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Cna Financial Corp (CNA) SEC Filing 10-K Annual report for the fiscal year ending Tuesday, December 31, 2013

Cna Financial Corp

CIK: 21175 Ticker: CNA

FOR IMMEDIATE RELEASE

CONTACT:
MEDIA:
 
ANALYSTS:
Jennifer Martinez, 312/822-5167
 
James Anderson, 312/822-7757
Sarah Pang, 312/822-6394
 
Derek Smith, 312/822-6612
 
 
David Adams, 312/822-2183
CNA FINANCIAL ANNOUNCES FOURTH QUARTER 2013 RESULTS
Q4 NOI OF $0.79 PER SHARE; $1.24 ADJUSTED FOR RETRO REINSURANCE CHARGE
EXCLUDING CHARGE, 2013 NOI OF $1.04 BILLION GENERATING OPERATING ROE OF 8.7%
2013 P&C COMBINED RATIO OF 97.9%, AN IMPROVEMENT OF 7.1 PTS
BOOK VALUE PER SHARE EX AOCI OF $45.26, UP 6% IN 2013
SPECIAL DIVIDEND OF $1.00 PER SHARE PLUS 25% INCREASE TO QUARTERLY DIVIDEND
CHICAGO, February 10, 2014 ---
CNA Financial Corporation (NYSE: CNA) today announced fourth quarter 2013 net operating income of $213 million, or $0.79 per share, and net income of $221 million, or $0.82 per share. Full year 2013 results were net operating income of $917 million, or $3.40 per share, and net income of $937 million, or $3.47 per share. Fourth quarter and full year results were adversely affected by a $123 million after-tax charge related to retroactive reinsurance accounting for the 2010 Asbestos and Environmental Pollution Loss Portfolio Transfer. Property & Casualty Operations combined ratio for the fourth quarter and full year was 95.0% and 97.9%, respectively.
CNA Financial also declared a special dividend of $1.00 per share and a quarterly dividend of $0.25 per share, payable March 12, 2014 to stockholders of record on February 24, 2014.
 
Results for the Three Months Ended December 31 (a)
 
 
Results for the Year Ended December 31 (a)
 
($ millions, except per share data)
2013
 
 
2012
 
 
2013
 
 
2012
 
Net operating income:
 
 
 
 
 
 
 
 
 
 
 
Net operating income, adjusted
$
336

 
 
$
(7
)
 
 
$
1,040

 
 
$
587

 
Retro reinsurance charge
(123
)
 
 

 
 
(123
)
 
 

 
Net operating income (loss)
$
213

 
 
$
(7
)
 
 
$
917

 
 
$
587

 
Net income (loss)
$
221

 
 
$
(9
)
 
 
$
937

 
 
$
628

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per diluted share:
 
 
 
 
 
 
 
 
 
 
 
Net operating income, adjusted
$
1.24

 
 
$
(0.03
)
 
 
$
3.85

 
 
$
2.18

 
Retro reinsurance charge
(0.45
)
 
 

 
 
(0.45
)
 
 

 
Net operating income (loss)
$
0.79

 
 
$
(0.03
)
 
 
$
3.40

 
 
$
2.18

 
Net income (loss)
$
0.82

 
 
$
(0.03
)
 
 
$
3.47

 
 
$
2.33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
December 31,
 
 
 
 
 
 
 
 
2013
 
 
2012
 
 
Change
 
 
 
 
Book value per share
$
46.91

 
 
$
45.71

 
 
3%

 
 
 
 
Book value per share excluding AOCI
45.26

 
 
42.62

 
 
6%

 
 
 
 

(a)
Management utilizes the net operating income financial measure to monitor the Company's operations. Please refer to Note K in the Condensed Consolidated Financial Statements within the September 30, 2013 Form 10-Q for further discussion of this measure.

1

The following information was filed by Cna Financial Corp (CNA) on Monday, February 10, 2014 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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. Wabash
Chicago, Illinois
(Address of principal executive offices)
 
60604
(Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Common Stock
with a par value
of $2.50 per share
 
Name of each exchange on which registered
New York Stock Exchange
Chicago Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [x] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x] Accelerated filer [ ] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
As of February 14, 2014, 269,824,832 shares of common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2013 was approximately $870 million based on the closing price of $32.62 per share of the common stock on the New York Stock Exchange on June 30, 2013.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the CNA Financial Corporation Proxy Statement prepared for the 2014 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report.



Item Number
 
Page
Number
 
 
1.
1A.
1B.
2.
3.
4.
 
PART II
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
PART III
 
10.
11.
12.
13.
14.
 
PART IV
 
15.


2


PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNAF and its subsidiaries. CNA's property and casualty and remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company, Western Surety Company, Hardy Underwriting Bermuda Limited and its subsidiaries and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 90% of our outstanding common stock as of December 31, 2013.
Our insurance products primarily include commercial property and casualty coverages, including surety. Our services include risk management, information services, warranty and claims administration. Our products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, insurance companies, associations, professionals and other groups.
Our core business, commercial property and casualty insurance operations, is reported in three business segments: CNA Specialty, CNA Commercial and Hardy. Our non-core businesses are managed in two business segments: Life & Group Non-Core and Corporate & Other Non-Core. Each segment is managed separately due to differences in their product lines and markets. Discussions of each segment, including the products offered, customers served, and distribution channels used, are set forth in the Management's Discussion and Analysis (MD&A) included under Item 7 and in Note O to the Consolidated Financial Statements included under Item 8.
Competition
The property and casualty insurance industry is highly competitive both as to rate and service. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. We must continuously allocate resources to refine and improve our insurance products and services.
There are approximately 2,800 individual companies that sell property and casualty insurance in the United States. Based on 2012 statutory net written premiums, we are the eighth largest commercial insurance writer and the 13th largest property and casualty insurance organization in the United States.
Regulation
The insurance industry is subject to comprehensive and detailed regulation and supervision. Each domestic and foreign jurisdiction has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, prescribing the form and content of statutory financial reports, and regulating capital adequacy and the type, quality and amount of investments permitted. Such regulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval by insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance subsidiaries making the transfer or payment.
Hardy, a specialized Lloyd's of London (Lloyd's) underwriter, is also supervised by the Council of Lloyd's, which is the franchisor for all Lloyd's operations. The Council of Lloyd's has wide discretionary powers to regulate Lloyd's underwriting, such as establishing the capital requirements for syndicate participation. In addition, the annual business plans of each syndicate are subject to the review and approval of the Lloyd's Franchise Board, which is responsible for business planning and monitoring for all syndicates.

3


The European Union's executive body, the European Commission, is implementing new capital adequacy and risk management regulations called Solvency II that would apply to our European operations. In addition, global regulators, including the United States National Association of Insurance Commissioners, are working with the International Association of Insurance Supervisors (IAIS) to consider changes to insurance company supervision. Among the areas being addressed are company and group capital requirements, group supervision and enterprise risk management. It is not currently clear to what extent or how the activities of the IAIS will impact the Company or U.S. insurance regulation.
Domestic insurers are also required by the state insurance regulators to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.
Further, insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty fund assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers' compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process.
Although the federal government does not currently directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance industry. These initiatives and legislation include proposed federal oversight of certain insurers; tort reform proposals; proposals addressing natural catastrophe exposures; terrorism risk mechanisms; federal financial services reforms; and various tax proposals affecting insurance companies. Any of the foregoing regulatory limitations, impositions and restrictions may result in significant burdens on us.
Various legislative and regulatory efforts to reform the tort liability system have, and will continue to, impact our industry. Although there has been some tort reform with positive impact to the insurance industry, new causes of action and theories of damages continue to be proposed in state court actions or by federal or state legislatures that continue to expand liability for insurers and their policyholders.
Employee Relations
As of December 31, 2013, we had approximately 7,035 employees and have experienced satisfactory labor relations. We have never had work stoppages due to labor disputes.
We have comprehensive benefit plans for substantially all of our employees, including retirement plans, savings plans, disability programs, group life programs and group health care programs. See Note J to the Consolidated Financial Statements included under Item 8 for further discussion of our benefit plans.
Direct Written Premiums by Geographic Concentration
Set forth below is the distribution of our direct written premiums by geographic concentration.
Direct Written Premiums
Years ended December 31
Percent of Total
 
2013
 
2012
 
2011
California
9.2
%
 
9.5
%
 
9.4
%
Texas
8.0

 
7.4

 
6.7

New York
7.3

 
7.1

 
6.7

Illinois
5.9

 
6.5

 
4.9

Florida
5.9

 
5.8

 
6.1

New Jersey
3.7

 
3.5

 
3.5

Pennsylvania
3.7

 
3.4

 
3.4

Canada
3.1

 
3.0

 
3.0

All other states, countries or political subdivisions
53.2

 
53.8

 
56.3

Total
100.0
%
 
100.0
%
 
100.0
%

4


Approximately 8.9%, 9.2% and 8.8% of our direct written premiums were derived from outside of the United States for the years ended December 31, 2013, 2012 and 2011.
Property and Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over time of reserves established for property and casualty claim and claim adjustment expenses at the end of the preceding ten calendar years for our property and casualty insurance companies. The table excludes our life insurance subsidiaries, and as such, the carried reserves will not agree to the Consolidated Financial Statements included under Item 8. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the originally reported reserve liability. The third section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of our property and casualty insurance subsidiaries' expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, and indicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years.

