CNA Financial - 10-Q quarterly report FY2018 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2018



[ ] 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.)



151 N. Franklin Chicago, Illinois (Address of principal executive offices)		60606 (Zip Code)

(312) 822-5000

(Registrant's telephone number, including area code)

Not Applicable

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

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

Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes [x] No [ ]

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



Large accelerated filer [x]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller reporting company [ ]	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 November 1, 2018
Common Stock, Par value $2.50		271,410,714



Item Number		Page Number
	PART I. Financial Information
1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (Unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2018 and 2017 (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44
3.	Quantitative and Qualitative Disclosures About Market Risk	67
4.	Controls and Procedures	67
	PART II. Other Information
1.	Legal Proceedings	68
6.	Exhibits	68

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PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CNA Financial Corporation

Condensed Consolidated Statements of Operations (Unaudited)



Periods ended September 30	Three Months						Nine Months
(In millions, except per share data)	2018			2017			2018			2017
Revenues
Net earned premiums	$	1,853		$	1,806		$	5,453		$	5,185
Net investment income	487			509			1,483			1,529
Net realized investment gains (losses):
Other-than-temporary impairment losses	(3		)	(5		)	(9		)	(9		)
Other net realized investment gains (losses)	17			(19		)	34			71
Net realized investment gains (losses)	14			(24		)	25			62
Non-insurance warranty revenue (Note J)	258			99			744			290
Other revenues	10			8			26			28
Total revenues	2,622			2,398			7,731			7,094
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits	1,312			1,480			3,978			4,053
Amortization of deferred acquisition costs	337			309			992			926
Non-insurance warranty expense (Note J)	235			74			676			216
Other operating expenses	302			307			903			875
Interest	34			41			104			124
Total claims, benefits and expenses	2,220			2,211			6,653			6,194
Income before income tax	402			187			1,078			900
Income tax expense	(66		)	(43		)	(181		)	(224		)
Net income	$	336		$	144		$	897		$	676

Basic earnings per share	$	1.24		$	0.53		$	3.30		$	2.49

Diluted earnings per share	$	1.23		$	0.53		$	3.29		$	2.48

Dividends declared per share	$	0.35		$	0.30		$	2.95		$	2.80

Weighted Average Outstanding Common Stock and Common Stock Equivalents
Basic	271.6			271.2			271.5			271.1
Diluted	272.5			272.1			272.4			272.0

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

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CNA Financial Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



Periods ended September 30	Three Months					Nine Months
(In millions)	2018			2017		2018			2017
Comprehensive Income
Net income	$	336		$	144	$	897		$	676
Other Comprehensive (Loss) Income, Net of Tax
Changes in:
Net unrealized gains on investments with other-than-temporary impairments	(1		)	1		(11		)	(3		)
Net unrealized gains on other investments	(158		)	23		(746		)	167
Net unrealized gains on investments	(159		)	24		(757		)	164
Foreign currency translation adjustment	—			41		(40		)	94
Pension and postretirement benefits	7			10		24			22
Other comprehensive (loss) income, net of tax	(152		)	75		(773		)	280
Total comprehensive income	$	184		$	219	$	124		$	956

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

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CNA Financial Corporation

Condensed Consolidated Balance Sheets



(In millions, except share data)	September 30, 2018 (Unaudited)			December 31, 2017
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $38,052 and $38,215)	$	39,628		$	41,487
Equity securities at fair value (cost of $784 and $659)	795			695
Limited partnership investments	2,297			2,369
Other invested assets	51			44
Mortgage loans	868			839
Short term investments	1,290			1,436
Total investments	44,929			46,870
Cash	310			355
Reinsurance receivables (less allowance for uncollectible receivables of $29 and $29)	4,224			4,261
Insurance receivables (less allowance for uncollectible receivables of $46 and $44)	2,354			2,292
Accrued investment income	406			411
Deferred acquisition costs	654			634
Deferred income taxes	314			137
Property and equipment at cost (less accumulated depreciation of $208 and $274)	332			326
Goodwill	147			148
Other assets (Note A)	3,589			1,133
Total assets	$	57,259		$	56,567
Liabilities
Insurance reserves:
Claim and claim adjustment expenses	$	21,604		$	22,004
Unearned premiums	4,289			4,029
Future policy benefits	10,605			11,179
Short term debt	—			150
Long term debt	2,680			2,708
Other liabilities (includes $52 and $143 due to Loews Corporation) (Note A)	6,571			4,253
Total liabilities	45,749			44,323
Commitments and contingencies (Notes C and F)
Stockholders' Equity
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,410,714 and 271,205,390 shares outstanding)	683			683
Additional paid-in capital	2,186			2,175
Retained earnings	9,456			9,414
Accumulated other comprehensive (loss) income	(757		)	32
Treasury stock (1,629,529 and 1,834,853 shares), at cost	(58		)	(60		)
Total stockholders’ equity	11,510			12,244
Total liabilities and stockholders' equity	$	57,259		$	56,567

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

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CNA Financial Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)



Nine months ended September 30
(In millions)	2018			2017
Cash Flows from Operating Activities
Net income	$	897		$	676
Adjustments to reconcile net income to net cash flows provided by operating activities:
Deferred income tax expense	37			125
Trading portfolio activity	2			8
Net realized investment gains	(25		)	(62		)
Equity method investees	136			89
Net amortization of investments	(48		)	(30		)
Depreciation and amortization	59			66
Changes in:
Receivables, net	(47		)	18
Accrued investment income	5			(31		)
Deferred acquisition costs	(24		)	(34		)
Insurance reserves	108			248
Other assets	(193		)	(121		)
Other liabilities	(107		)	(106		)
Other, net	68			48
Total adjustments	(29		)	218
Net cash flows provided by operating activities	868			894
Cash Flows from Investing Activities
Dispositions:
Fixed maturity securities - sales	6,622			4,167
Fixed maturity securities - maturities, calls and redemptions	1,838			2,635
Equity securities	69			22
Limited partnerships	304			160
Mortgage loans	83			22
Purchases:
Fixed maturity securities	(8,244		)	(6,877		)
Equity securities	(177		)	(18		)
Limited partnerships	(380		)	(85		)
Mortgage loans	(112		)	(153		)
Change in other investments	(10		)	(2		)
Change in short term investments	158			(29		)
Purchases of property and equipment	(87		)	(80		)
Other, net	16			20
Net cash flows provided (used) by investing activities	80			(218		)

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

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Nine months ended September 30
(In millions)	2018			2017
Cash Flows from Financing Activities
Dividends paid to common stockholders	$	(801	)	$	(761	)
Proceeds from the issuance of debt	—			496
Repayment of debt	(180		)	(391		)
Other, net	(8		)	(17		)
Net cash flows used by financing activities	(989		)	(673		)
Effect of foreign exchange rate changes on cash	(4		)	9
Net change in cash	(45		)	12
Cash, beginning of year	355			271
Cash, end of period	$	310		$	283

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

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CNA Financial Corporation

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)



Nine months ended September 30
(In millions)	2018			2017
Common Stock
Balance, beginning of period	$	683		$	683
Balance, end of period	683			683
Additional Paid-in Capital
Balance, beginning of period	2,175			2,173
Stock-based compensation	11			(6		)
Balance, end of period	2,186			2,167
Retained Earnings
Balance, beginning of period, as previously reported	9,414			9,359
Cumulative effect adjustments from changes in accounting guidance, net of tax	(50		)	—
Balance, beginning of period, as adjusted	9,364			9,359
Dividends to common stockholders	(805		)	(762		)
Net income	897			676
Balance, end of period	9,456			9,273
Accumulated Other Comprehensive (Loss) Income
Balance, beginning of period, as previously reported	32			(173		)
Cumulative effect adjustments from changes in accounting guidance, net of tax	(16		)	—
Balance, beginning of period, as adjusted	16			(173		)
Other comprehensive (loss) income	(773		)	280
Balance, end of period	(757		)	107
Treasury Stock
Balance, beginning of period	(60		)	(73		)
Stock-based compensation	2			12
Balance, end of period	(58		)	(61		)
Total stockholders' equity	$	11,510		$	12,169

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

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CNA Financial Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note A. General

Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. Loews Corporation (Loews) owned approximately 89% of the outstanding common stock of CNAF as of September 30, 2018.

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany amounts have been eliminated. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, including certain financial statement notes, 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, 2017, 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 period. Actual results may differ from those estimates.

The interim financial data as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 is unaudited. However, in the opinion of management, the interim data includes all adjustments, including normal recurring adjustments, 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.

Recently Adopted Accounting Standards Updates (ASU)

ASU 2014-09: In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in an amount that reflects the consideration the entity is entitled to receive for the transfer of the promised goods or services.

On January 1, 2018, the Company adopted the updated guidance using the modified retrospective method applied to all contracts which were not completed as of the date of adoption, with the cumulative effect recognized as an adjustment to the opening balance of Retained earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.

Under the new guidance, revenue on warranty products and services was recognized more slowly compared to the historic revenue recognition pattern. In addition, for warranty products where the Company acts as the principal in the transaction, Non-insurance warranty revenue and Non-insurance warranty expense are increased to reflect the gross amount paid by consumers, including the retail seller’s markup which is considered a commission to the Company's agent. This gross-up of revenue and expense also resulted in an increase to Other assets and Other liabilities on the Company's Condensed Consolidated Balance Sheets as the revenue and expense are recognized over the actuarially determined expected claims emergence pattern.

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The cumulative effect changes to the Condensed Consolidated Balance Sheet for the adoption of the updated guidance on January 1, 2018 were as follows:



(In millions)	Balance as of December 31, 2017		Adjustments Due to Adoption of Topic 606			Balance as of January 1, 2018
Other assets	$	1,133	$	1,882		$	3,015
Other liabilities	4,253		1,969			6,222
Deferred income taxes	137		21			158
Retained earnings	9,414		(66		)	9,348

The impact of adoption on the Condensed Consolidated Statements of Operations and Balance Sheet was as follows:



Periods ended September 30, 2018	Three Months									Nine Months
	Prior to Adoption			Effect of Adoption			As Reported			Prior to Adoption			Effect of Adoption			As Reported
(In millions)
Statement of operations:
Non-insurance warranty revenue	$	109		$	149		$	258		$	315		$	429		$	744
Total revenues	2,473			149			2,622			7,302			429			7,731

Non-insurance warranty expense	82			153			235			240			436			676
Total claims, benefits and expenses	2,067			153			2,220			6,217			436			6,653

Income before income tax	406			(4		)	402			1,085			(7		)	1,078
Income tax expense	(67		)	1			(66		)	(183		)	2			(181		)
Net income	339			(3		)	336			902			(5		)	897

Balance sheet⁽¹⁾at September 30, 2018:
Other assets										$	3,284		$	305		$	3,589
Other liabilities										6,259			312			6,571
Deferred income taxes										312			2			314
Retained earnings										9,461			(5		)	9,456


(1)	The Prior to Adoption amounts presented in this table include the cumulative effect adjustment at adoption presented in the prior table.

See Note J to the Condensed Consolidated Financial Statements for additional information regarding non-insurance revenues from contracts with customers.

