
Commercial mortgage-backed	85		2		141		15		226		17
Total asset-backed	668		7		593		81		1,261		88
U.S. Treasury and obligations of government-sponsored enterprises	23		1		—		—		23		1
Redeemable preferred stock	28		1		—		—		28		1
Total	$	1,819	$	27	$	866	$	128	$	2,685	$	155

The amount of pretax net realized losses on available-for-sale securities reclassified out of AOCI into earnings was $7 million for the three months ended June 30, 2013, and the amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $12 million for the six months ended June 30, 2013. The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $15 million and $47 million for the three and six months ended June 30, 2012.

Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2013 Securities in a Gross Unrealized Loss Position table above, are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. The investments with longer duration, primarily included within the states, municipalities and political subdivision asset category, were more significantly impacted by changes in market interest rates. 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; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at June 30, 2013.

The following table summarizes the activity for the three and six months ended June 30, 2013 and 2012 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2013 and 2012 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Beginning balance of credit losses on fixed maturity securities	$	92		$	100		$	95		$	92
Additional credit losses for securities for which an OTTI loss was previously recognized	1			10			1			21
Credit losses for securities for which an OTTI loss was not previously recognized	—			1			—			2
Reductions for securities sold during the period	(4		)	(4		)	(7		)	(8		)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	—			(8		)	—			(8		)
Ending balance of credit losses on fixed maturity securities	$	89		$	99		$	89		$	99

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 2013 and December 31, 2012. 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.

Contractual Maturity



	June 30, 2013				December 31, 2012
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	2,105	$	2,153	$	1,648	$	1,665
Due after one year through five years	11,450		12,078		13,603		14,442
Due after five years through ten years	10,613		10,981		8,726		9,555
Due after ten years	14,730		16,189		14,164		16,942
Total	$	38,898	$	41,401	$	38,141	$	42,604

Investment Commitments

As of June 30, 2013, the Company had committed approximately $372 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. As of June 30, 2013, the Company had commitments to purchase or fund additional amounts of $160 million and sell $150 million under the terms of such securities.

Note D. Derivative Financial Instruments

Gross estimated fair values of derivative positions are presented in Other invested assets and Other liabilities on the Condensed Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended June 30, 2013 and December 31, 2012. 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.

Derivative Financial Instruments



June 30, 2013	Contractual/ Notional Amount		Estimated Fair Value
(In millions)	Contractual/ Notional Amount		Asset		(Liability)
Without hedge designation
Credit default swaps - purchased protection	$	20	$	—	$	—
Currency forwards	41		—		—
Equity warrants	5		—		—
Total	$	66	$	—	$	—



December 31, 2012	Contractual/ Notional Amount		Estimated Fair Value
(In millions)	Contractual/ Notional Amount		Asset		(Liability)
Without hedge designation
Credit default swaps - purchased protection	$	20	$	—	$	(1	)
Currency forwards	59		—		(2		)
Equity warrants	5		—		—
Total	$	84	$	—	$	(3	)

During the three and six months ended June 30, 2013, new derivative transactions entered into totaled $1,443 million and $2,047 million in notional value while derivative termination activity totaled $1,523 million and $2,065 million. This activity was attributable to forward commitments for mortgage-backed securities, interest rate futures and foreign currency forwards. During the three and six months ended June 30, 2012, new derivative transactions entered into totaled $447 million and $779 million in notional value while derivative termination activity totaled $391 million and $712 million. This activity was primarily attributable to interest rate futures and forward commitments for mortgage-backed securities.

Note E. 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 methodologies and inputs used to estimate fair value for each specific security. Prices are determined by a dedicated group who ultimately report to the Company's CFO. This group is responsible for valuation policies and procedures. 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 methodologies 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 changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, iv) deep dives, where the Company independently validates detailed information regarding inputs and assumptions for individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

Assets and Liabilities Measured at Fair Value

Assets and liabilities measured at fair value on a recurring basis are summarized below.



June 30, 2013							Total Assets/(Liabilities) at Fair Value
(In millions)	Level 1		Level 2		Level 3		Total Assets/(Liabilities) at Fair Value
Assets
Fixed maturity securities:
Corporate and other bonds	$	30	$	21,556	$	202	$	21,788
States, municipalities and political subdivisions	—		10,599		140		10,739
Asset-backed:
Residential mortgage-backed	—		4,668		428		5,096
Commercial mortgage-backed	—		1,844		165		2,009
Other asset-backed	—		560		387		947
Total asset-backed	—		7,072		980		8,052
U.S. Treasury and obligations of government-sponsored enterprises	147		29		—		176
Foreign government	98		446		—		544
Redeemable preferred stock	49		58		25		132
Total fixed maturity securities	324		39,760		1,347		41,431
Equity securities	134		52		13		199
Other invested assets	—		36		—		36
Short term investments	1,057		423		—		1,480
Life settlement contracts, included in Other assets	—		—		91		91
Separate account business	6		239		2		247
Total assets	$	1,521	$	40,510	$	1,453	$	43,484
Liabilities
Derivative financial instruments, included in Other liabilities	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—



December 31, 2012									Total Assets/(Liabilities) at Fair Value
(In millions)	Level 1		Level 2			Level 3			Total Assets/(Liabilities) at Fair Value
Assets
Fixed maturity securities:
Corporate and other bonds	$	6	$	22,011		$	219		$	22,236
States, municipalities and political subdivisions	—		10,687			96			10,783
Asset-backed:
Residential mortgage-backed	—		5,507			413			5,920
Commercial mortgage-backed	—		1,693			129			1,822
Other asset-backed	—		584			368			952
Total asset-backed	—		7,784			910			8,694
U.S. Treasury and obligations of government-sponsored enterprises	158		24			—			182
Foreign government	140		473			—			613
Redeemable preferred stock	40		59			26			125
Total fixed maturity securities	344		41,038			1,251			42,633
Equity securities	117		98			34			249
Other invested assets	—		58			1			59
Short term investments	987		799			6			1,792
Life settlement contracts, included in Other assets	—		—			100			100
Separate account business	4		306			2			312
Total assets	$	1,452	$	42,299		$	1,394		$	45,145
Liabilities
Derivative financial instruments, included in Other liabilities	$	—	$	(2	)	$	(1	)	$	(3	)
Total liabilities	$	—	$	(2	)	$	(1	)	$	(3	)

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 June 30, 2013 and 2012.



Level 3 (In millions)	Balance at April 1, 2013			Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*			Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at June 30, 2013		Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	302		$	1		$	(3	)	$	13	$	(73	)	$	(6	)	$	—	$	(32	)	$	202	$	(1	)
States, municipalities and political subdivisions	129			—			4			37		(32		)	(3		)	5		—			140		—
Asset-backed:
Residential mortgage-backed	450			(1		)	(1		)	50		(10		)	(21		)	4		(43		)	428		(2		)
Commercial mortgage-backed	177			—			4			5		—			(2		)	21		(40		)	165		—
Other asset-backed	396			—			(3		)	38		(33		)	(11		)	—		—			387		(1		)
Total asset-backed	1,023			(1		)	—			93		(43		)	(34		)	25		(83		)	980		(3		)
Redeemable preferred stock	26			—			(1		)	—		—			—			—		—			25		—
Total fixed maturity securities	1,480			—			—			143		(148		)	(43		)	30		(115		)	1,347		(4		)
Equity securities	19			(5		)	(1		)	—		—			—			—		—			13		(5		)
Other invested assets, including derivatives, net	(1		)	—			—			—		—			1			—		—			—		—
Short term investments	5			—			—			—		(5		)	—			—		—			—		—
Life settlement contracts	95			4			—			—		—			(8		)	—		—			91		(1		)
Separate account business	2			—			—			—		—			—			—		—			2		—
Total	$	1,600		$	(1	)	$	(1	)	$	143	$	(153	)	$	(50	)	$	30	$	(115	)	$	1,453	$	(10	)



Level 3 (In millions)	Balance at April 1, 2012		Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*		Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at June 30, 2012		Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2012 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	486	$	3	$	2		$	68	$	(27	)	$	(13	)	$	9	$	(40	)	$	488	$	—
States, municipalities and political subdivisions	173		—		1			—		—			(85		)	—		—			89		—
Asset-backed:
Residential mortgage-backed	447		1		(18		)	22		—			(9		)	—		—			443		—
Commercial mortgage-backed	105		2		4			87		(12		)	(4		)	—		(16		)	166		—
Other asset-backed	384		2		(1		)	182		(99		)	(34		)	—		—			434		—
Total asset-backed	936		5		(15		)	291		(111		)	(47		)	—		(16		)	1,043		—
Redeemable preferred stock	53		—		—			—		(26		)	—			—		—			27		—
Total fixed maturity securities	1,648		8		(12		)	359		(164		)	(145		)	9		(56		)	1,647		—
Equity securities	74		—		19			15		(15		)	—			—		—			93		(1		)
Other invested assets, including derivatives, net	10		—		—			—		—			—			—		—			10		—
Short term investments	—		—		—			4		—			—			—		—			4		—
Life settlement contracts	115		20		—			—		—			(19		)	—		—			116		3
Separate account business	4		—		—			—		(1		)	—			—		—			3		—
Total	$	1,851	$	28	$	7		$	378	$	(180	)	$	(164	)	$	9	$	(56	)	$	1,873	$	2

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 six months ended June 30, 2013 and 2012.



