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 SeptemberJune 30, 20172018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-6169860
(I.R.S. Employer
Identification No.)
333 S. Wabash151 N. Franklin
Chicago, Illinois
(Address of principal executive offices)
 
6060460606
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)

333 S. Wabash, Chicago, Illinois 60604
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [ ] (Do not check if a smaller reporting company)
 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 OctoberJuly 26, 20172018
Common Stock, Par value $2.50 271,176,870271,395,494


Item Number 
Page
Number
 
Page
Number
PART I. Financial Information
 
PART I. Financial Information
 
1.
Condensed Consolidated Financial Statements:
 
Condensed Consolidated Financial Statements:
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (Unaudited)
3
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017 (Unaudited)
4
Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
5
Condensed Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017
5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)
6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (Unaudited)
6
Condensed Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)
8
Condensed Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2018 and 2017 (Unaudited)
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
9
2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
45
Management's Discussion and Analysis of Financial Condition and Results of Operations
44
3.
Quantitative and Qualitative Disclosures About Market Risk
66
Quantitative and Qualitative Disclosures About Market Risk
65
4.
Controls and Procedures
66
Controls and Procedures
65
PART II. Other Information
 
PART II. Other Information
 
1.
Legal Proceedings
67
Legal Proceedings
66
6.
Exhibits
67
Exhibits
66

PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CNA Financial Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions, except per share data)2017 2016 2017 20162018 2017 2018 2017
Revenues              
Net earned premiums$1,806
 $1,767
 $5,185
 $5,196
$1,815
 $1,734
 $3,600
 $3,379
Net investment income509
 524
 1,529
 1,461
506
 475
 996
 1,020
Net realized investment (losses) gains:       
       
Other-than-temporary impairment losses(5) (18) (9) (56)—
 (2) (6) (4)
Other net realized investment (losses) gains(19) 64
 71
 82
(1) 52
 17
 90
Net realized investment (losses) gains(24)
46
 62
 26
(1) 50
 11
 86
Non-insurance warranty revenue (Note J)248
 98
 486
 191
Other revenues107
 96
 318
 293
6
 9
 16
 20
Total revenues2,398

2,433

7,094
 6,976
2,574
 2,366
 5,109
 4,696
Claims, Benefits and Expenses              
Insurance claims and policyholders’ benefits1,480
 1,202
 4,053
 3,949
1,327
 1,280
 2,666
 2,573
Amortization of deferred acquisition costs309
 314
 926
 926
359
 312
 655
 617
Non-insurance warranty expense (Note J)225
 72
 441
 142
Other operating expenses381
 403
 1,091
 1,162
298
 292
 601
 568
Interest41
 39
 124
 119
35
 40
 70
 83
Total claims, benefits and expenses2,211

1,958

6,194
 6,156
2,244
 1,996
 4,433
 3,983
Income before income tax187
 475
 900
 820
330
 370
 676
 713
Income tax expense(43) (132) (224) (202)(60) (98) (115) (181)
Net income$144

$343

$676
 $618
$270
 $272
 $561
 $532
              
Basic earnings per share$0.53
 $1.27
 $2.49
 $2.28
$0.99
 $1.01
 $2.07
 $1.96
              
Diluted earnings per share$0.53
 $1.26
 $2.48
 $2.28
$0.99
 $1.00
 $2.06
 $1.96
              
Dividends declared per share$0.30
 $0.25
 $2.80
 $2.75
$0.30
 $0.25
 $2.60
 $2.50
              
Weighted Average Outstanding Common Stock and Common Stock Equivalents              
Basic271.2
 270.5
 271.1
 270.4
271.5
 271.1
 271.5
 271.0
Diluted272.1
 271.2
 272.0
 271.0
272.4
 271.9
 272.4
 271.9
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).


CNA Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Comprehensive Income       
Comprehensive Income (Loss)       
Net income$144
 $343
 $676
 $618
$270
 $272
 $561
 $532
Other Comprehensive Income, Net of Tax       
Other Comprehensive (Loss) Income, Net of Tax       
Changes in:              
Net unrealized gains on investments with other-than-temporary impairments1
 3
 (3) 7
(1) —
 (10) (4)
Net unrealized gains on other investments23
 42
 167
 586
(159) 77
 (588) 144
Net unrealized gains on investments24
 45
 164
 593
(160) 77
 (598) 140
Foreign currency translation adjustment41
 (24) 94
 (58)(52) 42
 (40) 53
Pension and postretirement benefits10
 6
 22
 17
7
 5
 17
 12
Other comprehensive income, net of tax75
 27
 280
 552
Total comprehensive income$219
 $370
 $956
 $1,170
Other comprehensive (loss) income, net of tax(205) 124
 (621) 205
Total comprehensive income (loss)$65

$396
 $(60) $737
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA Financial Corporation
Condensed Consolidated Balance Sheets
(In millions, except share data)September 30, 2017 (Unaudited) December 31,
2016		June 30, 2018 (Unaudited) December 31,
2017
Assets      
Investments:      
Fixed maturity securities at fair value (amortized cost of $38,814 and $38,361)$42,090
 $40,905
Equity securities at fair value (cost of $118 and $106)129
 110
Fixed maturity securities at fair value (amortized cost of $37,928 and $38,215)$39,795
 $41,487
Equity securities at fair value (cost of $762 and $659)773
 695
Limited partnership investments2,311
 2,371
2,363
 2,369
Other invested assets42
 36
48
 44
Mortgage loans722
 591
865
 839
Short term investments1,453
 1,407
1,308
 1,436
Total investments46,747
 45,420
45,152
 46,870
Cash283
 271
288
 355
Reinsurance receivables (less allowance for uncollectible receivables of $37 and $37)4,332
 4,416
Insurance receivables (less allowance for uncollectible receivables of $46 and $46)2,294
 2,209
Reinsurance receivables (less allowance for uncollectible receivables of $29 and $29)4,535
 4,261
Insurance receivables (less allowance for uncollectible receivables of $44 and $44)2,598
 2,292
Accrued investment income436
 405
396
 411
Deferred acquisition costs643
 600
673
 634
Deferred income taxes141
 379
296
 137
Property and equipment at cost (less accumulated depreciation of $275 and $254)325
 310
Property and equipment at cost (less accumulated depreciation of $234 and $274)347
 326
Goodwill147
 145
147
 148
Other assets1,234
 1,078
Other assets (Note A)3,426
 1,133
Total assets$56,582
 $55,233
$57,858
 $56,567
Liabilities 
  
 
  
Insurance reserves:   
   
Claim and claim adjustment expenses$22,209
 $22,343
$21,990
 $22,004
Unearned premiums4,060
 3,762
4,410
 4,029
Future policy benefits11,040
 10,326
10,667
 11,179
Short term debt150
 —
30
 150
Long term debt2,707
 2,710
2,679
 2,708
Other liabilities (includes $25 and $50 due to Loews Corporation)
4,247
 4,123
Other liabilities (includes $100 and $143 due to Loews Corporation) (Note A)6,667
 4,253
Total liabilities44,413
 43,264
46,443
 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; 271,176,870 and 270,495,998 shares outstanding)683
 683
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; 271,391,107 and 271,205,390 shares outstanding)683
 683
Additional paid-in capital2,167
 2,173
2,179
 2,175
Retained earnings9,273
 9,359
9,216
 9,414
Accumulated other comprehensive income (loss)107
 (173)
Treasury stock (1,863,373 and 2,544,245 shares), at cost(61) (73)
Accumulated other comprehensive (loss) income(605) 32
Treasury stock (1,649,136 and 1,834,853 shares), at cost(58) (60)
Total stockholders’ equity12,169
 11,969
11,415
 12,244
Total liabilities and stockholders' equity$56,582
 $55,233
$57,858
 $56,567
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA Financial Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30   
Six months ended June 30   
(In millions)2017 20162018 2017
Cash Flows from Operating Activities      
Net income$676
 $618
$561
 $532
Adjustments to reconcile net income to net cash flows provided by operating activities:      
Deferred income tax expense125
 112
15
 122
Trading portfolio activity8
 —
(13) (11)
Net realized investment gains(62) (26)(11) (86)
Equity method investees89
 265
(15) 42
Net amortization of investments(30) (17)(30) (21)
Depreciation and amortization66
 57
41
 43
Changes in:      
Receivables, net18
 (311)(587) (195)
Accrued investment income(31) (30)15
 1
Deferred acquisition costs(34) (24)(43) (41)
Insurance reserves248
 464
563
 262
Other assets(121) (96)(178) (118)
Other liabilities(106) 61
(11) (45)
Other, net48
 47
47
 30
Total adjustments218
 502
(207) (17)
Net cash flows provided by operating activities
894
 1,120
Net cash flows provided by operating activities354
 515
Cash Flows from Investing Activities    
  
Dispositions:      
Fixed maturity securities - sales4,167
 4,234
4,781
 3,142
Fixed maturity securities - maturities, calls and redemptions2,635
 2,263
1,306
 1,770
Equity securities22
 79
25
 22
Limited partnerships160
 200
93
 100
Mortgage loans22
 137
68
 17
Purchases:      
Fixed maturity securities(6,877) (7,472)(5,608) (4,840)
Equity securities(18) (1)(127) (8)
Limited partnerships(85) (222)(72) (47)
Mortgage loans(153) (88)(94) (72)
Change in other investments(2) 10
(6) (3)
Change in short term investments(29) 241
135
 81
Purchases of property and equipment(80) (94)(76) (68)
Disposals of property and equipment—
 107
Other, net20
 2
14
 17
Net cash flows used by investing activities$(218) $(604)
Net cash flows provided by investing activities439
 111
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

Nine months ended September 30   
Six months ended June 30   
(In millions)2017 20162018 2017
Cash Flows from Financing Activities      
Dividends paid to common stockholders$(761) $(746)$(706) $(676)
Proceeds from the issuance of debt496
 498
Repayment of debt(391) (358)(150) —
Other, net(17) 1
1
 (1)
Net cash flows used by financing activities(673)
(605)(855)
(677)
Effect of foreign exchange rate changes on cash9
 (8)(5) 5
Net change in cash12
 (97)(67) (46)
Cash, beginning of year271
 387
355
 271
Cash, end of period$283
 $290
$288
 $225
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).


CNA Financial Corporation
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Nine months ended September 30   
Six months ended June 30   
(In millions)2017 20162018 2017
Common Stock      
Balance, beginning of period$683
 $683
$683
 $683
Balance, end of period683
 683
683
 683
Additional Paid-in Capital      
Balance, beginning of period2,173
 2,153
2,175
 2,173
Stock-based compensation(6) 10
4
 (6)
Balance, end of period2,167
 2,163
2,179
 2,167
Retained Earnings      
Balance, beginning of period9,359
 9,313
Balance, beginning of period, as previously reported9,414
 9,359
Cumulative effect adjustments from changes in accounting guidance, net of tax(50) —
Balance, beginning of period, as adjusted9,364
 9,359
Dividends paid to common stockholders(762) (746)(709) (680)
Net income676
 618
561
 532
Balance, end of period9,273
 9,185
9,216
 9,211
Accumulated Other Comprehensive Income (Loss)   
Balance, beginning of period(173) (315)
Other comprehensive income280
 552
Accumulated Other Comprehensive (Loss) Income   
Balance, beginning of period, as previously reported32
 (173)
Cumulative effect adjustments from changes in accounting guidance, net of tax(16) —
Balance, beginning of period, as adjusted16
 (173)
Other comprehensive (loss) income(621) 205
Balance, end of period107
 237
(605) 32
Treasury Stock      
Balance, beginning of period(73) (78)(60) (73)
Stock-based compensation12
 5
2
 8
Balance, end of period(61) (73)(58) (65)
Total stockholders' equity$12,169
 $12,195
$11,415
 $12,028
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).


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 SeptemberJune 30, 2017.2018.
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, 2016,2017, 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 SeptemberJune 30, 20172018 and for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 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 March 2016,May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvementsto Employee Share-Based Payment Accounting. The updated accounting guidance simplifies the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. As of January 1, 2017, the Company adopted the updated accounting guidanceand began recognizing excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense within net income, instead of additional paid-in capital as required under previous guidance. The related cash flows are now classified within operating activities. As a result of this change, excess tax benefits are no longer included in assumed proceeds under the treasury stock method of calculating earnings per share. The impact of the accounting change resulted in a decrease of $2 million and $5 million to income tax expense for the three and nine months ended September 30, 2017.

Accounting Standards Pending Adoption
In May 2014, the 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. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 and may be
On January 1, 2018, the Company adopted the updated guidance using the modified retrospective method applied retrospectively or through a cumulative effect adjustment to retained earnings atall contracts which were not completed as of the date of adoption.  Whileadoption, with the Company continuescumulative effect recognized as an adjustment to evaluate the impactsopening balance of thisRetained earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.
Under the new guidance, on the Consolidated financial statements, including disclosures, the Company expects that revenue on warranty products and services will be recognized more slowly than undercompared to the currenthistoric revenue recognition pattern. For a significant portion ofIn addition, for warranty products in which the Company also expects Other revenuesacts as the principal in the transaction, Non-insurance warranty revenue and Other operating expenses to increaseNon-insurance warranty expense are increased to reflect the gross amount paid by consumers, toincluding the auto dealer that acts asretail seller’s markup which is considered a commission to the Company's agent. The Company expectsThis gross-up of revenue and expense also resulted in an increase to adopt this guidance usingOther assets and Other liabilities on the modified retrospective approach. WhileCompany's Condensed Consolidated Balance Sheets as the revenue and expense are recognized over the actuarially determined expected claims emergence pattern.

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 liabilities4,253
 1,969
 6,222
Deferred income taxes137
 21
 158
Retained earnings9,414
 (66) 9,348
The impact of adoption usingon the modified retrospective approach may be significant,Condensed Consolidated Statements of Operations and Balance Sheet was as follows:
Periods ended June 30, 2018Three Months Six 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$105
 $143
 $248
 $206
 $280
 $486
Total revenues2,431
 143
 2,574
 4,829
 280
 5,109
            
Non-insurance warranty expense80
 145
 225
 158
 283
 441
Total claims, benefits and expenses2,099
 145
 2,244
 4,150
 283
 4,433
            
Income before income tax332
 (2) 330
 679
 (3) 676
Income tax expense(61) 1
 (60) (116) 1
 (115)
Net income271
 (1) 270
 563
 (2) 561
            
Balance sheet(1) at June 30, 2018:
      

    
Other assets      $3,228
 $198
 $3,426
Other liabilities      6,466
 201
 6,667
Deferred income taxes      295
 1
 296
Retained earnings      9,218
 (2) 9,216
(1)The Prior to Adoption amounts presented include the cumulative effect adjustment at adoption.
See Note J to the Company does not expect the impact of the new guidance to be material to its results of operations or financial position.Condensed Consolidated Financial Statements for additional information regarding non-insurance revenues from contracts with customers.

