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, 2012
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 | x | No | ¨ | 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, 2012 | |||
Common stock, $0.01 par value | 395,596,576 shares |
2
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
June 30, 2012 |
December 31, 2011 |
|||||||
|
||||||||
(Dollar amounts in millions, except per share data) | ||||||||
Assets: |
||||||||
Investments: |
||||||||
Fixed maturities, amortized cost of $38,041 and $37,466 |
$ | 41,498 | $ | 40,040 | ||||
Equity securities, cost of $899 and $902 |
889 | 927 | ||||||
Limited partnership investments |
2,743 | 2,711 | ||||||
Other invested assets, primarily mortgage loans |
350 | 245 | ||||||
Short term investments |
5,595 | 5,105 | ||||||
|
||||||||
Total investments |
51,075 | 49,028 | ||||||
Cash |
136 | 129 | ||||||
Receivables |
9,145 | 9,259 | ||||||
Property, plant and equipment |
13,709 | 13,618 | ||||||
Goodwill |
908 | 908 | ||||||
Other assets |
1,401 | 1,357 | ||||||
Deferred acquisition costs of insurance subsidiaries |
584 | 552 | ||||||
Separate account business |
370 | 417 | ||||||
|
||||||||
Total assets |
$ | 77,328 | $ | 75,268 | ||||
|
||||||||
Liabilities and Equity: |
||||||||
Insurance reserves: |
||||||||
Claim and claim adjustment expense |
$ | 24,007 | $ | 24,303 | ||||
Future policy benefits |
10,352 | 9,810 | ||||||
Unearned premiums |
3,478 | 3,250 | ||||||
Policyholders funds |
167 | 191 | ||||||
|
||||||||
Total insurance reserves |
38,004 | 37,554 | ||||||
Payable to brokers |
395 | 162 | ||||||
Short term debt |
88 | 88 | ||||||
Long term debt |
9,048 | 8,913 | ||||||
Deferred income taxes |
952 | 622 | ||||||
Other liabilities |
4,230 | 4,309 | ||||||
Separate account business |
370 | 417 | ||||||
|
||||||||
Total liabilities |
53,087 | 52,065 | ||||||
|
||||||||
Preferred stock, $0.10 par value: |
||||||||
Authorized 100,000,000 shares |
||||||||
Common stock, $0.01 par value: |
||||||||
Authorized 1,800,000,000 shares |
||||||||
Issued 396,879,276 and 396,585,226 shares |
4 | 4 | ||||||
Additional paid-in capital |
3,543 | 3,494 | ||||||
Retained earnings |
15,263 | 14,890 | ||||||
Accumulated other comprehensive income |
746 | 384 | ||||||
|
||||||||
19,556 | 18,772 | |||||||
Less treasury stock, at cost (1,305,200 shares) |
51 | |||||||
|
||||||||
Total shareholders equity |
19,505 | 18,772 | ||||||
Noncontrolling interests |
4,736 | 4,431 | ||||||
|
||||||||
Total equity |
24,241 | 23,203 | ||||||
|
||||||||
Total liabilities and equity |
$ | 77,328 | $ | 75,268 | ||||
|
See accompanying Notes to Consolidated Condensed Financial Statements.
3
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Insurance premiums |
$ | 1,668 | $ | 1,595 | $ | 3,317 | $ | 3,210 | ||||||||
Net investment income |
386 | 519 | 1,112 | 1,180 | ||||||||||||
Investment gains (losses): |
||||||||||||||||
Other-than-temporary impairment losses |
(12 | ) | (41 | ) | (27 | ) | (61 | ) | ||||||||
Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss) |
(11 | ) | (21 | ) | (23 | ) | (42 | ) | ||||||||
|
||||||||||||||||
Net impairment losses recognized in earnings |
(23 | ) | (62 | ) | (50 | ) | (103 | ) | ||||||||
Other net investment gains |
43 | 81 | 102 | 145 | ||||||||||||
|
||||||||||||||||
Total investment gains |
20 | 19 | 52 | 42 | ||||||||||||
Contract drilling revenues |
726 | 870 | 1,481 | 1,659 | ||||||||||||
Other |
588 | 539 | 1,170 | 1,119 | ||||||||||||
|
||||||||||||||||
Total |
3,388 | 3,542 | 7,132 | 7,210 | ||||||||||||
|
||||||||||||||||
Expenses: |
||||||||||||||||
Insurance claims and policyholders benefits |
1,348 | 1,367 | 2,729 | 2,731 | ||||||||||||
Amortization of deferred acquisition costs |
309 | 286 | 604 | 583 | ||||||||||||
Contract drilling expenses |
405 | 388 | 802 | 750 | ||||||||||||
Other operating expenses |
1,001 | 824 | 1,820 | 1,561 | ||||||||||||
Interest |
111 | 129 | 222 | 280 | ||||||||||||
|
||||||||||||||||
Total |
3,174 | 2,994 | 6,177 | 5,905 | ||||||||||||
|
||||||||||||||||
Income before income tax |
214 | 548 | 955 | 1,305 | ||||||||||||
Income tax expense |
(16 | ) | (144 | ) | (238 | ) | (339 | ) | ||||||||
|
||||||||||||||||
Net income |
198 | 404 | 717 | 966 | ||||||||||||
Amounts attributable to noncontrolling interests |
(142 | ) | (154 | ) | (294 | ) | (337 | ) | ||||||||
|
||||||||||||||||
Net income attributable to Loews Corporation |
$ | 56 | $ | 250 | $ | 423 | $ | 629 | ||||||||
|
||||||||||||||||
Basic net income per share |
$ | 0.14 | $ | 0.61 | $ | 1.07 | $ | 1.53 | ||||||||
|
||||||||||||||||
Diluted net income per share |
$ | 0.14 | $ | 0.61 | $ | 1.06 | $ | 1.53 | ||||||||
|
||||||||||||||||
Dividends per share |
$ | 0.0625 | $ | 0.0625 | $ | 0.125 | $ | 0.125 | ||||||||
|
||||||||||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Shares of common stock |
396.40 | 407.82 | 396.59 | 410.34 | ||||||||||||
Dilutive potential shares of common stock |
0.73 | 0.92 | 0.71 | 0.93 | ||||||||||||
|
||||||||||||||||
Total weighted-average shares outstanding assuming dilution |
397.13 | 408.74 | 397.30 | 411.27 | ||||||||||||
|
See accompanying Notes to Consolidated Condensed Financial Statements.
4
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Net income |
$ | 198 | $ | 404 | $ | 717 | $ | 966 | ||||||||
|
||||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||
Changes in: |
||||||||||||||||
Net unrealized gains (losses) on investments with other-than-temporary impairments |
(3 | ) | 1 | 37 | 39 | |||||||||||
Net other unrealized gains on investments |
120 | 300 | 337 | 323 | ||||||||||||
|
||||||||||||||||
Total unrealized gains on available-for-sale investments |
117 | 301 | 374 | 362 | ||||||||||||
Unrealized gains (losses) on cash flow hedges |
(2 | ) | 6 | 13 | (11 | ) | ||||||||||
Foreign currency |
(19 | ) | 5 | 2 | 31 | |||||||||||
Pension liability |
4 | 2 | 11 | 2 | ||||||||||||
|
||||||||||||||||
Other comprehensive income |
100 | 314 | 400 | 384 | ||||||||||||
|
||||||||||||||||
Comprehensive income |
298 | 718 | 1,117 | 1,350 | ||||||||||||
Amounts attributable to noncontrolling interests |
(150 | ) | (199 | ) | (333 | ) | (388 | ) | ||||||||
|
||||||||||||||||
Total comprehensive income attributable to Loews Corporation |
$ | 148 | $ | 519 | $ | 784 | $ | 962 | ||||||||
|
See accompanying Notes to Consolidated Condensed Financial Statements.