Level 3 (In millions)	Balance at January 1, 2013		Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*			Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at June 30, 2013		Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2013 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	219	$	1		$	(1	)	$	123	$	(90	)	$	(26	)	$	26	$	(50	)	$	202	$	(2	)
States, municipalities and political subdivisions	96		(3		)	4			122		(79		)	(5		)	5		—			140		—
Asset-backed:
Residential mortgage-backed	413		2			(1		)	111		(10		)	(32		)	4		(59		)	428		(2		)
Commercial mortgage-backed	129		1			9			78		—			(9		)	21		(64		)	165		—
Other asset-backed	368		3			(2		)	174		(132		)	(24		)	—		—			387		(1		)
Total asset-backed	910		6			6			363		(142		)	(65		)	25		(123		)	980		(3		)
Redeemable preferred stock	26		—			(1		)	—		—			—			—		—			25		—
Total fixed maturity securities	1,251		4			8			608		(311		)	(96		)	56		(173		)	1,347		(5		)
Equity securities	34		(20		)	—			—		—			—			—		(1		)	13		(20		)
Other invested assets, including derivatives, net	—		—			—			—		(1		)	1			—		—			—		—
Short term investments	6		—			—			—		(6		)	—			—		—			—		—
Life settlement contracts	100		11			—			—		—			(20		)	—		—			91		(1		)
Separate account business	2		—			—			—		—			—			—		—			2		—
Total	$	1,393	$	(5	)	$	8		$	608	$	(318	)	$	(115	)	$	56	$	(174	)	$	1,453	$	(26	)



Level 3 (In millions)	Balance at January 1, 2012		Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*		Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at June 30, 2012		Unrealized gains (losses) on Level 3 assets and liabilities held at June 30, 2012 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	482	$	6	$	6		$	147	$	(113	)	$	(32	)	$	42	$	(50	)	$	488	$	—
States, municipalities and political subdivisions	171		—		3			—		—			(85		)	—		—			89		—
Asset-backed:
Residential mortgage-backed	452		2		(22		)	60		—			(16		)	—		(33		)	443		—
Commercial mortgage-backed	59		2		8			129		(12		)	(4		)	—		(16		)	166		—
Other asset-backed	343		6		3			358		(176		)	(59		)	—		(41		)	434		—
Total asset-backed	854		10		(11		)	547		(188		)	(79		)	—		(90		)	1,043		—
Redeemable preferred stock	—		—		—			53		(26		)	—			—		—			27		—
Total fixed maturity securities	1,507		16		(2		)	747		(327		)	(196		)	42		(140		)	1,647		—
Equity securities	67		—		16			26		(16		)	—			—		—			93		(3		)
Other invested assets, including derivatives, net	10		—		—			—		—			—			—		—			10		—
Short term investments	27		—		—			16		—			(39		)	—		—			4		—
Life settlement contracts	117		23		—			—		—			(24		)	—		—			116		3
Separate account business	23		—		—			—		(20		)	—			—		—			3		—
Total	$	1,751	$	39	$	14		$	789	$	(363	)	$	(259	)	$	42	$	(140	)	$	1,873	$	—

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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 Statements 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)
Other invested assets - Derivative financial instruments held in a trading portfolio		Net investment income
Other invested assets - Derivative financial instruments not held in a trading portfolio		Net realized investment gains (losses)
Other invested assets - Overseas deposits		Net investment income
Life settlement contracts		Other revenues

Securities shown in the Level 3 tables on the previous pages may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. 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. There were no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2013 or 2012. 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

Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer 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.

Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government 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. 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. Level 3 securities also include tax-exempt auction rate certificates and private placement debt securities. 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 expected call date assumption is unobservable due to the uncertain nature of principal prepayments prior to maturity and the credit spread adjustment that is security specific. Fair value of certain private placement debt securities 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, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

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Other Invested Assets

Level 1 securities include exchange traded derivatives, primarily futures, valued using quoted market prices. Level 2 securities include overseas deposits, which can be redeemed at net asset value in 90 days or less, and derivatives, primarily currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return 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

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 classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

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 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.

Separate Account Business

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

Significant Unobservable Inputs

The table below presents quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table 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 these unobservable inputs is neither provided nor reasonably available to the Company.



Assets (In millions)	Fair Value at June 30, 2013		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	106	Discounted cash flow	Expected call date	1.6 - 3.5 years (3.1 years)
				Credit spread	1.95% - 7.95% (2.67%)
	$	83	Market approach	Private offering price	$36.32 - $113.76 ($101.70)
Equity securities	$	13	Market approach	Private offering price	$33.73 - $4,017.00 per share ($936.89 per share)
Life settlement contracts	$	91	Discounted cash flow	Discount rate risk premium	9%
				Mortality assumption	69% - 883% (209.2%)

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Assets (In millions)	Fair Value at December 31, 2012		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	121	Discounted cash flow	Expected call date	3.3 - 5.3 years (4.3 years)
				Credit spread adjustment	0.02% - 0.48% (0.17%)
	$	72	Market approach	Private offering price	$42.39 - $102.32 ($100.11)
Equity securities	$	34	Market approach	Private offering price	$4.54 - $3,842.00 per share ($571.17 per share)
Life settlement contracts	$	100	Discounted cash flow	Discount rate risk premium	9%
				Mortality assumption	69% - 883% (208.9%)

For fixed maturity securities, an increase to the expected call date assumption and credit spread adjustment or decrease in the private offering price would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher 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 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 tables below.



June 30, 2013	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Notes receivable for the issuance of common stock	$	24	$	—	$	—	$	24	$	24
Mortgage loans	437		—		—		449		449
Financial liabilities
Premium deposits and annuity contracts	$	75	$	—	$	—	$	76	$	76
Short term debt	13		—		13		—		13
Long term debt	2,558		—		2,912		—		2,912



December 31, 2012	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Notes receivable for the issuance of common stock	$	21	$	—	$	—	$	21	$	21
Mortgage loans	401		—		—		418		418
Financial liabilities
Premium deposits and annuity contracts	$	100	$	—	$	—	$	104	$	104
Short term debt	13		—		13		—		13
Long term debt	2,557		—		3,016		—		3,016

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, adjusted for specific note receivable risk.

The fair values of Mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.

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

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The Company's senior notes and debentures were valued based on observable market prices. The fair value for other 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, Short term investments not carried at fair value, Accrued investment income 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 tables above.

Note F. Claim and Claim Adjustment Expense Reserves

The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including IBNR claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company'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 including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.

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 $65 million and $104 million for the three and six months ended June 30, 2013. Catastrophe losses in 2013 related primarily to U.S. storms. The Company reported catastrophe losses, net of reinsurance, of $68 million and $96 million for the three and six months ended June 30, 2012.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments.