5


Schedule of Loss Reserve Development
Calendar Year Ended
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010 (a)
 
2011
 
2012 (b)
 
2013
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originally reported gross reserves for unpaid claim and claim adjustment expenses
$
31,284

 
$
31,204

 
$
30,694

 
$
29,459

 
$
28,415

 
$
27,475

 
$
26,712

 
$
25,412

 
$
24,228

 
$
24,696

 
$
24,015

Originally reported ceded recoverable
13,847

 
13,682

 
10,438

 
8,078

 
6,945

 
6,213

 
5,524

 
6,060

 
4,967

 
5,075

 
4,911

Originally reported net reserves for unpaid claim and claim adjustment expenses
$
17,437

 
$
17,522

 
$
20,256

 
$
21,381

 
$
21,470

 
$
21,262

 
$
21,188

 
$
19,352

 
$
19,261

 
$
19,621

 
$
19,104

Cumulative net paid as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One year later
$
4,382

 
$
2,651

 
$
3,442

 
$
4,436

 
$
4,308

 
$
3,930

 
$
3,762

 
$
3,472

 
$
4,277

 
$
4,588

 
$

Two years later
6,104

 
4,963

 
7,022

 
7,676

 
7,127

 
6,746

 
6,174

 
6,504

 
7,459

 

 

Three years later
7,780

 
7,825

 
9,620

 
9,822

 
9,102

 
8,340

 
8,374

 
8,822

 

 

 

Four years later
10,085

 
9,914

 
11,289

 
11,312

 
10,121

 
9,863

 
10,038

 

 

 

 

Five years later
11,834

 
11,261

 
12,465

 
11,973

 
11,262

 
11,115

 

 

 

 

 

Six years later
12,988

 
12,226

 
12,917

 
12,858

 
12,252

 

 

 

 

 

 

Seven years later
13,845

 
12,551

 
13,680

 
13,670

 

 

 

 

 

 

 

Eight years later
14,073

 
13,245

 
14,409

 

 

 

 

 

 

 

 

Nine years later
14,713

 
13,916

 

 

 

 

 

 

 

 

 

Ten years later
15,337

 

 

 

 

 

 

 

 

 

 

Net reserves re-estimated as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
End of initial year
$
17,437

 
$
17,522

 
$
20,256

 
$
21,381

 
$
21,470

 
$
21,262

 
$
21,188

 
$
19,352

 
$
19,261

 
$
19,621

 
$
19,104

One year later
17,671

 
18,513

 
20,588

 
21,601

 
21,463

 
21,021

 
20,643

 
18,923

 
19,081

 
19,506

 

Two years later
19,120

 
19,044

 
20,975

 
21,706

 
21,259

 
20,472

 
20,237

 
18,734

 
18,946

 

 

Three years later
19,760

 
19,631

 
21,408

 
21,609

 
20,752

 
20,014

 
20,012

 
18,514

 

 

 

Four years later
20,425

 
20,212

 
21,432

 
21,286

 
20,350

 
19,784

 
19,758

 

 

 

 

Five years later
21,060

 
20,301

 
21,326

 
20,982

 
20,155

 
19,597

 

 

 

 

 

Six years later
21,217

 
20,339

 
21,060

 
20,815

 
20,021

 

 

 

 

 

 

Seven years later
21,381

 
20,142

 
20,926

 
20,755

 

 

 

 

 

 

 

Eight years later
21,199

 
20,023

 
20,900

 

 

 

 

 

 

 

 

Nine years later
21,100

 
20,054

 

 

 

 

 

 

 

 

 

Ten years later
21,135

 

 

 

 

 

 

 

 

 

 

Total net (deficiency) redundancy
$
(3,698
)
 
$
(2,532
)
 
$
(644
)
 
$
626

 
$
1,449

 
$
1,665

 
$
1,430

 
$
838

 
$
315

 
$
115

 
$

Reconciliation to gross re-estimated reserves:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net reserves re-estimated
$
21,135

 
$
20,054

 
$
20,900

 
$
20,755

 
$
20,021

 
$
19,597

 
$
19,758

 
$
18,514

 
$
18,946

 
$
19,506

 
$

Re-estimated ceded recoverable
15,852

 
14,706

 
12,025

 
9,697

 
8,293

 
7,252

 
6,593

 
7,093

 
5,850

 
5,531

 

Total gross re-estimated reserves
$
36,987

 
$
34,760

 
$
32,925

 
$
30,452

 
$
28,314

 
$
26,849

 
$
26,351

 
$
25,607

 
$
24,796

 
$
25,037

 
$

Total gross (deficiency) redundancy
$
(5,703
)
 
$
(3,556
)
 
$
(2,231
)
 
$
(993
)
 
$
101

 
$
626

 
$
361

 
$
(195
)
 
$
(568
)
 
$
(341
)
 
$

Net (deficiency) redundancy related to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asbestos
$
(177
)
 
$
(123
)
 
$
(113
)
 
$
(112
)
 
$
(107
)
 
$
(79
)
 
$

 
$

 
$

 
$

 
$

Environmental pollution
(209
)
 
(209
)
 
(159
)
 
(159
)
 
(159
)
 
(76
)
 

 

 

 

 

Total asbestos and environmental pollution
(386
)
 
(332
)
 
(272
)
 
(271
)
 
(266
)
 
(155
)
 

 

 

 

 

Core (Non-asbestos & environmental pollution)
(3,312
)
 
(2,200
)
 
(372
)
 
897

 
1,715

 
1,820

 
1,430

 
838

 
315

 
115

 

Total net (deficiency) redundancy
$
(3,698
)
 
$
(2,532
)
 
$
(644
)
 
$
626

 
$
1,449

 
$
1,665

 
$
1,430

 
$
838

 
$
315

 
$
115

 
$



6


(a)
Effective January 1, 2010, we ceded our net asbestos and environmental pollution claim and allocated claim adjustment expense reserves under a retroactive reinsurance agreement, as further discussed in Note F to the Consolidated Financial Statements included under Item 8.
(b)
On July 2, 2012, we acquired Hardy Underwriting Bermuda Limited. As a result of this acquisition, net reserves were increased by $291 million.
Additional information regarding our property and casualty claim and claim adjustment expense reserves and reserve development is set forth in the MD&A included under Item 7 and in Notes A and F to the Consolidated Financial Statements included under Item 8.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, including CNA, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.
We also make available free of charge on or through our internet website at www.cna.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Copies of these reports may also be obtained, free of charge, upon written request to: CNA Financial Corporation, 333 S. Wabash Avenue, Chicago, IL 60604, Attn: Jonathan D. Kantor, Executive Vice President, General Counsel and Secretary.

7


ITEM 1A. RISK FACTORS
Our business faces many risks. Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on our results of operations, equity, business and insurer financial strength and corporate debt ratings. You should carefully consider and evaluate all of the information included in this Report and any subsequent reports we may file with the SEC or make available to the public before investing in any securities we issue.
If we determine that our recorded insurance reserves are insufficient to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, we may need to increase our insurance reserves which would result in a charge to our earnings.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for reported and unreported claims and for future policy benefits. Insurance reserves are not an exact calculation of liability but instead are complex estimates derived by us, generally utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, mortality, morbidity, discount rates, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Mortality is the relative incidence of death. Morbidity is the frequency and severity of illness, sickness and diseases contracted. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying claims develop, particularly in so-called “long tail” or long duration coverages, we are sometimes required to add to our reserves. This is called unfavorable net prior year development and results in a charge to our earnings in the amount of the added reserves, recorded in the period the change in estimate is made. These charges can be substantial.
We are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims, resulting in further increases in our reserves. The effects of these and other unforeseen emerging claim and coverage issues are extremely difficult to predict. Examples of emerging or potential claims and coverage issues include:
uncertainty in future medical costs in workers' compensation. In particular, medical cost inflation could be greater than expected due to new treatments, drugs, and devices; increased healthcare utilization; and/or the future costs of healthcare facilities. In addition, the relationship between workers' compensation and government and private healthcare providers could change, potentially shifting costs to workers' compensation;
increased uncertainty related to medical professional liability, medical products liability and workers’ compensation coverages resulting from the Patient Protection and Affordable Care Act;
significant class action litigation; and
mass tort claims, including bodily injury claims related to benzene, lead, noise induced hearing loss, injuries from various medical products including pharmaceuticals, and various other chemical and radiation exposure claims.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review and change our reserve estimates in a regular and ongoing process as experience develops and further claims are reported and settled. If estimated reserves are insufficient for any reason, the required increase in reserves would be recorded as a charge against our earnings in the period in which reserves are determined to be insufficient. These charges could be substantial.