5
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)
Loews Corporation Shareholders | ||||||||||||||||||||||||||||
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|
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Accumulated | Common | |||||||||||||||||||||||||||
Additional | Other | Stock | ||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | |||||||||||||||||||||||
Total | Stock | Capital | Earnings | Income (Loss) | Treasury | Interests | ||||||||||||||||||||||
|
||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Balance, January 1, 2011, as reported |
$ | 23,106 | $ | 4 | $ | 3,667 | $ | 14,564 | $ | 230 | $ | (15 | ) | $ | 4,656 | |||||||||||||
Adjustment to initially apply updated guidance on accounting for costs associated with acquiring or renewing insurance contracts |
(78 | ) | (64 | ) | (14 | ) | ||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance, January 1, 2011, as restated |
23,028 | 4 | 3,667 | 14,500 | 230 | (15 | ) | 4,642 | ||||||||||||||||||||
Net income |
966 | 629 | 337 | |||||||||||||||||||||||||
Other comprehensive income |
384 | 333 | 51 | |||||||||||||||||||||||||
Dividends paid |
(247 | ) | (51 | ) | (196 | ) | ||||||||||||||||||||||
Acquisition of CNA Surety noncontrolling interests |
(475 | ) | (59 | ) | 17 | (433 | ) | |||||||||||||||||||||
Issuance of equity securities by subsidiary |
152 | 28 | 1 | 123 | ||||||||||||||||||||||||
Purchase of Loews treasury stock |
(415 | ) | (415 | ) | ||||||||||||||||||||||||
Issuance of Loews common stock |
4 | 4 | ||||||||||||||||||||||||||
Stock-based compensation |
12 | 10 | 2 | |||||||||||||||||||||||||
Other |
(10 | ) | (2 | ) | (2 | ) | (6 | ) | ||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance, June 30, 2011 |
$ | 23,399 | $ | 4 | $ | 3,648 | $ | 15,076 | $ | 581 | $ | (430 | ) | $ | 4,520 | |||||||||||||
|
||||||||||||||||||||||||||||
Balance, January 1, 2012, as reported |
$ | 23,273 | $ | 4 | $ | 3,499 | $ | 14,957 | $ | 375 | $ | | $ | 4,438 | ||||||||||||||
Adjustment to initially apply updated guidance on accounting for costs associated with acquiring or renewing insurance contracts |
(70 | ) | (5 | ) | (67 | ) | 9 | (7 | ) | |||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance, January 1, 2012, as restated |
23,203 | 4 | 3,494 | 14,890 | 384 | | 4,431 | |||||||||||||||||||||
Net income |
717 | 423 | 294 | |||||||||||||||||||||||||
Other comprehensive income |
400 | 361 | 39 | |||||||||||||||||||||||||
Dividends paid |
(266 | ) | (50 | ) | (216 | ) | ||||||||||||||||||||||
Issuance of equity securities by subsidiary |
222 | 36 | 1 | 185 | ||||||||||||||||||||||||
Purchase of Loews treasury stock |
(51 | ) | (51 | ) | ||||||||||||||||||||||||
Issuance of Loews common stock |
5 | 5 | ||||||||||||||||||||||||||
Stock-based compensation |
11 | 10 | 1 | |||||||||||||||||||||||||
Other |
| (2 | ) | 2 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance, June 30, 2012 |
$ | 24,241 | $ | 4 | $ | 3,543 | $ | 15,263 | $ | 746 | $ | (51 | ) | $ | 4,736 | |||||||||||||
|
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 | 2012 | 2011 | ||||||
|
||||||||
(In millions) | ||||||||
Operating Activities: |
||||||||
Net income |
$ | 717 | $ | 966 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities, net |
673 | 443 | ||||||
Changes in operating assets and liabilities, net: |
||||||||
Receivables |
257 | 203 | ||||||
Deferred acquisition costs |
(17 | ) | (19 | ) | ||||
Insurance reserves |
121 | 93 | ||||||
Other assets |
(81 | ) | 27 | |||||
Other liabilities |
(87 | ) | (276 | ) | ||||
Trading securities |
(477 | ) | (521 | ) | ||||
|
||||||||
Net cash flow operating activities |
1,106 | 916 | ||||||
|
||||||||
Investing Activities: |
||||||||
Purchases of fixed maturities |
(5,169 | ) | (6,200 | ) | ||||
Proceeds from sales of fixed maturities |
3,303 | 4,124 | ||||||
Proceeds from maturities of fixed maturities |
1,566 | 1,825 | ||||||
Purchases of equity securities |
(27 | ) | (44 | ) | ||||
Proceeds from sales of equity securities |
61 | 153 | ||||||
Purchases of property, plant and equipment |
(530 | ) | (300 | ) | ||||
Deposits for construction of offshore drilling equipment |
(169 | ) | (478 | ) | ||||
Acquisitions |
(170 | ) | ||||||
Dispositions |
151 | 9 | ||||||
Change in short term investments |
(116 | ) | 1,580 | |||||
Change in other investments |
(75 | ) | (301 | ) | ||||
Other, net |
17 | 5 | ||||||
|
||||||||
Net cash flow investing activities |
(1,158 | ) | 373 | |||||
|
||||||||
Financing Activities: |
||||||||
Dividends paid |
(50 | ) | (51 | ) | ||||
Dividends paid to noncontrolling interests |
(216 | ) | (196 | ) | ||||
Acquisition of CNA Surety noncontrolling interests |
(426 | ) | ||||||
Purchases of treasury shares |
(51 | ) | (422 | ) | ||||
Issuance of common stock |
5 | 4 | ||||||
Proceeds from sale of subsidiary stock |
246 | 172 | ||||||
Principal payments on debt |
(1,246 | ) | (1,433 | ) | ||||
Issuance of debt |
1,375 | 1,101 | ||||||
Other, net |
(4 | ) | (12 | ) | ||||
|
||||||||
Net cash flow financing activities |
59 | (1,263 | ) | |||||
|
||||||||
Effect of foreign exchange rate on cash |
2 | |||||||
|
||||||||
Net change in cash |
7 | 28 | ||||||
Cash, beginning of period |
129 | 120 | ||||||
|
||||||||
Cash, end of period |
$ | 136 | $ | 148 | ||||
|
See accompanying Notes to Consolidated Condensed Financial Statements.
7
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); interstate transportation and storage of natural gas (Boardwalk Pipeline Partners, LP (Boardwalk Pipeline), a 61% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids) (HighMount Exploration & Production LLC (HighMount), a wholly owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (Loews Hotels), a wholly owned subsidiary). In the first quarter of 2012, Boardwalk Pipeline sold 9.2 million common units through a public offering for $245 million, reducing the Companys ownership interest from 64% to 61%. 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, 2012 and December 31, 2011 and the results of operations and comprehensive income for the three and six months ended June 30, 2012 and 2011 and changes in shareholders equity and cash flows for the six months ended June 30, 2012 and 2011.
Net income for the second quarter and first half of each of the years is not necessarily indicative of net income for that entire year.
Reference is made to the Notes to Consolidated Financial Statements in the 2011 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.
The Company presents basic and diluted net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income 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 1.9 million, 1.7 million, 2.3 million and 1.8 million shares were not included in the diluted weighted average shares amount for the three and six months ended June 30, 2012 and 2011 due to the exercise price being greater than the average stock price.
Hardy Underwriting Bermuda Limited (Hardy) On July 2, 2012, CNA completed the previously announced acquisition of Hardy, a specialized Lloyds of London (Lloyds) underwriter of marine and aviation, property and specialty business, as well as property treaty reinsurance. Hardy has business operations in the United Kingdom, Bermuda, Bahrain, Guernsey and Singapore. For the year ended December 31, 2011, Hardy reported gross written premiums of $430 million. The closing of the acquisition followed approval of the transaction agreement by Hardy shareholders and regulatory approvals in various jurisdictions. The purchase price for Hardy was approximately $230 million. At June 30, 2012, approximately $230 million of British pound denominated short term investments were held in escrow to fund the acquisition.
CNA has not yet finalized the purchase accounting related to the acquisition of Hardy. CNA estimates that the fair value of Hardys assets will include approximately $55 million of identifiable indefinite-lived intangible assets and $80 million of identifiable finite-lived intangible assets, as well as the recognition of approximately $35 million of goodwill. The goodwill is not expected to be deductible for tax purposes.