Net Prior Year Development



Three months ended June 30, 2013
(In millions)	CNA Specialty			CNA Commercial			Hardy		Corporate & Other Non-Core			Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(41	)	$	27		$	12	$	(3	)	$	(5	)
Pretax (favorable) unfavorable premium development	(5		)	(5		)	2		—			(8		)
Total pretax (favorable) unfavorable net prior year development	$	(46	)	$	22		$	14	$	(3	)	$	(13	)



Three months ended June 30, 2012
(In millions)	CNA Specialty			CNA Commercial			Corporate & Other Non-Core			Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(35	)	$	(13	)	$	(4	)	$	(52	)
Pretax (favorable) unfavorable premium development	(5		)	(19		)	1			(23		)
Total pretax (favorable) unfavorable net prior year development	$	(40	)	$	(32	)	$	(3	)	$	(75	)



Six months ended June 30, 2013
(In millions)	CNA Specialty			CNA Commercial			Hardy		Corporate & Other Non-Core			Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(56	)	$	16		$	11	$	(2	)	$	(31	)
Pretax (favorable) unfavorable premium development	(13		)	(15		)	6		1			(21		)
Total pretax (favorable) unfavorable net prior year development	$	(69	)	$	1		$	17	$	(1	)	$	(52	)



Six months ended June 30, 2012
(In millions)	CNA Specialty			CNA Commercial			Corporate & Other Non-Core			Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(41	)	$	(27	)	$	(2	)	$	(70	)
Pretax (favorable) unfavorable premium development	(14		)	(36		)	2			(48		)
Total pretax (favorable) unfavorable net prior year development	$	(55	)	$	(63	)	$	—		$	(118	)

For the three and six months ended June 30, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.

CNA Specialty

The following table provides further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the CNA Specialty segment for the three and six months ended June 30, 2013 and 2012.



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Medical Professional Liability	$	(17	)	$	(9	)	$	(20	)	$	(15	)
Other Professional Liability	(23		)	(6		)	(24		)	(2		)
Surety	1			—			2			1
Warranty	—			—			—			(1		)
Other	(2		)	(20		)	(14		)	(24		)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(41	)	$	(35	)	$	(56	)	$	(41	)

Three Month Comparison

2013

Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2009 and prior.

Overall, favorable development for other professional liability was related to better than expected loss emergence in accident years 2007 through 2009. Unfavorable development was recorded in accident years 2010 through 2012 related to an increase in severity.

2012

Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2008 through 2010.

Other includes standard property and casualty coverages provided to CNA Specialty customers. Favorable development for other coverages was primarily due to favorable loss emergence in property and workers' compensation coverages in accident years 2005 and subsequent.

Six Month Comparison

2013

Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.

Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.

2012

Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2008 through 2010 and reductions in the estimated frequency of large losses in accident years 2008 and prior.

Favorable development for other coverages was primarily due to favorable loss emergence in property and workers' compensation coverages in accident years 2005 and subsequent.

CNA Commercial

The following table provides further detail of the development recorded for the CNA Commercial segment for the three and six months ended June 30, 2013 and 2012.



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Commercial Auto	$	2		$	2		$	(3	)	$	2
General Liability	15			(13		)	(6		)	(5		)
Workers' Compensation	45			8			70			(11		)
Property and Other	(35		)	(10		)	(45		)	(13		)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	27		$	(13	)	$	16		$	(27	)

Three Month Comparison

2013

Unfavorable development for general liability coverages was primarily related to increased incurred loss severity in accident years 2010 through 2012.

Unfavorable development for workers' compensation was primarily in response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers' compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013.

Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 and favorable loss emergence on non-catastrophe losses in accident year 2012.

2012

Favorable development for general liability coverages was primarily related to favorable loss emergence in accident years 2005 and prior.

Favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident year 2010.

Six Month Comparison

2013

Overall, favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2002 and prior. Unfavorable development was recorded in accident years 2010 through 2012 primarily related to increased incurred loss severity.

Unfavorable development for workers' compensation was recorded in response to legislation in New York as discussed above. Additional unfavorable development was primarily due to higher than expected large losses and increased severity in the state of California in accident year 2010.

2012

Overall, favorable development for workers' compensation reflects favorable experience in accident years 2001 and prior. Unfavorable development was recorded in accident year 2010 related to increased medical severity and in accident year 2011 related to favorable premium development.

Hardy

The following table provides further detail of the development recorded for the Hardy segment for the three and six months ended June 30, 2013.



Periods ended June 30, 2013
(In millions)	Three Months			Six Months
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Marine and Aviation	$	4		$	3
Non-Marine Property	7			7
Property Treaty	2			2
Specialty	(1		)	(1		)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	12		$	11

Three and Six Months

2013

Unfavorable development for non-marine property was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake.

Note G. Legal Proceedings and Contingent Liabilities

The Company is a party to routine litigation incidental to its business, which, based on the facts and circumstances currently known, is not material to the Condensed Consolidated Financial Statements.

Note H. Benefit Plans

The components of net periodic cost (benefit) are presented in the following table.

Net Periodic Cost (Benefit)



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Pension cost (benefit)
Service cost	$	3		$	3		$	6		$	6
Interest cost on projected benefit obligation	30			33			60			67
Expected return on plan assets	(45		)	(42		)	(90		)	(85		)
Amortization of net actuarial (gain) loss	12			9			24			19
Net periodic pension cost (benefit)	$	—		$	3		$	—		$	7

Postretirement cost (benefit)
Interest cost on projected benefit obligation	$	1		$	1		$	1		$	1
Amortization of prior service credit	(5		)	(5		)	(9		)	(9		)
Net periodic postretirement cost (benefit)	$	(4	)	$	(4	)	$	(8	)	$	(8	)

Note I. Other Intangible Assets

Other intangible assets are presented in the following table.



	June 30, 2013				December 31, 2012
(In millions)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Finite-lived intangible assets:
Value of business acquired	$	59	$	57	$	62	$	43
Trade name	8		1		8		—
Distribution channel	12		1		13		—
Total finite-lived intangible assets	79		59		83		43
Indefinite-lived intangible assets	69				73
Total other intangible assets	$	148	$	59	$	156	$	43

For the three and six months ended June 30, 2013, amortization expense of $4 million and $13 million was included in Amortization of deferred acquisition costs and $2 million and $5 million was included in Other operating expenses in the Statement of Operations for the Hardy segment. For the three and six months ended June 30, 2012, no amortization expense was recognized. The gross carrying amounts and accumulated amortization in the table above may change from period to period as a result of foreign currency translation. Estimated future amortization expense for intangible assets is $2 million for the remainder of 2013, $3 million in 2014, $1 million in 2015 and $2 million in years 2016, 2017 and 2018.

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, the Company, 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, the Company 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 which provide liquidity 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 and other related costs at June 30, 2013 that the Company could be required to pay under this guarantee, in excess of amounts already recorded, were approximately $92 million. If the Company 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.

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 June 30, 2013, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $724 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 June 30, 2013, 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 June 30, 2013 and December 31, 2012, the Company had recorded liabilities of approximately $7 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.

Note K. Business Segments

The Company's core property and casualty commercial insurance operations are reported in three business segments: CNA Specialty, CNA Commercial and Hardy. The Company'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 CNAF's Annual Report on Form 10-K for the year ended December 31, 2012. The Company manages most of its assets on a legal entity basis, while segment operations are generally conducted across legal entities. As such, only insurance and reinsurance receivables, insurance reserves, deferred acquisition costs and goodwill are readily identifiable for all individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of 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 intersegment 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 by management through analysis of various factors including unrealized gains and losses on securities, portfolio duration and exposure to market and credit risk. Based on such analyses, the Company may recognize an OTTI loss on an investment security in accordance with its policy, or sell a security, which may produce realized gains and losses.

Net operating income (loss) is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses and 2) 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 some 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 results of operations and selected balance sheet items by segment are presented in the following tables.