ASU 2016-01: In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-OverallInstruments - 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 is effective for interim and annual periods beginning after December 15, 2017.  The Company expectsprimarily changes the primary change to be the requirementmodel for equity investmentssecurities by requiring changes in the fair value of equity securities (except those accounted for under the equity method of accounting, orthose without readily determinable fair values and those that result in consolidation of the investee) to be measured atrecognized 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 six months ended June 30, 2018, the Company recognized $10 million and $25 million in pretax losses within Net realized investment gains (losses) for the change in fair value withof non-redeemable preferred stock and $2 million and $2 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 six months ended June 30, 2017, there was less than a $1 million decrease and a $1 million decrease in the fair value of common stock and a $2 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 recognizedof 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. Upon adoption,The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The Company will recognize an adjustmentadopted 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 cumulativepresentation 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 unrealized investment gainsservice cost and losses relatednon-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 available-for-sale equity securities within the opening balances of Retained earnings and Accumulated other comprehensive income (loss). The Company does not expect the impact of adopting ASU 2016-01 to have a material effect on 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.
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.

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 the assets and liabilities for the rights and obligations created by allthe 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. 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 presentationuse of the allowance method rather than the write-down method for credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down.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 MarchIncome Tax Reform Update
On December 22, 2017, H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the FASBConcurrent 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 ASUStaff Accounting Bulletin No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving118 (SAB 118) to provide guidance on accounting for the PresentationTax Reform Legislation impacts when the measurements of Net Periodic Pension Costthe 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 Net Periodic Postretirement Benefit Cost. adjustments to provisional amounts, in subsequent reporting periods within the one year measurement period.
The updated accounting guidance requires changesCompany has reflected the following incomplete but reasonably estimated provisional items in Deferred income taxes on the Condensed Consolidated Balance Sheet at June 30, 2018. The effects of the adjustments to the presentation ofCompany’s provisional amounts for the components of net periodic benefit cost on thethree and six months ended June 30, 2018 did not impact 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 guidance is effective for interim and annual periods beginning after December 15, 2017. tax expense.
The Company is currently evaluatinghas recalculated its insurance reserves and the effecttransition 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 guidance willtransition 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 on the Company's financial statements.inclusions in U.S. taxable income for certain earnings of foreign subsidiaries in future years.

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 effectimpact 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 ninesix months ended SeptemberJune 30, 2017,2018, approximately 907835 thousand and 916929 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 1approximately 445 thousand and approximately 42 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 ninesix months ended SeptemberJune 30, 2016,2017, approximately 707847 thousand and 549915 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 175 thousand and 178less than 1 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.


Note C.C. Investments
The significant components of Net investment income are presented in the following table.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Fixed maturity securities$455
 $457
 $1,367
 $1,352
$444
 $457
 $890
 $912
Equity securities1
 1
 4
 8
12
 2
 22
 3
Limited partnership investments51
 65
 157
 97
40
 16
 70
 106
Mortgage loans9
 8
 24
 30
14
 8
 25
 15
Short term investments4
 2
 10
 6
6
 3
 12
 6
Trading portfolio3
 1
 9
 7
3
 4
 5
 6
Other1
 4
 2
 4
3
 —
 3
 1
Gross investment income524
 538
 1,573
 1,504
522
 490
 1,027
 1,049
Investment expense(15) (14) (44) (43)(16) (15) (31) (29)
Net investment income$509
 $524
 $1,529
 $1,461
$506
 $475
 $996
 $1,020
During the three and six months ended June 30, 2018, $2 million and $1 million of Net investment income was recognized due to the change in fair value of common stock still held as of June 30, 2018.
Net realized investment gains (losses) are presented in the following table.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Net realized investment gains (losses):              
Fixed maturity securities:              
Gross realized gains$34
 $67
 $139
 $152
$37
 $56
 $106
 $105
Gross realized losses(18) (20) (47) (106)(33) (12) (84) (29)
Net realized investment gains (losses) on fixed maturity securities16

47

92

46
4
 44
 22
 76
Equity securities:       
Gross realized gains—
 1
 1
 5
Gross realized losses—
 (4) (1) (10)
Net realized investment gains (losses) on equity securities—

(3)
—

(5)
Equity securities(10) —
 (25) —
Derivatives(1) 1
 (3) (12)4
 (3) 9
 (2)
Short term investments and other(39) 1
 (27) (3)1
 9
 5
 12
Net realized investment gains (losses)$(24)
$46

$62
 $26
$(1) $50
 $11
 $86
During the three and six months ended June 30, 2018, $10 million and $25 million of Net realized investment gains (losses) for the three and nine months ended September 30, 2017 included a $42 million loss relatedlosses were recognized due to the redemptionchange in fair value of the Company's $350 million senior notes due November 2019. Net realized investment gains (losses) for the nine months ended Septembernon-redeemable preferred stock still held as of June 30, 2016 included a $8 million loss related to the first quarter 2016 redemption of the Company's $350 million senior notes due August 2016.2018.
The components of Other-than-temporary impairment (OTTI)OTTI losses recognized in earnings by asset type are presented in the following table.
Periods ended September 30Three Months Nine Months
(In millions)2017 2016 2017 2016
Fixed maturity securities available-for-sale:    
  
Corporate and other bonds$4
 $14
 $8
 $43
Asset-backed:       
Residential mortgage-backed1
 —
 1
 1
Other asset-backed—
 —
 —
 3
Total asset-backed1

—

1
 4
Total fixed maturity securities available-for-sale5

14

9
 47
Equity securities available-for-sale -- Common stock—
 4
 —
 9
OTTI losses recognized in earnings$5

$18

$9
 $56
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Fixed maturity securities available-for-sale:
      
Corporate and other bonds$—
 $2
 $5
 $4
Asset-backed—
 —
 1
 —
OTTI losses recognized in earnings$—
 $2
 $6
 $4

The following tables present a summary of fixed maturity and equity securities.
September 30, 2017
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
June 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$17,965
 $1,645
 $26
 $19,584
 $—
$17,883
 $938
 $203
 $18,618
 $—
States, municipalities and political subdivisions12,462
 1,501
 7
 13,956
 (14)10,856
 1,161
 8
 12,009
 —
Asset-backed:                  
Residential mortgage-backed4,906
 127
 28
 5,005
 (28)4,961
 72
 85
 4,948
 (25)
Commercial mortgage-backed1,858
 55
 13
 1,900
 —
2,082
 23
 33
 2,072
 —
Other asset-backed1,047
 18
 4
 1,061
 —
1,557
 9
 9
 1,557
 —
Total asset-backed7,811
 200
 45
 7,966
 (28)8,600
 104
 127
 8,577
 (25)
U.S. Treasury and obligations of government-sponsored enterprises115
 3
 3
 115
 —
127
 3
 3
 127
 —
Foreign government439
 10
 4
 445
 —
436
 6
 5
 437
 —
Redeemable preferred stock18
 2
 —
 20
 —
9
 1
 —
 10
 —
Total fixed maturity securities available-for-sale38,810
 3,361
 85
 42,086
 $(42)37,911
 2,213
 346
 39,778
 $(25)
Total fixed maturity securities trading4
 

 

 4
  17
     17
  
Equity securities available-for-sale:         
Common stock16
 7
 1
 22
  
Preferred stock102
 5
 —
 107
  
Total equity securities available-for-sale118
 12
 1
 129
  
Total$38,932
 $3,373
 $86
 $42,219
  
Total fixed maturity securities$37,928
 $2,213
 $346
 $39,795
  

December 31, 2016
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Unrealized
OTTI
Losses (Gains)
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$17,711
 $1,323
 $76
 $18,958
 $(1)$17,210
 $1,625
 $28
 $18,807
 $—
States, municipalities and political subdivisions12,060
 1,213
 33
 13,240
 (16)12,478
 1,551
 2
 14,027
 (11)
Asset-backed:                  
Residential mortgage-backed5,004
 120
 51
 5,073
 (28)5,043
 109
 32
 5,120
 (27)
Commercial mortgage-backed2,016
 48
 24
 2,040
 —
1,840
 46
 14
 1,872
 —
Other asset-backed1,022
 8
 5
 1,025
 —
1,083
 16
 5
 1,094
 —
Total asset-backed8,042
 176
 80
 8,138
 (28)7,966
 171
 51
 8,086
 (27)
U.S. Treasury and obligations of government-sponsored enterprises83
 10
 —
 93
 —
111
 2
 4
 109
 —
Foreign government435
 13
 3
 445
 —
437
 9
 2
 444
 —
Redeemable preferred stock18
 1
 —
 19
 —
10
 1
 —
 11
 —
Total fixed maturity securities available-for-sale38,349
 2,736
 192
 40,893
 $(45)38,212
 3,359
 87
 41,484
 $(38)
Total fixed maturity securities trading12
 

 

 12
  3
     3
  
Equity securities available-for-sale:                  
Common stock13
 6
 —
 19
  21
 7
 1
 27
  
Preferred stock93
 2
 4
 91
  638
 31
 1
 668
  
Total equity securities available-for-sale106
 8
 4
 110
  659
 38
 2
 695
  
Total$38,467
 $2,744
 $196
 $41,015
  
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.


The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI).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 Non-Core 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1,321$1,186 million and $1,014$1,411 million.

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 TotalLess than 12 Months 12 Months or Longer Total
September 30, 2017
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
June 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$1,216
 $21
 $91
 $5
 $1,307
 $26
$6,963
 $192
 $193
 $11
 $7,156
 $203
States, municipalities and political subdivisions583
 6
 56
 1
 639
 7
723
 8
 3
 —
 726
 8
Asset-backed:                      
Residential mortgage-backed1,522
 25
 106
 3
 1,628
 28
3,183
 68
 344
 17
 3,527
 85
Commercial mortgage-backed378
 6
 138
 7
 516
 13
913
 16
 228
 17
 1,141
 33
Other asset-backed129
 4
 10
 —
 139
 4
632
 6
 27
 3
 659
 9
Total asset-backed2,029
 35
 254
 10
 2,283
 45
4,728
 90
 599
 37
 5,327
 127
U.S. Treasury and obligations of government-sponsored enterprises67
 3
 6
 —
 73
 3
49
 1
 19
 2
 68
 3
Foreign government191
 4
 5
 —
 196
 4
178
 3
 40
 2
 218
 5
Total fixed maturity securities available-for-sale4,086
 69
 412
 16
 4,498
 85
Equity securities available-for-sale:        

 

Common stock2
 1
 —
 —
 2
 1
Preferred stock16
 —
 —
 —
 16
 —
Total equity securities available-for-sale18
 1
 —
 —
 18
 1
Total$4,104

$70

$412

$16

$4,516

$86
$12,641
 $294
 $854
 $52
 $13,495
 $346

Less than 12 Months 12 Months or Longer TotalLess than 12 Months 12 Months or Longer Total
December 31, 2016
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
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$2,615
 $61
 $254
 $15
 $2,869
 $76
$1,354
 $21
 $168
 $7
 $1,522
 $28
States, municipalities and political subdivisions959
 32
 23
 1
 982
 33
72
 1
 85
 1
 157
 2
Asset-backed:                      
Residential mortgage-backed2,136
 44
 201
 7
 2,337
 51
1,228
 5
 947
 27
 2,175
 32
Commercial mortgage-backed756
 22
 69
 2
 825
 24
403
 4
 212
 10
 615
 14
Other asset-backed398
 5
 24
 —
 422
 5
248
 3
 18
 2
 266
 5
Total asset-backed3,290
 71
 294
 9
 3,584
 80
1,879
 12
 1,177
 39
 3,056
 51
U.S. Treasury and obligations of government-sponsored enterprises5
 —
 —
 —
 5
 —
49
 2
 21
 2
 70
 4
Foreign government108
 3
 —
 —
 108
 3
166
 2
 4
 —
 170
 2
Total fixed maturity securities available-for-sale6,977
 167
 571
 25
 7,548
 192
3,520
 38
 1,455
 49
 4,975
 87
Equity securities available-for-sale -- Preferred stock12
 —
 13
 4
 25
 4
Equity securities available-for-sale:
 
 
 
 
 
Common stock7
 1
 —
 —
 7
 1
Preferred stock93
 1
 —
 —
 93
 1
Total equity securities available-for-sale100
 2
 —
 —
 100
 2
Total$6,989
 $167
 $584
 $29
 $7,573
 $196
$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.

Based on current facts and circumstances, the Company believes the unrealized losses presented in the SeptemberJune 30, 20172018 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 SeptemberJune 30, 2017.2018.
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 SeptemberJune 30, 20172018 and 20162017 and for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Beginning balance of credit losses on fixed maturity securities$30
 $41
 $36
 $53
$25
 $32
 $27
 $36
Reductions for securities sold during the period(2) (2) (8) (14)(4) (2) (6) (6)
Reductions for securities the Company intends to sell or more likely than not will be required to sell—
 (1) —
 (1)
Ending balance of credit losses on fixed maturity securities$28

$38

$28
 $38
$21
 $30
 $21
 $30
Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
(In millions)
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Cost or
Amortized
Cost
 
Estimated
Fair
Value
 
Cost or
Amortized
Cost
 
Estimated
Fair
Value
Due in one year or less$1,374
 $1,404
 $1,779
 $1,828
$1,301
 $1,322
 $1,135
 $1,157
Due after one year through five years7,931
 8,293
 7,566
 7,955
8,211
 8,421
 8,165
 8,501
Due after five years through ten years15,853
 16,574
 15,892
 16,332
16,138
 16,240
 16,060
 16,718
Due after ten years13,652
 15,815
 13,112
 14,778
12,261
 13,795
 12,852
 15,108
Total$38,810
 $42,086
 $38,349
 $40,893
$37,911
 $39,778
 $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 $170$161 million and $174$167 million as of SeptemberJune 30, 20172018 and December 31, 20162017 and a fair value of $(1)$4 million and $3$(3) million as of SeptemberJune 30, 20172018 and December 31, 2016.2017. 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 SeptemberJune 30, 2017,2018, the Company had committed approximately $405$551 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of SeptemberJune 30, 2017,2018, the Company had mortgage loan commitments of $68$15 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 SeptemberJune 30, 2017,2018, the Company had commitments to purchase or fund additional amounts of $205$272 million and sell $185$111 million under the terms of such securities.


Note D.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.

Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are presented in the following tables.
September 30, 2017      
Total
Assets/Liabilities
at Fair Value
(In millions)Level 1 Level 2 Level 3 
Assets       
Fixed maturity securities:       
Corporate and other bonds$—
 $19,469
 $119
 $19,588
States, municipalities and political subdivisions—
 13,955
 1
 13,956
Asset-backed:       
Residential mortgage-backed—
 4,829
 176
 5,005
Commercial mortgage-backed—
 1,876
 24
 1,900
Other asset-backed—
 915
 146
 1,061
Total asset-backed—
 7,620
 346
 7,966
U.S. Treasury and obligations of government-sponsored enterprises115
 —
 —
 115
Foreign government—
 445
 —
 445
Redeemable preferred stock20
 —
 —
 20
Total fixed maturity securities135
 41,489
 466
 42,090
Equity securities110
 —
 19
 129
Other invested assets—
 5
 —
 5
Short term investments479
 876
 —
 1,355
Total assets$724
 $42,370
 $485
 $43,579
Liabilities     
  
Other liabilities$—
 $1
 $—
 $1
Total liabilities$—
 $1
 $—
 $1
 Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises and foreign governments and redeemable preferred stock.
December 31, 2016      
Total
Assets/Liabilities
at Fair Value
(In millions)Level 1 Level 2 Level 3 
Assets       
Fixed maturity securities:       
Corporate and other bonds$—
 $18,840
 $130
 $18,970
States, municipalities and political subdivisions—
 13,239
 1
 13,240
Asset-backed:       
Residential mortgage-backed—
 4,944
 129
 5,073
Commercial mortgage-backed—
 2,027
 13
 2,040
Other asset-backed—
 968
 57
 1,025
Total asset-backed—
 7,939
 199
 8,138
U.S. Treasury and obligations of government-sponsored enterprises93
 —
 —
 93
Foreign government—
 445
 —
 445
Redeemable preferred stock19
 —
 —
 19
Total fixed maturity securities112
 40,463
 330
 40,905
Equity securities91
 —
 19
 110
Other invested assets—
 5
 —
 5
Short term investments475
 853
 —
 1,328
Life settlement contracts, included in Other assets—
 —
 58
 58
Total assets$678
 $41,321
 $407
 $42,406
Liabilities     
  
Other liabilities$—
 $(3) $—
 $(3)
Total liabilities$—
 $(3) $—
 $(3)
June 30, 2018      
Total
Assets/Liabilities
at Fair Value
(In millions)Level 1 Level 2 Level 3 
Assets       
Fixed maturity securities:       
Corporate bonds and other$166
 $18,949
 $94
 $19,209
States, municipalities and political subdivisions—
 12,008
 1
 12,009
Asset-backed—
 8,304
 273
 8,577
Total fixed maturity securities166
 39,261
 368
 39,795
Equity securities:       
Common stock85
 —
 4
 89
Non-redeemable preferred stock67
 604
 13
 684
Total equity securities152
 604
 17
 773
Short term and other167
 1,050
 —
 1,217
Total assets$485
 $40,915
 $385
 $41,785
Liabilities     
  
Other liabilities$—
 $(4) $—
 $(4)
Total liabilities$—
 $(4) $—
 $(4)
December 31, 2017      
Total
Assets/Liabilities
at Fair Value
(In millions)Level 1 Level 2 Level 3 
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 securities128
 40,925
 434
 41,487
Equity securities:       
Common stock23
 —
 4
 27
Non-redeemable preferred stock68
 584
 16
 668
Total equity securities91
 584
 20
 695
Short term and other396
 958
 —
 1,354
Total assets$615
 $42,467
 $454
 $43,536
Liabilities     
  
Other liabilities$—
 $3
 $—
 $3
Total liabilities$—
 $3
 $—
 $3

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Level 3
(In millions)
Balance as of
July 1,
2017
 Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) Purchases Sales Settlements 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
September 30,
2017
 Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)*
Fixed maturity securities:                   
Corporate and other bonds$100
 $1
 $1
 $13
 $—
 $(11) $15
 $—
 $119
 $—
States, municipalities and political subdivisions1
 —
 —
 —
 —
 —
 —
 —
 1
 —
Asset-backed:                 
  
Residential mortgage-backed123
 1
 1
 —
 —
 (7) 58
 —
 176
 —
Commercial mortgage-backed13
 —
 (1) 12
 —
 (2) 2
 —
 24
 —
Other asset-backed82
 (1) 1
 27
 —
 (4) 41
 —
 146
 —
Total asset-backed218
 —
 1
 39
 —
 (13) 101
 —
 346
 —
Total fixed maturity securities319
 1
 2
 52
 —
 (24) 116
 —
 466
 —
Equity securities19
 —
 —
 —
 —
 —
 —
 —
 19
 —
Life settlement contracts1
 —
 —
 —
 (1) —
 —
 —
 —
 —
Total$339
 $1
 $2
 $52
 $(1) $(24) $116
 $—
 $485
 $—
Level 3
(In millions)
Corporate bonds and other States, municipalities and political subdivisions Asset-backed Equity securities Derivative financial instruments Total
Balance as of April 1, 2018$100
 $1
 $279
 $18
 $—
 $398
Total realized and unrealized investment gains (losses):          

Reported in Net realized investment gains (losses)—
 —
 —
 (1) —
 (1)
Reported in Net investment income—
 —
 —
 —
 —
 —
Reported in Other comprehensive income(1) —
 (1) —
 —
 (2)
Total realized and unrealized investment gains (losses)(1) —
 (1) (1) —
 (3)
Purchases2
 —
 41
 —
 —
 43
Sales(5) —
 —
 —
 —
 (5)
Settlements(2) —
 (6) —
 —
 (8)
Transfers into Level 3—
 —
 13
 —
 —
 13
Transfers out of Level 3—
 —
 (53) —
 —
 (53)
Balance as of June 30, 2018$94
 $1
 $273
 $17
 $—
 $385
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2018 recognized in Net income (loss)$—
 $—
 $—
 $(1) $—
 $(1)

Level 3
(In millions)
Balance as of
July 1,
2016
 Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) Purchases Sales Settlements 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
September 30,
2016
 Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:                   
Corporate and other bonds$242
 $1
 $7
 $16
 $—
 $(5) $—
 $—
 $261
 $—
States, municipalities and political subdivisions2
 —
 —
 —
 —
 (1) —
 —
 1
 —
Asset-backed:                 
  
Residential mortgage-backed134
 —
 (1) 5
 —
 (1) —
 (58) 79
 —
Commercial mortgage-backed11
 —
 —
 23
 —
 (8) —
 (2) 24
 —
Other asset-backed45
 —
 —
 34
 —
 —
 —
 (36) 43
 —
Total asset-backed190
 —
 (1) 62
 —
 (9) —
 (96) 146
 —
Total fixed maturity securities434
 1
 6
 78
 —
 (15) —
 (96) 408
 —
Equity securities19
 (1) 1
 —
 —
 —
 —
 —
 19
 (2)
Life settlement contracts67
 —
 —
 —
 —
 —
 —
 —
 67
 —
Total$520
 $—
 $7
 $78
 $—
 $(15) $—
 $(96) $494
 $(2)
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 April 1, 2017$121
 $1
 $256
 $19
 $—
 $46
 $443
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
 —
 —
 —
 13
Sales—
 —
 —
 (1) —
 (45) (46)
Settlements(11) —
 (7) —
 —
 —
 (18)
Transfers into Level 3—
 —
 24
 —
 —
 —
 24
Transfers out of Level 3(10) —
 (70) —
 —
 —
 (80)
Balance as of June 30, 2017$100
 $1
 $218
 $19
 $—
 $1
 $339
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2017 recognized in Net income (loss)$—
 $—
 $—
 $—
 $—
 $—
 $—


Level 3
(In millions)
Balance as of
January 1,
2017
 Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) Purchases Sales Settlements 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
September 30,
2017
 Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)*
Fixed maturity securities:                   
Corporate and other bonds$130
 $1
 $2
 $18
 $(1) $(36) $15
 $(10) $119
 $—
States, municipalities and political subdivisions1
 —
 —
—
—
 —
 —
 —
 —
 1
 —
Asset-backed:                   
Residential mortgage-backed129
 3
 4
—
—
 —
 (18) 58
 —
 176
 —
Commercial mortgage-backed13
 —
 (1)—
12
 —
 (2) 2
 —
 24
 —
Other asset-backed57
 (2) 1
—
78
 —
 (6) 93
 (75) 146
 —
Total asset-backed199
 1
 4
 90
 —
 (26) 153
 (75) 346
 —
Total fixed maturity securities330
 2
 6
 108
 (1) (62) 168
 (85) 466
 —
Equity securities19
 —
 2
—
1
 (3) —
 —
 —
 19
 —
Derivative financial instruments—
 1
 —
—
—
 (1) —
 —
 —
 —
 —
Life settlement contracts58
 6
 —
 —
 (59) (5) —
 —
 —
 —
Total$407
 $9
 $8
 $109
 $(64) $(67) $168
 $(85) $485
 $—
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) —
 7
 (3) —
 3
Reported in Net investment income—
 —
 —
 —
 —
 —
Reported in Other comprehensive income(1) —
 (6) —
 —
 (7)
Total realized and unrealized investment gains (losses)(2) —
 1
 (3) —
 (4)
Purchases2
 —
 71
 —
 —
 73
Sales(5) —
 (72) —
 —
 (77)
Settlements(4) —
 (12) —
 —
 (16)
Transfers into Level 35
 —
 13
 —
 —
 18
Transfers out of Level 3—
 —
 (63) —
 —
 (63)
Balance as of June 30, 2018$94
 $1
 $273
 $17
 $—
 $385
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2018 recognized in Net income (loss)$—
 $—
 $—
 $(3) $—
 $(3)

Level 3
(In millions)
Balance as of
January 1,
2016
 Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)* Net change in unrealized appreciation (depreciation) included in Other comprehensive income (loss) Purchases Sales Settlements 
Transfers into
Level 3
 
Transfers out
of Level 3
 
Balance as of
September 30,
2016
 Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:                   
Corporate and other bonds$168
 $1
 $14
 $163
 $(36) $(15) $—
 $(34) $261
 $—
States, municipalities and political subdivisions2
 —
 —
 —
 —
 (1) —
 —
 1
 —
Asset-backed:                 
  
Residential mortgage-backed134
 2
 (2) 15
 —
 (10) —
 (60) 79
 —
Commercial mortgage-backed22
 —
 —
 32
 —
 (17) 3
 (16) 24
 —
Other asset-backed53
 —
 2
 69
 (25) (1) 2
 (57) 43
 —
Total asset-backed209
 2
 —
 116
 (25) (28) 5
 (133) 146
 —
Total fixed maturity securities379
 3
 14
 279
 (61) (44) 5
 (167) 408
 —
Equity securities20
 (1) —
 —
 —
 —
 —
 —
 19
 (2)
Life settlement contracts74
 10
 —
 —
 —
 (17) —
 —
 67
 2
Total$473
 $12
 $14
 $279
 $(61) $(61) $5
 $(167) $494
 $—
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
 —
 2
Reported in Other revenues—
 —
 —
 —
 —
 6
 6
Reported in Other comprehensive income1
 —
 3
 2
 —
 —
 6
Total realized and unrealized investment gains (losses)1
 —
 4
 2
 1
 6
 14
Purchases5
 —
 51
 1
 —
 —
 57
Sales(1) —
 —
 (3) (1) (58) (63)
Settlements(25) —
 (13) —
 —
 (5) (43)
Transfers into Level 3—
 —
 52
 —
 —
 —
 52
Transfers out of Level 3(10) —
 (75) —
 —
 —
 (85)
Balance as of June 30, 2017$100
 $1
 $218
 $19
 $—
 $1
 $339
Unrealized gains (losses) on Level 3 assets and liabilities held as of June 30, 2017 recognized in Net income (loss)$—
 $—
 $—
 $—
 $—
 $—
 $—


*Net realized and unrealized gains and losses from Level 3 securities and derivatives are reported in Net income (loss) as follows:
Major Category of Assets and LiabilitiesCondensed Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale (1)
Net realized investment gains (losses)
Fixed maturity securities tradingNet investment income
Equity securities (1)
Net realized investment gains (losses)
Other invested assets - Derivative financial instruments held in a trading portfolioNet investment income
Other invested assets - Derivative financial instruments not held in a trading portfolioNet realized investment gains (losses)
Life settlement contractsOther revenues
Other liabilities - Derivative financial instrumentsNet realized investment gains (losses)
(1) Unrealized gains and losses are reported within AOCI.
Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended SeptemberJune 30, 20172018, there were no transfers between Level 1 and 2016,Level 2. During the six months ended June 30, 2018, there were $29 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the three and six months ended June 30, 2017 there were no transfers between Level 1 and Level 2. The Company's policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Level 1 securities include highly liquid and exchange traded bonds and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.

Short Term and Other Invested Assets
The fair value of Federal Home Loan Bank of Chicago (FHLBC) stock is equal to par because it can only be redeemed by the FHLBC at par or sold to another member of the FHLBC at par and is classified as Level 2.
As of September 30, 2017 and December 31, 2016, there were approximately $37 million and $31 million respectively 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.
Short Term Investments
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
As of June 30, 2018 and December 31, 2017, there were approximately $42 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 accounts forsold its investment in life settlement contracts usingto a third party in 2017. The valuation of the fair value method. Historically, the fair value of life settlement contracts was determined as the present value of the anticipated death benefits less anticipated premium payments based on contractthe terms that are distinct for each insured, as well as the Company's own assumptions for mortality, premium expense and the rate of return that a buyer would require on the contracts.
sale. The entire portfolio of life settlement contracts, which is included within the Life and Group Non-Core segment, was determined to be held for sale as of December 31, 2016 as the Company reached an agreement on terms to sell the portfolio. As such, the Company adjusted the fair value to the estimated sales proceeds less cost to sell. The definitive Purchase and Sale Agreement (PSA) related to the portfolio was executed on March 7, 2017 (sale date). In connection therewith, the life settlement contracts and related sale proceeds were placed in escrow until the buyer was recognized as the owner and beneficiary of each individual life settlement contract by the life insurance company that issued the policy. All of the contracts have been released from escrow as of September 30, 2017. The Company derecognized the released contracts and recorded the consideration, including a note receivable, which is payable over three years and is carried at amortized cost less any valuation allowance. The note receivable of $45 million is included within Other assets on the September 30, 2017 Condensed Consolidated Balance Sheet and interest income is accreted to the principal balance of the note.
The fair value of the Company's investments in life settlement contracts were $0 million and $58 million as of September 30, 2017 and December 31, 2016, and are included in Other assets on the Condensed Consolidated Balance Sheets. Despite the sale, the contracts were classified as Level 3 as there iswas not an active market for life settlement contracts. The cash receipts and payments related to the life settlement contracts prior to the sale date are included in Cash Flows from operating activities on the Condensed Consolidated Statements of Cash Flows. Cash receipts related to the sale of the life settlement contracts, as well as principal payments on the note receivable, are included in Cash Flows from investing activities.
Derivative Financial Investments
Level 2 securitiesinvestments 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.

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 valuation of life settlement contracts was based on the terms of the sale of the contracts to a third party; therefore, the contracts are not included in the table below.
September 30, 2017
Estimated Fair Value
(In millions)
 Valuation Technique(s) Unobservable Input(s) 
Range
 (Weighted Average)
June 30, 2018
Estimated Fair Value
(In millions)
 Valuation Technique(s) Unobservable Input(s) 
Range
 (Weighted Average)
Fixed maturity securities$139
 Discounted cash flow Credit spread 1% - 12% (3%)$130
 Discounted cash flow Credit spread 1% - 12% (3%)
December 31, 2016Estimated Fair Value
(In millions)		 Valuation Technique(s) Unobservable Input(s) 
Range
 (Weighted Average)
December 31, 2017Estimated Fair Value
(In millions)		 Valuation Technique(s) Unobservable Input(s) 
Range
 (Weighted Average)
Fixed maturity securities$106
 Discounted cash flow Credit spread 2% - 40% (4%)$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, 2017
Carrying
Amount
 Estimated Fair Value
June 30, 2018
Carrying
Amount
 Estimated Fair Value
(In millions)
Carrying
Amount
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets                 
Mortgage loans$722
 $—
 $—
 $731
 $731
$865
 $—
 $—
 $850
 $850
Note receivable45
—
—
 —
—
46
 46
34

—

—
 34
 34
Liabilities                  
Short term debt$150
 $—
 $152
 $—
 $152
$30
 $—
 $30
 $—
 $30
Long term debt2,707
 —
 2,916
 —
 2,916
2,679
 —
 2,754
 —
 2,754
December 31, 2016Carrying
Amount		 Estimated Fair Value
December 31, 2017Carrying
Amount		 Estimated Fair Value
(In millions)Carrying
Amount		 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets                 
Mortgage loans$591
 $—
 $—
 $594
 $594
$839
 $—
 $—
 $844
 $844
Note receivable46
 —
 —
 46
 46
Liabilities                  
Short term debt$150
 $—
 $150
 $—
 $150
Long term debt$2,710
 $—
 $2,952
 $—
 $2,952
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 Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.
The carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Short term investments not carried at fair value, Accrued investment income and certain Other assets and Other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the tables above.

