UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
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 1-6541
LOEWS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2646102 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
667 Madison Avenue, New York, N.Y. 10065-8087
(Address of principal executive offices) (Zip Code)
(212) 521-2000
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | x | No | ¨ |
Indicate by check mark whether the registrant has submitted electronically 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 | ¨ | No | x | Not Applicable | ¨ |
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 | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | ¨ | No | x |
Class |
Outstanding at July 23, 2010 | |||
Common stock, $0.01 par value | 418,252,199 shares |
2
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
June 30, 2010 |
December 31, 2009 |
|||||||
(Dollar amounts in millions, except per share data) | ||||||||
Assets: |
||||||||
Investments: |
||||||||
Fixed maturities, amortized cost of $37,729 and $35,824 |
$ | 38,897 | $ | 35,816 | ||||
Equity securities, cost of $891 and $943 |
935 | 1,007 | ||||||
Limited partnership investments |
2,256 | 1,996 | ||||||
Short term investments |
5,622 | 7,215 | ||||||
Total investments |
47,710 | 46,034 | ||||||
Cash |
91 | 190 | ||||||
Receivables |
9,765 | 10,212 | ||||||
Property, plant and equipment |
12,626 | 13,274 | ||||||
Deferred income taxes |
561 | 627 | ||||||
Goodwill |
856 | 856 | ||||||
Other assets |
1,908 | 1,346 | ||||||
Deferred acquisition costs of insurance subsidiaries |
1,095 | 1,108 | ||||||
Separate account business |
447 | 423 | ||||||
Total assets |
$ | 75,059 | $ | 74,070 | ||||
Liabilities and Equity: |
||||||||
Insurance reserves: |
||||||||
Claim and claim adjustment expense |
$ | 25,968 | $ | 26,816 | ||||
Future policy benefits |
8,217 | 7,981 | ||||||
Unearned premiums |
3,303 | 3,274 | ||||||
Policyholders funds |
172 | 192 | ||||||
Total insurance reserves |
37,660 | 38,263 | ||||||
Payable to brokers |
308 | 540 | ||||||
Short term debt |
247 | 10 | ||||||
Long term debt |
8,809 | 9,475 | ||||||
Other liabilities |
4,861 | 4,274 | ||||||
Separate account business |
447 | 423 | ||||||
Total liabilities |
52,332 | 52,985 | ||||||
Preferred stock, $0.10 par value: |
||||||||
Authorized 100,000,000 shares |
||||||||
Common stock, $0.01 par value: |
||||||||
Authorized 1,800,000,000 shares |
||||||||
Issued 425,557,499 and 425,497,522 shares |
4 | 4 | ||||||
Additional paid-in capital |
3,749 | 3,637 | ||||||
Retained earnings |
14,426 | 13,693 | ||||||
Accumulated other comprehensive income (loss) |
295 | (419 | ) | |||||
18,474 | 16,915 | |||||||
Less treasury stock, at cost (7,305,300 and 427,200 shares) |
(269 | ) | (16 | ) | ||||
Total shareholders equity |
18,205 | 16,899 | ||||||
Noncontrolling interests |
4,522 | 4,186 | ||||||
Total equity |
22,727 | 21,085 | ||||||
Total liabilities and equity |
$ | 75,059 | $ | 74,070 | ||||
See accompanying Notes to Consolidated Condensed Financial Statements.
3
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Insurance premiums |
$ | 1,608 | $ | 1,656 | $ | 3,223 | $ | 3,328 | ||||||||
Net investment income |
526 | 735 | 1,143 | 1,182 | ||||||||||||
Investment gains (losses): |
||||||||||||||||
Other-than-temporary impairment losses |
(58 | ) | (484 | ) | (148 | ) | (1,098 | ) | ||||||||
Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss) |
1 | 89 | 31 | 89 | ||||||||||||
Net impairment losses recognized in earnings |
(57 | ) | (395 | ) | (117 | ) | (1,009 | ) | ||||||||
Other net investment gains |
68 | 98 | 149 | 181 | ||||||||||||
Total investment gains (losses) |
11 | (297 | ) | 32 | (828 | ) | ||||||||||
Contract drilling revenues |
812 | 923 | 1,656 | 1,779 | ||||||||||||
Other |
529 | 517 | 1,145 | 1,096 | ||||||||||||
Total |
3,486 | 3,534 | 7,199 | 6,557 | ||||||||||||
Expenses: |
||||||||||||||||
Insurance claims and policyholders benefits |
1,147 | 1,295 | 2,455 | 2,637 | ||||||||||||
Amortization of deferred acquisition costs |
345 | 349 | 687 | 698 | ||||||||||||
Contract drilling expenses |
349 | 306 | 654 | 600 | ||||||||||||
Impairment of natural gas and oil properties |
1,036 | |||||||||||||||
Other operating expenses |
715 | 718 | 1,447 | 1,494 | ||||||||||||
Interest |
127 | 110 | 257 | 204 | ||||||||||||
Total |
2,683 | 2,778 | 5,500 | 6,669 | ||||||||||||
Income (loss) before income tax |
803 | 756 | 1,699 | (112 | ) | |||||||||||
Income tax (expense) benefit |
(262 | ) | (197 | ) | (535 | ) | 198 | |||||||||
Net income |
541 | 559 | 1,164 | 86 | ||||||||||||
Amounts attributable to noncontrolling interests |
(175 | ) | (219 | ) | (378 | ) | (393 | ) | ||||||||
Net income (loss) attributable to Loews Corporation |
$ | 366 | $ | 340 | $ | 786 | $ | (307 | ) | |||||||
Basic net income (loss) per share |
$ | 0.88 | $ | 0.78 | $ | 1.87 | $ | (0.70 | ) | |||||||
Diluted net income (loss) per share |
$ | 0.87 | $ | 0.78 | $ | 1.87 | $ | (0.70 | ) | |||||||
Dividends per share |
$ | 0.0625 | $ | 0.0625 | $ | 0.125 | $ | 0.125 | ||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Shares of common stock |
418.64 | 435.07 | 420.69 | 435.09 | ||||||||||||
Dilutive potential shares of common stock |
0.74 | 0.56 | 0.79 | |||||||||||||
Total weighted-average shares outstanding assuming dilution |
419.38 | 435.63 | 421.48 | 435.09 | ||||||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
4
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) | ||||||||||||||||
Net income |
$ | 541 | $ | 559 | $ | 1,164 | $ | 86 | ||||||||
Other comprehensive income (loss) |
||||||||||||||||
Changes in: |
||||||||||||||||
Net unrealized gains (losses) on investments with other- than-temporary impairments |
17 | (34 | ) | 42 | (34 | ) | ||||||||||
Net other unrealized gains on investments |
373 | 1,492 | 680 | 1,891 | ||||||||||||
Total unrealized gains on available-for-sale investments |
390 | 1,458 | 722 | 1,857 | ||||||||||||
Unrealized gains (losses) on cash flow hedges |
6 | (12 | ) | 67 | 3 | |||||||||||
Foreign currency |
16 | 77 | 6 | 70 | ||||||||||||
Pension liability |
2 | 1 | 4 | |||||||||||||
Other comprehensive income |
414 | 1,524 | 799 | 1,930 | ||||||||||||
Comprehensive income |
955 | 2,083 | 1,963 | 2,016 | ||||||||||||
Amounts attributable to noncontrolling interests |
(219 | ) | (377 | ) | (464 | ) | (600 | ) | ||||||||
Total comprehensive income attributable to Loews Corporation |
$ | 736 | $ | 1,706 | $ | 1,499 | $ | 1,416 | ||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
5
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF EQUITY
(Unaudited)
Loews Corporation Shareholders | ||||||||||||||||||||||||||
Total | Loews Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Common Held in |
Noncontrolling Interests |
||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Balance, January 1, 2010 |
$ | 21,085 | $ | 4 | $ | 3,637 | $ | 13,693 | $ | (419 | ) | $ | (16 | ) | $ | 4,186 | ||||||||||
Sale of subsidiary common units |
279 | 83 | 1 | 195 | ||||||||||||||||||||||
Net income |
1,164 | 786 | 378 | |||||||||||||||||||||||
Other comprehensive income |
799 | 713 | 86 | |||||||||||||||||||||||
Dividends paid |
(356 | ) | (53 | ) | (303 | ) | ||||||||||||||||||||
Purchase of Loews treasury stock |
(253 | ) | (253 | ) | ||||||||||||||||||||||
Issuance of Loews common stock |
1 | 1 | ||||||||||||||||||||||||
Stock-based compensation |
11 | 9 | 2 | |||||||||||||||||||||||
Other |
(3 | ) | 19 | (22 | ) | |||||||||||||||||||||
Balance, June 30, 2010 |
$ | 22,727 | $ | 4 | $ | 3,749 | $ | 14,426 | $ | 295 | $ | (269 | ) | $ | 4,522 | |||||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
6
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30 | 2010 | 2009 | ||||||
(In millions) | ||||||||
Operating Activities: |
||||||||
Net income |
$ | 1,164 | $ | 86 | ||||
Adjustments to reconcile net income to net cash provided by operating activities, net |
446 | 1,849 | ||||||
Changes in operating assets and liabilities, net: |
||||||||
Reinsurance receivables |
374 | 424 | ||||||
Other receivables |
(40 | ) | (382 | ) | ||||
Deferred acquisition costs |
13 | (20 | ) | |||||
Insurance reserves |
(437 | ) | (245 | ) | ||||
Other liabilities |
(27 | ) | (246 | ) | ||||
Trading securities |
(589 | ) | 177 | |||||
Other, net |
(104 | ) | 9 | |||||
Net cash flow operating activities |
800 | 1,652 | ||||||
Investing Activities: |
||||||||
Purchases of fixed maturities |
(9,478 | ) | (12,402 | ) | ||||
Proceeds from sales of fixed maturities |
6,388 | 11,083 | ||||||
Proceeds from maturities of fixed maturities |
1,866 | 1,723 | ||||||
Purchases of equity securities |
(62 | ) | (240 | ) | ||||
Proceeds from sales of equity securities |
128 | 441 | ||||||
Purchases of property, plant and equipment |
(473 | ) | (1,380 | ) | ||||
Sales of property, plant and equipment |
591 | 7 | ||||||
Change in short term investments |
1,058 | (897 | ) | |||||
Other, net |
(170 | ) | 10 | |||||
Net cash flow investing activities |
$ | (152 | ) | $ | (1,655 | ) | ||
See accompanying Notes to Consolidated Condensed Financial Statements.