Three months ended June 30, 2013	CNA Specialty			CNA Commercial			Hardy			Life & Group Non-Core			Corporate & Other Non-Core
(In millions)	CNA Specialty			CNA Commercial			Hardy			Life & Group Non-Core			Corporate & Other Non-Core			Eliminations			Total
Operating revenues
Net earned premiums	$	746		$	840		$	76		$	138		$	—		$	—		$	1,800
Net investment income	151			211			1			207			8			—			578
Other revenues	63			65			(1		)	1			2			(1		)	129
Total operating revenues	960			1,116			76			346			10			(1		)	2,507
Claims, Benefits and Expenses
Net incurred claims and benefits	452			644			41			380			(2		)	—			1,515
Policyholders’ dividends	1			2			—			3			—			—			6
Amortization of deferred acquisition costs	156			153			20			6			—			—			335
Other insurance related expenses	65			142			13			33			—			—			253
Other expenses	60			2			6			2			39			(1		)	108
Total claims, benefits and expenses	734			943			80			424			37			(1		)	2,217
Operating income (loss) before income tax	226			173			(4		)	(78		)	(27		)	—			290
Income tax (expense) benefit on operating income (loss)	(78		)	(61		)	2			42			9			—			(86		)
Net operating income (loss)	148			112			(2		)	(36		)	(18		)	—			204
Net realized investment gains (losses), pre-tax	(6		)	(12		)	1			—			3			—			(14		)
Income tax (expense) benefit on net realized investment gains (losses)	2			4			(1		)	—			(1		)	—			4
Net realized investment gains (losses)	(4		)	(8		)	—			—			2			—			(10		)
Net income (loss)	$	144		$	104		$	(2	)	$	(36	)	$	(16	)	$	—		$	194



Three months ended June 30, 2012	CNA Specialty			CNA Commercial			Hardy	Life & Group Non-Core			Corporate & Other Non-Core
(In millions)	CNA Specialty			CNA Commercial			Hardy	Life & Group Non-Core			Corporate & Other Non-Core			Eliminations			Total
Operating revenues
Net earned premiums	$	719		$	809			$	139		$	2		$	(1	)	$	1,668
Net investment income	112			151				201			6			—			470
Other revenues	57			11				16			2			—			86
Total operating revenues	888			971				356			10			(1		)	2,224
Claims, Benefits and Expenses
Net incurred claims and benefits	448			591				323			(20		)	—			1,342
Policyholders’ dividends	1			3				2			—			—			6
Amortization of deferred acquisition costs	154			147				8			—			—			309
Other insurance related expenses	77			135				36			1			(1		)	248
Other expenses	50			10				4			47			—			111
Total claims, benefits and expenses	730			886				373			28			(1		)	2,016
Operating income (loss) before income tax	158			85				(17		)	(18		)	—			208
Income tax (expense) benefit on operating income (loss)	(52		)	(28		)		20			4			—			(56		)
Net operating income (loss)	106			57				3			(14		)	—			152
Net realized investment gains (losses), pre-tax	8			13				4			(3		)	—			22
Income tax (expense) benefit on net realized investment gains (losses)	(2		)	(5		)		(1		)	—			—			(8		)
Net realized investment gains (losses)	6			8				3			(3		)	—			14
Net income (loss)	$	112		$	65			$	6		$	(17	)	$	—		$	166



Six months ended June 30, 2013	CNA Specialty			CNA Commercial			Hardy			Life & Group Non-Core			Corporate & Other Non-Core
(In millions)	CNA Specialty			CNA Commercial			Hardy			Life & Group Non-Core			Corporate & Other Non-Core			Eliminations			Total
Operating revenues
Net earned premiums	$	1,469		$	1,677		$	140		$	279		$	—		$	(1	)	$	3,564
Net investment income	321			461			2			411			16			—			1,211
Other revenues	123			75			—			5			5			(1		)	207
Total operating revenues	1,913			2,213			142			695			21			(2		)	4,982
Claims, Benefits and Expenses
Net incurred claims and benefits	917			1,244			72			705			2			—			2,940
Policyholders’ dividends	2			4			—			4			—			—			10
Amortization of deferred acquisition costs	306			302			41			14			—			—			663
Other insurance related expenses	136			285			29			66			—			(1		)	515
Other expenses	114			11			13			7			85			(1		)	229
Total claims, benefits and expenses	1,475			1,846			155			796			87			(2		)	4,357
Operating income (loss) before income tax	438			367			(13		)	(101		)	(66		)	—			625
Income tax (expense) benefit on operating income (loss)	(150		)	(130		)	3			65			22			—			(190		)
Net operating income (loss)	288			237			(10		)	(36		)	(44		)	—			435
Net realized investment gains (losses), pre-tax	(3		)	(8		)	2			14			9			—			14
Income tax (expense) benefit on net realized investment gains (losses)	1			3			(1		)	(5		)	(3		)	—			(5		)
Net realized investment gains (losses)	(2		)	(5		)	1			9			6			—			9
Net income (loss)	$	286		$	232		$	(9	)	$	(27	)	$	(38	)	$	—		$	444



June 30, 2013
(In millions)
Reinsurance receivables	$	698	$	1,146	$	235	$	1,258	$	2,704	$	—		$	6,041
Insurance receivables	$	786	$	1,219	$	208	$	11	$	3	$	—		$	2,227
Deferred acquisition costs	$	317	$	277	$	56	$	—	$	—	$	—		$	650
Goodwill	$	117	$	—	$	35	$	—	$	—	$	—		$	152
Insurance reserves
Claim and claim adjustment expenses	$	6,877	$	10,973	$	447	$	3,031	$	3,011	$	—		$	24,339
Unearned premiums	1,787		1,682		265		136		—		(1		)	3,869
Future policy benefits	—		—		—		10,787		—		—			10,787
Policyholders’ funds	9		14		—		110		—		—			133



Six months ended June 30, 2012	CNA Specialty			CNA Commercial			Hardy	Life & Group Non-Core			Corporate & Other Non-Core
(In millions)	CNA Specialty			CNA Commercial			Hardy	Life & Group Non-Core			Corporate & Other Non-Core			Eliminations			Total
Operating revenues
Net earned premiums	$	1,425		$	1,612			$	280		$	1		$	(1	)	$	3,317
Net investment income	287			416				399			16			—			1,118
Other revenues	113			20				14			7			—			154
Total operating revenues	1,825			2,048				693			24			(1		)	4,589
Claims, Benefits and Expenses
Net incurred claims and benefits	916			1,158				659			(13		)	—			2,720
Policyholders’ dividends	(1		)	6				4			—			—			9
Amortization of deferred acquisition costs	302			286				16			—			—			604
Other insurance related expenses	149			279				71			—			(1		)	498
Other expenses	100			17				10			95			—			222
Total claims, benefits and expenses	1,466			1,746				760			82			(1		)	4,053
Operating income (loss) before income tax	359			302				(67		)	(58		)	—			536
Income tax (expense) benefit on operating income (loss)	(121		)	(106		)		51			18			—			(158		)
Net operating income (loss)	238			196				(16		)	(40		)	—			378
Net realized investment gains (losses), pre-tax	16			24				17			1			—			58
Income tax (expense) benefit on net realized investment gains (losses)	(4		)	(9		)		(6		)	(1		)	—			(20		)
Net realized investment gains (losses)	12			15				11			—			—			38
Net income (loss)	$	250		$	211			$	(5	)	$	(40	)	$	—		$	416



December 31, 2012
(In millions)
Reinsurance receivables	$	665	$	1,155	$	294	$	1,273	$	2,844	$	—	$	6,231
Insurance receivables	$	673	$	1,116	$	181	$	9	$	4	$	—	$	1,983
Deferred acquisition costs	$	300	$	269	$	29	$	—	$	—	$	—	$	598
Goodwill	$	117	$	—	$	37	$	—	$	—	$	—	$	154
Insurance reserves
Claim and claim adjustment expenses	$	6,748	$	11,326	$	521	$	3,006	$	3,162	$	—	$	24,763
Unearned premiums	1,685		1,569		222		134		—		—		3,610
Future policy benefits	—		—		—		11,475		—		—		11,475
Policyholders’ funds	8		15		—		134		—		—		157

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.