Note E.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 all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $269$26 million and $342$60 million for the three and ninesix months ended SeptemberJune 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.2018. The remaining catastrophe losses in 2017 resulted primarily from U.S. weather-related events. Catastrophe-related reinsurance reinstatement premium was $6 million for the three and nine months ended September 30, 2017. The Companycompany reported catastrophe losses, net of reinsurance, of $16$39 million and $137$73 million for the three and ninesix months ended SeptemberJune 30, 2016. Catastrophe2017. Net catastrophe losses in 2016 resulted2018 and 2017 related primarily fromto U.S. weather-related events and the Fort McMurray wildfires.events.

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 Non-Core segment.
For the nine months ended September 30 
For the six months ended June 30   
(In millions)2017 20162018 2017
Reserves, beginning of year:      
Gross$22,343
 $22,663
$22,004
 $22,343
Ceded4,094
 4,087
3,934
 4,094
Net reserves, beginning of year18,249
 18,576
18,070
 18,249
Net incurred claim and claim adjustment expenses:      
Provision for insured events of current year3,949
 3,799
2,552
 2,443
Decrease in provision for insured events of prior years(284) (332)(112) (159)
Amortization of discount138
 134
92
 93
Total net incurred (1)
3,803

3,601
2,532
 2,377
Net payments attributable to:      
Current year events(560) (591)(312) (266)
Prior year events(3,401) (3,209)(2,387) (2,331)
Total net payments(3,961)
(3,800)(2,699) (2,597)
Foreign currency translation adjustment and other110
 39
(70) 70
Net reserves, end of period18,201
 18,416
17,833
 18,099
Ceded reserves, end of period4,008
 4,256
4,157
 4,080
Gross reserves, end of period$22,209

$22,672
$21,990
 $22,179
(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 allocated claim adjustment expense reserves, and premium accruals, net of reinsurance, for prior years are defined as net prior year development.loss reserve development (development). These changes can be favorable or unfavorable. The following tables and discussion present the net prior yeartable presents development recorded for the Specialty, Commercial, International and Corporate & Other Non-Core segments.
Three months ended September 30, 2017         
(In millions)

Specialty
  Commercial International 
Corporate
& Other
Non-Core
 Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development$(109) $(7) $1
 $—
 $(115)
Pretax (favorable) unfavorable premium development(3) (11) (5) —
 (19)
Total pretax (favorable) unfavorable net prior year development$(112) $(18) $(4) $—
 $(134)
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Pretax (favorable) unfavorable development:       
Specialty$(44) $(23) $(74) $(35)
Commercial(13) (34) (22) (77)
International(2) 2
 (2) —
Corporate & Other—
 —
 —
 —
Total pretax (favorable) unfavorable development$(59) $(55) $(98) $(112)
Three months ended September 30, 2016         
(In millions)

Specialty
  Commercial International 
Corporate
& Other
Non-Core
 Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development$(112) $(5) $(15) $—
 $(132)
Pretax (favorable) unfavorable premium development—
 (3) (2) —
 (5)
Total pretax (favorable) unfavorable net prior year development$(112) $(8) $(17) $—
 $(137)
Nine months ended September 30, 2017         
(In millions)

Specialty
  Commercial International 
Corporate
& Other
Non-Core
 Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development$(163) $(65) $1
 $—
 $(227)
Pretax (favorable) unfavorable premium development(13) 27
 (16) —
 (2)
Total pretax (favorable) unfavorable net prior year development$(176) $(38) $(15) $—
 $(229)
Nine months ended September 30, 2016         
(In millions)

Specialty
  Commercial International 
Corporate
& Other
Non-Core
 Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development$(211) $(37) $(34) $—
 $(282)
Pretax (favorable) unfavorable premium development(18) (7) (2) —
 (27)
Total pretax (favorable) unfavorable net prior year development$(229) $(44) $(36) $—
 $(309)
Premium development can occur in the property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium.  Audits on policies usually occur in a period after the expiration date of the policy. See further information on the premium development in the Commercial segment for the three and nine months ended September 30, 2017 within the Small Business discussion in Note F.

Specialty
The following table presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the Specialty segment.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Pretax (favorable) unfavorable development:              
Medical Professional Liability$1
 $13
 $5
 $(17)$3
 $2
 $23
 $22
Other Professional Liability and Management Liability(27) (48) (96) (98)(34) (37) (68) (69)
Surety(82) (63) (82) (63)(15) —
 (30) —
Warranty(1) 2
 5
 7
(6) 6
 (6) 6
Other—
 (16) 5
 (40)8
 6
 7
 6
Total pretax (favorable) unfavorable development$(109) $(112) $(163) $(211)$(44) $(23) $(74) $(35)
Three Months
2018
Favorable development in other professional liability and management liability was primarily in professional liability errors and omissions (E&O) reflecting lower than expected claim frequency in accident years 2014 through 2016 and favorable severity for accident years 2012 and prior.
Favorable development in surety was driven by continued lower than expected loss emergence on accident years 2015 and prior. 
2017
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 20122013 through 2015 primarily for professional liability products.
Favorable development in surety coverages was primarily due toand lower than expected frequency of large lossesseverity in accident years 2015 and prior.2014 through 2016 for professional liability.
2016Six Months
2018
Unfavorable development for medical professional liability was largelyprimarily due to higher than expected frequencyseverity in accident years 2014 and 20152017 in aging services. Increased claims on a specific hospital policy in accident years 2014 and 2015 was also an unfavorable contributor although more than offset by favorable development relative to expectations in accident years 2013 and prior.our hospitals business.
Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims and favorable outcomes on specific claims for accident years 2010 through 2014.
Favorable development in surety coverages was primarily due to lower than expected claim frequency of large lossesfor accident years 2013 through 2017 related to financial institutions. Additional favorable development was in professional liability errors and omissions (E&O) reflecting lower than expected claim frequency in accident years 2014 through 2016 and favorable severity for accident years 2012 and prior.
Favorable development for other coveragessurety was due to bettercontinued lower than expected claimloss emergence for accident years 2015 and prior.
2017
Unfavorable development in medical professional liability was primarily due to continued higher than expected frequency in commercial lines coverages provided to Specialty customers in accident years 2010 through 2015.

Nine Months
2017aging services.
Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower than expected frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 20122013 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.
2016
Favorable development for medical professional liability was primarily due to lower than expected severities for individual healthcare professionals, allied facilities and hospitals in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected frequency and severity in accident years 2014 and 2015 in our aging services business.
Favorable development in other professional liability and management liability was primarily related to favorable settlements on closed claims in accident years 2011 through 2013 in professional services. Additional favorable development related to lower than expected frequency of claims and favorable outcomes on specific claims in accident years 2010 through 2014 in professional services. This was partially offset by unfavorable development related to a specific financial institutions claim in accident year 2014, higher severities in accident year 2015, and deterioration on credit crises-related claims in accident year 2009.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.
Favorable development for other coverages provided to Specialty customers was due to better than expected claim frequency in property coverages in accident year 2015 and commercial lines coverages in accident years 2010 through 2015.



Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Pretax (favorable) unfavorable development:              
Commercial Auto$(14) $(12) $(40) $(47)$—
 $1
 $(1) $(25)
General Liability7
 14
 6
 (38)26
 1
 18
 (17)
Workers' Compensation7
 (6) (39) 48
(6) (47) (12) (47)
Property and Other(7) (1) 8
 —
(33) 11
 (27) 12
Total pretax (favorable) unfavorable development$(7) $(5) $(65) $(37)$(13) $(34) $(22) $(77)
Three Months
2017
Favorable development for 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 2012.2018
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 oldergeneral liability was driven by higher than expected claim severity in umbrella in accident years.
2016years 2013 through 2015. 
Favorable development for commercial autoin property and other was primarily due to lower than expected severities in accident years 2012 through 2015.
Unfavorable development for general liability was primarily due to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.
Favorable development for workers' compensation was primarily driven by lower than expected frequencies in accident years 2009 through 2014, partially offset by the estimated impact of recent Florida court rulings in accident years 2008 through 2015.


Nine Months
2017
Favorable development for commercial auto was primarily due to lower than expectedclaim severity in accident years 2013 through 2016, as well as a large favorable recovery on a claimfrom catastrophes in accident year 2012.2017.
2017
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.
Unfavorable development for property and other was primarily due to higher than expected severity in accident year 2016.
2016Six 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 from catastrophes in accident year 2017.
2017
Favorable development for commercial auto was primarily due to favorable settlements on claimslower than expected severity in accident years 2010 through 2014 and lower than expected severities in accident years 20122013 through 2015.
Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013. This was partially offset by unfavorable development related to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.
Unfavorable development for workers' compensation was primarily due to higher than expected severity for Defense Base Act contractors and the estimated impact of recent Florida court rulings in accident years 2008 through 2015. This was partially offset by favorable development related to lower than expected frequenciesseverity in life sciences.
Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, 2009 through 2014.partially attributable to California reforms related to decreases in medical costs.
Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event. This was offset by favorable development primarily due to better than expected loss frequency in accident years 2013 through 2015.

year 2016.

International
The following table presents further detail of the development recorded for the International segment.
Periods ended September 30Three Months Nine Months
(In millions)2017 2016 2017 2016
Pretax (favorable) unfavorable development:       
Medical Professional Liability$4
 $(2) $(1) $(3)
Other Professional Liability(8) (1) 1
 16
Liability4
 (2) (1) (21)
Property & Marine(4) (9) (15) (16)
Other5
 (1) 17
 (10)
Total pretax (favorable) unfavorable development$1
 $(15) $1
 $(34)
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Pretax (favorable) unfavorable development:       
Casualty$(6) $1
 $(6) $1
Property12
 (10) 12
 (11)
Energy and Marine(5) (3) (5) (3)
Specialty9
 16
 9
 15
Healthcare and Technology(12) (2) (12) (2)
Total pretax (favorable) unfavorable development$(2) $2
 $(2) $—
Three Months
20172018
FavorableUnfavorable development in other professional liabilityproperty was primarily due to better than expected emergence in the Canadian run-off business in accident years 2014 and prior.
2016
Favorable development for other professional liability was primarily due to favorable settlements on claims in accident years 2013 and prior. This was largely offset by higher than expected unfavorable large loss emergence in accident years 2014 and 2015.
Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 United Kingdom (UK) floods.

Nine Months
2017
Favorable development for other professional liability was primarily due to better than expected emergence in the Canadian run-off business in accident years 2014 and prior, as well as several favorable settlements relating to large claims in the Europe Professional Indemnity portfolio. This was partially offsetdriven by higher than expected severity in Canada and higher than expected frequency in Hardy, both in accident year 2017.
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 arising from the management liability business.and prior related to healthcare in Europe.
2017
Favorable development for property and marine was due to better than expected frequency in accident years 2014 through 2016.
Unfavorable development for other coveragesspecialty 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 Hardy Political Riskspolitical risks portfolio, relating largely to accident year 2016.
2016Six Months
Unfavorable2018
The drivers of development for other professional liability was primarily due to higher than expected large loss emergence in accident years 2011 through 2015, partially offset by favorable settlements on claims in accident years 2013 and prior.the six month period were consistent with the three month summary above.
Favorable2017
The drivers of development for liability was primarily due to better than expected severity in accident years 2013 and prior.
Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 UK floods.
Favorable development for other coverages was primarily due to better than expected severity in auto liability in accident years 2011 through 2015.six month period were generally consistent with the three month summary above.


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.
SubsequentIn years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves which resultedresulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is impactedaffected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Additional amounts ceded under LPT:       
Net A&EP adverse development before consideration of LPT$—
 $—
 $60
 $200
$—
 $—
 $113
 $60
Provision for uncollectible third-party reinsurance on A&EP—
 —
 (16) —
Total additional amounts ceded under LPT—
 —
 97
 60
Retroactive reinsurance benefit recognized(17) (12) (60) (94)(15) (3) (72) (43)
Pretax impact of A&EP reserve development and the LPT$(17) $(12) $—
 $106
Pretax impact of deferred retroactive reinsurance$(15) $(3) $25
 $17
Based upon the Company's annual A&EP reserve review, net unfavorable prior year development of $60$113 million and $200$60 million was recognized before consideration of cessions to the LPT for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. 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 2016 unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. While thisthe unfavorable development was ceded to NICO under the LPT, the Company’s Net income in bothfor the six month periods waswere negatively affected due to the application of retroactive reinsurance accounting.
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the cumulative amounts ceded under the LPT were $2.9$3.0 billion and $2.8$2.9 billion. The unrecognized deferred retroactive reinsurance benefit was $334$351 million and $326 million as of SeptemberJune 30, 20172018 and December 31, 2016.2017.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $2.9$3.0 billion and $2.8$3.1 billion as of SeptemberJune 30, 20172018 and December 31, 2016.2017. 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.

Note F. Legal Proceedings, Contingencies and Guarantees
CNA 401(k) Plus Plan Litigation
In September 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (CAC) (a former subsidiary of CCC), CNAF, the Investment Committee of the CNA 401(k) Plus Plan (Plan), The Northern Trust Company and John Does 1-10 (collectively Defendants) related to the Plan. The complaint alleges that Defendants breached fiduciary duties to the Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the Plan's Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of Plan participants who had invested in the Fixed Income Fund suffered lower returns in their Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. CCC and the other defendants are contesting the case, and no class has been certified. The Plan trustees have provided notice to their fiduciary coverage insurance carriers. Progress
The plaintiff, Defendants and the Plan's fiduciary insurance carriers have agreed on terms to settle this matter and have executed settlement agreements. The plaintiff and Defendants have proposed a class settlement for court approval, and the court granted preliminary approval subject to a fairness hearing. Based on the litigation has been limited as the parties are currently in mediation.
Based on information currently available and our assessment of the mediation,executed settlement agreements, management has recorded its best estimate of the Company's probable loss; however, it is reasonably possible that the ultimate liability may differ from that amount given the inherent uncertainty involved in this matter. After consideration of available insurance coverage, managementloss and does not believe that the ultimate resolution of this matter will have a material impact on the Company’s results of operations or financial position though the timing of recognition of any additional loss, if any, and insurance recovery, if any, may differ.position.
Small Business Premium Rate Adjustment
In prior quarters,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 the Company determined that it would voluntarily issue premium refunds along with interest on affected policies. After the rating errors were identified, written and earned premium have been reported net of any impact from the premium rate adjustments. There was noThe Company increased Earned premium development impact for the three months ended September 30, 2017 and $37 million of adverse premium development was recognized as a result of the rating errors for the nine months ended September 30, 2017. Pretax operating income was reduced by $1 million and $7reduced Earned premium by $37 million for the three and ninesix months ended SeptemberJune 30, 20172017. Interest expense increased for interest due to policyholders on the premium rate adjustments.adjustments by $1 million and $6 million for the three and six months ended June 30, 2017.
The policyholder refunds for the multi-packagemulti-peril package product were issued in the current quarter.third quarter of 2017. The policyholder refunds for workers’ compensation policies are in process and are expected to be completed by the end of 2018. Interest expense of $1 million was recorded for the six months ended June 30, 2018. The estimated refund liability, including interest, for the workers' compensation policies as of SeptemberJune 30, 20172018 was $61 million including interest. Any fines or penalties related to the foregoing are reasonably possible, but are not expected to be material to the Company's results of operations or financial position.$47 million.
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 SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had recorded liabilities of approximately $5 million related to guarantee and indemnification agreements. Managementagreements and management believes that it is not likely 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 SeptemberJune 30, 2017,2018, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to quantifiable indemnification agreements was $254$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 SeptemberJune 30, 2017,2018, 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 SeptemberJune 30, 2017,2018, 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.