Accounting Changes In October of 2010, the Financial Accounting Standards Board issued updated accounting guidance which limits the capitalization of costs incurred to acquire or renew insurance contracts to those that are incremental direct costs of successful contract acquisitions. The previous guidance allowed the capitalization of
8
acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts, whether the costs related to successful or unsuccessful efforts.
As of January 1, 2012, the Company adopted the updated accounting guidance prospectively as of January 1, 2004, the earliest date practicable. Due to the lack of available historical data related to certain accident and health contracts issued prior to January 1, 2004, a full retrospective application of the change in accounting guidance was impracticable. Acquisition costs capitalized prior to January 1, 2004 will continue to be accounted for under the previous accounting guidance and will be amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefit reserves for such contracts.
The Company has adjusted its previously reported financial information included herein to reflect the change in accounting guidance for deferred acquisition costs. The impacts of adopting the new accounting standard on the Companys Consolidated Condensed Balance Sheet as of December 31, 2011 were a $106 million decrease in Deferred acquisition costs of insurance subsidiaries and a $37 million decrease in Deferred income tax liabilities. The impacts to Accumulated other comprehensive income (AOCI) and Additional paid-in capital (APIC) were the result of the indirect effects of the Companys adoption of this guidance on Shadow Adjustments, as further discussed in Note 2, and CNAs acquisition of the noncontrolling interest of CNA Surety in 2011.
The impacts on the Companys Consolidated Condensed Statements of Income for the three and six months ended June 30, 2011 were a $64 million and $112 million decrease in Amortization of deferred acquisition costs, a $67 million and $119 million increase in Other operating expenses, no impact and a $1 million decrease in Income tax expense, and a $1 million decrease in Net income attributable to noncontrolling interests for both periods, resulting in a $2 million and $5 million decrease in Net income and a $0.01 and $0.01 decrease in Basic and Diluted net income per share. There were no changes to net cash flows from operating, investing or financing activities for the comparative periods presented as a result of the adoption of the new accounting standard.
9
2. Investments
Net investment income is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities |
$ | 505 | $ | 505 | $ | 1,021 | $ | 1,011 | ||||||||
Short term investments |
4 | 4 | 7 | 7 | ||||||||||||
Limited partnerships |
(43 | ) | 22 | 100 | 156 | |||||||||||
Equity securities |
2 | 6 | 6 | 12 | ||||||||||||
Income (loss) from trading portfolio (a) |
(74 | ) | (8 | ) | (4 | ) | 15 | |||||||||
Other |
7 | 5 | 11 | 9 | ||||||||||||
|
||||||||||||||||
Total investment income |
401 | 534 | 1,141 | 1,210 | ||||||||||||
Investment expenses |
(15 | ) | (15 | ) | (29 | ) | (30 | ) | ||||||||
|
||||||||||||||||
Net investment income |
$ | 386 | $ | 519 | $ | 1,112 | $ | 1,180 | ||||||||
|
||||||||||||||||
(a) Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(90), $(17), $(60) and $1 for the three and six months ended June 30, 2012 and 2011.
Investment gains (losses) are as follows:
|
| |||||||||||||||
Fixed maturity securities |
$ | 17 | $ | 20 | $ | 47 | $ | 40 | ||||||||
Equity securities |
(2 | ) | 1 | (2 | ) | |||||||||||
Derivative instruments |
(1 | ) | (2 | ) | (1 | ) | ||||||||||
Short term investments |
1 | 3 | ||||||||||||||
Other |
4 | 6 | 2 | |||||||||||||
|
||||||||||||||||
Investment gains (a) |
$ | 20 | $ | 19 | $ | 52 | $ | 42 | ||||||||
|
||||||||||||||||
(a) Includes gross realized gains of $51, $90, $123 and $183 and gross realized losses of $34, $72, $75 and $145 on available-for-sale securities for the three and six months ended June 30, 2012 and 2011.
The components of other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are as follows:
|
| |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||
Corporate and other bonds |
$ | 6 | $ | 15 | $ | 16 | $ | 24 | ||||||||
Asset-backed: |
||||||||||||||||
Residential mortgage-backed |
15 | 46 | 29 | 74 | ||||||||||||
U.S. Treasury and obligations of government - sponsored enterprises |
1 | |||||||||||||||
|
||||||||||||||||
Total fixed maturities available-for-sale |
21 | 61 | 46 | 98 | ||||||||||||
|
||||||||||||||||
Equity securities available-for-sale: |
||||||||||||||||
Common stock |
2 | 1 | 4 | 4 | ||||||||||||
Preferred stock |
1 | |||||||||||||||
|
||||||||||||||||
Total equity securities available-for-sale |
2 | 1 | 4 | 5 | ||||||||||||
|
||||||||||||||||
Net OTTI losses recognized in earnings |
$ | 23 | $ | 62 | $ | 50 | $ | 103 | ||||||||
|
10
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 all 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. 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 OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.
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 and credit support from lower level tranches.
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.
11
The amortized cost and fair values of securities are as follows:
June 30, 2012 | Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Unrealized OTTI Losses (Gains) |
|||||||||||||||
(In millions) | ||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate and other bonds |
$ | 19,350 | $ | 2,209 | $ | 79 | $ | 21,480 | ||||||||||||
States, municipalities and political subdivisions |
9,225 | 1,225 | 66 | 10,384 | ||||||||||||||||
Asset-backed: |
||||||||||||||||||||
Residential mortgage-backed |
5,817 | 215 | 141 | 5,891 | $ | 42 | ||||||||||||||
Commercial mortgage-backed |
1,514 | 82 | 27 | 1,569 | (2 | ) | ||||||||||||||
Other asset-backed |
1,046 | 20 | 1 | 1,065 | ||||||||||||||||
|
||||||||||||||||||||
Total asset-backed |
8,377 | 317 | 169 | 8,525 | 40 | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
172 | 12 | 184 | |||||||||||||||||
Foreign government |
616 | 23 | 639 | |||||||||||||||||
Redeemable preferred stock |
101 | 10 | 111 | |||||||||||||||||
|
||||||||||||||||||||
Fixed maturities available-for-sale |
37,841 | 3,796 | 314 | 41,323 | 40 | |||||||||||||||
Fixed maturities, trading |
200 | 25 | 175 | |||||||||||||||||
|
||||||||||||||||||||
Total fixed maturities |
38,041 | 3,796 | 339 | 41,498 | 40 | |||||||||||||||
|
||||||||||||||||||||
Equity securities: |
||||||||||||||||||||
Common stock |
27 | 21 | 48 | |||||||||||||||||
Preferred stock |
225 | 17 | 242 | |||||||||||||||||
|
||||||||||||||||||||
Equity securities available-for-sale |
252 | 38 | 290 | | ||||||||||||||||
Equity securities, trading |
647 | 67 | 115 | 599 | ||||||||||||||||
|
||||||||||||||||||||
Total equity securities |
899 | 105 | 115 | 889 | | |||||||||||||||
|
||||||||||||||||||||
Total |
$ | 38,940 | $ | 3,901 | $ | 454 | $ | 42,387 | $ | 40 | ||||||||||
|
||||||||||||||||||||
December 31, 2011 |
||||||||||||||||||||
|
||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate and other bonds |
$ | 19,086 | $ | 1,946 | $ | 154 | $ | 20,878 | ||||||||||||
States, municipalities and political subdivisions |
9,018 | 900 | 136 | 9,782 | ||||||||||||||||
Asset-backed: |
||||||||||||||||||||
Residential mortgage-backed |
5,786 | 172 | 183 | 5,775 | $ | 99 | ||||||||||||||
Commercial mortgage-backed |
1,365 | 48 | 59 | 1,354 | (2 | ) | ||||||||||||||
Other asset-backed |
946 | 13 | 4 | 955 | ||||||||||||||||
|
||||||||||||||||||||
Total asset-backed |
8,097 | 233 | 246 | 8,084 | 97 | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
479 | 14 | 493 | |||||||||||||||||
Foreign government |
608 | 28 | 636 | |||||||||||||||||
Redeemable preferred stock |
51 | 7 | 58 | |||||||||||||||||
|
||||||||||||||||||||
Fixed maturities available-for-sale |
37,339 | 3,128 | 536 | 39,931 | 97 | |||||||||||||||
Fixed maturities, trading |
127 | 18 | 109 | |||||||||||||||||
|
||||||||||||||||||||
Total fixed maturities |
37,466 | 3,128 | 554 | 40,040 | 97 | |||||||||||||||
|
||||||||||||||||||||
Equity securities: |
||||||||||||||||||||
Common stock |
30 | 17 | 47 | |||||||||||||||||
Preferred stock |
258 | 4 | 5 | 257 | ||||||||||||||||
|
||||||||||||||||||||
Equity securities available-for-sale |
288 | 21 | 5 | 304 | | |||||||||||||||
Equity securities, trading |
614 | 76 | 67 | 623 | ||||||||||||||||
|
||||||||||||||||||||
Total equity securities |
902 | 97 | 72 | 927 | | |||||||||||||||
|
||||||||||||||||||||
Total |
$ | 38,368 | $ | 3,225 | $ | 626 | $ | 40,967 | $ | 97 | ||||||||||
|
12
The net unrealized gains on investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At June 30, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $846 million and $651 million. To the extent that unrealized gains on fixed income securities supporting certain products within CNAs Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction through Other comprehensive income (Shadow Adjustments).