8


Our key assumptions used to determine reserves for long term care products and payout annuity contracts could vary significantly from actual experience.
Our reserves for long term care products are based on key assumptions including morbidity, mortality, policy persistency (the percentage of policies remaining in force) and discount rate. These assumptions are critical bases for reserve estimates and, while monitored consistently, are inherently uncertain due to the limited historical data and industry data available to us, as only a small portion of the long term care policies which have been written to date are in claims paying status, and the potential changing trends in morbidity and mortality over time. Assumptions relating to mortality and discount rate also form the basis for reserve determination for payout annuity products.
A prolonged period during which interest rates remain at levels lower than those anticipated in our reserving would result in shortfalls in investment income on assets supporting our obligations under long term care policies and payout annuity contracts, which may also require changes to our reserves. This risk is more significant for long term care products because the long potential duration of the policy obligations exceeds the duration of the supporting investment assets. If estimated reserves are insufficient for any reason, including changes in assumptions, the required increase in reserves would be recorded as a charge against our earnings in the period in which reserves are determined to be insufficient. These charges could be substantial.
Catastrophe losses are unpredictable and could result in material losses.
Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses. These events can be natural or man-made, and may include hurricanes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil commotion, and acts of terrorism. The frequency and severity of these catastrophe events are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow.
The extent of our losses from catastrophes is a function of the total amount of our insured exposures in the affected areas, the frequency and severity of the events themselves, the level of reinsurance assumed and ceded, and reinsurance reinstatement premiums, if any. As in the case of catastrophe losses generally, it can take a long time for the ultimate cost to us to be finally determined, as a multitude of factors contribute to such costs, including evaluation of general liability and pollution exposures, additional living expenses, infrastructure disruption, business interruption and reinsurance collectibility. Reinsurance coverage for terrorism events is provided only in limited circumstances, especially in regard to “unconventional” terrorism acts, such as nuclear, biological, chemical or radiological attacks. As a result, catastrophe losses are particularly difficult to estimate. Additionally, the U.S. government currently provides financial protection through the Terrorism Risk Insurance Program Reauthorization Act, which is set to expire December 31, 2014. Should that act expire without reauthorization or be reauthorized under materially different terms, our net exposure to a significant terrorist event could increase.
We have exposures related to asbestos and environmental pollution (A&EP) claims, which could result in material losses.
Our property and casualty insurance subsidiaries have exposures related to A&EP claims. Our experience has been that establishing claim and claim adjustment expense reserves for casualty coverages relating to A&EP claims is subject to uncertainties that are greater than those presented by other claims. Additionally, traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for A&EP. As a result, estimating the ultimate cost of both reported and unreported A&EP claims is subject to a higher degree of variability.
On August 31, 2010, we completed a retroactive reinsurance transaction under which substantially all of our legacy A&EP liabilities were ceded to National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., subject to an aggregate limit of $4 billion (Loss Portfolio Transfer). If the other parties to the Loss Portfolio Transfer do not fully perform their obligations, our liabilities for A&EP claims covered by the Loss Portfolio Transfer exceed the aggregate limit of $4 billion, or we determine we have exposures to A&EP claims not covered by the Loss Portfolio Transfer, we may need to increase our recorded net reserves which would result in a charge against our earnings. These charges could be substantial.

9


Our premium writings and profitability are affected by the availability and cost of reinsurance.
We purchase reinsurance to help manage our exposure to risk. Under our ceded reinsurance arrangements, another insurer assumes a specified portion of our exposure in exchange for a specified portion of policy premiums. Market conditions determine the availability and cost of the reinsurance protection we purchase, which affects the level of our business and profitability, as well as the level and types of risk we retain. If we are unable to obtain sufficient reinsurance at a cost we deem acceptable, we may be unwilling to bear the increased risk and would reduce the level of our underwriting commitments.
We may not be able to collect amounts owed to us by reinsurers, which could result in higher net incurred losses.
We have significant amounts recoverable from reinsurers which are reported as receivables on our Consolidated Balance Sheets and are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves. The ceding of insurance does not, however, discharge our primary liability for claims. As a result, we are subject to credit risk relating to our ability to recover amounts due from reinsurers. In the past, certain of our reinsurance carriers have experienced credit downgrades by rating agencies within the term of our contractual relationship. Such action increases the likelihood that we will not be able to recover amounts due. In addition, reinsurers could dispute amounts which we believe are due to us. If the amounts we collect from reinsurers are less than the amount recorded for any of the foregoing reasons, our net incurred losses will be higher.
We may not be able to collect amounts owed to us by policyholders who hold deductible policies, which could result in higher net incurred losses.
A portion of our business is written under deductible policies. Under these policies, we are obligated to pay the related insurance claims and are reimbursed by the policyholder to the extent of the deductible, which may be significant. As a result we are exposed to credit risk to the policyholder. If we are not able to collect the amounts due to us from policyholders, our incurred losses will be higher.
We may incur significant realized and unrealized investment losses and volatility in net investment income arising from changes in the financial markets.
Our investment portfolio is exposed to various risks, such as interest rate, credit, equity, and currency risks, many of which are unpredictable. Financial markets are highly sensitive to changes in economic conditions, monetary policies, domestic and international geopolitical issues and many other factors. Changes in financial markets including fluctuations in interest rates, credit, equity and currency prices, and many other factors beyond our control can adversely affect the value of our investments and the realization of investment income.
We have significant holdings in fixed maturity investments that are sensitive to changes in interest rates. A decline in interest rates may reduce the returns earned on new fixed maturity investments, thereby reducing our net investment income, while an increase in interest rates may reduce the value of our existing fixed maturity investments. The value of our fixed maturity investments is also subject to risk that certain investments may default or become impaired due to deterioration in the financial condition of issuers of the investments we hold. Any such impairments which we deem to be other-than-temporary would result in a charge to our earnings.
In addition, we invest a portion of our assets in equity securities and limited partnerships which are subject to greater market volatility than our fixed maturity investments. Limited partnership investments generally provide a lower level of liquidity than fixed maturity or equity investments and therefore may also limit our ability to withdraw assets. As a result of all of these factors, we may not earn an adequate return on our investments, may incur losses on the disposition of our investments, and may be required to write down the value of our investments.
Our valuation of investments and impairment of securities requires significant judgment, which is inherently uncertain.
We exercise significant judgment in analyzing and validating fair values, which are primarily provided by third parties, for securities in our investment portfolio, including those that are not regularly traded in active markets. We also exercise significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. The valuation of residential and commercial mortgage and other asset-backed securities can be particularly sensitive to fairly small changes in collateral performance.

10


Due to the inherent uncertainties involved with these judgments, we may incur unrealized losses and conclude that other-than-temporary write downs of our investments are required.
Changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate could adversely impact our results of operations.
Federal and/or state tax legislation that would lessen or eliminate some or all of the tax attributes currently affecting us could materially and adversely impact our results of operations, in particular, changes to tax laws governing tax credits. Other potential tax law changes, including the taxation of interest from municipal bonds, could also adversely affect the value of our investment portfolio and the rate at which we discount certain liabilities.
Any significant interruption in the operation of our facilities, systems and business functions could result in a materially adverse effect on our operations.
Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted manner, through our employees or vendor relationships, necessary business functions (such as internet support and 24-hour call centers), processing new and renewal business, and processing and paying claims and other obligations. Our facilities and systems could become unavailable, inoperable, or otherwise impaired from a variety of causes, including, without limitation, natural events, such as hurricanes, tornadoes, windstorms, earthquakes, severe winter weather and fires, or other events, such as explosions, terrorist attacks, computer security breaches or cyber attacks, riots, hazardous material releases, medical epidemics, utility outages, interruptions of our data processing and storage systems or the systems of third-party vendors, or unavailability of communications facilities. Likewise, we could experience a significant failure or corruption of one or more of our information technology, telecommunications, or other systems for various reasons, including significant failures that might occur as existing systems are replaced or upgraded.
The shut-down or unavailability of one or more of our systems or facilities for any reason could significantly impair our ability to perform critical business functions on a timely basis. In addition, because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such events could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner, or perform other necessary business functions, including the ability to issue financial statements in a timely manner. This could result in a materially adverse effect on our business results, prospects, and liquidity, as well as damage to customer goodwill.
Failure to protect personal information of our customers, claimants or employees, loss of key vendor relationships or exposure relating to claim administration and claim adjudication functions performed by a vendor could result in a materially adverse effect on our operations.
If a vendor, third-party administrator or employee fails to protect personal information of our customers, claimants or employees, we may suffer operational impairments and financial losses, as well as significant harm to our reputation.
In the event that one or more of our vendors suffers a bankruptcy, is sold to another entity, sustains a significant business interruption or otherwise becomes unable to continue to provide products or services, we may suffer operational impairments and financial losses associated with transferring business to a new vendor, assisting a vendor with rectifying operational difficulties or assuming previously outsourced operations ourselves.
Additionally, we rely on certain third-party claims administrators, including the administrator of our long term care claims, to perform significant claim administration and claim adjudication functions. Any failure by such administrator to properly perform service functions may result in losses as a result of over-payment of claims, legal claims against us and adverse regulatory enforcement exposure.
We face intense competition in our industry and may be adversely affected by the cyclical nature of the property and casualty business.
All aspects of the insurance industry are highly competitive and we must continuously allocate resources to refine and improve our insurance products and services. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. Insurers compete on the basis of factors including

11


products, price, services, ratings and financial strength. The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, resulting in less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. During periods in which price competition is high, we may lose business to competitors offering competitive insurance products at lower prices. As a result, our premium levels and expense ratio could be materially adversely impacted.
We are subject to capital adequacy requirements and, if we are unable to maintain or raise sufficient capital to meet these requirements, regulatory agencies may restrict or prohibit us from operating our business.
Insurance companies such as ours are subject to capital adequacy standards set by regulators to help identify companies that merit further regulatory attention. These standards apply specified risk factors to various asset, premium and reserve components of statutory capital and surplus reported in our statutory basis of accounting financial statements. Current rules, including those promulgated by insurance regulators and specialized markets, such as Lloyd's, require companies to maintain statutory capital and surplus at a specified minimum level determined using the applicable regulatory capital adequacy formula. If we do not meet these minimum requirements, we may be restricted or prohibited from operating our business. If we are required to record a material charge against earnings in connection with a change in estimate or the occurrence of an event, or if we incur significant losses related to our investment portfolio, we may violate these minimum capital adequacy requirements unless we are able to raise sufficient additional capital. We may be limited in our ability to raise significant amounts of capital on favorable terms or at all.
Our insurance subsidiaries, upon whom we depend for dividends in order to fund our working capital needs, are limited by insurance regulators in their ability to pay dividends.
We are a holding company and are dependent upon dividends, loans and other sources of cash from our subsidiaries in order to meet our obligations. Ordinary dividend payments, or dividends that do not require prior approval by the insurance subsidiaries' domiciliary insurance regulator are generally limited to amounts determined by formula which varies by jurisdiction. The formula for the majority of domestic states is the greater of 10% of the prior year statutory surplus or the prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to the date of payment. Some jurisdictions, including certain domestic states, however, have an additional stipulation that dividends cannot exceed the prior year's earned surplus. If we are restricted, by regulatory rule or otherwise, from paying or receiving intercompany dividends, we may not be able to fund our working capital needs and debt service requirements from available cash. As a result, we would need to look to other sources of capital which may be more expensive or may not be available at all.
Rating agencies may downgrade their ratings of us and thereby adversely affect our ability to write insurance at competitive rates or at all.
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries, as well as our public debt, are rated by rating agencies, namely, A.M. Best Company (A.M. Best), Moody's Investors Service, Inc. (Moody's) and Standard & Poor's (S&P). Ratings reflect the rating agency's opinions of an insurance company's or insurance holding company's financial strength, capital adequacy, operating performance, strategic position and ability to meet its obligations to policyholders and debt holders.
Due to the intense competitive environment in which we operate, the uncertainty in determining reserves and the potential for us to take material unfavorable net prior year development in the future, and possible changes in the methodology or criteria applied by the rating agencies, the rating agencies may take action to lower our ratings in the future. The severity of the impact on our business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets, and the required collateralization of certain future payment obligations or reserves.
In addition, it is possible that a lowering of the corporate debt ratings of Loews by certain of the rating agencies could result in an adverse impact on our ratings, independent of any change in our circumstances.