Revenues by Line of Business



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
CNA Specialty
International	$	59		$	53		$	118		$	110
Professional & Management Liability	687			645			1,387			1,339
Surety	123			121			239			240
Warranty & Alternative Risks	85			77			166			152
CNA Specialty revenues	954			896			1,910			1,841
CNA Commercial
Commercial Insurance	827			736			1,653			1,571
International	90			90			183			181
Small Business	187			158			369			320
CNA Commercial revenues	1,104			984			2,205			2,072
Hardy revenues	77						144
Life & Group Non-Core
Health	287			287			585			578
Life & Annuity	58			57			119			117
Other	1			16			5			15
Life & Group Non-Core revenues	346			360			709			710
Corporate & Other Non-Core revenues	13			7			30			25
Eliminations	(1		)	(1		)	(2		)	(1		)
Total revenues	$	2,493		$	2,246		$	4,996		$	4,647

Note L. Changes in Accumulated Other Comprehensive Income (Loss) by Component

The tables below present the changes in Accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2013.

Changes in Accumulated Other Comprehensive Income (Loss)



(In millions)	Net unrealized gains (losses) on investments with OTTI losses			Net unrealized gains (losses) on other investments			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance at April 1, 2013	$	34		$	1,309		$	(716	)	$	100		$	727
Other comprehensive income (loss) before reclassifications	(8		)	(589		)	—			(13		)	(610		)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $3, $2, $0, and $5	—			(4		)	(5		)	—			(9		)
Other comprehensive income (loss) after tax (expense) benefit of $4, $314, $(2), $0, and $316	(8		)	(585		)	5			(13		)	(601		)
Balance at June 30, 2013	$	26		$	724		$	(711	)	$	87		$	126



(In millions)	Net unrealized gains (losses) on investments with OTTI losses		Net unrealized gains (losses) on other investments			Pension and postretirement benefits			Cumulative foreign currency translation adjustment			Total
Balance at January 1, 2013	$	20	$	1,371		$	(721	)	$	161		$	831
Other comprehensive income (loss) before reclassifications	6		(638		)	—			(74		)	(706		)
Amounts reclassified from accumulated other comprehensive income (loss) after tax (expense) benefit of $0, $(3), $5, $0, and $2	—		9			(10		)	—			(1		)
Other comprehensive income (loss) after tax (expense) benefit of $(3), $349, $(5), $0, and $341	6		(647		)	10			(74		)	(705		)
Balance at June 30, 2013	$	26	$	724		$	(711	)	$	87		$	126

Amounts reclassified from Accumulated other comprehensive income (loss) shown above are reported in Net income (loss) as follows:



Component of AOCI		Condensed Consolidated Statements of Operations Line Item Affected by Reclassifications
Net unrealized gains (losses) on investments with OTTI losses		Net realized investment gains (losses)
Net unrealized gains (losses) on other investments		Net realized investment gains (losses)
Pension and postretirement benefits		Other operating expenses

Item 2. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

Overview

The following discussion highlights significant factors affecting the Company. References to “we,” “our,” “us” or like terms refer to the business of CNA. Based on 2011 statutory net written premiums, we are the seventh largest commercial insurance writer and the 13^th largest property and casualty insurance organization in the United States of America.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements included under Part I, Item 1 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012.

We utilize the net operating income financial measure to monitor our operations. Net operating income is calculated by excluding from net income (loss) the after-tax effects of 1) net realized investment gains or losses and 2) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note K to the Condensed Consolidated Financial Statements included under Part I, Item 1. In the evaluation of the results of our CNA Specialty, CNA Commercial and Hardy 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.

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 F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

CONSOLIDATED OPERATIONS

Results of Operations

The following table includes the consolidated results of our 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 June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Operating Revenues
Net earned premiums	$	1,800		$	1,668		$	3,564		$	3,317
Net investment income	578			470			1,211			1,118
Other revenues	129			86			207			154
Total operating revenues	2,507			2,224			4,982			4,589
Claims, Benefits and Expenses
Net incurred claims and benefits	1,515			1,342			2,940			2,720
Policyholders' dividends	6			6			10			9
Amortization of deferred acquisition costs	335			309			663			604
Other insurance related expenses	253			248			515			498
Other expenses	108			111			229			222
Total claims, benefits and expenses	2,217			2,016			4,357			4,053
Operating income before income tax	290			208			625			536
Income tax expense on operating income	(86		)	(56		)	(190		)	(158		)
Net operating income	204			152			435			378
Net realized investment gains (losses), pre-tax	(14		)	22			14			58
Income tax (expense) benefit on net realized investment gains (losses)	4			(8		)	(5		)	(20		)
Net realized investment gains (losses)	(10		)	14			9			38
Net income	$	194		$	166		$	444		$	416

Three Month Comparison

Net income increased $28 million for the three months ended June 30, 2013 as compared with the same period in 2012. This increase was due to higher net operating income, partially offset by decreased net realized investment results.

Net realized investment results decreased $24 million for the three months ended June 30, 2013 as compared with the same period in 2012. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.

Net operating income increased $52 million for the three months ended June 30, 2013 as compared with the same period in 2012. Net operating income increased $95 million for our core segments, CNA Specialty, CNA Commercial and Hardy. This increase was primarily due to higher net investment income, improved current accident year underwriting results and a settlement benefit of $30 million after-tax related to workers' compensation residual market litigation. Catastrophe losses were $43 million after-tax for the three months ended June 30, 2013 as compared with $44 million after-tax for the same period in 2012. These favorable items were partially offset by lower favorable net prior year development. Net operating results decreased $43 million for our non-core segments, primarily related to results in our Life & Group Non-Core segment. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.

Favorable net prior year development of $13 million and $75 million was recorded for the three months ended June 30, 2013 and 2012 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development for the three months ended June 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Net earned premiums increased $132 million for the three months ended June 30, 2013 as compared with the same period in 2012, driven by the acquisition of Hardy in July of 2012, a $31 million increase in CNA Commercial and a $27 million increase in CNA Specialty. See the Segment Results section of this MD&A for further discussion.

Six Month Comparison

Net income increased $28 million for the six months ended June 30, 2013 as compared with the same period in 2012. This increase was due to higher net operating income, partially offset by decreased net realized investment gains.

Net realized investment gains decreased $29 million for the six months ended June 30, 2013 as compared with the same period in 2012.

Net operating income increased $57 million for the six months ended June 30, 2013 as compared with the same period in 2012. Net operating income increased $81 million for our core segments, CNA Specialty, CNA Commercial and Hardy. This increase was primarily due to improved current accident year underwriting results, higher net investment income and the legal settlement benefit referenced above. These favorable items were partially offset by lower favorable net prior year development. Catastrophe losses were $68 million after-tax for the six months ended June 30, 2013 as compared with $62 million after-tax for the same period in 2012. Net operating results decreased $24 million for our non-core segments, primarily related to results in our Life & Group Non-Core segment. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.

Favorable net prior year development of $52 million and $118 million was recorded for the six months ended June 30, 2013 and 2012 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development for the six months ended June 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Net earned premiums increased $247 million for the six months ended June 30, 2013 as compared with the same period in 2012, driven by the acquisition of Hardy in July of 2012, a $65 million increase in CNA Commercial and a $44 million increase in CNA Specialty. See the Segment Results section of this MD&A for further discussion.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Condensed Consolidated Financial Statements (Unaudited) in conformity with 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 and Insurance Receivables


•	Valuation of Investments and Impairment of Securities


•	Long Term Care Products and Payout Annuity Contracts


•	Pension and Postretirement Benefit Obligations


•	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 Annual Report on Form 10-K for the year ended December 31, 2012 for further information.

SEGMENT RESULTS

The following discusses the results of operations for our operating segments.

CNA Specialty

The following table details the results of operations for CNA Specialty.

Results of Operations



Periods ended June 30	Three Months						Six Months
(In millions, except ratios)	2013			2012			2013			2012
Net written premiums	$	756		$	718		$	1,559		$	1,483
Net earned premiums	746			719			1,469			1,425
Net investment income	151			112			321			287
Net operating income	148			106			288			238
Net realized investment gains (losses)	(4		)	6			(2		)	12
Net income	144			112			286			250
Ratios
Loss and loss adjustment expense	60.6		%	62.2		%	62.4		%	64.2		%
Expense	29.7			32.1			30.1			31.7
Dividend	0.1			0.1			0.2			(0.1		)
Combined	90.4		%	94.4		%	92.7		%	95.8		%

Three Month Comparison

Net written premiums for CNA Specialty increased $38 million for the three months ended June 30, 2013 as compared with the same period in 2012, driven by increased rate. Net earned premiums increased $27 million as compared with the same period in 2012, consistent with increased net written premiums over recent quarters.