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ASU 2016-01: In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance primarily changes the model for equity securities by requiring changes in the fair value of equity securities (except those accounted for under the equity method of accounting, those without readily determinable fair values and those that result in consolidation of the investee) to be recognized through the income statement. The Company adopted the updated guidance on January 1, 2018 and recognized a cumulative effect adjustment that increased beginning Retained earnings by $28 million, net of tax. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.

For the three and nine months ended September 30, 2018, the Company recognized $2 million in pretax gains and $23 million in pretax losses within Net realized investment gains (losses) for the change in fair value of non-redeemable preferred stock and $1 million in pretax losses and $1 million in pretax gains within Net investment income for the change in fair value of common stock as a result of this change. For the three and nine months ended September 30, 2017, there was a $1 million increase and less than a $1 million increase in the fair value of common stock and less than a $1 million increase and a $7 million increase in the fair value of non-redeemable preferred stock recognized in Other comprehensive income. The Company's non-redeemable preferred stock contain characteristics of debt securities, are priced similarly to bonds, and are held primarily for income generation through periodic dividends. While recognition of gains and losses on these securities are no longer discretionary, management does not consider the changes in fair value of non-redeemable preferred stock to be reflective of our primary operations. As such, the changes in the fair value of these securities are recorded through Net realized investments gains (losses). The Company owns certain common stock with the intention of holding the securities primarily for market appreciation and as such, the changes in the fair value of these securities are recorded through Net investment income.

ASU 2017-07: In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the income statement by requiring service cost to be presented with other employee compensation costs and other components of net periodic pension cost to be presented outside of any subtotal of operating income. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The Company adopted the updated guidance effective January 1, 2018. The guidance was applied on a prospective basis for capitalization of service costs and on a retrospective basis for the presentation of the service cost and other components of net periodic benefit costs in the Company's Condensed Consolidated Statements of Operations and in its disclosures. The Company expanded the related footnote disclosure, Note G to the Condensed Consolidated Financial Statements, to disclose the amount of service cost and non-service cost components of net periodic benefit cost and the line items in the Condensed Consolidated Statements of Operations in which such amounts are reported. The change limiting the costs eligible for capitalization is not material to the Company’s results of operations or financial position.

ASU 2018-02: In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. GAAP requires the remeasurement of deferred tax assets and liabilities due to a change in the tax rate to be included in Net income, even if the related income tax effects were originally recognized in Accumulated other comprehensive income (AOCI). The ASU allows a reclassification from AOCI to Retained earnings for stranded tax effects resulting from the new U.S. Federal corporate income tax rate enacted on December 22, 2017. The Company early adopted the updated guidance effective January 1, 2018 and elected to reclassify the stranded income tax effects relating to the reduction in the Federal corporate income tax rate from AOCI to Retained earnings at the beginning of the period of adoption. The net impact of the accounting change resulted in a $12 million increase in AOCI and a corresponding decrease in Retained earnings. The $12 million increase in AOCI is comprised of a $142 million increase in net unrealized gains (losses) on investments partially offset by a $130 million decrease in unrecognized pension and postretirement benefits.

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The Company releases tax effects from AOCI utilizing the security-by-security approach for Net unrealized gains (losses) on investments with Other-than-temporary impairment (OTTI) losses and Net unrealized gains (losses) on other investments. For Pension and postretirement benefits, tax effects from AOCI are released at enacted tax rates based on the pre-tax adjustments to pension liabilities or assets recognized within OCI.

ASU 2018-13: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance requires changes to the disclosures for fair value measurement by adding, removing and modifying disclosures. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods therein and early adoption is permitted. As of September 30, 2018, the Company adopted the updated guidance and added disclosures on changes in unrealized gains (losses) on Level 3 assets recognized in Other comprehensive income as well as the weighted average rate used to develop significant inputs utilized in the fair value measurements of Level 3 assets. The Company also eliminated disclosures on the amount of transfers between Level 1 and Level 2 assets and the policy for timing of transfers between Levels.

Accounting Standards Pending Adoption

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The updated accounting guidance requires lessees to recognize on the balance sheet assets and liabilities for the rights and obligations created by the majority of leases, including those historically accounted for as operating leases. The guidance is effective for interim and annual periods beginning after December 15, 2018 and prescribes a modified retrospective transition method but allows entities to utilize a practical expedient and apply the guidance prospectively beginning with the adoption date. The Company has decided to utilize the practical expedient. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statements. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on the Company's financial statements, but expects the primary changes to be the use of the expected credit loss model for its mortgage loan portfolio and reinsurance receivables and the use of the allowance method rather than the write-down method for credit losses within the available-for-sale fixed maturities portfolio. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines.

In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. The standard requires entities to annually update cash flow assumptions, including morbidity and persistency, and update discount rate assumptions quarterly using an upper-medium grade fixed-income instrument yield. The effect of changes in cash flow assumptions will be recorded in Net income and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income.

This guidance is effective for interim and annual periods beginning after December 15, 2020, and requires restatement of the prior periods presented. Early adoption is permitted. The Company is currently evaluating the method and timing of adoption and the effect the updated guidance will have on its financial statements. The annual updating of cash flow assumptions is expected to increase income statement volatility. The quarterly change in discount rate is expected to increase volatility in the Company’s stockholders' equity, but that will be somewhat mitigated because Shadow Adjustments are eliminated under the new guidance.

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In August 2018, the FASB issued ASU No. 2018-14, Compensation -Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The updated accounting guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing, modifying and adding disclosures. The guidance is effective for annual periods ending after December 15, 2020, and early adoption is permitted. The Company anticipates early adopting this standard in the fourth quarter of 2018.

Income Tax Reform Update

On December 22, 2017, H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” was signed into law (Tax Reform Legislation).

Shortly after enactment, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 118 (SAB 118) to provide guidance on accounting for the Tax Reform Legislation impacts when the measurements of the income tax effects are complete, incomplete, or incomplete but for which a provisional amount can be estimated. SAB 118 permits the recognition of provisional amounts, and adjustments to provisional amounts, in subsequent reporting periods within the one year measurement period.

The Company has reflected the following incomplete but reasonably estimated provisional items in Deferred income taxes on the Condensed Consolidated Balance Sheet at September 30, 2018. Adjustments to the Company's provisional amounts for the three and nine months ended September 30, 2018 did not impact income tax expense.


•	The Company has recalculated its insurance reserves and the transition adjustment from existing law.


•	The Company has recalculated amounts under special accounting method provisions for recognizing income for Federal income tax purposes no later than for financial accounting purposes and the transition adjustment from existing law.


•	The Company has not recorded current or deferred taxes with respect to the international provisions since it does not expect to have inclusions in U.S. taxable income for certain earnings of foreign subsidiaries in future years.

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Note B. Earnings (Loss) Per Share

Earnings (loss) 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 nine months ended September 30, 2018, approximately 900 thousand and 925 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, approximately 1 thousand and 3 thousand potential shares attributable to exercises or conversions into common stock 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 nine months ended September 30, 2017, approximately 907 thousand and 916 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were included in the calculation of diluted earnings per share. For those same periods, less than 1 thousand and approximately 4 thousand potential shares attributable to exercises or conversions into common stock under stock-based employee compensation plans were not included in the calculation of diluted earnings per share, because the effect would have been antidilutive.

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Note C. Investments

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Fixed maturity securities	$	449		$	455		$	1,339		$	1,367
Equity securities	10			1			32			4
Limited partnership investments	23			51			93			157
Mortgage loans	11			9			36			24
Short term investments	6			4			18			10
Trading portfolio	1			3			6			9
Other	1			1			4			2
Gross investment income	501			524			1,528			1,573
Investment expense	(14		)	(15		)	(45		)	(44		)
Net investment income	$	487		$	509		$	1,483		$	1,529

During the three and nine months ended September 30, 2018, Net investment income was reduced by a $2 million loss due to the change in fair value of common stock still held as of September 30, 2018.

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	42		$	34		$	148		$	139
Gross realized losses	(32		)	(18		)	(116		)	(47		)
Net realized investment gains (losses) on fixed maturity securities	10			16			32			92
Equity securities	2			—			(23		)	—
Derivatives	1			(1		)	10			(3		)
Short term investments and other	1			(39		)	6			(27		)
Net realized investment gains (losses)	$	14		$	(24	)	$	25		$	62

During the three and nine months ended September 30, 2018, $2 million of Net realized investment gains and $23 million of Net realized investment losses were recognized due to the change in fair value of non-redeemable preferred stock still held as of September 30, 2018. Net realized investment gains (losses) for the three and nine months ended September 30, 2017 included a $42 million loss related to the redemption of the Company's $350 million senior notes due November 2019.

The components of OTTI losses recognized in earnings by asset type are presented in the following table.



Periods ended September 30	Three Months				Nine Months
(In millions)	2018		2017		2018		2017
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	1	$	4	$	6	$	8
Asset-backed	2		1		3		1
OTTI losses recognized in earnings	$	3	$	5	$	9	$	9

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



September 30, 2018 ⁽¹⁾	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	$	18,348	$	887	$	215	$	19,020	$	—
States, municipalities and political subdivisions	10,171		994		20		11,145		—
Asset-backed:
Residential mortgage-backed	5,024		62		115		4,971		(24		)
Commercial mortgage-backed	2,165		23		36		2,152		—
Other asset-backed	1,732		6		9		1,729		—
Total asset-backed	8,921		91		160		8,852		(24		)
U.S. Treasury and obligations of government-sponsored enterprises	145		2		2		145		—
Foreign government	457		4		6		455		—
Redeemable preferred stock	9		1		—		10		—
Total fixed maturity securities available-for-sale	38,051		1,979		403		39,627		$	(24	)
Total fixed maturity securities trading	1						1
Total fixed maturity securities	$	38,052	$	1,979	$	403	$	39,628



December 31, 2017	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	$	17,210	$	1,625	$	28	$	18,807	$	—
States, municipalities and political subdivisions	12,478		1,551		2		14,027		(11		)
Asset-backed:
Residential mortgage-backed	5,043		109		32		5,120		(27		)
Commercial mortgage-backed	1,840		46		14		1,872		—
Other asset-backed	1,083		16		5		1,094		—
Total asset-backed	7,966		171		51		8,086		(27		)
U.S. Treasury and obligations of government-sponsored enterprises	111		2		4		109		—
Foreign government	437		9		2		444		—
Redeemable preferred stock	10		1		—		11		—
Total fixed maturity securities available-for-sale	38,212		3,359		87		41,484		$	(38	)
Total fixed maturity securities trading	3						3
Equity securities available-for-sale:
Common stock	21		7		1		27
Preferred stock	638		31		1		668
Total equity securities available-for-sale	659		38		2		695
Total fixed maturity and equity securities	$	38,874	$	3,397	$	89	$	42,182


(1)	As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The change in fair value of equity securities is now recognized through the income statement. See Note A to the Condensed Consolidated Financial Statements for additional information.

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The net unrealized gains on investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group segment would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments). As of September 30, 2018 and December 31, 2017, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,115 million and $1,411 million.

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The following tables present the estimated fair value and gross unrealized losses of 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.