Note G.G. Benefit Plans
The components of net periodic pension cost (benefit) are presented in the following table.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Pension cost (benefit)       
Net periodic pension cost (benefit)       
Service cost$—
 $—
 $—
 $—
Non-service cost:       
Interest cost on projected benefit obligation$25
 $29
 $77
 $85
24
 26
 47
 52
Expected return on plan assets(38) (41) (116) (121)(40) (39) (80) (78)
Amortization of net actuarial loss9
 9
 27
 28
9
 9
 18
 18
Settlement loss6
 —
 8
 —
1
 —
 5
 2
Net periodic pension cost (benefit)$2
 $(3) $(4) $(8)
Total non-service cost(6) (4) (10) (6)
Total net periodic pension cost (benefit)$(6) $(4) $(10) $(6)

The Company contributed $26 million to its pension plans forFor the ninethree and six months ended SeptemberJune 30, 2018, the Company recognized $2 million and $3 million of non-service cost in Insurance claims and policyholders' benefits and $4 million and $7 million of non-service cost in Other operating expenses.
For the three and six months ended June 30, 2017, the Company recognized $1 million and expects to contribute an additional $2 million to its pension plans before December 31, 2017.of non-service cost in Insurance claims and policyholders' benefits and $3 million and $4 million of non-service cost in Other operating expenses.

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, 2017$26
 $786
 $(635) $(145) $32
Other comprehensive income (loss) before reclassifications1
 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
(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 April 1, 2018$21
 $430
 $(765) $(86) $(400)
Other comprehensive income (loss) before reclassifications(1) (156) —
 (52) (209)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(1), $2, $- and $1—
 3
 (7) —
 (4)
Other comprehensive income (loss) net of tax (expense) benefit of $1, $46, $(2), $- and $45(1) (159) 7
 (52) (205)
Balance as of June 30, 2018$20
 $271
 $(758) $(138) $(605)
(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, 2016$31
 $934
 $(637) $(118) $210
Other comprehensive income (loss) before reclassifications7
 69
 —
 (24) 52
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(2), $(13), $3, $- and $(12)4
 27
 (6) —
 25
Other comprehensive income (loss) net of tax (expense) benefit of $(2), $(19), $(3), $- and $(24)3
 42
 6
 (24) 27
Balance as of September 30, 2016$34
 $976
 $(631) $(142) $237
(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 April 1, 2017$26
 $709
 $(640) $(187) $(92)
Other comprehensive income (loss) before reclassifications(1) 108
 —
 42
 149
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $1, $(15), $3, $-, and $(11)(1) 31
 (5) —
 25
Other comprehensive income (loss) net of tax (expense) benefit of $-, $(48), $(3), $- and $(51)—
 77
 5
 42
 124
Balance as of June 30, 2017$26
 $786
 $(635) $(145) $32

(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
(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 adjusted30
 859
 (775) (98) 16
Other comprehensive income (loss) before reclassifications(11) (570) —
 (40) (621)
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $-, $(5), $5, $- and $-(1) 18
 (17) —
 —
Other comprehensive income (loss) net of tax (expense) benefit of $3, $155, $(5), $- and $153(10) (588)
17
 (40) (621)
Balance as of June 30, 2018$20
 $271
 $(758) $(138) $(605)
(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, 2016$27
 $390
 $(648) $(84) $(315)
Other comprehensive income (loss) before reclassifications9
 615
 —
 (58) 566
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(1), $(12), $9, $- and $(4)2
 29
 (17) —
 14
Other comprehensive income (loss) net of tax (expense) benefit of $(4), $(292), $(9), $- and $(305)7
 586
 17
 (58) 552
Balance as of September 30, 2016$34
 $976
 $(631) $(142) $237
(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(1) 193
 —
 53
 245
Amounts reclassified from accumulated other comprehensive income (loss) net of tax (expense) benefit of $(1), $(24), $7, $- and $(18)3
 49
 (12) —
 40
Other comprehensive income (loss) net of tax (expense) benefit of $1, $(86), $(7), $- and $(92)(4) 144
 12
 53
 205
Balance as of June 30, 2017$26
 $786
 $(635) $(145) $32
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

Note I.I. Business Segments
The Company's core 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 non-core operations outside of Property & Casualty Operations are managed and reported in two segments: Life & Group Non-Core and Corporate & Other Non-Core.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, 2016.2017. 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 all individual segments. Distinct investment portfolios are not maintained for every individual segment; accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of Net investment income and Realized investment gains or losses are allocated primarily based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense has been eliminated. Income taxes have been allocated on the basis of the taxable income of the segments.
In the following tables, certain financial measures are presented to provide information used by management to monitor the Company's operating performance. Management utilizes these financial measures to monitor the Company's insurance operations and investment portfolio. Net operating
The performance of the Company's insurance operations is monitored by management through core income (loss), which is derived from certain income statement amounts, is used by management to monitor performance of the Company's insurance operations.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. Based on such analyses, the Company may recognize an OTTI loss on an investment security in accordance with its policy, or sell a security, which may produce realized gains and losses.
Net operatingCore 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, and iii) any cumulative effects of changes in accounting guidance.guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of net operatingcore income (loss) excludes net realized investment gains (losses)or losses because net realized investment gains (losses) are largely discretionary, except for someor losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations.


The Company's results of operations and selected balance sheet items by segment are presented in the following tables.
Three months ended September 30, 2017

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
    
Three months ended June 30, 2018

Specialty
 

Commercial
 International 
Life &
Group
 
Corporate
& Other
    
(In millions)

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 Eliminations Total Eliminations Total
Operating revenues  
  
             
Net earned premiums$703
 $741
 $226
 $136
 $—
 $—
 $1,806
$683
 $753
 $248
 $131
 $—
 $—
 $1,815
Net investment income134
 161
 13
 195
 6
 —
 509
130
 157
 15
 198
 6
 —
 506
Non-insurance warranty revenue248
 —
 —
 —
 —
 —
 248
Other revenues99
 7
 1
 —
 —
 —
 107
—
 8
 (1) —
 (1) —
 6
Total operating revenues936
 909
 240
 331
 6
 —
 2,422
1,061
 918
 262
 329
 5
 —
 2,575
Claims, Benefits and Expenses 
  
    
  
  
  
Claims, benefits and expenses 
  
    
  
  
  
Net incurred claims and benefits357
 611
 200
 322
 (15) —
 1,475
372
 470
 166
 327
 (14) —
 1,321
Policyholders’ dividends1
 4
 —
 —
 —
 —
 5
1
 5
 —
 —
 —
 —
 6
Amortization of deferred acquisition costs153
 120
 36
 —
 —
 —
 309
149
 127
 83
 —
 —
 —
 359
Non-insurance warranty expense225
 —
 —
 —
 —
 —
 225
Other insurance related expenses68
 133
 48
 32
 —
 —
 281
70
 126
 10
 30
 —
 —
 236
Other expenses85
 6
 (4) 2
 52
 —
 141
12
 10
 7
 1
 67
 —
 97
Total claims, benefits and expenses664
 874
 280
 356
 37
 —
 2,211
829
 738
 266
 358
 53
 —
 2,244
Operating income (loss) before income tax272
 35
 (40) (25) (31) —
 211
Income tax (expense) benefit on operating income (loss)(92) (10) 2
 35
 13
 —
 (52)
Net operating income (loss) 180
 25
 (38) 10
 (18) —
 159
Core income (loss) before income tax232
 180
 (4) (29) (48) —
 331
Income tax (expense) benefit on core income (loss)(49) (37) (3) 19
 9
 —
 (61)
Core income (loss) $183
 $143
 $(7) $(10) $(39) $—
 270
Net realized investment gains (losses)4
 6
 4
 3
 (41) —
 (24)            (1)
Income tax (expense) benefit on net realized investment gains (losses)(1) (3) (1) (1) 15
 —
 9
            1
Net realized investment gains (losses), after tax3
 3
 3
 2
 (26) —
 (15)            —
Net income (loss)$183
 $28
 $(35) $12
 $(44) $—
 $144
Net income            $270

Three months ended September 30, 2016

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
    
Three months ended June 30, 2017

Specialty
 

Commercial
 International 
Life &
Group
 
Corporate
& Other
    
(In millions)

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 Eliminations Total Eliminations Total
Operating revenues  
  
             
Net earned premiums$704
 $719
 $210
 $134
 $—
 $—
 $1,767
$678
 $716
 $206
 $135
 $—
 $(1) $1,734
Net investment income140
 175
 13
 192
 4
 —
 524
117
 146
 13
 195
 4
 —
 475
Non-insurance warranty revenue98
 —
 —
 —
 —
 —
 98
Other revenues93
 7
 —
 (4) —
 —
 96
—
 9
 (1) —
 1
 —
 9
Total operating revenues937
 901
 223
 322
 4
 —
 2,387
893
 871
 218
 330
 5
 (1) 2,316
Claims, Benefits and Expenses 
  
    
  
  
  
Claims, benefits and expenses 
  
    
  
  
  
Net incurred claims and benefits330
 446
 117
 313
 (11) —
 1,195
394
 426
 129
 328
 (2) —
 1,275
Policyholders’ dividends4
 3
 —
 —
 —
 —
 7
1
 4
 —
 —
 —
 —
 5
Amortization of deferred acquisition costs151
 118
 45
 —
 —
 —
 314
147
 120
 45
 —
 —
 —
 312
Non-insurance warranty expense72
 —
 —
 —
 —
 —
 72
Other insurance related expenses77
 151
 33
 37
 (3) —
 295
71
 129
 31
 32
 (1) (1) 261
Other expenses78
 9
 1
 2
 57
 —
 147
11
 10
 (1) 1
 50
 —
 71
Total claims, benefits and expenses640
 727
 196
 352
 43
 —
 1,958
696
 689
 204
 361
 47
 (1) 1,996
Operating income (loss) before income tax297
 174
 27
 (30) (39) —
 429
Income tax (expense) benefit on operating income (loss)(102) (60) (7) 36
 15
 —
 (118)
Net operating income (loss) 195
 114
 20
 6
 (24) —
 311
Core income (loss) before income tax197
 182
 14
 (31) (42) —
 320
Income tax (expense) benefit on core income (loss)(66) (62) (4) 36
 15
 —
 (81)
Core income (loss) $131
 $120
 $10
 $5
 $(27) $—
 239
Net realized investment gains (losses)9
 12
 6
 17
 2
 —
 46
            50
Income tax (expense) benefit on net realized investment gains (losses)(3) (3) (1) (6) (1) —
 (14)            (17)
Net realized investment gains (losses), after tax6
 9
 5
 11
 1
 —
 32
            33
Net income (loss)$201
 $123
 $25
 $17
 $(23) $—
 $343
Net income            $272



Nine months ended September 30, 2017

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
    
Six months ended June 30, 2018

Specialty
 

Commercial
 International 
Life &
Group
 
Corporate
& Other
    
(In millions)

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
 Eliminations Total Eliminations Total
Operating revenues  
  
             
Net earned premiums$2,056
 $2,097
 $629
 $404
 $—
 $(1) $5,185
$1,355
 $1,496
 $484
 $265
 $—
 $—
 $3,600
Net investment income407
 482
 38
 587
 15
 —
 1,529
252
 306
 29
 398
 11
 —
 996
Non-insurance warranty revenue486
 —
 —
 —
 —
 —
 486
Other revenues291
 25
 —
 1
 1
 —
 318
1
 16
 (1) 1
 —
 (1) 16
Total operating revenues2,754
 2,604
 667
 992
 16
 (1) 7,032
2,094
 1,818
 512
 664
 11
 (1) 5,098
Claims, Benefits and Expenses 
      
  
  
  
Claims, benefits and expenses 
  
    
  
  
  
Net incurred claims and benefits1,141
 1,470
 444
 980
 4
 —
 4,039
751
 938
 308
 630
 27
 —
 2,654
Policyholders’ dividends3
 11
 —
 —
 —
 —
 14
2
 10
 —
 —
 —
 —
 12
Amortization of deferred acquisition costs445
 354
 127
 —
 —
 —
 926
294
 248
 113
 —
 —
 —
 655
Non-insurance warranty expense441
 —
 —
 —
 —
 —
 441
Other insurance related expenses209
 387
 106
 96
 (1) (1) 796
134
 253
 66
 60
 —
 —
 513
Other expenses248
 31
 (11) 5
 146
 —
 419
23
 21
 3
 3
 109
 (1) 158
Total claims, benefits and expenses2,046
 2,253
 666
 1,081
 149
 (1) 6,194
1,645
 1,470
 490
 693
 136
 (1) 4,433
Operating income (loss) before income tax708
 351
 1
 (89) (133) —
 838
Income tax (expense) benefit on operating income (loss)(238) (117) (9) 108
 51
 —
 (205)
Net operating income (loss)470
 234
 (8) 19
 (82) —
 633
Core income (loss) before income tax449
 348
 22
 (29) (125) —
 665
Income tax (expense) benefit on core income (loss)(95) (72) (6) 33
 26
 —
 (114)
Core income (loss) $354
 $276
 $16
 $4
 $(99) $—
 551
Net realized investment gains (losses)25
 36
 17
 20
 (36) —
 62
            11
Income tax (expense) benefit on net realized investment gains (losses)(9) (12) (3) (8) 13
 —
 (19)            (1)
Net realized investment gains (losses), after tax16
 24
 14
 12
 (23) —
 43
            10
Net income (loss)$486
 $258
 $6
 $31
 $(105) $—
 $676
Net income            $561
June 30, 2018             
(In millions)             
Reinsurance receivables$926
 $695
 $265
 $433
 $2,245
 $—
 $4,564
Insurance receivables996
 1,311
 327
 8
 —
 —
 2,642
Deferred acquisition costs317
 248
 108
 —
 —
 —
 673
Goodwill117
 —
 30
 —
 —
 —
 147
Insurance reserves             
Claim and claim adjustment expenses5,816
 8,599
 1,706
 3,522
 2,347
 —
 21,990
Unearned premiums2,103
 1,608
 564
 136
 —
 (1) 4,410
Future policy benefits—
 —
 —
 10,667
 —
 —
 10,667

September 30, 2017             
(In millions)             
Reinsurance receivables$819
 $590
 $227
 $453
 $2,280
 $—
 $4,369
Insurance receivables984
 1,087
 256
 11
 2
 —
 2,340
Deferred acquisition costs318
 230
 95
 —
 —
 —
 643
Goodwill117
 —
 30
 —
 —
 —
 147
Insurance reserves             
Claim and claim adjustment expenses6,063
 8,630
 1,640
 3,468
 2,408
 —
 22,209
Unearned premiums2,010
 1,426
 490
 134
 —
 —
 4,060
Future policy benefits—
 —
 —
 11,040
 —
 —
 11,040