CNA Specialty's average rate increased 7% for the three months ended June 30, 2013, as compared with an increase of 5% for the three months ended June 30, 2012, for the policies that renewed in each period. Retention of 84% and 86% was achieved in each period.

Net income increased $32 million for the three months ended June 30, 2013 as compared with the same period in 2012. This increase was due to higher net operating income, partially offset by decreased net realized investment results.

Net operating income increased $42 million for the three months ended June 30, 2013 as compared with the same period in 2012. This increase was primarily due to higher net investment income and improved underwriting results.

The combined ratio improved 4.0 points for the three months ended June 30, 2013 as compared with the same period in 2012. The loss ratio improved 1.6 points, due primarily to an improved current accident year loss ratio. The expense ratio improved 2.4 points, primarily due to the impact of lower expenses and a higher net earned premium base.

Favorable net prior year development of $46 million and $40 million was recorded for the three months ended June 30, 2013 and 2012. Further information on CNA Specialty's net prior year development for the three months ended June 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Six Month Comparison

Net written premiums for CNA Specialty increased $76 million for the six months ended June 30, 2013 as compared with the same period in 2012, primarily driven by increased rate. Net earned premiums increased $44 million as compared with the same period in 2012, consistent with increased net written premiums over recent quarters.

CNA Specialty's average rate increased 7% for the six months ended June 30, 2013, as compared with an increase of 4% for the six months ended June 30, 2012, for the policies that renewed in each period. Retention of 85% and 86% was achieved in each period.

Net income increased $36 million for the six months ended June 30, 2013 as compared with the same period in 2012, due to the same reasons discussed above in the three month comparison.

Net operating income increased $50 million for the six months ended June 30, 2013 as compared with the same period in 2012. This increase was primarily due to improved underwriting results and higher net investment income.

The combined ratio improved 3.1 points for the six months ended June 30, 2013 as compared with the same period in 2012. The loss ratio improved 1.8 points, due to an improved current accident year loss ratio and higher favorable net prior year development. The expense ratio improved 1.6 points, primarily due to the impact of lower expenses and a higher net earned premium base.

Favorable net prior year development of $69 million and $55 million was recorded for the six months ended June 30, 2013 and 2012. Further information on CNA Specialty's net prior year development for the six months ended June 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves as of June 30, 2013 and December 31, 2012 for CNA Specialty.

Gross and Net Carried Claim and Claim Adjustment Expense Reserves



	June 30, 2013		December 31, 2012
(In millions)	June 30, 2013		December 31, 2012
Gross Case Reserves	$	2,320	$	2,292
Gross IBNR Reserves	4,557		4,456
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	6,877	$	6,748
Net Case Reserves	$	2,035	$	2,008
Net IBNR Reserves	4,156		4,104
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	6,191	$	6,112

CNA Commercial

The following table details the results of operations for CNA Commercial.

Results of Operations



Periods ended June 30	Three Months						Six Months
(In millions, except ratios)	2013			2012			2013			2012
Net written premiums	$	826		$	889		$	1,744		$	1,732
Net earned premiums	840			809			1,677			1,612
Net investment income	211			151			461			416
Net operating income	112			57			237			196
Net realized investment gains (losses)	(8		)	8			(5		)	15
Net income	104			65			232			211
Ratios
Loss and loss adjustment expense	76.5		%	72.9		%	74.1		%	71.8		%
Expense	34.9			34.8			35.0			35.0
Dividend	0.3			0.4			0.2			0.4
Combined	111.7		%	108.1		%	109.3		%	107.2		%

Three Month Comparison

Net written premiums for CNA Commercial decreased $63 million for the three months ended June 30, 2013 as compared with the same period in 2012, primarily driven by underwriting actions taken in certain business classes, including a transfer of $44 million of in-force business. These underwriting actions were partially offset by continued strong rate increases. Net earned premiums increased $31 million for the three months ended June 30, 2013 as compared with the same period in 2012, consistent with increased net written premiums over recent quarters.

CNA Commercial's average rate increased 9% for the three months ended June 30, 2013, as compared with an increase of 7% for the three months ended June 30, 2012, for the policies that renewed in each period. Retention of 75% and 77% was achieved in each period.

Net income increased $39 million for the three months ended June 30, 2013 as compared with the same period in 2012. This increase was due to higher net operating income, partially offset by decreased net realized investment results.

Net operating income increased $55 million for the three months ended June 30, 2013 as compared with the same period in 2012. This increase was primarily due to higher net investment income, a settlement benefit of $30 million after-tax and improved current accident year underwriting results. These favorable items were partially offset by unfavorable net prior year development in 2013, which includes $23 million after-tax recorded for workers' compensation in response to legislation related to the New York Fund for Reopened Cases, as discussed further in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1. The settlement benefit related to workers' compensation residual market litigation, and is reflected within Other revenues and is not included in the combined ratio.

The combined ratio increased 3.6 points for the three months ended June 30, 2013 as compared with the same period in 2012. The loss ratio increased 3.6 points, primarily due to unfavorable net prior year development, partially offset by an improved current accident year loss ratio. Catastrophe losses were $59 million, or 7.1 points of the loss ratio, for the three months ended June 30, 2013, as compared with $65 million, or 8.0 points of the loss ratio, for the three months ended June 30, 2012.

Unfavorable net prior year development of $22 million was recorded for the three months ended June 30, 2013, compared to favorable net prior year development of $32 million for the three months ended June 30, 2012. Further information on CNA Commercial net prior year development for the three months ended June 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Six Month Comparison

Net written premiums for CNA Commercial increased $12 million for the six months ended June 30, 2013 as compared with the same period in 2012, primarily driven by strong rate increases, partially offset by underwriting actions taken in certain business classes. Net earned premiums increased $65 million for the six months ended June 30, 2013 as compared with the same period in 2012, consistent with increased net written premiums over recent quarters.

CNA Commercial's average rate increased 9% for the six months ended June 30, 2013, as compared with an increase of 6% for the six months ended June 30, 2012, for the policies that renewed in each period. Retention of 76% and 77% was achieved in each period.

Net income increased $21 million for the six months ended June 30, 2013 as compared with the same period in 2012, due to the same reasons discussed above in the three month comparison.

Net operating income increased $41 million for the six months ended June 30, 2013 as compared with the same period in 2012. This increase was primarily due to the same reasons discussed above in the three month comparison.

The combined ratio increased 2.1 points for the six months ended June 30, 2013 as compared with the same period in 2012. The loss ratio increased 2.3 points, primarily due to unfavorable net prior year development, partially offset by an improved current accident year loss ratio. Catastrophe losses were $97 million, or 5.8 points of the loss ratio, for the six months ended June 30, 2013, as compared with $91 million, or 5.6 points of the loss ratio, for the six months ended June 30, 2012.

Unfavorable net prior year development of $1 million was recorded for the six months ended June 30, 2013, compared to favorable net prior year development of $63 million for the six months ended June 30, 2012. Further information on CNA Commercial net prior year development for the six months ended June 30, 2013 and 2012 is included in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves as of June 30, 2013 and December 31, 2012 for CNA Commercial.

Gross and Net Carried Claim and Claim Adjustment Expense Reserves



(In millions)	June 30, 2013		December 31, 2012
Gross Case Reserves	$	6,059	$	6,146
Gross IBNR Reserves	4,914		5,180
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	10,973	$	11,326
Net Case Reserves	$	5,542	$	5,611
Net IBNR Reserves	4,331		4,600
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	9,873	$	10,211

Hardy

The following table details the results of operations for Hardy.

Results of Operations



Periods ended June 30, 2013
(In millions, except ratios)	Three Months			Six Months
Net written premiums	$	138		$	193
Net earned premiums	76			140
Net investment income	1			2
Net operating income (loss)	(2		)	(10		)
Net realized investment gains (losses)	—			1
Net income (loss)	(2		)	(9		)
Ratios
Loss and loss adjustment expense	53.9		%	51.5		%
Expense	44.5			50.1
Dividend	—			—
Combined	98.4		%	101.6		%

Three Month Results

The composition of net earned premiums for Hardy was $32 million for marine and aviation, $22 million for non-marine property, $11 million for specialty lines and $11 million for property treaty reinsurance.