12


We are subject to extensive existing state, local and foreign governmental regulations that restrict our ability to do business and generate revenues.
The insurance industry is subject to comprehensive and detailed regulation and supervision. Most insurance regulations are designed to protect the interests of our policyholders and third-party claimants, rather than our investors. Each jurisdiction in which we do business has established supervisory agencies that regulate the manner in which we do business, generally at the state level. Any changes in federal regulation could also impose significant burdens on us. In addition, the Lloyd's marketplace sets rules under which its members, including our Hardy syndicate, operate.
These rules and regulations relate to, among other things, the following:
standards of solvency including risk-based capital measurements;
restrictions on the nature, quality and concentration of investments;
restrictions on our ability to withdraw from unprofitable lines of insurance or unprofitable market areas;
the required use of certain methods of accounting and reporting;
the establishment of reserves for unearned premiums, losses and other purposes;
potential assessments for funds necessary to settle covered claims against impaired, insolvent or failed private or quasi-governmental insurers;
licensing of insurers and agents;
approval of policy forms;
limitations on the ability of our insurance subsidiaries to pay dividends to us; and
limitations on the ability to non-renew, cancel, increase rates or change terms and conditions in policies.
Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. The jurisdictions in which we do business may also require us to provide coverage to persons whom we would not otherwise consider eligible. Each jurisdiction dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each jurisdiction.

13


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Chicago location, owned by CCC, houses our principal executive offices. Our subsidiaries own or lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to our principal office locations.
Location
Amount (Square Feet) of Building Owned and Occupied or Leased and Occupied by CNA
Principal Usage
333 S. Wabash Avenue, Chicago, Illinois
639,553

 
Principal executive offices of CNAF
2405 Lucien Way, Maitland, Florida
113,084

 
Property and casualty insurance offices
125 S. Broad Street, New York, New York
71,847

 
Property and casualty insurance offices
101 S. Reid Street, Sioux Falls, South Dakota
61,631

 
Property and casualty insurance offices
4150 N. Drinkwater Boulevard, Scottsdale, Arizona
56,281

 
Property and casualty insurance offices
401 Penn Street, Reading, Pennsylvania
56,009

 
Property and casualty insurance offices
10375 Park Meadows Drive, Littleton, Colorado
42,968

 
Property and casualty insurance offices
675 Placentia Avenue, Brea, California
41,340

 
Property and casualty insurance offices
700 N. Pearl Street, Dallas, Texas
37,870

 
Property and casualty insurance offices
1249 S. River Road, Cranbury, New Jersey
36,946

 
Property and casualty insurance offices
We lease the office space described above except for the building in Chicago, Illinois which is owned. We consider that our properties are generally in good condition, are well maintained and are suitable and adequate to carry on our business.
ITEM 3. LEGAL PROCEEDINGS
Information on our legal proceedings is set forth in Note G to the Consolidated Financial Statements included under Item 8.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

14


PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange under the symbol CNA.
As of February 14, 2014, we had 269,824,832 shares of common stock outstanding. Approximately 90% of our outstanding common stock is owned by Loews. We had 1,230 stockholders of record as of February 14, 2014 according to the records maintained by our transfer agent.
Our Board of Directors has approved an authorization to purchase, in the open market or through privately negotiated transactions, our outstanding common stock, as our management deems appropriate. No repurchases were made in the fourth quarter of 2013.
The table below shows the high and low sales prices for our common stock based on the New York Stock Exchange Composite Transactions.
Common Stock Information
 
2013
 
2012
Quarter:
High
 
Low
 
Dividends
Declared
 
High
 
Low
 
Dividends
Declared
First
$
32.69

 
$
28.89

 
$
0.20

 
$
29.73

 
$
26.70

 
$
0.15

Second
35.27

 
30.71

 
0.20

 
30.67

 
26.87

 
0.15

Third
38.30

 
32.66

 
0.20

 
28.35

 
25.91

 
0.15

Fourth
42.89

 
37.44

 
0.20

 
29.57

 
27.06

 
0.15

The following graph compares the total return of our common stock, the Standard & Poor's 500 (S&P 500) Index and the S&P 500 Property & Casualty Insurance Index for the five year period from December 31, 2008 through December 31, 2013. The graph assumes that the value of the investment in our common stock and for each index was $100 on December 31, 2008 and that dividends, if any, were reinvested.
Stock Price Performance Graph
Company / Index
2008
 
2009
 
2010
 
2011
 
2012
 
2013
CNA Financial Corporation
100.00

 
145.99

 
164.54

 
165.10

 
176.65

 
276.68

S&P 500 Index
100.00

 
126.46

 
145.51

 
148.59

 
172.37

 
228.19

S&P 500 Property & Casualty Insurance Index
100.00

 
112.35

 
122.38

 
122.08

 
146.63

 
202.78


15


ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data. On July 2, 2012, we acquired Hardy Underwriting Bermuda Limited and its subsidiaries. The results of Hardy are included from the date of acquisition. The table should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Selected Financial Data
As of or for the years ended December 31
 
 
 
 
 
 
 
 
 
(In millions, except per share data)
2013
 
2012
 
2011
 
2010
 
2009
Results of Operations:
 
 
 
 
 
 
 
 
 
Revenues
$
10,113

 
$
9,547

 
$
8,949

 
$
9,209

 
$
8,472

Income (loss) from continuing operations, net of tax
$
937

 
$
628

 
$
629

 
$
780

 
$
482

Income (loss) from discontinued operations, net of tax

 

 
(1
)
 
(21
)
 
(2
)
Net (income) loss attributable to noncontrolling interests, net of tax

 

 
(16
)
 
(68
)
 
(62
)
Net income (loss) attributable to CNA
$
937

 
$
628

 
$
612

 
$
691

 
$
418

Basic Earnings (Loss) Per Share Attributable to CNA Common Stockholders:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to CNA common stockholders
$
3.48

 
$
2.33

 
$
2.27

 
$
2.36

 
$
1.11

Income (loss) from discontinued operations attributable to CNA common stockholders

 

 

 
(0.08
)
 
(0.01
)
Basic earnings (loss) per share attributable to CNA common stockholders
$
3.48

 
$
2.33

 
$
2.27

 
$
2.28

 
$
1.10

Diluted Earnings (Loss) Per Share Attributable to CNA Common Stockholders:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to CNA common stockholders
$
3.47

 
$
2.33

 
$
2.27

 
$
2.36

 
$
1.11

Income (loss) from discontinued operations attributable to CNA common stockholders

 

 

 
(0.08
)
 
(0.01
)
Diluted earnings (loss) per share attributable to CNA common stockholders
$
3.47

 
$
2.33

 
$
2.27

 
$
2.28

 
$
1.10

Dividends declared per common share
$
0.80

 
$
0.60

 
$
0.40

 
$

 
$

Financial Condition:
 
 
 
 
 
 
 
 
 
Total investments
$
46,107

 
$
47,636

 
$
44,373

 
$
42,655

 
$
41,996

Total assets
57,194

 
58,522

 
55,110

 
55,252

 
55,218

Insurance reserves
38,394

 
40,005

 
37,554

 
37,590

 
38,263

Long and short term debt
2,560

 
2,570

 
2,608

 
2,651

 
2,303

Total CNA stockholders' equity
12,651

 
12,314

 
11,488

 
10,882

 
10,587

Book value per common share
$
46.91

 
$
45.71

 
$
42.66

 
$
40.44

 
$
35.64



16


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Index to this MD&A
Management's discussion and analysis of financial condition and results of operations is comprised of the following sections:

17


OVERVIEW
The following discussion should be read in conjunction with Item 1A. Risk Factors, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data of this Form 10-K. References to net operating income (loss), net realized investment gains (losses) and net income (loss) used in this MD&A reflect amounts attributable to CNA, unless otherwise noted.
Subsequent Event
On February 10, 2014, we entered into a definitive agreement to sell the majority of our run-off annuity and pension deposit business. Further information on the sale is set forth in Note R to the Consolidated Financial Statements included under Item 8.