	Less than 12 Months				12 Months or Longer				Total
September 30, 2018 ⁽¹⁾	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	$	7,546	$	197	$	342	$	18	$	7,888	$	215
States, municipalities and political subdivisions	807		19		2		1		809		20
Asset-backed:
Residential mortgage-backed	3,409		89		501		26		3,910		115
Commercial mortgage-backed	968		15		322		21		1,290		36
Other asset-backed	953		9		45		—		998		9
Total asset-backed	5,330		113		868		47		6,198		160
U.S. Treasury and obligations of government-sponsored enterprises	35		—		42		2		77		2
Foreign government	188		4		64		2		252		6
Total	$	13,906	$	333	$	1,318	$	70	$	15,224	$	403



	Less than 12 Months				12 Months or Longer				Total
December 31, 2017	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	$	1,354	$	21	$	168	$	7	$	1,522	$	28
States, municipalities and political subdivisions	72		1		85		1		157		2
Asset-backed:
Residential mortgage-backed	1,228		5		947		27		2,175		32
Commercial mortgage-backed	403		4		212		10		615		14
Other asset-backed	248		3		18		2		266		5
Total asset-backed	1,879		12		1,177		39		3,056		51
U.S. Treasury and obligations of government-sponsored enterprises	49		2		21		2		70		4
Foreign government	166		2		4		—		170		2
Total fixed maturity securities available-for-sale	3,520		38		1,455		49		4,975		87
Equity securities available-for-sale:
Common stock	7		1		—		—		7		1
Preferred stock	93		1		—		—		93		1
Total equity securities available-for-sale	100		2		—		—		100		2
Total	$	3,620	$	40	$	1,455	$	49	$	5,075	$	89


(1)	As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The change in fair value of equity securities is now recognized through the income statement. See Note A to the Condensed Consolidated Financial Statements for additional information.

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Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2018 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of September 30, 2018.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of September 30, 2018 and 2017 and for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Beginning balance of credit losses on fixed maturity securities	$	21		$	30		$	27		$	36
Reductions for securities sold during the period	(2		)	(2		)	(8		)	(8		)
Ending balance of credit losses on fixed maturity securities	$	19		$	28		$	19		$	28

Contractual Maturity

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



	September 30, 2018				December 31, 2017
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,457	$	1,473	$	1,135	$	1,157
Due after one year through five years	8,017		8,197		8,165		8,501
Due after five years through ten years	16,453		16,475		16,060		16,718
Due after ten years	12,124		13,482		12,852		15,108
Total	$	38,051	$	39,627	$	38,212	$	41,484

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

Derivative Financial Instruments

The Company holds an embedded derivative on a funds withheld liability with a notional value of $174 million and $167 million as of September 30, 2018 and December 31, 2017 and a fair value of $6 million and $(3) million as of September 30, 2018 and December 31, 2017. The embedded derivative on the funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Condensed Consolidated Balance Sheets.

Investment Commitments

As of September 30, 2018, the Company had committed approximately $605 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

As of September 30, 2018, the Company had mortgage loan commitments of $16 million representing signed loan applications received and accepted.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. Purchases and sales of privately placed debt securities are recorded once funded. As of September 30, 2018, the Company had commitments to purchase or fund additional amounts of $282 million and sell $87 million under the terms of such securities.

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Note D. Fair Value

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

Level 1 - Quoted prices for identical instruments in active markets.

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

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

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

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

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Assets and Liabilities Measured at Fair Value

Assets and liabilities measured at fair value on a recurring basis are presented in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.



September 30, 2018								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 bonds and other	$	183	$	19,260		$	188	$	19,631
States, municipalities and political subdivisions	—		11,145			—		11,145
Asset-backed	—		8,554			298		8,852
Total fixed maturity securities	183		38,959			486		39,628
Equity securities:
Common stock	101		—			4		105
Non-redeemable preferred stock	51		625			14		690
Total equity securities	152		625			18		795
Short term and other	252		931			—		1,183
Total assets	$	587	$	40,515		$	504	$	41,606
Liabilities
Other liabilities	$	—	$	(6	)	$	—	$	(6	)
Total liabilities	$	—	$	(6	)	$	—	$	(6	)



December 31, 2017							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 bonds and other	$	128	$	19,148	$	98	$	19,374
States, municipalities and political subdivisions	—		14,026		1		14,027
Asset-backed	—		7,751		335		8,086
Total fixed maturity securities	128		40,925		434		41,487
Equity securities:
Common stock	23		—		4		27
Non-redeemable preferred stock	68		584		16		668
Total equity securities	91		584		20		695
Short term and other	396		958		—		1,354
Total assets	$	615	$	42,467	$	454	$	43,536
Liabilities
Other liabilities	$	—	$	3	$	—	$	3
Total liabilities	$	—	$	3	$	—	$	3

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The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).



Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions			Asset-backed			Equity securities		Derivative financial instruments		Total
Balance as of July 1, 2018	$	94		$	1		$	273		$	17	$	—	$	385
Total realized and unrealized investment gains (losses):
Reported in Net realized investment gains (losses)	—			—			(2		)	1		—		(1		)
Reported in Net investment income	—			—			—			—		—		—
Reported in Other comprehensive income	—			—			—			—		—		—
Total realized and unrealized investment gains (losses)	—			—			(2		)	1		—		(1		)
Purchases	67			—			55			—		—		122
Sales	—			—			—			—		—		—
Settlements	(3		)	(1		)	(25		)	—		—		(29		)
Transfers into Level 3	30			—			29			—		—		59
Transfers out of Level 3	—			—			(32		)	—		—		(32		)
Balance as of September 30, 2018	$	188		$	—		$	298		$	18	$	—	$	504
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Net income (loss)	$	—		$	—		$	(2	)	$	1	$	—	$	(1	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Other Comprehensive Income	—			—			1			—		—		1



Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities		Derivative financial instruments		Life settlement contracts			Total
Balance as of July 1, 2017	$	100		$	1	$	218		$	19	$	—	$	1		$	339
Total realized and unrealized investment gains (losses):
Reported in Net realized investment gains (losses)	1			—		—			—		—		—			1
Reported in Other revenues	—			—		—			—		—		—			—
Reported in Other comprehensive income	1			—		1			—		—		—			2
Total realized and unrealized investment gains (losses)	2			—		1			—		—		—			3
Purchases	13			—		39			—		—		—			52
Sales	—			—		—			—		—		(1		)	(1		)
Settlements	(11		)	—		(13		)	—		—		—			(24		)
Transfers into Level 3	15			—		101			—		—		—			116
Transfers out of Level 3	—			—		—			—		—		—			—
Balance as of September 30, 2017	$	119		$	1	$	346		$	19	$	—	$	—		$	485
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)	$	—		$	—	$	—		$	—	$	—	$	—		$	—

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Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions			Asset-backed			Equity securities			Derivative financial instruments		Total
Balance as of January 1, 2018	$	98		$	1		$	335		$	20		$	—	$	454
Total realized and unrealized investment gains (losses):
Reported in Net realized investment gains (losses)	(1		)	—			5			(2		)	—		2
Reported in Net investment income	—			—			—			—			—		—
Reported in Other comprehensive income	(1		)	—			(6		)	—			—		(7		)
Total realized and unrealized investment gains (losses)	(2		)	—			(1		)	(2		)	—		(5		)
Purchases	69			—			126			—			—		195
Sales	(5		)	—			(72		)	—			—		(77		)
Settlements	(7		)	(1		)	(37		)	—			—		(45		)
Transfers into Level 3	35			—			42			—			—		77
Transfers out of Level 3	—			—			(95		)	—			—		(95		)
Balance as of September 30, 2018	$	188		$	—		$	298		$	18		$	—	$	504
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Net income (loss)	$	—		$	—		$	(2	)	$	(2	)	$	—	$	(4	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Other Comprehensive Income	(2		)	—			(2		)	—			—		(4		)



Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities			Derivative financial instruments			Life settlement contracts			Total
Balance as of January 1, 2017	$	130		$	1	$	199		$	19		$	—		$	58		$	407
Total realized and unrealized investment gains (losses):
Reported in Net realized investment gains (losses)	1			—		1			—			1			—			3
Reported in Other revenues	—			—		—			—			—			6			6
Reported in Other comprehensive income	2			—		4			2			—			—			8
Total realized and unrealized investment gains (losses)	3			—		5			2			1			6			17
Purchases	18			—		90			1			—			—			109
Sales	(1		)	—		—			(3		)	(1		)	(59		)	(64		)
Settlements	(36		)	—		(26		)	—			—			(5		)	(67		)
Transfers into Level 3	15			—		153			—			—			—			168
Transfers out of Level 3	(10		)	—		(75		)	—			—			—			(85		)
Balance as of September 30, 2017	$	119		$	1	$	346		$	19		$	—		$	—		$	485
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)	$	—		$	—	$	—		$	—		$	—		$	—		$	—

Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume.

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Valuation Methodologies and Inputs

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

Fixed Maturity Securities

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

Equity Securities

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

Short Term and Other Invested Assets

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.

As of September 30, 2018 and December 31, 2017, there were approximately $45 million and $39 million of overseas deposits within other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.

Life Settlement Contracts

The Company sold its life settlement contracts to a third party in 2017. The valuation of the life settlement contracts was based on the terms of sale. The contracts were classified as Level 3 as there was not an active market for life settlement contracts.

Derivative Financial Investments

Level 2 investments primarily include the embedded derivative on the funds withheld liability. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs.

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Significant Unobservable Inputs

The following tables present 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 tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company. The weighted average rate is calculated based on fair value.



September 30, 2018	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	198	Discounted cash flow	Credit spread	1% - 12% (2%)



December 31, 2017	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Fixed maturity securities	$	136	Discounted cash flow	Credit spread	1% - 12% (3%)

For fixed maturity securities, an increase to the credit spread assumptions 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 assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are presented in the following tables.



September 30, 2018	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	868	$	—	$	—	$	847	$	847
Note receivable	35		—		—		35		35
Liabilities
Long term debt	$	2,680	$	—	$	2,734	$	—	$	2,734



December 31, 2017	Carrying Amount		Estimated Fair Value
(In millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	839	$	—	$	—	$	844	$	844
Note receivable	46		—		—		46		46
Liabilities
Short term debt	$	150	$	—	$	150	$	—	$	150
Long term debt	2,708		—		2,896		—		2,896

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

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.

The fair value of the note receivable was based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar notes, adjusted for specific credit risk. The note receivable is included within Other assets on the Condensed Consolidated Balance Sheets.

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.

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Note E. 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 incurred but not reported (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 claim reserving trends and 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 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 $46 million and $106 million for the three and nine months ended September 30, 2018. Net catastrophe losses for the three and nine months ended September 30, 2018 included $35 million related to Hurricane Florence. The remaining catastrophe losses in 2018 resulted primarily from U.S. weather-related events. The Company reported catastrophe losses, net of reinsurance, of $269 million and $342 million for the three and nine months ended September 30, 2017. Net catastrophe losses for the three and nine months ended September 30, 2017 included $149 million related to Hurricane Harvey, $95 million related to Hurricane Irma and $20 million related to Hurricane Maria and also required reinsurance reinstatement premium of $6 million. The remaining catastrophe losses in 2017 resulted primarily from U.S. weather-related events.

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Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward

The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group segment.