Hardy's average rate decreased 1% for the three months ended June 30, 2013 for the policies that renewed in the period. Retention of 64% was achieved in the period.

Results included pretax unfavorable net prior year development of $14 million primarily related to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake. The net prior year development included $2 million of unfavorable premium development. Additionally, results included foreign currency transaction losses of $3 million and non-run rate purchase accounting expenses of $2 million. Further information on Hardy's amortization expense is included in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1.

No catastrophe losses were incurred for the three months ended June 30, 2013. The loss ratio was adversely affected by unfavorable development, as discussed above.

Six Month Results

The composition of net earned premiums for Hardy was $64 million for marine and aviation, $41 million for non-marine property, $18 million for specialty lines and $17 million for property treaty reinsurance.

Hardy's average rate was flat for the six months ended June 30, 2013 for the policies that renewed in the period. Retention of 67% was achieved in the period.

Results included pretax unfavorable net prior year development of $17 million driven by the same reasons discussed above in the three month results. The net prior year development included $6 million of unfavorable premium development. Additionally, results included non-run rate purchase accounting expenses of $5 million and foreign currency transaction losses of $5 million.

Further information on Hardy's amortization expense is included in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1.

No catastrophe losses were incurred for the six months ended June 30, 2013. The loss ratio was adversely affected by unfavorable development.

The following table summarizes the gross and net carried reserves as of June 30, 2013 and December 31, 2012 for Hardy.

Gross and Net Carried Claim and Claim Adjustment Expense Reserves



(In millions)	June 30, 2013		December 31, 2012
Gross Case Reserves	$	304	$	333
Gross IBNR Reserves	143		188
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	447	$	521
Net Case Reserves	$	168	$	192
Net IBNR Reserves	82		82
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	250	$	274

Life & Group Non-Core

The following table summarizes the results of operations for Life & Group Non-Core.

Results of Operations



Periods ended June 30	Three Months					Six Months
(In millions)	2013			2012		2013			2012
Net earned premiums	$	138		$	139	$	279		$	280
Net investment income	207			201		411			399
Net operating income (loss)	(36		)	3		(36		)	(16		)
Net realized investment gains (losses)	—			3		9			11
Net income (loss)	(36		)	6		(27		)	(5		)

Three Month Comparison

Net earned premiums for Life & Group Non-Core decreased $1 million for the three months ended June 30, 2013 as compared with the same period in 2012. Net earned premiums relate primarily to the individual and group long term care businesses.

Net results decreased $42 million for the three months ended June 30, 2013 as compared with the same period in 2012. This decrease was primarily due to unfavorable morbidity in our long term care business, driven by an increase in claim volume, and a gain on a life settlement contract in 2012.

Six Month Comparison

Net earned premiums for Life & Group Non-Core decreased $1 million for the six months ended June 30, 2013 as compared with the same period in 2012.

Net loss increased $22 million for the six months ended June 30, 2013 as compared with the same period in 2012. This increase was primarily due to unfavorable morbidity in our long term care business. First quarter 2013 results for our long term care business reflected favorable claims experience driven by mortality. Second quarter long term care results reflect unfavorable claims experience driven by morbidity.

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&EP) and intersegment eliminations.

Results of Operations



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Net investment income	$	8		$	6		$	16		$	16
Net operating income (loss)	(18		)	(14		)	(44		)	(40		)
Net realized investment gains (losses)	2			(3		)	6			—
Net income (loss)	(16		)	(17		)	(38		)	(40		)

Three Month Comparison

Net loss decreased $1 million for the three months ended June 30, 2013 as compared with the same period in 2012. Both periods benefited from releases of previously established allowances for uncollectible amounts arising from changes in estimates. For the three months ended June 30, 2013, results were positively affected by $6 million related to the release of an allowance established for officer notes receivable. For the three months ended June 30, 2012, results were positively affected by $13 million related to the release of an allowance established for uncollectible reinsurance receivables.

Favorable net prior year development of $3 million was recorded for the three months ended June 30, 2013 and 2012.

Six Month Comparison

Net loss decreased $2 million for the six months ended June 30, 2013 as compared with the same period in 2012, primarily due to the same reasons discussed above in the three month comparison.

Favorable net prior year development of $1 million was recorded for the six months ended June 30, 2013 as compared with no net prior year development for the same period in 2012.

The following table summarizes the gross and net carried reserves as of June 30, 2013 and December 31, 2012 for Corporate & Other Non-Core.

Gross and Net Carried Claim and Claim Adjustment Expense Reserves



(In millions)	June 30, 2013		December 31, 2012
Gross Case Reserves	$	1,195	$	1,207
Gross IBNR Reserves	1,816		1,955
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	3,011	$	3,162
Net Case Reserves	$	283	$	292
Net IBNR Reserves	204		220
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	487	$	512

INVESTMENTS

Net Investment Income

The significant components of pretax net investment income are presented in the following table.

Net Investment Income



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Fixed maturity securities	$	498		$	505		$	997		$	1,021
Short term investments	1			2			2			3
Limited partnership investments	79			(35		)	210			95
Equity securities	3			2			6			6
Mortgage loans	6			5			11			8
Trading portfolio	5			4			10			11
Other	—			2			1			3
Gross investment income	592			485			1,237			1,147
Investment expense	(14		)	(15		)	(26		)	(29		)
Net investment income	$	578		$	470		$	1,211		$	1,118

Net investment income for the three months ended June 30, 2013 increased $108 million as compared with the same period in 2012. The increase was primarily driven by limited partnership investment results. The decrease in fixed maturity securities income was due to the effect of investing at lower interest rates, partially offset by a higher invested asset base.

Net investment income for the six months ended June 30, 2013 increased $93 million as compared with the same period in 2012, due to the same reasons discussed above in the three month comparison.

The fixed maturity investment portfolio provided a pretax effective income yield of 5.2% and 5.4% for the six months ended June 30, 2013 and 2012. Tax-exempt municipal bonds generated $71 million and $140 million of net investment income for the three and six months ended June 30, 2013 compared with $69 million and $135 million of net investment income for the same periods in 2012.

Net Realized Investment Gains (Losses)

The components of net realized investment results are presented in the following table.

Net Realized Investment Gains (Losses)



Periods ended June 30	Three Months						Six Months
(In millions)	2013			2012			2013			2012
Fixed maturity securities:
Corporate and other bonds	$	15		$	20		$	46		$	43
States, municipalities and political subdivisions	—			12			(2		)	27
Asset-backed	(21		)	(17		)	(18		)	(29		)
U.S. Treasury and obligations of government-sponsored enterprises	—			1			—			2
Foreign government	1			1			1			4
Total fixed maturity securities	(5		)	17			27			47
Equity securities	(2		)	—			(15		)	1
Derivative securities	(5		)	1			(3		)	—
Short term investments and other	(2		)	4			5			10
Net realized investment gains (losses), pre-tax	(14		)	22			14			58
Income tax (expense) benefit on net realized investment gains (losses)	4			(8		)	(5		)	(20		)
Net realized investment gains (losses)	$	(10	)	$	14		$	9		$	38

Net realized investment results decreased $24 million and $29 million for the three and six months ended June 30, 2013 as compared with the same periods in 2012, driven by lower realized investment gains on sales of securities, partially offset by lower OTTI losses recognized in earnings. Further information on our realized gains and losses, including our OTTI losses, is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Portfolio Quality

Our fixed maturity portfolio consists primarily of high quality bonds, 91% and 92% of which were rated as investment grade (rated BBB- or higher) at June 30, 2013 and December 31, 2012. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody's), in that order of preference. If a security is not rated by these rating agencies, we formulate an internal rating. At June 30, 2013 and December 31, 2012, approximately 98% of the fixed maturity portfolio was rated by S&P or Moody's, or was issued or guaranteed by the U.S. Government, Government agencies or Government-sponsored enterprises.

The following table summarizes the ratings of our fixed maturity portfolio at fair value.