18


CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A.
Years ended December 31
 
 
 
 
 
(In millions)
2013
 
2012
 
2011
Operating Revenues
 
 
 
 
 
Net earned premiums
$
7,271

 
$
6,882

 
$
6,603

Net investment income
2,450

 
2,282

 
2,054

Other revenues
361

 
320

 
294

Total operating revenues
10,082

 
9,484

 
8,951

Claims, Benefits and Expenses
 
 
 
 
 
Net incurred claims and benefits
5,927

 
5,867

 
5,476

Policyholders' dividends
20

 
29

 
13

Amortization of deferred acquisition costs
1,362

 
1,274

 
1,176

Other insurance related expenses
1,017

 
1,049

 
980

Other expenses
474

 
456

 
433

Total claims, benefits and expenses
8,800

 
8,675

 
8,078

Operating income from continuing operations before income tax
1,282

 
809

 
873

Income tax expense on operating income
(365
)
 
(222
)
 
(247
)
Net operating (income) loss attributable to noncontrolling interests

 

 
(16
)
Net operating income from continuing operations attributable to CNA
917

 
587

 
610

Net realized investment gains (losses), pretax
31

 
63

 
(2
)
Income tax (expense) benefit on net realized investment gains (losses)
(11
)
 
(22
)
 
5

Net realized investment gains
20

 
41

 
3

Income from continuing operations attributable to CNA
937

 
628

 
613

Loss from discontinued operations attributable to CNA

 

 
(1
)
Net income attributable to CNA
$
937

 
$
628

 
$
612

2013 Compared with 2012
Net income increased $309 million in 2013 as compared with 2012, driven by higher net operating income.
Net realized investment gains decreased $21 million in 2013 as compared with 2012. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income increased $330 million in 2013 as compared with 2012. Net operating income increased $427 million for our core segments, CNA Specialty, CNA Commercial and Hardy. This increase was primarily due to improved current accident year underwriting results and higher net investment income. These favorable items were partially offset by lower favorable net prior year development. Catastrophe losses were $111 million after-tax in 2013 as compared to catastrophe impacts of $270 million after-tax in 2012 as further discussed below. Net operating results decreased $97 million for our non-core segments, primarily driven by results in our Corporate & Other Non-Core segment related to retroactive reinsurance accounting. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Aggregate favorable net prior year development of $160 million and $251 million was recorded in 2013 and 2012 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.

19


Net earned premiums increased $389 million in 2013 as compared with 2012 driven by the acquisition of Hardy in July of 2012, a $106 million increase in CNA Specialty and a $44 million increase in CNA Commercial. See the Segment Results section of this MD&A for further discussion.
2012 Compared with 2011
Net income increased $16 million in 2012 as compared with 2011, driven by increased net realized investment gains, partially offset by lower net operating income.
Net realized investment gains increased $38 million in 2012 as compared with 2011. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income decreased $23 million in 2012 as compared with 2011. Net operating income decreased $126 million for our core segments, CNA Specialty, CNA Commercial and Hardy. This decrease was primarily due to higher catastrophe impacts and decreased favorable net prior year development. These unfavorable impacts were partially offset by higher net investment income, driven by significantly favorable limited partnership results. Catastrophe impacts were $270 million after-tax in 2012 as compared to $144 million after-tax in 2011. Catastrophe impacts in 2012 reflect $190 million after-tax related to Storm Sandy, including reinstatement premiums of $10 million after-tax. Net operating results improved $103 million for our non-core segments, primarily related to results in our Life & Group Non-Core segment. See the Life & Group Non-Core and Corporate & Other Non-Core sections of this MD&A for further discussion of our non-core results.
Aggregate favorable net prior year development of $251 million and $431 million was recorded in 2012 and 2011 related to our CNA Specialty, CNA Commercial, Hardy and Corporate & Other Non-Core segments. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.
Net earned premiums increased $279 million in 2012 as compared with 2011 driven by the acquisition of Hardy, a $102 million increase in CNA Specialty and a $66 million increase in CNA Commercial. See the Segment Results section of this MD&A for further discussion.

20


CRITICAL ACCOUNTING ESTIMATES
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (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 Consolidated Financial Statements and the amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our 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 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 discussed below are considered by us to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Note A to the Consolidated Financial Statements included under Item 8 should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations or equity.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts include long term care products and payout annuity contracts and are estimated using actuarial estimates about mortality, morbidity and persistency as well as assumptions about expected investment returns. The reserve for unearned premiums on property and casualty contracts represents the portion of premiums written related to the unexpired terms of coverage. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
Reinsurance and Insurance Receivables
An exposure exists with respect to the collectibility of ceded property and casualty and life reinsurance to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities we have ceded under reinsurance agreements. An allowance for uncollectible reinsurance is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, our past experience and current economic conditions. Further information on our reinsurance receivables is included in Note H to the Consolidated Financial Statements included under Item 8.
Additionally, an exposure exists with respect to the collectibility of amounts due from policyholders related to insurance contracts, including amounts due from insureds under high deductible policies. An allowance for uncollectible insurance receivables is recorded on the basis of periodic evaluations of balances due from insureds currently or in the future, management's experience and current economic conditions.
If actual experience differs from the estimates made by management in determining the allowances for uncollectible reinsurance and insurance receivables, net receivables as reflected on our Consolidated Balance Sheets may not be collected. Therefore, our results of operations or equity could be materially adversely impacted.

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Valuation of Investments and Impairment of Securities
We classify our fixed maturity securities and equity securities as either available-for-sale or trading which are both carried at fair value on the balance sheet. Fair value represents the price that would be received in a sale of an asset in an orderly transaction between market participants on the measurement date, the determination of which requires us to make a significant number of assumptions and judgments. Securities with the greatest level of subjectivity around valuation are those that rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are based on assumptions consistent with what we believe other market participants would use to price such securities. Further information on our fair value measurements is included in Note D to the Consolidated Financial Statements included under Item 8.
Our investment portfolio is subject to market declines below amortized cost that may be other-than-temporary and therefore result in the recognition of impairment losses in earnings. Factors considered in the determination of whether or not a decline is other-than-temporary include a current intention or need to sell the security or an indication that a credit loss exists. Significant judgment exists regarding the evaluation of the financial condition and expected near-term and long-term prospects of the issuer, the relevant industry conditions and trends, and whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We have an Impairment Committee which reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Further information on our process for evaluating impairments is included in Note A to the Consolidated Financial Statements included under Item 8.
Long Term Care Products and Payout Annuity Contracts
Future policy benefit reserves for our life and group products are based on certain assumptions including morbidity, mortality, policy persistency, and discount rates. The adequacy of the reserves is contingent on actual experience related to these key assumptions, which were generally established at time of issue. If actual experience differs from these assumptions, the reserves may not be adequate, requiring us to add to reserves.
A prolonged period during which interest rates remain at levels lower than those anticipated in our reserving discount rate assumption could result in shortfalls in investment income on assets supporting our obligations under long term care policies and payout annuity contracts, which may also require changes to our reserves.
These changes to our reserves could materially adversely impact our results of operations and equity. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
Pension and Postretirement Benefit Obligations
We make a significant number of assumptions in estimating the liabilities and costs related to our pension and postretirement benefit obligations under our benefit plans. The assumptions that most impact these costs are the discount rate and the expected long term rate of return on plan assets. These assumptions are evaluated relative to current economic factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.
To determine the discount rate assumption as of the year-end measurement date for our CNA Retirement Plan and CNA Health and Group Benefits Program, we considered the estimated timing of plan benefit payments and available yields on high quality fixed income debt securities. For this purpose, high quality is considered a rating of Aa or better by Moody's or a rating of AA or better from S&P. We reviewed several yield curves constructed using the cash flow characteristics of the plans as well as bond indices as of the measurement date. The year-over-year change of those data points was also considered.
In determining the expected long term rate of return on plan assets assumption for our CNA Retirement Plan, we considered the historical performance of the investment portfolio as well as the long term market return expectations based on the investment mix of the portfolio.
Further information on our pension and postretirement benefit obligations is included in Note J to the Consolidated Financial Statements included under Item 8.

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Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return basis of assets and liabilities. Any resulting future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. The assessment of the need for a valuation allowance requires management to make estimates and assumptions about future earnings, reversal of existing temporary differences and available tax planning strategies. If actual experience differs from these estimates and assumptions, the recorded deferred tax asset may not be fully realized resulting in an increase to income tax expense in our results of operations. In addition, the ability to record deferred tax assets in the future could be limited, resulting in a higher effective tax rate in that future period.

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RESERVES - ESTIMATES AND UNCERTAINTIES
The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain. As noted below, we review our reserves for each segment of our business periodically and any such review could result in the need to increase reserves in amounts which could be material and could adversely impact our results of operations, equity, business and insurer financial strength and corporate debt ratings. Further information on reserves is provided in Note F to the Consolidated Financial Statements included under Item 8.
Property and Casualty Claim and Claim Adjustment Expense Reserves
We maintain loss reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (IBNR). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves as of each balance sheet date are provided in the Segment Results section of this MD&A and in Note F to the Consolidated Financial Statements included under Item 8.
We are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of emerging or potential claims and coverage issues include:
uncertainty in future medical costs in workers' compensation. In particular, medical cost inflation could be greater than expected due to new treatments, drugs, and devices; increased healthcare utilization; and/or the future costs of healthcare facilities. In addition, the relationship between workers' compensation and government and private healthcare providers could change, potentially shifting costs to workers' compensation;
increased uncertainty related to medical professional liability, medical products liability and workers’ compensation coverages resulting from the Patient Protection and Affordable Care Act;
significant class action litigation; and
mass tort claims, including bodily injury claims related to benzene, lead, noise induced hearing loss, injuries from various medical products including pharmaceuticals, and various other chemical and radiation exposure claims.
The impact of these and other unforeseen emerging or potential claims and coverage issues is difficult to predict and could materially adversely affect the adequacy of our claim and claim adjustment expense reserves and could lead to future reserve additions.
Our property and casualty insurance subsidiaries also have actual and potential exposures related to A&EP claims. Our experience has been that establishing reserves for casualty coverages relating to A&EP claims and the related claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Additionally, traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for A&EP. As a result, estimating the ultimate cost of both reported and unreported A&EP claims are subject to a higher degree of variability.
To mitigate the risks posed by our exposure to A&EP claims and claim adjustment expenses, as further discussed in Note F to the Consolidated Financial Statements included under Item 8, on August 31, 2010 we completed a