For the nine months ended September 30
(In millions)	2018			2017
Reserves, beginning of year:
Gross	$	22,004		$	22,343
Ceded	3,934			4,094
Net reserves, beginning of year	18,070			18,249
Net incurred claim and claim adjustment expenses:
Provision for insured events of current year	3,866			3,949
Decrease in provision for insured events of prior years	(173		)	(284		)
Amortization of discount	136			138
Total net incurred ⁽¹⁾	3,829			3,803
Net payments attributable to:
Current year events	(658		)	(560		)
Prior year events	(3,415		)	(3,401		)
Total net payments	(4,073		)	(3,961		)
Foreign currency translation adjustment and other	(80		)	110
Net reserves, end of period	17,746			18,201
Ceded reserves, end of period	3,858			4,008
Gross reserves, end of period	$	21,604		$	22,209


(1)	Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits which are not reflected in the table above.

Net Prior Year Development

Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Pretax (favorable) unfavorable development:
Specialty	$	(53	)	$	(99	)	$	(127	)	$	(134	)
Commercial	(5		)	(17		)	(27		)	(94		)
International	(2		)	1			(4		)	1
Corporate & Other	(2		)	—			(2		)	—
Total pretax (favorable) unfavorable development	$	(62	)	$	(115	)	$	(160	)	$	(227	)

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Specialty

The following table presents further detail of the development recorded for the Specialty segment.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Pretax (favorable) unfavorable development:
Medical Professional Liability	$	15		$	8		$	38		$	30
Other Professional Liability and Management Liability	(45		)	(19		)	(113		)	(88		)
Surety	(20		)	(82		)	(50		)	(82		)
Warranty	(1		)	(1		)	(7		)	5
Other	(2		)	(5		)	5			1
Total pretax (favorable) unfavorable development	$	(53	)	$	(99	)	$	(127	)	$	(134	)

Three Months

2018

Unfavorable development in medical professional liability was primarily driven by higher than expected frequency and severity in aging services in accident years 2014 through 2017.

Favorable development in other professional liability and management liability was primarily driven by favorable outcomes on individual claims in accident years 2013 and prior in financial institutions.

Favorable development in surety was due to continued lower than expected loss emergence for accident years 2017 and prior.

2017

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2012 through 2015, primarily for professional liability products.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.

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Nine Months

2018

Unfavorable development for medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in our hospitals business and higher than expected frequency and severity in aging services in accident years 2014 through 2017.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency for accident years 2013 through 2017 related to financial institutions and professional liability errors and omissions (E&O), favorable severity for accident years 2012 and prior related to professional liability E&O, and favorable outcomes on individual claims in financial institutions in accident years 2013 and prior.

Favorable development for surety was due to lower than expected loss emergence for accident years 2017 and prior.

2017

Unfavorable development in medical professional liability was primarily due to continued higher than expected frequency in aging services.

Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2012 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.

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Commercial

The following table presents further detail of the development recorded for the Commercial segment.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Pretax (favorable) unfavorable development:
Commercial Auto	$	1		$	(12	)	$	—		$	(37	)
General Liability	(5		)	(2		)	13			(19		)
Workers' Compensation	(2		)	9			(14		)	(38		)
Property and Other	1			(12		)	(26		)	—
Total pretax (favorable) unfavorable development	$	(5	)	$	(17	)	$	(27	)	$	(94	)

Three Months

2017

Favorable development in commercial auto was primarily due to lower than expected severity in accident years 2015 and 2016, as well as a large favorable recovery on a claim in accident year 2012.

Unfavorable development in workers' compensation reflects the recognition of loss estimates related to favorable premium development as well as an adverse arbitration ruling related to reinsurance recoverables from older accident years.

Nine Months

2018

Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015.

Favorable development in property and other was driven by lower than expected claim severity in catastrophes in accident year 2017.

2017

Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2016, as well as a large favorable recovery on a claim in accident year 2012.

Favorable development for general liability was due to lower than expected severity in life sciences.

Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs. This was partially offset by unfavorable development related to an adverse arbitration ruling on reinsurance recoverables from older accident years as well as the recognition of loss estimates associated with favorable premium development.

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International

The following table presents further detail of the development recorded for the International segment.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Pretax (favorable) unfavorable development:
Casualty	$	(5	)	$	6		$	(11	)	$	7
Property	1			(7		)	13			(18		)
Energy and Marine	(5		)	(6		)	(10		)	(9		)
Specialty	8			5			17			20
Healthcare and Technology	(1		)	3			(13		)	1
Total pretax (favorable) unfavorable development	$	(2	)	$	1		$	(4	)	$	1

Nine Months

2018

Favorable development in casualty was primarily driven by better than expected frequency in the liability portion of the package business in Canada and general liability in Europe.

Unfavorable development in property was primarily driven by higher than expected severity in Canada and higher than expected frequency in CNA Hardy, both in accident year 2017.

Favorable development in energy and marine was primarily driven by better than expected large loss frequency in the energy book in recent accident years.

Unfavorable development in specialty was driven by increased severity in accident year 2017 related to professional indemnity.

Favorable development in healthcare and technology was primarily driven by lower than expected frequency in accident years 2015 and prior related to healthcare in Europe.

2017

Favorable development for property was due to better than expected frequency in accident years 2014 through 2016.

Unfavorable development for specialty was primarily due to higher than expected severity in accident year 2015 arising from the management liability business, partially offset by favorable development in accident years 2014 and prior. Additional unfavorable development was related to adverse large claims experience in the CNA Hardy political risks portfolio, relating largely to accident year 2016.

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Asbestos and Environmental Pollution (A&EP) Reserves

In 2010, Continental Casualty Company (CCC) together with several of the Company’s other insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.

The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Additional amounts ceded under LPT:
Net A&EP adverse development before consideration of LPT	$	—		$	—		$	113		$	60
Provision for uncollectible third-party reinsurance on A&EP	—			—			(16		)	—
Total additional amounts ceded under LPT	—			—			97			60
Retroactive reinsurance benefit recognized	(12		)	(17		)	(84		)	(60		)
Pretax impact of deferred retroactive reinsurance	$	(12	)	$	(17	)	$	13		$	—

Based upon the Company's annual A&EP reserve review, net unfavorable prior year development of $113 million and $60 million was recognized before consideration of cessions to the LPT for the nine months ended September 30, 2018 and 2017. Additionally, in 2018, the Company released a portion of its provision for uncollectible third party reinsurance. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos environmental accounts and paid losses on assumed reinsurance exposures. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The Company expects to complete another A&EP reserve review in the fourth quarter of 2018 and intends to maintain that timing going forward annually.

As of September 30, 2018 and December 31, 2017, the cumulative amounts ceded under the LPT were $3.0 billion and $2.9 billion. The unrecognized deferred retroactive reinsurance benefit was $339 million and $326 million as of September 30, 2018 and December 31, 2017.

NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $3.2 billion and $3.1 billion as of September 30, 2018 and December 31, 2017. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the Company’s A&EP claims.

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Note F. Legal Proceedings, Contingencies and Guarantees

Small Business Premium Rate Adjustment

In 2016 and 2017, the Company identified rating errors related to its multi-peril package product and workers' compensation policies within its Small Business unit and determined that it would voluntarily issue premium refunds along with interest on affected policies. After the rating errors were identified, written and earned premium were reported net of any impact from the premium rate adjustments.

The policyholder refunds for the multi-peril package product were issued in the third quarter of 2017. The policyholder refunds for workers’ compensation policies were largely completed in the third quarter of 2018.

For the nine months ended September 30, 2017, earned premium was reduced by $37 million. Earned premium increased by $6 million for the three and nine months ended September 30, 2018 as a result of a change in estimate of the refund payments to policyholders. Additionally, Interest expense increased for interest due to policyholders on the premium rate adjustments by $1 million and $7 million for the three and nine months ended September 30, 2017 and $1 million for the nine months ended September 30, 2018.

Other Litigation

The Company is a party to other routine litigation incidental to its business, which, based on the facts and circumstances currently known, is not material to the Company's results of operations or financial position.

Guarantees

As of September 30, 2018 and December 31, 2017, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements and management does not believe that any future indemnity claims will be significantly greater than the amounts recorded.

In the course of selling business entities and assets to third parties, the Company agreed to guarantee the performance of certain obligations of previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third-party loans may include provisions that survive indefinitely. As of September 30, 2018, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to quantifiable indemnification agreements was $252 million. In certain cases, should the Company be required to make payments under any such guarantee, it would have the right to seek reimbursement from an affiliate of a previously owned subsidiary.

In addition, the Company has agreed to provide indemnification to third-party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 2018, 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. Certain provisions of the indemnification agreements survive indefinitely, while others survive until the applicable statutes of limitation expire, or until the agreed-upon contract terms expire.

The Company also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of September 30, 2018, the potential amount of future payments the Company could be required to pay under these guarantees was approximately $1.8 billion, which will be paid over the lifetime of the annuitants. The Company does not believe any payment is likely under these guarantees, as the Company is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

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Note G. Benefit Plans

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Net periodic pension cost (benefit)
Service cost	$	—		$	—		$	—		$	—
Non-service cost (benefit):
Interest cost on projected benefit obligation	23			25			70			77
Expected return on plan assets	(40		)	(38		)	(120		)	(116		)
Amortization of net actuarial loss	10			9			28			27
Settlement loss	—			6			5			8
Total non-service cost (benefit)	(7		)	2			(17		)	(4		)
Total net periodic pension cost (benefit)	$	(7	)	$	2		$	(17	)	$	(4	)

For the three and nine months ended September 30, 2018, the Company recognized $3 million and $6 million of non-service benefit in Insurance claims and policyholders' benefits and $4 million and $11 million of non-service benefit in Other operating expenses.

For the three and nine months ended September 30, 2017, the Company recognized $1 million of non-service cost and $1 million of non-service benefit in Insurance claims and policyholders' benefits and $1 million of non-service cost and $3 million of non-service benefit in Other operating expenses.

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Note H. Accumulated Other Comprehensive Income (Loss) by Component

The tables below display the changes in Accumulated other comprehensive income (loss) by component.



(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 as of July 1, 2018	$	20		$	271		$	(758	)	$	(138	)	$	(605	)
Other comprehensive income (loss) before reclassifications	(1		)	(148		)	—			—			(149		)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(2), $1, $- and $(1)	—			10			(7		)	—			3
Other comprehensive income (loss) net of tax (expense) benefit of $-, $42, $(1), $- and $41	(1		)	(158		)	7			—			(152		)
Balance as of September 30, 2018	$	19		$	113		$	(751	)	$	(138	)	$	(757	)



(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 as of July 1, 2017	$	26	$	786	$	(635	)	$	(145	)	$	32
Other comprehensive income (loss) before reclassifications	1		35		—			41			77
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(4), $5, $-, and $1	—		12		(10		)	—			2
Other comprehensive income (loss) net of tax (expense) benefit of $-, $(16), $(5), $- and $(21)	1		23		10			41			75
Balance as of September 30, 2017	$	27	$	809	$	(625	)	$	(104	)	$	107

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(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 as of January 1, 2018, as previously reported	$	25		$	750		$	(645	)	$	(98	)	$	32
Cumulative effect adjustment from accounting change for adoption of ASU 2018-02⁽¹⁾	5			137			(130		)	—			12
Cumulative effect adjustment from accounting change for adoption of ASU 2016-01⁽¹⁾ net of tax (expense) benefit of $-, $8, $-, $- and $8	—			(28		)	—			—			(28		)
Balance as of January 1, 2018, as adjusted	30			859			(775		)	(98		)	16
Other comprehensive income (loss) before reclassifications	(12		)	(718		)	—			(40		)	(770		)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(7), $6, $- and $(1)	(1		)	28			(24		)	—			3
Other comprehensive income (loss) net of tax (expense) benefit of $3, $197, $(6), $- and $194	(11		)	(746		)	24			(40		)	(773		)
Balance as of September 30, 2018	$	19		$	113		$	(751	)	$	(138	)	$	(757	)


(1)	See Note A to the Condensed Consolidated Financial Statements for additional information.