The available-for-sale securities in a gross unrealized loss position are as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
June 30, 2012 | Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
Corporate and other bonds |
$ | 1,550 | $ | 53 | $ | 192 | $ | 26 | $ | 1,742 | $ | 79 | ||||||||||||
States, municipalities and political subdivisions |
174 | 2 | 301 | 64 | 475 | 66 | ||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||
Residential mortgage-backed |
276 | 13 | 923 | 128 | 1,199 | 141 | ||||||||||||||||||
Commercial mortgage-backed |
158 | 5 | 153 | 22 | 311 | 27 | ||||||||||||||||||
Other asset-backed |
181 | 1 | 181 | 1 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total asset-backed |
615 | 19 | 1,076 | 150 | 1,691 | 169 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total |
$ | 2,339 | $ | 74 | $ | 1,569 | $ | 240 | $ | 3,908 | $ | 314 | ||||||||||||
|
||||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
Corporate and other bonds |
$ | 2,552 | $ | 126 | $ | 159 | $ | 28 | $ | 2,711 | $ | 154 | ||||||||||||
States, municipalities and political subdivisions |
67 | 1 | 721 | 135 | 788 | 136 | ||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||
Residential mortgage-backed |
719 | 36 | 874 | 147 | 1,593 | 183 | ||||||||||||||||||
Commercial mortgage-backed |
431 | 39 | 169 | 20 | 600 | 59 | ||||||||||||||||||
Other asset-backed |
389 | 4 | 389 | 4 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total asset-backed |
1,539 | 79 | 1,043 | 167 | 2,582 | 246 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total fixed maturities available-for-sale |
4,158 | 206 | 1,923 | 330 | 6,081 | 536 | ||||||||||||||||||
Equity securities available-for-sale: |
||||||||||||||||||||||||
Preferred stock |
117 | 5 | 117 | 5 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total |
$ | 4,275 | $ | 211 | $ | 1,923 | $ | 330 | $ | 6,198 | $ | 541 | ||||||||||||
|
The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $15 million, $20 million, $47 million and $41 million for the three and six months ended June 30, 2012 and 2011.
13
The following table summarizes the activity for the three and six months ended June 30, 2012 and 2011 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2012 and 2011 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Beginning balance of credit losses on fixed maturity securities |
$ | 100 | $ | 113 | $ | 92 | $ | 141 | ||||||||
Additional credit losses for securities for which an OTTI loss was previously recognized |
10 | 8 | 21 | 18 | ||||||||||||
Credit losses for securities for which an OTTI loss was not previously recognized |
1 | 2 | 1 | |||||||||||||
Reductions for securities sold during the period |
(4 | ) | (21 | ) | (8 | ) | (46 | ) | ||||||||
Reductions for securities the Company intends to sell or more likely than not will be required to sell |
(8 | ) | (18 | ) | (8 | ) | (32 | ) | ||||||||
|
||||||||||||||||
Ending balance of credit losses on fixed maturity securities |
$ | 99 | $ | 82 | $ | 99 | $ | 82 | ||||||||
|
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 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 two major providers, Standard & Poors and Moodys Investors Service, Inc. in that order of preference. If a security is not rated by these providers, the Company formulates an internal rating.
Asset-Backed Securities
Asset-backed securities include residential mortgage-backed securities, both agency and non-agency, commercial mortgage-backed securities and other asset-backed securities. The fair value of total asset-backed holdings at June 30, 2012 was $8.5 billion which was comprised of 2,035 different securities. The fair value of these securities tends to be influenced by the characteristics and projected cash flows of the underlying collateral rather than the credit of the issuer. 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.
The gross unrealized losses on residential mortgage-backed securities included $63 million related to securities guaranteed by a U.S. government agency or sponsored enterprise and $78 million related to non-agency structured securities. Non-agency structured securities included 94 securities that had at least one trade lot in a gross unrealized loss position and the aggregate severity of the gross unrealized loss was approximately 8.9% of amortized cost.
Commercial mortgage-backed securities included 44 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 7.9% of amortized cost.
14
The following table summarizes asset-backed securities in a gross unrealized loss position by ratings distribution at June 30, 2012.
June 30, 2012 | Amortized Cost |
Estimated Fair Value |
Gross Unrealized Losses |
|||||||||
|
||||||||||||
(In millions) | ||||||||||||
U.S. Government, Government Agencies and Government-Sponsored Enterprises |
$ | 468 | $ | 405 | $ | 63 | ||||||
AAA |
247 | 241 | 6 | |||||||||
AA |
163 | 155 | 8 | |||||||||
A |
141 | 134 | 7 | |||||||||
BBB |
162 | 148 | 14 | |||||||||
Non-investment grade |
679 | 608 | 71 | |||||||||
|
||||||||||||
Total |
$ | 1,860 | $ | 1,691 | $ | 169 | ||||||
|
The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and uncertainty with regard to the timing and amount of ultimate collateral realization, but are not indicative of the ultimate collectibility of the current carrying values of the securities. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at June 30, 2012.
Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 2012 and December 31, 2011. 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, 2012 | December 31, 2011 | |||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less |
$ | 1,889 | $ | 1,904 | $ | 1,802 | $ | 1,812 | ||||||||
Due after one year through five years |
13,118 | 13,728 | 13,110 | 13,537 | ||||||||||||
Due after five years through ten years |
8,561 | 9,228 | 8,410 | 8,890 | ||||||||||||
Due after ten years |
14,273 | 16,463 | 14,017 | 15,692 | ||||||||||||
|
||||||||||||||||
Total |
$ | 37,841 | $ | 41,323 | $ | 37,339 | $ | 39,931 | ||||||||
|
Investment Commitments
As of June 30, 2012, the Company had committed approximately $141 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. 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, 2012, the Company had commitments to purchase $145 million and sell $124 million of such investments. The Company has an obligation to fund additional amounts under the terms of current loan participations that may not be recorded until a draw is made. As of June 30, 2012, the Company had obligations on unfunded bank loan participations in the amount of $12 million.
15
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 type of financial instruments being measured and the methodologies and inputs used at June 30, 2012 were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.
Prices may fall within Level 1, 2 or 3 depending upon the methodologies and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using methodologies and inputs the Company believes market participants would use to value the assets.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include (i) the review of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analyses, where the Company independently validates information regarding inputs and assumptions for individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.