Six months ended June 30, 2017

Specialty
 

Commercial
 International 
Life &
Group
 
Corporate
& Other
    
(In millions)    Eliminations Total
Operating revenues             
Net earned premiums$1,332
 $1,377
 $403
 $268
 $—
 $(1) $3,379
Net investment income265
 329
 25
 392
 9
 —
 1,020
Non-insurance warranty revenue191
 —
 —
 —
 —
 —
 191
Other revenues1
 18
 (1) 1
 1
 —
 20
Total operating revenues1,789
 1,724
 427
 661
 10
 (1) 4,610
Claims, benefits and expenses 
      
  
  
  
Net incurred claims and benefits794
 849
 244
 658
 19
 —
 2,564
Policyholders’ dividends2
 7
 —
 —
 —
 —
 9
Amortization of deferred acquisition costs289
 237
 91
 —
 —
 —
 617
Non-insurance warranty expense142
 —
 —
 —
 —
 —
 142
Other insurance related expenses138
 257
 58
 64
 (1) (1) 515
Other expenses21
 25
 (7) 3
 94
 —
 136
Total claims, benefits and expenses1,386
 1,375
 386
 725
 112
 (1) 3,983
Core income (loss) before income tax403
 349
 41
 (64) (102) —
 627
Income tax (expense) benefit on core income (loss)(135) (118) (11) 73
 38
 —
 (153)
Core income (loss)$268
 $231
 $30
 $9
 $(64) $—
 474
Net realized investment gains (losses)            86
Income tax (expense) benefit on net realized investment gains (losses)            (28)
Net realized investment gains (losses), after tax            58
Net income            $532
Nine months ended September 30, 2016

Specialty
 

Commercial
 International 
Life &
Group
Non-Core
 
Corporate
& Other
Non-Core
    
(In millions)    Eliminations Total
Operating revenues 
  
    
  
  
  
Net earned premiums$2,088
 $2,103
 $605
 $401
 $—
 $(1) $5,196
Net investment income380
 465
 38
 567
 11
 —
 1,461
Other revenues269
 21
 1
 (1) 3
 —
��293
Total operating revenues2,737
 2,589
 644
 967
 14
 (1) 6,950
Claims, Benefits and Expenses 
      
  
  
  
Net incurred claims and benefits1,097
 1,357
 395
 976
 109
 —
 3,934
Policyholders’ dividends6
 9
 —
 —
 —
 —
 15
Amortization of deferred acquisition costs443
 351
 132
 —
 —
 —
 926
Other insurance related expenses225
 422
 98
 101
 (3) (1) 842
Other expenses232
 25
 17
 7
 158
 —
 439
Total claims, benefits and expenses2,003
 2,164
 642
 1,084
 264
 (1) 6,156
Operating income (loss) before income tax734
 425
 2
 (117) (250) —
 794
Income tax (expense) benefit on operating income (loss)(248) (145) (3) 117
 88
 —
 (191)
Net operating income (loss)486
 280
 (1) —
 (162) —
 603
Net realized investment gains (losses)2
 2
 14
 12
 (4) —
 26
Income tax (expense) benefit on net realized investment gains (losses)(1) —
 (3) (9) 2
 —
 (11)
Net realized investment gains (losses), after tax1
 2
 11
 3
 (2) —
 15
Net income (loss)$487
 $282
 $10
 $3
 $(164) $—
 $618

December 31, 2016             
December 31, 2017             
(In millions)                          
Reinsurance receivables$760
 $621
 $131
 $462
 $2,479
 $—
 $4,453
$671
 $654
 $212
 $438
 $2,315
 $—
 $4,290
Insurance receivables982
 1,021
 233
 17
 2
 —
 2,255
969
 1,103
 254
 8
 2
 —
 2,336
Deferred acquisition costs310
 214
 76
 —
 —
 —
 600
318
 223
 93
 —
 —
 —
 634
Goodwill117
 —
 28
 —
 —
 —
 145
117
 —
 31
 —
 —
 —
 148
Insurance reserves             
             
Claim and claim adjustment expenses6,149
 8,894
 1,328
 3,358
 2,614
 —
 22,343
5,669
 8,764
 1,636
 3,499
 2,436
 —
 22,004
Unearned premiums1,911
 1,323
 396
 132
 —
 —
 3,762
2,020
 1,409
 472
 128
 —
 —
 4,029
Future policy benefits—
 —
 —
 10,326
 —
 —
 10,326
—
 —
 —
 11,179
 —
 —
 11,179


The following table presents operating revenue by line of business for each reportable segment. Revenues are comprised of operating revenues and net realized investment gains and losses.
Periods ended September 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Specialty              
Management & Professional Liability$656
 $677
 $1,963
 $1,954
$627
 $620
 $1,251
 $1,258
Surety144
 139
 404
 399
145
 136
 274
 260
Warranty & Alternative Risks(1)140
 130
 412
 386
289
 137
 569
 271
Specialty revenues940
 946

2,779

2,739
1,061
 893
 2,094
 1,789
Commercial 
  
         
  
Middle Market501
 463
 1,421
 1,298
521
 469
 1,025
 937
Small Business131
 154
 357
 448
120
 126
 239
 222
Other Commercial Insurance283
 296
 862
 845
277
 276
 554
 565
Commercial revenues915
 913

2,640

2,591
918
 871
 1,818
 1,724
International

 

        

 

Canada60
 51
 164
 152
63
 52
 121
 103
CNA Europe87
 82
 239
 241
91
 79
 179
 151
Hardy97
 96
 281
 265
108
 87
 212
 173
International revenues244
 229

684

658
262
 218
 512
 427
Life & Group Non-Core revenues334
 339
 1,012
 979
Corporate & Other Non-Core revenues(35) 6
 (20) 10
Life & Group revenues329
 330
 664
 661
Corporate & Other revenues5
 5
 11
 10
Eliminations—
 —
 (1) (1)—
 (1) (1) (1)
Total operating revenues2,575
 2,316
 5,098
 4,610
Net realized investment gains (losses)(1) 50
 11
 86
Total revenues$2,398
 $2,433

$7,094

$6,976
$2,574
 $2,366
 $5,109
 $4,696
(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.


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 in which 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 $3.2 billion reported in Other liabilities as of January 1, 2018 and June 30, 2018. The increase in the deferred revenue balance for the six months ended June 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 six months ended June 30, 2018, the Company recognized $213 million and $435 million of revenues that were included in the deferred revenue balance as of January 1, 2018. For the three and six months ended June 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 $493 million of the deferred revenue in the remainder of 2018, $825 million in 2019, $656 million in 2020, and $1.2 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 are deferred and recorded as Other assets. These costs are amortized to Non-insurance warranty expense consistent with how the related revenue is recognized.
A premium deficiency arises to the extent that estimated future costs associated with these contracts exceed unrecognized revenue. The Company evaluates deferred costs for recoverability as part of our premium deficiency assessment. Anticipated investment income is considered in the determination of the recoverability of deferred costs. If necessary, adjustments to deferred costs and a premium deficiency reserve, if any, are recorded in current period results of operations. No premium deficiency was recognized in the six months ended June 30, 2018.
As of June 30, 2018, capitalized commission costs were $2.3 billion and capitalized administrator service costs were $19 million. For the three and six months ended June 30, 2018, the amount of amortization of capitalized costs was $164 million and $321 million and there was no impairment loss related to the costs capitalized.

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 2016 statutory net written premiums, we are the eighth 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, 2016.2017.
We utilize the net operatingcore income (loss) financial measure to monitor our operations. Net operatingCore 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, and iii) any cumulative effects of changes in accounting guidance.guidance and iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. Federal tax rate change. The calculation of net operatingcore income (loss) excludes net realized investment gains or losses because net realized investment gains or losses are largely discretionary, except for some losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Management monitors net operatingcore income (loss) for each business segment to assess segment performance. Presentation of consolidated net operatingcore 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 core 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,cost, 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. Rate, renewalRenewal premium change, rate and retention presented for the prior year isare 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 allocated claim adjustment expense reserves, and premium accruals, 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.


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 amountsamount 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
Pension and Postretirement Benefit Obligations
Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations, 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, 20162017 for further information.


CONSOLIDATED OPERATIONS
The following table includes the consolidated results of our operations.operations including our financial measure, Core income (loss). For more detailed components of our business operations and discussion of the net operatingcore income (loss) financial measure, see the segment discussionssections 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 30Three Months Nine Months
Periods ended June 30Three Months Six Months
(In millions)2017 2016 2017 20162018 2017 2018 2017
Operating Revenues              
Net earned premiums$1,806
 $1,767
 $5,185
 $5,196
$1,815
 $1,734
 $3,600
 $3,379
Net investment income509
 524
 1,529
 1,461
506
 475
 996
 1,020
Non-insurance warranty revenue248
 98
 486
 191
Other revenues107
 96
 318
 293
6
 9
 16
 20
Total operating revenues2,422
 2,387
 7,032
 6,950
2,575
 2,316
 5,098
 4,610
Claims, Benefits and Expenses              
Net incurred claims and benefits1,475
 1,195
 4,039
 3,934
1,321
 1,275
 2,654
 2,564
Policyholders' dividends5
 7
 14
 15
6
 5
 12
 9
Amortization of deferred acquisition costs309
 314
 926
 926
359
 312
 655
 617
Other insurance related expenses281
 295
 796
 842
236
 261
 513
 515
Non-insurance warranty expense225
 72
 441
 142
Other expenses141
 147
 419
 439
97
 71
 158
 136
Total claims, benefits and expenses2,211
 1,958
 6,194
 6,156
2,244
 1,996
 4,433
 3,983
Operating income before income tax211
 429
 838
 794
Income tax expense on operating income(52) (118) (205) (191)
Net operating income159
 311
 633
 603
Core income before income tax331
 320
 665
 627
Income tax expense on core income(61) (81) (114) (153)
Core income270
 239
 551

474
Net realized investment (losses) gains(24) 46
 62
 26
(1) 50
 11
 86
Income tax benefit (expense) on net realized investment (losses) gains9
 (14) (19) (11)1
 (17) (1) (28)
Net realized investment (losses) gains, after tax(15) 32
 43
 15
Net realized investment gains, after tax—
 33
 10
 58
Net income$144
 $343
 $676
 $618
$270
 $272
 $561
 $532
Three Month Comparison
Net operatingCore income decreased $152increased $31 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. Net operating2017. Excluding the favorable effect of the Federal corporate income decreased $162 milliontax rate change, core income for our core segmentsProperty & Casualty Operations increased approximately $3 million primarily due to higher net investment income driven by significantly higher 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 was consistent with the prior period while core loss for our Corporate & Other segment increased approximately $5 million.
Pretax net catastrophe losses in the current year period partially offset by improved non-catastrophe current accident year underwriting results. Net operating results improved $10were $26 million for our non-core segments. The after-tax impact of catastrophes was $191and $39 million including $4 million for reinsurance reinstatement premium, for the three months ended SeptemberJune 30, 2017 as compared to $11 million for the same period in 2016.
2018 and 2017. Favorable net prior year loss reserve development of $134$59 million and $137$55 million was recorded in the three months ended SeptemberJune 30, 20172018 and 20162017 related to our Specialty, Commercial, International and InternationalCorporate & 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.

NineSix Month Comparison
Net operatingCore income increased $30$77 million for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. Net operating2017. Excluding the favorable effect of the Federal corporate income decreased $69 milliontax rate change, core income for our core segments primarilyProperty & Casualty Operations increased approximately $7 million due to significantly higherimproved underwriting results partially offset by lower net investment income driven by lower limited partnership returns. Excluding the unfavorable effect of the Federal corporate income tax rate change, core income for our Life & Group segment increased approximately $23 million while core loss for our Corporate & Other segment increased approximately $17 million.
Pretax net catastrophe losses inwere $60 million and $73 million for the current year periodsix months ended June 30, 2018 and lower favorable2017. Favorable net prior year loss reserve development partially offset by improved non-catastrophe current accident year underwriting results and higher net investment income. Net operating results improved $99 million for our non-core segments primarily driven by lower adverse prior year reserve development recorded in the nine months ended September 30, 2017 as compared to the same period in 2016 under the A&EP Loss Portfolio Transfer. The after-tax impact of catastrophes was $239 million, including $4 million from reinsurance reinstatement premium, for the nine months ended September 30, 2017 as compared to $93 million for the same period in 2016.
Favorable net prior year development of $229$98 million and $309$112 million was recorded in the ninesix months ended SeptemberJune 30, 20172018 and 20162017 related to our Specialty, Commercial, International and InternationalCorporate & 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.

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



Specialty
The following table presentsdetails the results of operations.operations for Specialty.
Periods ended September 30Three Months
Nine Months
(In millions, except ratios, rate and retention)2017 2016
2017
2016
Periods ended June 30Three Months Six Months
(In millions, except ratios, rate, renewal premium change and retention)2018 2017 2018 2017
Net written premiums$705
 $733
 $2,100
 $2,108
$688
 $701
 $1,374
 $1,371
Net earned premiums703
 704
 2,056
 2,088
683
 678
 1,355
 1,332
Net investment income134
 140
 407
 380
130
 117
 252
 265
Net operating income180
 195
 470
 486
Net realized investment gains, after tax3
 6
 16
 1
Net income183
 201
 486
 487
Core income183
 131
 354
 268
              
Other performance metrics:              
Loss and loss adjustment expense ratio50.8 % 46.8% 55.5% 52.6%54.6% 58.1% 55.4% 59.6%
Expense ratio31.3
 32.5
 31.8
 32.0
32.0
 32.0
 31.6
 32.0
Dividend ratio0.2
 0.6
 0.1
 0.3
0.2
 0.2
 0.2
 0.1
Combined ratio82.3 % 79.9% 87.4% 84.9%86.8% 90.3% 87.2% 91.7%
              
Rate(1)% 0% 0% 1%2% 1% 2% 1%
Renewal premium change0
 2
 2
 2
4
 3
 3
 4
Retention89
 88
 89
 88
82
 89
 84
 88
New business$64
 $66
 $187
 $192
$92
 $62
 $173
 $117
Three Month Comparison
Net written premiums for Specialty decreased $28$13 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016 largely2017 driven by the timinga higher level of certain renewals. Renewal premium change was flat. Retention remained strong at 89%ceded reinsurance to support growth in management liability and lower retention partially offset by higher new business was at relatively consistent levels.and positive renewal premium change. The decreaseincrease in net earned premiums was consistent with the trend in net written premiums.premiums in recent quarters.
Net operatingCore income decreased $15increased $52 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016, primarily2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income increased approximately $21 million due to improved underwriting results and higher net catastrophe losses partially offsetinvestment income driven by improved non-catastrophe current accident year underwriting results.higher limited partnership returns.
The combined ratio increased 2.4improved 3.5 points for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. The loss ratio increased 4.0improved 3.5 points driven byprimarily due to higher favorable net prior year loss reserve development and an improved current accident year loss ratio. Net catastrophe losses which were $38$3 million, or 5.40.5 points of the loss ratio, for the three months ended SeptemberJune 30, 20172018, as compared to $1$5 million, or 0.20.9 points of the loss ratio, for the three months ended SeptemberJune 30, 2016. The loss ratio excluding catastrophes and development improved 1.3 points.2017. The expense ratio improved 1.2 points for the three months ended SeptemberJune 30, 2017 as compared2018 was consistent with the same period in 2016 reflecting both our ongoing efforts to improve productivity and the actions undertaken in last year's third and fourth quarters to reduce expenses.2017.
Favorable net prior year loss reserve development of $112$44 million and $23 million was recorded infor the three months ended SeptemberJune 30, 20172018 and 2016.2017. 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.