24


transaction with NICO, a subsidiary of Berkshire Hathaway Inc., under which substantially all of our legacy A&EP liabilities were ceded to NICO effective January 1, 2010 (Loss Portfolio Transfer).
The Loss Portfolio Transfer is a retroactive reinsurance contract. During 2013 the cumulative amounts ceded under the Loss Portfolio Transfer exceeded the consideration paid, resulting in a $189 million deferred retroactive reinsurance gain. This deferred benefit will be recognized in earnings in future periods in proportion to actual recoveries under the Loss Portfolio Transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within the limit under the contract.
Establishing Property & Casualty Reserve Estimates
In developing claim and claim adjustment expense (“loss” or “losses”) reserve estimates, our actuaries perform detailed reserve analyses that are staggered throughout the year. The data is organized at a “product” level. A product can be a line of business covering a subset of insureds such as commercial automobile liability for small or middle market customers, it can encompass several lines of business provided to a specific set of customers such as dentists, or it can be a particular type of claim such as construction defect. Every product is reviewed at least once during the year. The analyses generally review losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to establish estimates net of reinsurance. In addition to the detailed analyses, we review actual loss emergence for all products each quarter.
The detailed analyses use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. Our actuaries determine a point estimate of ultimate loss by reviewing the various estimates and assigning weight to each estimate given the characteristics of the product being reviewed. The reserve estimate is the difference between the estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated as such includes a provision for development on known cases (supplemental development) as well as a provision for claims that have occurred but have not yet been reported (pure IBNR).
Most of our business can be characterized as long-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. Our long-tail exposures include commercial automobile liability, workers' compensation, general liability, medical professional liability, other professional liability and management liability coverages, assumed reinsurance run-off and products liability. Short-tail exposures include property, commercial automobile physical damage, marine and warranty. CNA Specialty and CNA Commercial contain both long-tail and short-tail exposures. Hardy contains primarily short-tail exposures. Corporate & Other Non-Core contains long-tail exposures.
Various methods are used to project ultimate loss for both long-tail and short-tail exposures including, but not limited to, the following:
paid development;
incurred development;
loss ratio;
Bornhuetter-Ferguson using paid loss;
Bornhuetter-Ferguson using incurred loss;
frequency times severity; and
stochastic modeling.
The paid development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident or policy years with further expected changes in paid loss. Selection of the paid loss pattern may require consideration of several factors including the impact of inflation on claims costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself may require evaluation of changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors. Because this method assumes that

25


losses are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
For many products, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail products such as workers' compensation.
The incurred development method is similar to the paid development method, but it uses case incurred losses instead of paid losses.  Since the method uses more data (case reserves in addition to paid losses) than the paid development method, the incurred development patterns may be less variable than paid patterns. However, selection of the incurred loss pattern typically requires analysis of all of the same factors described above. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place, and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.
The loss ratio method multiplies earned premiums by an expected loss ratio to produce ultimate loss estimates for each accident or policy year. This method may be useful for immature accident or policy periods or if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio typically requires analysis of loss ratios from earlier accident or policy years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson method using paid loss is a combination of the paid development method and the loss ratio method. This method normally determines expected loss ratios similar to the approach used to estimate the expected loss ratio for the loss ratio method and typically requires analysis of the same factors described above. This method assumes that future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the paid development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the paid development method typically requires consideration of the same factors listed in the description of the paid development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. For long-tail lines, this method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson method using incurred loss is similar to the Bornhuetter-Ferguson method using paid loss except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving have taken place, and the method typically requires analysis of the same factors that need to be reviewed for the loss ratio and incurred development methods.
The frequency times severity method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident or policy year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for products where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims may require analysis of several factors including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss may require analysis of the impact of large losses and claim cost trends based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.
Stochastic modeling produces a range of possible outcomes based on varying assumptions related to the particular product being modeled. For some products, we use models which rely on historical development patterns at an aggregate level, while other products are modeled using individual claim variability assumptions supplied by the claims department. In either case, multiple simulations are run and the results are analyzed to produce a range of

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potential outcomes. The results will typically include a mean and percentiles of the possible reserve distribution which aid in the selection of a point estimate.
For many exposures, especially those that can be considered long-tail, a particular accident or policy year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, our actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method.  For most of our products, even the incurred losses for accident or policy years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, we will not assign any weight to the paid and incurred development methods. We will use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods.  For short-tail exposures, the paid and incurred development methods can often be relied on sooner, primarily because our history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, we may also use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods for short-tail exposures.
For other more complex products where the above methods may not produce reliable indications, we use additional methods tailored to the characteristics of the specific situation.
Periodic Reserve Reviews
The reserve analyses performed by our actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with our senior management to determine the best estimate of reserves. This group considers many factors in making this decision. The factors include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, pricing and underwriting trends in the insurance market, and legal, judicial, social and economic trends.
Our recorded reserves reflect our best estimate as of a particular point in time based upon known facts, consideration of the factors cited above and our judgment. The carried reserve may differ from the actuarial point estimate as the result of our consideration of the factors noted above as well as the potential volatility of the projections associated with the specific product being analyzed and other factors impacting claims costs that may not be quantifiable through traditional actuarial analysis. This process results in management's best estimate which is then recorded as the loss reserve.
Currently, our recorded reserves are modestly higher than the actuarial point estimate. For CNA Commercial, CNA Specialty and Hardy, the difference between our reserves and the actuarial point estimate is primarily driven by uncertainty with respect to immature accident years, claim cost inflation, changes in claims handling, changes to the tort environment which may adversely impact claim costs, and the effects from the economy. For Corporate & Other Non-Core, the difference between our reserves and the actuarial point estimate is primarily driven by the potential tail volatility of run-off exposures.
The key assumptions fundamental to the reserving process are often different for various products and accident or policy years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the paid development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. As a result, the effect on reserve estimates of a particular change in assumptions typically cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.
Our recorded reserves are management's best estimate. In order to provide an indication of the variability associated with our net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in significant factors affecting our reserve estimates for particular types of business. These significant factors are the ones that we believe could most likely materially impact the reserves. This discussion covers the major types of business for which we believe a material deviation to our reserves is reasonably possible. There can be no assurance that actual experience will be consistent with the current assumptions or with the variation

27


indicated by the discussion. In addition, there can be no assurance that other factors and assumptions will not have a material impact on our reserves.
Within CNA Specialty, we believe a material deviation to our net reserves is reasonably possible for professional liability and management liability products and Surety products. This includes professional liability coverages provided to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and other professional firms. This also includes directors and officers (D&O), employment practices, fiduciary, fidelity and surety coverages, as well as insurance products serving the healthcare delivery system. The most significant factor affecting reserve estimates for these products is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislative changes and other factors. Underwriting and claim handling decisions such as the classes of business written and individual claim settlement decisions can also impact claim severity. If the estimated claim severity increases by 9%, we estimate that the net reserves would increase by approximately $550 million. If the estimated claim severity decreases by 3%, we estimate that net reserves would decrease by approximately $200 million. Our net reserves for these products were approximately $5.9 billion at December 31, 2013.
Within CNA Commercial, the two types of business for which we believe a significant deviation to our net reserves is reasonably possible are workers' compensation and general liability.
For CNA Commercial workers' compensation, since many years will pass from the time the business is written until all claim payments have been made, claim cost inflation on claim payments is the most significant factor affecting workers' compensation reserve estimates. Workers' compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers' compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would increase by approximately $400 million. If estimated workers' compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would decrease by approximately $400 million. Our net reserves for CNA Commercial workers' compensation were approximately $4.6 billion at December 31, 2013.
For CNA Commercial general liability, the most significant factor affecting reserve estimates is claim severity. Claim severity is driven by changes in the cost of repairing or replacing property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors. If the estimated claim severity for general liability increases by 6%, we estimate that our net reserves would increase by approximately $200 million. If the estimated claim severity for general liability decreases by 3%, we estimate that our net reserves would decrease by approximately $100 million. Our net reserves for CNA Commercial general liability were approximately $3.7 billion at December 31, 2013.
Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, we regularly review the adequacy of our reserves and reassess our reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review our reserve estimates on a regular basis and make adjustments in the period that the need for such adjustments is determined. These reviews have resulted in our identification of information and trends that have caused us to change our reserves in prior periods and could lead to the identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations, equity, business and insurer financial strength and corporate debt ratings positively or negatively. See the Ratings section of this MD&A for further information regarding our financial strength and corporate debt ratings.
Life & Group Non-Core Policyholder Reserves
We calculate and maintain reserves for policyholder claims and benefits for our Life & Group Non-Core segment based on actuarial assumptions. The determination of these reserves is fundamental to our financial results and requires management to make assumptions about expected investment and policyholder experience over the life