7
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30 | 2010 | 2009 | ||||||
(In millions) | ||||||||
Financing Activities: |
||||||||
Dividends paid |
$ | (53 | ) | $ | (54 | ) | ||
Dividends paid to noncontrolling interests |
(303 | ) | (321 | ) | ||||
Purchases of treasury shares |
(266 | ) | (32 | ) | ||||
Purchases of treasury shares by subsidiary |
(2 | ) | ||||||
Issuance of common stock |
1 | 2 | ||||||
Proceeds from sale of subsidiary stock |
333 | |||||||
Principal payments on debt |
(556 | ) | (260 | ) | ||||
Issuance of debt |
125 | 666 | ||||||
Policyholders investment contract net deposits (withdrawals) |
(6 | ) | (8 | ) | ||||
Other, net |
(20 | ) | 12 | |||||
Net cash flow financing activities |
(745 | ) | 3 | |||||
Effect of foreign exchange rate on cash |
(2 | ) | 5 | |||||
Net change in cash |
(99 | ) | 5 | |||||
Cash, beginning of period |
190 | 131 | ||||||
Cash, end of period |
$ | 91 | $ | 136 | ||||
See accompanying Notes to Consolidated Condensed Financial Statements.
8
Loews Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (CNA), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (Diamond Offshore), a 50.4% owned subsidiary); exploration, production and marketing of natural gas and natural gas liquids (HighMount Exploration & Production LLC (HighMount), a wholly owned subsidiary); the operation of interstate natural gas pipeline systems (Boardwalk Pipeline Partners, LP (Boardwalk Pipeline), a 66% owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (Loews Hotels), a wholly owned subsidiary). In the first quarter of 2010 the Company sold 11.5 million common units of its subsidiary, Boardwalk Pipeline, for $333 million, reducing the Companys ownership interest from 72% to 66%. Unless the context otherwise requires, the terms Company, Loews and Registrant as used herein mean Loews Corporation excluding its subsidiaries and the term Net income (loss) Loews as used herein means Net income (loss) attributable to Loews Corporation.
In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2010 and December 31, 2009 and the results of operations and comprehensive income for the three and six months ended June 30, 2010 and 2009 and changes in cash flows for the six months ended June 30, 2010 and 2009.
Net income (loss) for the second quarter and first half of each of the years is not necessarily indicative of net income (loss) for that entire year.
Reference is made to the Notes to Consolidated Financial Statements in the 2009 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.
The Company presents basic and diluted earnings per share on the Consolidated Condensed Statements of Operations. Basic earnings per share excludes dilution and is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock appreciation rights (SARs) of 2.6 and 2.5 million shares were not included in the diluted weighted average shares amount for the three and six months ended June 30, 2010 due to the exercise price being greater than the average stock price. For the three and six months ended June 30, 2009, 3.4 and 5.7 million shares, consisting solely of stock options and SARs, are not included in the diluted weighted average shares amount as their effects are antidilutive.
Sale of Assets On April 30, 2010, HighMount completed the sale of exploration and production assets located in the Antrim Shale in Michigan and on May 28, 2010, HighMount completed the sale of exploration and production assets located in the Black Warrior Basin in Alabama. These sales did not have a material impact on the Consolidated Condensed Statements of Operations. HighMount used the net proceeds from the sale, of approximately $500 million, to reduce the outstanding debt under its term loans.
On July 7, 2010, Diamond Offshore completed the sale of one of its high performance, premium jack-up drilling rigs, the Ocean Shield, and will recognize a pretax gain of approximately $30 million in the third quarter of 2010.
Accounting changes In June of 2009, the Financial Accounting Standards Board (FASB) issued updated accounting guidance which amended the requirements for determination of the primary beneficiary of a variable interest entity, required an ongoing assessment of whether an entity is the primary beneficiary and required enhanced interim and annual disclosures. The updated accounting guidance became effective for quarterly and annual reporting periods beginning after November 15, 2009, except for investment company type entities for which the requirements under this guidance have been deferred indefinitely. The adoption of this updated accounting guidance as of January 1, 2010 had no impact on the Companys financial condition or results of operations.
9
New accounting pronouncements not yet adopted In March 2010, the FASB issued updated accounting guidance which amends the accounting and reporting requirements related to derivatives to provide clarifying language regarding when embedded credit derivative features, including those in synthetic collateralized debt and loan obligations, are considered embedded derivatives subject to potential bifurcation. The updated accounting guidance is effective for the first quarter beginning after June 15, 2010. The adoption of this updated accounting guidance is not expected to have a material impact on the Companys financial condition or results of operations.
2. Investments
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) | ||||||||||||||||
Net investment income consisted of: |
||||||||||||||||
Fixed maturity securities |
$ | 519 | $ | 487 | $ | 1,029 | $ | 962 | ||||||||
Short term investments |
7 | 13 | 14 | 24 | ||||||||||||
Limited partnerships |
7 | 159 | 87 | 89 | ||||||||||||
Equity securities |
9 | 14 | 19 | 28 | ||||||||||||
Income (loss) from trading portfolio |
(5 | ) | 72 | 16 | 98 | |||||||||||
Other |
2 | 1 | 5 | 4 | ||||||||||||
Total investment income |
539 | 746 | 1,170 | 1,205 | ||||||||||||
Investment expenses |
(13 | ) | (11 | ) | (27 | ) | (23 | ) | ||||||||
Net investment income |
$ | 526 | $ | 735 | $ | 1,143 | $ | 1,182 | ||||||||
Investment gains (losses) are as follows: |
||||||||||||||||
Fixed maturity securities |
$ | 66 | $ | (392 | ) | $ | 93 | $ | (750 | ) | ||||||
Equity securities |
(28 | ) | 64 | (25 | ) | (152 | ) | |||||||||
Derivative instruments |
(18 | ) | 33 | (31 | ) | 64 | ||||||||||
Short term investments |
1 | (5 | ) | 4 | 9 | |||||||||||
Other |
(10 | ) | 3 | (9 | ) | 1 | ||||||||||
Investment gains (losses) (a) |
$ | 11 | $ | (297 | ) | $ | 32 | $ | (828 | ) | ||||||
(a) | Includes gross realized gains of $133, $173, $235 and $281 and gross realized losses of $95, $501, $167 and $1,183 on available-for-sale securities for the three and six months ended June 30, 2010 and 2009. |
10
The components of other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are as follows:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||
Asset-backed securities: |
||||||||||||
Residential mortgage-backed securities |
$ | 11 | $ | 119 | $ | 37 | $ | 268 | ||||
Commercial mortgage-backed securities |
165 | 2 | 181 | |||||||||
Other asset-backed securities |
2 | 2 | 31 | |||||||||
Total asset-backed securities |
13 | 284 | 41 | 480 | ||||||||
States, municipalities and political subdivisions securities |
6 | 15 | 20 | 15 | ||||||||
Corporate and other bonds |
24 | 94 | 42 | 284 | ||||||||
Redeemable preferred stock |
9 | |||||||||||
Total fixed maturities available-for-sale |
43 | 393 | 103 | 788 | ||||||||
Equity securities available-for-sale: |
||||||||||||
Common stock |
5 | 1 | 5 | 4 | ||||||||
Preferred stock |
9 | 1 | 9 | 217 | ||||||||
Total equity securities available-for-sale |
14 | 2 | 14 | 221 | ||||||||
Net OTTI losses recognized in earnings |
$ | 57 | $ | 395 | $ | 117 | $ | 1,009 | ||||
A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.
Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by CNAs Chief Financial Officer. The Impairment Committee is responsible for evaluating securities in an unrealized loss position on at least a quarterly basis.
The Impairment Committees assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. In order to determine if a credit loss exists, the factors considered by the Impairment Committee include (i) the financial condition and near term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities. The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as an OTTI loss in Other comprehensive income.
11
CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers, credit support from lower level tranches and impacts of rating agency downgrades. The discount rate utilized is either the yield at acquisition or, for lower rated structured securities, the current yield.
CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.
Prior to adoption of the updated accounting guidance related to OTTI in the second quarter of 2009, OTTI losses were not bifurcated between credit and non-credit components. The difference between fair value and amortized cost was recognized in earnings for all securities for which the Company did not expect to recover the amortized cost basis, or for which the Company did not have the ability and intent to hold until recovery of fair value to amortized cost.
The amortized cost and fair values of securities are as follows:
Cost
or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses | Estimated Fair Value |
Unrealized OTTI Losses | ||||||||||||||
June 30, 2010 | Less Than 12 Months |
12 Months or Greater |
||||||||||||||||
(In millions) | ||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||
U.S. Treasury securities and obligations of government agencies |
$ | 146 | $ | 19 | $ | 165 | ||||||||||||
Asset-backed securities: |
||||||||||||||||||
Residential mortgage-backed securities |
6,527 | 133 | $ | 11 | $ | 326 | 6,323 | $ | 252 | |||||||||
Commercial mortgage-backed securities |
1,052 | 18 | 2 | 77 | 991 | |||||||||||||
Other asset-backed securities |
733 | 17 | 17 | 733 | ||||||||||||||
Total asset-backed securities |
8,312 | 168 | 13 | 420 | 8,047 | 252 | ||||||||||||
States, municipalities and political subdivisions securities |
7,617 | 274 | 20 | 292 | 7,579 | |||||||||||||
Foreign government securities |
577 | 15 | 1 | 591 | ||||||||||||||
Corporate and other bonds |
19,705 | 1,591 | 46 | 123 | 21,127 | 26 | ||||||||||||
Redeemable preferred stock |
48 | 4 | 1 | 51 | ||||||||||||||
Fixed maturities available- for-sale |
36,405 | 2,071 | 80 | 836 | 37,560 | 278 | ||||||||||||
Fixed maturities, trading |
1,324 | 28 | 2 | 13 | 1,337 | |||||||||||||
Total fixed maturities |
37,729 | 2,099 | 82 | 849 | 38,897 | 278 | ||||||||||||
Equity securities: |
||||||||||||||||||
Common stock |
77 | 12 | 1 | 88 | ||||||||||||||
Preferred stock |
463 | 42 | 2 | 42 | 461 | |||||||||||||
Equity securities available-for-sale |
540 | 54 | 3 | 42 | 549 | |||||||||||||
Equity securities, trading |
351 | 86 | 21 | 30 | 386 | |||||||||||||
Total equity securities |
891 | 140 | 24 | 72 | 935 | |||||||||||||
Total |
$ | 38,620 | $ | 2,239 | $ | 106 | $ | 921 | $ | 39,832 | $ | 278 | ||||||
12
Cost
or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses | Estimated Fair Value |
Unrealized OTTI Losses | ||||||||||||||
December 31, 2009 | Less Than 12 Months |
12 Months or Greater |
||||||||||||||||
(In millions) | ||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||
U.S. Treasury securities and obligations of government agencies |
$ | 184 | $ | 16 | $ | 1 | $ | 199 | ||||||||||
Asset-backed securities: |
||||||||||||||||||
Residential mortgage-backed securities |
7,470 | 72 | 43 | $ | 561 | 6,938 | $ | 246 | ||||||||||
Commercial mortgage-backed securities |
709 | 10 | 1 | 134 | 584 | 3 | ||||||||||||
Other asset-backed securities |
858 | 14 | 1 | 39 | 832 | |||||||||||||
Total asset-backed securities |
9,037 | 96 | 45 | 734 | 8,354 | 249 | ||||||||||||
States, municipalities and political subdivisions securities |
7,280 | 203 | 30 | 329 | 7,124 | |||||||||||||
Foreign government securities |
467 | 14 | 1 | 1 | 479 | |||||||||||||
Corporate and other bonds |
18,410 | 1,107 | 44 | 244 | 19,229 | 26 | ||||||||||||
Redeemable preferred stock |
51 | 4 | 1 | 54 | ||||||||||||||
Fixed maturities available- for-sale |
35,429 | 1,440 | 121 | 1,309 | 35,439 | 275 | ||||||||||||
Fixed maturities, trading |
395 | 3 | 21 | 377 | ||||||||||||||
Total fixed maturities |
35,824 | 1,443 | 121 | 1,330 | 35,816 | 275 | ||||||||||||
Equity securities: |
||||||||||||||||||
Common stock |
61 | 14 | 1 | 1 | 73 | |||||||||||||
Preferred stock |
572 | 40 | 41 | 571 | ||||||||||||||
Equity securities available-for-sale |
633 | 54 | 1 | 42 | 644 | | ||||||||||||
Equity securities, trading |
310 | 109 | 10 | 46 | 363 | |||||||||||||
Total equity securities |
943 | 163 | 11 | 88 | 1,007 | | ||||||||||||
Total |
$ | 36,767 | $ | 1,606 | $ | 132 | $ | 1,418 | $ | 36,823 | $ | 275 | ||||||
The amount of pretax net unrealized gains on available-for-sale securities reclassified out of Accumulated other comprehensive income (AOCI) into earnings was $39 million and $71 million for the three and six months ended June 30, 2010. The amount of pretax net unrealized losses on available-for-sale securities reclassified out of AOCI into earnings was $328 million for the three months ended June 30, 2009.