NineSix Month Comparison
Net written premiums for Specialty decreased $8increased $3 million for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 20162017 driven by higher new business and positive renewal premium change partially offset by a higher level of ceded reinsurance to support growth in management liability and lower new business.retention. The decreaseincrease in net earned premiums was consistent with the trend in net written premiums.
Net operatingCore income decreased $16increased $86 million for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 20162017. Excluding the favorable effect of the Federal corporate income tax rate change, core income increased approximately $27 million due to lowerimproved underwriting results driven by higher favorable net prior year loss reserve development.
The combined ratio improved 4.5 points for the six months ended June 30, 2018 as compared with the same period in 2017. The loss ratio improved 4.2 points primarily due to higher favorable net prior year loss reserve development and higher net catastrophe losses partially offset by higher net investment income.
The combined ratio increased 2.5 points for the nine months ended September 30, 2017 as compared with the same period in 2016. The loss ratio increased 2.9 points, primarily due to lower favorable net prioran improved current accident year loss reserve development and higher net catastrophe losses.ratio. Net catastrophe losses were $47$6 million, or 2.30.5 points of the loss ratio, for the ninesix months ended SeptemberJune 30, 20172018, as compared to $14$9 million, or 0.7 points of the loss ratio, for the ninesix months ended SeptemberJune 30, 2016. The loss ratio excluding catastrophes and development improved 1.0 point.2017. The expense ratio improved 0.2decreased 0.4 points for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017 driven by lower IT spend.
Favorable net prior year loss reserve development of $176$74 million and $229$35 million was recorded infor the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. 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 presentssummarizes the gross and net carried reserves.reserves for Specialty.
(In millions)September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Gross case reserves$1,808
 $1,871
$1,694
 $1,742
Gross IBNR reserves4,255
 4,278
4,122
 3,927
Total gross carried claim and claim adjustment expense reserves$6,063
 $6,149
$5,816
 $5,669
Net case reserves$1,645
 $1,681
$1,539
 $1,600
Net IBNR reserves3,607
 3,723
3,364
 3,407
Total net carried claim and claim adjustment expense reserves$5,252
 $5,404
$4,903
 $5,007

Commercial
The following table presentsdetails the results of operations.operations for Commercial.
Periods ended September 30Three Months Nine Months
(In millions, except ratios, rate and retention)2017 2016 2017 2016
Periods ended June 30Three Months Six Months
(In millions, except ratios, rate, renewal premium change and retention)2018 2017 2018 2017
Net written premiums$687
 $684
 $2,169
 $2,172
$810
 $782
 $1,642
 $1,506
Net earned premiums741
 719
 2,097
 2,103
753
 716
 1,496
 1,377
Net investment income161
 175
 482
 465
157
 146
 306
 329
Net operating income25
 114
 234
 280
Net realized investment gains, after tax
3
 9
 24
 2
Net income28
 123
 258
 282
Core income143
 120
 276
 231
       
       
Other performance metrics:              
Loss and loss adjustment expense ratio82.4% 62.2 % 70.1% 64.6 %62.4% 59.6% 62.7% 61.7%
Expense ratio34.3
 37.1
 35.3
 36.7
33.5
 34.4
 33.4
 35.8
Dividend ratio0.5
 0.5
 0.5
 0.4
0.7
 0.6
 0.7
 0.5
Combined ratio117.2% 99.8 % 105.9% 101.7 %96.6% 94.6% 96.8% 98.0%
              
Rate0% (3)% 0% (2)%1% 0% 1% 0%
Renewal premium change2
 5
 1
 4
4
 3
 3
 3
Retention85
 84
 86
 84
85
 86
 85
 86
New business$137
 $135
 $429
 $418
$157
 $154
 $338
 $294
Three Month Comparison
Net written premiums for Commercial increased $3were $28 million higher for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. The increase was2017 driven by higher new business within Middle Markets, as well as strong retention and positive renewal premium change.change and higher new business. The increase in net earned premiums was consistent with the trend in net written premiums.
Net operatingCore income decreased $89increased $23 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016 driven2017. Excluding the favorable effect of the Federal corporate income tax rate change, core income decreased approximately $2 million due to lower favorable net prior year loss reserve development partially offset by higher net catastrophe losses.investment income driven by improved limited partnership returns.
The combined ratio increased 17.42.0 points for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. The loss ratio increased 20.22.8 points driven by lower favorable net prior year loss reserve development and a higher net catastrophe losses partially offset by improved non-catastrophe current accident year underwriting results.number of large property losses. Net catastrophe losses were $173$19 million, or 23.92.5 points of the loss ratio, for the three months ended SeptemberJune 30, 2017,2018, as compared to $12$35 million, or 1.64.7 points of the loss ratio, for the three months ended SeptemberJune 30, 2016. Catastrophe-related reinsurance reinstatement premium was $1 million for the three months ended September 30, 2017. The loss ratio excluding catastrophes and development improved 1.2 points. The expense ratio improved 2.80.9 points for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016 reflecting both our ongoing efforts to improve productivity and the actions undertaken in last year's third and fourth quarters to reduce expenses.
Favorable net prior year development of $18 million and $8 million was recorded in the three months ended September 30, 2017 and 2016. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Nine Month Comparison
Net written premiums for Commercial decreased $3 million for the nine months ended September 30, 2017 as compared with the same period in 2016 due to unfavorable premium development driven by a premium rate adjustment within Small Business that is more fully discussed in Note F to the Condensed Consolidated Financial Statements under Part I, Item 1. This was partially offset bylower IT spend, lower employee costs and higher new business within Middle Markets, strong retention and positive renewal premium change. The decrease in net earned premiums was consistent with the trend in net written premiums.
Net operating income decreased $46 million for the nine months ended September 30, 2017 as compared with the same period in 2016 due to higher net catastrophe losses partially offset by improved non-catastrophe current accident year underwriting results.
The combined ratio increased 4.2 points for the nine months ended September 30, 2017 as compared with the same period in 2016. The loss ratio increased 5.5 points driven by higher net catastrophe losses which were $235 million, or 11.1 points of the loss ratio, for the nine months ended September 30, 2017, as compared to $95 million, or 4.6 points of the loss ratio, for the nine months ended September 30, 2016. Catastrophe-related reinsurance reinstatement premium was $1 million for the nine months ended September 30, 2017. The loss ratio excluding catastrophes and development improved 0.9 points. Excluding the impact of the Small Business premium rate adjustment, the expense ratio improved 2.6 points reflecting both our ongoing efforts to improve productivity and the actions undertaken in last year's third and fourth quarters to reduce expenses.
Favorable net prior year loss reserve development of $65$13 million and unfavorable premium development of $27 million was recorded for the nine months ended September 30, 2017 as compared with favorable net prior year loss reserve development of $37 million and favorable premium development of $7 million for the nine months ended September 30, 2016. Further information on net prior year development is in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
The following table presents the gross and net carried reserves.
(In millions)September 30, 2017 December 31, 2016
Gross case reserves$4,307
 $4,661
Gross IBNR reserves4,323
 4,233
Total gross carried claim and claim adjustment expense reserves$8,630
 $8,894
Net case reserves$4,029
 $4,353
Net IBNR reserves4,030
 3,952
Total net carried claim and claim adjustment expense reserves$8,059
 $8,305

International
The following table presents the results of operations.
Periods ended September 30Three Months
Nine Months
(In millions, except ratios, rate and retention)2017
2016
2017
2016
Net written premiums$207
 $207
 $664
 $637
Net earned premiums226
 210
 629
 605
Net investment income13
 13
 38
 38
Net operating (loss) income(38) 20
 (8) (1)
Net realized investment gains, after tax3
 5
 14
 11
Net (loss) income(35) 25
 6
 10
        
Other performance metrics:       
Loss and loss adjustment expense ratio88.4% 55.4% 70.6% 65.2%
Expense ratio37.5
 37.8
 37.2
 38.2
Combined ratio125.9% 93.2% 107.8% 103.4%
        
Rate1% (1)% 0% (1)%
Renewal premium change4
 (1) 1
 (1)
Retention73
 74
 78
 78
New business$69
 $67
 $207
 $189
Three Month Comparison
Net written premiums for International for the three months ended September 30, 2017 were consistent with the same period in 2016. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Net operating results decreased $58 million for the three months ended September 30, 2017 as compared with the same period in 2016 driven by higher net catastrophe losses and lower favorable net prior year loss reserve development.
The combined ratio increased 32.7 points for the three months ended September 30, 2017 as compared with the same period in 2016. The loss ratio increased 33.0 points driven by higher net catastrophe losses and lower favorable net prior year loss reserve development. Net catastrophe losses were $58 million, or 27.5 points of the loss ratio for the three months ended September 30, 2017 as compared to $3 million, or 1.5 points of the loss ratio, for the three months ended September 30, 2016. Catastrophe-related reinsurance reinstatement premium was $5 million for the three months ended September 30, 2017. The loss ratio excluding catastrophes and development was 0.5 points higher than the prior year period. The expense ratio improved 0.3 points for the three months ended September 30, 2017 as compared with the same period in 2016.
Favorable net prior year development of $4 million and $17$34 million was recorded for the three months ended SeptemberJune 30, 20172018 and 2016.2017. 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.

NineSix Month Comparison
Net written premiums for International increased $27Commercial were $136 million higher for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016 due2017. The prior period included an unfavorable premium rate adjustment in Small Business which 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 Small Business premium rate adjustment, net written premiums increased $90 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.
Net operating results decreased $7Core income increased $45 million for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016 driven by lower2017. Excluding the favorable neteffect of the Federal corporate income tax rate change and the unfavorable Small Business premium rate adjustment in the prior year loss reserve development and higher net catastrophe losses partially offset by favorable period, over period foreign currency exchange results.
The combined ratio increased 4.4 points for the nine months ended September 30, 2017 as compared with the same period in 2016. The loss ratio increased 5.4 points, primarilycore income decreased approximately $27 million due to lower favorable net prior year loss reserve developmentdevelopment.
Excluding the impact of the Small Business premium rate adjustment, the combined ratio increased 1.3 points, driven by 4.1 points of less favorable net prior year loss reserve development. This was largely offset by a 1.4 point improvement in the current accident year loss ratio and a 1.6 point decrease in the expense ratio driven by higher net catastrophe losses.earned premiums and lower IT spend and employee costs. Net catastrophe losses were $60$48 million, or 10.33.2 points of the loss ratio, for the ninesix months ended SeptemberJune 30, 20172018, as compared to $28$62 million, or 4.74.3 points of the loss ratio, for the ninesix months ended SeptemberJune 30, 2016. Catastrophe-related reinsurance reinstatement premium was $5 million for the nine months ended September 30, 2017. The loss ratio excluding catastrophes and development improved 4.5 points. The expense ratio improved 1.0 point for the nine months ended September 30, 2017 as compared with the same period in 2016, primarily due to higher net earned premiums.
Favorable net prior year loss reserve development of $15$22 million and $36$77 million was recorded for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. 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 presentssummarizes the gross and net carried reserves.reserves for Commercial.
(In millions)September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Gross case reserves$716
 $632
$4,227
 $4,427
Gross IBNR reserves924
 696
4,372 4,337
Total gross carried claim and claim adjustment expense reserves$1,640
 $1,328
$8,599
 $8,764
Net case reserves$617
 $548
$3,906
 $4,103
Net IBNR reserves807
 653
4,043
 4,033
Total net carried claim and claim adjustment expense reserves$1,424
 $1,201
$7,949
 $8,136

Life & Group Non-CoreInternational
The following table presentsdetails the results of operations.operations for International.
Periods ended September 30Three Months
Nine Months
(In millions)2017
2016
2017
2016
Net earned premiums$136
 $134
 $404
 $401
Net investment income195
 192
 587
 567
Net operating income10
 6
 19
 —
Net realized investment gains, after tax2
 11
 12
 3
Net income12
 17
 31
 3
Periods ended June 30Three Months Six Months
(In millions, except ratios, rate, renewal premium change and retention)2018 2017 2018 2017
Net written premiums$271
 $219
 $566
 $457
Net earned premiums248
 206
 484
 403
Net investment income15
 13
 29
 25
Core (loss) income(7) 10
 16
 30
        
Other performance metrics:       
Loss and loss adjustment expense ratio66.8% 62.8% 63.7% 60.6%
Expense ratio37.9
 37.3
 37.1
 37.1
Combined ratio104.7% 100.1% 100.8% 97.7%
        
Rate3% 0% 3% 0%
Renewal premium change8
 3
 6
 2
Retention73
 82
 78
 80
New business$83
 $73
 $176
 $138
Three Month Comparison
Net operating income improved $4written premiums for International increased $52 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. Our long term care business continued to produce results generally in line with our 2015 reset assumptions.
Nine Month Comparison
Net operating income improved $192017. Excluding the effect of foreign currency exchange rates, net written premiums increased $42 million or 19% for the ninethree months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. The improvement was2017 driven by favorable morbidity partially offset by unfavorable persistencypositive renewal premium change and higher new business. The increase in net earned premiums wasconsistent with the long term care business.trend in net written premiums.

Corporate & Other Non-Core
The following table presents theCore results of operations.
Periods ended September 30Three Months Nine Months
(In millions)2017 2016 2017 2016
Net investment income$6
 $4
 $15
 $11
Interest expense39
 39
 116
 119
Net operating loss(18) (24) (82) (162)
Net realized investment (losses) gains, after tax(26) 1
 (23) (2)
Net loss(44) (23) (105) (164)
Three Month Comparison
Net operating loss improved $6decreased $17 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017 driven by lower underwriting results. The after-tax net realized investment loss in the current period included a $27 million loss on the early redemptioneffect of the Company's $350 million senior notes.Federal corporate income tax rate change was not significant.
Nine Month Comparison
Net operating loss improved $80 millionThe combined ratio increased 4.6 points for the ninethree months ended SeptemberJune 30, 2017,2018 as compared with the same period in 2016,2017. The loss ratio increased 4.0 points, primarily due to a higher current accident year loss ratio driven by a higher number of large property losses mainly in Canada. Net catastrophe losses were $4 million, or 1.6 points of the loss ratio, for the three months ended June 30, 2018. There were no net catastrophe losses for the three months ended June 30, 2017. The expense ratio increased 0.6 points for the three months ended June 30, 2018 as compared with the same period in 2017 driven by higher acquisition expenses.
Favorable net prior year loss reserve development of $2 million was recorded for the three months ended June 30, 2018 as compared with unfavorable net prior year loss reserve development of $2 million for the three months ended June 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.