16
The fair values of CNAs life settlement contracts 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, 2012 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Corporate and other bonds |
$ | 20,992 | $ | 488 | $ | 21,480 | ||||||||||
States, municipalities and political subdivisions |
10,295 | 89 | 10,384 | |||||||||||||
Asset-backed: |
||||||||||||||||
Residential mortgage-backed |
5,448 | 443 | 5,891 | |||||||||||||
Commercial mortgage-backed |
1,403 | 166 | 1,569 | |||||||||||||
Other asset-backed |
631 | 434 | 1,065 | |||||||||||||
|
||||||||||||||||
Total asset-backed |
7,482 | 1,043 | 8,525 | |||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
$ | 142 | 42 | 184 | ||||||||||||
Foreign government |
120 | 519 | 639 | |||||||||||||
Redeemable preferred stock |
28 | 56 | 27 | 111 | ||||||||||||
|
||||||||||||||||
Fixed maturities available-for-sale |
290 | 39,386 | 1,647 | 41,323 | ||||||||||||
Fixed maturities, trading |
81 | 94 | 175 | |||||||||||||
|
||||||||||||||||
Total fixed maturities |
$ | 290 | $ | 39,467 | $ | 1,741 | $ | 41,498 | ||||||||
|
||||||||||||||||
Equity securities available-for-sale |
$ | 106 | $ | 91 | $ | 93 | $ | 290 | ||||||||
Equity securities, trading |
589 | 1 | 9 | 599 | ||||||||||||
|
||||||||||||||||
Total equity securities |
$ | 695 | $ | 92 | $ | 102 | $ | 889 | ||||||||
|
||||||||||||||||
Short term investments |
$ | 5,068 | $ | 271 | $ | 4 | $ | 5,343 | ||||||||
Other invested assets |
11 | 11 | ||||||||||||||
Receivables |
65 | 18 | 83 | |||||||||||||
Life settlement contracts |
116 | 116 | ||||||||||||||
Separate account business |
12 | 355 | 3 | 370 | ||||||||||||
Payable to brokers |
(27 | ) | (24 | ) | (6 | ) | (57 | ) |
17
December 31, 2011 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Corporate and other bonds |
$ | 20,396 | $ | 482 | $ | 20,878 | ||||||||||
States, municipalities and political subdivisions |
9,611 | 171 | 9,782 | |||||||||||||
Asset-backed: |
||||||||||||||||
Residential mortgage-backed |
5,323 | 452 | 5,775 | |||||||||||||
Commercial mortgage-backed |
1,295 | 59 | 1,354 | |||||||||||||
Other asset-backed |
612 | 343 | 955 | |||||||||||||
|
||||||||||||||||
Total asset-backed |
7,230 | 854 | 8,084 | |||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
$ | 451 | 42 | 493 | ||||||||||||
Foreign government |
92 | 544 | 636 | |||||||||||||
Redeemable preferred stock |
5 | 53 | 58 | |||||||||||||
|
||||||||||||||||
Fixed maturities available-for-sale |
548 | 37,876 | 1,507 | 39,931 | ||||||||||||
Fixed maturities, trading |
8 | 101 | 109 | |||||||||||||
|
||||||||||||||||
Total fixed maturities |
$ | 548 | $ | 37,884 | $ | 1,608 | $ | 40,040 | ||||||||
|
||||||||||||||||
Equity securities available-for-sale |
$ | 124 | $ | 113 | $ | 67 | $ | 304 | ||||||||
Equity securities, trading |
609 | 14 | 623 | |||||||||||||
|
||||||||||||||||
Total equity securities |
$ | 733 | $ | 113 | $ | 81 | $ | 927 | ||||||||
|
||||||||||||||||
Short term investments |
$ | 4,570 | $ | 508 | $ | 27 | $ | 5,105 | ||||||||
Other invested assets |
11 | 11 | ||||||||||||||
Receivables |
79 | 8 | 87 | |||||||||||||
Life settlement contracts |
117 | 117 | ||||||||||||||
Separate account business |
21 | 373 | 23 | 417 | ||||||||||||
Payable to brokers |
(32 | ) | (20 | ) | (23 | ) | (75 | ) |
18
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 and six months ended June 30, 2012 and 2011:
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Unrealized Held at |
|||||||||||||||||||||||||||||||||||||||
2012 | Balance, April 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | Transfers into |
Transfers out of |
Balance, June 30 |
|||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 485 | $ | 3 | $ | 2 | $ | 68 | $ | (26 | ) | $ | (13 | ) | $ | 9 | $ | (40 | ) | $ | 488 | |||||||||||||||||||
States, municipalities and political subdivisions |
173 | 1 | (85 | ) | 89 | |||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
447 | 1 | (18 | ) | 22 | (9 | ) | 443 | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed |
105 | 2 | 4 | 87 | (12 | ) | (4 | ) | (16 | ) | 166 | |||||||||||||||||||||||||||||
Other asset-backed |
384 | 2 | (1 | ) | 182 | (99 | ) | (34 | ) | 434 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
936 | 5 | (15 | ) | 291 | (111 | ) | (47 | ) | (16 | ) | 1,043 | ||||||||||||||||||||||||||||
Redeemable preferred stock |
53 | (26 | ) | 27 | ||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
1,647 | 8 | (12 | ) | 359 | (163 | ) | (145 | ) | 9 | (56 | ) | 1,647 | |||||||||||||||||||||||||||
Fixed maturities, trading |
101 | (3 | ) | (4 | ) | 94 | ||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 1,748 | $ | 8 | $ | (12 | ) | $ | 359 | $ | (166 | ) | $ | (145 | ) | $ | 9 | $ | (60 | ) | $ | 1,741 | $ | | ||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 74 | 19 | $ | 15 | $ | (15 | ) | $ | 93 | $ | (1 | ) | |||||||||||||||||||||||||||
Equity securities trading |
11 | $ | (2 | ) | 9 | (2 | ) | |||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 85 | $ | (2 | ) | $ | 19 | $ | 15 | $ | (15 | ) | $ | | $ | | $ | | $ | 102 | $ | (3 | ) | |||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Short term investments |
$ | | $ | 4 | $ | 4 | ||||||||||||||||||||||||||||||||||
Other invested assets |
11 | 11 | ||||||||||||||||||||||||||||||||||||||
Life settlement contracts |
115 | $ | 20 | $ | (19 | ) | 116 | $ | 3 | |||||||||||||||||||||||||||||||
Separate account business |
4 | $ | (1 | ) | 3 | |||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
(8 | ) | 1 | $ | 21 | (1 | ) | (1 | ) | 12 |
19
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Unrealized Liabilities Held
at June 30 |
|||||||||||||||||||||||||||||||||||||||
2011 | Balance, April 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | Transfers into |
Transfers out of |
Balance, June 30 |
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 576 | $ | (2 | ) | $ | 2 | $ | 304 | $ | (29 | ) | $ | (70 | ) | $ | 31 | $ | 812 | $ | (3 | ) | ||||||||||||||||||
States, municipalities and political subdivisions |
188 | (1 | ) | (8 | ) | 179 | ||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
738 | (13 | ) | 12 | 50 | (57 | ) | (19 | ) | $ | (24 | ) | 687 | (15 | ) | |||||||||||||||||||||||||
Commercial mortgage-backed |
88 | 2 | 5 | 95 | ||||||||||||||||||||||||||||||||||||
Other asset-backed |
445 | 1 | 127 | (44 | ) | (24 | ) | (14 | ) | 491 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
1,271 | (12 | ) | 14 | 182 | (101 | ) | (43 | ) | | (38 | ) | 1,273 | (15 | ) | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
2,035 | (14 | ) | 15 | 486 | (130 | ) | (121 | ) | 31 | (38 | ) | 2,264 | (18 | ) | |||||||||||||||||||||||||
Fixed maturities, trading |
182 | (68 | ) | 114 | 1 | |||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 2,217 | $ | (14 | ) | $ | 15 | $ | 486 | $ | (198 | ) | $ | (121 | ) | $ | 31 | $ | (38 | ) | $ | 2,378 | $ | (17 | ) | |||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 30 | $ | (1 | ) | $ | 4 | $ | (2 | ) | $ | 5 | $ | 36 | $ | (1 | ) | |||||||||||||||||||||||
Equity securities trading |