Activity for the three and six months ended June 30, 2010 related to the pretax fixed maturity credit loss component reflected within Retained earnings for securities still held at June 30, 2010 was as follows:
Three Months 2010 |
Six Months Ended 2010 |
|||||||
(In millions) | ||||||||
Beginning balance of credit losses on fixed maturity securities |
$ | 171 | $ | 164 | ||||
Additional credit losses for which an OTTI loss was previously recognized |
11 | 22 | ||||||
Credit losses for which an OTTI loss was not previously recognized |
3 | 8 | ||||||
Reductions for securities sold during the period |
(14 | ) | (23 | ) | ||||
Ending balance of credit losses on fixed maturity securities |
$ | 171 | $ | 171 | ||||
13
Activity for the three months ended June 30, 2009 related to the pretax fixed maturity credit loss component reflected within Retained earnings for securities still held at June 30, 2009 was as follows:
Three Months Ended June 30, 2009 |
||||
(In millions) | ||||
Beginning balance of credit losses on fixed maturity securities |
$ | 192 | ||
Additional credit losses for which an OTTI loss was previously recognized |
21 | |||
Credit losses for which an OTTI loss was not previously recognized |
84 | |||
Reductions for securities sold during the period |
(36 | ) | ||
Reductions for securities the Company intends to sell or more likely than not will be required to sell |
(49 | ) | ||
Ending balance of credit losses on fixed maturity securities |
$ | 212 | ||
Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the June 30, 2010 summary of fixed maturity and equity securities table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.
The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from the three major providers, Standard & Poors, Moodys Investors Service, Inc. and Fitch Ratings in that order of preference. If a security is not rated by any of the three, the Company formulates an internal rating. For securities with credit support from third party guarantees, the rating reflects the greater of the underlying rating of the issuer or the insured rating.
Asset-Backed Securities
The fair value of total asset-backed holdings at June 30, 2010 was $8,047 million which was comprised of 2,134 different asset-backed structured securities. The fair value of these securities does not tend to be influenced by the credit of the issuer but rather the characteristics and projected cash flows of the underlying collateral. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently. Of these securities, 175 have underlying collateral that is either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation collateral is measured by the original deal structure.
Residential mortgage-backed securities include 232 structured securities in a gross unrealized loss position. In addition, there were 34 agency mortgage-backed pass-through securities which are guaranteed by agencies of the U.S. Government in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 10.4% of amortized cost.
Commercial mortgage-backed securities include 42 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 12.7% of amortized cost. Other asset-backed securities include 19 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 8.8% of amortized cost.
14
The asset-backed securities in a gross unrealized loss position by ratings distribution are as follows:
June 30, 2010 | Amortized Cost |
Estimated Fair Value |
Gross Unrealized Losses | ||||||
(In millions) | |||||||||
U.S. Government Agencies |
$ | 47 | $ | 42 | $ | 5 | |||
AAA |
1,697 | 1,571 | 126 | ||||||
AA |
411 | 371 | 40 | ||||||
A |
324 | 270 | 54 | ||||||
BBB |
342 | 311 | 31 | ||||||
Non-investment grade and equity tranches |
1,245 | 1,068 | 177 | ||||||
Total |
$ | 4,066 | $ | 3,633 | $ | 433 | |||
The Company believes the unrealized losses are primarily attributable to broader economic conditions, liquidity concerns and wider than historical bid/ask spreads, and are not indicative of the quality of the underlying collateral. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Generally, non-investment grade securities consist of investments which were investment grade at the time of purchase but have subsequently been downgraded and primarily consist of holdings senior to the equity tranche. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of amortized cost and interest, collateral shortfalls, or substantial changes in future cash flow expectations; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at June 30, 2010.
States, Municipalities and Political Subdivisions Securities
The holdings in this portfolio consist of both tax-exempt and taxable special revenue and assessment bonds, representing 72.7% of the overall portfolio, followed by general obligation political subdivision bonds at 18.7% and state general obligation bonds at 8.6%.
The unrealized losses on the Companys investments in this portfolio are due to market conditions in certain sectors or states that continued to lag behind the broader municipal market performance. Yields for certain issuers and types of securities, such as zero coupon bonds, auction rate securities and tobacco securitizations, continue to be higher than historical norms relative to after tax returns on other fixed income alternatives. The holdings for all securities in this category include 240 securities in a gross unrealized loss position. The aggregate severity of the total gross unrealized losses was approximately 12.4% of amortized cost.
The states, municipalities and political subdivisions securities in a gross unrealized loss position by ratings distribution are as follows:
June 30, 2010 | Amortized Cost |
Estimated Fair Value |
Gross Unrealized Losses | ||||||
(In millions) | |||||||||
AAA |
$ | 868 | $ | 819 | $ | 49 | |||
AA |
708 | 588 | 120 | ||||||
A |
438 | 416 | 22 | ||||||
BBB |
481 | 362 | 119 | ||||||
Non-investment grade |
22 | 20 | 2 | ||||||
Total |
$ | 2,517 | $ | 2,205 | $ | 312 | |||
15
The largest exposures at June 30, 2010 as measured by gross unrealized losses were special revenue bonds issued by several states backed by tobacco settlement funds with gross unrealized losses of $110 million, and several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $85 million. All of these securities are rated investment grade.
The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at June 30, 2010.
Corporate and Other Bonds
The holdings in this category include 278 securities in a gross unrealized loss position. The aggregate severity of the gross unrealized losses was 5.7% of amortized cost.
The corporate and other bonds in a gross unrealized loss position by ratings distribution are as follows:
June 30, 2010 | Amortized Cost |
Estimated Fair Value |
Gross Unrealized Losses | ||||||
(In millions) | |||||||||
Ratings distribution: |
|||||||||
AAA |
$ | 36 | $ | 33 | $ | 3 | |||
AA |
149 | 148 | 1 | ||||||
A |
745 | 714 | 31 | ||||||
BBB |
1,243 | 1,153 | 90 | ||||||
Non-investment grade |
761 | 717 | 44 | ||||||
Total |
$ | 2,934 | $ | 2,765 | $ | 169 | |||
The unrealized losses on corporate and other bonds, primarily in the financial sector of the portfolio, are attributable to the lingering impacts of the U.S. and European financial crisis over the past several years. Overall conditions in the corporate bond market have generally continued to improve during 2010, resulting in improvement in the Companys unrealized position. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at June 30, 2010.
The Company has invested in securities with characteristics of both debt and equity investments, often referred to as hybrid debt securities. Such securities are typically debt instruments issued with long or extendable maturity dates, may provide for the ability to defer interest payments without defaulting and are usually lower in the capital structure of the issuer than traditional bonds. The data in the table above includes financial industry sector hybrid debt securities with an aggregate fair value of $496 million and an aggregate amortized cost of $561 million.
16
Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 2010 and December 31, 2009. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.
June 30, 2010 | December 31, 2009 | |||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value | |||||||||
(In millions) | ||||||||||||
Due in one year or less |
$ | 2,096 | $ | 2,056 | $ | 1,240 | $ | 1,219 | ||||
Due after one year through five years |
11,391 | 11,817 | 10,046 | 10,244 | ||||||||
Due after five years through ten years |
9,107 | 9,424 | 10,647 | 10,539 | ||||||||
Due after ten years |
13,811 | 14,263 | 13,496 | 13,437 | ||||||||
Total |
$ | 36,405 | $ | 37,560 | $ | 35,429 | $ | 35,439 | ||||
Investment Commitments
As of June 30, 2010, the Company had committed approximately $237 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of June 30, 2010, the Company had commitments to purchase $256 million and sell $104 million of such investments.
3. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:
| Level 1 Quoted prices for identical instruments in active markets. |
| Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| Level 3 Valuations derived from valuation techniques in which one or more significant inputs are not observable. |
The Company attempts to establish fair value as an exit price in an orderly transaction consistent with normal settlement market conventions. The Company is responsible for the valuation process and seeks to obtain quoted market prices for all securities. When quoted market prices in active markets are not available, the Company uses a number of methodologies to establish fair value estimates, including discounted cash flow models, prices from recently executed transactions of similar securities or broker/dealer quotes, utilizing market observable information to the extent possible. In conjunction with modeling activities, the Company may use external data as inputs. The modeled inputs are consistent with observable market information, when available, or with the Companys assumptions as to what market participants would use to value the securities. The Company also uses pricing services as a significant source of data. The Company monitors all the pricing inputs to determine if the markets from which the data is gathered are active. As further validation of the Companys valuation process, the Company samples past fair value estimates and compares the valuations to actual transactions executed in the market on similar dates.