Fixed Maturity Ratings



(In millions)	June 30, 2013		%		December 31, 2012		%
U.S. Government, Government agencies and Government-sponsored enterprises	$	3,670	9	%	$	4,540	11	%
AAA rated	3,048		7		3,224		8
AA and A rated	19,482		47		19,305		45
BBB rated	11,460		28		11,997		28
Non-investment grade	3,771		9		3,567		8
Total	$	41,431	100	%	$	42,633	100	%

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 amortized cost of our non-investment grade fixed maturity bond portfolio was $3,613 million and $3,355 million at June 30, 2013 and December 31, 2012. The following table summarizes the ratings of this portfolio at fair value.

Non-investment Grade



(In millions)	June 30, 2013		%		December 31, 2012		%
BB	$	1,622	43	%	$	1,529	43	%
B	1,191		32		1,075		30
CCC - C	679		18		724		20
D	279		7		239		7
Total	$	3,771	100	%	$	3,567	100	%

The following table summarizes available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution as of June 30, 2013.

Gross Unrealized Losses by Ratings Distribution



June 30, 2013	Estimated Fair Value		%		Gross Unrealized Losses		%
(In millions)	Estimated Fair Value		%		Gross Unrealized Losses		%
U.S. Government, Government agencies and Government-sponsored enterprises	$	1,216	14	%	$	65	15	%
AAA	640		8		21		5
AA	1,555		18		133		30
A	1,605		19		61		14
BBB	2,346		28		126		29
Non-Investment Grade	1,137		13		34		7
Total	$	8,499	100	%	$	440	100	%

The following table provides the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.

Gross Unrealized Losses by Maturity Profile



June 30, 2013	Estimated Fair Value		%		Gross Unrealized Losses		%
Due in one year or less	$	246	3	%	$	4	1	%
Due after one year through five years	1,448		17		35		8
Due after five years through ten years	3,939		46		182		41
Due after ten years	2,866		34		219		50
Total	$	8,499	100	%	$	440	100	%

Duration

A primary objective in the management of the investment portfolio is to optimize return relative to corresponding 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 corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and 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 the liabilities in the Life & Group Non-Core segment including annuities, structured settlements and long term care products.

The effective durations of fixed maturity securities, short term investments and interest rate derivatives are presented in the table below. Short term investments are net of payable and receivable amounts for securities purchased and sold, but not yet settled.

Effective Durations



	June 30, 2013			December 31, 2012
(In millions)	Fair Value		Effective Duration (In years)	Fair Value		Effective Duration (In years)
Investments supporting Life & Group Non-Core	$	14,986	11.2	$	15,590	11.3
Other interest sensitive investments	27,790		4.3	28,855		3.9
Total	$	42,776	6.7	$	44,445	6.5

The investment portfolio is periodically analyzed for changes in duration and related price 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 Annual Report on Form 10-K for the year ended December 31, 2012.

Short Term Investments

The carrying value of the components of the short term investment portfolio is presented in the following table.

Short Term Investments



(In millions)	June 30, 2013		December 31, 2012
Short term investments:
Commercial paper	$	374	$	751
U.S. Treasury securities	836		617
Money market funds	164		301
Other	157		163
Total short term investments	$	1,531	$	1,832

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.

For the six months ended June 30, 2013, net cash provided by operating activities was $569 million as compared with $618 million for the same period in 2012. Cash provided by operating activities in 2012 was favorably affected by a $75 million tax refund.

Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments. Additionally, cash flows from investing activities may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.

For the six months ended June 30, 2013, net cash used by investing activities was $471 million as compared with net cash used of $510 million for the same period in 2012. The cash flow from investing activities is affected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.

Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity instruments.

For the six months ended June 30, 2013, net cash used by financing activities was $127 million as compared with $83 million for the same period in 2012. Net cash used by financing activities in both periods was primarily related to the payment of dividends to common stockholders.

Common Stock Dividends

Dividends of $0.40 per share of our common stock were declared and paid in the first half of 2013. On July 26, 2013, our Board of Directors declared a quarterly dividend of $0.20 per share, payable August 28, 2013 to stockholders of record on August 12, 2013. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs, and regulatory constraints.

Liquidity

We believe that our present cash flows from operations, investing activities and financing activities are sufficient to fund our current and expected working capital and debt obligation needs and we do not expect this to change in the near term. There are currently no amounts outstanding under our $250 million senior unsecured revolving credit facility.

During the first half of 2013, CCC paid dividends of $200 million to CNAF. As of June 30, 2013, CCC is able to pay approximately $500 million of dividends during the remainder of 2013 that would not be subject to the prior approval of the Illinois Department of Insurance.

We have an effective automatic shelf registration statement under which we may issue debt, equity or hybrid securities.

Ratings

Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by major rating agencies and these ratings reflect the rating agency's opinion of the insurance company's financial strength, operating performance, strategic position and ability to meet our obligations to policyholders. In June 2013, S&P upgraded our property and casualty insurance financial strength ratings to A with a stable outlook and upgraded the credit rating on the senior debt of CNAF to BBB. Further information on our ratings is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

FORWARD-LOOKING STATEMENTS

This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for asbestos and environmental pollution and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; volatility in investment returns; expected cost savings and other results from our expense reduction activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. These risks and uncertainties include, but are not limited to, the following:

Company-Specific Factors

•

the risks and uncertainties associated with our loss reserves, as outlined in the Critical Accounting Estimates and the Reserves - Estimates and Uncertainties sections of our Annual Report on Form 10-K, including the sufficiency of the reserves and the possibility for future increases, which would be reflected in the results of operations in the period that the need for such adjustment is determined;


•	the risk that the other parties to the transaction in which, subject to certain limitations, we ceded our legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction;


•	the performance of reinsurance companies under reinsurance contracts with us; and


•	the consummation of contemplated transactions and the successful integration of acquired operations.

Industry and General Market Factors


•	the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;


•	product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew under priced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;

•

general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create additional losses to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services, and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;


•	conditions in the capital and credit markets, including continuing uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of our investments;


•	conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms, as well as restrictions on the ability or willingness of Loews to provide additional capital support to us; and


•	the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices.

Regulatory Factors


•	regulatory initiatives and compliance with governmental regulations, judicial interpretations within the regulatory framework, including interpretation of policy provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation involving us, and rulings and changes in tax laws and regulations;

•

regulatory limitations, impositions and restrictions upon us, including the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies as well as the new federal financial regulatory reform of the insurance industry established by the Dodd-Frank Wall Street Reform and Consumer Protection Act;


•	increased operating costs and underwriting losses arising from the Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act, as well as health care reform proposals at the state level; and


•	regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries, imposed by regulatory authorities, including regulatory capital adequacy standards.

Impact of Catastrophic Events and Related Developments


•	weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow;


•	regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;


•	man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;


•	the unpredictability of the nature, targets, severity or frequency of potential terrorist events, as well as the uncertainty as to our ability to contain our terrorism exposure effectively; and


•	the occurrence of epidemics.

Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in our market risk components for the six months ended June 30, 2013. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A on our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012 for further information. Additional information related to portfolio duration is discussed in the Investments section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management on a timely basis to allow decisions regarding required disclosure.

As of June 30, 2013, the Company's management, including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of June 30, 2013.

On July 2, 2012, the Company completed the acquisition of Hardy. During the second quarter of 2013, the Company completed the integration of Hardy's internal controls over financial reporting into its evaluation. There have been no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

Information on our legal proceedings is set forth in Note G to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Item 4. Mine Safety Disclosures

Not applicable.

Item 6. Exhibits

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		CNA Financial Corporation

Dated: July 30, 2013	By	/s/ D. Craig Mense
		D. Craig Mense Executive Vice President and Chief Financial Officer

EXHIBIT INDEX



Description of Exhibit	Exhibit Number

Certification of Chief Executive Officer	31.1

Certification of Chief Financial Officer	31.2

Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.1

Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.2

XBRL Instance Document	101.INS

XBRL Taxonomy Extension Schema	101.SCH

XBRL Taxonomy Extension Calculation Linkbase	101.CAL

XBRL Taxonomy Extension Definition Linkbase	101.DEF

XBRL Taxonomy Label Linkbase	101.LAB

XBRL Taxonomy Extension Presentation Linkbase	101.PRE

CNA Financial - 10-Q quarterly report FY2013 Q2

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