Six Month Comparison
Net written premiums for International increased $109 million for the six months ended June 30, 2018 as compared with the same period in 2017. Excluding the effect of foreign currency exchange rates, net written premiums increased $79 million or 16% for the six months ended June 30, 2018 as compared with the same period in 2017 driven by positive renewal premium change and higher new business. The increase in net earned premiums wasconsistent with the trend in net written premiums.
Core income decreased $14 million for the six months ended June 30, 2018 as compared with the same period in 2017 driven by lower underwriting results. The effect of the Federal corporate income tax rate change was not significant.
The combined ratio increased 3.1 points for the six months ended June 30, 2018 as compared with the same period in 2017. The loss ratio increased 3.1 points, primarily due to a higher current accident year loss ratio driven by a higher number of large property losses mainly in Canada and attritional losses in the U.K. Net catastrophe losses were $6 million, or 1.3 points of the loss ratio, for the six months ended June 30, 2018, as compared to $2 million, or 0.6 points of the loss ratio, for the six months ended June 30, 2017. The expense ratio was consistent for the six months ended June 30, 2018 and 2017.
Favorable net prior year loss reserve development of $2 million and nil was recorded for the six months ended June 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 International.
(In millions)June 30, 2018 December 31, 2017
Gross case reserves$831
 $744
Gross IBNR reserves875
 892
Total gross carried claim and claim adjustment expense reserves$1,706
 $1,636
Net case reserves$674
 $640
Net IBNR reserves780
 792
Total net carried claim and claim adjustment expense reserves$1,454
 $1,432

Life & Group
The following table details the results of operations for Life & Group.
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Net earned premiums$131
 $135
 $265
 $268
Net investment income198
 195
 398
 392
Core loss before income tax(29) (31) (29) (64)
Income tax benefit on core loss19
 36
 33
 73
Core (loss) income(10) 5
 4
 9
Three Month Comparison
Core results decreased $15 million for the three months ended June 30, 2018 as compared with the same period in 2017. Excluding the unfavorable effect of the Federal corporate income tax rate change, core income was consistent with the prior period. Morbidity continues to trend in line with expectations. Persistency continues to benefit from a high proportion of policyholders choosing to reduce benefits in lieu of premium rate increases. However, the favorable persistency trend was offset this quarter when a significant number of policies converted 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 for the three months ended June 30, 2018.
Six Month Comparison
Core income decreased $5 million for the six months ended June 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 $23 million. While the drivers of core income for the six month period were generally consistent with the three month summary noted above, the favorability driven by policyholders choosing to reduce benefits in lieu of premium rate increases was greater because the trend positively impacted both quarters in the six month period.

Corporate & Other
The following table details the results of operations for Corporate & Other.
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Net investment income$6
 $4
 $11
 $9
Interest expense34
 39
 68
 77
Core loss(39) (27) (99) (64)
Three Month Comparison
Core loss increased $12 million for the three months ended June 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 $5 million driven by non-recurring costs of $23 million associated with the transition to a new IT infrastructure service provider. This was partially offset by a higher recognition of retroactive reinsurance deferred gain on the LPT due to higher net A&EP claim payments, as compared to the prior year period. The LPT is further discussed in Note E to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Six Month Comparison
Core loss increased $35 million for the six months ended June 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 $17 million driven by non-recurring costs of $23 million associated with the transition to a new IT infrastructure service provider and higher adverse net prior year reserve development recorded in 20172018 for A&EP under the Loss Portfolio Transfer. The after-tax net realized investment loss inLPT, as compared to the current period included a $27 million loss on the early redemption of the Company's $350 million senior notes. prior year period.
The following table presentssummarizes the gross and net carried reserves.reserves for Corporate & Other.
(In millions)September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Gross case reserves$1,397
 $1,524
$1,199
 $1,371
Gross IBNR reserves1,011
 1,090
1,148
 1,065
Total gross carried claim and claim adjustment expense reserves$2,408
 $2,614
$2,347
 $2,436
Net case reserves$97
 $94
$92
 $94
Net IBNR reserves123
 136
109
 111
Total net carried claim and claim adjustment expense reserves$220
 $230
$201
 $205

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 30Three Months
Nine Months
(In millions)2017
2016
2017
2016
Fixed maturity securities:       
    Taxable$349
 $354
 $1,047
 $1,048
    Tax-Exempt106
 103
 320
 304
Total fixed maturity securities455

457

1,367
 1,352
Limited partnership investments51
 65
 157
 97
Other, net of investment expense3
 2
 5
 12
Net investment income$509

$524

$1,529
 $1,461
Net investment income, after tax$363
 $371
 $1,096
 $1,048
        
Effective income yield for the fixed maturity securities portfolio, pretax4.7% 4.8% 4.7% 4.8%
Effective income yield for the fixed maturity securities portfolio, after tax3.4% 3.4% 3.4% 3.4%
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Fixed income securities:       
Taxable fixed income securities$354
 $353
 $704
 $701
Tax-exempt fixed income securities100
 106
 205
 214
Total fixed income securities454
 459
 909
 915
Limited partnership and common stock investments42
 16
 73
 106
Other, net of investment expense10
 —
 14
 (1)
Pretax net investment income$506
 $475
 $996
 $1,020
Fixed income securities, after tax$375
 $333
 $752
 $664
Net investment income, after tax416
 344
 821
 733
        
Effective income yield for the fixed income securities portfolio, pretax4.7% 4.8% 4.7% 4.8%
Effective income yield for the fixed income securities portfolio, after tax3.9% 3.4% 3.9% 3.4%
NetPretax net investment income after tax,increased $31 million for the three months ended SeptemberJune 30, 2017 decreased $8 million2018 as compared with the same period in 2016.2017. The increase was driven by limited partnership and common stock investments, which returned 1.8% in 2018 as compared with 0.7% in the prior year period. Net investment income, after tax, increased $72 million for the three months ended June 30, 2018 as compared with the same period in 2017 driven by the lower Federal corporate income tax rate and higher limited partnership returns.
Pretax net investment income decreased $24 million for the six months ended June 30, 2018 as compared with the same period in 2017. The decrease was driven by limited partnership and common stock investments, which returned 2.2%3.0% in 20172018 as compared with 2.6%4.5% in the prior year period. Income from fixed maturity securities,However, despite the decline in limited partnership income, net investment income, after tax, increased $88 million for the threesix months ended SeptemberJune 30, 2017 increased $2 million2018 as compared with the same period in 2016, primarily due to an increase in the invested asset base.
Net investment income, after tax, for the nine months ended September 30, 2017 increased $48 million as compared with the same period in 2016. The increase was driven by limited partnership investments, which returned 6.8% in 2017 as compared with 3.8% in the prior year period. Income from fixed maturity securities, afterlower Federal corporate income tax for the nine months ended September 30, 2017 increased $14 million as compared with the same period in 2016, primarily due to an increase in the invested asset base.rate.


Net Realized Investment Gains (Losses)
The components of Net realized investment results are presented in the following table.
Periods ended September 30Three Months Nine Months
(In millions)2017 2016 2017 2016
Fixed maturity securities:       
Corporate and other bonds$13
 $18
 $81
 $10
States, municipalities and political subdivisions4
 20
 14
 23
Asset-backed(2) 5
 (7) 5
U.S. Treasury and obligations of government-sponsored enterprises—
 3
 3
 5
Foreign government1
 1
 1
 3
Total fixed maturity securities16

47

92

46
Equity securities—
 (3) —
 (5)
Derivative financial securities(1) 1
 (3) (12)
Short term investments and other(39) 1
 (27) (3)
Net realized investment (losses) gains(24)
46

62
 26
Income tax benefit (expense) on net realized investment (losses) gains9
 (14) (19) (11)
Net realized investment (losses) gains, after tax$(15)
$32

$43
 $15
Periods ended June 30Three Months Six Months
(In millions)2018 2017 2018 2017
Fixed maturity securities:       
Corporate bonds and other$9
 $41
 $28
 $71
States, municipalities and political subdivisions6
 4
 26
 10
Asset-backed(11) (1) (32) (5)
Total fixed maturity securities4
 44
 22
 76
Non-redeemable preferred stock(10) —
 (25) —
Short term and other5
 6
 14
 10
Net realized investment (losses) gains(1) 50
 11
 86
Income tax benefit (expense) on net realized investment (losses) gains1
 (17) (1) (28)
Net realized investment gains, after tax$—
 $33
 $10
 $58
NetPretax net realized investment results after tax, decreased $47$51 million for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 20162017. The decrease was driven by lower net realized gains on sales of securities partially offset by lower OTTI losses recognizedand the decline in earnings. Additionally, the current period Net realized investment losses include a lossfair value of $27 million after tax related to the redemption of our $350 million senior notes due November 2019.non-redeemable preferred stock.
NetPretax net realized investment gains after tax, improved $28decreased $75 million for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 20162017. The decrease was driven by lower OTTI losses recognizednet realized gains on sales of securities and the decline in earnings. Additionally, the current period Net realized investment gains include a lossfair value of $27 million after tax related to the redemption of our $350 million senior notes due November 2019.non-redeemable preferred stock.
Further information on our realized gains and losses, including our OTTI losses, is set forth in Note C to the Condensed Consolidated Financial Statements included under Part I, Item 1.

Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of our fixed maturity securities by rating distribution.
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017

(In millions)
Estimated Fair Value Net Unrealized Gains (Losses) Estimated Fair Value Net Unrealized Gains (Losses)Estimated Fair Value Net Unrealized Gains (Losses) Estimated Fair Value Net Unrealized Gains (Losses)
U.S. Government, Government agencies and Government-sponsored enterprises$4,386
 $43
 $4,212
 $32
$4,392
 $(60) $4,514
 $21
AAA1,899
 143
 1,881
 110
3,129
 256
 1,954
 152
AA9,136
 911
 8,911
 750
6,868
 538
 8,982
 914
A9,876
 957
 9,866
 832
8,914
 618
 9,643
 952
BBB13,730
 1,051
 12,802
 664
13,643
 461
 13,554
 1,093
Non-investment grade3,063
 171
 3,233
 156
2,849
 54
 2,840
 140
Total$42,090
 $3,276
 $40,905
 $2,544
$39,795
 $1,867
 $41,487
 $3,272
As of SeptemberJune 30, 20172018 and December 31, 2016, only2017, 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, 2017June 30, 2018
(In millions)Estimated Fair Value Gross Unrealized LossesEstimated Fair Value Gross Unrealized Losses
U.S. Government, Government agencies and Government-sponsored enterprises$1,531
 $27
$3,380
 $84
AAA277
 7
411
 10
AA665
 10
830
 11
A562
 10
2,155
 44
BBB1,015
 21
5,608
 159
Non-investment grade448
 10
1,111
 38
Total$4,498
 $85
$13,495
 $346
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, 2017June 30, 2018
(In millions)Estimated Fair Value Gross Unrealized LossesEstimated Fair Value Gross Unrealized Losses
Due in one year or less$53
 $2
$112
 $7
Due after one year through five years742
 16
2,198
 32
Due after five years through ten years2,812
 53
9,532
 254
Due after ten years891
 14
1,653
 53
Total$4,498
 $85
$13,495
 $346

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 Non-Core segment.
The effective durations of fixed maturityincome 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, 2017 December 31, 2016June 30, 2018 December 31, 2017
(In millions)Estimated Fair Value 
Effective
Duration
(In years)
 Estimated Fair Value 
Effective
Duration
(In years)
Estimated Fair Value 
Effective
Duration
(In years)
 Estimated Fair Value 
Effective
Duration
(In years)
Investments supporting Life & Group Non-Core$16,580
 8.6
 $15,724
 8.7
Other interest sensitive investments26,849
 4.4
 26,669
 4.6
Investments supporting Life & Group$16,260
 8.2
 $16,797
 8.4
Other investments25,339
 4.5
 26,817
 4.4
Total$43,429
 6.0
 $42,393
 6.1
$41,599
 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, 2016.2017.
Short Term Investments
The carrying value of the components of the Short term investments are presented in the following table.
   
(In millions)September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Short term investments:      
Commercial paper$658
 $733
$1,019
 $905
U.S. Treasury securities436
 433
133
 355
Money market funds44
 44
37
 44
Other315
 197
119
 132
Total short term investments$1,453
 $1,407
$1,308
 $1,436

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 ninesix months ended SeptemberJune 30, 2017,2018, net cash provided by operating activities was $894$354 million as compared with $1,120$515 million for the same period in 2016. Cash2017. The decrease in cash provided by operating activities reflected higher net claim payments andwas driven by a lower level of distributions on limited partnerships partially offset by an increase in premiums collected and lower salaries and related expenses paid.higher net claim payments.
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 usedprovided by investing activities was $218$439 million for the ninesix months ended SeptemberJune 30, 20172018, as compared with net cash used of $604$111 million for the same period in 2016.2017. 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. In the first quarter of 2016, we sold the principal executive offices of CNAF for $107 million.
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 ninesix months ended SeptemberJune 30, 2017,2018, net cash used by financing activities was $673$855 million as compared with $605$677 million for the same period in 2016. 2017. 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 balances of our 7.35% senior notes due November 15, 2019. In the first quarter of 2016,2018, we issued $500 million of 4.50% senior notes due March 1, 2026 and redeemed the $350$150 million outstanding aggregate principal balance of our 6.50%6.950% senior notes due AugustJanuary 15, 2016.2018.
Common Stock Dividends
Dividends of $2.80$2.60 per share on our common stock, including a special dividend of $2.00 per share, were declared and paid during the ninesix months ended SeptemberJune 30, 2017.2018. On OctoberJuly 27, 2017,2018, our Board of Directors declared a quarterly dividend of $0.30$0.35 per share, on our common stock, payable NovemberAugust 29, 20172018 to stockholders of record on NovemberAugust 13, 2017.2018. 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.

Liquidity
Later this year, management intends to pay down the $30 million of subordinated variable rate debt of Hardy due September 15, 2036. 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 Federal Home Loan Bank of Chicago (FHLBC).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 SeptemberJune 30, 20172018 CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 20172018 that would not be subject to the Department's prior approval is $1,075$1,073 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $100$180 million during the threesix months ended December 31, 20162017 and $855$770 million during the ninesix months ended SeptemberJune 30, 2017.2018. As of SeptemberJune 30, 20172018 CCC is able to pay approximately $120$123 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.


ACCOUNTING STANDARDS UPDATE
For a discussion of Accounting Standards Updates adopted as of January 1, 2017in 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.

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.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as "Brexit." As a result of the referendum, in 2017 the British government formally commenced the process to leave the E.U. and began negotiating the terms of treaties that will govern the U.K.'s future relationship with the E.U. Although the terms of any future treaties are unknown, we believe changes in our international operating platform will be required to allow us to continue to write business in the E.U. after the completion of Brexit, thereforeBrexit. Therefore, we have begun the process of establishing a new European subsidiary in Luxembourg. As a result of these changes, the complexity and cost of regulatory compliance of our European business is likely to increase.
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.


Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our market risk components for the ninesix months ended SeptemberJune 30, 2017.2018. 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, 20162017 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 SeptemberJune 30, 2017,2018, 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 SeptemberJune 30, 2017.2018.
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 SeptemberJune 30, 20172018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II. Other Information
Item 1. Legal Proceedings
Information on our legal proceedings is set forth in Note F to the Condensed Consolidated Financial Statements included under Part I, Item 1.
Item 6. Exhibits
See Exhibit Index.


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  CNA Financial Corporation
   
Dated: OctoberJuly 30, 20172018By/s/ D. Craig Mense
  
D. Craig Mense
Executive Vice President and
Chief Financial Officer
(Duly authorized officer and principal financial officer)



EXHIBIT INDEX

Description of ExhibitExhibit 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 Document101.INS
  
XBRL Taxonomy Extension Schema101.SCH
  
XBRL Taxonomy Extension Calculation Linkbase101.CAL
  
XBRL Taxonomy Extension Definition Linkbase101.DEF
  
XBRL Taxonomy Label Linkbase101.LAB
  
XBRL Taxonomy Extension Presentation Linkbase101.PRE


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