(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 as of January 1, 2017	$	30		$	642	$	(647	)	$	(198	)	$	(173	)
Other comprehensive income (loss) before reclassifications	—			228		—			94			322
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(1), $(28), $12, $- and $(17)	3			61		(22		)	—			42
Other comprehensive income (loss) net of tax (expense) benefit of $1, $(102), $(12), $- and $(113)	(3		)	167		22			94			280
Balance as of September 30, 2017	$	27		$	809	$	(625	)	$	(104	)	$	107

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 and Insurance claims and policyholders' benefits

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Note I. Business Segments

The Company's property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International. These three segments are collectively referred to as Property & Casualty Operations. The Company's operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.

Effective January 1, 2018, management changed the segment presentation of the life sciences business and technology and media related errors and omissions business within the Specialty and Commercial business segments. The life sciences business moved from the Specialty business segment to the Commercial business segment and the technology and media related errors and omissions business moved from the Commercial business segment to the Specialty business segment. The new management responsibility for these businesses better aligns with line of business underwriting expertise and the manner in which the products are sold. Prior period information has been conformed to the new segment presentation.

The accounting policies of the segments are the same as those described in Note A to the Consolidated Financial Statements within CNAF's Annual Report on Form 10-K for the year ended December 31, 2017. 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 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 have 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.

The performance of the Company's insurance operations is monitored by management through core income (loss), which is derived from certain income statement amounts. 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.

Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net realized investment gains (losses), ii) income or loss from discontinued operations, iii) any cumulative effects of changes in accounting guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of core income (loss) excludes net realized investment gains or losses because net realized investment gains or losses 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.

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The Company's results of operations and selected balance sheet items by segment are presented in the following tables.



Three months ended September 30, 2018	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	684		$	782		$	255		$	133		$	—		$	(1	)	$	1,853
Net investment income	124			144			14			200			5			—			487
Non-insurance warranty revenue	258			—			—			—			—			—			258
Other revenues	—			8			1			(1		)	2			—			10
Total operating revenues	1,066			934			270			332			7			(1		)	2,608
Claims, benefits and expenses
Net incurred claims and benefits	373			496			172			277			(12		)	—			1,306
Policyholders’ dividends	1			5			—			—			—			—			6
Amortization of deferred acquisition costs	153			127			57			—			—			—			337
Non-insurance warranty expense	235			—			—			—			—			—			235
Other insurance related expenses	68			133			36			31			(1		)	(1		)	266
Other expenses	11			10			3			2			44			—			70
Total claims, benefits and expenses	841			771			268			310			31			(1		)	2,220
Core income (loss) before income tax	225			163			2			22			(24		)	—			388
Income tax (expense) benefit on core income (loss)	(48		)	(36		)	(1		)	10			4			—			(71		)
Core income (loss)	$	177		$	127		$	1		$	32		$	(20	)	$	—		317
Net realized investment gains (losses)																			14
Income tax (expense) benefit on net realized investment gains (losses)																			(1		)
Net realized investment gains (losses), after tax																			13
Net deferred tax asset remeasurement⁽¹⁾																			6
Net income																			$	336


(1)	The net deferred tax asset remeasurement as of December 31, 2017 was updated based on the filed 2017 tax return resulting in a $6 million benefit for the three months ended September 30, 2018.

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Three months ended September 30, 2017	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations		Total
Operating revenues
Net earned premiums	$	692		$	752		$	226		$	136		$	—		$	—	$	1,806
Net investment income	129			166			13			195			6			—		509
Non-insurance warranty revenue	99			—			—			—			—			—		99
Other revenues	1			6			1			—			—			—		8
Total operating revenues	921			924			240			331			6			—		2,422
Claims, benefits and expenses
Net incurred claims and benefits	358			610			200			322			(15		)	—		1,475
Policyholders’ dividends	1			4			—			—			—			—		5
Amortization of deferred acquisition costs	151			122			36			—			—			—		309
Non-insurance warranty expense	74			—			—			—			—			—		74
Other insurance related expenses	65			136			48			32			—			—		281
Other expenses	11			6			(4		)	2			52			—		67
Total claims, benefits and expenses	660			878			280			356			37			—		2,211
Core income (loss) before income tax	261			46			(40		)	(25		)	(31		)	—		211
Income tax (expense) benefit on core income (loss)	(88		)	(14		)	2			35			13			—		(52		)
Core income (loss)	$	173		$	32		$	(38	)	$	10		$	(18	)	$	—	159
Net realized investment gains (losses)																		(24		)
Income tax (expense) benefit on net realized investment gains (losses)																		9
Net realized investment gains (losses), after tax																		(15		)
Net income																		$	144

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Nine months ended September 30, 2018	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	2,039		$	2,278		$	739		$	398		$	—		$	(1	)	$	5,453
Net investment income	376			450			43			598			16			—			1,483
Non-insurance warranty revenue	744			—			—			—			—			—			744
Other revenues	1			24			—			—			2			(1		)	26
Total operating revenues	3,160			2,752			782			996			18			(2		)	7,706
Claims, benefits and expenses
Net incurred claims and benefits	1,124			1,434			480			907			15			—			3,960
Policyholders’ dividends	3			15			—			—			—			—			18
Amortization of deferred acquisition costs	447			375			170			—			—			—			992
Non-insurance warranty expense	676			—			—			—			—			—			676
Other insurance related expenses	202			386			102			91			(1		)	(1		)	779
Other expenses	34			31			6			5			153			(1		)	228
Total claims, benefits and expenses	2,486			2,241			758			1,003			167			(2		)	6,653
Core income (loss) before income tax	674			511			24			(7		)	(149		)	—			1,053
Income tax (expense) benefit on core income (loss)	(143		)	(108		)	(7		)	43			30			—			(185		)
Core income (loss)	$	531		$	403		$	17		$	36		$	(119	)	$	—		868
Net realized investment gains (losses)																			25
Income tax (expense) benefit on net realized investment gains (losses)																			(2		)
Net realized investment gains (losses), after tax																			23
Net deferred tax asset remeasurement ⁽¹⁾																			6
Net income																			$	897


(1)	The net deferred tax asset remeasurement as of December 31, 2017 was updated based on the filed 2017 tax return resulting in a $6 million benefit for the nine months ended September 30, 2018.



September 30, 2018
(In millions)
Reinsurance receivables	$	685	$	729	$	239	$	427	$	2,173	$	—	$	4,253
Insurance receivables	942		1,189		259		10		—		—		2,400
Deferred acquisition costs	315		240		99		—		—		—		654
Goodwill	117		—		30		—		—		—		147
Insurance reserves
Claim and claim adjustment expenses	5,509		8,584		1,689		3,551		2,271		—		21,604
Unearned premiums	2,129		1,520		510		130		—		—		4,289
Future policy benefits	—		—		—		10,605		—		—		10,605

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Nine months ended September 30, 2017	Specialty			Commercial			International			Life & Group			Corporate & Other
(In millions)																Eliminations			Total
Operating revenues
Net earned premiums	$	2,024		$	2,129		$	629		$	404		$	—		$	(1	)	$	5,185
Net investment income	394			495			38			587			15			—			1,529
Non-insurance warranty revenue	290			—			—			—			—			—			290
Other revenues	2			24			—			1			1			—			28
Total operating revenues	2,710			2,648			667			992			16			(1		)	7,032
Claims, benefits and expenses
Net incurred claims and benefits	1,152			1,459			444			980			4			—			4,039
Policyholders’ dividends	3			11			—			—			—			—			14
Amortization of deferred acquisition costs	440			359			127			—			—			—			926
Non-insurance warranty expense	216			—			—			—			—			—			216
Other insurance related expenses	203			393			106			96			(1		)	(1		)	796
Other expenses	32			31			(11		)	5			146			—			203
Total claims, benefits and expenses	2,046			2,253			666			1,081			149			(1		)	6,194
Core income (loss) before income tax	664			395			1			(89		)	(133		)	—			838
Income tax (expense) benefit on core income (loss)	(223		)	(132		)	(9		)	108			51			—			(205		)
Core income (loss)	$	441		$	263		$	(8	)	$	19		$	(82	)	$	—		633
Net realized investment gains (losses)																			62
Income tax (expense) benefit on net realized investment gains (losses)																			(19		)
Net realized investment gains (losses), after tax																			43
Net income																			$	676



December 31, 2017
(In millions)
Reinsurance receivables	$	671	$	654	$	212	$	438	$	2,315	$	—	$	4,290
Insurance receivables	969		1,103		254		8		2		—		2,336
Deferred acquisition costs	318		223		93		—		—		—		634
Goodwill	117		—		31		—		—		—		148
Insurance reserves
Claim and claim adjustment expenses	5,669		8,764		1,636		3,499		2,436		—		22,004
Unearned premiums	2,020		1,409		472		128		—		—		4,029
Future policy benefits	—		—		—		11,179		—		—		11,179

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The following table presents operating revenue by line of business for each reportable segment.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Specialty
Management & Professional Liability	$	616		$	638		$	1,867		$	1,896
Surety	153			143			427			403
Warranty & Alternative Risks⁽¹⁾	297			140			866			411
Specialty revenues	1,066			921			3,160			2,710
Commercial
Middle Market	530			513			1,555			1,450
Small Business	125			131			364			353
Other Commercial Insurance	279			280			833			845
Commercial revenues	934			924			2,752			2,648
International
Canada	66			61			187			164
CNA Europe	94			87			273			238
CNA Hardy	110			92			322			265
International revenues	270			240			782			667
Life & Group revenues	332			331			996			992
Corporate & Other revenues	7			6			18			16
Eliminations	(1		)	—			(2		)	(1		)
Total operating revenues	2,608			2,422			7,706			7,032
Net realized investment gains (losses)	14			(24		)	25			62
Total revenues	$	2,622		$	2,398		$	7,731		$	7,094


(1)	As of January 1, 2018, the Company adopted ASU 2014-09 Revenue Recognition (Topic 606): Revenue from Contracts with Customers. See Note A to the Condensed Consolidated Financial Statements for additional information.

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Note J. Non-Insurance Revenues from Contracts with Customers

Non-Insurance revenue is recognized when obligations under the terms of a contract with a customer are satisfied; generally this occurs over time as obligations are fulfilled. Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing services.

Deferred Non-Insurance Warranty Revenue

Non-insurance warranty revenue is primarily generated from separately-priced service contracts that provide mechanical breakdown and other coverages to vehicle or consumer goods owners. The warranty contracts generally provide coverage from 1 month to 10 years. For warranty products where the Company acts as the principal in the transaction, Non-insurance warranty revenues are reported on a gross basis, with amounts billed to customers reported as Non-insurance warranty revenue and commissions paid to agents reported as Non-insurance warranty expense. Non-insurance warranty revenue is reported net of any premiums related to contractual liability coverage issued by the Company's insurance operations. Additionally, the Company provides warranty administration services for dealer and manufacturer obligor warranty products, which include limited warranties and guaranteed automobile protection waivers.