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of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.
The actuarial assumptions represent management's best estimates at the date the contract was issued plus a margin for adverse deviation. Actuarial assumptions include estimates of morbidity, mortality, policy persistency, discount rates and expenses over the life of the contracts. Under GAAP, these assumptions are locked in throughout the life of the contract unless a premium deficiency develops. The impact of differences between the actuarial assumptions and actual experience is reflected in results of operations each period.
Annually, management assesses the adequacy of its GAAP reserves by product group by performing premium deficiency testing. In this test, reserves computed using best estimate assumptions as of the date of the test without provisions for adverse deviation are compared to the recorded reserves. If reserves determined based on management's current best estimate assumptions are greater than the existing net GAAP reserves (i.e. reserves net of any Deferred acquisition costs asset), the existing net GAAP reserves would be increased to the greater amount. Any such increase would be reflected in our results of operations in the period in which the need for such adjustment is determined, and could materially adversely affect our results of operations, equity and business and insurer financial strength and corporate debt ratings.
Payout Annuity Reserves
Our payout annuity reserves consist primarily of single premium group and structured settlement annuities. The annuity payments are generally fixed and are either for a specified period or contingent on the survival of the payee. These reserves are discounted except for reserves for loss adjustment expenses on structured settlements not funded by annuities in our property and casualty insurance companies. In 2012 and 2011, we recognized a premium deficiency on our payout annuity reserves. Therefore, the actuarial assumptions established at time of issue have been unlocked and updated to management's then current best estimate. The actuarial assumptions that management believes are subject to the most variability are discount rate and mortality.
The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our assumptions. We have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur.
It should be noted that our current GAAP payout annuity reserves contain a level of margin in excess of management's current best estimates. Any required increase in the net GAAP reserves resulting from the hypothetical revisions in the table below would first reduce the margin before they would affect results of operations. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
Sensitivity Analysis
December 31, 2013
 
 
Estimated reduction to pretax income
Hypothetical revisions (In millions)
Discount rate:
 
50 basis point decline
$
106

100 basis point decline
$
247

Mortality:
 
5% decline
$
5

10% decline
$
31

Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized above.

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Long Term Care Reserves
Long term care policies provide benefits for nursing home, assisted living and home health care subject to various daily and lifetime caps. Policyholders must continue to make periodic premium payments to keep the policy in force. Generally we have the ability to increase policy premiums, subject to state regulatory approval.
Our long term care reserves consist of an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. The active life reserve represents the present value of expected future benefit payments and expenses less expected future premium.
The actuarial assumptions that management believes are subject to the most variability are discount rate, morbidity, and persistency, which can be affected by policy lapses and death. There is limited historical data and industry data available to us for these reserves, as only a small portion of the long term care policies which have been written to date are in claims paying status and trends in morbidity and mortality change over time. As a result, our long term care reserves may be subject to material increases if these trends develop adversely to our expectations.
The table below summarizes the estimated pretax impact on our results of operations from various hypothetical revisions to our assumptions. We have assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur.
It should be noted that our current GAAP long term care reserves contain a level of margin in excess of management's current best estimates. Any required increase in the net GAAP reserves resulting from the hypothetical revisions in the table below would first reduce the margin before they would affect results of operations. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
Sensitivity Analysis
December 31, 2013
 
 
Estimated reduction to pretax income
Hypothetical revisions (In millions)
Discount rate:
 
50 basis point decline
$
305

100 basis point decline
$
1,041

Morbidity:
 
5% increase
$
188

10% increase
$
724

Persistency:
 
5% decline in voluntary lapse and mortality
$
18

10% decline in voluntary lapse and mortality
$
418

Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized above.

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SEGMENT RESULTS

The following discusses the results of continuing operations for our operating segments.
Our core property and casualty commercial insurance operations are reported in three business segments: CNA Specialty, CNA Commercial and Hardy. CNA Specialty provides a broad array of professional, financial and specialty property and casualty products and services, primarily through insurance brokers and managing general underwriters. CNA Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. CNA Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers. Hardy underwrites primarily short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance. The Company acquired Hardy on July 2, 2012.
Our non-core operations are managed in two segments: Life & Group Non-Core and Corporate & Other Non-Core. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Corporate & Other Non-Core primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business in run-off, including CNA Re and A&EP. Intersegment eliminations are also included in this segment.
Our property and casualty field structure consists of 49 underwriting locations across the United States. In addition, there are five centralized processing operations which handle policy processing, billing and collection activities, and also act as call centers to optimize service. The claims structure consists of two regional claim centers designed to efficiently handle the high volume of low severity claims including property damage, liability, and workers' compensation medical only claims, and 16 principal claim offices handling the more complex claims. In addition, we have underwriting and claim capabilities in Canada and Europe.
We utilize the net operating income financial measure to monitor our operations. Net operating income (loss) is calculated by excluding from net income (loss) attributable to CNA the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting guidance. See further discussion regarding how we manage our business in Note O to the Consolidated Financial Statements included under Item 8. In evaluating the results of our CNA Specialty, CNA Commercial and Hardy segments, we utilize the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders' dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the impact of related acquisition expenses. Further information on our reserves is provided in Note F to the Consolidated Financial Statements included under Item 8.

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CNA Specialty
Business Overview
CNA Specialty provides management and professional liability and other coverages through property and casualty products and services, both domestically and abroad, through a network of brokers, independent agencies and managing general underwriters. CNA Specialty provides solutions for managing the risks of its clients, including architects, lawyers, accountants, health care professionals, financial intermediaries and public and private companies. Product offerings also include surety and fidelity bonds and warranty services.
CNA Specialty includes the following business groups:
Management & Professional Liability provides management and professional liability insurance and risk management services and other specialized property and casualty coverages in the United States. This group provides professional liability coverages to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and other professional firms. Management & Professional Liability also provides D&O, employment practices, fiduciary and fidelity coverages. Specific areas of focus include small and mid-size firms, public as well as privately held firms, and not-for-profit organizations, where tailored products for these client segments are offered. Products within Management & Professional Liability are distributed through brokers, independent agents and managing general underwriters. Management & Professional Liability, through CNA HealthPro, also offers insurance products to serve the healthcare industry. Products include professional and general liability as well as associated standard property and casualty coverages, and are distributed on a national basis through brokers, independent agents and managing general underwriters. Key customer segments include aging services, allied medical facilities, life sciences, dentists, doctors, hospitals, and nurses and other medical practitioners.
International provides similar management and professional liability insurance and other specialized property and casualty coverages, through similar distribution channels, in Canada and Europe.
Surety offers small, medium and large contract and commercial surety bonds. Surety provides surety and fidelity bonds in all 50 states through a network of independent agencies. On June 10, 2011, CNA completed the acquisition of the noncontrolling interest of Surety.
Warranty and Alternative Risks provides extended service contracts and related products that provide protection from the financial burden associated with mechanical breakdown and other related losses, primarily for vehicles and portable electronic communication devices.

32



The following table details the results of operations for CNA Specialty.
Results of Operations
Years ended December 31
 
 
 
 
 
(In millions, except ratios)
2013
 
2012
 
2011
Net written premiums
$
3,091

 
$
2,924

 
$
2,872

Net earned premiums
3,004

 
2,898

 
2,796

Net investment income
657

 
592

 
500

Net operating income
707

 
504

 
517

Net realized investment gains (losses)
(2
)
 
13

 
(3
)
Net income
705

 
517

 
514

Ratios
 
 
 
 
 
Loss and loss adjustment expense
56.7
%
 
63.2
%
 
59.3
 %
Expense
30.0

 
31.5

 
30.7

Dividend
0.2

 
0.1

 
(0.1
)
Combined
86.9
%
 
94.8
%
 
89.9
 %
2013 Compared with 2012
Net written premiums for CNA Specialty increased $167 million in 2013 as compared with 2012, primarily driven by increased rate. Net earned premiums increased $106 million in 2013 as compared with 2012, consistent with increases in net written premiums.
CNA Specialty's average rate increased 6% for 2013, as compared with an increase of 5% in 2012 for the policies that renewed in each period. Retention of 85% and 86% was achieved in each period.
Net income increased $188 million in 2013 as compared with 2012. This increase was driven by higher net operating income.
Net operating income increased $203 million in 2013 as compared with 2012, primarily due to improved underwriting results and higher net investment income.
The combined ratio improved 7.9 points in 2013 as compared with 2012. The loss ratio improved 6.5 points, primarily due to an improved current accident year loss ratio and higher favorable net prior year development. The expense ratio improved 1.5 points in 2013 as compared with 2012, primarily due to the impact of lower underwriting expenses and a higher net earned premium base.
Favorable net prior year development of $247 million and $150 million was recorded in 2013 and 2012. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.

33


The following table summarizes the gross and net carried reserves as of December 31, 2013 and 2012 for CNA Specialty.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
December 31
 
 
 
(In millions)
2013
 
2012
Gross Case Reserves
$
2,270

 
$
2,292

Gross IBNR Reserves
4,419

 
4,456

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,689

 
$
6,748

Net Case Reserves
$
2,024

 
$
2,008

Net IBNR Reserves
4,142

 
4,104

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
6,166

 
$
6,112

2012 Compared with 2011
Net written premiums for CNA Specialty increased $52 million in 2012 as compared with 2011, primarily driven by positive rate achievement, partially offset by lower new business levels in certain lines. Net earned premiums increased $102 million in 2012 as compared with 2011, consistent with increases in net written premiums.
CNA Specialty's average rate increased 5% for 2012, as compared to flat average rate in 2011 for the policies that renewed during those periods. Retention of 86% and 87% was achieved in each period.
Net income increased $3 million in 2012 as compared with 2011. This increase was due to improved net realized investment results, partially offset by lower net operating income.
Net operating income decreased $13 million in 2012 as compared with 2011, primarily due to decreased favorable net prior year development and decreased current accident year underwriting results, partially offset by higher investment income and the inclusion of our Surety business on a wholly-owned basis in 2012.
The combined ratio increased 4.9 points in 2012 as compared with 2011. The loss ratio increased 3.9 points, primarily due to decreased favorable net prior year development as well as the impact of a higher current accident year loss ratio. The expense ratio increased 0.8 points in 2012 as compared with 2011, primarily due to increased acquisition and underwriting expenses.
Favorable net prior year development of $150 million and $245 million was recorded in 2012 and 2011. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.