6 | (5 | ) | 1 | 14 | 16 | (5 | ) | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 36 | $ | (6 | ) | $ | | $ | 5 | $ | (2 | ) | $ | | $ | 19 | $ | | $ | 52 | $ | (6 | ) | |||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Short term investments |
$ | 27 | $ | (21 | ) | $ | 6 | |||||||||||||||||||||||||||||||||
Other invested assets |
9 | $ | 1 | 10 | $ | 1 | ||||||||||||||||||||||||||||||||||
Life settlement contracts |
127 | 6 | (4 | ) | 129 | 3 | ||||||||||||||||||||||||||||||||||
Separate account business |
39 | $ | (2 | ) | 37 | |||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
(36 | ) | (11 | ) | $ | (1 | ) | 11 | (37 | ) |
20
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Unrealized Held at |
|||||||||||||||||||||||||||||||||||||||
2012 | Balance, January 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | Transfers into |
Transfers out of |
Balance, June 30 |
|||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 482 | $ | 6 | $ | 6 | $ | 146 | $ | (112 | ) | $ | (32 | ) | $ | 42 | $ | (50 | ) | $ | 488 | |||||||||||||||||||
States, municipalities and political subdivisions |
171 | 3 | (85 | ) | 89 | |||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
452 | 2 | (22 | ) | 60 | (16 | ) | (33 | ) | 443 | ||||||||||||||||||||||||||||||
Commercial mortgage-backed |
59 | 2 | 8 | 129 | (12 | ) | (4 | ) | (16 | ) | 166 | |||||||||||||||||||||||||||||
Other asset-backed |
343 | 6 | 3 | 358 | (176 | ) | (59 | ) | (41 | ) | 434 | |||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
854 | 10 | (11 | ) | 547 | (188 | ) | (79 | ) | (90 | ) | 1,043 | ||||||||||||||||||||||||||||
Redeemable preferred stock |
| 53 | (26 | ) | 27 | |||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
1,507 | 16 | (2 | ) | 746 | (326 | ) | (196 | ) | 42 | (140 | ) | 1,647 | |||||||||||||||||||||||||||
Fixed maturities, trading |
101 | (7 | ) | 1 | (1 | ) | 94 | $ | (7 | ) | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 1,608 | $ | 9 | $ | (2 | ) | $ | 747 | $ | (327 | ) | $ | (196 | ) | $ | 42 | $ | (140 | ) | $ | 1,741 | $ | (7 | ) | |||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 67 | $ | 16 | $ | 26 | $ | (16 | ) | $ | 93 | $ | (3 | ) | ||||||||||||||||||||||||||
Equity securities trading |
14 | $ | (5 | ) | 9 | (4 | ) | |||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 81 | $ | (5 | ) | $ | 16 | $ | 26 | $ | (16 | ) | $ | | $ | | $ | | $ | 102 | $ | (7 | ) | |||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Short term investments |
$ | 27 | $ | 16 | $ | (39 | ) | $ | 4 | |||||||||||||||||||||||||||||||
Other invested assets |
11 | 11 | ||||||||||||||||||||||||||||||||||||||
Life settlement contracts |
117 | $ | 23 | (24 | ) | 116 | $ | 3 | ||||||||||||||||||||||||||||||||
Separate account business |
23 | $ | (20 | ) | 3 | |||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
(15 | ) | (4 | ) | $ | 34 | (6 | ) | 3 | 12 | 1 |
21
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Unrealized |
|||||||||||||||||||||||||||||||||||||||
2011 | Balance, January 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | Transfers into Level 3 |
Transfers out of Level 3 |
Balance, June 30 |
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 624 | $ | 2 | $ | (3 | ) | $ | 346 | $ | (50 | ) | $ | (97 | ) | $ | 40 | $ | (50 | ) | $ | 812 | $ | (3 | ) | |||||||||||||||
States, municipalities and political subdivisions |
266 | (87 | ) | 179 | ||||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
767 | (12 | ) | 14 | 97 | (83 | ) | (41 | ) | (55 | ) | 687 | (15 | ) | ||||||||||||||||||||||||||
Commercial mortgage- backed |
73 | 3 | 18 | 5 | (4 | ) | 95 | |||||||||||||||||||||||||||||||||
Other asset-backed |
359 | 5 | 327 | (131 | ) | (55 | ) | (14 | ) | 491 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
1,199 | (4 | ) | 32 | 429 | (218 | ) | (96 | ) | | (69 | ) | 1,273 | (15 | ) | |||||||||||||||||||||||||
Redeemable preferred stock |
3 | 3 | (3 | ) | (3 | ) | | |||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
2,092 | 1 | 26 | 775 | (271 | ) | (280 | ) | 40 | (119 | ) | 2,264 | (18 | ) | ||||||||||||||||||||||||||
Fixed maturities, trading |
184 | 1 | (71 | ) | 114 | 1 | ||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 2,276 | $ | 2 | $ | 26 | $ | 775 | $ | (342 | ) | $ | (280 | ) | $ | 40 | $ | (119 | ) | $ | 2,378 | $ | (17 | ) | ||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 26 | $ | (2 | ) | $ | (1 | ) | $ | 19 | $ | (11 | ) | $ | 5 | $ | 36 | $ | (4 | ) | ||||||||||||||||||||
Equity securities trading |
6 | (5 | ) | 1 | 14 | 16 | (5 | ) | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 32 | $ | (7 | ) | $ | (1 | ) | $ | 20 | $ | (11 | ) | $ | | $ | 19 | $ | | $ | 52 | $ | (9 | ) | ||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Short term investments |
$ | 27 | $ | 12 | $ | (23 | ) | $ | (10 | ) | $ | 6 | ||||||||||||||||||||||||||||
Other invested assets |
26 | $ | 3 | $ | (19 | ) | 10 | $ | 1 | |||||||||||||||||||||||||||||||
Life settlement contracts |
129 | 9 | (9 | ) | 129 | 3 | ||||||||||||||||||||||||||||||||||
Separate account business |
41 | (4 | ) | 37 | ||||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
(21 | ) | (19 | ) | $ | (16 | ) | 19 | (37 | ) |
Net realized and unrealized gains and losses are reported in Net income as follows:
Major Category of Assets and Liabilities | Consolidated Condensed Statements of Income 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 | |
Other invested assets | Investment gains (losses) | |
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 |
22
Securities shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2012 and 2011. The Companys policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Significant Unobservable Inputs
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.
June 30, 2012 | Fair Value | Valuation Technique(s) |
Unobservable Input(s) | Range (Weighted Average) | ||||||
(In millions) | ||||||||||
Assets |
||||||||||
Fixed maturity securities |
$ | 122 | Discounted cash flow | Expected maturity date | 0.3 4.7 years (3.5 years) | |||||
Spreads off benchmark yields | 225 325 bps (269bps) | |||||||||
34 | Market approach | Private offering price | $97.25 $100.08 ($99.16) | |||||||
Equity securities |
93 | Market approach | Private offering price | $0.10 $4,023 per share | ||||||
($268.85 per share) | ||||||||||
Life settlement contracts |
116 | Discounted cash flow | Discount rate risk premium | 9% | ||||||
Mortality assumption | 65% 928% (185%)
|
For fixed maturity securities, an increase to the expected call date assumption or credit spreads off benchmark yields or decrease in the private offering price would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The methods and assumptions used to estimate the fair value for financial assets and liabilities not measured at fair value were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.
23
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Companys financial instrument assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the tables below. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.