The Company recognizes Non-insurance warranty revenues over the service period in proportion to the actuarially determined expected claims emergence pattern. Customers pay in full at the inception of the warranty contract. A liability for deferred revenue is recorded when cash payments are received or due in advance of the Company's performance. The deferred revenue balance includes amounts which are refundable on a pro rata basis upon cancellation.

The Company had deferred non-insurance warranty revenue balances of $2.9 billion and $3.3 billion reported in Other liabilities as of January 1, 2018 and September 30, 2018. The increase in the deferred revenue balance for the nine months ended September 30, 2018 was primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by cancellations and revenues recognized during the period. For the three and nine months ended September 30, 2018, the Company recognized $200 million and $635 million of revenues that were included in the deferred revenue balance as of January 1, 2018. For the three and nine months ended September 30, 2018, Non-insurance warranty revenue recognized from performance obligations related to prior periods due to a change in estimate was not material. The Company expects to recognize approximately $316 million of the deferred revenue in the remainder of 2018, $891 million in 2019, $718 million in 2020, and $1.4 billion thereafter.

Cost to Obtain and Fulfill Non-Insurance Warranty Contracts with Customers

Dealers, retailers and agents earn commission for assisting the Company in obtaining non-insurance warranty contracts. Additionally, the Company utilizes a third-party to perform warranty administrator services for its consumer good warranties. These costs, which are deferred and recorded as Other assets, are amortized to Non-insurance warranty expense consistent with how the related revenue is recognized.

Losses under warranty contracts shall be recognized when it is probable that estimated future costs exceed unrecognized revenue. The Company evaluates deferred costs for recoverability including consideration of anticipated investment income. Adjustments to deferred costs, if necessary, are recorded in the current period results of operations. No adjustments were recorded for the nine months ended September 30, 2018.

As of September 30, 2018, capitalized commission costs were $2.4 billion and capitalized administrator service costs were $22 million. For the three and nine months ended September 30, 2018, the amount of amortization of capitalized costs was $173 million and $494 million and there was no impairment loss related to the costs capitalized.

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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 2017 statutory net written premiums, we are the ninth largest commercial insurer 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, 2017.

We utilize the core income (loss) financial measure to monitor our operations. Core income (loss) is calculated by excluding from net income (loss) the after-tax effects of i) net realized investment gains or losses, ii) income or loss from discontinued operations, iii) any cumulative effects of changes in accounting guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of core income (loss) excludes net realized investment gains or losses because net realized investment gains or losses 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. Management monitors core income (loss) for each business segment to assess segment performance. Presentation of consolidated core income (loss) is deemed to be a non-GAAP financial measure. See further discussion regarding how we manage our business in Note I to the Condensed Consolidated Financial Statements included under Part I, Item 1. For reconciliations of non-GAAP measures to the most comparable GAAP measures and other information, please refer herein and/or to CNA's most recent 10-K on file with the Securities and Exchange Commission.

In evaluating the results of our Specialty, Commercial and International 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. In addition we also utilize renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers.

Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development within this MD&A. These changes can be favorable or unfavorable. Net prior year loss reserve development does not include the effect of related acquisition expenses. Further information on our reserves is provided in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of the Condensed Consolidated Financial Statements 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 amount 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 Policies


•	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, equity, business, and insurer financial strength and corporate debt ratings. 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, 2017 for further information.

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CONSOLIDATED OPERATIONS

The following table includes the consolidated results of our operations including our financial measure, Core income (loss). For more detailed components of our business operations and discussion of the core income (loss) financial measure, see the segment sections within this MD&A. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Operating Revenues
Net earned premiums	$	1,853		$	1,806		$	5,453		$	5,185
Net investment income	487			509			1,483			1,529
Non-insurance warranty revenue	258			99			744			290
Other revenues	10			8			26			28
Total operating revenues	2,608			2,422			7,706			7,032
Claims, Benefits and Expenses
Net incurred claims and benefits	1,306			1,475			3,960			4,039
Policyholders' dividends	6			5			18			14
Amortization of deferred acquisition costs	337			309			992			926
Other insurance related expenses	266			281			779			796
Non-insurance warranty expense	235			74			676			216
Other expenses	70			67			228			203
Total claims, benefits and expenses	2,220			2,211			6,653			6,194
Core income before income tax	388			211			1,053			838
Income tax expense on core income	(71		)	(52		)	(185		)	(205		)
Core income	317			159			868			633
Net realized investment gains (losses)	14			(24		)	25			62
Income tax (expense) benefit on net realized investment gains (losses)	(1		)	9			(2		)	(19		)
Net realized investment gains (losses), after tax	13			(15		)	23			43
Net deferred tax asset remeasurement	6			—			6			—
Net income	$	336		$	144		$	897		$	676

Three Month Comparison

Core income increased $158 million for the three months ended September 30, 2018 as compared with the same period in 2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income for our Property & Casualty Operations increased approximately $85 million primarily due to lower net catastrophe losses partially offset by lower favorable net prior year loss reserve development and lower net investment income driven by limited partnership returns. Excluding the unfavorable effect of the Federal corporate income tax rate change which reduced the income tax benefit, core income for our Life & Group segment increased approximately $31 million while core loss for our Corporate & Other segment decreased approximately $1 million.

Pretax net catastrophe losses were $46 million and $269 million for the three months ended September 30, 2018 and 2017. Favorable net prior year loss reserve development of $62 million and $115 million was recorded in the three months ended September 30, 2018 and 2017 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison

Core income increased $235 million for the nine months ended September 30, 2018 as compared with the same period in 2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income for our Property & Casualty Operations increased approximately $92 million primarily due to lower net catastrophe losses partially offset by lower favorable net prior year loss reserve development and lower net investment income driven by limited partnership returns. Excluding the unfavorable effect of the Federal corporate income tax rate change, core income for our Life & Group segment increased approximately $54 million while core loss for our Corporate & Other segment increased approximately $16 million.

Pretax net catastrophe losses were $106 million and $342 million for the nine months ended September 30, 2018 and 2017. Favorable net prior year loss reserve development of $160 million and $227 million was recorded in the nine months ended September 30, 2018 and 2017 related to our Specialty, Commercial, International and Corporate & Other segments. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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SEGMENT RESULTS

The following discusses the results of operations for our business segments. Our property and casualty commercial insurance operations are managed and reported in three business segments: Specialty, Commercial and International, which we refer to collectively as Property & Casualty Operations. Our operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group and Corporate & Other.

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Specialty

The following table details the results of operations for Specialty.



Periods ended September 30	Three Months						Nine Months
(In millions, except ratios, rate, renewal premium change and retention)	2018			2017			2018			2017
Net written premiums	$	688		$	695		$	2,062		$	2,066
Net earned premiums	684			692			2,039			2,024
Net investment income	124			129			376			394
Core income	177			173			531			441

Other performance metrics:
Loss and loss adjustment expense ratio	54.5		%	51.7		%	55.1		%	56.9		%
Expense ratio	32.3			31.2			31.8			31.8
Dividend ratio	0.2			0.2			0.2			0.1
Combined ratio	87.0		%	83.1		%	87.1		%	88.8		%

Rate	2		%	0		%	2		%	1		%
Renewal premium change	3			1			3			3
Retention	84			90			84			89
New business	$	93		$	60		$	266		$	177

Three Month Comparison

Net written premiums for Specialty decreased $7 million for the three months ended September 30, 2018 as compared with the same period in 2017 driven by a higher level of ceded reinsurance to support growth in management liability and lower retention partially offset by higher new business and positive renewal premium change. The decrease in net earned premiums was consistent with the trend in net written premiums.

Core income increased $4 million for the three months ended September 30, 2018 as compared with the same period in 2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income decreased approximately $27 million driven by lower favorable net prior year loss reserve development partially offset by lower catastrophe losses.

The combined ratio of 87.0% increased 3.9 points for the three months ended September 30, 2018 as compared with the same period in 2017. The loss ratio increased 2.8 points primarily due to lower favorable net prior year loss reserve development partially offset by lower catastrophe losses. Net catastrophe losses were $16 million, or 2.4 points of the loss ratio, for the three months ended September 30, 2018, as compared to $35 million, or 5.0 points of the loss ratio, for the three months ended September 30, 2017. The expense ratio for the three months ended September 30, 2018 increased 1.1 points as compared with the same period in 2017 driven by higher acquisition expenses and lower net earned premiums.

Favorable net prior year loss reserve development of $53 million and $99 million was recorded for the three months ended September 30, 2018 and 2017. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison

Net written premiums for Specialty decreased $4 million for the nine months ended September 30, 2018 as compared with the same period in 2017 driven by a higher level of ceded reinsurance to support growth in management liability and lower retention partially offset by higher new business and positive renewal premium change. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income increased $90 million for the nine months ended September 30, 2018 as compared with the same period in 2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income was consistent with the prior period due to improved underwriting results offset by lower net investment income driven by limited partnership returns.

The combined ratio of 87.1% improved 1.7 points for the nine months ended September 30, 2018 as compared with the same period in 2017. The loss ratio improved 1.8 points primarily due to an improved current accident year loss ratio partially offset by lower favorable net prior year loss reserve development. Net catastrophe losses were $22 million, or 1.1 points of the loss ratio, for the nine months ended September 30, 2018, as compared to $44 million, or 2.2 points of the loss ratio, for the nine months ended September 30, 2017. The expense ratio for the nine months ended September 30, 2018 was consistent with the same period in 2017.

Favorable net prior year loss reserve development of $127 million and $134 million was recorded for the nine months ended September 30, 2018 and 2017. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves for Specialty.



(In millions)	September 30, 2018		December 31, 2017
Gross case reserves	$	1,591	$	1,742
Gross IBNR reserves	3,918		3,927
Total gross carried claim and claim adjustment expense reserves	$	5,509	$	5,669
Net case reserves	$	1,427	$	1,600
Net IBNR reserves	3,409		3,407
Total net carried claim and claim adjustment expense reserves	$	4,836	$	5,007

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Commercial

The following table details the results of operations for Commercial.



Periods ended September 30	Three Months						Nine Months
(In millions, except ratios, rate, renewal premium change and retention)	2018			2017			2018			2017
Net written premiums	$	697		$	697		$	2,339		$	2,203
Net earned premiums	782			752			2,278			2,129
Net investment income	144			166			450			495
Core income	127			32			403			263

Other performance metrics:
Loss and loss adjustment expense ratio	63.5		%	81.2		%	63.0		%	68.6		%
Expense ratio	33.2			34.2			33.3			35.3
Dividend ratio	0.7			0.5			0.7			0.5
Combined ratio	97.4		%	115.9		%	97.0		%	104.4		%

Rate	2		%	0		%	1		%	0		%
Renewal premium change	3			2			3			3
Retention	84			86			85			86
New business	$	123		$	138		$	461		$	432

Three Month Comparison

Net written premiums for Commercial for the three months ended September 30, 2018 were consistent with the same period in 2017 as growth in gross written premium was offset by a higher level of ceded reinsurance. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core income increased $95 million for the three months ended September 30, 2018 as compared with the same period in 2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income increased approximately $73 million primarily due to lower net catastrophe losses partially offset by lower favorable net prior year loss reserve development and lower net investment income driven by limited partnership returns.