34


CNA Commercial
Business Overview
CNA Commercial works with an independent agency distribution system and a network of brokers to market a broad range of property and casualty insurance products and services to small, middle-market and large businesses and organizations domestically and abroad. Property products include standard and excess property coverages, as well as marine coverage, and boiler and machinery. Casualty products include standard casualty insurance products such as workers' compensation, general and product liability, commercial auto and umbrella coverages. Most insurance programs are provided on a guaranteed cost basis; however, we also offer specialized loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.
These property and casualty products are offered as part of our Small Business, Commercial and International insurance groups. Our Small Business insurance group serves our smaller commercial accounts and the Commercial insurance group serves our middle markets and larger risks. In addition, CNA Commercial provides total risk management services relating to claim and information services to the large commercial insurance marketplace, through a wholly-owned subsidiary, CNA ClaimPlus, Inc., a third-party administrator. We also provide specialized insurance to customers who are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. The International insurance group primarily consists of the commercial product lines of our operations in Europe and Canada. During the fourth quarter of 2011, we sold our 50% ownership interest in First Insurance Company of Hawaii (FICOH).
The following table details the results of operations for CNA Commercial.
Results of Operations
Years ended December 31
 
 
 
 
 
(In millions, except ratios)
2013
 
2012
 
2011
Net written premiums
$
3,312

 
$
3,373

 
$
3,350

Net earned premiums
3,350

 
3,306

 
3,240

Net investment income
927

 
854

 
763

Net operating income
468

 
277

 
367

Net realized investment gains (losses)
(9
)
 
27

 
14

Net income
459

 
304

 
381

Ratios
 
 
 

 
 

Loss and loss adjustment expense
73.9
%
 
77.9
%
 
70.9
%
Expense
34.2

 
35.3

 
34.6

Dividend
0.2

 
0.3

 
0.3

Combined
108.3
%
 
113.5
%
 
105.8
%
2013 Compared with 2012
Net written premiums for CNA Commercial decreased $61 million in 2013 as compared with 2012 primarily driven by previous underwriting actions taken in certain business classes. These underwriting actions were partially offset by continued strong rate increases. Net earned premiums increased $44 million in 2013 as compared with 2012 consistent with increased net written premiums in earlier periods.
CNA Commercial's average rate increased 8% in 2013, as compared with an increase of 7% in 2012 for the policies that renewed in each period. Retention of 74% and 77% was achieved in each period.
Net income increased $155 million in 2013 as compared with 2012. This increase was due to higher net operating income, partially offset by decreased net realized investment results.
Net operating income increased $191 million in 2013 as compared with 2012. This increase was primarily due to improved current accident year underwriting results, higher net investment income, and a settlement benefit of $31 million after-tax. These favorable items were partially offset by the unfavorable impact of net prior year development.

35


The combined ratio improved 5.2 points in 2013 as compared with 2012. The loss ratio improved 4.0 points, primarily due to decreased catastrophe losses and an improved current accident year non-catastrophe loss ratio, partially offset by the unfavorable impact of net prior year development. Catastrophe losses were $142 million, or 4.2 points of the loss ratio for 2013, as compared to $356 million, or 10.9 points of the loss ratio for 2012.
The expense ratio improved 1.1 points in 2013 as compared with 2012, primarily due to decreased expenses including favorable changes in estimates of insurance assessment liabilities.
Unfavorable net prior year development of $95 million was recorded in 2013, compared to favorable net prior year development of $81 million for 2012. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves as of December 31, 2013 and 2012 for CNA Commercial.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
December 31
 
 
 
(In millions)
2013
 
2012
Gross Case Reserves
$
5,829

 
$
6,146

Gross IBNR Reserves
4,820

 
5,180

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
10,649

 
$
11,326

Net Case Reserves
$
5,358

 
$
5,611

Net IBNR Reserves
4,269

 
4,600

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
9,627

 
$
10,211

2012 Compared with 2011
Net written premiums for CNA Commercial increased $23 million in 2012 as compared with 2011. Net written premiums for 2011 included $128 million related to FICOH. Excluding FICOH, the increase in net written premiums was primarily driven by positive rate achievement. Net earned premiums increased $66 million in 2012 as compared with 2011. Net earned premium for 2011 included $125 million related to FICOH. Excluding FICOH, the increase in net earned premiums was driven by the increase in net written premiums and the impact of favorable premium development in 2012 as compared with unfavorable premium development in 2011.
CNA Commercial's average rate increased 7% in 2012, as compared with an increase of 2% in 2011 for the policies that renewed in each period. Retention of 77% and 78% was achieved in each period.
Net income decreased $77 million in 2012 as compared with 2011. This decrease was due to lower net operating income, partially offset by improved net realized investment results.
Net operating income decreased $90 million in 2012 as compared with 2011. This decrease was primarily due to higher catastrophe losses and decreased favorable net prior year development. These unfavorable impacts were partially offset by higher net investment income, as well as an unfavorable tax expense item in 2011 due to an increase in the tax rate applicable to a sold subsidiary.
The combined ratio increased 7.7 points in 2012 as compared with 2011. The loss ratio increased 7.0 points, primarily due to the impacts of higher catastrophe losses and decreased favorable net prior year development, partially offset by an improved current accident year non-catastrophe loss ratio. Catastrophe losses were $356 million, or 10.9 points of the loss ratio for 2012, as compared to $208 million, or 6.4 points of the loss ratio for 2011. Catastrophe losses in 2012 included $241 million related to Storm Sandy.
The expense ratio increased 0.7 points in 2012 as compared with 2011, primarily due to the favorable impact of recoveries in 2011 on insurance receivables written off in prior years.
Favorable net prior year development of $81 million and $183 million was recorded in 2012 and 2011. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.

36


Hardy
Business Overview
On July 2, 2012, we completed the acquisition of Hardy. Through Lloyd's Syndicate 382, Hardy underwrites primarily short-tail exposures in the following coverages.
Marine & Aviation provides coverage for a variety of large risks including energy, cargo and specie, marine hull, and general aviation. Energy covers participants in the energy supply, generation and delivery chain, with a primary focus on worldwide upstream oil and gas operations. Products primarily include offshore and onshore property damage, loss of production income and business interruption, construction abandonment, and seepage and pollution. Cargo covers the transportation and storage of a wide range of products and commodities and specie offers coverage for jewelers block and fine art. Marine hull provides coverage for ocean and brown water hull, fishing vessels, yachts and other marine related risks. General aviation primarily consists of rotor wing aircraft.
Non-Marine Property comprises direct and facultative property, including construction insurance of industrial and commercial risks (heavy industry, general manufacturing, commercial property portfolios), together with residential and small commercial risks.
Property Treaty Reinsurance offers catastrophe reinsurance on an excess of loss basis, proportional treaty and excess of loss coverages and crop reinsurance.
Specialty Lines offers coverage for a variety of risks including political violence, accident and health, and financial institutions.
The results below reflect Hardy's share of Syndicate 382's results. Third-party capital providers provided 7.5% of the syndicate's capital for the 2011 year of account and 25% for the 2012 year of account. We provided all of the syndicate's capital for the 2013 year of account.
In the fourth quarter of 2013, we commuted with a third-party capital provider that had a 15% share of the 2012 year of account. As a result, we now provide 90% of the capital for the 2012 year of account. The commutation resulted in a gain of $1 million and recognition of the 15% share of the 2012 year of account results in premiums, losses and expenses.

37


The following table details the results of operations for Hardy.
Results of Operations
Years ended December 31
 
 
 
(In millions, except ratios)
2013
 
2012
Net written premiums
$
396

 
$
117

Net earned premiums
361

 
120

Net investment income
4

 
3

Net operating income (loss)
10

 
(23
)
Net realized investment gains (losses)
1

 
(1
)
Net income (loss)
11

 
(24
)
Ratios
 
 
 
Loss and loss adjustment expense
44.8
%
 
60.3
%
Expense
48.6

 
57.2

Dividend

 

Combined
93.4
%
 
117.5
%
2013 Compared with 2012
Results for 2012 are reflected from the date of acquisition. Net written premiums increased $279 million and net earned premiums increased $241 million in 2013 as compared with 2012. These significant premium increases are primarily driven by Hardy providing all of the capital support for the 2013 year of account and the commutation noted above. The commutation increased 2013 net written premiums by $51 million, net earned premiums by $45 million and net incurred losses by $22 million.
Hardy's average rate decreased 2% in 2013, as compared with an increase of 1% in 2012 for the policies that renewed in each period. Retention of 70% and 68% was achieved in each period.
Net results increased $35 million and net operating results increased $33 million in 2013 as compared with 2012, primarily due to improved underwriting results.
The combined ratio improved 24.1 points in 2013 as compared with 2012. The loss ratio improved 15.5 points, primarily due to the impact of Storm Sandy in 2012. Catastrophe losses related to Storm Sandy were $17 million, or 17.3 points of the loss ratio and 21.4 points of the combined ratio in 2012, reflecting the impact of reinstatement premiums. Catastrophe losses in 2013 were $5 million, or 1.3 points of the loss ratio. The expense ratio improved 8.6 points in 2013 as compared with 2012, primarily due to the higher net earned premium base.
Favorable net prior year development of $3 million and $8 million was recorded in 2013 and 2012. Further information on net prior year development is included in Note F to the Consolidated Financial Statements included under Item 8.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
December 31
 
 
 
(In millions)
2013
 
2012