17
The fair values of CNAs life settlement contracts investments are included in Other assets. Equity options purchased are included in Equity Securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are summarized in the tables below:
June 30, 2010 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. Treasury securities and obligations of government agencies |
$ | 96 | $ | 69 | $ | 165 | ||||||||||
Asset-backed securities: |
||||||||||||||||
Residential mortgage-backed securities |
5,664 | $ | 659 | 6,323 | ||||||||||||
Commercial mortgage-backed securities |
896 | 95 | 991 | |||||||||||||
Other asset-backed securities |
427 | 306 | 733 | |||||||||||||
Total asset-backed securities |
| 6,987 | 1,060 | 8,047 | ||||||||||||
States, municipalities and political subdivisions securities |
7,040 | 539 | 7,579 | |||||||||||||
Foreign government securities |
92 | 499 | 591 | |||||||||||||
Corporate and other bonds |
20,409 | 718 | 21,127 | |||||||||||||
Redeemable preferred stock |
3 | 47 | 1 | 51 | ||||||||||||
Fixed maturities available-for-sale |
191 | 35,051 | 2,318 | 37,560 | ||||||||||||
Fixed maturities, trading |
1,037 | 109 | 191 | 1,337 | ||||||||||||
Total fixed maturities |
$ | 1,228 | $ | 35,160 | $ | 2,509 | $ | 38,897 | ||||||||
Equity securities available-for-sale |
$ | 415 | $ | 130 | $ | 4 | $ | 549 | ||||||||
Equity securities, trading |
386 | 386 | ||||||||||||||
Total equity securities |
$ | 801 | $ | 130 | $ | 4 | $ | 935 | ||||||||
Short term investments |
$ | 4,193 | $ | 1,408 | $ | 21 | $ | 5,622 | ||||||||
Receivables |
83 | 13 | 96 | |||||||||||||
Life settlement contracts |
134 | 134 | ||||||||||||||
Separate account business |
32 | 378 | 37 | 447 | ||||||||||||
Payable to brokers |
(88 | ) | (97 | ) | (9 | ) | (194 | ) | ||||||||
Discontinued operations investments, included in Other assets |
8 | 124 | 132 |
18
December 31, 2009 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. Treasury securities and obligations of government agencies |
$ | 145 | $ | 54 | $ | 199 | ||||||||||
Asset-backed securities: |
||||||||||||||||
Residential mortgage-backed securities |
6,309 | $ | 629 | 6,938 | ||||||||||||
Commercial mortgage-backed securities |
461 | 123 | 584 | |||||||||||||
Other asset-backed securities |
484 | 348 | 832 | |||||||||||||
Total asset-backed securities |
| 7,254 | 1,100 | 8,354 | ||||||||||||
States, municipalities and political subdivisions securities |
6,368 | 756 | 7,124 | |||||||||||||
Foreign government securities |
139 | 340 | 479 | |||||||||||||
Corporate and other bonds |
18,620 | 609 | 19,229 | |||||||||||||
Redeemable preferred stock |
3 | 49 | 2 | 54 | ||||||||||||
Fixed maturities available-for-sale |
287 | 32,685 | 2,467 | 35,439 | ||||||||||||
Fixed maturities, trading |
102 | 78 | 197 | 377 | ||||||||||||
Total fixed maturities |
$ | 389 | $ | 32,763 | $ | 2,664 | $ | 35,816 | ||||||||
Equity securities available-for-sale |
$ | 503 | $ | 130 | $ | 11 | $ | 644 | ||||||||
Equity securities, trading |
363 | 363 | ||||||||||||||
Total equity securities |
$ | 866 | $ | 130 | $ | 11 | $ | 1,007 | ||||||||
Short term investments |
$ | 6,818 | $ | 397 | $ | 7,215 | ||||||||||
Receivables |
53 | $ | 2 | 55 | ||||||||||||
Life settlement contracts |
130 | 130 | ||||||||||||||
Separate account business |
43 | 342 | 38 | 423 | ||||||||||||
Payable to brokers |
(87 | ) | (135 | ) | (50 | ) | (272 | ) | ||||||||
Discontinued operations investments, included in Other liabilities |
19 | 106 | 16 | 141 |
19
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2010 and 2009:
Balance, April 1 |
Net Realized
Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Purchases, Issuances |
Transfers into Level 3 |
Transfers Level 3 |
Balance, June 30 |
Unrealized Recognized in Level 3 Assets and Liabilities Held at June 30 |
||||||||||||||||||||||||
2010 | Included in Net Income |
Included in OCI |
||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||
Asset-backed securities: |
||||||||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 679 | $ | 2 | $ | 3 | $ | 13 | $ | (38 | ) | $ | 659 | |||||||||||||||||
Commercial mortgage- backed securities |
112 | 2 | 11 | (30 | ) | 95 | ||||||||||||||||||||||||
Other asset-backed securities |
368 | 1 | (18 | ) | (45 | ) | 306 | $ | (2 | ) | ||||||||||||||||||||
Total asset-backed securities |
1,159 | 2 | 6 | 6 | (113 | ) | 1,060 | (2 | ) | |||||||||||||||||||||
States, municipalities and political subdivisions securities |
737 | 4 | (202 | ) | 539 | |||||||||||||||||||||||||
Corporate and other bonds |
680 | 7 | 9 | 57 | $ | 14 | (49 | ) | 718 | (3 | ) | |||||||||||||||||||
Redeemable preferred stock |
4 | 6 | (2 | ) | (7 | ) | 1 | |||||||||||||||||||||||
Fixed maturities available-for-sale |
2,580 | 15 | 17 | (146 | ) | 14 | (162 | ) | 2,318 | (5 | ) | |||||||||||||||||||
Fixed maturities, trading |
216 | 2 | (27 | ) | 191 | 1 | ||||||||||||||||||||||||
Total fixed maturities |
$ | 2,796 | $ | 17 | $ | 17 | $ | (173 | ) | $ | 14 | $ | (162 | ) | $ | 2,509 | $ | (4 | ) | |||||||||||
Equity securities available-for-sale |
$ | 8 | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | 4 | $ | (1 | ) | ||||||||||||||
Short term investments |
1 | 20 | 21 | |||||||||||||||||||||||||||
Life settlement contracts |
131 | 7 | (4 | ) | 134 | 5 | ||||||||||||||||||||||||
Separate account business |
40 | (3 | ) | 37 | ||||||||||||||||||||||||||
Discontinued operations investments |
15 | (15 | ) | | ||||||||||||||||||||||||||
Derivative financial instruments, net |
(27 | ) | (7 | ) | $ | 28 | 10 | 4 |
20
2009 | Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Purchases, Issuances |
Transfers into Level 3 |
Transfers |
Balance, |
Unrealized on Level 3 Assets and Liabilities Held at June 30 |
|||||||||||||||||||||||||
Balance, April 1 |
Included in Net Income (Loss) |
Included in OCI |
|||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Fixed maturity securities: |
|||||||||||||||||||||||||||||||
Asset-backed securities: |
|||||||||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 743 | $ | (6 | ) | $ | 35 | $ | (25 | ) | $ | 71 | $ | (10 | ) | $ | 808 | $ | (5 | ) | |||||||||||
Commercial mortgage- backed securities |
158 | (155 | ) | 155 | (9 | ) | 26 | 175 | (155 | ) | |||||||||||||||||||||
Other asset-backed securities |
252 | 10 | (2 | ) | (119 | ) | 141 | ||||||||||||||||||||||||
Total asset-backed securities |
1,153 | (161 | ) | 200 | (36 | ) | 97 | (129 | ) | 1,124 | (160 | ) | |||||||||||||||||||
States, municipalities and political subdivisions securities |
784 | 18 | (17 | ) | 785 | ||||||||||||||||||||||||||
Corporate and other bonds |
809 | 47 | (137 | ) | 16 | (5 | ) | 730 | (1 | ) | |||||||||||||||||||||
Redeemable preferred stock |
19 | (18 | ) | 1 | |||||||||||||||||||||||||||
Fixed maturities available-for-sale |
2,765 | (161 | ) | 265 | (190 | ) | 113 | (152 | ) | 2,640 | (161 | ) | |||||||||||||||||||
Fixed maturities, trading |
213 | 6 | 6 | 4 | 229 | 4 | |||||||||||||||||||||||||
Total fixed maturities |
$ | 2,978 | $ | (155 | ) | $ | 265 | $ | (184 | ) | $ | 117 | $ | (152 | ) | $ | 2,869 | $ | (157 | ) | |||||||||||
Equity securities available-for-sale |
$ | 210 | $ | (1 | ) | $ | 209 | ||||||||||||||||||||||||
Life settlement contracts |
127 | $ | 5 | $ | (6 | ) | 126 | ||||||||||||||||||||||||
Separate account business |
38 | 3 | (3 | ) | 38 | ||||||||||||||||||||||||||
Discontinued operations investments |
13 | 1 | (1 | ) | 13 | ||||||||||||||||||||||||||
Derivative financial instruments, net |
(58 | ) | 17 | (2 | ) | 36 | (7 | ) | $ | (11 | ) |
21
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2010 and 2009:
2010 | Balance, January 1 |
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Purchases, Issuances |
Transfers |
Transfers out of Level 3 |
Balance, June 30 |
Unrealized Recognized in Net Income on Level 3 Assets and Liabilities Held at June 30 |
|||||||||||||||||||||||
Included in Net Income |
Included in OCI |
|||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||
Asset-backed securities: |
||||||||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 629 | $ | (8 | ) | $ | 29 | $ | 55 | $ | (46 | ) | $ | 659 | $ | (10 | ) | |||||||||||||
Commercial mortgage- backed securities |
123 | (1 | ) | (2 | ) | 6 | $ | 7 | (38 | ) | 95 | (1 | ) | |||||||||||||||||
Other asset-backed securities |
348 | 4 | 22 | (23 | ) | (45 | ) | 306 | (2 | ) | ||||||||||||||||||||
Total asset-backed securities |
1,100 | (5 | ) | 49 | 38 | 7 | (129 | ) | 1,060 | (13 | ) | |||||||||||||||||||
States, municipalities and political subdivisions securities |
756 | 6 | (223 | ) | 539 | |||||||||||||||||||||||||
Corporate and other bonds |
609 | 9 | 38 | 112 | 23 | (73 | ) | 718 | (4 | ) | ||||||||||||||||||||
Redeemable preferred stock |
2 | 6 | (7 | ) | 1 | |||||||||||||||||||||||||
Fixed maturities available-for-sale |
2,467 | 10 | 93 | (80 | ) | 30 | (202 | ) | 2,318 | (17 | ) | |||||||||||||||||||
Fixed maturities, trading |
197 | 8 | (14 | ) | 191 | 7 | ||||||||||||||||||||||||
Total fixed maturities |
$ | 2,664 | $ | 18 | $ | 93 | $ | (94 | ) | $ | 30 | $ | (202 | ) | $ | 2,509 | $ | (10 | ) | |||||||||||
Equity securities available-for-sale |
$ | 11 | $ | (1 | ) | $ | (1 | ) | $ | 2 | $ | (7 | ) | $ | 4 | $ | (1 | ) | ||||||||||||
Short term investments |
| 20 | 1 | 21 | ||||||||||||||||||||||||||
Life settlement contracts |
130 | 17 | (13 | ) | 134 | 7 | ||||||||||||||||||||||||
Separate account business |
38 | (1 | ) | 37 | ||||||||||||||||||||||||||
Discontinued operations investments |
16 | $ | 1 | (2 | ) | (15 | ) | | ||||||||||||||||||||||
Derivative financial instruments, net |
(48 | ) | (15 | ) | 42 | 25 | 4 |
22
2009 |
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Purchases, Issuances |
Unrealized Gains (Losses) Recognized in Net Income (Loss) on Level 3 Assets and Liabilities Held at June 30 |
||||||||||||||||||||||||||||
Balance, January 1 |
Included in Net Income (Loss) |
Included in OCI |
Transfers into Level 3 |
Transfers out of Level 3 |
Balance, June 30 |
||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Fixed maturity securities: |
|||||||||||||||||||||||||||||||
Asset-backed securities: |
|||||||||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 782 | $ | (23 | ) | $ | 36 | $ | (48 | ) | $ | 71 | $ | (10 | ) | $ | 808 | $ | (12 | ) | |||||||||||
Commercial mortgage- backed securities |
186 | (165 | ) | 142 | (14 | ) | 26 | 175 | (165 | ) | |||||||||||||||||||||
Other asset-backed securities |
139 | (30 | ) | 40 | (42 | ) | 153 | (119 | ) | 141 | (31 | ) | |||||||||||||||||||
Total asset-backed securities |
1,107 | (218 | ) | 218 | (104 | ) | 250 | (129 | ) | 1,124 | (208 | ) | |||||||||||||||||||
States, municipalities and political subdivisions securities |
750 | 55 | (20 | ) | 785 | ||||||||||||||||||||||||||
Foreign government securities |
6 | (6 | ) | ||||||||||||||||||||||||||||
Corporate and other bonds |
616 | (5 | ) | 46 | 67 | 18 | (12 | ) | 730 | (7 | ) | ||||||||||||||||||||
Redeemable preferred stock |
13 | (9 | ) | 8 | 7 | (18 | ) | 1 | (9 | ) | |||||||||||||||||||||
Fixed maturities available-for-sale |
2,492 | (232 | ) | 327 | (50 | ) | 268 | (165 | ) | 2,640 | (224 | ) | |||||||||||||||||||
Fixed maturities, trading |
218 | 9 | (2 | ) | 4 | 229 | 4 | ||||||||||||||||||||||||
Total fixed maturities |
$ | 2,710 | $ | (223 | ) | $ | 327 | $ | (52 | ) | $ | 272 | $ | (165 | ) | $ | 2,869 | $ | (220 | ) | |||||||||||
Equity securities available-for-sale |
$ | 210 | $ | (1 | ) | $ | 209 | ||||||||||||||||||||||||
Life settlement contracts |
129 | $ | 16 | $ | (19 | ) | 126 | $ | 2 | ||||||||||||||||||||||