The combined ratio of 97.4% improved 18.5 points for the three months ended September 30, 2018 as compared with the same period in 2017. The loss ratio improved 17.7 points driven by lower net catastrophe losses partially offset by lower favorable net prior year loss reserve development. Net catastrophe losses were $25 million, or 3.1 points of the loss ratio, for the three months ended September 30, 2018, as compared to $176 million, or 23.9 points of the loss ratio, for the three months ended September 30, 2017. The expense ratio improved 1.0 point for the three months ended September 30, 2018 as compared with the same period in 2017 driven by lower employee costs and higher net earned premiums.

Favorable net prior year loss reserve development of $5 million and $17 million was recorded for the three months ended September 30, 2018 and 2017. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison

Net written premiums for Commercial increased $136 million for the nine months ended September 30, 2018 as compared with the same period in 2017. The premium rate adjustments in Small Business affected both net written premiums and net earned premiums as more fully discussed in Note F to the Condensed Consolidated Financial Statements under Part 1, Item 1. Excluding the effect of the Small Business premium rate adjustments, net written premiums increased $83 million driven by higher new business and positive renewal premium change. The increase in net earned premiums was consistent with the trend in net written premiums.

Core income increased $140 million for the nine months ended September 30, 2018 as compared with the same period in 2017. Excluding the favorable effect of the Federal corporate income tax rate change and the unfavorable Small Business premium rate adjustments, core income increased approximately $51 million primarily due to lower net catastrophe losses partially offset by lower favorable net prior year loss reserve development and lower net investment income driven by limited partnership returns.

The combined ratio of 97.0% improved 7.4 points for the nine months ended September 30, 2018 as compared with the same period in 2017. The loss ratio improved 5.6 points driven by lower net catastrophe losses partially offset by lower favorable net prior year loss reserve development. Net catastrophe losses were $73 million, or 3.1 points of the loss ratio, for the nine months ended September 30, 2018, as compared to $238 million, or 11.1 points of the loss ratio, for the nine months ended September 30, 2017. Excluding the Small Business premium rate adjustments, the expense ratio improved 1.2 points driven by lower employee costs and IT spend.

Favorable net prior year loss reserve development of $27 million and $94 million was recorded for the nine months ended September 30, 2018 and 2017. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

The following table summarizes the gross and net carried reserves for Commercial.



(In millions)	September 30, 2018		December 31, 2017
Gross case reserves	$	4,184	$	4,427
Gross IBNR reserves	4,400		4,337
Total gross carried claim and claim adjustment expense reserves	$	8,584	$	8,764
Net case reserves	$	3,835	$	4,103
Net IBNR reserves	4,069		4,033
Total net carried claim and claim adjustment expense reserves	$	7,904	$	8,136

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International

The following table details the results of operations for International.



Periods ended September 30	Three Months						Nine Months
(In millions, except ratios, rate, renewal premium change and retention)	2018			2017			2018			2017
Net written premiums	$	196		$	207		$	762		$	664
Net earned premiums	255			226			739			629
Net investment income	14			13			43			38
Core income (loss)	1			(38		)	17			(8		)

Other performance metrics:
Loss and loss adjustment expense ratio	67.6		%	88.4		%	65.0		%	70.6		%
Expense ratio	36.3			37.5			36.8			37.2
Combined ratio	103.9		%	125.9		%	101.8		%	107.8		%

Rate	3		%	1		%	3		%	0		%
Renewal premium change	8			3			6			2
Retention	67			76			77			79
New business	$	72		$	69		$	248		$	207

Three Month Comparison

Net written premiums for International decreased $11 million for the three months ended September 30, 2018 as compared with the same period in 2017. Excluding the effect of foreign currency exchange rates, net written premiums decreased $9 million or 4% for the three months ended September 30, 2018 as compared with the same period in 2017 driven by a higher level of ceded reinsurance. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.

Core results improved $39 million for the three months ended September 30, 2018 as compared with the same period in 2017 driven by lower net catastrophe losses. The effect of the Federal corporate income tax rate change was not significant.

The combined ratio of 103.9% improved 22.0 points for the three months ended September 30, 2018 as compared with the same period in 2017. The loss ratio improved 20.8 points, primarily due to lower net catastrophe losses partially offset by a higher number of large property losses in CNA Hardy. Net catastrophe losses were $5 million, or 2.1 points of the loss ratio, for the three months ended September 30, 2018, as compared to $58 million, or 27.5 points of the loss ratio for the three months ended September 30, 2017. The expense ratio improved 1.2 points for the three months ended September 30, 2018 as compared with the same period in 2017 driven by higher net earned premiums.

Favorable net prior year loss reserve development of $2 million was recorded for the three months ended September 30, 2018 as compared with unfavorable net prior year loss reserve development of $1 million for the three months ended September 30, 2017. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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Nine Month Comparison

Net written premiums for International increased $98 million for the nine months ended September 30, 2018 as compared with the same period in 2017. Excluding the effect of foreign currency exchange rates, net written premiums increased $69 million or 10% for the nine months ended September 30, 2018 as compared with the same period in 2017 driven by positive renewal premium change and higher new business partially offset by a higher level of ceded reinsurance. The increase in net earned premiums was consistent with the trend in net written premiums.

Core results improved $25 million for the nine months ended September 30, 2018 as compared with the same period in 2017 driven by lower net catastrophe losses partially offset by unfavorable period over period foreign currency exchange results. The effect of the Federal corporate income tax rate change was not significant.

The combined ratio of 101.8% improved 6.0 points for the nine months ended September 30, 2018 as compared with the same period in 2017. The loss ratio improved 5.6 points, primarily due to lower net catastrophe losses partially offset by a higher number of large property losses. Net catastrophe losses were $11 million, or 1.5 points of the loss ratio, for the nine months ended September 30, 2018, as compared to $60 million, or 10.3 points of the loss ratio, for the nine months ended September 30, 2017. The expense ratio improved 0.4 points for the nine months ended September 30, 2018 as compared with the same period in 2017 driven by higher net earned premiums partially offset by higher employee costs.

Favorable net prior year loss reserve development of $4 million was recorded for the nine months ended September 30, 2018 as compared with unfavorable net prior year loss reserve development of $1 million for the nine months ended September 30, 2017. Further information on net prior year loss reserve development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Effective October 1 2018, CNA Hardy will no longer write property treaty, marine hull, and construction all risk/erection all risk through the Lloyd’s platform. While these three classes combined represent a relatively small component of the International segment’s business, it may result in lower net written premiums within the CNA Hardy business.

The following table summarizes the gross and net carried reserves for International.



(In millions)	September 30, 2018		December 31, 2017
Gross case reserves	$	811	$	744
Gross IBNR reserves	878		892
Total gross carried claim and claim adjustment expense reserves	$	1,689	$	1,636
Net case reserves	$	677	$	640
Net IBNR reserves	775		792
Total net carried claim and claim adjustment expense reserves	$	1,452	$	1,432

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Life & Group

The following table details the results of operations for Life & Group.



Periods ended September 30	Three Months					Nine Months
(In millions)	2018		2017			2018			2017
Net earned premiums	$	133	$	136		$	398		$	404
Net investment income	200		195			598			587
Core income (loss) before income tax	22		(25		)	(7		)	(89		)
Income tax benefit on core income (loss)	10		35			43			108
Core income	32		10			36			19

Three Month Comparison

Core income increased $22 million for the three months ended September 30, 2018 as compared with the same period in 2017. Excluding the unfavorable effect of the Federal corporate income tax rate change, core income increased approximately $31 million. This increase was driven by a $24 million after-tax reduction in long term care claim reserves resulting from the annual claims experience study. This study was completed in the third quarter of 2018 as compared to the fourth quarter in 2017. Persistency continues to benefit from a high proportion of policyholders choosing to reduce benefits in lieu of premium rate increases. Morbidity continues to trend in line with expectations.

Nine Month Comparison

Core income increased $17 million for the nine months ended September 30, 2018 as compared with the same period in 2017. Excluding the unfavorable effect of the Federal corporate income tax rate change, core income increased approximately $54 million. Persistency continues to benefit from a high proportion of policyholders choosing to reduce benefits in lieu of premium rate increases. The favorable persistency trend was partially offset by a significant number of policies converting to a fully paid-up status with modest future benefits following the termination of a large group account. The reserves associated with these converted policies were, on average, slightly higher than the previously recorded carried reserves, resulting in a negative financial impact. Morbidity continues to trend in line with expectations. Additionally, core income for the nine months ended September 30, 2018 includes the $24 million benefit of the reduction in long term care claim reserves resulting from the annual claims experience study.

Life & Group Policyholder Reserves

Annually, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. The GPV process occurred in the third quarter of 2018 as compared to the fourth quarter in 2017. See Reserves - Estimates and Uncertainties 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, 2017 for further information on the reserving process.

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The September 30, 2018 GPV indicated our recorded reserves included a margin of approximately $182 million. A summary of the changes in the estimated reserve margin is presented in the table below:



Long Term Care Active Life Reserve - Change in estimated reserve margin (In millions)
December 31, 2017 Estimated Margin	$	246
Changes in underlying morbidity assumptions	(213		)
Changes in underlying persistency assumptions and inforce policy inventory	(86		)
Changes in underlying discount rate assumptions	17
Changes in underlying premium rate action assumptions	178
Changes in underlying expense and other assumptions	40
September 30, 2018 Estimated Margin	$	182

The decrease in the margin in 2018 was driven by the removal of the future morbidity improvement assumption and extending the period of mortality improvement within the persistency assumptions. These unfavorable drivers were partially offset by higher than expected rate increases on active rate action programs and favorable changes to the underlying expense and discount rate assumptions.

The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our active life reserve assumptions. The annual GPV process involves updating all assumptions to the then current best estimate, and historically all significant assumptions have been revised each year. In the Hypothetical Revisions table below, we have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group and would occur absent any changes, mitigating or otherwise, in the other assumptions. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. Any required increase in the recorded reserves resulting from the hypothetical revision in the table below would first reduce the margin in our carried reserves before it would affect results of operations. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. The estimated impacts to results of operations in the table below are after consideration of the existing margin.



September 30, 2018
	Estimated reduction to pretax income
Hypothetical revisions (In millions)	Estimated reduction to pretax income
Morbidity:
5% increase in morbidity	$	460
10% increase in morbidity	1,103
Persistency:
5% decrease in active life mortality and lapse	$	31
10% decrease in active life mortality and lapse	253
Discount Rates:
50 basis point decline in future interest rates	$	140
100 basis point decline in future interest rates	500
Premium Rate Actions:
50% decrease in anticipated future premium rate increases	$	—

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While the GPV process indicated there is margin in the recorded future policy benefit reserves at September 30, 2018, management noted that its projections indicate a pattern of expected profits in earlier future years followed by expected losses in later future years ("profits followed by losses"). In that circumstance, GAAP requires that the future policy benefit reserves should be increased in the profitable years by an amount necessary to offset losses that would be recognized in later years.

As a result, in the fourth quarter of 2018 the Company will begin to establish additional future policy benefit reserves in periods where the long term care business generates core income. The amount of the additional future policy benefit reserves in each quarterly period will be based on the ratio of the present value of future losses divided by the present value of future profits resulting from the most recently completed GPV.