Carrying | Estimated Fair Value | |||||||||||||||||
June 30, 2012 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In millions) | ||||||||||||||||||
Financial Assets: |
||||||||||||||||||
Other invested assets, primarily mortgage loans |
$ | 339 | $ | 352 | $ | 352 | ||||||||||||
Financial Liabilities: |
||||||||||||||||||
Premium deposits and annuity contracts |
105 | 109 | 109 | |||||||||||||||
Short term debt |
88 | $ | 83 | 5 | 88 | |||||||||||||
Long term debt |
9,048 | 9,589 | 287 | 9,876 |
December 31, 2011 | Carrying Amount |
Estimated Fair Value |
||||||
|
||||||||
(In millions) |
||||||||
Financial assets: |
||||||||
Other invested assets, primarily mortgage loans |
$ | 234 | $ | 247 | ||||
Financial liabilities: |
||||||||
Premium deposits and annuity contracts |
109 | 114 | ||||||
Short term debt |
88 | 90 | ||||||
Long term debt |
8,913 | 9,533 |
24
4. Derivative Financial Instruments
A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. 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, 2012 | December 31, 2011 | |||||||||||||||||||||||
|
||||||||||||||||||||||||
Contractual/ Notional |
Estimated Fair Value |
Contractual/ Notional |
Estimated Fair Value |
|||||||||||||||||||||
Amount | Asset | (Liability) | Amount | Asset | (Liability) | |||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
With hedge designation: |
||||||||||||||||||||||||
Interest rate risk: |
||||||||||||||||||||||||
Interest rate swaps |
$ | 300 | $ | (5 | ) | $ | 300 | $ | 3 | $ | (3 | ) | ||||||||||||
Commodities: |
||||||||||||||||||||||||
Forwards short |
291 | $ | 72 | (4 | ) | 268 | 64 | (22 | ) | |||||||||||||||
Foreign exchange: |
||||||||||||||||||||||||
Currency forwards short |
219 | 3 | (3 | ) | 154 | 1 | (8 | ) | ||||||||||||||||
Without hedge designation: |
||||||||||||||||||||||||
Equity markets: |
||||||||||||||||||||||||
Options purchased |
393 | 30 | 286 | 33 | ||||||||||||||||||||
written |
499 | (20 | ) | 398 | (23 | ) | ||||||||||||||||||
Equity swaps and warrants long |
11 | 8 | 63 | 16 | ||||||||||||||||||||
Equity futures short |
218 | (5 | ) | |||||||||||||||||||||
Interest rate risk: |
||||||||||||||||||||||||
Interest rate swaps |
100 | (2 | ) | 100 | 1 | (1 | ) | |||||||||||||||||
Credit default swaps |
||||||||||||||||||||||||
purchased protection |
88 | 2 | (1 | ) | 145 | 8 | (1 | ) | ||||||||||||||||
sold protection |
43 | (2 | ) | 28 | (2 | ) | ||||||||||||||||||
Foreign exchange: |
||||||||||||||||||||||||
Currency forwards long |
68 | 3 | 203 | 4 | ||||||||||||||||||||
short |
258 | (3 | ) | 330 | (2 | ) |
For derivative financial instruments without hedge designation, 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 Income. Losses of $1 million, $2 million and $1 million were included in Investment gains (losses) for the three and six months ended June 30, 2012 and the six months ended June 30, 2011. Gains of $5 million and $1 million and losses of $4 million were included in Net investment income for the three and six months ended June 30, 2012 and the six months ended June 30, 2011.
The Companys derivative financial instruments with cash flow hedge designation hedge variable price risk associated with the purchase and sale of natural gas and other energy-related products, exposure to foreign currency losses on future foreign currency expenditures, as well as risks attributable to changes in interest rates on long term debt. For the three and six months ended June 30, 2012, the amount of gains recognized in OCI related to these cash flow hedges were $15 million and $49 million. For the three and six months ended June 30, 2011, gains of $5 million and losses of $11 million were recognized in OCI related to these cash flow hedges. For the three and six months ended June 30, 2012, the amount of gains reclassified from AOCI into income were $18 million and $27
25
million. Losses of $3 million and gains of $5 million were reclassified from AOCI into income for the three and six months ended June 30, 2011. As of June 30, 2012, the estimated amount of net unrealized gains associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $51 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three and six months ended June 30, 2012 and 2011.
5. Property, Plant and Equipment
June 30, 2012 |
December 31, 2011 |
|||||||
|
||||||||
(In millions) | ||||||||
Pipeline equipment (net of accumulated DD&A of $1,045 and $926) |
$ | 6,716 | $ | 6,749 | ||||
Offshore drilling equipment (net of accumulated DD&A of $3,400 and $3,378) |
3,965 | 4,119 | ||||||
Natural gas and oil proved and unproved properties (net of accumulated DD&A of $2,365 and $2,056) |
1,162 | 1,330 | ||||||
Other (net of accumulated DD&A of $937 and $899) |
972 | 799 | ||||||
Construction in process |
894 | 621 | ||||||
|
||||||||
Property, plant and equipment, net |
$ | 13,709 | $ | 13,618 | ||||
|
HighMount Impairment of Natural Gas and Oil Properties
For the three and six months ended June 30, 2012, HighMount recorded non-cash ceiling test impairment charges of $222 million and $266 million ($142 million and $170 million after tax) related to its carrying value of natural gas and oil properties. The impairments were recorded within Other operating expenses and as credits to Accumulated depreciation, depletion and amortization. The write-downs were the result of declines in natural gas and natural gas liquid (NGL) prices. Had the effects of HighMounts cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $266 million and $335 million ($170 million and $214 million after tax). As a result of significant declines in natural gas and NGL prices at June 30, 2012, HighMount performed a goodwill impairment test. HighMount also performed its annual goodwill impairment test as of April 30, 2012. No impairment charges were required.
Diamond Offshore
In May of 2012, Diamond Offshore entered into a contract for a fourth ultra-deepwater drillship at a total cost of $655 million including commissioning, spares and project management. The first installment of $169 million was included in Construction in process
During the first half of 2012, Diamond Offshore sold six jack-up rigs for total proceeds of $132 million, resulting in a pretax gain of approximately $76 million, recorded in Other revenues.
Loews Hotels
In June of 2012, Loews Hotels acquired a hotel in Hollywood, California, which will be operated as the Loews Hollywood Hotel. The hotel has approximately 630 guestrooms, including 32 suites and over 48,000 square feet of meeting space. The acquisition was funded with a combination of cash and newly incurred debt.
6. 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 including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
26
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNAs ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Companys results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $68 million and $96 million for the three and six months ended June 30, 2012. Catastrophe losses in 2012 related primarily to U.S. storms. CNA reported catastrophe losses, net of reinsurance, of $100 million and $155 million for the three and six months ended June 30, 2011.
Net Prior Year Development
The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other.
Three Months Ended June 30, 2012 | CNA Specialty |
CNA Commercial |
Other | Total | ||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (35 | ) | $ | (13 | ) | $ | (4 | ) | $ | (52) | |||||
Pretax (favorable) unfavorable premium development |
(5 | ) | (19 | ) | 1 | (23) | ||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (40 | ) | $ | (32 | ) | $ | (3 | ) | $ | (75) | |||||
|
||||||||||||||||
Three Months Ended June 30, 2011 |
||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (52 | ) | $ | (50 | ) | $ | (9 | ) | $ | (111) | |||||
Pretax (favorable) unfavorable premium development |
(1 | ) | 40 | 39 | ||||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (53 | ) | $ | (10 | ) | $ | (9 | ) | $ | (72) | |||||
|
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Six Months Ended June 30, 2012 | CNA Specialty |
CNA Commercial |
Other | Total | ||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (41 | ) | $ | (27 | ) | $ | (2 | ) | $ | (70) | |||||
Pretax (favorable) unfavorable premium development |
(14 | ) | (36 | ) | 2 | (48) | ||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (55 | ) | $ | (63 | ) | $ | | $ | (118) | ||||||
|
||||||||||||||||
Six Months Ended June 30, 2011 |
||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (67 | ) | $ | (57 | ) | $ | (6 | ) | $ | (130) | |||||
Pretax (favorable) unfavorable premium development |
(8 | ) | 32 | (1 | ) | 23 | ||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (75 | ) | $ | (25 | ) | $ | (7 | ) | $ | (107) | |||||
|
For the three and six months ended June 30, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.
For the three and six months ended June 30, 2011, unfavorable premium development was recorded due to a reduction of ultimate premium estimates relating to retrospectively rated policies, partially offset by premium adjustments on auditable policies due to increased exposures.