Separate account business |
38 | 4 | (4 | ) | 38 | ||||||||||||||||||||||||||
Discontinued operations investments |
15 | (2 | ) | 13 | |||||||||||||||||||||||||||
Derivative financial instruments, net |
(72 | ) | 35 | (12 | ) | 42 | (7 | ) | (15 | ) |
Net realized and unrealized gains and losses are reported in Net income (loss) as follows:
Major Category of Assets and Liabilities | Consolidated Condensed Statements of Operations Line Items | |
Fixed maturity securities available-for-sale | Investment gains (losses) | |
Fixed maturity securities, trading | Net investment income | |
Equity securities available-for-sale | Investment gains (losses) | |
Equity securities, trading | Net investment income | |
Derivative financial instruments held in a trading portfolio | Net investment income | |
Derivative financial instruments, other | Investment gains (losses) and Other revenues | |
Life settlement contracts | Other revenues |
Securities shown in the Level 3 tables may be transferred in or out based on the availability of observable market information used to verify pricing sources or used in pricing models. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. The Companys policy is to recognize transfers between levels at the beginning of the reporting period.
The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified.
23
Fixed Maturity Securities
Level 1 securities include highly liquid government bonds within the U.S. Treasury securities category and securities issued by foreign governments for which quoted market prices are available. The remaining fixed maturity securities are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves, broker/dealer quotes and other pricing models utilizing observable inputs. The valuation for most fixed maturity securities is classified as Level 2. Securities within Level 2 include certain corporate bonds, states, municipalities and political subdivisions securities, foreign provincial and local government bonds, asset-backed securities, mortgage-backed pass-through securities and redeemable preferred stock. Level 2 securities may also include securities that have firm sale commitments and prices that are not recorded until the settlement date. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. These securities include certain corporate bonds, asset-backed securities, states, municipalities and political subdivisions securities and redeemable preferred stock. Within corporate bonds and states, municipalities and political subdivisions securities, Level 3 securities also include tax-exempt and taxable auction rate certificates. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the maturity date assumption is unobservable due to the uncertain nature of the principal prepayments prior to maturity.
Equity Securities
Level 1 securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing observable inputs. Level 3 securities include equity securities that are priced using internal models with inputs that are not market observable.
Derivative Financial Instruments
Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, credit default swaps, equity warrants and options are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.
Short Term Investments
The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 includes commercial paper, for which all inputs are observable. Level 3 securities include bank debt securities purchased within one year of maturity where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency to the market inputs used.
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNAs own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
Discontinued Operations Investments
Assets relating to CNAs discontinued operations include fixed maturity securities and short term investments. The valuation methodologies for these asset types have been described above.
24
Separate Account Business
Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies for these asset types have been described above.
Assets and Liabilities Not Measured at Fair Value
The Company did not have any financial instrument assets which are not measured at fair value. The carrying amount and estimated fair value of the Companys financial instrument liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the table below.
June 30, 2010 | December 31, 2009 | |||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value | |||||||||
(In millions) | ||||||||||||
Financial liabilities: |
||||||||||||
Premium deposits and annuity contracts |
$ | 101 | $ | 103 | $ | 105 | $ | 106 | ||||
Short term debt |
247 | 247 | 10 | 10 | ||||||||
Long term debt |
8,809 | 9,086 | 9,475 | 9,574 |
The following methods and assumptions were used in estimating the fair value of these financial liabilities.
Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.
Fair value of debt was based on quoted market prices when available. When quoted market prices were not available, the fair value for debt was based on quoted market prices of comparable instruments adjusted for differences between the quoted instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
4. Derivative Financial Instruments
The Company invests in certain derivative instruments for a number of purposes, including: (i) asset and liability management activities, (ii) income enhancements for its portfolio management strategy and (iii) to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur.
Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with the Companys portfolio strategy.
The Company does not believe that any of the derivative instruments utilized by it are unusually complex, nor do these instruments contain embedded leverage features which would expose the Company to a higher degree of risk.
The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, equity stock price risk, commodity price risk and foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of an obligor to make timely payment of principal and/or interest). The Companys principal objective under such risk strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.
CNAs use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. Derivatives entered into for hedging, regardless of the choice to designate hedge accounting, shall have a maturity that effectively correlates to the underlying hedged asset or liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to
25
changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through securities lending, to engage in derivative transactions.
The Company has exposure to economic losses due to interest rate risk arising from changes in the level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to interest rate risk in the normal course of portfolio management, which includes rebalancing its existing portfolios of assets and liabilities. In addition, various derivative financial instruments are used to modify the interest rate risk exposures of certain assets and liabilities. These strategies include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards and commitments to purchase securities. These instruments are generally used to lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities or investment contracts, or to hedge (on an economic basis) interest rate risks associated with investments and variable rate debt. The Company infrequently designates these types of instruments as hedges against specific assets or liabilities.
The Company is exposed to equity price risk as a result of its investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities, or instruments that derive their value from such securities. The Company attempts to mitigate its exposure to such risks by limiting its investment in any one security or index. The Company may also manage this risk by utilizing instruments such as options, swaps, futures and collars to protect appreciation in securities held.
The Company has exposure to credit risk arising from the uncertainty associated with a financial instrument obligors ability to make timely principal and/or interest payments. The Company attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and frequently monitoring the credit quality of issuers and counterparties. In addition, the Company may utilize credit derivatives such as credit default swaps (CDS) to modify the credit risk inherent in certain investments. CDS involve a transfer of credit risk from one party to another in exchange for periodic payments.
Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value of financial instruments denominated in a foreign currency. The Companys foreign transactions are primarily denominated in Australian dollars, Brazilian reais, British pounds, Canadian dollars and the European Monetary Unit. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards. In May of 2009, Diamond Offshore began a hedging strategy and designated certain of its qualifying foreign currency forward exchange contracts as cash flow hedges.
In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions are entered into with the intention of providing additional income or yield to a particular portfolio segment or instrument. Income enhancement transactions are limited in scope and primarily involve the sale of covered options in which the Company receives a premium in exchange for selling a call or put option.
The Company will also use CDS to sell credit protection against a specified credit event. In selling credit protection, CDS are used to replicate fixed income securities when credit exposure to certain issuers is not available or when it is economically beneficial to transact in the derivative market compared to the cash market alternative. Credit risk includes both the default event risk and market value exposure due to fluctuations in credit spreads. In selling CDS protection, the Company receives a periodic premium in exchange for providing credit protection on a single name reference obligation or a credit derivative index. If there is an event of default as defined by the CDS agreement, the Company is required to pay the counterparty the referenced notional amount of the CDS contract and in exchange the Company is entitled to receive the referenced defaulted security or the cash equivalent.
26
The tables below summarize open CDS contracts where the Company sold credit protection as of June 30, 2010 and December 31, 2009. The fair value of the contracts represents the amounts that the Company would receive at those dates to exit the derivative positions. The maximum amount of future payments assumes no residual value in the defaulted securities that the Company would receive as part of the contract terminations and is equal to the notional value of the CDS contracts.
June 30, 2010 | Fair Value of Credit Default Swaps |
Maximum Amount of Future Payments under Credit Default Swaps |
Weighted Average Years To Maturity | |||||
(In millions) | ||||||||
B-rated |
$ | 1 | $ | 8 | 2.6 | |||
Total |
$ | 1 | $ | 8 | 2.6 | |||
December 31, 2009 |
||||||||
B-rated |
$ | 8 | 3.1 | |||||
Total |
$ | | $ | 8 | 3.1 | |||
Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Consolidated Condensed Balance Sheets. The Company attempts to mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association (ISDA) Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. The Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of collateral provided by the Company was $41 million at June 30, 2010 and $7 million at December 31, 2009 and primarily consisted of cash and U.S. Treasury Bills. The fair value of cash collateral received from counterparties was $1 million at June 30, 2010 and December 31, 2009.