The need for additional future policy benefit reserves for profits followed by losses as well as the percentage used to establish such reserves will be re-evaluated in connection with the next GPV, which is expected to be completed in the third quarter of 2019.

The following table summarizes policyholder reserves for Life & Group.



September 30, 2018
(In millions)	Claim and claim adjustment expenses		Future policy benefits		Total
Long term care	$	2,689	$	9,078	$	11,767
Structured settlement annuities	535		—		535
Other	16		—		16
Total	3,240		9,078		12,318
Shadow adjustments ⁽¹⁾	118		1,293		1,411
Ceded reserves ⁽²⁾	193		234		427
Total gross reserves	$	3,551	$	10,605	$	14,156



December 31, 2017
(In millions)	Claim and claim adjustment expenses		Future policy benefits		Total
Long term care	$	2,568	$	8,959	$	11,527
Structured settlement annuities	547		—		547
Other	16		—		16
Total	3,131		8,959		12,090
Shadow adjustments ⁽¹⁾	159		1,990		2,149
Ceded reserves ⁽²⁾	209		230		439
Total gross reserves	$	3,499	$	11,179	$	14,678


(1)	To the extent that unrealized gains on fixed income securities supporting long term care products and annuity contracts would result in a premium deficiency if those gains were realized, an increase in Insurance reserves is recorded, net of tax, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).


(2)	Ceded reserves relate to claim or policy reserves fully reinsured in connection with a sale or exit from the underlying business.

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Corporate & Other

The following table details the results of operations for Corporate & Other.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Net investment income	$	5		$	6		$	16		$	15
Interest expense	33			39			101			116
Core loss	(20		)	(18		)	(119		)	(82		)

Three Month Comparison

Core loss increased $2 million for the three months ended September 30, 2018 as compared with the same period in 2017. Excluding the unfavorable effect of the Federal corporate income tax rate change, core loss decreased approximately $1 million.

Nine Month Comparison

Core loss increased $37 million for the nine months ended September 30, 2018 as compared with the same period in 2017. Excluding the unfavorable effect of the Federal corporate income tax rate change, core loss increased approximately $16 million driven by non-recurring costs of $27 million associated with the transition to a new IT infrastructure service provider and higher adverse net prior year reserve development recorded in 2018 for A&EP under the LPT, as compared to the prior year period.

The following table summarizes the gross and net carried reserves for Corporate & Other.



(In millions)	September 30, 2018		December 31, 2017
Gross case reserves	$	1,170	$	1,371
Gross IBNR reserves	1,101		1,065
Total gross carried claim and claim adjustment expense reserves	$	2,271	$	2,436
Net case reserves	$	91	$	94
Net IBNR reserves	105		111
Total net carried claim and claim adjustment expense reserves	$	196	$	205

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INVESTMENTS

Net Investment Income

The significant components of Net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity and non-redeemable preferred stock.



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Fixed income securities:
Taxable fixed income securities	$	366		$	350		$	1,070		$	1,051
Tax-exempt fixed income securities	93			106			298			320
Total fixed income securities	459			456			1,368			1,371
Limited partnership and common stock investments	23			51			96			157
Other, net of investment expense	5			2			19			1
Pretax net investment income	$	487		$	509		$	1,483		$	1,529
Fixed income securities, after tax	$	378		$	330		$	1,130		$	994
Net investment income, after tax	400			363			1,221			1,096

Effective income yield for the fixed income securities portfolio, pretax	4.7		%	4.7		%	4.7		%	4.7		%
Effective income yield for the fixed income securities portfolio, after tax	3.9		%	3.4		%	3.9		%	3.4		%

Pretax net investment income decreased $22 million for the three months ended September 30, 2018 as compared with the same period in 2017. The decrease was driven by limited partnership and common stock investments, which returned 0.9% in 2018 as compared with 2.2% in the prior year period. However, despite the decline in limited partnership income, net investment income, after tax, increased $37 million for the three months ended September 30, 2018 as compared with the same period in 2017 driven by the lower Federal corporate income tax rate.

Pretax net investment income decreased $46 million for the nine months ended September 30, 2018 as compared with the same period in 2017. The decrease was driven by limited partnership and common stock investments, which returned 4.0% in 2018 as compared with 6.8% in the prior year period. However, despite the decline in limited partnership income, net investment income, after tax, increased $125 million for the nine months ended September 30, 2018 as compared with the same period in 2017 driven by the lower Federal corporate income tax rate.

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Net Realized Investment Gains (Losses)

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



Periods ended September 30	Three Months						Nine Months
(In millions)	2018			2017			2018			2017
Fixed maturity securities:
Corporate bonds and other	$	8		$	14		$	36		$	85
States, municipalities and political subdivisions	9			4			35			14
Asset-backed	(7		)	(2		)	(39		)	(7		)
Total fixed maturity securities	10			16			32			92
Non-redeemable preferred stock	2			—			(23		)	—
Short term and other	2			(40		)	16			(30		)
Net realized investment gains (losses)	14			(24		)	25			62
Income tax (expense) benefit on net realized investment gains (losses)	(1		)	9			(2		)	(19		)
Net realized investment gains (losses), after tax	$	13		$	(15	)	$	23		$	43

Pretax net realized investment results improved $38 million for the three months ended September 30, 2018 as compared with the same period in 2017. The prior period Net realized investment losses included a pretax loss of $42 million as a result of the redemption of our $350 million senior notes due November 2019.

Pretax net realized investment gains decreased $37 million for the nine months ended September 30, 2018 as compared with the same period in 2017. The decrease was driven by lower net realized gains on sales of securities and the decline in fair value of non-redeemable preferred stock. Additionally, the prior period included the pretax loss of $42 million discussed above.

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.

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Portfolio Quality

The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.



	September 30, 2018					December 31, 2017
(In millions)	Estimated Fair Value		Net Unrealized Gains (Losses)			Estimated Fair Value		Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises	$	4,430	$	(96	)	$	4,514	$	21
AAA	3,064		221			1,954		152
AA	6,575		459			8,982		914
A	8,838		525			9,643		952
BBB	13,997		417			13,554		1,093
Non-investment grade	2,724		50			2,840		140
Total	$	39,628	$	1,576		$	41,487	$	3,272

As of September 30, 2018 and December 31, 2017, 3% and 2% of our fixed maturity portfolio was rated internally.

The following table presents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.



	September 30, 2018
(In millions)	Estimated Fair Value		Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises	$	3,735	$	113
AAA	488		10
AA	1,093		19
A	2,558		57
BBB	6,319		167
Non-investment grade	1,031		37
Total	$	15,224	$	403

The following table presents 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.



	September 30, 2018
(In millions)	Estimated Fair Value		Gross Unrealized Losses
Due in one year or less	$	231	$	6
Due after one year through five years	2,540		37
Due after five years through ten years	10,369		294
Due after ten years	2,084		66
Total	$	15,224	$	403

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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 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 long term care and structured settlement liabilities in the Life & Group segment.

The effective durations of fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.



	September 30, 2018			December 31, 2017
(In millions)	Estimated Fair Value		Effective Duration (In years)	Estimated Fair Value		Effective Duration (In years)
Investments supporting Life & Group	$	16,155	8.2	$	16,797	8.4
Other investments	25,407		4.5	26,817		4.4
Total	$	41,562	5.9	$	43,614	5.9

The duration of the total portfolio is aligned with the cash flow characteristics of the underlying liabilities.

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 included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017.

Short Term Investments

The carrying value of the components of the Short term investments are presented in the following table.



(In millions)	September 30, 2018		December 31, 2017
Short term investments:
Commercial paper	$	895	$	905
U.S. Treasury securities	227		355
Other	168		176
Total short term investments	$	1,290	$	1,436

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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 nine months ended September 30, 2018, net cash provided by operating activities was $868 million as compared with $894 million for the same period in 2017. The decrease in cash provided by operating activities was driven by higher income taxes paid and higher net claim payments partially offset by an increase in premiums collected.

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

Net cash provided by investing activities was $80 million for the nine months ended September 30, 2018, as compared with net cash used of $218 million for the same period in 2017. 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 securities.

For the nine months ended September 30, 2018, net cash used by financing activities was $989 million as compared with $673 million for the same period in 2017. In the third quarter of 2018, we redeemed the $30 million of subordinated variable rate debt of CNA Hardy due September 15, 2036. In the first quarter of 2018, we redeemed the $150 million outstanding aggregate principal balance of our 6.950% senior notes due January 15, 2018. In the third quarter of 2017, we issued $500 million of 3.45% senior notes due August 15, 2027 and redeemed the $350 million outstanding aggregate principal balance of our 7.35% senior notes due November 15, 2019.

Common Stock Dividends

Dividends of $2.95 per share on our common stock, including a special dividend of $2.00 per share, were declared and paid during the nine months ended September 30, 2018. On November 2, 2018, our Board of Directors declared a quarterly dividend of $0.35 per share, payable December 5, 2018 to stockholders of record on November 19, 2018. 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.

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Liquidity

We believe that our present cash flows from operating, investing 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 and no borrowings outstanding through our membership in the FHLBC.

Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the Department), are determined based on the greater of the prior year's statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of September 30, 2018 CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2018 that would not be subject to the Department's prior approval is $1,073 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $100 million during the three months ended December 31, 2017 and $910 million during the nine months ended September 30, 2018. As of September 30, 2018 CCC is able to pay approximately $63 million of dividends that would not be subject to prior approval of the Department. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

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

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ACCOUNTING STANDARDS UPDATE

For a discussion of Accounting Standards Updates adopted in the current period and that will be adopted in the future, see Note A to the Condensed Consolidated Financial Statements included under Part I, Item 1.

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 A&EP 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 insurance 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 risks and uncertainties associated with potential acquisitions and divestitures, including the consummation of such transactions, the successful integration of acquired operations and the potential for subsequent impairment of goodwill or intangible assets.

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 underpriced 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; 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.

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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, legislative actions that increase claimant activity, 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 with respect to our ability to increase premium rates, and 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; 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 global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail 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, the unpredictability of the nature, targets, severity or frequency of such events, and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; and


•	the occurrence of epidemics.

Referendum on the United Kingdom's Membership in the European Union

•

in 2016, the United Kingdom (U.K.) approved an exit from the European Union (E.U.), commonly referred to as "Brexit.” Brexit is scheduled to be completed in early 2019. As treaties between the U.K. and the E.U. have not been finalized, as of January 1, 2019, we intend to write business in the E.U. through our recently established European subsidiary in Luxembourg as our U.K.-domiciled subsidiary will presumably no longer provide a platform for our operations throughout the European continent. As a result of such structural changes and modification to our European operations, the complexity and cost of regulatory compliance of our European business has increased and will likely continue to result in elevated expenses.

Our forward-looking statements speak only as of the date of the filing of this Quarterly Report on Form 10-Q 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in our market risk components for the nine months ended September 30, 2018. See the Quantitative and Qualitative Disclosures About Market Risk included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017 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 September 30, 2018, 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 September 30, 2018.

There has been no change 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 September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. Other Information

Item 1. Legal Proceedings

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

Item 6. Exhibits

See Exhibit Index.

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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: November 5, 2018	By	/s/ James M. Anderson
		James M. Anderson Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)

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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 FY2018 Q3

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