CNA Specialty
The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development recorded for the CNA Specialty segment:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Medical professional liability |
$ | (9 | ) | $ | (20 | ) | $ | (15 | ) | $ | (34 | ) | ||||
Other professional liability |
(6 | ) | (27 | ) | (2 | ) | (21 | ) | ||||||||
Surety |
(3 | ) | 1 | (3 | ) | |||||||||||
Warranty |
(2 | ) | (1 | ) | (12 | ) | ||||||||||
Other |
(20 | ) | (24 | ) | 3 | |||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (35 | ) | $ | (52 | ) | $ | (41 | ) | $ | (67 | ) | ||||
|
28
Three Month Comparison
2012
Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2008 through 2010.
Other includes standard property and casualty coverages provided to CNA Specialty customers. Favorable development for other coverages was primarily due to favorable loss emergence in property and workers compensation coverages in accident years 2005 and subsequent.
2011
Favorable development for medical professional liability was primarily due to favorable case incurred emergence in primary institutions in accident years 2008 and prior.
Favorable development for other professional liability was driven by better than expected loss emergence in life agents coverages.
Six Month Comparison
2012
Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2008 through 2010 and reductions in the estimated frequency of large losses in accident years 2008 and prior.
Favorable development for other coverages was primarily due to favorable loss emergence in property and workers compensation coverages in accident years 2005 and subsequent.
2011
Favorable development for medical professional liability was primarily due to favorable case incurred emergence in accident years 2008 and prior.
Favorable development for other professional liability was driven by better than expected loss emergence in life agents coverages.
Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss policy covering CNAs non-insurance warranty subsidiary.
CNA Commercial
The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development recorded for the CNA Commercial segment:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Commercial auto |
$ | 2 | $ | (44 | ) | $ | 2 | $ | (34 | ) | ||||||
General liability |
(13 | ) | (5 | ) | 22 | |||||||||||
Workers compensation |
8 | 28 | (11 | ) | 36 | |||||||||||
Property and other |
(10 | ) | (34 | ) | (13 | ) | (81 | ) | ||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (13 | ) | $ | (50 | ) | $ | (27 | ) | $ | (57 | ) | ||||
|
29
Three Month Comparison
2012
Favorable development for general liability coverages was primarily related to favorable loss emergence in accident years 2005 and prior.
Favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident year 2010.
2011
Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims in accident years 2006 and prior.
Unfavorable development for workers compensation primarily reflected higher than expected severity on risk management claims, in accident years 2006 and prior.
Favorable development for property coverages was due to favorable loss emergence related to catastrophe claims in accident year 2008 and non-catastrophe claims in accident years 2009 and prior.
Six Month Comparison
2012
Overall, favorable development for workers compensation reflects favorable experience in accident years 2001 and prior. Unfavorable development was recorded in accident year 2010 related to increased medical severity and in accident year 2011 related to favorable premium development.
Favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident year 2010.
2011
Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims in accident years 2006 and prior.
The unfavorable development in the general liability coverages was primarily due to two large claim outcomes on umbrella claims in accident year 2001.
Unfavorable development for workers compensation primarily reflected higher than expected severity on risk management claims, in accident years 2006 and prior.
Favorable development for property coverages was due to lower than expected frequency in commercial multi-peril coverages primarily in accident year 2010, a favorable settlement on an individual claim in accident year 2003 in the equipment breakdown book, favorable loss emergence related to catastrophe claims in accident year 2008 and favorable loss emergence related to non-catastrophe claims in accident years 2009 and prior.
7. Debt
In April of 2012, CNA entered into a $250 million credit agreement with a syndicate of banks and lenders. The credit agreement which matures on April 19, 2016 bears interest at London Interbank Offered Rate plus applicable margin and is intended to be used for general corporate purposes. At CNAs election the commitments under the unsecured credit facility may be increased from time to time up to an additional aggregate amount of $100 million, and two one-year extensions are available prior to first and second anniversary of the closing. As of June 30, 2012 there were no borrowings under the credit facility and CNA was in compliance with all covenants.
In June of 2012, Boardwalk Pipeline issued $300 million principal amount of 4.0% senior notes due June 15, 2022. Boardwalk Pipeline used the proceeds to reduce borrowings under its revolving credit facility.
In April of 2012, Boardwalk Pipeline entered into a Second Amended and Restated Credit Agreement (Amended Credit Agreement) having aggregate lending commitments of $1.0 billion. The Amended Credit Agreement has a
30
maturity date of April 2017. As of June 30, 2012, Boardwalk Pipeline had $215 million of loans outstanding under its revolving credit facility with a weighted-average interest rate on the borrowings of 1.4% and had no letters of credit issued. As of June 30, 2012, Boardwalk Pipeline was in compliance with all covenants under the credit facility and had available borrowing capacity of $785 million.
In June of 2012, Loews Hotels borrowed $81 million under a new $105 million loan agreement. The loan agreement bears interest at 4.25% and matures on June 15, 2015.
8. Benefit Plans
Pension PlansThe 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 PlansThe 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, |
|||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Service cost |
$ | 6 | $ | 5 | $ | 12 | $ | 12 | ||||||||
Interest cost |
37 | 41 | 75 | 82 | ||||||||||||
Expected return on plan assets |
(46 | ) | (47 | ) | (93 | ) | (94 | ) | ||||||||
Amortization of unrecognized net loss |
12 | 7 | 23 | 14 | ||||||||||||
|
||||||||||||||||
Net periodic benefit cost |
$ | 9 | $ | 6 | $ | 17 | $ | 14 | ||||||||
|
||||||||||||||||
Other Postretirement Benefits | ||||||||||||||||
|
|
|||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Interest cost |
$ | 2 | $ | 2 | $ | 3 | $ | 4 | ||||||||
Expected return on plan assets |
(1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||
Amortization of unrecognized net gain |
(1 | ) | ||||||||||||||
Amortization of unrecognized prior service benefit |
(7 | ) | (6 | ) | (13 | ) | (13 | ) | ||||||||
Regulatory asset decrease |
2 | 3 | ||||||||||||||
|
||||||||||||||||
Net periodic benefit cost |
$ | (6 | ) | $ | (4 | ) | $ | (12 | ) | $ | (8 | ) | ||||
|
9. 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
31
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. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other 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 and asbestos and environmental pollution.
Diamond Offshores business primarily consists of operating 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. Diamond Offshores fleet consists of 44 drilling rigs, including four new-build rigs which are under construction and one rig being constructed utilizing the hull of one of Diamond Offshores existing mid-water floaters. On June 30, 2012, Diamond Offshores drilling rigs were located offshore 11 countries in addition to the United States.
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 region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, with approximately 14,300 miles of pipeline.
HighMount is engaged in the exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), primarily located in the Permian Basin in West Texas. HighMount holds mineral rights on over 700,000 net acres with over 6,000 producing wells.
Loews Hotels owns and/or operates 18 hotels, 16 of which are in the United States and two are in Canada.
The Corporate and other segment consists primarily of corporate investment income, including investment gains (losses) from non-insurance subsidiaries, corporate interest expense 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, 2011, other than the accounting for deferred acquisition costs, as further discussed in Note 1 herein. 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.
32
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, |
|||||||||||||||
|
|
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Revenues (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
CNA Specialty |
$ | 896 | $ | 875 | $ | 1,841 | $ | 1,766 | ||||||||
CNA Commercial |
984 | 984 | 2,072 | 2,078 | ||||||||||||
Life and Group Non-Core |
360 | 333 | 710 | 659 | ||||||||||||
Other |
6 | 10 | 24 | 23 | ||||||||||||
|
||||||||||||||||
Total CNA Financial |
2,246 | 2,202 | 4,647 | 4,526 | ||||||||||||
Diamond Offshore |
793 | 892 | 1,589 | 1,701 | ||||||||||||
Boardwalk Pipeline |
277 | 263 | 591 | 574 | ||||||||||||
HighMount |
69 | 98 | 145 | 202 | < |