The agreements governing HighMounts derivative instruments contain certain covenants, including a maximum debt to capitalization ratio reviewed quarterly. If HighMount does not comply with these covenants, the counterparties to the derivative instruments could terminate the agreements and request payment on those derivative instruments in net liability positions. The aggregate fair value of HighMounts derivative instruments that are in a liability position was $99 million at June 30, 2010. HighMount was not required to post any collateral under the governing agreements. At June 30, 2010, HighMount was in compliance with all of its covenants under the derivatives agreements.
See Note 3 for information regarding the fair value of derivative instruments.
27
A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. Equity options purchased are included in Equity securities, and all other derivative assets are reported as Receivables. Derivative liabilities are included in Payable to brokers on the Consolidated Condensed Balance Sheets. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.
June 30, 2010 | December 31, 2009 | |||||||||||||||||
Contractual/ | Contractual/ | |||||||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | |||||||||||||||
Amount | Asset | (Liability) | Amount | Asset | (Liability) | |||||||||||||
(In millions) | ||||||||||||||||||
With hedge designation |
||||||||||||||||||
Interest rate risk: |
||||||||||||||||||
Interest rate swaps |
$ | 1,095 | $ | (92) | $ | 1,600 | $ | (135) | ||||||||||
Commodities: |
||||||||||||||||||
Forwards short |
575 | $ | 91 | (6) | 715 | $ | 50 | (39) | ||||||||||
Foreign exchange: |
||||||||||||||||||
Currency forwards short |
119 | (4) | 114 | 3 | ||||||||||||||
Other |
13 | 2 | ||||||||||||||||
Without hedge designation |
||||||||||||||||||
Equity markets: |
||||||||||||||||||
Options purchased |
164 | 34 | 242 | 45 | ||||||||||||||
Options written |
232 | (14) | 282 | (9) | ||||||||||||||
Equity warrants |
5 | |||||||||||||||||
Interest rate risk: |
||||||||||||||||||
Options on government |
635 | (13) | ||||||||||||||||
Interest rate swaps |
5 | 9 | ||||||||||||||||
Credit default swaps purchased protection |
35 | (3) | 116 | (11) | ||||||||||||||
Credit default swaps sold protection |
8 | 1 | 8 | |||||||||||||||
Futures long |
610 | |||||||||||||||||
Futures short |
2,839 | 132 | ||||||||||||||||
Commodities: |
||||||||||||||||||
Forwards long |
11 | 1 | ||||||||||||||||
Forwards short |
18 | 4 | ||||||||||||||||
Other |
5 | 2 | ||||||||||||||||
Total |
$ | 6,356 | $ | 131 | $ | (132) | $ | 3,233 | $ | 100 | $ | (194) | ||||||
Derivatives without hedge designation For derivatives not held in a trading portfolio, new derivative transactions entered into totaled approximately $610 million and $714 million in notional value while derivative termination activity totaled approximately $626 million and $775 million during the three and six months ended June 30, 2010. This activity was primarily attributable to interest rate futures and forward commitments for mortgage-backed securities. During the three and six months ended June 30, 2009, new derivative transactions entered into totaled approximately $4.4 billion and $10.5 billion in notional value while derivative termination activity totaled approximately $5.3 billion and $11.4 billion. This activity was primarily attributable to interest rate futures, interest rate options and interest rate swaps.
28
A summary of the recognized gains (losses) related to derivative financial instruments without hedge designation follows. Changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Condensed Statements of Operations.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) | ||||||||||||||||
Included in Net investment income: |
||||||||||||||||
Equity risk: |
||||||||||||||||
Equity options purchased |
$ | 10 | $ | (18 | ) | $ | (3 | ) | $ | (20 | ) | |||||
Equity options written |
(1 | ) | 25 | 5 | 30 | |||||||||||
Futures long |
(4 | ) | 11 | (3 | ) | 11 | ||||||||||
Futures short |
1 | (3 | ) | |||||||||||||
Foreign exchange: |
||||||||||||||||
Currency forwards long |
(2 | ) | 2 | (2 | ) | (6 | ) | |||||||||
Currency forwards short |
(1 | ) | (1 | ) | 7 | |||||||||||
Currency options short |
(4 | ) | (2 | ) | ||||||||||||
Interest rate risk: |
||||||||||||||||
Credit default swaps purchased protection |
3 | 12 | ||||||||||||||
Credit default swaps sold protection |
(2 | ) | (8 | ) | ||||||||||||
Options on government securities short |
3 | 14 | ||||||||||||||
Futures long |
(21 | ) | (18 | ) | 5 | |||||||||||
Futures short |
(3 | ) | ||||||||||||||
Other |
(1 | ) | (4 | ) | (2 | ) | (5 | ) | ||||||||
(26 | ) | 20 | (29 | ) | 40 | |||||||||||
Included in Investment gains (losses): |
||||||||||||||||
Equity options written |
4 | 15 | ||||||||||||||
Interest rate risk: |
||||||||||||||||
Interest rate swaps |
(18 | ) | 38 | (44 | ) | 59 | ||||||||||
Credit default swaps purchased protection |
(26 | ) | (35 | ) | ||||||||||||
Credit default swaps sold protection |
8 | 2 | ||||||||||||||
Futures short |
9 | 23 | ||||||||||||||
Commodity forwards short |
13 | |||||||||||||||
(18 | ) | 33 | (31 | ) | 64 | |||||||||||
Included in Other revenues: |
||||||||||||||||
Currency options short |
9 | 9 | ||||||||||||||
Total |
$ | (44 | ) | $ | 62 | $ | (60 | ) | $ | 113 | ||||||
Cash flow hedges A significant portion of the Companys hedge strategies represents cash flow hedges of the variable price risk associated with the purchase and sale of natural gas and other energy-related products. As of June 30, 2010, approximately 91.0 billion cubic feet of natural gas equivalents was hedged by qualifying cash flow hedges. The effective portion of these commodity hedges is reclassified from AOCI into earnings when the anticipated transaction affects earnings. Approximately 35% of these derivatives have settlement dates in 2010 and 50% have settlement dates in 2011. As of June 30, 2010, the estimated amount of net unrealized gains associated with commodity contracts that will be reclassified into earnings during the next twelve months was $64 million. However, these amounts are likely to vary materially as a result of changes in market conditions. Diamond Offshore uses foreign currency forward exchange contracts to reduce exposure to foreign currency losses on future foreign currency expenditures. The effective portion of these hedges is reclassified from AOCI into earnings when the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. As of June 30,
29
2010, the estimated amount of net unrealized losses associated with these contracts that will be reclassified into earnings over the next twelve months was $4 million. The Company also uses interest rate swaps to hedge its exposure to variable interest rates or risk attributable to changes in interest rates on long term debt. The effective portion of the hedges is amortized to interest expense over the term of the related notes. As of June 30, 2010, the estimated amount of net unrealized losses associated with interest rate swaps that will be reclassified into earnings during the next twelve months was $51 million. However, this is likely to vary as a result of changes in the LIBOR rate. For the three and six months ended June 30, 2010 and 2009, the net amounts recognized due to ineffectiveness were less than $1 million.
In the first quarter of 2010, HighMount determined that a portion of the expected underlying transactions related to its hedging activities were no longer probable of occurring and discontinued hedge accounting treatment for a portion of its interest rate cash flow hedges and its commodity price swaps. HighMount entered into definitive sales agreements for exploration and production assets in the Antrim Shale in Michigan in March 2010 and Black Warrior Basin in Alabama in April 2010. As a result, HighMount recognized losses of $14 million and $36 million in Investment gains (losses) in the Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2010, reflecting the reclassification of net derivative losses from AOCI to earnings. These amounts are reflected in the table below.
The following table summarizes the effective portion of the net derivative gains or losses included in OCI and the amount reclassified into Income (loss) for derivatives designated as cash flow hedges and for the de-designated hedges:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) |
||||||||||||||||
Amount of gain (loss) recognized in OCI |
||||||||||||||||
Commodities |
$ | 13 | $ | 11 | $ | 117 | $ | 103 | ||||||||
Foreign exchange |
(5 | ) | 6 | (5 | ) | 6 | ||||||||||
Interest rate |
(12 | ) | 13 | (34 | ) | 4 | ||||||||||
Total |
$ | (4 | ) | $ | 30 | $ | 78 | $ | 113 | |||||||
Amount of gain (loss) reclassified from AOCI into income (loss) |
||||||||||||||||
Commodities |
$ | 18 | $ | 65 | $ | 48 | $ | 139 | ||||||||
Foreign exchange |
(1 | ) | 1 | |||||||||||||
Interest rate |
(33 | ) | (17 | ) | (79 | ) | (31 | ) | ||||||||
Total |
$ | (16 | ) | $ | 48 | $ | (30 | ) | $ | 108 | ||||||
Location of gain (loss) reclassified from AOCI into income (loss):
Type of cash flow hedge |
Consolidated Condensed Statements of Operations line items | |
Commodities |
Other revenues and Investment gains (losses) | |
Foreign exchange |
Contract drilling expenses | |
Interest rate |
Interest and Investment gains (losses) |
The Company also enters into short sales as part of its portfolio management strategy. Short sales are commitments to sell a financial instrument not owned at the time of sale, usually done in anticipation of a price decline. Short sales of equity securities resulted in proceeds of $64 million and $66 million with fair value liabilities of $61 million and $78 million at June 30, 2010 and December 31, 2009. These positions are marked to market and
30
investment gains or losses are included in Net investment income in the Consolidated Condensed Statements of Operations.
5. Claim and Claim Adjustment Expense Reserves
CNAs property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (IBNR) as of the reporting date. CNAs reserve projections are based primarily on detailed analysis of the facts in each case, CNAs experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Companys results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $48 million and $88 million for the three and six months ended June 30, 2010 for events occurring in those periods. Catastrophe losses in 2010 related primarily to wind, thunderstorms and winter storms. CNA reported catastrophe losses, net of reinsurance, of $43 million and $56 million for the three and six months ended June 30, 2009 for events occurring in those periods. There can be no assurance that CNAs ultimate cost for catastrophes will not exceed current estimates.
The following provides discussion of the Companys Asbestos and Environmental Pollution (A&E) reserves.
A&E Reserves
CNAs property and casualty insurance subsidiaries have actual and potential exposures related to A&E claims.
The following table provides data related to CNAs A&E claim and claim adjustment expense reserves managed by its centralized A&E claims group.
June 30, 2010 | December 31, 2009 | |||||||||||||||
Asbestos | Environmental Pollution |
Asbestos | Environmental Pollution |
|||||||||||||
(In millions) |
||||||||||||||||
Gross reserves |
$ | 1,937 | $ | 412 | $ | 2,046 | $ | 482 | ||||||||
Ceded reserves |
(875 | ) | (174 | ) | (909 | ) | (196 | ) | ||||||||
Net reserves |
$ | 1,062 | $ | 238 | $ | 1,137 | $ | 286 | ||||||||
In connection with the pending transaction related to A&E reinsurance discussed in Note 11, CNA is also ceding A&E liabilities reflected by the carried reserves of certain assumed reinsurance run-off books of business not managed by the centralized A&E claims group. As of December 31, 2009 there were approximately $68 million of net A&E claim and claim adjustment expense reserves within these assumed reinsurance run-off books of business. Additionally, CNA had approximately $90 million of net undiscounted A&E reserves within its discontinued operations, which are included in Other liabilities on the Consolidated Condensed Balance Sheets on a discounted
31
basis of $61 million. The A&E liabilities in the table above along with these A&E liabilities will be ceded under the pending A&E reinsurance transaction.
Asbestos
The table below provides a reconciliation between CNAs beginning and ending net reserves for asbestos.
Six months ended June 30 | 2010 | 2009 | ||||||
(In millions) | ||||||||
Beginning net reserves |
$ | 1,137 | $ | 1,202 | ||||
Paid claims, net of reinsurance recoveries |
(75 | ) | (89 | ) | ||||
Ending net reserves |
$ | 1,062 | $ | 1,113 | ||||
The ultimate cost of reported claims, and in particular A&E claims, is subject to a great many uncertainties, including future developments of various kinds that CNA does not control and that are difficult or impossible to foresee accurately. With respect to the litigation identified, pending rulings are critical to the evaluation of the ultimate cost to CNA. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called non-products liability coverage contained within their policies rather than products liability coverage, and that the claimed non-products coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert non-products claims outside the products liability aggregate will succeed. CNAs policies also contain other limits applicable to these claims and CNA has additional coverage defenses to certain claims. CNA has attempted to manage its asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on acceptable terms, CNA aggressively litigates the claim. However, adverse developments with respect to such matters could have a material adverse effect on the Companys results of operations and/or equity.
Certain asbestos claim litigation in which CNA is currently engaged is described below:
A.P. Green: In February 2003, CNA announced it had resolved asbestos-related coverage litigation and claims involving A.P. Green Industries, A.P. Green Services and BigelowLiptak Corporation. Under the agreement, CNA is required to pay $70 million, net of reinsurance recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of reorganization. The settlement received initial bankruptcy court approval in August 2003. The debtors plan of reorganization includes an injunction to protect CNA from any future claims. The bankruptcy court issued an opinion in September 2007 recommending confirmation of that plan. In July 2008, the District Court affirmed the Bankruptcy Courts ruling. Several insurers have appealed that ruling to the Third Circuit Court of Appeals; that appeal was argued in May 2009. On June 15, 2010, the Court of Appeals entered an order to list the case for rehearing. No date has been set for rehearing.
Direct Action Case - Montana: In March 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty, et al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland Casualty and the State of Montana. This action alleges that the carriers failed to warn of or otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R. Graces pending bankruptcy. In April 2008, W.R. Grace announced a settlement in principle with the asbestos personal injury claimants committee subject to confirmation of a plan of reorganization by the bankruptcy court. The confirmation hearing was held in two phases. The first phase was held in June 2009. The second phase concluded in January 2010 and the bankruptcy court has taken the matter under advisement. The settlement in principle with the asbestos claimants has no present impact on the stay currently imposed on the
32
Montana direct action and with respect to such claims, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the potential application of Statutes of Limitation to many of the claims which may be made depending on the nature and scope of the alleged duties; (c) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) the extent that such liability would be shared with other potentially responsible parties; and (f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CNA is vigorously defending these and other cases and believes that it has meritorious defenses to the claims asserted. However, there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial exposure represented by these matters. Adverse developments with respect to any of these matters could have a material adverse effect on CNAs business, insurer financial strength and debt ratings and the Companys results of operations and/or equity.
Environmental Pollution
The table below provides a reconciliation between CNAs beginning and ending net reserves for environmental pollution.
Six months ended June 30 | 2010 | 2009 | ||||||
(In millions) | ||||||||
Beginning net reserves |
$ | 286 | $ | 262 | ||||
Paid claims, net of reinsurance recoveries |
(48 | ) | (22 | ) | ||||
Ending net reserves |
$ | 238 | $ | 240 | ||||
Net Prior Year Development
The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other Insurance. Favorable net prior year development of $17 million and $26 million was recorded in the Life & Group Non-Core segment for the three and six months ended June 30, 2010. Development in 2010 included favorable reserve development of $24 million arising from a commutation of an assumed reinsurance agreement in the first quarter of 2010. For the three and six months ended June 30, 2009 for the Life & Group Non-Core segment, favorable net prior year development of $5 million and unfavorable net prior year development $6 million was recorded.
Three Month Comparison
Three Months Ended June 30, 2010 | CNA Specialty |
CNA Commercial |
Other Insurance |
Total | ||||||||||||
(In millions) |
||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development: |
||||||||||||||||
Core (Non-A&E) |
$ | (125 | ) | $ | (175 | ) | $ | 1 | $ | (299 | ) | |||||
Pretax (favorable) unfavorable premium development |
1 | 35 | (2 | ) | 34 | |||||||||||
Total pretax favorable net prior year development |
$ | (124 | ) | $ | (140 | ) | $ | (1 | ) | $ | (265 | ) | ||||
33
Three Months Ended June 30, 2009 | CNA Specialty |
CNA Commercial |
Other Insurance |
Total | ||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development: |
||||||||||||||||
Core (Non-A&E) |
$ | (35 | ) | $ | (85 | ) | $ | 4 | $ | (116 | ) | |||||
Pretax (favorable) unfavorable premium development |
2 | 56 | (2 | ) | 56 | |||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (33 | ) | $ | (29 | ) | $ | 2 | $ | (60 | ) | |||||
2010 Net Prior Year Development
CNA Specialty
The favorable claim and allocated claim adjustment expense reserve development was primarily due to professional liability coverages as further discussed below.
Approximately $51 million of favorable claim and allocated claim adjustment expense reserve development was recorded for medical professional liability coverages due to favorable incurred emergence, primarily in accident years 2007 and prior.
Favorable claim and allocated claim adjustment expense reserve development of approximately $33 million was recorded for financial institutions and life agents coverages due to reduced frequency of large claims and favorable ceded recoveries, primarily in accident years 2007 and prior. Favorable development of $18 million was recorded in architects and engineers coverages due to favorable incurred emergence and claims closing favorable to expectations, primarily in accident years 2007 and prior.
CNA Commercial
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in property, auto and international coverages as further discussed below.
Approximately $98 million of favorable claim and allocated claim adjustment expense reserve development was recorded for property coverages. Favorable development of $53 million was recorded in catastrophe coverages due to favorable incurred loss emergence, primarily in accident years 2008 and 2009. Favorable claim and allocated claim adjustment expense reserve development of approximately $45 million was recorded for non-catastrophe related property coverages, primarily due to decreased severity in accident years 2009 and prior.
Approximately $61 million of favorable claim and allocated claim adjustment expense reserve development was primarily due to decreased frequency and severity trends in commercial auto coverages in accident years 2009 and prior.
Approximately $35 million of favorable claim and allocated claim adjustment expense reserve development was recorded in international commercial coverages. Approximately $21 million of favorable development was recorded due to decreased frequency across several lines within an affiliate, primarily in accident years 2008 and prior. The remaining favorable development was primarily due to a commutation within CNAs European operations book of renewable energy business.
Approximately $32 million of unfavorable claim and allocated claim adjustment expense reserve development was due to increased claim frequency in a portion of our primary casualty surplus lines book in accident years 2008 and 2009.
Approximately $35 million of unfavorable premium development was recorded due to a change in ultimate premium estimates relating to retrospectively rated policies and return premium on auditable policies due to reduced exposures.
34
2009 Net Prior Year Development
CNA Specialty
Favorable claim and allocated claim adjustment expense reserve development of approximately $25 million for medical professional liability was primarily due to better than expected frequency and severity in accident years 2005 and prior, including individual claims closing favorable to expectations.
Approximately $8 million of favorable claim and allocated claim adjustment expense reserve development was recorded for professional liability coverages due primarily to favorable experience on a number of large claims, primarily related to financial institutions in accident years 2003 and prior.
CNA Commercial
Favorable claim and allocated claim adjustment expense reserve development was primarily due to experience in property coverages. Prior year catastrophe reserves decreased approximately $33 million, driven by the favorable settlement of several claims primarily in accident years 2005 and 2007. An additional $17 million of favorable claim and allocated claim adjustment expense reserve development was due to non-catastrophe related favorable loss emergence on large property coverages, primarily in accident years 2007 and 2008.
Approximately $25 million of favorable claim and allocated claim adjustment expense reserve development was due to decreased frequency and severity trends related to construction defect exposures in accident years 2003 and prior.
Approximately $40 million of adverse premium development was related to changes in estimated ultimate premium on retrospectively rated coverages. Additional adverse premium development was due to an estimated liability for an assessment related to a reinsurance association and less premium processing on auditable policies than expected.
Six Month Comparison
Six Months Ended June 30, 2010 | CNA Specialty |
CNA Commercial |
Other Insurance |
Total | ||||||||||||
(In millions) |
||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development: |
||||||||||||||||
Core (Non-A&E) |
$ | (150 | ) | $ | (203 | ) | $ | 3 | $ | (350 | ) | |||||
Pretax (favorable) unfavorable premium development |
(3 | ) | 56 | (3 | ) | 50 | ||||||||||
Total pretax favorable net prior year development |
$ | (153 | ) | $ | (147 | ) | $ | | $ | (300 | ) | |||||
Six Months Ended June 30, 2009 | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development: |
||||||||||||||||
Core (Non-A&E) |
$ | (64 | ) | $ | (127 | ) | $ | 5 | $ | (186 | ) | |||||
Pretax (favorable) unfavorable premium development |
(3 | ) | 76 | (3 | ) | 70 | ||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (67 | ) | $ | (51 | ) | $ | 2 | $ | (116 | ) | |||||
2010 Net Prior Year Development
CNA Specialty
The favorable claim and allocated claim adjustment expense reserve development was primarily due to professional liability coverages as discussed below.
35
Approximately $52 million of favorable claim and allocated claim adjustment expense reserve development was recorded for medical professional liability coverages primarily due to favorable incurred emergence, primarily in accident years 2007 and prior.
Favorable claim and allocated claim adjustment expense reserve development of approximately $68 million was recorded for financial institutions, commercial governance and life agents coverages due to reduced frequency of large claims and favorable ceded recoveries, primarily in accident years 2007 and prior. Favorable development of $28 million was recorded in architects and engineers coverages due to favorable incurred emergence and claims closing favorable to expectations, primarily in accident years 2007 and prior. This favorability was partially offset by unfavorable development of approximately $28 million in employee practices liability driven by higher unemployment, primarily in accident years 2008 and 2009.
CNA Commercial
The favorable claim and allocated claim adjustment expense reserve development was primarily due to favorable experience in property, auto and international casualty coverages as discussed below.
Approximately $116 million of favorable claim and allocated claim adjustment expense reserve development was recorded for property coverages. Favorable development of $53 million was recorded in catastrophe coverages due to favorable incurred loss emergence, primarily in accident years 2008 and 2009. Favorable claim and allocated claim adjustment expense reserve development of approximately $63 million was recorded for non-catastrophe related property coverages, primarily due to decreased severity in accident years 2009 and prior.
Approximately $61 million of favorable claim and allocated claim adjustment expense reserve development was primarily due to decreased frequency and severity trends in commercial auto coverages in accident years 2009 and prior.
Approximately $47 million of favorable claim and allocated claim adjustment expense reserve development was recorded in international commercial coverages. Approximately $25 million of favorable development was recorded due to decreased frequency across several lines within an affiliate, primarily in accident years 2008 and prior. The remaining favorable development was primarily due to a commutation within the European affiliates book of renewable energy business.
Approximately $32 million of unfavorable claim and allocated claim adjustment expense reserve development was due to increased claim frequency in a portion of our primary casualty surplus lines book in accident years 2008 and 2009.
Approximately $56 million of unfavorable premium development was recorded due to a change in ultimate premium estimates relating to retrospectively rated policies and return premium on auditable policies due to reduced exposures.
2009 Net Prior Year Development
CNA Specialty
Favorable claim and allocated claim adjustment expense reserve development of approximately $25 million for medical professional liability was primarily due to better than expected frequency and severity in accident years 2005 and prior, including claims closing favorable to expectations.
Approximately $28 million of favorable claim and allocated claim adjustment expense reserve development was recorded for professional liability coverages due primarily to favorable experience on a number of large claims related to financial institutions in accident years 2003 and prior and decreased frequency of large claims in accident years 2007 and prior.
An additional $4 million of favorable claim and allocated claim adjustment expense reserve development was a result of favorable outcomes on claims relating to catastrophes in accident year 2005.
CNA Commercial
Favorable claim and allocated claim adjustment expense reserve development was primarily due to experience in property coverages. Prior year catastrophe reserves decreased approximately $64 million, driven by the favorable settlement of several claims primarily in accident years 2005 and 2007, and favorable frequency and severity on
36
claims relating to catastrophes in accident year 2008. An additional $17 million of favorable claim and allocated claim adjustment expense reserve development was due to non-catastrophe related favorable loss emergence on large property coverages, primarily in accident years 2007 and 2008.
Approximately $25 million of favorable claim and allocated claim adjustment expense reserve development was due to decreased frequency and severity trends related to construction defect exposures in accident years 2003 and prior.
Approximately $40 million of adverse premium development was related to changes in estimated ultimate premium on retrospectively rated coverages. Additional adverse premium development was due to an estimated liability for an assessment related to a reinsurance association and less premium processing on auditable policies than expected.
6. Benefit Plans
Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participants age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which cover salaried employees are based on formulas which include, among others, years of service and average pay. The Companys funding policy is to make contributions in accordance with applicable governmental regulatory requirements.
Other Postretirement Benefit Plans - The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no Company coverage. The benefits provided by the Company are basically health and, for certain retirees, life insurance type benefits.
The Company funds certain of these benefit plans and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire.
The components of net periodic benefit cost are as follows:
Pension Benefits | ||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) |
||||||||||||||||
Service cost |
$ | 7 | $ | 6 | $ | 13 | $ | 13 | ||||||||
Interest cost |
41 | 43 | 83 | 86 | ||||||||||||
Expected return on plan assets |
(44 | ) | (39 | ) | (88 | ) | (78 | ) | ||||||||
Amortization of unrecognized net loss |
7 | 7 | 14 | 14 | ||||||||||||
Net periodic benefit cost |
$ | 11 | $ | 17 | $ | 22 | $ | 35 | ||||||||
Other Postretirement Benefits | ||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) |
||||||||||||||||
Service cost |
$ | 1 | $ | 1 | ||||||||||||
Interest cost |
$ | 3 | $ | 3 | 6 | 6 | ||||||||||
Expected return on plan assets |
(1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||
Amortization of unrecognized net loss |
1 | 2 | 1 | |||||||||||||
Amortization of unrecognized prior service benefit |
(6 | ) | (6 | ) | (12 | ) | (12 | ) | ||||||||
Regulatory asset decrease |
2 | 2 | 3 | 3 | ||||||||||||
Net periodic benefit cost |
$ | (1 | ) | $ | (2 | ) | $ | (2 | ) | $ | (3 | ) | ||||
37
7. Business Segments
The Companys reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.
CNAs core property and casualty commercial insurance operations are reported in two business segments: CNA Specialty and CNA Commercial. 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.
CNAs non-core operations are managed in two segments: Life & Group Non-Core and Other Insurance. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other Insurance primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re. This segment also includes the results related to the centralized adjusting and settlement of A&E.
Diamond Offshores business primarily consists of operating 47 offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. On June 30, 2010, Diamond Offshores drilling rigs were located offshore twelve countries in addition to the United States. On July 7, 2010, Diamond Offshore completed the sale of one of its high performance, premium jack-up drilling rigs, the Ocean Shield.
HighMounts business consists primarily of natural gas exploration and production operations located in the Permian Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. In the second quarter of 2010, HighMount sold its exploration and production assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. The Michigan and Alabama properties represented approximately 17%, in aggregate, of HighMounts total proved reserves.
Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas. This segment consists of three interstate natural gas pipeline systems originating in the Gulf Coast area and running north and east through Texas, Louisiana, Mississippi, Alabama, Florida, Arkansas, Tennessee, Kentucky, Indiana, Ohio, Illinois and Oklahoma.
Loews Hotels owns and/or operates 19 hotels, 17 of which are in the United States and two are in Canada. The Loews Atlanta Hotel, which is operated under a management contract, opened on April 1, 2010.
The Corporate and other segment consists primarily of corporate investment income, including investment gains (losses) from non-insurance subsidiaries, corporate interest expenses and other unallocated expenses.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. In addition, CNA does not maintain a distinct investment portfolio for each of its insurance segments, and accordingly, allocation of assets to each segment is not performed. Therefore, net investment income and investment gains (losses) are allocated based on each segments carried insurance reserves, as adjusted.
38
The following tables set forth the Companys consolidated revenues and income (loss) attributable to Loews Corporation by business segment:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) |
||||||||||||||||
Revenues (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
CNA Specialty |
$ | 875 | $ | 787 | $ | 1,741 | $ | 1,477 | ||||||||
CNA Commercial |
981 | 954 | 2,054 | 1,790 | ||||||||||||
Life and Group Non-Core |
321 | 329 | 641 | 453 | ||||||||||||
Other Insurance |
56 | 26 | 112 | 14 | ||||||||||||
Total CNA Financial |
2,233 | 2,096 | 4,548 | 3,734 | ||||||||||||
Diamond Offshore |
823 | 957 | 1,685 | 1,843 | ||||||||||||
HighMount |
105 | 147 | 253 | 322 | ||||||||||||
Boardwalk Pipeline |
256 | 201 | 557 | 425 | ||||||||||||
Loews Hotels |
81 | 73 | 156 | 146 | ||||||||||||
Corporate and other |
(12 | ) | 60 | 87 | ||||||||||||
Total |
$ | 3,486 | $ | 3,534 | $ | 7,199 | $ | 6,557 | ||||||||
Income (loss) before income tax and noncontrolling interest (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
CNA Specialty |
$ | 302 | $ | 147 | $ | 518 | $ | 202 | ||||||||
CNA Commercial |
187 | 55 | 350 | (32 | ) | |||||||||||
Life and Group Non-Core |
(45 | ) | (42 | ) | (66 | ) | (282 | ) | ||||||||
Other Insurance |
5 | (27 | ) | 7 | (87 | ) | ||||||||||
Total CNA Financial |
449 | 133 | 809 | (199 | ) | |||||||||||
Diamond Offshore |
320 | 520 | 725 | 971 | ||||||||||||
HighMount |
18 | 46 | 75 | (960 | ) | |||||||||||
Boardwalk Pipeline |
53 | 18 | 141 | 69 | ||||||||||||
Loews Hotels |
6 | 6 | 5 | (23 | ) | |||||||||||
Corporate and other |
(43 | ) | 33 | (56 | ) | 30 | ||||||||||
Total |
$ | 803 | $ | 756 | $ | 1,699 | $ | (112 | ) | |||||||
Net income (loss) - Loews (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
CNA Specialty |
$ | 170 | $ | 84 | $ | 293 | $ | 119 | ||||||||
CNA Commercial |
100 | 41 | 200 | (3 | ) | |||||||||||
Life and Group Non-Core |
(17 | ) | (15 | ) | (20 | ) | (146 | ) | ||||||||
Other Insurance |
6 | (11 | ) | 11 | (41 | ) | ||||||||||
Total CNA Financial |
259 | 99 | 484 | (71 | ) | |||||||||||
Diamond Offshore |
104 | 181 | 240 | 344 | ||||||||||||
HighMount |
5 | 29 | 37 | (612 | ) | |||||||||||
Boardwalk Pipeline |
21 | 8 | 59 | 30 | ||||||||||||
Loews Hotels |
4 | 3 | 3 | (15 | ) | |||||||||||
Corporate and other |
(27 | ) | 20 | (37 | ) | 17 | ||||||||||
Total |
$ | 366 | $ | 340 | $ | 786 | $ | (307 | ) | |||||||
39
(a) | Investment gains (losses) included in Revenues, Income (loss) before income tax and noncontrolling interest and Net income (loss) - Loews are as follows: |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues and Income (loss) before income tax and noncontrolling interest: |
||||||||||||||||
CNA Financial: |
||||||||||||||||
CNA Specialty |
$ | 32 | $ | (83 | ) | $ | 45 | $ | (192 | ) | ||||||
CNA Commercial |
(13 | ) | (183 | ) | 8 | (369 | ) | |||||||||
Life & Group Non-Core |
(1 | ) | 13 | (5 | ) | (177 | ) | |||||||||
Other Insurance |
11 | (44 | ) | 15 | (91 | ) | ||||||||||
Total CNA Financial |
29 | (297 | ) | 63 | (829 | ) | ||||||||||
Corporate and other |
(18 | ) | (31 | ) | 1 | |||||||||||
Total |
$ | 11 | $ | (297 | ) | $ | 32 | $ | (828 | ) | ||||||
Net income (loss) - Loews: |
||||||||||||||||
CNA Financial: |
||||||||||||||||
CNA Specialty |
$ | 19 | $ | (51 | ) | $ | 27 | $ | (114 | ) | ||||||
CNA Commercial |
(12 | ) | (110 | ) | (218 | ) | ||||||||||
Life & Group Non-Core |